10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  
SECURITIES EXCHANGE ACT OF 1934

for the fiscal year ended June 30, 2003

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  
SECURITIES EXCHANGE ACT OF 1934

for the transition period from              to             .

Commission file number: 001-31265

AVATECH SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	52-2023997
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
11400A Cronridge Drive, Owings Mills, Maryland	21117
(Address of principal executive offices)	(Zip Code)

(410) 581-8080

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Title of Class	Name of Each Exchange on Which Registered
None	None

Securities registered pursuant to Section 12(g) of the Act:

Title of Class

Common Stock, $.01 par value

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x  No  ¨

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.    Yes  ¨  No  x

The aggregate market value of the voting stock held by non-affiliates of the registrant as of December 31, 2002 was $1,925,968.

The number of shares of common stock outstanding as of September 30, 2003 was 3,055,959

DOCUMENTS INCORPORATED BY REFERENCE

To the extent specified, Part III of this Form 10-K incorporates information by reference to the Registrant’s definitive proxy statement for its 2003 Annual Meeting of Shareholders (to be filed).

AVATECH SOLUTIONS, INC.

2003 ANNUAL REPORT ON FORM 10-K

Table of Contents

PART I			1
	ITEM 1.	Business	1
	ITEM 2.	Properties	7
	ITEM 3.	Legal Proceedings	7
	ITEM 4.	Submission of Matters to a Vote of Security Holders	7
PART II			8
	ITEM 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	8
	ITEM 6.	Selected Financial Data	9
	ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
	ITEM 7A.	Quantitative and Qualitative Disclosures about Market Risk	21
	ITEM 8.	Financial Statements and Supplementary Data	21
	ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures	21
PART III			22
	ITEM 10.	Directors and Executive Officers of the Registrant	22
	ITEM 11.	Executive Compensation	23
	ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	23
	ITEM 13.	Certain Relationships and Related Transactions	23
	ITEM 14.	Principal Accountant Fees and Services	23
PART IV			24
	ITEM 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8 - K	24
FINANCIAL STATEMENTS AND SCHEDULES			F-1

PART I

ITEM 1. BUSINESS

Background

Avatech Solutions, Inc. was formed as a Delaware corporation on September 9, 1996. On June 20, 1997, we merged with CADWORKS, Inc., a company conducting its operations principally in Texas and providing design automation software, training, technical support, and professional services to corporations, and accounted for the merger as a recapitalization. On June 30, 1997, our wholly-owned subsidiary merged with Premier Design Systems, Inc., a company with similar operations conducting its operations principally in Maryland, in a business combination accounted for as a pooling-of-interests. All of the outstanding common stock of CADWORKS, Inc. was exchanged for 593,525 shares of our voting common stock and all of the outstanding common stock of Premier Design Systems, Inc. was exchanged for 665,575 shares of our voting common stock. During fiscal years 1998 through 1999, we consummated business combinations with nine companies that provided design automation software, training, technical support, and professional services to corporations, government agencies, and educational institutions throughout the United States. We consummated seven of these business combinations by exchanging of all of the outstanding shares of voting common stock of the acquired company for shares of our voting common stock and accounted for these transactions as poolings-of-interests. We accounted for the other two of these business combinations as purchases.

In November 2002, Avatech Solutions completed its merger with PlanetCAD, Inc and became a wholly owned subsidiary of PlanetCAD, Inc. Contemporaneously with the merger, PlanetCAD changed its name to Avatech Solutions, Inc, and Avatech changed its name to Avatech Solutions Subsidiary, Inc. In December 2002 Avatech Solutions, Inc. began trading on the OTC Bulletin Board under the symbol AVSO.OB. During the merger, PlanetCAD issued registered shares of its common stock in exchange for all of the outstanding common stock of Avatech Solutions, Inc. As a result of the merger, PlanetCAD’s shareholders were issued twenty-five percent and Avatech’s shareholders were issued seventy-five percent of the surviving company’s outstanding common stock. Because Avatech’s shareholders received the majority of the common stock of the post-merger Avatech, Avatech was deemed to have acquired PlanetCAD.

In the fourth quarter of fiscal year 2003, we restructured the business to eliminate certain unprofitable operating segments, including the acquired PlanetCAD operations and three reseller locations.

General

We are a leading provider of design automation and data management solutions for the manufacturing, building design, engineering, and total infrastructure and facilities management markets. We specialize in software development and customization, technical support, training, and consulting aimed at improving design and documentation efficiencies and the seamless integration of workflow processes. Our sales are to corporations, government agencies, and educational institutions worldwide. Our product sales are primarily the resale of packaged design software programs that are installed on a user workstation, on a local area network server, or in a hosted environment. The programs perform and support a wide variety of functions related to design, modeling, drafting, mapping, rendering, and facilities management tasks. We are one of the largest domestic commercial resellers of design software developed by Autodesk, Inc. (Autodesk) and one of the world’s leading design software and digital content companies for the building design and land development, manufacturing, utilities, and telecommunications industries.

We differentiate ourselves from traditional product resellers through the wide range of value-added services we can provide as part of an overall business solutions engagement. Our services are structured around three areas: training, technical support, and professional services—and are often bundled with the associated software products that support them. Education classes are offered through our nineteen training classroom facilities or directly at a customer site, and include basic through advanced product training and customized company-specific training curriculum. Our instructors are application engineers and product specialists who have formal training or industry experience in the course content. Technical support services are provided primarily through our telephone support center located in Omaha, Nebraska. Through our staff of full time consultants, we provide assistance to customers with questions or issues concerning the suite of software products we resell and those associated with the

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professional services engagements we perform. Professional services include project-focused offerings that are fulfilled primarily with our own application engineers and programmers and include software customization, data migration, computer aided design standards consulting, workflow analysis, and implementation assistance for complex software products. Our strategic focus is in responding to our customers’ requests for interoperability and product lifecycle management solutions that address broader, enterprise-wide initiatives.

More than ninety percent of our total revenue arises from the resale of Autodesk’s software and the delivery of related services from the sales of these products. We are required to enter into annual channel partner agreements with Autodesk and other software developers that we represent. These agreements authorize us to sell certain software products to certain customers in certain geographic areas of the United States. There are no clauses in these agreements that limit or restrict the services that we can offer to customers.

We have a national sales and service delivery network of approximately one hundred thirty-three personnel operating out of fifteen business offices across the country. Our sales database has over one hundred eighty thousand point-of-contact names collected over a fifteen-year time span and an active customer list of approximately eighteen thousand private firms and federal, state, and local agencies.

In July 2003, we entered into an Authorized Reseller Agreement with Dassault Systèmes of France, a world leader in product lifecycle management (PLM) solutions, with more than sixty-five thousand customers in eighty countries, which makes us a Dassault Systèmes Business Partner and authorizes us sell Dassault’s SMARTEAM PLM solution throughout North America. Product Lifecycle Management (PLM) software solutions are expected to be a significant new tool for manufacturers in multiple vertical industries over the next decade. According to AMR Research, the PLM software market was two billion dollars in 2001 and will grow to nearly eight billion dollars by 2006. Prior to this arrangement, Dassault’s SmarTeam products were generally marketed in the United States exclusively through IBM and on every other continent through leading resellers.

We believe that PLM software and services represents a significant opportunity for future growth. Our arrangement with Dassault will not only provide us with a potentially significant new product line, but will also permit us to expand our higher margin services business and significantly increase the average size of sales transactions. PLM software significantly enhances manufacturing efficiencies and permits manufacturers to manage products through their active lifecycles. We believe that our arrangement with Dassault will provide us with important product diversity consistent with our new strategy of increased investment of people, diversification of product and service offerings, and a targeted merger and acquisition program to expand our geographic footprint.

Industry Background

Today’s increasingly competitive business environment has forced many companies in diverse industries to increase efficiencies while improving flexibility and responsiveness to changing market conditions. In addition to facing higher competitive standards with respect to product quality, variety and price, businesses also recognize the need to shorten lead times, adjust production for frequent changes in customer requirements, and quote more accurate and reliable delivery dates. Furthermore, a company’s operations may span multiple continents, requiring suppliers in one part of the world to collaborate with a plant in another. These forces are prompting companies to collaborate with technology transparency, across a broad range of suppliers and customers, to improve efficiencies within multi-enterprise value chains and market places.

The development and proliferation of communications, desktop automation, and software applications, including applications for specific industry focus such as architecture and building design, manufacturing, engineering, and total infrastructure, and facilities management are accelerating many companies’ efforts to increase efficiencies by enabling a platform-independent communications network. This platform independence and demand for interoperability has prompted demand for a dynamic, open, and integrated environment among customers, suppliers, and designers. In response to these evolving market forces, many companies are seeking business solutions that include re-engineering their business processes to reduce manufacturing cycle times, shifting from mass production to order-driven manufacturing, increasing the use of outsourcing, and sharing information more readily with vendors and customers over the Internet.

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Markets

As a provider of design automation and data management solutions, our portfolio of products and services principally address the needs of the following markets:

The architecture, engineering and construction (AEC) market is comprised of design services focused on the construction of large physical assets such as buildings, roads, factories, utility companies, and commercial infrastructure projects. Architects, builders, and civil engineers use design automation systems to create detailed three dimensional construction drawings, material specifications, and maintenance records. Digital files are created and shared by multiple architects, engineers, and suppliers of services and raw materials throughout the construction schedule and subsequent operations of the asset.

The mechanical design and manufacturing market is primarily focused on the design, tooling, assembly, and testing of instruments, electronic devices, machines, mechanical devices, and power-driven equipment. Inventors, engineers, technicians, and designers use design automation software as basic tools in the overall form, fit and function, creation, and refinement of the product or item. Given the physical and electronic complexity of most items invented today, software and services are critical to achieving tight production schedules and cost targets.

Electronic document management (EDM) systems provide methodical and organized processes involved with the storage, retrieval, management, and versioning of design files, drawings, and related documents such as customer correspondence, inventory lists, digital images, and other items. These products are based on a client/server architecture, and are scalable from a departmental solution to a division level infrastructure system.

Geographic information systems (GIS) software permits users to link together disparate data files (maps, aerial photos, tax records, marketing data, etc.) and provide the user with a unified image and knowledge base of a specific geographic location or building location. This software can also be used to develop emergency exit and disaster rescue plans by providing detailed information about employee locations, communication information, distances to the closest stairwells and elevators, fire hose connection points, etc. New technology based on powerful desktop computer hardware has enabled software developers to offer products that are easier to use and less expensive than the previous applications, thus expanding the volume of purchases, installation, and level of usage from the traditional civil engineering, utilities, public works, and transportation logistics markets and into the emergency services and Homeland Security segments.

Facilities management applications enable facility managers and physical plant staff to efficiently operate and utilize all aspects of a facility’s operational systems (heating, cooling, power, communications, security, etc.) including its internal and external space and infrastructure. When integrated with Internet browsers, GIS, and document management tools, users are able to have substantial knowledge about their buildings, their neighborhoods, and their documents, which leads to increased effectiveness and cost containment.

We also provide rapidly implemented, scalable, tailored and uniquely cost-effective product lifecycle management (PLM) solutions designed to offer streamlined data management, improved workflow, and comprehensive collaboration to help companies optimize business processes, shorten the time-to-market, increase innovation, and reduce costs.

Solutions and Products

As a provider of design automation solutions, we sell software packages developed by third party software developers. We also provide a variety of services to assist our customers in maximizing the benefits from these software applications. These services include training, technical support, and professional services.

Our product sales are primarily composed of packaged software programs that are installed on a user workstation, on a local area network server, or in a hosted environment. The programs perform and support a wide variety of functions related to design, drafting, manufacturing, workflow automation, and document management activities. Our product offerings include a full range of design automation software packages from the industry leader, Autodesk, document management software from Cyco Software, Inc., and PLM software from Dassault Systèmes.

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Training Services. We have a curriculum of over thirty different subjects related to various software solutions offered at our nineteen training facilities and through mobile labs that we can send to a customer site. Our employees serve as class instructors and have formal training or successful industry experience in the topics they are teaching. All instructors must pass annual subject-matter exams required by Autodesk and other software providers to retain their product-based teaching certifications. We also provide training services that are highly tailored to meet the needs of a particular customer, including company-specific operational topics, customized product usage, and other general technology or process training.

Technical Support Services. We provide end-user and corporate technical support services through our National Support Center (NSC) located in Omaha, Nebraska. A staff of full-time product and technology consultants assist customers calling with questions about product features, functions, usability issues, and configurations—as well as from our professional services engagements. The NSC offers services through multiple access levels including prepaid services, actual elapsed time, and annual support contracts. Customers can communicate with the NSC through e-mail, telephone, and fax channels. Standard NSC support services are offered on a 12-hour by 5-day basis, with premium pricing for extended coverage hours.

Professional Services. Professional services are project-focused offerings that include software customization, data migration, computer aided design standards consulting, supplemental staffing for design work, drawing digitization, symbol library development, and GIS database development. We also provide technology interoperability, engineering collaboration, and workflow improvement solutions with design automation and manufacturing organizations.

Channel Sales Agreement with Autodesk, Our Largest Vendor; Distributor Arrangement with Dassault Systèmes. Our revenues are primarily derived from the resale of vendor software products and services. These resales are made pursuant to channel sales agreements whereby we are granted authority to purchase and resell the vendor products and services. Under these agreements, we either resell software directly to our customers or act as a sales agent for various vendors and receive commissions for our sales efforts. We entered into an Authorized Channel Partner Agreement with Autodesk, Inc. whereby Autodesk appointed us as a non-exclusive partner to market, distribute, and support Autodesk software products. Collectively with our subsidiaries, we must achieve a yearly minimum revenue in the amount of three hundred thousand dollars from the sale of Autodesk’s software products in order to be eligible to purchase such products directly from Autodesk.

We have also entered into a Authorized Reseller Agreement with Dassault Systèmes whereby we will market and distribute Dassault’s SMARTEAM PLM products in the United States. In connection with this July 2003 arrangement, Dassault provided us with certain financial assistance, including funds to create a dedicated PLM sales force and related marketing efforts. We did not earn any revenue from the sale of Dassault’s PLM products prior to fiscal year 2004.

Sales and Marketing

Our merger and acquisition growth strategy, coupled with post merger marketing efforts, has provided us with a sales database of over one hundred and eighty thousand point-of-contact names and an active customer base of eighteen thousand organizations.

We sell software products and solutions services through a direct sales organization consisting of sales representatives, many with engineering degrees and industry experience, and pre-sales technical consultants. Many of our customers were successfully transitioned from acquired companies, as dedicated sales representatives worked diligently to retain their customer relationships. We have a Customer Care Center in Tampa, FL, which focuses on outbound telesales and fulfillment for smaller transactional sales.

We utilize a customer relationship system (CRM) to manage customer communications that is deployed at all offices via a wide-area network. We also use a sophisticated electronic marketing system for permission-based, automated one to one marketing communications and regular electronic publications. The features include automatic customized e-mail messages to prospects with interest in our products and services and automated lead distribution directly to the sales force. In addition, we have a comprehensive and scaleable website, which supports secure transactions and serves streaming media demonstrations and technical tips on a 24x7 on-demand basis.

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Customers

We market our products to private companies, public corporations, government agencies, and educational institutions throughout the United States. In fiscal year 2003, the revenues generated by our top ten customers represented approximately five percent of total revenues.

We have a national sales and service delivery network that is comprised of fifteen business offices and nineteen training classrooms across the country. Our customers include:

AOL Time Warner Communications	AT&T	Baltimore Gas & Electric
Baseland	Bechtel	Becton Dickenson
Bell Atlantic	Bouck & Lee Engineers	Caterpillar
Champion Industries	City of Baltimore	City of Roseville, CA
Colorado Springs Utilities	Consumers Energy	Dewberry & Davis
Ford Motor Company	General Electric	General Mills
Goodyear	Hellmuth, Obata & Kassabaum, Inc.	Honeywell
INTEL	JCPenney	John Deere
Johnson & Johnson	Kimley-Horn & Associates	Lucent Technologies
MBNA	Media One	Michigan Department of Transportation
Naptheon	NASA	National Park Service
Nestle	Nolte Engineering	Norfolk Naval Air Station
Oceana Naval Base	Ozark Aircraft	Pacific Bell
Parker Hannifan	Parsons Brinckerhoff Quade &	Pioneer Hybrid
Qwest Communications	Douglas, Inc.	Royal Caribbean International
RTKL Associates	Rockwell	SBC
Siemens	Sacramento Regional Transit	Texaco
Texas Instruments	Siemens Medical Systems	Trane
Union Pacific	The Sports Authority	US Bureau of Land Management
Verizon	URS Greiner

Competition

We compete in the design automation channel, a market historically composed of small niche, regionally focused companies. Since we began operations in 1997, the Autodesk reseller channel has changed radically. The number of Autodesk channel participants has declined significantly from approximately four hundred at the time of our formation to approximately 130 currently. The many new products and their increased complexity have made it very difficult for small companies to compete. The vast majority of smaller resellers lack the technical talent, financial resources, marketing, public relations, and business management skills to transition from the old, single-application product model to one offering complete solutions.

While several small reseller competitors exist in the various geographic territories where we conduct business, we have a competitive advantage in terms of geographic reach, comprehensive training and support, and the provision of other products and services. We are one of the largest commercial Autodesk reseller in the United States. Two national competitors that could be compared to us in scale, size, geographical reach, and target markets for the resale of Autodesk products are INCAT International, Inc. (INCAT) and RAND A Technology Corporation (RAND).

INCAT is a systems integrator for design automation products. They have thirty offices in nine countries with worldwide headquarters in the United Kingdom. They have fifteen offices in the United States. They have approximately eight hundred employees worldwide with approximately sixty-five percent in consulting, design engineering and technical support. While INCAT is larger than Avatech, we estimate that the Autodesk portion of its business is less than one-fourth as large as our Autodesk business.

RAND is the largest computer-aided design and engineering technology company worldwide. However, we estimate that its Autodesk-related business is less than fifty percent as large as ours. It operates in 104 offices located in twenty-seven countries with headquarters in Canada. It has thirty-eight offices in the United States. As of December 31, 2001, it reported having over twelve hundred employees worldwide.

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Intellectual Property

We regard our technology and other proprietary rights as essential to our business. While we rely on copyright, trade secret, confidentiality procedures, contract provisions, and trademark law to protect our technology and intellectual property, we believe that the technological skills of our employees and reliable service maintenance are also critical to establishing and maintaining an intellectual property leadership position.

We own several federally registered trademarks, including “AVATECH SOLUTIONS,” and “AVANEWS,” and have a number of trademark applications pending. We have no patents or patent applications pending. We acquired a number of other trademarks as a result of our merger with PlanetCAD.

We have entered into confidentiality agreements with our employees, consultants, and corporate partners and intend to control access to, and distribution of our products, documentation, and other proprietary information.

This Annual Report on Form 10-K contains trademarks and trade names of Avatech Solutions, Inc. and its affiliates as well as those of other companies. All trademarks and trade names appearing in this report are the property of their respective holders.

Employees

Presently, we have approximately 133 full time employees and two part time employees located in fifteen offices throughout the United States. Many of our current employees formerly were employees of the companies that we acquired. Approximately forty-one are located in Maryland, where we have our corporate headquarters as well as one sales and one training location. Maryland is also the location of our centralized accounting, order processing, and marketing functions. Approximately forty-five of our employees are engaged in sales and marketing activities and approximately fifty-six employees are engaged in service fulfillment.

Our future success depends in significant part upon the continued services of our key sales, technical, and senior management personnel and our ability to attract and retain highly qualified sales, technical, and managerial personnel. None of our employees are represented by collective bargaining agreements, and we have never experienced a work stoppage. We believe our employee relations are good.

Available Information

Our Internet website is www.avatechsolutions.com. We make available free of charge on our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file with or furnish such materials with the SEC.

Our executive offices are located at 11400 Cronridge Drive, Suite A, Owings Mills, Maryland 21117 and our telephone number is (410) 581-8080.

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ITEM 2. PROPERTIES

Our corporate offices are located in Owings Mills, Maryland where we lease approximately 10,010 square feet of office space, pursuant to a lease which expires on May 31, 2004. These facilities house our executive and primary administrative offices as well as accounting, order processing operations, IT, sales, and marketing. We also lease office space at the following locations:

Location	Square Footage	Term
California—Roseville *	176	6/15/2004
Colorado—Englewood	7,250	03/31/2005
Colorado—Boulder *	3,720	11/1/2007
Connecticut—Middlefield	1,300	Month to month
Florida—Tampa	2,290	12/31/2003
Illinois – Westchester	150	6/15/2004
Iowa—Cedar Rapids	2,525	05/20/2006
Iowa—Clive	4,310	04/30/2004
Kentucky—Georgetown	950	01/31/2005
Maryland—Owings Mills	10,100	5/31/2004
Minnesota—St. Paul	2,782	03/31/2007
Nebraska—Omaha	6,242	02/29/2008
New Jersey—East Brunswick	2,000	03/31/2004
Texas—Austin	2,125	10/31/2004
Texas—Irving	3,416	01/31/2008
Virginia—Alexandria	280	04/30/2004
Virginia—Richmond	2,250	03/31/2006
Virginia—Virginia Beach	5,000	12/31/2003

* We no longer maintain offices in these locations, however, our leases have not yet expired.

Not listed are leases for space that we have vacated if the sublessee’s payments to us defray, in whole or in substantial part, our lease payment obligations.

The commercial real estate market is volatile and unpredictable in terms of available space, rental fees, and occupancy rates and preferred locations. We cannot be certain that additional space will be available when we require it, or that it will be affordable or in a preferred location.

ITEM 3. LEGAL PROCEEDINGS

We are not currently a party to any material legal proceeding.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Price Data

Prior to our merger with PlanetCAD, PlanetCAD’s common stock was listed on the American Stock Exchange under the symbol “PCD”. Since the date of the merger, our common stock has been trading on the OTC Bulletin Board under the symbol “AVSO.OB”. The following table indicates the high and low sales prices per share, rounded to the nearest whole cent, reported by the American Stock Exchange, for the periods indicated prior to November 20, 2002 and as available through the OTC market for the periods indicated since that date. The OTC quotations represent prices between dealers and do not reflect the retailer markups, markdowns or commissions, and may not represent actual transactions. All prices shown have been restated to reflect the two-for-one stock dividend which will be distributed on October 1, 2003 for shareholders of record at September 15, 2003 as well as the one-for-twenty reverse stock split that occurred on October 22, 2002.

Period	High		Low
Fiscal Year Ending June 30, 2002
First Quarter	$	3.67	$	1.00
Second Quarter		1.60		0.67
Third Quarter		1.47		1.13
Fourth Quarter		2.87		1.13
Fiscal Year Ending June 30, 2003
First Quarter	$	2.87	$	1.60
Second Quarter		2.00		0.17
Third Quarter		0.68		0.34
Fourth Quarter		0.50		0.15
Fiscal Year Ending June 30, 2004
First Quarter	$	0.65	$	0.08

There is no public market for our Series C Convertible Preferred Stock, however, we issued 172,008 shares of this stock for $1.69 per share.

Recent Closing Prices

On October 1, 2003, the last closing price for our common stock on the OTC Bulletin Board, as reported by Reuters, was $0.80.

Dividend Information

We have never paid cash dividends on our common stock and we anticipate that we will continue to retain any earnings for the foreseeable future for use in the expansion and operation of our business.

Our Series C Convertible Preferred Stock is eligible for 10% annual, cumulative dividends, payable quarterly, when and as declared by the Board of Directors. These dividends have priority over any declaration or payment of any dividend or other distribution on our Common Stock and all other currently outstanding shares of our equity securities.

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Number of Stockholders

As of September 30, 2003, there were 114 holders of record of our common stock and 10 holders of our Series C Convertible Preferred Stock.

Recent Sales of Unregistered Securities

On April 7, 2003, we issued 131,299 shares of our Series C Convertible Preferred Stock for an aggregate purchase price of $221,895 to “accredited investors” as defined by Rule 501 of the Securities Act. On April 8, 2003, we issued an additional 14,792 shares of our Series C Preferred Stock for an aggregate purchase price of $24,998, on April 18, 2003 we issued an additional 20,000 shares of our Series C Preferred Stock for an aggregate purchase price of $33,800, and on May 7, 2003 we issued 5,917 shares of Series C Preferred Stock for an aggregate purchase price of $10,000. Each of these issuances was to accredited investors.

Our Series C Preferred Stock is convertible at any time beginning 120 days after the date of purchase and must be converted if our shares trade for more than $6.76 per share for sixty consecutive trading days on the NASDAQ national market system. We must redeem this stock under certain circumstances involving a business combination approved by the Board of Directors. All past sales of our Series C Preferred Stock were made in reliance upon the exemption in Section 4(2) of the Securities Act of 1933 for sales to accredited investors only. The Commission has asserted our filing of a registration statement covering resales of the common stock into which the Series C Convertible Preferred Stock is convertible on March 26, 2003 (even though a shelf registration with no distribution of a preliminary prospectus and, therefore, no offers to resell common stock having been made) may have constituted “general advertising,” thereby precluding our reliance on the section 4(2) exemption. We offered each purchaser to date the right to rescind his purchase and all elected not to do so.

On May 28, 2003, we issued warrants to an “accredited investor” to purchase 97,200 shares of our common stock in exchange for his agreement to extend the repayment date of our existing $500,000 obligation to him until July 1, 2004 at a 12% rate of interest and to advance an additional $500,000 on the same terms. These warrants carry a purchase price of $0.27 per share and expire on June 1, 2008. Because the issuance was to an “accredited investor” within the meaning of Rule 501 under the Securities Act, the offer and sale of these securities were exempt from registration under Rule 506 of the Securities Act.

On June 1, 2003, we issued 10% subordinated notes for an aggregate $150,000 due on January 1, 2004 and warrants to purchase 45,000 shares of our common stock to “accredited investors” in exchange for these investors’ agreement to cancel existing 10% subordinated notes for an aggregate $150,000 due on July 1, 2003. These warrants carry a purchase price of $0.35 per share and expire on July 1, 2004. On the same date, we issued 12% subordinated notes for an aggregate $100,000 due on January 1, 2004 to accredited investors in exchange for those investors’ agreement to cancel existing 10% subordinated notes for an aggregate $100,000 due on July 1, 2003. Because these issuances were to “accredited investors” within the meaning of Rule 501 under the Securities Act, the offer and sale of these securities were exempt from registration under Rule 506 of the Securities Act.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected historical annual consolidated financial data is derived from our audited financial statements as of and for the five years ended June 30, 2003. The following consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this Report.

	Year Ended June 30,
Statement of Operations Data:(1)	2003			2002			2001			2000			1999
Revenue:
Product sales	$	12,667,141		$	17,195,381		$	18,571,208		$	19,676,342		$	23,053,101
Service revenues		6,101,339			5,911,665			5,481,227			6,909,674			6,266,986
Commission revenue		4,261,366			4,395,730			3,802,778			2,719,039			2,702,596
Total revenue		23,029,846			27,502,776			27,855,213			29,305,055			32,022,683
Cost of revenue:
Cost of product sales		8,988,503			11,486,205			12,802,140			14,077,943			16,699,981
Cost of service revenue		3,875,670			3,446,542			3,473,537			4,261,875			4,548,512
Total cost of revenue		12,864,173			14,932,747			16,275,677			18,339,818			21,248,493
Gross margin		10,165,673			12,570,029			11,579,536			10,965,237			10,774,190
Other expenses:
Selling, general and administrative		12,379,577			12,001,786			10,587,388			11,811,260			11,537,095
Depreciation and amortization(2)		414,304			516,470			597,167			598,837			639,679
Impairment loss		—			284,766			—			—			—
Total other expenses		12,793,881			12,803,022			11,184,555			12,410,097			12,176,774
Operating income (loss)		(2,628,208	)		(232,993	)		394,981			(1,444,860	)		(1,402,584	)
Other income/(expense)
Gain on the extinguishment of debt		1,960,646			—			—			—			—
Interest and other income/ (expense)		15,915			59,871			60,251			(50,420	)		(15,693	)
Minority interest		(94,140	)		—			—			—			—
Interest expense		(290,375	)		(487,472	)		(553,180	)		(619,518	)		(481,347	)
		1,592,046			(427,601	)		(492,929	)		(669,938	)		(497,040	)
Loss from continuing operations before income taxes and cumulative effect of change in accounting principle		(1,036,162	)		(660,594	)		(97,948	)		(2,114,798	)		(1,899,624	)
Income tax expense (benefit)		408,072			(295,194	)		7,426			—			—
Loss from continuing operations before cumulative effect of change in accounting principle		(1,444,234	)		(365,400	)		(105,374	)		(2,114,798	)		(1,899,624	)
Income (loss) from operations of discontinued operating segments		(1,884,072	)		117,905			194,710			61,561
Income (loss) before cumulative effect of change in accounting principle		(3,328,306	)		(247,495	)		89,336			(2,053,237	)
Cumulative effect of change in accounting for goodwill(2)		(520,000	)		—			—			—			—
Net income (loss)	$	(3,848,306	)	$	(247,495	)	$	89,336		$	(2,053,237	)	$	(1,899,624	)
Earnings (loss) per common share — basic and diluted	$	(0.48	)	$	(0.04	)	$	0.01		$	(0.30	)	$	(0.28	)
Weighted average number of common shares outstanding — basic and diluted		8,028,030			6,674,979			6,662,568			6,754,206			6,710,133

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	As of June 30,
Balance Sheet Data:	2003			2002			2001			2000			1999
Cash and cash equivalents	$	540,384		$	222,562		$	309,621		$	423,307		$	1,198,675
Working capital		(3,821,523	)		(1,615,747	)		(3,927,450	)		(1,257,780	)		157,394
Total assets		5,271,967			7,108,413			8,377,015			7,920,247			9,827,994
Total debt		2,851,212			5,980,013			6,480,880			5,750,883			6,492,239
Total stockholders’ deficiency		(5,974,197	)		(3,737,862	)		(3,424,838	)		(3,427,041	)		(1,609,640	)

⁽¹⁾ In 2003, we decided to discontinue the operations of PlanetCAD Inc. and close three offices located in New York, Michigan and Ohio. The results of operations of these operations are treated as discontinued operations and reported as a separate component of operating results in our consolidated statement of operations for all periods presented. A more detailed description of this transaction is provided in Note 4 of the Consolidated Financial Statements.

⁽²⁾ As of July 1, 2002, we adopted Statements of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“Statement 142”). As a result, goodwill and other intangible assets deemed to have indefinite lives are no longer amortized, but are subject to annual impairment tests. As a result of testing goodwill for impairment upon the adoption of Statement 142, we recorded a non-cash impairment charge of $520,000, which is included as a cumulative effect of a change in accounting principle in the 2003 statement of operations. A more detailed description of this transaction is provided in Note 1 of the Consolidated Financial Statements.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT.

Certain statements set forth below constitute “forward-looking statements”. Such forward-looking statements involve known and unknown risk, uncertainties and other factors including, but not limited to, those discussed in our annual and quarterly reports, that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements implied by such forward-looking statements. Given these uncertainties, investors and prospective investors are cautioned not to place undue reliance on such forward-looking statements. We disclaim any obligation to update information contained in any forward-looking statement.

Overview

Avatech Solutions is a leading provider of design automation and data management solutions for the manufacturing, building design, engineering, and total infrastructure and facilities management markets. We specialize in software development, technical support, training and consulting aimed at improving design and documentation efficiencies and the seamless integration of workflow processes. These technology solutions enable our customers to enhance productivity, profitability and competitive position. We are one of the largest Autodesk software integrators worldwide and a leading provider of engineering document management solutions.

During 2003, we revised our growth strategy and began to focus on new ways of expanding our people resources, product offerings, and geographic “footprint.” We plan to increase our efforts to attract and employ highly qualified professionals in specialized areas throughout the organization, including salespeople, applications engineers, and software developers. Our portfolio of products and services has been expanded to include new relationships with other software manufacturers, additional service offerings, and continued development of new proprietary software products to support our entry into the product lifecycle management (PLM) market. Geographic expansion will be supported by targeted mergers and acquisitions, the opening of new locations, and expanded international product distribution relationships. This diversification strategy is intended to match our product and service offerings more precisely with the needs of our customers.

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In November 2002, we consummated a merger with PlanetCAD Inc., whereby shareholders of Avatech Solutions, Inc. exchanged their shares for common stock of PlanetCAD. Upon completion of the merger, the shareholders of Avatech owned 75% of the outstanding common stock of PlanetCAD. PlanetCAD develops, markets, and supports cycle time reduction software solutions that integrate engineering processes and data for the manufacturing supply chain. For accounting purposes, the shareholders of Avatech were deemed to have acquired PlanetCAD, as Avatech’s shareholders own a majority of the outstanding common stock of the surviving entity.

In connection with the merger, we were expecting to realize significant operating synergies as a result of combining a software developer with the established distribution network of Avatech. The operating synergies were critical to the success of the merger, since at that time, PlanetCAD was generating significant operating losses. Although the opportunities to develop software technology through PlantCAD were attractive, the operating synergies originally anticipated by the combining the companies were not realized. As a result, we decided to sell the principal products and technology comprising the PlanetCAD business in May 2003. In May 2003, we sold PlanetCAD’s principal software technology to an unrelated third party in the United Kingdom for $1.2 million. Most of the operations of PlanetCAD were conducted from our Boulder, Colorado office, which was closed in June 2003. In disposing of the operations, we recorded a loss on disposal of approximately $175,000 in June 2003.

Additionally, we decided to close three offices in New York, Michigan and Ohio due to operating performance issues. These locations were authorized software dealers subject to a channel partner agreement with our principal suppliers. As a result, we are no longer authorized to market or distribute software products subject to the channel partner agreement in those states. In connection with the closure of these locations, we recognized a loss on disposal of approximately $179,000 in June 2003.

The results of operations of PlanetCAD and other discontinued operating segments are treated as discontinued operations, and reported as a separate component of operating results in our consolidated statements of operations. Our consolidated financial statements for periods prior to 2003 have been restated to consistently present these operations as discontinued operations. Unless otherwise indicated, all amounts included in Management’s Discussion and Analysis of Financial Condition and Results of Operations are from continuing operations. We have included in Note 4 – Discontinued Operations of PlanetCAD and Certain Operating Segments to the Consolidated Financial Statements a more comprehensive discussion about our discontinued operations.

Product Sales. Our product sales consist primarily of the resale of packaged design software programs that are installed on a user workstation, on a local area network server, or in a hosted environment. The programs perform and support a wide variety of functions related to design, modeling, drafting, mapping, rendering, and facilities management tasks. We are one of the largest domestic resellers of design software developed by Autodesk, one of the world’s leading design software and digital content companies for building design and land development, manufacturing, utilities, telecommunications, wireless data services and digital media. Approximately 90% of the our total product revenues are related to Autodesk products.

Service Revenue. We also provide services in the form of training, technical support, and professional services. Our training offerings include product and process education classes at our training facilities or directly at a customer site. Our class instructors are application engineers who have formal training or industry experience in the course content.

We provide technical support services primarily through our telephone support center located in Omaha, Nebraska. Through our staff of full time consultants, we provide assistance to customers making inquiries concerning the software products that we sell.

We also provide project-focused professional consulting services through our own application engineers and programmers, as well as software customization, data migration, computer aided design standards consulting, workflow analysis, and implementation assistance for complex software products.

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Commission Revenue. We generate commission revenue from the resale of Autodesk software to various customers, a number of which Autodesk considers to be “major accounts.” Autodesk designates these customers as major accounts based on specific criteria, primarily sales volume, and typically gives these customers volume discounts. We are responsible for managing and reselling Autodesk products to a number of these major account customers; however, software product is shipped directly from Autodesk to the customers. We receive commissions upon shipment of the product from Autodesk to the customer based on the product sales price, the product type, total volume, and overall performance.

Cost of Product Sales. Our cost of product sales consists of the cost of purchasing products from software suppliers or hardware manufacturers. Additionally, we include the associated shipping and handling costs in cost of product sales.

Cost of Service Revenue. Cost of service revenue includes the direct costs associated with the implementation of software and hardware solutions as well as training, support services, and professional services. These costs consist primarily of compensation, benefits, travel, and the costs of third-party contractors engaged by us. Cost of service revenue does not include an allocation of overhead costs.

Selling, General and Administrative Expense. Selling, general and administrative expense consists primarily of compensation and other expenses associated with management, finance, human resources, and information systems. Additionally, advertising and public relations expense, as well as expenses for facilities such as rent and utilities, are included in selling, general and administrative expense. Although selling, general and administrative expenses increased in 2003, we instituted a number of cost containment measures to align our selling, general and administrative expenses with our current revenue levels. First, we terminated approximately 30 employees in June 2003, which we expect to contribute approximately $1.9 of reductions in salaries and employee benefits. And second, we reduced our professional fees, telephone, supplies, marketing, and travel expense related to PlanetCAD and the three offices we closed due to operating performance issues in June 2003. We considered these expense reduction measures necessary during the later part of fiscal 2003 to help reduce operating losses arising from the prolonged impact of the economic recession impacting the software industry.

Depreciation and Amortization Expense. Depreciation and amortization expense represents the period costs associated with our investment in property and equipment, consisting principally of computer equipment, software, furniture and fixtures, and leasehold improvements. Depreciation and amortization expense is computed using the straight-line method. Additionally, we lease all of our facilities and depreciate leasehold improvements over the lesser of the lease term or the useful life of the asset.

Until July 1, 2002, we amortized goodwill, the excess of the purchase price paid over the fair value of the identifiable net assets acquired in purchase business combinations, over the expected period of benefit, generally 10 to 15 years. As of July 1, 2002, we no longer amortize goodwill, but rather make annual assessments of impairment.

Interest Expense. Interest expense consists primarily of interest on our revolving line-of-credit and subordinated debt, which we incurred to fund operations over the past three years.

Critical Accounting Policies

General. Our consolidated financial statements are impacted by the accounting policies uses and the estimates and assumptions made by management during their preparation. Critical accounting policies and estimates that impact the consolidated financial statements are those that relate to software revenue recognition and estimates of bad debts. We discuss all of these critical accounting policies with our Audit Committee on a periodic basis. A summary of the significant accounting policies can be found in the Notes to the Consolidated Financial Statements. Presented below is a description of the accounting policies that are most critical to an understanding of our consolidated financial statements.

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Software Revenue Recognition. We derive most of our revenue from the resale of packaged software products. Our product sales may also include hardware that may be purchased for the convenience of our customers. Historically, we have not experienced significant customer returns. We earn service revenue from training and other professional services, which often are related to the products that we sell and these services are not essential to the functionality of the software. We offer annual support contracts to our customers for the software products that we sell, or we offer maintenance and support services under hourly billing arrangements.

We recognize revenue from software arrangements in accordance with the provisions of AICPA Statement of Position No. 97-2, Software Revenue Recognition, as amended by SOP No 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. Prior to recognizing any revenue under these arrangements, (1) persuasive evidence of an arrangement must exist, (2) delivery of the software or service must have occurred, (3) all fees must be assessed as fixed or determinable and (4) all fees must be probable of collection. We determine whether criteria (3) and (4) have been satisfied based on our judgment regarding the fixed nature of the fee charged for services rendered and products delivered and the collectibility of such fee. Revenue recognized for any reporting period could be adversely affected if changes in conditions cause us to determine these criteria are not met for certain future transactions.

Our customer arrangements can involve the sale of one or more elements. When this occurs, we allocate revenue to each element based on the relative fair value of each element. We limit the assessment of fair value to the price that we charge when the element is sold separately. All of the elements included in the multiple element arrangements have been analyzed by management, which may include products that are resold, training and other professional services, and support services. We have determined that sufficient evidence of the fair value based on these separate sales exists to allocate revenue to the specified elements. We recognize training and other professional services revenue as services are delivered and recognize support revenue ratably over the respective contract term. We include all unrecognized fees that have been billed in our deferred revenue.

Bad Debts. We maintain an allowance for doubtful accounts for estimated losses which may result from the inability of our customers to pay for purchased products and services or for disputes that affect our ability to fully collect our accounts receivable. We estimate this allowance by reviewing the status of our past-due accounts and record general reserves based on our historical bad debt expense. Our actual experience has not varied significantly from our estimates; however, if the financial condition of our customers were to deteriorate, resulting in their inability to pay for products or services, we may need to record additional allowances in future periods. To mitigate this risk, we perform ongoing credit evaluations of our customers.

Effect of Recent Accounting Pronouncements

In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 146, Accounting for Costs Associated with Exit or Disposal Activities (Statement 146). Statement 146 supersedes EITF Issue No. 94-3 Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. Statement 146 requires that costs associated with an exit or disposal plan be recognized when incurred rather than at the date of a commitment to an exit or disposal plan. Statement 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002, and early adoption is encouraged. We adopted Statement 146 effective for disposal activities after December 31, 2002.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. The objective of Interpretation No. 46 is to improve financial reporting by companies involved with variable interest entities. The Interpretation requires variable interest entities to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. Currently, we do not have any investments in or an agreement with variable interest entities and, therefore, will apply the provisions of Interpretation No. 46 prospectively.

Years Ended June 30, 2003, 2002 and 2001

The following table sets forth the percentages of total revenues represented by selected items reflected in our audited Consolidated Statements of Operations included elsewhere in this report. The year-to-year comparisons of financial results are not necessarily indicative of future results.

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	Year Ended June 30,
	2003		2002		2001
Revenue:
Product sales	55.0	%	62.5	%	66.7	%
Service revenues	26.5	%	21.5	%	19.7	%
Commission revenue	18.5	%	16.0	%	13.6	%
Total revenue	100.0	%	100.0	%	100.0	%
Cost of Revenue:
Cost of product sales	39.0	%	41.8	%	45.9	%
Cost of service revenue	16.8	%	12.5	%	12.5	%
	55.8	%	54.3	%	58.4	%
Gross margin	44.1	%	45.7	%	41.6	%
Other expenses:
Selling, general and administrative	53.8	%	43.6	%	38.0	%
Depreciation and amortization	1.8	%	1.9	%	2.1	%
Impairment loss	—		1.0	%	—
	55.6	%	46.5	%	40.1	%
Operating income (loss)	(11.4	)%	(0.8	)%	1.4	%
Other income:
Gain on the extinguishment of debt	8.5	%	—		—
Interest and other income	0.1	%	0.2	%	0.2	%
Minority interest	(0.4	)%	—		—
Interest expense	(1.3	)%	(1.8	)%	(2.0	)%
	6.9	%	(1.6	)%	(1.8	)%
Loss from continuing operations before income taxes and cumulative effect of change in accounting principle	(4.5	)%	(2.4	)%	(0.4	)%
Income tax expense (benefit)	1.8	%	(1.1	)%	0.0	%
Loss from continuing operations before cumulative effect of change in accounting principle	(6.3	)%	(1.3	)%	(0.4	)%
Income (loss) from continuing operations of discontinued operating segments (including loss on disposal of $354,000 in 2003)	(8.2	)%	0.4	%	0.7	%
Income (loss) before cumulative effect of change in accounting principle	(14.5	)%	(0.9	)%	0.3	%
Cumulative effect of change in accounting for goodwill	(2.3	)%	—		—
Net income (loss)	(16.7	)%	(0.9	)%	0.3	%

Year Ended June 30, 2003 Compared to Year Ended June 30, 2002

Revenues. Total revenues for the year ended June 30, 2003 decreased $4.5 million, or 16.2%, to $23.0 million, compared to $27.5 million for the same period in 2002. Our revenues include product sales, service revenue, and commission revenue. Overall, the gross margin percentage decreased to 44.1% in the year ended June 30, 2003, compared to 45.7% in the same period in 2002. For the year ended June 30, 2003, revenues in two of three categories—product revenue and commission revenue – decreased as a result of the weak economic conditions and a restructuring of the major account programs provided by Autodesk. During 2003, Autodesk reduced the number of customers designated as major accounts by changing the specific criteria for granting volume discounts. However, we continue to realign our sales organization and focus on being a full solution service provider for our customers. As a result, our service revenues have increased over the prior period.

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Product sales for the year ended June 30, 2003 decreased $4.5 million, or 26.3%, to $12.7 million, compared to $17.2 million in the same period in 2002. We attribute this fluctuation in product sales to weak economic conditions causing customers to defer purchasing software products as well as the timing and customer acceptance of product upgrades. During the fiscal year ending June 30, 2003, hardware sales decreased by $160,000, or 35%. Since fiscal 1999, we continue to de-emphasize the resale of hardware products to our customers due to the less favorable profit margins associated with hardware sales.

Service revenue for the year ended June 30, 2003 increased $190,000, or 3.2%, to $6.1 million, compared to $5.9 million in the same period in 2002. This increase in service revenue is a direct result of an increase in professional and technical support service contracts. We were engaged to perform professional services as part of a few large facilities management software implementation projects initiated in 2003. Additionally, the increase is a result of increased training service revenue due to an increase in the number of training seminars held at Avatech sites.

Commission revenue for the year ended June 30, 2003 decreased $134,000, or 3.1%, to $4.3 million, compared to $4.4 million in the same period in 2001. The decrease in commission revenues resulted from Autodesk’s restructuring of the major account program and an industry-wide decrease in sales volume related to the associated software products.

Cost of Revenues and Expenses

Costs of Revenue. Cost of product sales for the year ended June 30, 2003 decreased $2.5 million, or 21.7%, to $9 million, compared to $11.5 million for the same period in 2002. Cost of product sales as a percentage of related revenue for the year ended June 30, 2003 increased to 71.0% from 66.8% in the same period in 2002. We attribute this increase in cost of product sales as a percentage of related revenues to the restructuring of Autodesk’s marketing co-op programs, which increased our cost of product sales as a percentage of related revenue by 5%. During 2003, Autodesk reduced the number of customers designated as major accounts by changing the specific criteria for granting volume discounts.

Cost of service revenue for the year ended June 30, 2003 increased $429,000, or 12.5%, to $3.9 million compared to $3.4 million for the same period in 2002. Cost of service revenue as a percentage of related revenue for the year ended June 30, 2003 increased to 63.5% from 58.3% in the same period in 2002. We attribute this increase in cost of service revenue as a percentage of revenues primarily to our need to subcontract certain work to third party providers. During 2003, we were engaged to perform professional services as part of a few large facilities management software implementation projects. In order to provide the appropriate expertise and service the projects, we subcontracted some of this work to third party providers, which resulted in an increase in related the cost of service revenues.

Selling, General and Administrative Expense. Selling, general and administrative expense for the year ended June 30, 2003 increased $0.4 million, or 3.1%, to $12.4 million, compared to $12.0 million for the same period in 2002. Selling, general and administrative expense as a percent of total revenues was 53.8% during the year ended June 30, 2003, and 43.6% during the same period in 2002. We attribute the increase in selling, general and administrative expense to the fixed cost required to support a nationwide network of 20 offices, and the PlanetCAD (a public company) merger of November 19, 2002. After this reverse merger, our professional services costs increased by $370,000 and insurance expense increased by $172,000 due to the cost of being a public company.

Depreciation and Amortization. Depreciation and amortization expense for the year ended June 30, 2003 decreased $102,000 or 19.8%, to $414,000, compared to $516,000 for the same period in 2002. Depreciation and amortization expense of property and equipment decreased as a result of reduced capital expenditures for computer equipment and software and an increase in the number of fully depreciated assets compared to the prior period.

Other Income (Expense). Other income (expense) was ($428,000) and $1.6 million in 2002 and 2003, respectively. We attribute the significant increase in other income during the 2003 fiscal year to a gain recorded from the extinguishment of debt. In January 1999, we borrowed $3.0 million from a significant supplier. In August 2002, we executed an agreement to extinguish the debt for a cash payment of $1.0 million resulting in a $2.0 million gain on the extinguishment of debt. The extinguishment of debt also contributed to the $197,000 reduction in interest expense in 2003 compared to 2002.

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Income Tax Benefit. Income tax expense (benefit) was ($295,000) and $408,000 in 2002 and 2003, respectively. In August 2002, we realized a $2.0 million taxable gain from the extinguishment of certain debt, which resulted in us recording a net deferred tax asset of $373,000 at June 30, 2002. In 2003, we recorded deferred income tax expense of $373,000 related to the estimated reduction in deferred tax assets in 2003. This increase in deferred income tax expense coupled with certain state tax expense resulted in the additional income tax expense for 2003. We have recorded a valuation allowance of $2.3 million against our deferred tax assets due to significant uncertainties surrounding their ultimate realization. We have net operating loss carryforward of approximately $8.3 million, which are available to reduce future taxable income.

Cumulative Effect of Change in Accounting Principle. As of July 1, 2002, we adopted Statement of Financial Accounting Standards Board Statement No. 142, Goodwill and Other Intangible Assets (“Statement 142”). As a result of adopting Statement 142 and performing the required transitional impairment tests, we recorded a non-cash charge of $520,000, which is included in cumulative effect of change in accounting principle in the 2003 consolidated statement of operations. The impairment charge relates solely to Avatech of Michigan, a business unit that ceased operations in June 2003.

Year Ended June 30, 2002 Compared to Year Ended June 30, 2001

Revenues. Total revenues for the year ended June 30, 2002 decreased $0.4 million, or 1.3%, to $27.5 million, compared to $27.9 million for the same period in 2001. Overall, the gross margin percentage increased to 45.7% in the year ended June 30, 2002, compared to 41.6% in the same period in 2001. For the year ended June 30, 2002, revenues in two of three categories—service revenue and commission revenue—increased as a result of a realigned sales organization and a renewed focus by us to become a full solution service provider for our customers. Although price changes occurred throughout the period, they did not have a material effect on fluctuations in revenues. We attribute our increased commission revenue during this period to realigning our sales organization in September 2000, which allowed us to improve our sales forecasting and better exploit sales opportunities on high margin software products and major accounts.

Product sales for the year ended June 30, 2002 decreased $1.4 million, or 7.4%, to $17.2 million, compared to $18.6 million in the same period in 2001. We attribute this fluctuation in product sales to a decrease in sales volume of software sold to our customer base. During 2002, our sales focus was on Autodesk major accounts in order to increase our commission revenue. The lack of attention on our product sales resulted in a reduction in sales volume, as well as a significant decline in the resale of hardware products. As Autodesk major account sales increased, the level of focus on other end product sales then diminished and resulted in a $1.6 million or 7.8% decrease in related revenues. Additionally, hardware sales decreased by $381,000, or 46% during the period ending June 30, 2002. Since fiscal 1999, we continue to de-emphasized the resale of hardware products to our customers.

Service revenue for the year ended June 30, 2002 increased $430,000, or 7.9%, to $5.9 million, compared to $5.5 million in the same period in 2001. The increase in service revenue is a direct result of an increase in the number of training and professional services sold through our expanded customer base during 2002. Our training and technical support services have received additional sales focus as we transition to a full solution service provider of software and services for our customers.

Commission revenue for the year ended June 30, 2002 increased $593,000, or 15.6%, to $4.4 million, compared to $3.8 million in the same period in 2001. The increase in commission revenues resulted from our realigned sales organization, which has improved sales to major accounts that provide for commission revenue.

Cost of Revenues and Expenses

Costs of Revenue. Cost of product sales for the year ended June 30, 2002 decreased $1.3 million, or 10.3%, to $11.5 million, compared to $12.8 million for the same period in 2001. Cost of product sales as a percentage of related revenue for the year ended June 30, 2002 decreased to 66.8% from 68.9% in the same period in 2001. We attribute the decrease in cost of product sales as a percentage of related revenues to an increase in sales of higher margin software products.

Cost of service revenue for the year ended June 30, 2002 decreased $27,000, or 0.8%, to $3.4 million compared to $3.5 million for the same period in 2001. Cost of service revenue as a percentage of related revenue for

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the year ended June 30, 2002 decreased to 58.3% from 63.4% in the same period in 2001. We attribute the decrease in cost of service revenue as a percentage of revenues to our enhanced efforts to sell higher margin training and professional services rather than lower margin installations of hardware products.

Selling, General and Administrative Expense. Selling, general and administrative expense for the year ended June 30, 2002 increased $1.4 million, or 13.4%, to $12 million, compared to $10.6 million for the same period in 2001. Selling, general and administrative expense as a percent of total revenues was 43.6% during the year ended June 30, 2002, compared to 38% during the same period in 2001. The expansion of our sales force and technical support staff in our existing locations, as well as the costs associated with opening three new offices in Chicago, IL, St. Paul, MN, and Tampa, FL, during the third and fourth quarters of 2001 contributed to the increase in selling, general and administrative expense during this period. In addition, we increased our sales force and support staff by approximately 15 employees in the fiscal year ending June 30, 2002, resulting in an approximate $1.0 million increase in selling, general and administrative expense. New facilities costs also contributed $50,000 to selling, general and administrative expense during the same period.

Depreciation and Amortization. Depreciation and amortization expense for the year ended June 30, 2002 decreased $81,000 or 13.5%, to $516,000, compared to $597,000 for the same period in 2001. Depreciation and amortization expense of property and equipment decreased as a result of capital expenditures for computer equipment and software made in 1999 becoming fully depreciated in 2001.

Goodwill Impairment. For the year ended June 30, 2002, we recorded an impairment charge of $285,000 for the write-down of unamortized goodwill to its estimated fair value. We recorded this impairment charge in the third quarter of 2002 after determining that sales at one subsidiary were unlikely to reach previously projected levels. We evaluated the goodwill for impairment by comparing our best estimate of undiscounted future cash flows with the carrying value of goodwill. As the carrying value of goodwill exceeded the estimate of undiscounted future cash flows, a discounted cash flow analysis was performed to estimate the fair value of the goodwill.

Other Income (Expense). Other expense for the year ended June 30, 2002 decreased $65,000, or 13.3%, to $427,000, compared to $493,000 for the same period in 2001. We attribute this reduction in other expense in 2002 primarily to a reduction in interest expense resulting from a decrease in the variable interest rate associated with our revolving line-of-credit.

Income Tax Benefit. In 2002, we recorded an income tax benefit of $295,000. This benefit includes current income tax expense of $88,000 for state income taxes and a deferred tax benefit of $373,000. The deferred tax benefit of $373,000 resulted from a change in the estimate of the amount of net operating loss carryforwards that we believed we would be able to use to reduce 2003 income taxes. We revised this estimate principally because we recorded a $1.96 million gain from the extinguishment of certain debt in August 2002, increasing our 2003 taxable income.

Liquidity and Capital Resources

Historically, we have financed our operations and met our capital expenditure requirements primarily through cash flows provided by operations and borrowings under short-term and long-term debt arrangements. For the year ended June 2003, we used cash in operations of $1.6 million, compared to $1.1 million of cash that was generated from operations in fiscal year 2002. The principal reason for this $2.7 million change in cash provided from operations was an increase of $3.1 million in the net loss before non-cash gains and charges in fiscal year 2003. We funded our operating cash needs in 2003 with cash on-hand and proceeds from the sale of securities that we received upon the merger with PlanetCAD totaling approximately $1.6 million, and net proceeds of approximately $1.2 million from debt financing arrangements.

Our operating assets and liabilities consist primarily of accounts receivable, accounts payable, and inventory. Changes in these balances are affected principally by the timing of sales and investments in inventory based on expected customer demand. We minimize inventory levels through arrangements with suppliers to ship products with an average delivery period of two days and centralized inventory management. We purchase 90% of our product from one principal supplier which provides us with the ability to purchase up to $3.0 million of inventory under 60 to 90 day payment terms. Day sales outstanding (DSO’s) in receivables increased to 58 days at

18

June 30, 2003 from 52 days at June 30, 2002. Historically, we have been able to manage our DSOs in a range from 50 to 60 days. Our customary collection terms range from 30 to 60 days for all of our customers.

Current liabilities include $1.6 million of borrowings under a line-of-credit from a senior lender as well as $250,000 of subordinated notes. In October 2000, we entered into a $2.0 million revolving line-of-credit agreement with a senior lender that was to expire in October 2003, and was payable within 60 days of demand. Borrowings under the line-of-credit accrued interest at the senior lender’s prime rate plus 1.5%. On September 11, 2003, we refinanced our line of credit and obtained a 3-year revolving line of credit with a another bank in an amount up to $2,000,000. Borrowings under this line-of-credit bear interest at the prime rate plus 2.0% and are limited to 75% of eligible accounts receivable. This line-of-credit expires in three years and is payable within 60 days of demand.

In January 1999, we borrowed $3.0 million from a junior lender. In August 2002, we executed an agreement to extinguish the debt for a cash payment of $1.0 million and compliance with certain non-financial covenants. We borrowed $500,000 from each of PlanetCAD and an Avatech director and shareholder to make the cash payment. On November 19, 2002 Avatech completed its merger with PlanetCAD and the loan from PlanetCAD was eliminated in consolidation. The loan to the director and shareholder accrued simple interest at a rate of 15.0%, was due to mature on July 1, 2003, and was subordinate to our senior lender. On May 28, 2003, we issued $1.0 million of senior subordinated notes to the director and shareholder in exchange for $500,000 of additional cash and the cancellation of the $500,000 note issued in August 2002. These new notes accrue interest at a rate of 12% per annum, with quarterly interest payments due commencing September 1, 2003, and mature on July 1, 2004.

We also had outstanding $1.6 million of 10% subordinated notes in 2002, and issued another $175,000 of 10% subordinated notes during 2003. The notes were to mature on July 1, 2003, and interest was payable quarterly until maturity or prepayment. In connection with the merger with PlanetCAD, Inc. in November 2002, subordinated note holders owning an aggregate of $1.5 million of the subordinated notes exchanged their notes for 610,000 shares of preferred stock of a subsidiary. The remaining note holders agreed to extend the maturity dates on the $250,000 of remaining outstanding subordinated notes to January 1, 2004. As a result of these exchanges, we reduced our liabilities at June 30, 2003 by $1.5 million and improved our working capital position. We expect to reduce our interest expense by $152,500 per year due to this exchange.

Our investing activities consist principally of investments in computer and office equipment. We acquired $394,000 in 2001, $259,000 in 2002 and $273,000 in 2003, and have no outstanding purchase commitments at June 30, 2003. In order to maintain current operations, we believe that our average annual outlay for investments in computer equipment and office furniture will be consistent with the previous three years.

As described more fully above, our financing activities in all periods consisted principally of borrowings and repayments under our line of credit. Net borrowings (repayments) under line of credit were $733,000 in 2001, $494,000 in 2002 and $212,000 in 2003.

In connection with the acquisition of PlanetCAD, we incurred approximately $0.9 million of merger costs and PlanetCAD incurred approximately $1.3 million of merger costs. These costs have reduced the amount of working capital that we have available for operations. We have implemented various cost containment programs in order to minimize the impact of the transaction. During fiscal 2003, we instituted an expense reduction program which contributed to a $2.2 million reduction in selling, general and administrative expense. We considered these expense reduction measures necessary during the later part of fiscal 2003 to help reduce operating losses arising from the prolonged impact of the economic recession impacting the software industry. Additionally, we expect to reduce expenses of approximately $1.6 million due to the shut down and discontinuance of certain operating segments.

On July 22, 2003, we entered into a loan agreement with a software developer to borrow up to $1.5 million for working capital purposes. The loan is to be received in two payments with the initial funding of $1.0 million occurring on July 25, 2003 and the remaining $500,000 to be provided so long as we meet certain marketing and distribution milestones. The loan agreement requires repayment of principal plus interest at 6% per annum in thirty-five equal quarterly installments beginning in January 2005. We must meet certain financial and non-financial covenants in connection with this agreement.

19

Based on our evaluation of the cash expected to be generated from operations in the near term, available capital resources and the timing of cash payments to lenders, we believe that we have sufficient sources of working capital to fund our operations in the normal course of business through at least June 30, 2004.

Below is a summary of our contractual obligations and commitments at June 30, 2003:

	Payments due by Period
Contractual Obligations	Total		2004		2005		2006		2007		2008
Long-term debt and line-of-credit	$	2,851,212	$	1,884,709	$	966,503	$	—	$	—	$	—
Operating leases		1,472,736		692,076		301,902		193,890		185,760		99,108
Total obligations	$	4,323,948	$	2,576,785	$	1,268,405	$	193,890	$	185,760		99,108

Quarterly Results of Operations

The following table sets forth unaudited quarterly financial information for each of the eight quarters in the two years ended June 30, 2003. This financial information has been restated to reflect the discontinued operations of PlanetCAD Inc. and the closing of three offices located in New York, Michigan and Ohio as well as the non-cash impairment charge of $520,000, which is included as a cumulative effect of a change in accounting principle effective July 1, 2003. Management believes that this information has been prepared on the same basis as the audited consolidated financial statements appearing elsewhere in this Report and, in management’s opinion, this information includes all adjustments, consisting only of normal recurring adjustments, necessary to fairly present the unaudited quarterly operating results when read in conjunction with our audited consolidated financial statements and the notes thereto appearing elsewhere in this Report. These operating results are not necessarily indiciative of results for any future period.

	Three Months Ended
	Sept. 30, 2001			Dec. 31, 2001		Mar. 31, 2002			Jun. 30, 2002			Sept. 30, 2002			Dec. 31, 2002			Mar. 31, 2003			Jun. 30, 2003
Revenues	$	6,992,552		$	6,883,236	$	5,782,882		$	7,844,106		$	5,473,660		$	5,454,712		$	5,222,300		$	6,879,174
Cost of sales		3,931,805			3,693,554		3,142,223			4,165,165			2,965,330			2,938,202			2,683,244			4,277,397
Gross margin		3,060,747			3,189,682		2,640,659			3,678,941			2,508,330			2,516,510			2,539,056			2,601,777
Operating income (loss)		(215,185	)		207,898		(157,226	)		(68,480	)		(545,581	)		(522,689	)		(86,137	)		(1,473,801	)
Net income (loss)	$	(361,260	)	$	161,685	$	(151,474	)	$	103,554		$	452,076		$	(799,729	)	$	(758,790	)	$	(2,741,863	)
Earnings (loss) per share—basic and diluted	$	(0.05	)	$	0.02	$	(0.02	)	$	0.02		$	0.07		$	(0.11	)	$	(0.09	)	$	(0.34	)
Shares used in computation		6,680,031			6,670,785		6,665,919			6,674,979			6,690,870			7,172,370			8,897,874			8,028,030

Our operating results may vary significantly from quarter to quarter due to a variety of factors. One such significant factor is the potential fluctuation in revenues due to seasonality of the business.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from changes in interest rates associated with our variable rate line-of-credit facility. At June 30, 2003, approximately 57% of our outstanding debt bore interest at variable rates. Accordingly, our earnings and cash flow are affected by changes in interest rates. Assuming the current level of borrowings at variable rates and assuming a 100 basis point change in the 2003 average interest rate under these borrowings, it is estimated that our 2003 interest expense and net income would have changed by less than $20,000. In the event of an adverse change in interest rates, management would likely take actions to further mitigate our exposure. However, due to the uncertainty of the actions that would be taken and their possible effects, this analysis assumes no such actions. Further this analysis does not consider the effects of the change in the level of overall economic activity that could exist in such an environment.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data required by this Item 8 are included in our Consolidated Financial Statements and set forth in the pages indicated in Item 15(a) of this Annual Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None.

ITEM 9A. CONTROLS AND PROCEDURES

Within 90 days prior to the filing date of this report, an evaluation was performed under the supervision and with the participation of our management, including the CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective. Since the date of the evaluation, there have been no significant changes in our internal controls or in other factors that could significantly affect internal controls, nor were there any significant deficiencies or material weaknesses in these controls requiring corrective action.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information with respect to the identity and business experience of our directors and their remuneration in our definitive Proxy Statement to be filed pursuant to Regulation 14A and issued in conjunction with the 2003 Annual Meeting of Shareholders, is incorporated herein by reference. The information with respect to the identity and business experience of our executive officers is set forth in Part I of this Form 10-K.

Executive Officers of the Registrant

Set forth below is information with respect to the individuals who serve as our executive officers.

Name	Age	Position
Donald “Scotty” Walsh	66	Chief Executive Officer
Eric L. Pratt	38	President and Chief Operating Officer
Beth O. MacLaughlin	52	Chief Financial Officer
Debra Keith	51	Senior Vice President
Scott Fischer	44	Executive Vice President

There are no family relationships among any of our directors or executive officers.

DONALD R. WALSH. Before joining Avatech as its CEO in December, 2002, Mr. Walsh was the Executive Vice President of Business & Network Systems Sales for InterVoice-Brite, Inc., a global leader in the call automation industry, a position he held since August 1999. From August 1990 until the 1999 merger of Brite Voice Systems, Inc. with InterVoice, Inc., Mr. Walsh served as the Executive Vice President of Worldwide Sales for the Brite Voice Systems. Before joining Brite Voice Systems, Mr. Walsh served as President of PSC Information Services, a division of a Philadelphia suburban corporation that provides data processing products and services. Mr. Walsh’s experience also includes 23 years of experience with IBM.

ERIC L. PRATT. Mr. Pratt joined Avatech on April 15, 2003 as President and Chief Operating Officer. From 2000 through 2003, he served as Vice President of Business Development for Sonus, Inc. and as Executive Vice President of the Sales, Marketing and Professional Services division of Telecom Technologies, Inc. before Sonus acquired Telecom Technologies, Inc. Before that, he served as the Vice President of the Network Services Division of InterVoice-Brite, Inc. from 1997 to 2000. Mr. Pratt has a BS in Industrial Engineering from Texas Tech University and fourteen years’ sales and management experience in the high-tech and communications sectors.

BETH O. MACLAUGHLIN. Ms. MacLaughlin joined Avatech Solutions Subsidiary, Inc. in 1998 as its Controller and was appointed Vice President-Finance, Controller and Interim Chief Financial Officer in August 2003. Prior to joining Avatech in 1998, she served as director of Finance for NRL & Associates, a manufacturing firm, and held responsibilities as a staff accountant for two public accounting firms. She was adjunct professor of accounting at Catonsville Community College and an accounting instructor at Anne Arundel Community College during the period 1995 through 2001. She is a certified public accountant and holds a B.S. in Accounting from the University of Baltimore, where she graduated with cum laude honors in 1994.

SCOTT FISCHER. Mr. Fischer joined Avatech in April 2002 as Senior Vice President, Professional Services and currently serves as our Executive Vice President—Operations. Prior to going to Avatech, Mr. Fischer was a principal in TenX Capital Partners from June of 2001 to April of 2002. Prior, he was Vice President and General Manager—Americas for Wireless Knowledge, a start-up wireless technology provider from January through May of 2001. From June of 1999 through January of 2001, Mr. Fischer was a Senior Vice President of AppNet, then Commerce One, which acquired it. Mr. Fischer was Vice President—Sales and Marketing, General Manager, of triSpan Internet Business Solutions, of Conshohocken, Pennsylvania from August 1998 until June of 1999, when the company was sold. From October 1997 to August 1998, Mr. Fischer was the President of NDC Group, a consulting company in Alexandria, Virginia. Mr. Fischer began his career with Anderson Consulting (Accenture) where he worked until September 1997.

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DEBRA KEITH. Ms. Keith joined Avatech in July of 1998 as a Sales Manager and became Senior Vice President of Sales and Marketing in April 2002. Prior to joining Avatech, Ms. Keith was the Sales Development Manager for Autodesk, Inc. from December of 1994 through July of 1998. From 1979 until 1994, Ms. Keith held various management positions in Auto-trol Technology Corporation of Denver, Colorado, including Business Unit Manager (1992 to 1994) and Senior Account Manager (1987 to 1992).

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference from our definitive Proxy Statement to be issued in conjunction with the 2003 Annual Meeting of Shareholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated by reference from our definitive Proxy Statement to be issued in conjunction with the 2003 Annual Meeting of Shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference from our definitive Proxy Statement to be issued in conjunction with the 2003 Annual Meeting of Shareholders.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference from our definitive Proxy Statement to be issued in conjunction with the 2003 Annual Meeting of Shareholders.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8 - K

(a) 1. Financial Statements

	Page
Reports of Independent Auditors	F-2
Consolidated Balance Sheets as of June 30, 2002 and 2003	F-4
Consolidated Statements of Operations for the Years Ended June 30, 2001, 2002, and 2003	F-6
Consolidated Statements of Stockholder’s deficit for the Years Ended June 30, 2001, 2002, and 2003	F-7
Consolidated Statements of Cash Flows for the Years Ended June 30, 2001, 2002, and 2003	F-8
Notes to Consolidated Financial Statements	F-9

2. Financial Statement Schedules: Schedule II - Schedule of Valuation and Qualifying Accounts

Reports of Independent Auditors on Financial Statement Schedules

The Board of Directors and Stockholders

Avatech Solutions, Inc.

We have audited the consolidated financial statements of Avatech Solutions, Inc. as of June 30, 2002 and 2003 and for the years then ended, and have issued our report thereon dated September 18, 2003 (included elsewhere in this Report). Our audit also included the 2003 and 2002 amounts included in the financial statement schedule responsive to Item 15(a) of this Report. This schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits.

In our opinion, the 2003 and 2002 amounts in the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

	/s/ Ernst & Young LLP
Baltimore, Maryland
September 18, 2003

The Board of Directors and Stockholders

Avatech Solutions, Inc.

We have audited the consolidated financial statements of Avatech Solutions, Inc. as of June 30, 2001 and for the year then ended, and have issued our report thereon dated September 18, 2003 (included elsewhere in this Report). Our audit also included the 2001 amounts included in the financial statement schedule responsive to Item 15(a) of this Report. This schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audit.

In our opinion, the 2001 amounts in the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

	/s/ Walpert & Wolpoff, LLP
Baltimore, Maryland
September 18, 2003

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Avatech Solutions, Inc. and Subsidiaries Valuation and Qualifying Accounts

			Additions
Description	Balance at beginning of period		Charged to costs and expenses		Charged to other accounts –  describe			Deductions – describe			Balance at end of period
Year Ended June 30, 2003:
Deducted from assets accounts:
Allowance for doubtful accounts:	$	112,000	$	118,000	$	53,000	(2)	$	(123,000	)1	$	160,000
Year Ended June 30, 2002:
Deducted from assets accounts:
Allowance for doubtful accounts:	$	212,000	$	76,000	$	—		$	(176,000	)1	$	112,000
Year Ended June 30, 2001:
Deducted from assets accounts:
Allowance for doubtful accounts:	$	282,000	$	7,000	$	—		$	(77,000	)1	$	212,000

¹ Uncollectible accounts written off, net of recoveries.

² Allowance recorded upon acquisition.

3.    Exhibits required to be filed by Item 601 of Regulation S-K

Exhibit No.	Description of Exhibit
2.1	Agreement and Plan of Merger a
3.1	Restated Certificate of Incorporation b
3.2	First Amendment to Restated Certificate of Incorporation b
3.3	Reverse Split Amendment to Restated Certificate of Incorporation a
3.4	Amendment of PlanetCAD’s Certificate of Incorporation to change the name of PlanetCAD, Inc. to Avatech Solutions, Inc. a
3.5	Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock c
3.6	Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock d
3.7	Certificate of Designation, Preferences and Rights of Series C Convertible Preferred Stock e
3.8	By-Laws b
10.01	Autodesk Authorized Channel Partner Agreement by and among Avatech Solutions, Inc. and Autodesk, Inc. effective as of February 1, 1997 and as later amended on February 1, 2002 a
10.02	Autodesk Loan Agreement by and among Autodesk, Inc. and Avatech Solutions, Inc. and its subsidiaries dated January 25, 1999 f
10.03	Bentley Reseller Agreement by and among Avatech Solutions, Inc. and Bentley Systems, Incorporated dated June 11, 2001 and as later amended on March 15, 2002 a,*
10.04	Settlement Agreement between Autodesk and Avatech Solutions, Inc. dated August 14, 2002 g
10.05	Autodesk Authorized Channel Partner Agreement by and among Avatech Solutions, Inc. and Autodesk, Inc. effective as of February 1, 2003 e
10.06	Loan Agreement by and between Avatech Solutions Subsidiary, Inc. and a Strategic Partner dated July 22, as amended (confidential treatment of Name requested and filed separately with the Commission)
10.07	Security Agreement by and between Avatech Solutions Subsidiary, Inc. and a Strategic Partner dated July 22, 2003 (confidential treatment of Name requested and filed separately with the Commission)

25

10.08	Guaranty by and between Avatech Solutions, Inc. and a Strategic Partner dated July 22, 2003 (confidential treatment of Name requested and filed separately with the Commission)
10.09	Demand Promissory Note by and between Avatech Solutions Subsidiary, Inc. and Key Bank and Trust in the amount of $2,000,000 dated September 11, 2003
10.10	Loan and Security Agreement by and between Avatech Solutions Subsidiary, Inc. and Key Bank and Trust dated September 11, 2003
10.11	Guaranty by and between Avatech Solutions, Inc. and Key Bank and Trust dated September 11, 2003
10.12	Warrant to purchase 15,000 shares of Common Stock issued by Avatech Solutions, Inc. to Key Bank and Trust on September 11, 2003
10.13	Master Lease Agreement by and between Allstate Leasing, Inc. and Avatech Solutions, Inc. dated July 17, 2001 a
10.14	Form of 10% Subordinated Note with attached Warrant issued by Avatech Solutions, Inc. to certain note holders in connection with Avatech Solutions Subsidiary, Inc.’s 1998 $2,600,000 Subordinated Debt Offering, dated June 1, 2003
10.15	Form of 12 % Subordinated Note issued by Avatech Solutions, Inc. to certain note holders in connection with Avatech Solutions Subsidiary, Inc.’s 1998 $2,600,000 Subordinated Debt Offering dated June 1, 2003
10.16	Senior Subordinated Promissory Note, principal amount $500,000.00, issued by Avatech Solutions, Inc. in favor of PlanetCAD Inc dated August 13, 2002 f
10.17	Senior Subordinated Promissory Note, principal amount $500,000.00, issued by Avatech Solutions, Inc. in favor of W. James Hindman dated August 13, 2002 f
10.18	Promissory Note, principal amount $500,000.00, issued by Avatech Solutions, Inc. in favor of W. James Hindman dated May 28, 2003
10.19	Promissory Note, principal amount $500,000.00, issued by Avatech Solutions, Inc. in favor of W. James Hindman dated May 28, 2003
10.20	Warrants to purchase up to 32,400 shares of Common Stock issued by Avatech to W. James Hindman dated May 28, 2003
10.21	Affadavit and Discharge of Indebtedness by W. James Hindman.
10.22	Subordination Agreement by and among PlanetCAD Inc., Avatech Solutions, Inc., Technical Learningware Company, Inc. and CIT Group/Business Credit, Inc. dated August 14, 2002 h
10.23	Subordination Agreement by and among W. James Hindman, Avatech Solutions, Inc., Technical Learningware Company, Inc. and CIT Group/Business Credit, Inc. dated August 13, 2002 f
10.24	Form Purchase Agreement for Series C Convertible Preferred Stock e
10.25	Avatech Solutions Subsidiary, Inc. 1998 Stock Option Plan a
10.26	Avatech Solutions Subsidiary, Inc. 2000 Stock Option Plan a
10.27	Avatech Solutions, Inc. Stockholders’ Agreement by and among Avatech Solutions, Inc. and certain stockholders of Avatech Solutions, Inc. who acquired shares of Avatech Solutions, Inc. common stock under Avatech Solutions, Inc.’s terminated employee stock purchase plan a
10.28	2002 Stock Option Plan a
10.29	Restricted Stock Award Plan e
10.30	Employment Agreement by and between Debra Keith and Avatech Solutions, Inc. dated as of April 4, 2003
10.31	Employment Agreement by and between Eric L. Pratt and Avatech Solutions, Inc. dated April 15, 2003 i
10.32	Employment Agreement by and between Scott N. Fischer and Avatech Solutions, Inc. dated as of March 17, 2003

26

10.33	Consulting Agreement by and between V. Joel Nicholson and Avatech Solutions, Inc. effective as of June 1, 2003 i
10.34	Employment Agreement by and between Donald R. “Scotty” Walsh and Avatech Solutions, Inc. dated July 1, 2003
10.35	Letter Agreement by and between Henry D. Felton and Avatech Solutions, Inc. dated August 21, 2003
16.1	Letter regarding change in certifying accountant j
21.1	Subsidiaries of the Registrant k
23.1	Consent of Ernst & Young LLP
23.2	Consent of Walpert and Wolpoff, LLP
24.1	Power of Attorney l
31.1	Certification of Donald R. “Scotty” Walsh, Chief Executive Officer
31.2	Certification of Beth O. MacLaughlin, Chief Financial Officer
32.1	Section 1350 Certifications

a. Incorporated by reference to our Registration Statement on form S-4 filed on May 30, 20002.

b. Incorporated by reference to our Registration Statement on form SB-2 filed on November 21, 2000.

c. Incorporated by reference to our Registration Statement on form 8-A filed on March 11, 2002.

d. Incorporated by reference to our Current Report on form 8-K, filed on May 28, 2002.

e. Incorporated by reference to our Amended Registration Statement on form S-1, filed on April 11, 2003.

f. Incorporated by reference to our Amended Registration Statement on form S-4 filed on September 13, 2002.

g. Incorporated by reference to our Amended Registration Statement on form S-4 filed on September 27, 2002.

h. Incorporated by reference to our Current Report on form 8-K, filed on August 21, 2002.

i. Incorporated by reference to our Amended Registration Statement on form S-1, filed on June 4, 2003.

j. Incorporated by reference to our Current Report on Form 8-K, filed March 4, 2003.

k. Incorporated by reference to our Registration Statement on form S-1, filed on March 26, 2003.

l. Incorporated by reference to our Registration Statement on Form S-8, filed on August 29, 2003.

t. Terminated

(b)     Reports on Form 8-K

We have filed the following Reports on Form 8-K during the most recent quarter:

Report	Date
Current Report on Form 8-K	April 16, 2003
Current Report on Form 8-K	May 16, 2003
Current Report on Form 8-K	May 16, 2003
Current Report on Form 8-K	June 23, 2003

27

SIGNATURES

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

	AVATECH SOLUTIONS, INC.
Date: October 3, 3003	By:	/s/ Donald R. (Scotty) Walsh
		Donald R. (Scotty) Walsh
		Chief Executive Officer

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

Name	Title	Date
/s/	Chief Executive Officer and Director	October 3, 3003
Donald “Scotty” Walsh
/s/	Chief Financial Officer	October 3, 3003
Beth O. MacLaughlin
/s/	Chairman of the Board	October 3, 3003
W. James Hindman
By: Beth O. MacLaughlin, Attorney-in-Fact
/s/	Vice Chairman of the Board	October 3, 3003
Hank Felton
By: Beth O. MacLaughlin, Attorney-in-Fact
/s/	Director	October 3, 3003
Eugene J. Fischer
By: Beth O. MacLaughlin, Attorney-in-Fact
/s/	Director	October 3, 3003
George Cox
By: Beth O. MacLaughlin, Attorney-in-Fact

28

FINANCIAL STATEMENTS AND SCHEDULES

Avatech Solutions, Inc.

Index to Consolidated Financial Statements

	Page
Reports of Independent Auditors	F–2
Consolidated Balance Sheets	F–4
Consolidated Statements of Operations	F–6
Consolidated Statements of Stockholders’ Deficit	F–7
Consolidated Statements of Cash Flows	F–8
Notes to Consolidated Financial Statements	F–9

F-1

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders

Avatech Solutions, Inc.

We have audited the accompanying consolidated balance sheets of Avatech Solutions, Inc. and subsidiaries as of June 30, 2002 and 2003, and the related consolidated statements of operations, stockholders’ deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Avatech Solutions, Inc. and subsidiaries at June 30, 2002 and 2003, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.

As discussed in Note 1 to the financial statements, the Company changed its method of accounting for goodwill effective July 1, 2002.

/s/ Ernst & Young LLP

Baltimore, Maryland

September 18, 2003

F-2

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders

Avatech Solutions, Inc. and Subsidiaries

We have audited the consolidated balance sheet of Avatech Solutions, Inc. and Subsidiaries as of June 30, 2001 (not included herein), and the related accompanying consolidated statements of operations, stockholders’ deficiency, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Avatech Solutions, Inc. and Subsidiaries as of June 30, 2001, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

WALPERT & WOLPOFF, LLP

Baltimore, Maryland

September 18, 2003

F-3

Avatech Solutions, Inc. and Subsidiaries

Consolidated Balance Sheets

	June 30
	2002		2003
Assets
Current assets:
Cash and cash equivalents	$	222,562	$	540,384
Accounts receivable, less allowance of $112,000 in 2002 and $160,000 in 2003		4,108,372		3,393,123
Inventory		356,013		146,877
Deferred income taxes		373,000		—
Prepaid expenses		113,469		395,189
Other current assets		—		94,258
Total current assets		5,173,416		4,569,831
Property and equipment:
Computer software and equipment		2,664,168		2,925,159
Office furniture and equipment		778,037		760,020
Leasehold improvements		198,002		207,661
		3,640,207		3,892,840
Less accumulated depreciation and amortization		2,889,000		3,255,361
		751,207		637,479
Goodwill		752,920		52,272
Other assets		430,870		12,385
Total assets	$	7,108,413	$	5,271,967

F-4

	June 30
	2002			2003
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable and accrued expenses	$	3,655,902		$	5,089,207
Accrued compensation and related benefits		223,919			354,555
Borrowings under line-of-credit		1,422,901			1,634,709
Current portion of long-term debt		500,000			250,000
Deferred revenue		650,511			736,963
Other current liabilities		335,930			325,920
Total current liabilities		6,789,163			8,391,354
Long-term debt		3,282,112			—
Notes payable to related parties		775,000			966,503
Other long-term liabilities		—			363,307
Commitments and contingencies		—			—
Minority interest		—			1,525,000
Stockholders’ deficit:
Preferred stock, $0.01 par value; 1,297,537 shares authorized; 1,000,000 shares designated as Series C Convertible Preferred Stock; Series C issued and outstanding shares of 172,008 in 2003		—			1,720
Common stock, $0.01 par value; 22,500,000 shares authorized; issued and outstanding shares of 6,662,010 in 2002 and 8,897,874 in 2003		66,621			88,980
Additional paid-in capital		1,654,562			3,242,454
Accumulated deficit		(5,459,045	)		(9,307,351	)
Total stockholders’ deficit		(3,737,862	)		(5,974,197	)
Total liabilities and stockholders’ deficit	$	7,108,413		$	5,271,967

See accompanying notes.

F-5

AVATECH SOLUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

	Year ended June 30
	2001			2002			2003
	(Restated – see Note 4)			(Restated – see Note 4)
Revenues:
Product sales	$	18,571,208		$	17,195,381		$	12,667,141
Service revenue		5,481,227			5,911,665			6,101,339
Commission revenue		3,802,778			4,395,730			4,261,366
		27,855,213			27,502,776			23,029,846
Cost of revenue:
Cost of product sales		12,802,140			11,486,205			8,988,503
Cost of service revenue		3,473,537			3,446,542			3,875,670
		16,275,677			14,932,747			12,864,173
Gross margin		11,579,536			12,570,029			10,165,673
Other expenses:
Selling, general and administrative		10,587,388			12,001,786			12,379,577
Depreciation and amortization		597,167			516,470			414,304
Impairment loss		—			284,766			—
		11,184,555			12,803,022			12,793,881
Operating income (loss)		394,981			(232,993	)		(2,628,208	)
Other income (expense):
Gain on the extinguishment of debt		—			—			1,960,646
Minority interest		—			—			(94,140	)
Interest and other income		60,251			59,871			15,915
Interest expense		(553,180	)		(487,472	)		(290,375	)
		(492,929	)		(427,601	)		1,592,046
Loss from continuing operations before income taxes and cumulative effect of change in accounting principle		(97,948	)		(660,594	)		(1,036,162	)
Income tax expense (benefit)		7,426			(295,194	)		408,072
Loss from continuing operations before cumulative effect of change in accounting principle		(105,374	)		(365,400	)		(1,444,234	)
Income (loss) from operations of discontinued operating segments (including loss on disposal of $354,000 in 2003)		194,710			117,905			(1,884,072	)
Income (loss) before cumulative effect of change in accounting principle		89,336			(247,495	)		(3,328,306	)
Cumulative effect of change in accounting for goodwill		—			—			(520,000	)
Net income (loss)	$	89,336		$	(247,495	)	$	(3,848,306	)
Loss from continuing operations before cumulative effect of change in accounting principle per common share – basic and diluted	$	(0.02	)	$	(0.06	)	$	(0.18	)
Earnings (loss) per common share – basic and diluted	$	0.01		$	(0.04	)	$	(0.48	)

See accompanying notes.

F-6

AVATECH SOLUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Deficit

Years ended June 30, 2001, 2002, and 2003

	Preferred Stock			Common Stock					Additional Paid-In Capital			Accumulated Deficit			Total
	Number of Shares	Par Value		Number of Shares		Par Value
Balance at July 1, 2000	—	$	—	6,710,385		$	67,104		$	1,806,741		$	(5,300,886	)	$	(3,427,041	)
Issuance of common stock for cash	—		—	6,864			69			26,179			—			26,248
Purchase of common stock from former employees	—		—	(35,073	)		(351	)		(113,030	)		—			(113,381	)
Net income for fiscal year 2001	—		—	—			—			—			89,336			89,336
Balance at June 30, 2001	—		—	6,682,176			66,822			1,719,890			(5,211,550	)		(3,424,838	)
Purchase of common stock from current and former employees	—		—	(20,166	)		(201	)		(65,328	)		—			(65,529	)
Net loss for fiscal year 2002	—		—	—			—			—			(247,495	)		(247,495	)
Balance at June 30, 2002				6,662,010			66,621			1,654,562			(5,459,045	)		(3,737,862	)
Issuance of shares of common stock to purchase PlanetCAD, Inc.				2,235,864			22,359			1,262,641			—			1,285,000
Issuance of warrants in conjunction with notes payable				—			—			36,288			—			36,288
Issuance of Series C Convertible Preferred Stock for cash	172,008		1,720							288,963						290,683
Net loss for fiscal year 2003				—			—			—			(3,848,306	)		(3,848,306	)
Balance at June 30, 2003	172,008	$	1,720	8,897,874		$	88,980		$	3,242,454		$	(9,307,351	)	$	(5,974,197	)

See accompanying notes.

F-7

AVATECH SOLUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

	Year ended June 30
	2001			2002			2003
Cash flows from operating activities
Net income (loss)	$	89,336		$	(247,495	)	$	(3,848,306	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision for bad debts		73,893			75,542			118,046
Gain on extinguishment of debt		—			—			(1,960,646	)
Depreciation and amortization		694,503			612,918			665,990
Deferred income taxes		—			(373,000	)		373,000
Impairment loss		—			285,374			256,864
Cumulative effect of change in accounting principle		—			—			520,000
Write-off of in-process research and development		—			—			282,000
Loss on disposal of property and equipment		1,420			7,575			116,862
Amortization of debt discount charged to interest expense		2,694			3,844			6,325
Changes in operating assets and liabilities:
Accounts receivable		(1,027,531	)		893,017			787,249
Inventory		(7,065	)		106,647			209,136
Prepaid expenses and other current assets		96,987			190,804			235,997
Accounts payable and accrued expenses		(295,547	)		(240,179	)		725,490
Accrued compensation and related benefits		(23,439	)		(69,862	)		109,014
Deferred revenue		14,144			(144,405	)		(142,874	)
Other current liabilities		29,410			(4,058	)		(10,000	)
Net cash provided by (used in) operating activities		(351,195	)		1,096,722			(1,555,853	)
Cash flows from investing activities
Purchase of property and equipment		(394,060	)		(258,944	)		(273,088	)
Proceeds from sale of property and equipment		6,343			10,584			7,325
Proceeds from sale of available-for-sale securities		—			—			625,000
Acquisition costs related to PlanetCAD merger		—			(302,228	)		(612,782	)
Cash received from PlanetCAD merger		—			—			995,425
Net cash provided by (used in) investing activities		(387,717	)		(550,588	)		741,880
Cash flows from financing activities
Proceeds from borrowings under line-of-credit		30,977,721			31,166,171			29,490,344
Repayments of borrowings under line-of-credit		(30,244,758	)		(31,660,182	)		(29,278,536	)
Proceeds from issuance of long-term debt		—			—			175,000
Proceeds from issuance of notes payable to related parties		—			—			1,500,000
Repayments of long-term debt		(6,810	)		—			(1,000,000	)
Proceeds from issuance of common stock		26,248			—			—
Proceeds from issuance of preferred stock		—			—			290,683
Repurchase of common stock		(113,381	)		(65,529	)		—
Change in other assets		(13,794	)		(73,653	)		(45,696	)
Net cash provided by (used in) financing activities		625,226			(633,193	)		1,131,795
Net increase (decrease) in cash and cash equivalents		(113,686	)		(87,059	)		317,822
Cash and cash equivalents—beginning of year		423,307			309,621			222,562
Cash and cash equivalents—end of year	$	309,621		$	222,562		$	540,384

See accompanying notes.

F-8

AVATECH SOLUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Nature of Business and Basis of Presentation

Avatech Solutions, Inc. provides design automation software, hardware, training, technical support and professional services to corporations, government agencies and educational institutions throughout the United States.

The consolidated financial statements include the accounts of Avatech Solutions, Inc. and its majority-owned subsidiaries. One of the Company’s subsidiaries has issued and outstanding preferred stock, which is accounted for as minority interest. All intercompany accounts and transactions between the Company and its consolidated affiliated companies have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Inventory

Inventory, consisting of computer software and hardware, is stated at the lower of first-in, first-out cost, or market.

Property and Equipment

Property and equipment is stated at cost. Depreciation for computer software and equipment and office furniture and equipment is provided for by the straight-line method over estimated useful lives ranging from three to seven years. Leasehold improvements are amortized over the lesser of the lease term or the useful life of the asset using the straight-line method.

Impairment of Long-Lived Assets Excluding Goodwill

Long-lived assets, excluding goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable. These events or changes in circumstances may include a significant deterioration of operating results, changes in business plans, or changes in anticipated future cash flows. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. Assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups. If the assets are impaired, the impairment recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets. Fair value is generally determined by estimates of discounted cash flows. The discount rate used in any estimate of discounted cash flows would be the rate required for a similar investment of like risk.

F-9

1. Summary of Significant Accounting Policies (continued)

Goodwill and Accounting Change

Goodwill is the excess of the purchase price paid over the fair value of the identifiable net assets acquired in purchase business combinations. Prior to July 1, 2002, goodwill was amortized on a straight-line basis over 15 to 20 years. As of July 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“Statement 142”). Under Statement 142, goodwill and other intangible assets deemed to have indefinite lives are no longer amortized, but are subject to annual impairment tests. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. The implied fair value of goodwill is the amount determined by deducting the estimated fair value of all tangible and identifiable intangible net assets of the reporting unit to which goodwill has been allocated from the estimated fair value of the reporting unit. If the recorded value of goodwill exceeds its implied value, an impairment charge is recorded for the excess.

The changes in the carrying amount of goodwill for the year ended June 30, 2003 are as follows:

Balance at July 1, 2002	$	752,920
Changes in goodwill during the year:
Cumulative effect of a change in accounting principle		520,000
Goodwill impairment of Avatech of Michigan disposal group		180,648
Balance at June 30, 2003	$	52,272

As a result of testing goodwill for impairment upon the adoption of Statement 142 as of July 1, 2002, the Company recorded a non-cash impairment charge of $520,000, which is included as a cumulative effect of a change in accounting principle in the consolidated statements of operations. The impairment charge relates solely to Avatech of Michigan, a business unit, which ceased operations in June 2003.

Net income (loss) adjusted to exclude goodwill amortization for the years ended June 30, 2001, 2002 and 2003 are as follows:

	Year ended June 30
	2001		2002			2003
Reported net income (loss)	$	89,336	$	(247,495	)	$	(3,848,306	)
Goodwill amortization, net of income taxes		87,297		73,000			—
Adjusted net income (loss)	$	176,633	$	(174,495	)	$	(3,848,306	)
Earnings (loss) per common share, basic and diluted:
Reported net income (loss)	$	0.01	$	(0.04	)	$	(0.48	)
Goodwill amortization, net of income taxes		0.01		0.01			—
Adjusted net income	$	0.02	$	(0.03	)	$	(0.48	)

Stock Options and Stock Granted to Employees

The Company records compensation expense for all stock-based compensation plans using the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25 “). Under APB No. 25, compensation expense is recorded over the vesting period to the extent that the fair value of the underlying stock on the date of grant exceeds the exercise or acquisition price of the stock or stock-based award. Financial Accounting Standards Board Statement No. 123, Accounting for Stock Based Compensation, (“Statement 123”) encourages companies to recognize expense for stock-based awards based on their estimated fair value on the date of grant. Statement 123 requires the disclosure of pro forma income and earnings per share data in the notes to the financial statements if the fair value method is not adopted.

F-10

1. Summary of Significant Accounting Policies (continued)

Stock Options and Stock Granted to Employees (continued)

The following table illustrates the effect on net income (loss) and earnings (loss) per share as if the Company had applied the fair value recognition provisions of Statement 123 to stock-based employee compensation:

	Year Ended June 30
	2001			2002			2003
Net income (loss) as reported	$	89,336		$	(247,495	)	$	(3,848,306	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of income taxes		(188,792	)		(116,362	)		(191,855	)
Pro forma net loss	$	(99,456	)	$	(363,857	)	$	(4,040,161	)
Earnings (loss) per common share:
Basic and diluted – as reported	$	0.01		$	(0.04	)	$	(0.48	)
Basic and diluted – pro forma	$	(0.01	)	$	(0.05	)	$	(0.50	)

To determine the pro forma data as required by Statement 123, the Company used stock option pricing models to measure the fair value of stock options as of the date of grant. For all stock options granted prior to November 19, 2002, the date the Company’s common stock became publicly traded and had a readily determinable market value, the Company used the minimum value method to calculate pro forma compensation expense. For all stock options grated after this date, the Company used the Black-Scholes option pricing model.

The minimum value method calculates the fair value of options as the excess of the estimated fair value of the underlying stock at the date of grant over the present value of both the exercise price and the expected dividend payments, each discounted at the risk-free rate, over the expected life of the option. The Black-Scholes option pricing model was developed for estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards. The following are the assumption made in computing the fair value of stock-based awards:

	Year ended June 30
	2001			2002			2003
Risk-free interest rate		5.21	%		4.48	%		3.03	%
Dividend yield		0	%		0	%		0	%
Option life		5 years			5 years			5 years
Stock price volatility		(	*)		(	*)		1.95
Weighted average fair value of granted options	$	2.55		$	1.77		$	1.48

(*) Assumption is not applicable under the minimum value method.

F-11

1. Summary of Significant Accounting Policies (continued)

Revenue Recognition and Accounts Receivable

The Company generates revenue from three sources: the resale of prepackaged software products, professional services and commissions.

Software products are frequently sold in an arrangement that includes implementation services or maintenance services. Maintenance services are limited to help desk support and training. The Company allocates the total arrangement fee among each element based on vendor-specific objective evidence of the relative fair value of each of the elements. The Company limits its assessment of fair value of each element to the price charged when the same element is sold separately.

Revenues for software product sales are recognized as revenue when four criteria are met. These four criteria are (i) a signed purchase order has been obtained (ii) delivery of the software has occurred (iii) the fee is fixed or determinable and (iv) the fee is probable of collection. Software product sales billed and not recognized as revenue are included in deferred revenue. The Company generally does not require collateral. The Company provides a 30-day return policy to its customers. The Company has historically not experienced significant returns, and accordingly, allowances for returned products are not recorded.

Revenues from maintenance services are recognized ratably over the contractual service period. Revenues from implementation and training services are recognized as the services are provided. Advance payments for these services are deferred and recognized in the periods when the services are performed.

The Company also receives commissions from vendors for transactions in which the Company does not take title to the product or have responsibility for the delivery of the services, has no risk of loss for collection, and has acted as an agent or broker. These commissions are recorded as revenue when earned.

Allowance for Doubtful Accounts

The Company uses estimates to determine the amount of the allowance for doubtful accounts necessary to reduce accounts receivable to its expected net realizable value. The Company estimates the amount of the required allowance by reviewing the status of past-due receivables and analyzing historical bad debt trends. Actual collection experience has not varied significantly from estimates, due primarily to credit policies, collection experience, and a lack of concentration of accounts receivable. The Company charges-off receivables deemed to be uncollectible to the allowance for doubtful accounts. Accounts receivable balances are not collateralized.

Cost of Product Sales

Cost of product sales includes the costs of purchasing software and hardware from suppliers and the associated shipping and handling costs.

Cost of Service Revenue

Cost of service revenue consists primarily of direct employee compensation and related benefits, the cost of subcontracted services and direct expenses billable to customers. Cost of service revenue does not include an allocation of overhead costs.

Warranty Costs

The Company does not provide for warranty costs for its products as such costs are incurred by the manufacturer of the products.

F-12

1. Summary of Significant Accounting Policies (continued)

Advertising Costs

Costs incurred for producing and communicating advertisements are expensed as incurred and included in selling, general and administrative expenses in the accompanying statements of operations. Advertising expenses approximated $412,000, $549,000 and $780,000 for years ended June 30, 2001, 2002 and 2003, respectively.

Business Segment Reporting

The Company’s operating segments are established based on geographical areas managed by location managers and for which discrete financial information is prepared and reviewed by the Company’s chief operating decision maker. These segments are aggregated for segment reporting purposes into one reporting segment because the operating segments have similar economic characteristics and generate revenues from sales of similar products and services to similar types of customers.

Income Taxes

The Company uses the liability method to account for income taxes. Income tax expense includes income taxes currently payable and deferred taxes arising from temporary differences between financial reporting and income tax bases of assets and liabilities. Deferred income taxes are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Stock Split

The Company’s board of directors authorized a three-for-one stock split in the form of a stock dividend to be distributed to stockholders of record on September 15, 2003. All share and per share data included in the consolidated financial statements have been restated to reflect the stock split.

Recent Accounting Pronouncements

Accounting for Costs Associated with Exit or Disposal Activities

In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (Statement 146). Statement 146 supersedes EITF Issue No. 94-3 Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. Statement 146 requires that costs associated with an exit or disposal plan be recognized when incurred rather than at the date of a commitment to an exit or disposal plan. Statement 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002, with early application encouraged. The adoption of Statement 146 is not expected to have a significant effect on the Company’s results of operations and financial position.

Consolidation of Variable Interest Entities

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. The objective of Interpretation No. 46 is to improve financial reporting by companies involved with variable interest entities. The Interpretation requires variable interest entities to be consolidated by a company if that company is subject to a majority of the risk loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. The Company currently does not have any investments in variable interest entities and, therefore, will apply the provisions of Interpretation No. 46 prospectively.

F-13

2. Supplemental Disclosure of Cash Flow Information

The following significant non-cash investing and financing activities occurred in 2003:

The Company entered into a business combination with PlanetCAD, Inc., whereby assets totaling $2.9 million were acquired and liabilities totaling $0.95 million were assumed in exchange for common stock.

Holders of $1.5 million of subordinated debt converted the debt into preferred stock in one of the Company’s wholly-owned subsidiaries.

The Company paid interest of approximately $533,000, $416,000 and $282,000 in 2001, 2002 and 2003, respectively.

3. Merger with PlanetCAD Inc.

On November 19, 2002, the Company consummated a merger with PlanetCAD Inc., whereby shareholders of the Company exchanged their shares of the Company’s common stock for common stock of PlanetCAD. Upon completion of the merger, the shareholders of the Company owned 75% of the outstanding common stock of PlanetCAD. PlanetCAD develops, markets, and supports cycle time reduction software solutions that integrate engineering processes and data for the manufacturing supply chain. In connection with the merger, options and warrants to purchase the common stock of the Company were converted into options and warrants to acquire common stock of the post-merger entity based on the merger exchange ratio.

For accounting purposes, the Company was deemed to have acquired PlanetCAD, as its shareholders own a majority of the outstanding common stock of the surviving entity. Upon the completion of the merger, the Company had 8,897,874 shares of outstanding common stock, 6,662,010 of which were issued to shareholders of Avatech upon the closing date. The results of operations of PlanetCAD are included in the accompanying 2003 statement of operations since November 1, 2002, or the effective date of the merger. The purchase method of accounting was used to record the acquisition, and the cost of acquiring PlanetCAD of $2.2 million, including estimated acquisition costs of $1.0 million, was assigned to acquired assets and liabilities based on their estimated fair value, as determined by an independent appraisal.

The purchase price allocation to acquired assets and liabilities at the acquisition date is summarized below:

Assets
Cash	$	995,000
Accounts receivable		120,000
Investments Prepaid expenses and other current assets		625,000 611,000
Property and equipment		337,000
Acquired technology and other amortizable intangible assets		216,000
Total assets		2,904,000
Liabilities
Accounts payable and accrued expenses		720,000
Deferred revenue		229,000
Total liabilities		949,000
Cost of net assets acquired, excluding acquired in-process research and development assets of $282,000	$	1,955,000

The value allocated to projects identified as in-process research and development of PlanetCAD products was charged to expense immediately following the completion of the merger and is included in the loss from operations of discontinued operating segments in the accompanying 2003 statement of operations. This write-off was necessary because the acquired in-process research and development had not yet reached technological feasibility and has no future alternative uses, and the related products under development may not achieve commercial viability. The value of acquired technology was determined by taking into account risks related to the characteristics and applications of the developed technology, existing and future markets and assessments of the stage of the developed technology’s life cycle. This analysis resulted in a valuation for developed technology that had reached technological feasibility and

F-14

3. Merger with PlanetCAD (continued)

therefore was capitalized. The developed technology and other intangible assets were amortized on a straight-line basis over 4 to 6 years.

In May 2003, the Company sold the software acquired from PlanetCAD and discontinued the acquired PlanetCAD operations. Accordingly, pro forma operating data of PlanetCAD is not relevant to an understanding of the potential future effects of these operations on consolidated results of operations, and therefore is not presented. See Note 4 for additional information.

4. Discontinued Operations of PlanetCAD and Certain Operating Segments

In June 2003, due to poor operating results, the Company closed three offices in New York, Michigan and Ohio. These locations were authorized software dealers subject to the Company’s channel partner agreement with its principal supplier. By virtue of these closings, the Company is no longer authorized to market or distribute software products subject to the channel partner agreements in those states. In connection with the closure of these locations, the Company recognized a loss on disposal of approximately $179,000 in June 2003.

In addition, the Company in May 2003 decided to discontinue the PlanetCAD business it acquired in November 2002. These operations were conducted from the Company’s Boulder, Colorado office, which was closed in June 2003. The software product technology developed by PlanetCAD was sold in May 2003 to an unrelated third party in the United Kingdom for $1,200,000. The purchase price is payable in cash by the purchaser as follows (i) $40,000 at closing, (ii) $200,000 in five monthly installments of $40,000 from July 2003 through November 2003, (iii) 50% of monthly revenues generated by the purchaser from the acquired assets from December 2003 through May 2005, not to exceed $960,000, and (iv) any unpaid balance in June 2005. As of June 30, 2003, the Company has received minimal cash from the sale of the PlanetCAD software products, and significant uncertainties exist surrounding the ability of the purchaser to ultimately make the required payments. Accordingly, the consideration from the sale of the PlanetCAD assets is being recorded as it is received. The Company recorded a loss on disposal of approximately $175,000 in June 2003.

These discontinued operations were components of the Company as their operations and cash flows were clearly distinguished, operationally and for financial reporting purposes, from the rest of the Company. The operations and cash flows of the components have been eliminated from the ongoing operations of the Company, and the Company will not have any significant continuing involvement in the operations of the components. Accordingly, the historical results of operations of these components are presented in the accompanying consolidated statements of operations as a separate component of operations classified as discontinued operations. The consolidated statements of operations for the years ended June 30, 2001 and 2002 have been restated to conform to this presentation.

Summarized operating results of the discontinued operations are as follows:

	Year ended June 30
	2001		2002		2003
Revenue:
Reseller locations	$	3,016,265	$	2,309,811	$	1,056,408
PlanetCAD operations		—		—		659,153
Total revenue	$	3,016,265	$	2,309,811	$	1,715,561
Pre-tax income (loss):
Reseller locations	$	194,710	$	117,905	$	34,236
PlanetCAD locations		—		—		(1,564,308	)
Total pre-tax income (loss)	$	194,710	$	117,905	$	(1,530,072	)

F-15

5. Borrowings Under Line-of-Credit

The Company maintained until September 2003 a revolving line-of-credit agreement with a financial institution payable within 60 days of demand by the lender. The credit extended under this financing agreement was limited to the lesser of $2 million or 75% of the Company’s aggregate outstanding eligible accounts receivable. The balance outstanding under this line-of-credit was $1,634,709 at June 30, 2003. Borrowings under this line-of-credit accrued interest at the prime rate plus 1.5% and were secured by the assets of the Company. In addition, the bank had the right to restrict any prepayment of other indebtedness by the Company. Because the interest rate adjusted with changes in the prime rate, the estimated fair value of the borrowings under the line of credit was equal to the carrying amount.

On September 11, 2003, the Company entered into a loan and security agreement with another lending institution, which replaces the existing revolving credit facility. The new loan agreement provides for a $2.0 million revolving line of credit that is payable within 60 days of demand by the lender. The credit extended under this new arrangement is limited to the lesser of $2.0 million or 75% of the Company’s aggregate outstanding eligible accounts receivable and expires in September 2006. Borrowings under this line-of-credit bear interest at the prime rate plus 2% and are secured by the assets of the Company.

6. Long-Term Debt and Gain on the Extinguishment of Debt

At June 30, 2002, the Company was obligated to one of its suppliers under a note agreement in the amount of $2.96 million, bearing interest at 6.5% per annum. The note required interest only payments through September 30, 2001, with subsequent quarterly payments of principal and interest of $621,311 until maturity in December 2002. In August 2002, the Company entered into an agreement to extinguish the outstanding $2.96 million debt for a cash payment of $1.0 million and compliance with certain non-financial covenants. The Company obtained the $1.0 million payable to the lender from borrowings from a director and shareholder and from PlanetCAD Inc., each in the amount of $500,000. These borrowings totaling $1.0 million accrued interest at 15% per annum. The loan from the director and shareholder was repaid on May 28, 2003. The loan from PlanetCAD was due at the earlier of (i) the date on which Avatech became unable or refused to complete the merger, or (ii) July 1, 2003. As described in Note 3, the Company completed its merger with PlanetCAD on November 19, 2002, at which time the $500,000 loan from PlanetCAD was eliminated in consolidation.

The gain on the extinguishment of the debt of $1.96 million was recorded in August 2002 upon the settlement of the $2.96 million note for cash of $1.0 million and compliance with certain non-financial covenants.

Additionally, the Company at June 30, 2002 had outstanding $1,600,000 of 10% subordinated notes and issued another $175,000 of 10% subordinated notes during 2003. In connection with the merger with PlanetCAD, Inc. approximately $1,525,000 of the subordinated notes were converted into 610,000 shares of preferred stock of a subsidiary on November 19, 2002. The $250,000 of remaining outstanding subordinated notes had their maturity dates extended to January 1, 2004. Accordingly, these subordinated notes are presented as current portion of long-term debt at June 30, 2003. The notes bear interest at rates ranging from 10% to 12% per annum to be paid quarterly until maturity. The notes are fully subordinated to the payment of senior indebtedness (line-of-credit) of the Company. In connection with extending the maturity dates, noteholders were issued stock purchase warrants to purchase 45,000 shares of common stock. Of these 45,000 shares, 15,000 shares are exercisable for $0.35 per share and 30,000 shares are exercisable for $0.17 per share. The warrants expire on January 1, 2004, and were determined to have an insignificant fair value. Accordingly, no value was ascribed to these warrants in the accompanying financial statements.

On May 28, 2003, the Company issued a $1.0 million senior subordinated note to a director and shareholder. The note was issued in consideration for cash of $500,000 and satisfaction of a $500,000 note issued in August 2002. The notes accrue interest at a rate of 12% per annum, with quarterly interest payments due commencing September 1, 2003, and mature on July 1, 2004. In connection with the notes, the director and shareholder received warrants to purchase 97,200 shares of the Company’s common stock.

F-16

6. Long-Term Debt and Gain on the Extinguishment of Debt (continued)

The warrants are exercisable for $0.27 per share and expire on June 1, 2008. The warrants were valued at $36,288, an estimate based on the Black-Scholes option pricing model. The estimated fair value of the warrants was recorded as additional paid-in capital and the notes have been recorded net of a discount of $36,288. This discount is being amortized using the interest method and recorded as additional interest expense over the term of the notes. At June 30, 2003, the balance outstanding under the promissory notes is $966,503.

The fair value of long-term debt at June 30, 2003 approximates its carrying value.

7. Preferred Stock

The Company has authorized 1,297,537 shares of preferred stock with a par value of $0.01 per share. At June 30, 2003, the Company had designated 1,000,000 shares of the authorized preferred stock as Series C Convertible Preferred Stock, of which 172,008 shares are outstanding with the following terms:

Redemption Feature

The preferred stock is redeemable in the event that the Company is engaged in a business combination that is approved by the board of directors and subsequently submitted and approved by a vote of the Company’s shareholders. Any director who holds shares of the Series C Convertible Preferred Stock is not eligible to vote on the proposed business combination. The redemption price is $1.69 per share plus an amount equal to all declared and unpaid dividends accrued on such shares since the original issue date.

Voting Rights

Each holder of the preferred stock shall vote together with all other classes and series of stock of the Company as a single class on all actions. Each share shall entitle the holder to one vote per share on each such action.

Dividend Rate

The holders of the preferred stock are entitled to receive cumulative, quarterly dividends of $0.04225 per share when and as declared by the Board of Directors.

Conversion Feature

The preferred stock is convertible at any time beginning 120 days after the original issuance date at the option of the holder and automatically converts into common stock if the common stock trades for more than $6.76 per share for 60 consecutive trading days on the NASDAQ national market system.

Each share of preferred stock is convertible into shares of common stock by multiplying the appropriate conversion rate in effect by the number of shares of preferred stock being converted. Currently, the conversion rate is three shares of common stock for each share of Series C Convertible Preferred Stock; however, this rate may be adjusted again due to stock splits, dividends, and other events defined in the stock purchase agreement.

Liquidation Preference

In the event of a liquidation, dissolution or winding up of the Company, the holders of Series C Convertible Preferred Stock are entitled to receive for each share, prior and in preference to any distribution of any of the assets or surplus funds to the holders of common stock, an amount equal to $1.69 per share plus all accumulated but unpaid dividends. If upon the occurrence of such event, the assets and funds thus distributed among the holders are insufficient to permit the payment of the preferential amount, then the entire assets and funds of the Company legally available for distribution shall be distributed ratably among the preferred stockholders.

F-17

8. Minority Interest

The Company has issued convertible preferred stock through one of its subsidiaries. The preferred stock accrues dividends at a rate of 10% per annum. Dividends may be paid each quarter from available cash of the subsidiary beginning October 1, 2002. The dividends on the subsidiary’s preferred stock are recorded as minority interest expense in the consolidated statement of operations. All accrued but unpaid dividends must be paid in cash at or before a liquidation event as defined in the preferred stock agreement. Each share of preferred stock will automatically convert into 3.3 shares of common stock of the parent upon the earlier of (i) 24 months from the issuance of the preferred stock or (ii) immediately preceding a liquidation event. On all matters submitted to the stockholders of the Company, the holders of the shares of Preferred Stock vote together as a single class on a one share, one vote basis. The preferred stock is presented as minority interest in the accompanying balance sheet at June 30, 2003.

9. Earnings Per Share

Basic earnings (loss) per common share is computed as net income (loss) divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share include the potential dilution that would occur from common shares issuable upon the exercise of outstanding stock options and warrants. Basic and diluted earnings (loss) per common share are equal for all years presented because the assumed exercise of options and warrants is antidilutive.

The following summarizes the computations of basic and diluted earnings per share:

	Year ended June 30
	2001			2002			2003
Numerator used in basic and diluted earnings (loss) per common share:
Loss from continuing operations before cumulative effect of change in accounting principle	$	(105,374	)	$	(365,400	)	$	(1,444,234	)
Income (loss) from discontinued operations, net of income taxes		194,710			117,905			(1,884,072	)
Cumulative effect of change in accounting for goodwill		—			—			(520,000	)
Net income (loss)	$	89,336		$	(247,495	)	$	(3,848,306	)
Denominator:
Weighted average shares outstanding		6,662,568			6,674,979			8,028,030
Earnings (loss) per common share:
Loss from continuing operations before cumulative effect of change in accounting principle	$	(0.02	)	$	(0.06	)	$	(0.18	)
Income (loss) from operations of discontinued operations, net of income taxes		0.03			0.02			(0.24	)
Cumulative effect of change in accounting principle		—			—			(0.06	)
Earnings (loss) per common share, basic and diluted	$	0.01		$	(0.04	)	$	(0.48	)

F-18

10. Stock Purchase Warrants

As of June 30, 2003, the Company has outstanding warrants to purchase common stock. A summary of these warrants is as follows:

Number of Shares	Exercise Price	Expiration Date
97,200	$0.27	June 2008
18,750	$6.67	June 2004
37,500	$83.33	June 2004
180,000	$43.33	February 2005
15,000	$0.35	January 2004
30,000	$0.17	January 2004
18,105	$0.01	November 2003
3,000	$1.92	July 2003
399,555

11. Employee Stock Compensation Plans

The Board of Directors may grant options under four stock option plans to purchase shares of the Company’s common stock at a price not less than the fair market value of the stock at the grant date. The Avatech Solutions, Inc. 2000 Stock Option Plan and the Avatech Solutions, Inc. 2002 Stock Option Plan are the only plans with significant stock option awards available for grant. All plans provide for the granting of either qualified or non-qualified stock options to purchase an aggregate of up to 1,580,250 shares of common stock to eligible employees, officers, and directors of the Company. Most options granted under the plans vest in three equal installments on the anniversary date of the grant over a three-year period.

A summary of stock option activity and related information is included in the table below:

	Year ended June 30
	2001				2002				2003
	Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price		Options		Weighted Average Exercise Price
Outstanding at beginning of year	306,120		$	3.81	445,491		$	3.81	775,950		$	3.81
Granted	196,812			3.81	472,092			3.81	482,442			2.78
Exercised	—			—	—			—	—			—
Forfeited	(57,441	)		3.81	(141,633	)		3.81	(224,431	)		6.40
Cancelled	—			—	—			—	(479,575	)		3.79
Outstanding at end of year	445,491		$	3.81	775,950			3.81	554,386		$	1.88
Exercisable at end of year	208,122		$	3.81	422,283		$	3.81	281,713		$	3.28
Weighted-average remaining contractual life				8.8 Years				8.7 Years				7.4 Years

F-19

11. Employee Stock Compensation Plans (continued)

Stock Option Cancellation Program

In April 2003, the Company offered its employees a voluntary option to surrender and cancel certain outstanding stock option agreements. Under the terms of the arrangement, the employee, if still employed, will receive an equivalent number of stock options six months and a day after the specific cancellation periods. In conjunction with this arrangement, the Company cancelled stock option agreements for the purchase of 479,575 shares of common stock. Any options granted in future periods subject to these agreements will have exercise prices equal to the then fair value of the Company’s common stock, and will vest over periods up to 36 months.

Employee Stock Purchase Plan

Effective May 1, 1998, the Company adopted the 1998 Employee Stock Purchase Plan for all employees meeting certain eligibility requirements. Under the Plan, employees may purchase shares of the Company’s common stock, subject to certain limitations, at 85% of its market value as determined by the Board of Directors. Purchases are limited to 10% of an employee’s eligible compensation. The Board of Directors authorized the suspension of this Plan in March 2000. During 2000, the Company sold approximately 56,430 shares to employees under this Plan.

The Plan does not contain a provision requiring the Company to repurchase shares from terminated employees. The Company elected to purchase 35,073 shares for $113,381 in 2001 and 20,166 shares for $65,529 in 2002 from former employees.

Restricted Stock Award Plan

In March 2003, the Company’s Board of Directors approved the Avatech Solutions, Inc. Restricted Stock Award Plan. Employees and consultants of the Company are eligible to receive stock awards under this plan if they are already shareholders or hold options to purchase shares of common stock. Additionally, officers or directors of the Company are eligible to receive restricted stock awards regardless of any pre-existing ownership of common stock or stock options. Vesting for restricted stock awards granted under this plan may vary, but awards will generally vest based on continued service of the recipient or achievement of specific performance goals. The Company has reserved 600,000 shares of common stock for issuance under the Restricted Stock Award Plan. No awards were granted as of June 30, 2003.

12. Shares Reserved for Future Issuance

At June 30, 2003, the Company has reserved 4,925,829 shares of common stock for future issuance upon the exercise of any stock options granted under the Company’s four stock option plans, exercise of outstanding stock purchase warrants, issuance of restricted stock awards, and the conversion of preferred stock.

13. Impairment Loss

In fiscal year 2002, the Company determined that the goodwill and other long-lived assets of one of its subsidiaries were likely impaired due to recurring operating losses and changes in the estimates of the future estimated cash flows from these operations over the remaining amortization period. The Company determined that the carrying value of these assets exceeded their estimated fair values by $285,374 and recorded an impairment loss in that amount. The fair value of the long-lived assets was determined using discounted cash flows over the remaining estimated useful life of the assets. Of the recorded impairment loss of $285,374, $283,000 related to goodwill and the remainder related to fixed assets.

F-20

14. Income Taxes

Income tax expense (benefit) includes current state income taxes of $7,426, $77,806, and $35,072 for 2001, 2002, and 2003, respectively. In 2002, a federal deferred income tax benefit of $373,000 was recorded. This benefit resulted from a reduction in the valuation allowance for deferred tax assets due to expected taxable income resulting from the $1.96 million gain from the extinguishment of debt in the first quarter of 2003. In 2003, the Company incurred unexpected operating losses and increased the valuation allowance for the net deferred tax assets by $373,000 recorded in 2002.

Significant components of the Company’s deferred tax assets and liabilities are as follows:

	2002			2003
Deferred tax assets:
Net operating loss carryforward	$	1,855,344		$	2,244,412
Allowance for doubtful accounts		43,214			25,184
Accrued vacation pay		—			3,738
Book over tax depreciation		77,341			52,758
Total deferred tax assets		1,975,899			2,326,092
Valuation allowance for deferred tax assets		(1,602,899	)		(2,326,092	)
Net deferred tax assets	$	373,000		$	—

The Company has recorded a valuation allowance for its deferred tax assets due to the inability to conclude that it is more likely than not that these assets will be realized from future taxable income.

The Company’s provision for income taxes resulted in effective tax rates that varied from the statutory federal income tax rate of 34%, as summarized in the table below.

	Year ended June 30
	2001			2002			2003
Expected federal income tax expense (benefit) from continuing operations at 34%	$	(33,302	)	$	(224,602	)	$	(352,295	)
Expenses not deductible for income tax purposes		22,913			150,358			14,074
State income taxes, net of federal benefit		8,580			(24,601	)		23,100
Change in valuation allowance for deferred tax assets		9,235			(196,349	)		723,193
	$	7,426		$	(295,194	)	$	408,072

At June 30, 2003, the Company has net operating loss carryforwards totaling approximately $5.6 million, which will begin to expire in 2012. Certain net operating loss carryforwards at June 30, 2003 are related to subsidiaries of the Company, and are available only to offset future taxable income of those subsidiaries.

F-21

15. Commitments and Contingencies

Operating Leases

The Company leases certain office space and equipment under noncancellable operating lease agreements that expire in various years through 2006, and generally do not contain significant renewal options. The Company also leases one office location from an entity controlled by a stockholder under a noncancellable operating lease, which expires in December 2003. Future minimum payments under all noncancellable operating leases with initial terms of one year or more consisted of the following at June 30, 2003:

	Related Party		Other		Total
Year ended June 30:
2004	$	39,162	$	652,914	$	692,076
2005		—		301,902		301,902
2006		—		193,890		193,890
2007		—		185,760		185,760
2008		—		99,108		99,108
Total minimum lease payments	$	39,162	$	1,433,574	$	1,472,736

Rent expense consisted of the following for the years ended June 30:

	2001		2002		2003
Office space	$	1,066,818	$	1,162,344	$	1,085,858
Equipment		69,132		40,361		14,695
	$	1,135,950	$	1,202,705	$	1,100,553

Rent expense for the years ended June 30, 2001, 2002 and 2003 included amounts paid to related parties of approximately $83,000, $85,000 and $90,000, respectively.

Agreements with Executives

The Company has entered into agreements with three executives that provide for payments of eighteen months of salary and immediate vesting of all stock options not previously vested upon termination of the executive or change in control of the Company. At June 30, 2003, the total contingency was approximately $566,000.

16. Employee Benefit and Incentive Compensation Plans

Effective January 1, 1998, the Company adopted the Avatech Solutions, Inc. 401(k) Retirement Savings Plan and Trust (the “Plan”). The Plan is a defined contribution plan, which covers substantially all employees of the Company, or its wholly-owned subsidiaries, who have attained age 21 and have completed 6 months of service. Participants may elect to contribute from 1% to 15% of eligible annual compensation to the Plan. Maximum salary deferrals are currently $10,000 per year. The Company will match 25% of the participant salary deferrals up to 6% of a participant’s compensation for all participants employed on the last day of the Plan year. The Company may also make discretionary profit-sharing contributions to the Plan for all participants who are employed on the last day of the Plan year. The total amount recorded by the Company as expense during the years ended June 30, 2001, 2002 and 2003 was approximately $79,000, $62,000 and $78,000, respectively.

F-22

17. Significant Supplier

Approximately 87%, 92% and 67% of the Company’s inventory purchases for the years ended June 30, 2001, 2002 and 2003, respectively, were from one vendor and approximately 81% and 60% of accounts payable at June 30, 2002 and 2003, respectively, were due to this vendor. Approximately 90% of the Company’s total product revenues are related to this suppliers products.

18. Subsequent Events

Restricted Stock Awards

On July 15, 2003, the Company granted 420,000 shares of restricted stock to several of its officers. Of the shares granted, 270,000 vested immediately and the remaining 150,000 shares vest over two years. The quoted market price of the common stock at July 14, 2003 was $0.17 per share, resulting in compensation expense to be recorded over the vesting period of approximately $70,000.

Agreement with Strategic Partner

On July 22, 2003, the Company entered into a marketing and channel distribution agreement with a strategic partner. Under this agreement, Avatech will provide marketing, distribution and related services for the partner’s products. In connection with this agreement, the strategic partner has agreed to fund certain marketing costs incurred by the Company. Additionally, the arrangement provides for a loan by the strategic partner to fund working capital needs related to the distribution of these products.

The terms of the loan agreement provide for a loan of $1,500,000 funded in two payments. Initial funding of $1,000,000 occurred on July 25, 2003. The remaining $500,000 of funding is to be provided based on the Company meeting certain marketing and distribution milestones. The loan agreement provides for repayment of principal plus interest at 6% per annum in thirty-five equal quarterly installments commencing in January 2005. The Company is required to meet certain financial and non-financial covenants in connection with this agreement.

19. Liquidity and Capital Resources

During 2003, the Company incurred significant losses from its operations that depleted its capital resources. These losses were incurred primarily due to unexpected declines in revenue and losses and costs related to the acquisition of PlanetCAD Inc. In response, management has taken actions to close under-performing offices, significantly reduce overhead to improve operating efficiency, initiate new revenue programs and obtain additional financing. Management believes that the actions it has taken to date will allow the Company to aggressively pursue its business plan and return to profitability in the near term.

Based on an evaluation of the likely cash generated from operations in the near term and available capital resources, management believes that it has sufficient sources of working capital to fund its operations in the normal course of business through at least June 30, 2004.

F-23

EX-10.06

                                                                   EXHIBIT 10.06

                       AVATECH SOLUTIONS SUBSIDIARY, INC.

                                   as Borrower

                                       and

                               Strategic Partner

               (Name withheld and filed separately with the SEC.)

                                    as Lender

                                 LOAN AGREEMENT

                                   $1,500,000

                                  July 22, 2003



                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----
                            ARTICLE 1 INTERPRETATION

1.1    Defined Terms..........................................................1
1.2    Gender and Number......................................................8
1.3    Headings, etc. ........................................................8
1.4    Currency...............................................................8
1.5    Non-Business Days......................................................8
1.6    Certain Phrases, etc. .................................................8
1.7    Accounting Terms.......................................................8
1.8    Incorporation of Schedules.............................................8
1.9    Conflict...............................................................9
1.10   Certificates...........................................................9

                            ARTICLE 2 CREDIT FACILITY

2.1    Availability...........................................................9
2.2    Use of Proceeds........................................................9
2.3    Mandatory Repayments..................................................10
2.4    Payments under this Agreement.........................................10
2.5    Omitted...............................................................11
2.6    Taxes.................................................................11

                               ARTICLE 3 INTEREST

3.1    Interest..............................................................12

                              ARTICLE 4 CONDITIONS

4.1    Conditions to each Loan...............................................12

                    ARTICLE 5 REPRESENTATIONS AND WARRANTIES

5.1    Representations and Warranties........................................14
5.2    Survival of Representations and Warranties............................19

                       ARTICLE 6 COVENANTS OF THE BORROWER

6.1    Affirmative Covenants.................................................19
6.2    Negative Covenants....................................................22
6.3    Financial Covenant....................................................23
6.4    Security Covenants....................................................24

                           ARTICLE 7 EVENTS OF DEFAULT

7.1    Events of Default......................................................25



                                TABLE OF CONTENTS
                                   (continued)

                                                                            Page
                                                                            ----

7.2    Remedies Upon Default.................................................27

                             ARTICLE 8 MISCELLANEOUS

8.1    Amendments, etc.......................................................27
8.2    Waiver................................................................28
8.3    Right of First Offer..................................................28
8.4    Evidence of Funded Debt...............................................28
8.5    Notices, etc. ........................................................28
8.6    Confidentiality.......................................................29
8.7    Costs, Expenses and Indemnity.........................................30
8.8    Successors and Assigns................................................31
8.9    Right of Set-Off......................................................32
8.10   Governing Law.........................................................32
8.11   Counterpart and Facsimile.............................................32

                                    SCHEDULES

       Schedule 1.1         -   Permitted Credit Facilities
       Schedule 5.1(w)(i)   -   Jurisdictions
       Schedule 5.1(w)(ii)  -   Authorizations
       Schedule 5.1(w)(iii) -   Intellectual Property
       Schedule 5.1(w)(iv)  -   Litigation
       Schedule 5.1(w)(v)   -   Material Agreements
       Schedule 5.1(v)      -   Certain Permitted Liens
       Schedule 6.1         -   Form of Compliance Certificate
       Schedule 6.2(b)      -   Permitted Liens



                                 LOAN AGREEMENT

     THIS LOAN AGREEMENT entered into as of July 22, 2003,

BETWEEN: AVATECH SOLUTIONS SUBSIDIARY, INC., a corporation incorporated under
         the laws of the State of Delaware, having its registered address at
         11403 A Cronhill Drive Owings Mills, Maryland 21117,

         (hereinafter referred to as the "Borrower"); and

AND:     Strategic Partner (name and address withheld and filed separately with
         the SEC),

         (hereinafter referred to as the "Lender").

                                    ARTICLE 1
                                 INTERPRETATION

1.1  Defined Terms

     As used in this Agreement, the following terms have the following meanings:

     "Agreement" means this loan agreement and all schedules and instruments in
     amendment or confirmation of it; and the expressions "Article" and
     "Section" followed by a number mean and refer to the specified Article or
     Section of this Agreement.

     "Borrower" means, at any time, Avatech Solutions Subsidiary, Inc. and its
     successors and permitted assigns.

     "Borrower's Security Agreement" means, a general security agreement from
     the Borrower in favour of the Lender granting the Lender a security
     interest in all of the property and assets of the Borrower.

     "Business Day" means any day of the year, other than a Saturday, Sunday or
     other day on which banks are required or authorized to close in either
     (location withheld and filed separately with the SEC) or New York, New
     York.

     "Business and Marketing Plan" means that business and marketing plan of the
     Borrower relative to the SP Products and Services Business for the years
     2003 to 2005, which is annexed to this Agreement as a supplement hereto and
     which includes, among other things, a geographic roadmap for deployment of
     Borrower's resources to sell SP Products and Services, quarterly staffing,
     training and revenue projections



                                       -2-

     by states and main cities and a marketing budget for the launching of the
     marketing and distribution of the SP Products and Services.

     "Change of Control" means the occurrence of any of the following: (i) the
     acquisition, directly or indirectly, by any Person, or any group of Persons
     acting jointly or in concert, of that number of voting shares of the Parent
     or the Borrower which (A) provides to that Person or that group of Persons
     the control over any annual or special meetings of stockholders of the
     Parent or the Borrower, and (b) is equal to or greater than the number of
     voting shares of the Parent or the Borrower held by any other Person, or by
     any other group of Persons acting jointly or in concert, immediately after
     such acquisition where, as a result of such acquisition, such person(s)
     exert actual control over significant board or management decisions of the
     Parent or the Borrower, or (ii) the change in a majority of the membership
     of the senior executive management of the Parent or the Borrower, (iii) the
     Parent or the Borrower is merged, consolidated or reorganized into or with
     another Person and, as a result, less than a majority of the combined
     voting power of the then outstanding securities of such Person immediately
     after such Transaction are held in the aggregate by the holders of the
     voting securities of the Parent or the Borrower, as the case may be,
     immediately prior to such transaction, (iv) any transaction or series of
     transactions resulting in the sale, transfer or other disposition of 30% or
     more of the assets of the Parent, the Borrower and their Subsidiaries on a
     consolidated basis, or (v) any transaction that would have, or the first of
     a series of transactions to the extent that such first transaction when
     completed would have, the same or similar effect as any transaction or a
     series of transactions referred to in paragraphs (i) through (iv) above.

     "Closing Date" means July 22, 2003.

     "Collateral" means any and all property and assets of the Borrower in
     respect of which the Lender has or will have a Lien pursuant to the
     Borrower's Security Agreement.

     "Common Stock" means the shares of common stock of the Borrower, par value
     $.01 per share.

     "Core Business" means the distribution, sale and manufacture of
     engineering-related software and related professional services.

     "Strategic Partner" means Strategic Partner (name withheld and filed
     separately with the SEC).

     "SP Products and Services" means the (names withheld and filed separately
     with the SEC) products of the Strategic Partner and any services ancillary
     or related to such products.

     "SP Products and Services Business" means the business of the Borrower
     which is the business of distributing SP Products and Services, and any
     business ancillary or related to such business.

     "Default" means an event, which with the giving of notice or passage of
     time, or both, would constitute an Event of Default.



                                       -3-

     "Event of Default" has the meaning specified in Article 7.

     "Financial Quarter" means one of the financial quarters of the Borrower
     being the periods of (a) January, February and March, (b) April, May and
     June, (c) July, August and September, and (d) October, November and
     December of each calendar year.

     "Financial Year" means a financial year of the Borrower being the period
     from and including July 1 in a calendar year to and including June 30 in
     the succeeding calendar year.

     "Fixed Rate" has the meaning ascribed thereto in Article 3.

     "Funded Debt" of any Person means (i) all indebtedness of such Person for
     borrowed money, including borrowings by way of bankers' acceptances and
     (except for any such reimbursement obligations in respect of amounts drawn
     under a letter of credit or letter guarantee to finance the payment of
     indebtedness incurred in the ordinary course of business that would
     ordinarily constitute a trade payable) reimbursement obligations for
     amounts drawn under a letter of credit or letter of guarantee, (ii) all
     indebtedness of such Person for the deferred purchase price of property or
     services, other than any such indebtedness incurred in the ordinary course
     of business that would ordinarily constitute a trade payable, and which is
     represented by a note, bond, debenture or other evidence of Funded Debt,
     (iii) all indebtedness created or arising under any conditional sale or
     other title retention agreement with respect to property acquired by such
     Person (even though the rights and remedies of the seller or lender under
     such agreement in the event of default are limited to repossession or sale
     of such property), (iv) all current liabilities of such Person represented
     by a note, bond, debenture or other evidence of Funded Debt to the extent
     that such indebtedness would be considered borrowed money in accordance
     with GAAP, and (v) all Capitalized Lease Obligations (as defined in the
     definition of 'Permitted Liens') of such Person.

     "GAAP" means generally accepted accounting principles in the United States
     in effect from time to time.

     "Governmental Entity" means any (i) multinational, federal, provincial,
     state, municipal, local or other government, governmental or public
     department, central bank, court, commission, board, bureau, agency or
     instrumentality, domestic or foreign, (ii) any subdivision or authority of
     any of the foregoing, or (iii) any quasi-governmental or private body
     exercising any regulatory, expropriation or taxing authority under or for
     the account of any of the above.

     "Guaranty" means a guaranty from the Parent in favour of the Lender
     pursuant to which the Parent agrees to guaranty all of the obligations of
     the Borrower under this Agreement.

     "Indemnified Person" has the meaning specified in Section 8.7(a).

     "Intellectual Property" means:



                                       -4-

          (i)  all issued patents, patentable inventions, pending applications
               for patents, and patents which may be issued from current
               applications, (including divisions, reissues, renewals,
               re-examinations, continuations, continuations in part and
               extensions) applied for or registered in any jurisdiction;

          (ii) all trade-marks, trade-names, brands, trade dress, business
               names, domain name, tag lines, designs, graphics, logos and other
               commercial symbols and indicia of origin whether registered or
               not, and any goodwill associated therewith;

          (iii) all copyrights, copyright registrations and applications
               therefore, and all other rights corresponding thereto throughout
               the world;

          (iv) all industrial designs and design patents or similar rights
               applied for or registered in any jurisdiction;

          (v)  all integrated circuit topographies or similar rights, applied
               for or registered in any jurisdiction; and

          (vi) all trade secrets and know-how.

     "Lender" means Strategic Partner.

     "Lien" means any mortgage, charge, pledge, hypothecation, security
     interest, assignment, encumbrance, lien (statutory or otherwise), title
     retention agreement or arrangement or other encumbrance of any nature or
     any other arrangement or condition that in substance secures payment or
     performance of an obligation.

     "Loans" means the Initial Loan and the Second Loan and "Loan" means either
     one of the Loans.

     "Loan Documents" means this Agreement, the Borrower's Security Agreement,
     the Guaranty and all other loan or security related documents, and all
     certificates, executed and delivered to the Lender by the Borrower or the
     Parent pursuant to or in connection therewith or with this Agreement.

     "Material Adverse Effect" means (i) a material adverse effect on the
     business, operations, results of operations, prospects, assets, liabilities
     or financial condition of the Parent, the Borrower and its Subsidiaries
     taken as a whole or (ii) a material adverse effect on the ability of the
     Parent or the Borrower to fulfill any of their respective payment
     obligations of principal or interest hereunder.

     "Material Agreements" means the agreements listed in Schedule 5.1(w)(v) and
     any agreement, contract or similar instrument to which the Parent, the
     Borrower or any of their Subsidiaries is a party or to which any of their
     property or assets may be subject for



                                       -5-

     which breach, non-performance, cancellation, termination or failure to
     renew could reasonably be expected to have a Material Adverse Effect.

     "Maturity Amounts" means all outstanding principal of the Loans and all
     accrued interest thereon.

     "Merger Transaction" has the meaning specified in subsection 6.2(c).

     "MOU" means the Memorandum of Understanding between the Parent and
     Strategic Partner dated as of      . (Withheld and filed separately with
     the SEC).

     "Parent" means Avatech Solutions, Inc., a Delaware corporation.

     "Permitted Credit Facility" means the Funded Debt of the Parent or the
     Borrower or any Subsidiary of the Borrower specified on Schedule 1.1, which
     schedule specifies the name of each creditor, the amount of such Funded
     Debt, the maturity date, the applicable interest rate and, in the event
     such Funded Debt is secured, the assets subject to such security interest.

     "Permitted Liens" means, in respect of any Person, any one or more of the
     following:

     (a)  Liens for taxes, assessments or government charges or levies not at
          the time due and delinquent or the validity of which is being
          contested at the time by such Person in good faith by proper legal
          proceedings, and which contested Liens have not had and would not
          reasonably be expected to have a Material Adverse Effect and, for
          which adequate provision has been made in accordance with GAAP;

     (b)  the Lien of any judgment rendered or claim filed against such Person
          which such Person is contesting in good faith by proper legal
          proceedings, and which Lien has not had and would not reasonably be
          expected to have a Material Adverse Effect;

     (c)  inchoate or statutory Liens of contractors, subcontractors, mechanics,
          workers, suppliers, materialmen, carriers and others in respect of
          construction, maintenance, repair or operation of assets of the
          Person, provided that such Liens are related to obligations not due or
          delinquent, are not registered against title to any assets of the
          Person and in respect of which adequate holdbacks are being maintained
          as required by applicable law or such Liens are being contested in
          good faith by appropriate proceedings and in respect of which there
          has been set aside a reserve (segregated to the extent required by
          GAAP) in an adequate amount and provided further that such Liens do
          not reduce the value of the asset so affected or materially interfere
          with the use of such asset in the operation of the business of the
          Person;

     (d)  restrictions, easements, rights-of-way, servitudes or other similar
          rights in land, real or immovable property (including rights of way
          and servitudes for railways, sewers, drains, gas and oil pipelines,
          gas and water mains, electric light and power



                                       -6-

          and telephone or telegraph or cable television conduits, poles, wires
          and cables) granted to or reserved by other persons; provided that,
          such restrictions, easements, rights-of-way, servitudes or other
          similar rights in the aggregate will not have or would not reasonably
          be expected to have a Material Adverse Effect;

     (e)  the right reserved to or vested in any Governmental Entity, by the
          terms of any statutory provision or by the terms of any lease,
          license, franchise, grant or permit of the Person (whether or not
          having the force of law) acquired by such Person (each, a "Permit"),
          to terminate any such Permit or to require annual or other payments as
          a condition to the continuance thereof;

     (f)  the encumbrance resulting from the deposit of cash or securities in
          connection with any of the Liens referred to in paragraph (a), (b) or
          (c) of this definition pending a final determination as to the
          existence or amount of any obligation referred to therein;

     (g)  security given to a public utility or any other Governmental Entity
          when required by such utility or other Governmental Entity in
          connection with the operations of such Person in the ordinary course
          of its business;

     (h)  title defects or irregularities which are of a minor nature; provided
          that such title, defects or irregularities in the aggregate will not
          materially impair the use of the property for the purposes for which
          it is held by such Person;

     (i)  Liens securing Capitalized Lease Obligations of such Person and
          Purchase Money Obligations of such Person not in excess of U.S.
          $50,000 in the aggregate at any time for the Borrower and its
          Subsidiaries taken as a whole; provided that (x) any such Lien
          securing a Capitalized Lease Obligation is limited to the property or
          asset including associated rights) which is the subject matter of such
          Capitalized Lease Obligation, and (y) in the case any such Lien
          securing a Purchase Money Obligation, such Lien is limited to the
          property or asset (including associated rights) acquired, constructed,
          installed or improved using the funds advanced to the Borrower or a
          Subsidiary in connection with such Purchase Money Obligation;

          For the purposes of this definition of Permitted Liens:

               "Capital Lease" means a lease of (or other agreement conveying
               the right to use) real and/or personal property, which lease is
               required to be classified and accounted for as a capital lease on
               a balance sheet of the lessee under GAAP; and

               "Capitalized Lease Obligations" means, as to any Person, the
               obligations of such Person to pay rent or other amounts under a
               Capital Lease and, for purposes of this Agreement, the amount of
               such obligations shall be the capitalized amount thereof,
               determined in accordance with GAAP, or the deemed principal
               amount under GAAP;



                                       -7-

     (j)  the Liens contemplated in favour of the Lender under this Agreement;

     (k)  Liens disclosed in Schedule 6.2(b) but only to the extent such Liens
          conform to their description in such Schedule;

     (l)  Liens from the Borrower and any of its Subsidiaries to secure any
          Permitted Credit Facility, but only to the extent such Liens conform
          to their description in Schedule 1.1, including the maximum liability
          subject to such Lien; and

     (m)  Liens to secure any refinancing (a "Refinancing"), extension, renewal
          or replacement as a whole, or in part, of any indebtedness or
          obligation (an "Original Obligation") secured by any Lien referred to
          in the foregoing clauses of this definition which Liens are not
          otherwise prohibited by the terms hereof, provided that (i) such
          Refinancing will be for the same or lesser amount as the Original
          Obligation that it replaces and (ii) the Lien securing such
          Refinancing will be on the same assets, or a lesser portion thereof,
          over which a Lien has been granted to prior to the date hereof
          securing such Original Obligation.

     "Person" means a natural person, partnership, corporation, joint stock
     company, trust, unincorporated association, joint venture or other entity
     or Governmental Entity and pronouns have a similarly extended meaning.

     "Purchase Money Obligation" means indebtedness of the Borrower or a
     Subsidiary thereof incurred or assumed to finance the purchase price, in
     whole or in part, of any property or asset or incurred to finance the cost,
     in whole or in part, of construction or installation of, or improvements
     to, any property or asset of the Borrower or a Subsidiary thereof, provided
     that the indebtedness is incurred or assumed within 24 months after, as the
     case may, the purchase of, or the completion of the construction or
     installation of, or the completion of improvements to, such property or
     asset, and includes any extension, renewal or refinancing of any of that
     indebtedness so long as the principal amount of such indebtedness on the
     date of such extension, renewal or refinancing is not increased.

     "Repayment Date" means June 1, 2013.

     "SEC" means the United States Securities and Exchange Commission.

     "Security" means, at any time, the Lien in favour of the Lender, in the
     assets and properties of the Borrower or any of its Subsidiaries securing
     its obligations under this Agreement and the other Loan Documents.

     "Subsidiary" of any corporation means any other corporation or limited
     liability company of which the outstanding capital stock possessing a
     majority of voting power in the election of directors is owned or
     controlled by such corporation directly or indirectly through Subsidiaries.

     "U.S. Dollars", "United States Dollars" and "U.S. $" each mean lawful money
     of the United States of America.



                                       -8-

1.2  Gender and Number

     Any reference in the Loan Documents to gender includes all genders and
words importing the singular number only include the plural and vice versa.

1.3  Headings, etc.

     The provision of a Table of Contents, the division of this Agreement into
Articles and Sections and the insertion of headings are for convenient reference
only and are not to affect the interpretation of this Agreement.

1.4  Currency

     All references in the Loan Documents to dollars, unless otherwise
specifically indicated, are expressed in United States currency.

1.5  Non-Business Days

     Unless otherwise expressly provided in this Agreement, whenever any payment
is stated to be due on a day other than a Business Day, the payment will be made
on the immediately following Business Day. Unless otherwise expressly provided
in this Agreement, whenever any action to be taken is stated or scheduled to be
required to be taken on, or (except with respect to the calculation of interest
or fees) any period of time is stated or scheduled to commence or terminate on,
a day other than a Business Day, the action will be taken or the period of time
will commence or terminate, as the case may be, on the immediately following
Business Day.

1.6  Certain Phrases, etc.

     In any Loan Document (i) (y) the words "including" and "includes" mean
"including (or includes) without limitation" and (z) the phrase "the aggregate
of", "the total of", "the sum of", or a phrase of similar meaning means "the
aggregate (or total or sum), without duplication, of", and (ii) in the
computation of periods of time from a specified date to a later specified date,
unless otherwise expressly stated, the word "from" means "from and including"
and the words "to" and "until" each mean "to but excluding".

1.7  Accounting Terms

     All accounting terms not specifically defined in this Agreement shall be
interpreted in accordance with GAAP.

1.8  Incorporation of Schedules

     The schedules attached to this Agreement shall, for all purposes of this
Agreement, form an integral part hereof.



                                       -9-

1.9  Conflict

     The provisions of this Agreement prevail in the event of any conflict or
inconsistency between its provisions and the provisions of any of the other Loan
Documents.

1.10 Certificates

     Any certificate required by the terms of this Agreement or any other Loan
Document to be given by an officer of the Borrower for and on behalf of the
Borrower or any of its Subsidiaries shall be given without any personal
liability on the part of the officer giving the certificate.

                                    ARTICLE 2
                                 CREDIT FACILITY

2.1  Availability

     (a)  The Lender agrees, on the terms and conditions of this Agreement, to
          lend the principal amount of U.S.$1,000,000 (the "Initial Loan") to
          the Borrower upon satisfaction of the conditions set forth in Section
          4.1 of this Agreement;

     (b)  The Lender agrees, on the terms and conditions of this Agreement, to
          lend the principal amount of U.S.$500,000 (the "Second Loan") to the
          Borrower on the business day following the date on which Borrower has
          demonstrated to lender (terms withheld and filed separately with the
          SEC).

     (c)  The Loans do not revolve and any amount repaid or prepaid on either
          Loan, as the case may be, cannot be reborrowed and reduces the Loan
          for which the repayment is made by the amount repaid or prepaid under
          such Loan, as the case may be.

2.2  Use of Proceeds

     The Borrower shall use the proceeds of the Loans for its general working
capital needs, including as follows: (i) to enable the Borrower and its
Subsidiaries to develop the business of the Borrower and its Subsidiaries as a
distributor of         Products and Services in the United States, as identified
on the Business and Marketing Plan, and (ii) to fund the working capital
requirements of the Borrower and its Subsidiaries for the purpose of
implementing the Business and Marketing Plan. The proceeds of the Loans will not
be used for the repayment of any Funded Debt owed to any officer, director or
affiliate of the Borrower.



                                      -10-

2.3  Mandatory Repayments

     (a)  The Borrower unconditionally promises to repay (subject to Article 7)
          each Loan in thirty-four (34) equal quarterly instalment_ and one
          final instalment, which shall include any principal amounts then
          outstanding, together with all accrued and unpaid interest and any
          other amounts due hereunder on the Repayment Date. The first
          instalment under each Loan shall be due and payable on the first
          Business Day of January 2005 and each subsequent instalment under each
          of the Loans after that date shall be due and payable on the first
          Business Day of each subsequent Financial Quarter until the Repayment
          Date.

     (b)  In addition to the payments set forth in (a) above, there shall become
          due and payable and the Borrower shall prepay any outstanding
          principal amount of the Loans, together with any accrued and unpaid
          interest and any other amounts due hereunder on the remaining unpaid
          Loans promptly upon (terms withheld and filed separately with the
          SEC).

2.4  Payments under this Agreement

     (a)  Unless otherwise expressly provided in this Agreement, the Borrower
          shall, not later than 10:00 a.m. (New York time) on the date a payment
          is due, make any payment required to be made by it to the Lender by
          depositing or forwarding by wire transfer the amount of the payment to
          an account, and in accordance with wire transfer instructions,
          specified by such Lender.

     (b)  All amounts (other than interest) owed by the Borrower to the Lender
          under a Loan Document, which are not paid when due (whether at stated
          maturity, on demand, by acceleration or otherwise), to the fullest
          extent permitted by applicable law, shall bear interest (both before
          and after default and judgment), from the date on which such amount is
          due until such amount is paid in full, payable on demand, at a rate
          per annum equal at all times to the greater of (i) the Fixed Rate (as
          defined below) and (ii) Prime Rate plus 2%.

     (c)  For the purposes of this Agreement, "Prime Rate" means the rate of
          interest that under current practice is listed under the heading
          "Money Rates" in the Eastern Edition of the Wall Street Journal, and
          if a range of rates is listed, the highest such rate, and should such
          practice change, such other indication of the prevailing prime rate of
          interest as may reasonably be chosen by the Lender.



                                      -11-

2.5  Omitted

2.6  Taxes

     If the Borrower shall be required to deduct any Indemnified Taxes from any
payments of interest by or on account of any obligation of the Borrower
hereunder, then (i) the Borrower shall make such deduction, and (ii) the
Borrower shall pay the full amount deducted to the relevant Governmental Entity
in accordance with applicable law. The Borrower shall deliver to the Lender a
copy of the tax or other information return reporting such payment or other
evidence of such payment of such Indemnified Taxes.

     In the event the Lender that is entitled to an exemption from or reduction
of withholding tax under the law of the jurisdiction in which the Borrower is
located, or any treaty to which such jurisdiction is a party, with respect to
payments under this Agreement the Lender shall deliver to the Borrower at the
time or times prescribed by applicable law, such properly completed and executed
documentation prescribed by applicable law or reasonably requested by the
Borrower as will permit such payments to be made without withholding or at a
reduced rate.

     The Lender shall take all steps reasonably necessary to claim from all
applicable Governmental Entities having taxing jurisdiction over the Lender or
its business a credit against or remission for or deduction from or other
available relief with respect to any Indemnified Taxes deducted by the Borrower
and paid by the Borrower to an applicable Governmental Entity as provided for
above (any of the foregoing being a "saving"). To the extent that the amount of
any saving from which the Lender benefits is less than the amount of the
applicable Indemnified Taxes so deducted by the Borrower and paid to the
applicable Governmental Entity (any such amount being the "saving deficiency"),
the Borrower will, promptly following receipt of a written certificate from the
Lender detailing such saving deficiency pay to the Lender the amount of the
applicable saving deficiency. The Lender shall not be considered to have
benefited from any saving which has ceased to be available due to the expiration
of the carry forward period for such saving, if applicable, and shall be
considered to have realized any resulting deficiency resulting therefrom at the
time of such expiration.

     In this section the following terms have the following meanings, namely:

     "Indemnified Taxes" means all Taxes other than Excluded Taxes.

     "Excluded Taxes" means, in relation to the Lender, those taxes on income,
net income or capital or franchise taxes which are imposed or levied by any
jurisdiction or any political subdivision of such jurisdiction solely as a
result of the Lender (a) being organized under the laws of such jurisdiction or
any political subdivision of such jurisdiction, (b) having its principal office
or lending office in such jurisdiction, (c) being resident in such jurisdiction,
(d) carrying on business in such jurisdiction, or (e) not dealing at arm's
length (as defined for the purposes of any taxing statute in the applicable
jurisdiction) with the Borrower, or which would not have been imposed had the
Lender satisfied a relevant authority that the Lender was not a Person mentioned
in clause (a), (b), (c), (d) or (e) above.



                                      -12-

     "Taxes" means taxes, levies, imposts, duties, charges, fees, deductions or
withholdings of any kind or nature whatsoever or any instalments, interest or
penalties payable with respect thereto now or in the future imposed, levied,
collected, withheld or assessed by the United States of America or any political
subdivision of the United States of America.

                                    ARTICLE 3
                                    INTEREST

3.1  Interest

     From and after the Closing Date, the unpaid balance of each Loan, from time
to time, shall bear interest in respect of each day, both before and after an
Event of Default or judgment, at a rate of six percent (6.0%) per annum (the
"Fixed Rate"). Such interest shall be calculated quarterly in arrears in U.S.
Dollars, and payable on the first Business Day of each Financial Quarter
commencing on the first Business Day of January 2005 until all amounts owing to
the Lender hereunder have been paid in full. For greater certainty and without
limitation, interest shall begin accruing on each Loan as of the date such Loan
is made to the Borrower; the first payment of interest on each Loan shall be
made on the first Business Day of January 2005 (which is the first Business Day
of the first Financial Quarter of 2005) which payment shall represent the
interest accrued between the date such Loan was made to the Borrower and the
first Business Day of January 2005. The second payment of interest under each
Loan shall be made on the first Business Day of the second Financial Quarter of
2005 which payment shall represent the interest accrued on each Loan between the
first Business Day of January 2005 and the first Business Day of the second
Financial Quarter of 2005 and so on for subsequent Financial Quarters.

                                    ARTICLE 4
                                   CONDITIONS

4.1  Conditions to each Loan

     The Parties each respectively acknowledge that the obligation of the Lender
to make any of the Loans is subject to the satisfaction, on or prior to the date
such Loan is to be made to the Borrower, of the following conditions:

     (a)  no Default or Event of Default has occurred or is continuing or would
          arise immediately after giving effect to or as a result of the Loans;

     (b)  the Loans will not violate any applicable law, order or judgment;

     (c)  no material adverse change in the business or financial condition of
          the Borrower or any of its Subsidiaries shall have occurred since
          March 31, 2003;



                                      -13-

     (d)  the representations and warranties of the Borrower contained in
          Article 5 are true and correct on the date each Loan is to be made as
          if such representations and warranties were made on that date;

     (e)  the Lender has received, in form, substance, scope and dated a date
          satisfactory to it and its counsel certified copies of:

          (i)  certificates of good standing with respect to the Borrower issued
               by the Secretary of State of Delaware and each other jurisdiction
               where the Borrower is qualified to operate as a foreign
               corporation;

          (ii) all discharges, subordination agreements, waivers and
               confirmations as may be required to ensure that all obligations
               under the Loan Documents are secured by Liens (subject only to
               Permitted Liens) on the property and assets of the Borrower with
               such exceptions as are permitted pursuant to this Agreement or
               any of the other Loan Documents; and

          (iii) such financial and other information with respect to the
               business of Borrower as the Lender shall have reasonably
               requested.

     The Parties each respectively acknowledge that the obligation of the Lender
to make the Initial Loan is also subject to the delivery, on or prior to the
date such Initial Loan is to be made to the Borrower, certified copies of:

     (a)  the Loan Documents;

     (b)  a certificate of insurance with respect to the insurance policies
          required pursuant to Section 6.1(j) showing the Lender as an
          additional loss payee as its interests may appear relative to the
          general property insurance carried with respect to the Borrower;

     (c)  opinion of counsel to the Borrower in form and substance reasonably
          satisfactory to the Lender;

     (d)  the written consent of The CIT Group/Business Credit, Inc. which
          consents to the Loans to be made to the Borrower pursuant to the terms
          of this Agreement;

     (e)  an amendment to the Borrower's existing financing agreement with The
          CIT Group/Business Credit, Inc. reducing the size of the revolving
          line of credit from $4.0 million to not more than $2.0 million; and

     (f)  the distribution agreement with Strategic Partner for the distribution
          of certain software products (names withheld and filed separately with
          the SEC) and the Business and Marketing Plan, each of which shall be
          annexed to this Agreement as a supplement hereto.

     The Parties each respectively acknowledge that the obligation of the Lender
to make the Second Loan is also subject to the delivery, on or prior to the date
such Second Loan is to be



                                      -14-

made to the Borrower, certified copies, each in form and substance reasonably
satisfactory to the Lender, of (i) amendments to the existing compensation,
commission and incentive plans of the Borrower, which amendments clearly create
a (product withheld and filed separately with the SEC) quota for all of
Borrower's outside sales professionals (referral credit) and (ii) a separate
sales compensation plan for the dedicated xxx sales team that is exclusively
based on xxx license and services revenue.

                                    ARTICLE 5
                         REPRESENTATIONS AND WARRANTIES

5.1  Representations and Warranties

     The Borrower represents and warrants to the Lender, acknowledging and
confirming that the Lender is relying on such representations and warranties,
without independent inquiry in entering into this Agreement and providing the
Loans, that:

     (a)  Incorporation and Qualification. The Borrower is a corporation duly
          incorporated, organized and validly existing under the laws of the
          State of Delaware. Each of the Subsidiaries of the Borrower is a
          corporation duly incorporated, organized and validly existing under
          the laws of its jurisdiction of incorporation as set forth in Schedule
          5.1(w)(i). Each of the Borrower and its Subsidiaries is qualified,
          licensed or registered to carry on business under the laws applicable
          to it in all jurisdictions in which the failure to be so qualified,
          licensed or registered would have a Material Adverse Effect.

     (b)  Corporate Power. The Borrower and each of its Subsidiaries has all
          requisite corporate power and authority to (i) own, lease and operate
          its properties and assets and to carry on its business as now being
          conducted by it, and (ii) enter into and perform their respective
          obligations under the Loan Documents to which they are a party;

     (c)  Conflict With Other Instruments. The execution and delivery by the
          Borrower and each of its Subsidiaries that are parties to the Loan
          Documents and the performance thereby of their respective obligations
          under, and compliance with the terms, conditions and provisions of,
          the Loan Documents will not (i) conflict with or result in a breach of
          any of the terms or conditions of (t) its charter documents or
          by-laws, (u) any applicable law, rule or regulation, (v) any
          contractual restriction binding on or affecting it or its properties,
          or (w) any judgment, injunction, determination or award which is
          binding on it, except in any such case for any such conflict or breach
          which would not have, and would not be reasonably expected to have, a
          Material Adverse Effect, or (ii) result in, require or permit (x) the
          imposition of any encumbrance in, on or with respect to any of its
          assets or property (except in favour of the Lender), (y) the
          acceleration of the maturity of any Funded Debt binding on or
          affecting the Borrower or any of its Subsidiaries, or (z) any third
          party to terminate or acquire rights under any Material Agreement;



                                      -15-

     (d)  Corporate Action, Governmental Approvals, etc. The execution and
          delivery of each of the Loan Documents by the Borrower and each of its
          Subsidiaries that is a party thereto and the performance thereby of
          their respective obligations under the Loan Documents have been duly
          authorized by all necessary corporate action. No authorization,
          consent, approval, registration, qualification, designation,
          declaration or filing with any Governmental Entity or other Person, is
          or was necessary in connection with the execution, delivery and
          performance of obligations under the Loan Documents except (a) for
          authorizations, consents, approvals, registrations, qualifications,
          designations, declarations or filings which are in full force and
          effect, unamended, at the date of this Agreement, (b) to the extent
          that the failure to have obtained any such other authorization,
          consent, approval, registration, qualification, designation,
          declaration or filing would not and could not reasonably be expected
          to have a Material Adverse Effect;

     (e)  Execution and Binding Obligation. This Agreement and the other Loan
          Documents have been duly executed and delivered by the Borrower and
          each of its Subsidiaries that is a party thereto and constitute legal,
          valid and binding obligations of the Borrower and such Subsidiaries
          enforceable against such Persons in accordance with their respective
          terms, subject only to the exceptions and qualifications set forth in
          the opinion, if any, of counsel for the Borrower delivered to the
          Lender in connection with the closing of the transactions contemplated
          under this Agreement;

     (f)  Authorizations, etc. The Borrower and each of its Subsidiaries possess
          all authorizations, permits, consents, registrations and approvals
          necessary to properly conduct their respective businesses at full
          operating capacity, and all such authorizations, permits, consents,
          registrations and approvals are in good standing and in full force and
          effect, except to the extent that the failure to possess any such
          authorization, permit, consent, registration or approval, or for the
          same to be in full force and effect, would not and could not
          reasonably be expected to have a Material Adverse Effect;

     (g)  Trademarks, Patents, etc. The Borrower and each of its Subsidiaries
          possesses, licenses or otherwise has the right to use all the
          trademarks, trade names, copyrights, patents and licenses reasonably
          necessary for the conduct of their respective businesses, except in
          any such case to the extent that the failure to do so would not have,
          and could not be reasonably expected to have, a Material Adverse
          Effect. To the best knowledge of the Borrower, neither it nor any of
          its Subsidiaries is infringing or is alleged to be infringing on the
          rights of any Person with respect to any patent, trademark, trade
          name, copyright (or any application or registration in respect
          thereof), license, discovery, improvement, process, formula, know-how,
          data, plan or specification to the extent that any such infringement
          or alleged infringement would not have, and would not be reasonably
          expected to have, a Material Adverse Effect;



                                      -16-

     (h)  No Infringement. The rights of the Borrower and its Subsidiaries in or
          to the Intellectual Property currently owned by the Borrower or its
          Subsidiaries, or licensed and used by the Borrower or its Subsidiaries
          in the conduct of its business (but excluding for greater certainty
          Intellectual Property which is owned by third parties and only sold or
          distributed by the Borrower or its Subsidiaries in the course of their
          business), do not conflict with or infringe (a) on the copyrights,
          trade secrets or know-how of any other Person, and none of the
          Borrower or the Subsidiaries have received any claim or written notice
          from any Person, to such effect and (b) to the best knowledge of the
          Borrower and its Subsidiaries, with the published patents or
          registered trademarks of any Person;

     (i)  Ownership and Use of Property. Except for Permitted Liens, each of the
          Borrower and its Subsidiaries has good and marketable title in fee
          simple to the real properties which they own and good and merchantable
          title to all the tangible and intangible personal property reflected
          as assets being owned by it in their books and records. The Borrower
          and each Subsidiary thereof owns, leases or has the lawful right to
          use all of the assets necessary for the conduct of their respective
          businesses at full operating capacity except to the extent that the
          failure to have such right to use would not and could not reasonably
          be expected to have a Material Adverse Effect;

     (j)  Compliance with Laws. Each of the real properties owned or leased of
          the Borrower and its Subsidiaries have been used in accordance with,
          and the Borrower and each of its Subsidiaries are in compliance with,
          all applicable laws, judgments and orders and rulings, guidelines and
          decisions having force of law except to the extent that the failure to
          be in such compliance would not and could not reasonably be expected
          to have a Material Adverse Effect;

     (k)  No Default. Neither the Borrower nor any of its Subsidiaries is in
          violation of its charter documents, its by-laws or any shareholders'
          agreement applicable to it;

     (l)  No Material Adverse Agreements. Neither the Borrower nor any of its
          Subsidiaries is a party to any agreement or instrument or subject to
          any restriction (including any restriction set forth in its charter
          documents, by-laws or any shareholders' agreement applicable to it)
          which has or, based on the facts and circumstances in effect on the
          date of this Agreement could reasonably be expected in the future to
          have a Material Adverse Effect;

     (m)  Omitted.

     (n)  Pension Plans. Neither the Borrower nor any of its Subsidiaries (i)
          has any unfunded obligation under any pension plan, or (ii) is a party
          to any pension plan which could create an unfunded obligation of the
          Borrower or its Subsidiaries under such plan;



                                      -17-

     (o)  Material Agreements, etc. The Borrower and its Subsidiaries are in
          compliance in all material respects with all Material Agreements and
          none of the Borrower or any of its Subsidiaries, or to the best
          knowledge of the Borrower, any other party to any Material Agreement,
          has defaulted in any material respect under any of the Material
          Agreements. No event has occurred which, with the giving of notice,
          lapse of time or both, would constitute a default under, or in respect
          of, any Material Agreement. There is no material dispute regarding any
          Material Agreement;

     (p)  Labor Matters. There are no existing or, to the best knowledge of the
          Borrower, threatened strikes, lock-outs or other disputes relating to
          any collective bargaining agreement to which the Borrower or any of
          its Subsidiaries is a party. None of the Borrower nor any of its
          Subsidiaries is a party to any collective agreement;

     (q)  Books and Records. All books and records of the Borrower and its
          Subsidiaries have been fully, properly and accurately kept and
          completed and there are no material inaccuracies or discrepancies of
          any kind contained or reflected therein. The Borrower's and its
          Subsidiaries' books and records and other data and information are
          available to the Borrower in the ordinary course of its business;

     (r)  Tax Liability. The Borrower and each of its Subsidiaries have filed
          all tax and tax-related information returns which are required to be
          filed. The Borrower and each of its Subsidiaries have paid all taxes,
          interest and penalties, if any, which have become due pursuant to such
          returns or pursuant to any assessment received by any of them other
          than those in respect of which liability based on such returns is
          being contesting in good faith and by appropriate proceedings where
          adequate reserves have been established in accordance with GAAP.
          Adequate provision for payment has been made in accordance with GAAP
          for taxes not yet due. There are no tax disputes existing or, to the
          knowledge of the Borrower, pending involving the Borrower, any of its
          Subsidiaries or the Business which could reasonably be expected to
          have a Material Adverse Effect;

     (s)  Corporate Structure. At the date of this Agreement:

          (i)  All material operations of the Core Business are conducted by the
               Borrower; the Parent conducts no material operations and holds no
               material assets other than all of the outstanding shares of
               Common Stock of the Borrower; and

          (ii) there are no Subsidiaries of the Borrower, other than
               Subsidiaries that hold no material assets or conduct no material
               operations;

     (t)  Financial Statements. The audited consolidated financial statements of
          the Borrower for the Financial Year ended on June 30, 2002 and the
          unaudited consolidated financial statements of the Borrower for the
          Financial Quarter ended March 31, 2003, copies of which have been
          furnished to the Lender, fairly present



                                      -18-

          the consolidated financial position of the Borrower at such dates and
          the consolidated results of the operations and changes in financial
          position of the Borrower for the periods then ended, all in accordance
          with GAAP. All Funded Debt of the Parent, the Borrower and its
          Subsidiaries is disclosed on the financial statements furnished to the
          Lender or is set forth on Schedule 1.1 and the description of such
          Funded Debt on Schedule 1.1 is true and correct in all material
          respects. Neither the Parent, the Borrower nor any of its Subsidiaries
          have any material liabilities, contingent or otherwise, not provided
          for or reflected on the financial statements furnished to the Lender
          or disclosed on Schedule 1.1;

     (u)  Reporting Issuer. The Borrower files periodic reports with the SEC
          pursuant to the requirements of the Securities Exchange Act of 1934,
          as amended and it is not in default of its obligations as such under
          securities legislation or regulations to which it is subject. Neither
          the SEC or other regulatory authority has issued any order preventing
          or suspending trading in any securities of the Borrower;

     (v)  Permitted Liens. Each of the security interests described in Schedule
          5.1(v) against the Borrower in _avour of the secured parties (the
          "Specified Secured Parties") identified in Schedule 5.1(v) only
          perfect a Lien upon property or assets of the Borrower which
          constitute Permitted Liens and do not perfect or otherwise relate to
          any Lien generally upon all of or substantially all of the property
          and assets of the Borrower; and none of the Specified Secured Parties
          have rights under such Liens, or under the agreements creating the
          indebtedness secured by such Liens, which materially adversely affect,
          or could reasonably be expected to materially adversely affect, the
          rights of the Lender under the Loan Documents;

     (w)  Schedule Disclosure. At the date of this Agreement:

               Schedule 5.1(w)(i) is a list of (i) the chief executive office,
               head office, registered office and chief place of business of the
               Borrower, (ii) the jurisdictions in which the Borrower carries on
               business, (iii) the jurisdictions in which the Borrower has any
               account debtors, (iv) the jurisdictions in which the Borrower
               stores any tangible personal property (except for goods in
               transit in the ordinary course of business), and (v) the office
               addresses of all of the Borrower and its Subsidiaries identifying
               on such list all Subsidiaries of the Borrower;

               Schedule 5.1(w)(ii) is a list of all authorizations, permits,
               consents, registrations and approvals which are material to the
               Borrower;

               Schedule 5.1(w)(iii) is a list of all trademarks, tradenames,
               copyrights and patents (and the registration particulars thereof)
               which are material to the Borrower;

               Schedule 5.1(w)(iv) is a list of all actions, suits, arbitrations
               or proceedings pending, taken or, to the Borrower's knowledge
               threatened,



                                      -19-

               before or by any Governmental Entity or other Person affecting
               the Borrower or any of its Subsidiaries involving claims which
               individually or in the aggregate exceed U.S.$100,000; and

               Schedule 5.1(w)(v) contains a list of all Material Agreements;
               and

     (x)  Disclosure. All written information respecting the Parent, the
          Borrower and its Subsidiaries supplied by the Borrower to the Lender
          (i) was prepared in good faith, adequately disclosed all relevant
          assumptions, is reasonable and (ii) is true and accurate in all
          material respects and does not omit to state any fact necessary to
          make such information not misleading at such time in light of the
          circumstances under which such information was provided. There is no
          fact known to the Borrower which could reasonably be expected to have
          a Material Adverse Effect and which has not been fully disclosed.
          Subject to the preceding provisions of this section, no event has
          occurred which could be reasonably anticipated to have a Material
          Adverse Effect since the date of the last audited financial statements
          delivered to the Lender.

5.2  Survival of Representations and Warranties.

     The representations and warranties in this Agreement and in any other Loan
Document shall not merge in or be prejudiced by, and shall survive (but for
greater certainty not be deemed to be repeated following) the Closing Date and
shall continue in full force and effect so long as any amounts are owing by the
Borrower to the Lender under this Agreement.

                                    ARTICLE 6
                            COVENANTS OF THE BORROWER

6.1  Affirmative Covenants

     So long as any amount owing by the Borrower or any of its Subsidiaries
under the Loan Documents remains unpaid, and unless consent is given in
accordance with Section 8.1, the Parent and the Borrower shall:

     (a)  Financial Reporting. Deliver to the Lender promptly (and in any event
          within 2 Business Days) following filing the same with SEC the
          quarterly and annual financial statements of the Borrower filed from
          time to time by the Borrower with the SEC pursuant to the Borrower's
          continuous disclosure obligations under U.S. securities legislation,
          and (ii) together with each delivery of such financial statements, a
          certificate (a "Compliance Certificate") of the Borrower substantially
          in the form of Schedule 6.1 signed on its behalf by its president,
          chief executive officer, chief operating officer, chief financial
          officer or treasurer (or any other officer of the Borrower with the
          duties and responsibilities of any such office notwithstanding that
          the title of such officer may be different than those specified above)
          any other officer acceptable to the Lender;



                                      -20-

     (b)  Environmental Reporting. Promptly, and in any event within 10 days,
          deliver to the Lender a detailed statement describing any of the
          following occurrences (i) any order or judgment of any Governmental
          Entity requiring the Borrower or any of its Subsidiaries to incur any
          liabilities ("Environmental Liabilities") imposed by, under or
          pursuant to any laws, regulations, orders, judgments and all other
          statutory requirements relating to public health and/or the protection
          of the environment and all authorizations, permits, consents,
          registrations and approvals issued pursuant to such laws, agreements
          or statutory requirements ("Environmental Laws") (w) in excess of
          $1,000,000 in any one instance, (x) together with all other
          expenditures incurred in respect of Environmental Liabilities in any
          Financial Year, in excess of $1,000,000 in the aggregate, (ii) any
          state of affairs on which could result in the incurrence of
          Environmental Liabilities (y) in excess of $1,500,000 in any one
          instance, or (z) together with all other expenditures incurred in
          respect of Environmental Liabilities in any Financial Year, in excess
          of $1,500,000 in the aggregate, and (iii) the action taken or proposed
          to be taken in connection with such occurrences;

     (c)  Corporate Existence. Except as otherwise permitted in this Agreement,
          preserve and maintain, and cause each of its Subsidiaries to preserve
          and maintain, its corporate existence;

     (d)  Compliance with Laws, etc. Comply, and cause each of its Subsidiaries
          to comply with the requirements of all applicable laws, judgments,
          orders, decisions and awards except to the extent that the failure to
          so comply would not and could not be reasonably expected to have a
          Material Adverse Effect;

     (e)  Maintenance of Properties. From time to time, make and cause each of
          the Subsidiaries of the Borrower to make all repairs, renewals,
          replacements, additions and improvements to the real properties owned
          or leased by the Borrower and its Subsidiaries and their other
          properties and assets, so that the SP Products and Services Business
          and the Borrower's Subsidiaries' respective businesses, as the case
          may be, may be properly and advantageously conducted at all times in
          accordance with prudent business management practice;

     (f)  Auditors. Continue to appoint as its auditors a firm of national
          standing in the United States;

     (g)  Payment of Taxes and Claims. Pay or cause to be paid and cause each of
          its Subsidiaries to pay or cause to be paid, when due, (i) all taxes,
          assessments and governmental charges or levies imposed upon it or upon
          its income, sales, capital or profit or any other property belonging
          to it or upon its Subsidiaries, and (ii) all claims which, if unpaid,
          might by law become a Lien upon the assets, except any such tax,
          assessment, charge, levy or claim which (x) is being contested in good
          faith and by proper proceedings and in respect of which the Borrower
          or its Subsidiaries have established adequate reserves in accordance
          with GAAP or (y) are Permitted Liens;



                                      -21-

     (h)  Keeping of Books. Keep, and cause each of the Subsidiaries of the
          Borrower to keep, proper books of record and account, in which full
          and correct entries shall be made in respect of the SP Products and
          Services Business or businesses, as the case may be;

     (i)  Visitation and Inspection. At any reasonable time or times during
          normal business hours and on reasonable notice to the Borrower, permit
          the Lender to visit the properties of the Borrower and its
          Subsidiaries, and to discuss their affairs, finances and accounts with
          the officer appointed as (or performing the functions of) the chief
          financial officer of the Borrower;

     (j)  Maintenance of Insurance. Maintain, in respect of itself and each of
          the Borrower's Subsidiaries, insurance at all times with responsible
          insurance carriers and in such amounts and covering such risks as are
          usually carried by companies engaged in similar businesses and owning
          similar properties in the same general areas in which the Borrower or
          such Subsidiaries, as the case may be, operate, such policies with
          respect to the general corporate liabilities, property and assets of
          the Borrower and show the Lender as an additional loss payee;

     (k)  SP Products and Services Business. The Parent, the Borrower and its
          Subsidiaries will, pursuant to the Business and Marketing Plan and any
          replacement thereof pursuant to the terms hereof: (i) continue to
          carry on the Core Business (other than the SP Products and Services
          Business), (ii) begin and subsequently continue to carry on the SP
          Products and Services Business, (iii) use best efforts to meet the
          objectives set forth in the Business and Marketing Plan, (iv) use best
          efforts to ensure that the business activities of the Borrower and its
          Subsidiaries are comprised primarily and substantially of the Core
          Business, (v) use best efforts to ensure that the SP Products and
          Services Business comprises a material part of the business activities
          of the Borrower and its Subsidiaries and (vi) not make any changes to
          Items (i)-(v) above;

     (l)  Annual Business Plan. Beginning upon the expiration of the term of the
          Business and Marketing Plan, being thirty (30) days prior to the end
          of the 2005 calendar year, and no less than thirty (30) days prior to
          the end of each subsequent calendar year, so long as the Borrower is
          liable for any amounts hereunder to the Lender, the Borrower shall
          deliver to the Lender a business plan relative to the SP Products and
          Services Business for the year to follow in a form reasonably
          acceptable to the Lender;

     (m)  Availability Under Senior Credit Facility. At any time the Borrower is
          subject to a mandatory repayment obligation pursuant to the terms of
          Section 2.3(b) above, the Borrower shall maintain availability under
          the terms of its credit agreement with The CIT Group/Business Credit,
          Inc. (or any successor thereto) of at least the amount of such
          mandatory repayment obligation plus $500,000; and



                                      -22-

     (n)  Further Assurances. Upon request of the Lender, execute and deliver or
          cause to be executed and delivered to the Lender such further
          instruments and do and cause to be done such further acts as may be
          necessary or proper in the reasonable opinion of the Lender to carry
          out more effectively the provisions and purposes of the Loan
          Documents.

6.2  Negative Covenants

     So long as any amount owing by the Borrower or any of its Subsidiaries
under the Loan Documents remains unpaid, and unless consent is given in
accordance with Section 8.1, neither the Parent nor the Borrower shall:

     (a)  Funded Debt. Create, incur, assume or suffer to exist or permit any of
          its Subsidiaries to create, incur, assume or suffer to exist any
          Funded Debt other than, without duplication, (i) Funded Debt to the
          Lender under this Agreement, (ii) Funded Debt from time to time under
          one or more Permitted Credit Facilities (subject to the maximum
          aggregate principal amount of the indebtedness permitted to be
          outstanding at such time under all such Permitted Credit Facilities
          pursuant to the definition of the term `Permitted Credit Facilities'),
          (iii) Funded Debt secured by any Permitted Lien (subject to the
          limitations on the indebtedness permitted to be secured by such
          Permitted Lien pursuant to the definition of the term `Permitted
          Lien'), and (iv) any refinancing, replacement or renewal of such
          Funded Debt not exceeding (y) in principal amount, the amount
          outstanding on the date of the refinancing, renewal or replacement,
          and (z) in interest rate, a market competitive rate on the date of the
          refinancing, renewal or replacement, and otherwise on terms and
          conditions no more restrictive than the terms and conditions of the
          Funded Debt to be refinanced, renewed or replaced;

     (b)  Liens. Create, incur, assume or suffer to exist, or permit any of the
          Borrower's Subsidiaries to create, incur, assume or suffer to exist,
          any Lien on any of their respective properties or assets other than
          Permitted Liens;

     (c)  Mergers, Etc. Enter into, or permit any of the Borrower's Subsidiaries
          to enter into, any reorganization, consolidation, amalgamation,
          arrangement, winding-up, merger or other similar transaction (any such
          transaction being a "Merger Transaction"); provided, that (i) Borrower
          may enter into a Merger Transaction so long as it is the surviving
          corporation of any such Merger Transaction and (ii) a Subsidiary of
          Borrower may enter into a Merger Transaction, in each case so long as
          the purchase price of any business acquired pursuant to such Merger
          Transaction does not exceed $250,000 and the Merger Transaction does
          not otherwise adversely impact the Lender's security interest in the
          assets of the Borrower;

     (d)  Disposal of Assets Generally. Sell, exchange, transfer, lease, release
          or abandon or otherwise dispose (a "Disposition") of, or permit any of
          its Subsidiaries to Dispose of, any assets or properties to any Person
          in any way that adversely



                                      -23-

          impacts the Lender's security interest of the assets of the Borrower
          than (i) bona fide sales, exchanges, leases, abandonments or other
          dispositions in the ordinary course of business for the purpose of
          carrying on the Core Business, and at fair market value, (ii) property
          or assets which have no material economic value in the Core Business
          or the Subsidiary's business or are obsolete;

     (e)  Share Issuances. Issue shares of common stock or preferred stock, or
          any options, warrants or securities convertible into shares of common
          stock or preferred stock to any competitors of SP in the (description
          withheld and filed separately with the SEC) business;

     (f)  Financial Year. Change its Financial Year without the prior written
          approval of the Lender;

     (g)  Amendments. Allow any amendments to any Material Agreement if such
          amendments could reasonably be expected to have a Material Adverse
          Effect;

     (h)  (Terms withheld and filed separately with the SEC).

     (i)  Dividends. Declare or pay any dividends to make any distribution of
          any kind on their outstanding capital stock or any other payment of
          any kind to any of their stockholders or any affiliate of any of their
          stockholders, provided, however, that dividends may be paid as may be
          currently required by classes of preferred stock outstanding on the
          date of this Agreement, so long as no Event of Default has occurred or
          would exist as a result of any such payments; and

     (j)  Affiliate Transactions. Make any loan to any director, officer or
          employee of the Parent, the Borrower or of its Subsidiaries or repay
          any loans advanced by any director, officer or employee of the Parent,
          the Borrower or any of its Subsidiaries; provided, however, that
          Borrower may make any regularly scheduled payments of interest and/or
          principal on any Funded Debt in existence on the date of this
          Agreement so long as no Event of Default has occurred or would exist
          as a result of any such payment and Borrower is able to make such
          payment without incurring any additional Funded Debt.

6.3  Financial Covenant

     So long as any amount owing by the Borrower or any of its Subsidiaries
under the Loan Documents remains unpaid, and unless consent is given in
accordance with Section 8.1, the Borrower's Adjusted Consolidated Funded Debt
(calculated as at the end of the most recently completed Financial Quarter)
shall not exceed 50% of the total assets of the Parent, the Borrower and its
Subsidiaries less any intangible assets (as determined on a consolidated basis
in



                                      -24-

accordance with GAAP and calculated as at the end of the most recently completed
Financial Quarter).

     For the purposes of this Section 6.3:

          "Adjusted Consolidated Funded Debt" means at any time the amount, if
          any, by which the Funded Debt of the Parent, the Borrower and its
          Subsidiaries determined on a consolidated basis in accordance with
          GAAP at such time exceeds Consolidated Cash and Short Term Investments
          at such time; and

          "Consolidated Cash and Short Term Investments" means, on any date, all
          cash and all debt securities or debt investments (including without
          limitation bankers' acceptances, government obligations, financial
          institution deposit certificates or debt obligations and commercial
          paper) which have terms to maturity of not more than 1 year from and
          including such date held on such date by the Parent, the Borrower and
          its Subsidiaries, determined on a consolidated basis in accordance
          with GAAP.

6.4  Security Covenants

     So long as any amount owing by the Borrower or any of its Subsidiaries
under the Loan Documents remains unpaid, and unless consent is given in
accordance with Section 8.1, the Borrower shall:

     (a)  Status of Accounts Collateral. With respect to the Collateral (i)
          maintain books and records pertaining to the Collateral in such
          detail, form and scope as the Lender reasonably requires, and (ii)
          report immediately to the Lender any matters materially adversely
          affecting the value, enforceability or collectibility of the
          Collateral, taken as a whole;

     (b)  Business Outside Certain Jurisdictions. At least 30 days prior to any
          of the following changes becoming effective, notify the Lender in
          writing of (i) any proposed change in the location of (w) any place of
          business of the Borrower, (x) the chief executive office or head
          office of the Borrower, (y) any account debtors of the Borrower, and
          (z) any place where tangible property of the Borrower is stored, and
          (ii) any proposed change in the name of the Borrower;

     (c)  Perfection and Protection of Security Interest. Promptly cure or cause
          to be cured any defects in the execution and delivery of any of the
          Loan Documents or any defects in the validity or enforceability of any
          of the Security and execute and deliver or cause to be executed and
          delivered, all such agreements, instruments and other documents
          (including the filing of any financing statements or financing change
          statements) as the Lender may consider necessary or desirable to
          protect or otherwise perfect the Security;

     (d)  Release of Security. On the date of the due payment and performance in
          full of all Maturity Amounts, under each of the Loans to the Lender
          this Agreement shall



                                      -25-

          terminate, the Lender will release and discharge, and will cause the
          Lender to release and discharge, the Security and all right, title and
          interest of the Lender in the property and assets of the Borrower and
          its Subsidiaries under the Borrower's Security Agreement. In addition,
          if any asset or property of the Borrower or a Subsidiary thereof is
          Disposed of as specifically permitted by this Agreement, the Lender,
          at the request of the Borrower, will, and will cause the Lender to,
          discharge such asset or property from the Security and deliver and
          re-assign to the Borrower or the applicable Subsidiary (without any
          representation or warranty) any such asset or property then in the
          possession of the Lender. If any Liens are permitted to be placed over
          any part of the assets or property of the Borrower or any of its
          Subsidiaries (whether in priority to any of the Security or otherwise)
          pursuant to the provisions of this Agreement, or otherwise at the
          direction or with the consent of the Lender, the Lender shall, at the
          request of the Borrower, will, and will cause the Lender to, provide
          such assurances, confirmations, postponements and subordinations
          respecting such assets and property and the Security as the Borrower
          may reasonably request in the circumstances.

                                    ARTICLE 7
                                EVENTS OF DEFAULT

7.1  Events of Default

     If any of the following events (each an "Event of Default") occurs and is
continuing:

     (a)  the Borrower fails to pay any principal or interest in respect of a
          Loan when such amount becomes due and payable and such failure remains
          unremedied for a period of ten (10) Business Days;

     (b)  any representation or warranty or certification made or deemed to be
          made by the Parent, the Borrower or any of its Subsidiaries thereof in
          any Loan Document shall prove to have been incorrect in any material
          respect when made or deemed to be made; and, if the circumstances
          giving rise to the materially incorrect representation or warranty are
          capable of modification or rectification (such that, thereafter the
          representation or warranty would not be incorrect in any material
          respect), the representation or warranty remains uncorrected for a
          period of thirty (30) days following written notice of such material
          incorrectness by the Lender to the Borrower;

     (c)  the Parent or the Borrower fails to perform or observe or comply with
          any of the covenants contained in Section 6.2 (Negative Covenants) or
          Section 6.3 (Financial Covenant), and such failure remains unremedied
          for thirty (30) days following notice of such failure by the Lender to
          the Borrower;

     (d)  the Parent or the Borrower fails to perform, observe or comply with
          any of the covenants contained in Section 6.1 (Affirmative Covenants)
          and such failure



                                      -26-

          remains unremedied for thirty (30) days following notice of such
          failure by the Lender to the Borrower;

     (e)  a Subsidiary of the Borrower fails to perform or observe or comply
          with any material term or agreement contained in any Loan Document to
          which it is a party and such failure remains unremedied for thirty
          (30) days following notice of such failure by the Lender to the
          Borrower;

     (f)  the Parent or the Borrower fails to perform, observe or comply with
          any other term, covenant or agreement contained in any Loan Document
          and such failure remains unremedied for thirty (30) days following
          written notice of such failure by the Lender to the Borrower;

     (g)  a Change of Control of Parent or the Borrower shall have occurred;

     (h)  if an event or events of default, as defined in any one or more
          indentures or instruments evidencing or under which the Parent, the
          Borrower or any of its Subsidiaries has incurred Funded Debt in an
          aggregate principal amount in excess of U.S. $300,000 shall happen and
          be continuing and (i) shall consist of a failure to make any payment
          when due and payable of any amount or amounts (whether principal,
          interest or both) exceeding in the aggregate under all such indentures
          and instruments U.S.$300,000, or (ii) shall have resulted in the
          acceleration of such Funded Debt so that Funded Debt in an aggregate
          amount (whether principal, interest or both) under all such indentures
          and instruments in excess of U.S.$300,000 shall be or become due and
          payable prior to the date on which the same would otherwise have
          become due and payable; provided, however, that if such event or
          events of default under such indentures or instruments is remedied or
          cured by the Borrower or its Subsidiaries, or waived by the holders of
          such Funded Debt, then the Event of Default occurring by reason
          thereof shall be deemed likewise to have been thereupon remedied,
          cured or waived without further action;

     (i)  the Borrower or any of its Subsidiaries fails to perform, observe or
          comply with any of the provisions of the distribution agreement (at
          any time following the execution of such agreement) and such failure
          remains unremedied for thirty (30) days following notice of such
          failure by the Lender to the Borrower;

     (j)  any judgment or order for the payment of money in excess of U.S.
          $100,000 (subject to no further right of appeal) is rendered against
          the Parent, the Borrower or any of its Subsidiaries and enforcement
          proceedings have been commenced by a creditor upon the judgment or
          order and such proceedings have not been effectively stayed;

     (k)  the Parent, the Borrower or any of its Subsidiaries (i) becomes
          insolvent or generally not able to pay its debts as they become due,
          (ii) admits in writing its inability to pay its debts generally or
          makes a general assignment for the benefit



                                      -27-

          of creditors, (iii) institutes or has instituted against it any
          proceeding seeking (x) to adjudicate it a bankrupt or insolvent, (y)
          liquidation, winding-up, reorganization, arrangement, adjustment,
          protection, relief or composition of it or its debts under any law
          relating to bankruptcy, insolvency, reorganization or relief of
          debtors including any plan of compromise or arrangement or other
          corporate proceeding involving or affecting its creditors, or (z) the
          entry of an order for relief or the appointment of a receiver, trustee
          or other similar official for it or for any substantial part of its
          properties and assets, and in the case of any such proceeding
          instituted against it (but not instituted by it), either the
          proceeding remains undismissed or unstayed for a period of thirty (30)
          days, or any of the actions sought in such proceeding (including the
          entry of an order for relief against it or the appointment of a
          receiver, trustee, custodian or other similar official for it or for
          any substantial part of its properties and assets) occurs, or (iv)
          takes any corporate action to authorize any of the above actions.

     Then the Lender may declare any or all of the Loans, all accrued interest
     and all other amounts payable under this Agreement to be immediately due
     and payable, without presentment, demand, protest or further notice of any
     kind, all of which are expressly waived by the Borrower.

7.2  Remedies Upon Default

(1)  Upon a declaration that a Loan is immediately due and payable pursuant to
     this Article 7, the Lender that has made the declaration may commence such
     legal action or proceedings as it, in its sole discretion, deems expedient,
     including, the commencement of enforcement proceedings under the Loan
     Documents all without any additional notice, presentation, demand, protest,
     notice of _ishonour, entering into of possession of any property or
     assets, or any other action or notice, all of which are expressly waived by
     the Borrower.

(2)  The rights and remedies of the Lender under the Loan Documents are
     cumulative and are in addition to, and not in substitution for, any other
     rights or remedies. Nothing contained in the Loan Documents with respect to
     the indebtedness or liability of the Borrower to the Lender, nor any act or
     omission of the Lender with respect to the Loan Documents or the Security
     shall in any way prejudice or affect the rights, remedies and powers of the
     Lender under the Loan Documents and the Security.

                                    ARTICLE 8
                                  MISCELLANEOUS

8.1  Amendments, etc.

     No amendment or waiver of any provision of any of the Loan Documents, nor
consent to any departure by the Borrower or any other Person from such
provisions, is effective unless in writing and approved by the Lender. Any
amendment, waiver or consent is effective only in the specific instance and for
the specific purpose for which it was given.



                                      -28-

8.2  Waiver

     (a)  No failure on the part of the Lender to exercise, and no delay in
          exercising, any right under any of the Loan Documents shall operate as
          a waiver of such right; nor shall any single or partial exercise of
          any right under any of the Loan Documents preclude any other or
          further exercise of such right or the exercise of any other right.

     (b)  Except as otherwise expressly provided in this Agreement, the
          covenants, representations and warranties shall not merge on and shall
          survive the initial advance and, notwithstanding such initial advance
          or any investigation made by or on behalf of any party, shall continue
          in full force and effect. The closing of this transaction shall not
          prejudice any right of one party against any other party in respect of
          anything done or omitted under this Agreement or in respect of any
          right to damages or other remedies.

8.3  Right of First Offer

     In the event the Borrower desires to sell, exchange or otherwise transfer
any assets or portion of its business representing in either case at least 10%
of the consolidated revenues of the Borrower (determined in accordance with the
most recent audited financial statements of the Borrower), the Borrower shall
give the Lender written notice, which shall set forth in reasonable detail the
assets or portion of the business to be sold or otherwise transferred. The
Lender shall have the right, exercisable upon written notice to the Borrower
within thirty (30) days after receipt of any written notice from the Borrower,
to offer to purchase all, but not less than all, of the assets or portion of the
business to be sold or otherwise transferred by the Borrower, at a purchase
price and on such terms and conditions as specified by the Lender in an offer
letter (the "Offer"). In the event that Borrower declines to accept the Lender's
terms as provided in the Offer, the Borrower may transfer such assets or portion
of its business to any third party at any time within six months following the
receipt of the Offer from the Lender, provided that the Borrower may not sell
such assets or portion of its business on for a price and on terms less
satisfactory than the price and the terms set forth in the Offer. In the event
the sale or transfer is not consummated within such six-month period, any
proposed transfer of assets or portion of its business by the Borrower shall
again be subject to the requirements of this Section 8.3.

8.4  Evidence of Funded Debt

     The indebtedness of the Borrower hereunder shall be evidenced by the
records of the Lender which shall constitute prima facie evidence of such
indebtedness.

8.5  Notices, etc

     Any notice, direction or other communication to be given under this
Agreement shall, except as otherwise permitted, be in writing and given by
delivering it or sending it by facsimile or other similar form of recorded
communication addressed:

     (a)  to the Borrower at:



                                      -29-

               11403 A Cronhill Drive
               Owings Mills, MD 21117

               Attention: Donald R. Walsh

               Telephone: +1-410-902-6900

               Facsimile: +1-410-902-8324

          with a copy to:

               Neuberger, Quinn, Gielen, Rubin & Gibber, P.A.
               One South Street
               27th Floor
               Baltimore, Maryland 21202

               Attention: Christopher Olander

               Telephone: +1-410-332-8550

               Facsimile: +1-410-332-8594

     (b)  to the Lender :

               Strategic Partner
               (Address withheld and filed separately with the SEC.)

          with a copy to:

               Ropes & Gray LLP
               45 Rockefeller Plaza
               New York, New York 10111

               Attention: Jonathan Cramer, Esq.

               Telephone: +1-212-841-0690

               Facsimile: +1-212-841-5725

     Any such communication shall be deemed to have been validly and effectively
given if (i) personally delivered, on the date of such delivery if such date is
a Business Day and such delivery was made prior to 4:00 p.m. (New York time),
otherwise on the next Business Day, (ii) transmitted by facsimile or similar
means of recorded communication on the Business Day following the date of
transmission. Any party may change its address for service from time to time by
notice given in accordance with the foregoing and any subsequent notice shall be
sent to the party at its changed address.

8.6  Confidentiality

     The Lender shall use reasonable efforts to ensure that financial statements
or other information relating to the Borrower which may be delivered to it
pursuant to this Agreement



                                      -30-

and which are not publicly filed or otherwise made available to the public
generally (and which are not independently known to the Lender) will be treated
confidentially by such Lender and will not, except with the consent of the
Borrower, be distributed or otherwise made available by the Lender to any Person
other than its directors, officers, employees, authorized agents, counsel or
other representatives (provided the other representatives have agreed or are
under a duty to keep all information confidential) required, in the reasonable
opinion of the Lender, to have such information. The Lender is authorized to
deliver a copy of any financial statements or any other information which may be
delivered to it pursuant to this Agreement to (i) any potential or actual
Assignee, as such term is defined below in Section 8.8(c) provided notice is
given to the Borrower and provided that such Assignee agrees in writing in
favour of the Borrower to be bound by the confidentiality provisions of this
Agreement, (ii) any Governmental Entity having jurisdiction over the Lender in
order to comply with any applicable law; and (iii) any Subsidiary of the Lender
required, in the reasonable opinion of the Lender, to have such information
provided that such Subsidiary will be advised by the Lender of and will be bound
by, and the Lender will be responsible for any breach by such Subsidiary of any
of, the confidentiality provisions of this Agreement.

8.7  Costs, Expenses and Indemnity

     (a)  The Borrower shall, whether or not the transaction contemplated in
          this Agreement are completed, indemnify and hold the Lender and its
          officers, directors, employees and agents (each an "Indemnified
          Person") harmless from, and shall pay to such Indemnified Person on
          demand, any amounts required to compensate the Indemnified Person for,
          any claim or loss suffered by, imposed on, or asserted against, the
          Indemnified Person as a result of, connected with or arising out of
          (i) a default (whether or not constituting a Default or an Event of
          Default) by the Borrower, (ii) any proceedings brought against the
          Indemnified Person due to its entering into of any of the Loan
          Documents and performing its obligations under the Loan Documents
          except to the extent caused by the gross negligence or wilful
          misconduct of an Indemnified Person, and (iii) the presence at, on or
          under or the discharge or likely discharge of contaminants from any of
          any of the properties now or previously used by the Borrower or any of
          its Subsidiaries, or the breach by or non-compliance with any
          Environmental Law by any mortgagor, owner, or lessee of such
          properties, except to the extent that any of the same have been caused
          by an Indemnified Party.

     (b)  The Borrower shall pay to the Lender on demand any amounts required to
          compensate the Lender for any loss suffered or incurred by it as a
          result of (i) the failure of the Borrower to give any notice in the
          manner and at the times required by this Agreement, or (ii) the
          failure of the Borrower to make a payment or a mandatory repayment in
          the manner and at the time specified in this Agreement. A certificate
          as to the amount of any loss submitted in good faith by the Lender to
          the Borrower shall be prima facie evidence of the amount of such loss,
          absent manifest error.



                                      -31-

     (c)  The provisions of this Section 8.7 shall survive the termination of
          this Agreement and the repayment of all Maturity Amounts. The Borrower
          acknowledges that neither its obligation to indemnify nor any actual
          indemnification by it of the Lender or any other Indemnified Person in
          respect of such Person's losses for legal fees and expenses shall in
          any way affect the confidentiality or privilege relating to any
          information communicated by such Person to its counsel.

8.8  Successors and Assigns

     (a)  This Agreement shall become effective when executed by the Borrower
          and the Lender and after that time shall be binding upon and inure to
          the benefit of the Borrower and the Lender and their respective
          successors and permitted assigns.

     (b)  The Borrower shall not have the right to assign its rights or
          obligations under this Agreement or any interest in this Agreement
          without the prior consent of the Lender.

     (c)  Subject to the next sentence, the Lender shall not have the right to
          assign its rights or obligations under any Loan Document or any
          interest in any Loan Document without the prior consent of the
          Borrower, unless such assignment is to a Subsidiary of      , in which
                                                                 -----
          case no consent of the Borrower is required. Notwithstanding the
          foregoing, at any time following the second anniversary of the Closing
          Date the Lender may assign all or any part of its interest in any Loan
          (but for greater certainty not in any other right or entitlement under
          any Loan Document) to (each an "Assignee") (i) one or more Persons
          that is not a competitor of the Borrower or its Subsidiaries, or (ii)
          a Person that is a competitor of the Borrower or its Subsidiaries, if
          such Person acquires the Lender or is acquired by the Lender, or any
          of its Subsidiaries, pursuant to a Change of Control of such Person or
          the Lender, as the case may be, without any requirement for notice to,
          or consent of, the Borrower or any other Person. Upon an assignment,
          (i) the Borrower shall assign any and all benefit of all Security to
          the Assignee and (ii) the Assignee shall have the same rights and
          benefits and be subject to the same limitations under the Loan
          Documents with respect to such Loan (but for greater certainty not
          with respect to any other right or entitlement under any Loan
          Documents) as it would have if it was the Lender, provided that no
          Assignee shall be entitled to receive any greater payment, on a
          cumulative basis, pursuant to Section 8.7 than the Lender which
          granted the assignment would have been entitled to receive.

     (d)  The Borrower shall provide such certificates, acknowledgements and
          further assurances in respect of this Agreement and the Loans as the
          Lender may reasonably require in connection with any assignment,
          pursuant to this Section 8.8.

     (e)  In the case of an assignment, the Lender shall deliver to the Borrower
          and the Borrower shall execute an assignment and assumption agreement
          pursuant to



                                      -32-

          which the Assignee assumes the obligations of the Lender and agrees to
          be bound by all the terms and conditions of this Agreement, all as if
          the Assignee had been an original party. Upon receipt by the Lender of
          the assignment and assumption agreement, the assigning Lender and the
          Borrower shall be released from their respective obligations under
          this Agreement (to the extent of such assignment and assumption) and
          shall have no liability or obligations to each other to such extent,
          except in respect of matters arising prior to the assignment.

     (f)  Any assignment pursuant to this Section 8.8 will not constitute a
          repayment by the Borrower to the assigning or granting Lender of a
          Loan nor a new loan to the Borrower by the Lender or by the Assignee
          and the parties acknowledge that the Borrower's obligations with
          respect to such Loan will continue and will not constitute new
          obligations.

8.9  Right of Set-off

     Each party is hereby authorized at any time and from time to time, to the
fullest extent permitted by law, to set off and apply the amount owed, due and
payable by the other hereunder to it hereunder against any and all of its
obligations to the other party hereunder or pursuant to any other agreement
entered into between the parties or otherwise, as the case may be, irrespective
of whether or not demand shall have been made. The rights of the parties under
this Section 8.9 are in addition to other rights and remedies (including,
without limitation, other rights of set-off) which the parties may have. Each
party acknowledges that it would be inequitable and unconscionable not to allow
the non-defaulting party a right of set-off.

8.10 Governing Law

     This Agreement shall be governed by and interpreted and enforced in
accordance with the laws of the State of Delaware without regard of the
principles of conflicts of laws thereof.

8.11 Counterparts and Facsimile

     This Agreement may be executed in any number of counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same instrument. Delivery of an executed
signature page to this Agreement by any party by facsimile transmission shall be
as effective as delivery of a manually executed copy of this Agreement by such
party.

            [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]



                                      -33-

     IN WITNESS WHEREOF the parties have executed this Loan Agreement on the
date appearing on the first page hereof.

                                      AVATECH SOLUTIONS SUBSIDIARY, INC.


                                      By: /s/
                                          --------------------------------------
                                          Name: Donald R. "Scotty" Walsh
                                          Title: Chief Executive Officer


                                       Strategic Partner.


                                      By: /s/
                                          --------------------------------------
                                          Name: (Name and title withheld and
                                          Title: filed separately with the SEC.)


                                      WITH RESPECT TO ARTICLES VI AND VIII:

                                      AVATECH SOLUTIONS, INC.


                                      By: /s/
                                          --------------------------------------
                                          Name: Donald R. "Scotty" Walsh
                                           Title: Chief Executive Officer

EX-10.07

                                                                   EXHIBIT 10.07

                               SECURITY AGREEMENT

          SECURITY AGREEMENT dated as of July 22, 2003 by and between AVATECH
SOLUTIONS SUBSIDIARY, INC., a Delaware corporation (the "Grantor"), and
Strategic Partner (name withheld and filed separately with the SEC) (the
"Secured Party").

                              W I T N E S S E T H:

          WHEREAS, the Secured Party has entered into a Loan Agreement, dated as
of July 22, 2003 (the "Loan Agreement"), with the Grantor pursuant to which the
Secured Party will make Loans to the Grantor; and

          WHEREAS, it is condition precedent to the making of the Initial Loan
under the Loan Agreement that the Grantor shall have granted to the Secured
Party the security interests set forth in this Agreement; and

          WHEREAS, all capitalized terms used herein without definition shall
have the respective meanings ascribed thereto in the Loan Agreement; and

          NOW, THEREFORE, in consideration of the foregoing premises and in
order to induce the Secured Party to make the loans pursuant to the Loan
Agreement, the Grantor hereby agrees with the Secured Party as follows:

     1. Grant of Security. The Grantor hereby assigns and pledges to and for the
ratable benefit of the Secured Party a continuing security interest in all of
the Grantor's right, title and interest in and to the following, whether now
owned or existing or hereafter arising or acquired and wheresoever located and
including all products and proceeds thereof (collectively, the "Collateral"):

     Accounts: All present and future "accounts" (as defined in the Uniform
Commercial Code as in effect in the State of Delaware (the "Code")), accounts
receivable and other rights of the Grantor to payment for goods sold or leased
or for services rendered, whether now existing or hereafter arising and wherever
arising, and whether or not they have been earned by performance (collectively,
"Accounts");

     Inventory: All "inventory" (as defined in the Code), including goods now
owned or hereafter acquired by the Grantor (wherever located, whether in the
possession of the Grantor or of a bailee or other person for sale, storage,
transit, processing, use or otherwise and whether consisting of whole goods,
spare parts, components, supplies or materials, or consigned, returned or
repossessed goods) which are held for sale or lease or to be furnished under any
present or future contract of service or which are raw materials, work in
process, finished goods, office supplies, maintenance supplies, packaging
materials, spare parts or similar items of Grantor or materials used or consumed
solely in the Grantor's business (collectively, "Inventory");

                                        1



     Equipment: All "equipment" (as defined in the Code), including all
machinery, equipment, tools, production fixtures, maintenance machinery and
equipment, furniture and leasehold improvements, distribution, selling, data
processing and office equipment, appliances, fixtures and trade fixtures, tools,
vehicles, and all other goods of every type and description (other than
Inventory), in each instance whether now owned or hereafter acquired by the
Grantor and wherever located (collectively, "Equipment");

     General Intangibles: All rights, interest, choses in action, causes of
action, claims and all other intangible property of the Grantor of every kind
and nature (other than Accounts), in each instance whether now owed or hereafter
acquired by the Grantor, and however and whenever arising, including, without
limitation, all corporate and other business records; all loans, royalties, and
other obligations receivable; all inventions, designs, trade secrets, computer
programs and prototypes, software and related documentation, printouts and other
computer materials; all the goodwill of the business of Grantor in connection
with the use, and symbolized by, each trademark, service mark and trade name of
Grantor; all licenses, franchises, customer lists, credit files, correspondence,
and advertising materials; all customer and supplier contracts, firm sale
orders, rights under license and franchise agreements, and other contracts and
contract rights; all interests in partnerships and joint ventures; all tax
refunds and tax refund claims; all right, title and interest under leases,
subleases, licenses and concessions and other agreements relating to real or
personal property; all payments due or made to the Grantor in connection with
any requisition, confiscation, condemnation, seizure or forfeiture of any
property by any person or governmental authority; all deposit accounts (general
or special) with any bank or other financial institution, including, without
limitation, any deposits or other sums at any time credited by or due to the
Grantor from the Secured Party, any lender or any of their respective
affiliates, with the same rights therein as if the deposits or other sums were
credited by or due from the Secured Party or any lender; all credit with and
other claims against carriers and shippers; all rights to indemnification; all
patents, trademarks, service marks, tradenames, patent applications and
trademark applications, and all claims by Grantor against third parties for any
infringement of any trademark, service mark or copyright; all reversionary
interests in pension and profit sharing plans and reversionary, beneficial and
residual interest in trusts; all proceeds of insurance of which the Grantor is
beneficiary; all letters of credit, guaranties, liens, security interests and
other security held by or granted to the Grantor; any restrictive covenants and
obligations of Grantor's officers, employees, former officers and former
employees and all rights, claims and causes of action against any of Grantor's
officers, former officers, employees or former employees; and all other
intangible property, whether or not similar to the foregoing;

     Chattel Paper, Instruments and Documents: All "chattel paper" (as defined
in the Code), all leases, all "instruments" (as defined in the Code) and all
payments thereunder and instruments and other property from time to time
delivered in respect thereof or in exchange therefor and all bills of lading,
warehouse receipts, documents of title and other "documents" (as defined in the
Code), in each instance whether now owned or hereafter acquired by the Grantor;

                                        2



     Investment Property: All "investment property" (as defined in the Code)
(including, without limitation, all (A) securities, whether certificated or
uncertificated, (B) security entitlements, (C) securities accounts, (D)
commodity contracts and (E) commodity accounts) in which such Grantor has now,
or acquires from time to time hereafter, any right, title or interest in any
manner, and the certificates or instruments, if any, representing or evidencing
such investment property, and all dividends, interest, distributions, value,
cash, instruments and other property from time to time received, receivable or
otherwise distributed in respect of or in exchange for any or all of such
investment property; and

     Other Property: All personal property or interests in personal property now
owned or hereafter acquired by the Grantor which now may be owned or hereafter
may come into the possession, custody or control of the Grantor or any agent of
the Grantor in any way or for any purpose (whether for safekeeping, deposit,
custody, pledge, transmission, collection or otherwise); and all rights and
interests of the Grantor, now existing or hereafter arising and however and
wherever arising, in respect of any and all (i) notes, drafts, letters of
credit, stocks, bonds, and debt and equity securities, whether or not
certificated, and warrants, options, puts and calls and other rights, to acquire
or otherwise relating to the same; (ii) money; (iii) proceeds of loans; and (iv)
insurance proceeds and books and records relating to any of the property covered
by this Agreement; together, in each instance, with all accessions and additions
to any of the property covered by this Agreement, any substitutions therefor,
and any replacements, proceeds and products therefor.

     2. Security For Obligations. This Agreement secures the payment and
performance of all obligations of the Grantor now or hereafter existing under
the Loan Agreement and this Agreement, in each case, as the same may be amended
and modified from time to time, whether for payment of principal, interest
(including, without limitation, interest accruing following the filing by or
against the Grantor of a bankruptcy proceeding), fees, expenses or otherwise
(all such obligations of the Grantor being hereinafter referred to collectively
as the "Secured Obligations").

     3. Grantor Remains Liable. Anything herein to the contrary notwithstanding,
(a) the Grantor shall remain solely liable under the contracts, agreements,
instruments and chattel paper included in the Collateral to the extent set forth
therein to perform all of its duties and obligations thereunder to the same
extent as if this Agreement and the Loan Agreement had not been executed, (b)
the exercise by the Secured Party of any of its rights hereunder or under the
Loan Agreement shall not release the Grantor from any of its duties or
obligations under the contracts and agreements included in the Collateral and
(c) the Secured Party shall not have any responsibility, obligation or liability
under the contracts, agreements, instruments, chattel paper or investment
property included in the Collateral by reason of this Agreement or the Loan
Agreement, nor shall the Secured Party be required or obligated, in any manner,
to (i) perform or fulfill any of the obligations or duties of the Grantor
thereunder, (ii) make any payment, or make any inquiry as to the nature or
sufficiency of any payment received by the Grantor or the

                                        3



sufficiency of any performance by any party under any such contracts,
agreements, instruments or chattel paper, or (iii) present or file any claim, or
take any action to collect or enforce any claim for payment assigned hereunder.

     4. Representations and Warranties of the Grantor. The Grantor represents
and warrants to the Secured Party with respect to the Collateral to the effect
set forth in the Loan Agreement, which representations and warranties are
incorporated herein by reference in their entirety as if made on and as of the
date hereof.

     5. Perfection and Maintenance of Security Interest and Lien; Further
Assurances. The Grantor agrees that until this Agreement has been terminated in
accordance with Section 12 hereof, the Secured Party's security interests in and
liens on and against the Collateral and all proceeds and products thereof shall
continue in full force and effect. The Grantor shall perform, from time to time,
any and all steps reasonably requested by the Secured Party to perfect, maintain
and protect the Secured Party's security interests in and liens on and against
the Collateral granted or purported to be granted hereby and to enable the
Secured Party to exercise its rights and remedies hereunder and under the Loan
Agreement, including, without limitation, (i) executing and filing financing or
continuation statements, upon an Event of Default and during the continuance
thereof, tradename and copyright assignments or any amendments thereof, in form
and substance reasonably satisfactory to the Secured Party and (ii) executing
and delivering all further instruments and documents as the Secured Party may
reasonably request to perfect or continue the perfection of their respective
security interests in the Collateral.

     6. Filing Costs. The Grantor shall pay the reasonable costs of, or
incidental to, all recordings or filings of all financing statements (including,
without limitation, all recording, documentary and intangible recording taxes).

     7. Appointment of Attorney-in-Fact. The Grantor hereby irrevocably appoints
the Secured Party as the Grantor's attorney-in-fact, with full authority in the
place and stead of the Grantor and in the name of the Grantor or otherwise, from
time to time in the discretion of the Secured Party and at any time and from
time to time during the continuance of an Event of Default (as defined in the
Loan Agreement), to take any action and to execute any instrument which the
Secured Party may deem necessary, for and on behalf of the Secured Party, to
accomplish the purposes of this Agreement, including, without limitation:

     (i) to ask, demand, collect, sue for, recover, compromise, receive and give
     acquittance and receipts for moneys due and to become due under or in
     respect of any of the Collateral;

     (ii) to receive, endorse, and collect any drafts or other instruments,
     documents and chattel paper, in connection with clause (i) above;

     (iii) to file any claims or take any action or institute any proceedings
     which the Secured Party may deem necessary or desirable for the collection
     of any of the

                                        4



     Collateral or otherwise to enforce the rights of the Secured Party with
     respect to any of the Collateral;

     (iv) to discharge any lien or encumbrance on or against the Collateral or
     bond the same; and

     (v) to take such other action as may be necessary to enforce the Secured
     Party's rights under this Agreement and the Loan Agreement.

     8. The Secured Party's Duties. The powers conferred on the Secured Party
hereunder are solely to protect its interest in the Collateral and shall not
impose any duty upon the Secured Party to exercise any such powers. Except for
the safe custody of any Collateral in its possession and the accounting for
moneys actually received by the Secured Party hereunder, the Secured Party shall
have no duties as to any Collateral. The Secured Party shall be deemed to have
exercised reasonable care in the custody and preservation of the Collateral in
its possession if the Collateral is accorded treatment substantially equal to
that which the Secured Party accords its own properties.

     9. Remedies. If any Event of Default shall have occurred and be continuing:

     (i) the Secured Party shall have, in addition to the other rights and
     remedies provided for herein and in the Loan Agreement or otherwise
     available to the Secured Party, all the rights and remedies of a secured
     party upon default under the Code; and

     (ii) the Secured Party shall apply all cash proceeds received by it in
     respect of any sale of, collection from, or other realization upon all or
     any part of the Collateral from, or other realization upon all or any part
     of the Collateral, for the benefit of the Secured Party, against all or any
     part of the Secured Obligations in such order as the Secured Party may
     select. Any surplus of such cash or cash proceeds held by the Secured Party
     and remaining after payment in full of all the Secured Obligations shall be
     paid over to the Grantor or to whomsoever may be lawfully entitled to
     receive such surplus.

     10. Indemnity and Expense. Upon the occurrence and during the continuance
of an Event of Default, the Grantor will upon demand pay to the Secured Party
the amount of any and all reasonable out-of-pocket expenses, including the fees
and disbursements of counsel and of any experts and agents, which the Secured
Party may incur in connection with (i) the custody (and protection during any
period of custody) of, collection from, or other realization upon, any of the
Collateral, (ii) the exercise or enforcement of any of the rights of the Secured
Party hereunder or under the Loan Agreement, or (iii) the failure by the Grantor
to perform or observe any of the provisions hereof. All of the foregoing fees,
costs and expenses shall be part of the Secured Obligations and shall be secured
by the Collateral. The Grantor shall indemnify and hold the Secured Party and
its officers, directors, employee, affiliates, counsel and agents (each, an
"Indemnified Person ") harmless from and against any and all liabilities,
obligations, losses, damages, penalties,

                                        5



actions or other proceedings (commenced or threatened and whether or not any
such Indemnified Person is a party thereto), judgments, costs, expenses and
disbursements of any kind, including reasonable attorneys' fees and
disbursements and other reasonable costs and expenses of investigation or
defense resulting from, arising out of or in any way relating to this Agreement,
the Loan Agreement or any transaction contemplated hereby or thereby (all of the
foregoing, collectively, the "Indemnified Liabilities "); provided that the
Grantor shall have no liability to an Indemnified Person hereunder with respect
to Indemnified Liabilities arising from the gross negligence or willful
misconduct of such Indemnified Person. All amounts due under this Section shall
be payable on demand of the Secured Party.

     11. Notices. Any notice, direction or other communication to be given under
this Agreement shall, except as otherwise permitted, be in writing and given by
delivering it or sending it by facsimile or other similar form of recorded
communication addressed:

to the Grantor at:

                     11403 A Cronhill Drive
                     Owings Mills, MD 21117
                     Attention: Donald R. Walsh
                     Telephone: (410) 902-6900
                     Facsimile: (410) 902-8324

with a copy to:

                     Neuberger, Quinn, Gielen, Rubin & Gibber, P.A.
                     One South Street
                     27th Floor
                     Baltimore, MD 21202
                     Attention: Christopher Olander
                     Telephone: (410) 332-8550
                     Facsimile: (410) 332-8594

to the Secured Party at:
                     Strategic Partner
                     (Address withheld and filed separately with the SEC.)

with a copy to:      Ropes & Gray LLP
                     45 Rockefeller Plaza
                     New York, New York 10111
                     Attention: Jonathan Cramer, Esq.
                     Telephone: (212) 841-0690
                     Facsimile: (212) 841-5725

or, in any such case, at such other address or addresses as shall have been
furnished in writing by such party to the others.

     12. Continuing Security Interest; Termination. This Agreement shall create
a continuing security interest in the Collateral and shall remain in full force
and effect until

                                        6



the earlier of (i) the payment in full of the Secured Obligations or (ii) the
termination of this Agreement by the Secured Party. This Agreement shall be
binding upon the Grantor and its successors and assigns and shall inure,
together with the rights and remedies of the Secured Party, to the benefit of
the Secured Party and its successors and assigns. Upon the termination of this
Agreement in accordance with this Section 12, the security interests granted
hereby shall terminate and all rights to the Collateral shall revert to the
Grantor. Upon any such termination, the Secured Party will, at the Grantor's
expense, execute and deliver to the Grantor such documents as the Grantor shall
reasonably request to evidence such termination, without representations or
warranties. The Grantor's successors and assigns shall include, without
limitation, a receiver, trustee or debtor-in-possession thereof or therefor.

     13. Choice of Law. This Agreement shall be governed by and interpreted and
enforced in accordance with the laws of the State of Delaware without regard of
the principles of conflicts of laws thereof, except as required by mandatory
provisions of law and except to the extent that the validity or perfection of
the security interest hereunder, or remedies hereunder, in respect of any
particular Collateral is governed by the laws of a jurisdiction other than the
State of Delaware. Unless otherwise defined herein terms used in Article 9 of
the Uniform Commercial Code in the State of Delaware are used herein as therein
defined.

     14. Execution in Counterparts. This Agreement may be executed in any number
of counterparts, each of which when so executed shall be deemed to be an
original and all of which when taken together shall constitute one and the same
instrument. Delivery of an executed signature page to this Agreement by any
party by facsimile transmission shall be as effective as delivery of a manually
executed copy of this Agreement by such party.

            [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

                                        7



     IN WITNESS WHEREOF, the parties have executed this Security Agreement on
the date appearing on the first page hereof.

                                            AVATECH SOLUTIONS SUBSIDIARY, INC.


                                            By:         /s/
                                                --------------------------------
                                               Name:
                                               Title:

                                            Strategic Partner


                                            By:         /s/
                                                --------------------------------
                                               Name: (Name withheld and filed
                                               Title:  separately with the SEC.)

                                        8

EX-10.08

                                                                   EXHIBIT 10.08

                                    GUARANTY

     THIS GUARANTY, dated as of July 22, 2003, made by AVATECH SOLUTIONS, INC.,
a Delaware corporation (the "Parent") is executed in favor of Strategic Partner
(name withheld and filed separately with the SEC) (the "Lender").

                              W I T N E S S E T H:

     WHEREAS, Avatech Solutions Subsidiary, Inc., a Delaware corporation and a
wholly owned subsidiary of Parent (the "Borrower"), is a party to a Loan
Agreement dated as of July 22, 2003 (as amended, restated or otherwise modified
from time to time, the "Loan Agreement"; capitalized terms used but not defined
herein have the respective meanings ascribed thereto in the Loan Agreement);

     WHEREAS, it is a condition precedent to the obligations of the Lender to
make Loans to the Borrower under the Loan Agreement that the Parent shall have
executed and delivered this Guaranty; and

     WHEREAS, the Parent will derive substantial direct and indirect benefits
from the Loans to be made to the Borrower under the Loan Agreement;

     NOW, THEREFORE, in consideration of the premises contained herein, the
receipt and sufficiency of which are hereby acknowledged, the Parent hereby
agrees with the Lender, as follows:

     Parent hereby unconditionally and irrevocably, as primary obligor and not
merely as surety, guarantees the full and prompt payment when due, whether by
acceleration or otherwise, and at all times thereafter, of (a) all obligations
of the Borrower, howsoever created, arising or evidenced, whether direct or
indirect, absolute or contingent, now or hereafter existing, or due or to become
due, which arise out of or in connection with the Loan Agreement or any other
Loan Document, as the same may be amended, modified, extended or renewed from
time to time and (b) all expenses paid or incurred by the Lender in enforcing
this Guaranty or any other applicable Loan Document against Lender (all such
obligations being herein collectively called the "Liabilities"); provided that
the liability of the undersigned hereunder shall be limited to the maximum
amount of the liabilities which the undersigned may guaranty without rendering
this Guaranty void or voidable with respect to the undersigned under any
fraudulent conveyance or fraudulent transfer law.

     This Guaranty shall in all respects be a continuing, irrevocable, absolute
and unconditional guaranty of payment and performance and not only
collectibility, and shall remain in full force and effect (notwithstanding,
without limitation, that at any time or from time to time no Liabilities are
outstanding) until all Liabilities have been paid in full or expired (other than
contingent indemnification obligations not yet due and payable) and the Loan
Agreement is terminated.

     Parent further agrees that if at any time all or any part of any payment
theretofore applied by the Lender to any of the Liabilities is or must be
rescinded or returned by the Lender for any



reason whatsoever (including, without limitation, the insolvency, bankruptcy or
reorganization of the Borrower), such Liabilities shall, for the purposes of
this Guaranty, to the extent that such payment is or must be rescinded or
returned, be deemed to have continued in existence, notwithstanding such
application by the Lender, and this Guaranty shall continue to be effective or
be reinstated, as the case may be, as to such Liabilities, all as though such
application by the Lender had not been made.

     The Lender may, from time to time, at its sole discretion and without
notice to Parent, take any or all of the following actions: (a) retain or obtain
the primary or secondary obligation of any obligor or obligors, in addition to
Parent, with respect to any of the Liabilities, (b) extend or renew any of the
Liabilities for one (1) or more periods (whether or not longer than the original
period), alter or exchange any of the Liabilities, or release or compromise any
obligation of any other obligor with respect to any of the Liabilities, and (c)
resort to Parent for payment of any of the Liabilities when due, whether or not
the Lender shall have proceeded against any other obligor primarily or
secondarily obligated with respect to any of the Liabilities.

     Any amounts received by the Lender from whatever source on account of the
Liabilities may be applied by it toward the payment of the Liabilities in
accordance with the Loan Agreement; and, notwithstanding any payments made by or
for the account of Parent pursuant to this Guaranty, Parent shall not exercise
any right of subrogation to any rights of the Lender until such time as this
Guaranty shall have been terminated and the Lender shall have received payment
of the full amount of all Liabilities.

     Parent expressly waives: (a) notice of the acceptance by the Lender of this
Guaranty, (b) notice of the existence or creation or non-payment of all or any
of the Liabilities, (c) presentment, demand, notice of dishonor, protest, and
all other notices (unless expressly provided for under the Loan Documents)
whatsoever, and (d) all diligence in collection or protection of or realization
upon any Liabilities or guaranty of any Liabilities.

     The creation or existence from time to time of additional Liabilities to
the Lender is hereby authorized, without notice to Parent, and shall in no way
affect or impair the rights of the Lender or the obligations of Parent under
this Guaranty.

     The Lender may from time to time, without notice to Parent, assign or
transfer any or all of the Liabilities or any interest therein; and,
notwithstanding any such assignment or transfer or any subsequent assignment or
transfer thereof, such Liabilities shall be and remain Liabilities for the
purposes of this Guaranty, and each and every immediate and successive assignee
or transferee of any of the Liabilities or of any interest therein shall, to the
extent of the interest of such assignee or transferee in the Liabilities, be
entitled to the benefits of this Guaranty to the same extent as if such assignee
or transferee were a Lender.

     No delay on the part of the Lender in the exercise of any right or remedy
shall operate as a waiver thereof, and no single or partial exercise by the
Lender of any right or remedy shall preclude other or further exercise thereof
or the exercise of any other right or remedy; nor shall any modification or
waiver of any provision of this Guaranty be binding upon the Lender except as
expressly set forth in a writing duly signed and delivered on behalf of the
Lender. No action of the Lender permitted hereunder shall in any way affect or
impair the rights of the Lender or

                                        2



the obligations of Parent under this Guaranty. For purposes of this Guaranty,
Liabilities shall include all obligations of the Company to the Lender arising
under or in connection with any Loan Document, notwithstanding any right or
power of the Borrower or anyone else to assert any claim or defense as to the
invalidity or unenforceability of any obligation, and no such claim or defense
shall affect or impair the obligations of Parent hereunder.

     All payments by Parent pursuant to this Guaranty shall be made to the
Lender for application as set forth in the Loan Agreement.

     Schedule 1 attached sets forth all obligations of other entities that
Parent has guaranteed, including the principal amount and material terms of such
guarantees. Parent covenants and agrees that it will not guaranty any additional
obligations of any entity that exceed $200,000 in the aggregate without the
consent of Lender.

     This Guaranty shall be binding upon Parent and its successors and assigns;
and all references herein to the Borrower and to Parent, respectively, shall be
deemed to include any successor or successors, whether immediate or remote, to
such entity.

     This Guaranty shall be construed in accordance with and governed by the
laws of the State of Delaware applicable to contracts made and to be performed
entirely within such State. Wherever possible each provision of this Guaranty
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Guaranty shall be prohibited by or
invalid under such law, such provision shall be ineffective to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Guaranty.

      [remainder of page intentionally left blank; signature page follows]

                                        3



     IN WITNESS WHEREOF, this Guaranty has been duly executed and delivered as
of the day and year first above written.

                                        AVATECH SOLUTIONS, INC.


                                        By: /s/
                                            ------------------------------------
                                        Name: Donald R. "Scotty" Walsh"
                                        Title: Chief Executive Officer

                                        Address:
                                        11403 A Cronhill Drive
                                        Owings Mills, MD 21117

EX-10.09

                                                                   EXHIBIT 10.09
Baltimore, Maryland                                                $2,000,000.00
September    , 2003
          ---

                             DEMAND PROMISSORY NOTE

     FOR VALUE RECEIVED, the undersigned, AVATECH SOLUTIONS SUBSIDIARY, INC., a
Delaware corporation ("BORROWER"), promises to pay to the order of KEY BANK AND
TRUST ("LENDER"), at the LENDER'S offices at 7F Gwynns Mill Court, Owings Mills,
Maryland 21117, or at such other places as the holder of this Promissory Note
may from time to time designate, the principal sum of Two Million Dollars
($2,000,000.00), or so much as may have been advanced to the BORROWER as
proceeds of the "LOAN," as such term is defined and described in the Loan And
Security Agreement ("AGREEMENT") of even date herewith between the LENDER and
the BORROWER, together with interest thereon at the rate or rates hereafter
specified until paid in full and any and all other sums which may be owing to
the holder of this Promissory Note by the BORROWER pursuant to this Promissory
Note. The following terms shall apply to this Promissory Note.

     1. Interest Rate. Interest shall accrue on the unpaid principal balance
of this Promissory Note until paid in full at the higher of: (a) seven and
one-half percent (7.5%); or (b) the annual fluctuating rate of interest which
shall equal the rate obtained by adding two percent (2.0%) to the "PRIME RATE OF
INTEREST" of the LENDER in effect from time to time. The term "PRIME RATE OF
INTEREST" means the highest prime rate of interest on corporate loans at large
U.S. Money Center Banks as presently published by The Wall Street Journal
(Eastern Edition) under the heading or column entitled "Money Rates" or in a
future substitute heading, column, or subheading published by The Wall Street
Journal, or succeeding nationally recognized publication selected by the LENDER.
Changes in the applicable interest rate shall be made as of, and immediately
upon, the occurrence of changes in the PRIME RATE OF INTEREST.

     2. Calculation Of Interest. Interest shall be calculated on the basis of a
three hundred sixty (360) days per year factor applied to the actual days on
which there exists an unpaid balance hereunder.

     3. Repayment. Accrued and unpaid interest, plus any then due applicable
late payment charges or default interest, shall be paid in consecutive monthly
payments beginning on the fifteenth calendar day of the first month immediately
following the date of this Promissory Note and continuing on the fifteenth
calendar day of each succeeding month. ALL SUMS OUTSTANDING HEREUNDER, INCLUDING
PRINCIPAL, INTEREST, CHARGES AND FEES, ARE PAYABLE IN FULL ON THAT DAY OCCURRING
SIXTY (60) CALENDAR DAYS AFTER THE DEMAND OF THE HOLDER OF THIS PROMISSORY NOTE;
PROVIDED, HOWEVER, THAT IF THERE IS AN "EVENT OF DEFAULT" (AS SUCH TERM IS
DEFINED IN THE AGREEMENT) ALL SUMS OUTSTANDING HEREUNDER ARE PAYABLE IN FULL
IMMEDIATELY UPON THE DEMAND OF THE LENDER. DEMAND FOR PAYMENT IN FULL OF ALL
SUMS DUE HEREUNDER MAY BE MADE AT ANY TIME BY THE HOLDER OF THIS PROMISSORY
NOTE, WITHOUT PRIOR NOTICE AND WITHOUT REGARD AS TO WHETHER OR NOT A DEFAULT OR
VIOLATION OF ANY OF THE BORROWER'S OBLIGATIONS UNDER THIS PROMISSORY NOTE IS
THEN EXISTING OR CONTINUING.

     4. Late Payment Charge. If any payment due hereunder, other than any
principal payment due on acceleration or demand, is not received by the holder
within fifteen (15) calendar days after its due date, the BORROWER shall pay a
late payment charge equal to five percent (5%)



of the amount (excluding any principal due as a result of acceleration or
demand) then due and payable. The late payment charge shall be due whether or
not the holder declares this Promissory Note in default or accelerates and
demands immediate payment of the sums due hereunder. The existence of the right
by the holder to receive a late payment charge shall not constitute a grace
period or provide any right in the BORROWER to make a payment other than on its
due date.

     5. Application Of Payments. All payments made hereunder shall be applied
first to late payment charges or other sums owed to the holder, next to accrued
interest, and then to principal, or in such other order or proportion as the
holder, in the holder's sole discretion, may elect from time to time.

     6. Prepayment. The BORROWER may prepay this Promissory Note in whole or in
part at any time without premium or additional interest. All prepayments made
upon the unpaid principal balance of this Promissory Note shall be applied to
the unpaid principal balance in the inverse order of scheduled maturities.

     7. Rights Upon Occurrence Of An Event Of Default. Upon the occurrence of an
"EVENT OF DEFAULT," as such term is defined in the AGREEMENT, the holder of this
Promissory Note shall have the following rights in addition to such other rights
and remedies as are authorized by the AGREEMENT or otherwise available to the
holder under applicable laws:

          7.1. Acceleration. The holder of this Promissory Note, in the holder's
sole discretion and without notice or demand, may accelerate and declare due and
immediately owing the entire unpaid principal balance plus accrued interest and
all other sums payable to the holder in accordance with the terms of any of
the "LOAN DOCUMENTS," as such term is defined in the AGREEMENT.

          7.2. Default Interest Rate. The holder of this Promissory Note, in the
holder's sole discretion and without notice or demand, may raise the rate of
interest accruing on the unpaid principal balance by two (2) percentage points
above the rate of interest otherwise applicable, independent of whether the
holder elects to accelerate the unpaid principal balance as a result of such
default, unless prior to the imposition of the default rate of interest, the
BORROWER cures such event to the satisfaction of the holder hereof. Any
individual waiver of the holder's right to impose the default rate of interest
shall not be considered a waiver of this section or any future right of the
holder to impose the default rate of interest pursuant to this Section.

          7.3. Confession Of Judgment. The BORROWER authorizes any attorney
admitted to practice before any court of record in the United States to appear
on its behalf in any court in one or more proceedings, or before any clerk
thereof or prothonotary or other court official, and to confess judgment against
the BORROWER in favor of the holder of this Promissory Note in the full amount
due on this Promissory Note (including principal, accrued interest and any and
all charges, fees and costs) plus attorneys' fees equal to fifteen percent (15%)
of the amount due, plus court costs, all without prior notice or opportunity of
the BORROWER for prior hearing. The BORROWER agrees and consents that venue and
jurisdiction shall be proper in the Circuit Court of any County of the State of
Maryland or of Baltimore City, Maryland, or in the United States District Court
for the District of Maryland. The BORROWER waives the benefit of any and every
statute, ordinance, or rule of court which may be lawfully waived conferring
upon it any right or privilege of exemption, homestead rights, stay of
execution, or supplementary proceedings, or other relief from the enforcement or
immediate enforcement of a judgment or related proceedings on a judgment. The
authority and power to appear for and enter judgment against the BORROWER shall
not be

                                        2



exhausted by one or more exercises thereof, or by any imperfect exercise
thereof, and shall not be extinguished by any judgment entered pursuant thereto;
such authority and power may be exercised on one or more occasions from time to
time, in the same or different jurisdictions, as often as the holder shall deem
necessary, convenient, or proper. In the event that the holder receives, as a
result of execution on a judgment confessed hereunder, attorneys' fees which
exceed the actual legal fees incurred by the holder in connection with the
unpaid balance due to the holder pursuant to this Promissory Note, then, upon
full and final payment of all other sums due and owing to the holder pursuant to
this Promissory Note and payment of the actual attorneys' fees incurred by the
holder, the holder shall remit such excess amount of attorneys' fees to the
BORROWER.

     8. Expenses Of Collection And Attorneys' Fees. Should this Promissory Note
be referred to an attorney for collection, whether or not judgment has been
confessed or suit has been filed, the BORROWER shall pay all of the holder's
reasonable costs, fees and expenses, including reasonable attorneys' fees,
resulting from such referral.

     9. Waiver Of Defenses. In the event any one or more holders of this
Promissory Note transfer this Promissory Note for value, the BORROWER agrees
that all subsequent holders of this Promissory Note who take for value and
without actual knowledge of a claim or defense of the BORROWER against a prior
holder shall not be subject to any claims or defenses which the BORROWER may
have against a prior holder, all of which are waived as to the subsequent
holder, and that all such subsequent holders shall have all rights of a holder
in due course with respect to the BORROWER even though the subsequent holder may
not qualify, under applicable law, absent this section, as a holder in due
course. The BORROWER shall retain all rights and claims which the BORROWER may
have against prior holders despite any such transfers and the waiver of defenses
provided in this section as to subsequent holders.

     10. Waiver Of Protest. The BORROWER, and all other parties to this
Promissory Note, whether maker, indorser, or guarantor, waive presentment,
notice of dishonor and protest.

     11. Extensions Of Maturity. All parties to this Promissory Note, whether
maker, indorser, or guarantor, agree that the maturity of this Promissory Note,
or any payment due hereunder, may be extended at any time or from time to time
without releasing, discharging, or affecting the liability of such party.

     12. Manner And Method Of Payment. All payments called for in this
Promissory Note shall be made in lawful money of the United States of America.
If made by check, draft, or other payment instrument, such check, draft, or
other payment instrument shall represent immediately available funds. In the
holder's discretion, any payment made by a check, draft, or other payment
instrument shall not be considered to have been made until such time as the
funds represented thereby have been collected by the holder. Should any payment
date fall on a non-banking day, the BORROWER shall make the payment on the next
succeeding banking day.

     13. Maximum Rate Of Interest. Any provision contained in any of the LOAN
DOCUMENTS to the contrary notwithstanding, the holder of this Promissory Note
shall not be entitled to receive or collect, nor shall the BORROWER be obligated
to pay, interest hereunder in excess of the maximum rate of interest permitted
by the laws of any state determined to be applicable thereto or the laws of the
United States of America applicable to loans in such applicable state or states,
and if any provisions of this Promissory Note or of any of the other LOAN
DOCUMENTS shall ever be construed or held to permit or require the charging,
collection or payment of any amount of interest in excess of that permitted by
such laws applicable thereto, the provisions of this paragraph shall

                                        3



control and shall override any contrary or inconsistent provision. The intention
of the parties is to at all times conform strictly with all applicable usury
laws, and other applicable laws regulating the rates of interest which may be
lawfully charged upon the credit facility evidenced by this Promissory Note. The
interest to be paid in accordance with the terms of this Promissory Note shall
be held subject to reduction to the amount allowed under any usury or other laws
as now or hereafter construed by the courts having jurisdiction, and any sums of
money paid in excess of the interest rate allowed by law shall be applied in
reduction of the principal amounts owing under this Promissory Note.

     14. Notices. Any notice or demand required or permitted by or in connection
with this Promissory Note shall be given in the manner specified in the
AGREEMENT for the giving of notices under the AGREEMENT. Notwithstanding
anything to the contrary, all notices and demands for payment from the holder
actually received in writing by the BORROWER shall be considered to be effective
upon the receipt thereof by the BORROWER regardless of the procedure or method
utilized to accomplish delivery thereof to the BORROWER.

     15. Assignability. This Promissory Note may be assigned by the LENDER or
any holder at any time or from time to time without notice to or consent from
the BORROWER.

     16. Binding Nature. This Promissory Note shall inure to the benefit of and
be enforceable by the LENDER and the LENDER'S successors and assigns and any
other person to whom the LENDER or any holder may grant an interest in the
BORROWER'S obligations hereunder, and shall be binding and enforceable against
the BORROWER and the BORROWER'S successors and assigns.

     17. Invalidity Of Any Part. If any provision or part of any provision of
this Promissory Note shall for any reason be held invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Promissory Note and this
Promissory Note shall be construed as if such invalid, illegal or unenforceable
provision or part thereof had never been contained herein, but only to the
extent of its invalidity, illegality, or unenforceability.

     18. Choice Of Law. The laws of the State of Maryland (excluding, however,
conflict of law principles) shall govern and be applied to determine all issues
relating to this Promissory Note and the rights and obligations of the parties
hereto, including the validity, construction, interpretation, and enforceability
of this Promissory Note and its various provisions and the consequences and
legal effect of all transactions and events which resulted in the issuance of
this Promissory Note or which occurred or were to occur as a direct or indirect
result of this Promissory Note having been executed.

     19. Consent To Jurisdiction; Agreement As To Venue. The BORROWER
irrevocably consents to the non-exclusive jurisdiction of the courts of the
State of Maryland and of the United States District Court for the District of
Maryland, if a basis for federal jurisdiction exists. The BORROWER agrees that
venue shall be proper in any circuit court of the State of Maryland selected by
the LENDER or in the United States District Court for the District of Maryland
if a basis for federal jurisdiction exists and waives any right to object to the
maintenance of a suit in any of the state or federal courts of the State of
Maryland on the basis of improper venue or of inconvenience of forum.

     20. Unconditional Obligations. The BORROWER'S obligations under this
Promissory Note shall be the unconditional duty and obligation of the BORROWER
and shall be independent

                                        4



of any rights of set-off, recoupment or counterclaim which the BORROWER might
otherwise have against the holder of this Promissory Note. The BORROWER shall
pay absolutely the payments of principal, interest, fees and expenses required
hereunder, free of any deductions and without abatement, diminution or set-off.

     21. Seal And Effective Date. This Promissory Note is an instrument executed
under seal and is to be considered effective and enforceable as of the date set
forth on the first page hereof, independent of the date of actual execution and
delivery.

     22. Tense; Gender; Defined Terms; Section Headings. As used herein, the
singular includes the plural and the plural includes the singular. A reference
to any gender also applies to any other gender. Defined terms are entirely
capitalized throughout. The section headings are for convenience only and are
not part of this Promissory Note.

     23. Actions Against Lender. Any action brought by the BORROWER against the
LENDER which is based, directly or indirectly, on this Promissory Note or any
matter in or related to this Promissory Note, including but not limited to the
making of the loan evidenced hereby or the administration or collection thereof,
shall be brought only in the courts of the State of Maryland. The BORROWER may
not file a counterclaim against the LENDER in a suit brought by the LENDER
against the BORROWER in a state other than the State of Maryland unless under
the rules of procedure of the court in which the LENDER brought the action the
counterclaim is mandatory, and not merely permissive, and will be considered
waived unless filed as a counterclaim in the action instituted by the LENDER.
The BORROWER agrees that any forum other than the State of Maryland is an
inconvenient forum and that a suit brought by the BORROWER against the LENDER in
a court of any state other than the State of Maryland should be forthwith
dismissed or transferred to a court located in the State of Maryland by that
Court.

     24. Waiver Of Jury Trial. The BORROWER (by execution of this Promissory
Note) and the LENDER (by acceptance of this Promissory Note) agree that any
suit, action, or proceeding, whether claim or counterclaim, brought or
instituted by or against the BORROWER or the LENDER, or any successor or assign
of the BORROWER or the LENDER, on or with respect to this Promissory Note or any
of the other LOAN DOCUMENTS, or which in any way relates, directly or
indirectly, to the obligations of the BORROWER to the LENDER under this
Promissory Note or any of the other LOAN DOCUMENTS, or the dealings of the
parties with respect thereto, shall be tried only by a court and not by a jury.
THE BORROWER AND THE LENDER HEREBY EXPRESSLY WAIVE ANY RIGHT TO A TRIAL BY JURY
IN ANY SUCH SUIT, ACTION, OR PROCEEDING.

                                        5



     IN WITNESS WHEREOF, the BORROWER has duly executed this Promissory Note
under seal as of the date first above written.

WITNESS/ATTEST:                            THE BORROWER:

                                           AVATECH SOLUTIONS SUBSIDIARY, INC.,
                                           A Delaware Corporation


                                           By:                            (SEAL)
- ---------------------------                    ---------------------------
                                              Name:
                                                    ----------------------
                                              Title:
                                                     ---------------------

                                        6

EX-10.10

================================================================================

                                                                   EXHIBIT 10.10

                           Loan and Security Agreement

                                     between

                       AVATECH SOLUTIONS SUBSIDIARY, INC.,
                             A Delaware Corporation

                                   "Borrower"

                                       and

                               KEY BANK AND TRUST,

                                    "Lender"

                     $2,000,000.00 Revolving Line Of credit

                          Dated: September      , 2003
                                           -----

================================================================================



                           LOAN AND SECURITY AGREEMENT

     THIS LOAN AND SECURITY AGREEMENT is dated as of September    , 2003 by and
                                                               ---
between AVATECH SOLUTIONS SUBSIDIARY, INC., a Delaware corporation ("BORROWER")
and KEY BANK AND TRUST ("LENDER").

                                    RECITALS

     The BORROWER has requested that the LENDER extend various credit
accommodations to the BORROWER. The LENDER is willing to provide the requested
credit accommodations upon the terms and conditions of this Loan And Security
Agreement, and upon the granting by the BORROWER to the LENDER of the security
interests, liens, and other assurances of payment provided for in this Loan And
Security Agreement.

     NOW, THEREFORE, in consideration of these premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:

                                    ARTICLE 1
                                   DEFINITIONS

     As used in this Loan And Security Agreement, the terms set forth in this
Article 1 have the meanings set forth below, unless the specific context of this
Loan And Security Agreement clearly requires a different meaning. Terms defined
in this Article 1 or elsewhere in this Loan And Security Agreement are in all
capital letters throughout this Loan And Security Agreement. The singular use of
any defined term includes the plural and the plural use includes the singular.

     Section 1.1. Account Debtor. The term "ACCOUNT DEBTOR" means collectively
each PERSON: (a) to or for whom the BORROWER has provided or has agreed to
provide any goods or services; or (b) which owes the BORROWER any sum of money
as a result of goods sold or services provided by the BORROWER; or (c) which is
the maker or endorser on any INSTRUMENT payable to the BORROWER or otherwise
owes the BORROWER any sum of money on account of any loan or other payment
obligation. With respect to each RECEIVABLE which is payable by any governmental
authority, "ACCOUNT DEBTOR" includes, without limitation, the agency,
instrumentality or official which has the duty of remitting or causing the
remittance of the amounts owing on such ACCOUNT or other RECEIVABLE.

     Section 1.2. Account, Chattel Paper, Deposit Account, Document, Equipment,
Fixtures, General Intangibles, Goods, Instrument, Inventory, Investment Property
and Letter-Of-Credit Right. The terms "ACCOUNT," "CHATTEL PAPER," "DEPOSIT
ACCOUNT," "DOCUMENT," "EQUIPMENT," "FIXTURES," "GENERAL INTANGIBLES," "GOODS,"
"INSTRUMENT," "INVENTORY," "INVESTMENT PROPERTY" and "LETTER-OF-CREDIT RIGHT"
shall have the same respective meanings as are given to those terms in the
Uniform Commercial Code, as adopted and in effect in the State of Maryland.

     Section 1.3. Affiliate. The term "AFFILIATE" means collectively any PERSON:
(a) that directly or indirectly, through one or more intermediaries, controls or
is controlled by, or is under common control with the BORROWER, including,
without limitation, the officers, managers and directors of the BORROWER; (b)
that directly or beneficially owns or holds ten percent (10%) or



more of any equity interests in the BORROWER; or (c) ten percent (10%) or more
of whose equity interests are owned directly or controlled by the BORROWER. As
used herein, the term "control" (including, with correlative meanings, the terms
"controlled by" and "under common control with") shall mean possession, directly
or indirectly, of the power to direct the management or policies of a PERSON,
whether through ownership of equity interests, by contract or otherwise.

     Section 1.4. Agreement. The term "AGREEMENT" means this Loan And Security
Agreement, as amended, extended, or modified from time to time by the parties
hereto, as well as all schedules, exhibits and attachments hereto.

     Section 1.5. Borrowing Base. The term "BORROWING BASE" means an amount
equal to: (a) seventy-five percent (75%) of the face amount (less maximum
discounts, credits and allowances which may be taken by or are granted to
ACCOUNT DEBTORS in connection therewith) of billed ELIGIBLE ACCOUNTS of the
BORROWER; minus (b) such reserves as the LENDER deems appropriate from time to
time.

     Section 1.6. Business Day. The term "BUSINESS DAY" means any day other than
a Saturday, Sunday, or other day on which commercial banking institutions in the
State of Maryland are required to be closed.

     Section 1.7. Capital Lease. The term "CAPITAL LEASE" means a lease with
respect to which the lessee's obligations thereunder should, in accordance with
G.A.A.P., be capitalized and reflected as a liability on the balance sheet of
the lessee.

     Section 1.8. Capital Lease Obligations. The term "CAPITAL LEASE
OBLIGATIONS" means any indebtedness incurred as a lessee pursuant to a CAPITAL
LEASE.

     Section 1.9. Closing. The term "CLOSING" means the execution and delivery
of this AGREEMENT, the NOTE, and various other LOAN DOCUMENTS. The date of
CLOSING is the date written above as the date of this AGREEMENT.

     Section 1.10. Code. The term "CODE" means the Internal Revenue Code of
1986, as amended, and all Treasury regulations, revenue rulings, revenue
procedures or announcements issued thereunder.

     Section 1.11. Collateral. The term "COLLATERAL" means all of the tangible
and intangible assets and personal property of the BORROWER, wherever located,
whether now owned or hereafter acquired by the BORROWER, together with all
substitutions therefor, and all replacements and renewals thereof, and all
accessions, additions, replacement parts, manuals, warranties and packaging
relating thereto, including but not limited to the following tangible and
intangible assets and property rights of the BORROWER: (a) ACCOUNTS; (b) CHATTEL
PAPER; (c) DEPOSIT ACCOUNTS; (d) DOCUMENTS; (e) EQUIPMENT; (f) FIXTURES; (g)
GENERAL INTANGIBLES; (h) GOODS; (i) INSTRUMENTS; (j) INVENTORY, including
returned, rejected, or repossessed INVENTORY and rights of reclamation and
stoppage in transit with respect to INVENTORY; (k) INVESTMENT PROPERTY; (l)
LETTER-OF-CREDIT RIGHTS; (m) RECEIVABLES; (n) copyrights, trademarks, patents,
and all pending applications thereof; and (o) all RECORDS relating to or
pertaining to any of the above listed COLLATERAL.

     Section 1.12. Collection Account. The term "COLLECTION ACCOUNT" means a
bank account designated by the LENDER from which the LENDER alone has power of
access and withdrawal.

                                      -2-



     Section 1.13. Commercial Account. The term "COMMERCIAL ACCOUNT" means the
commercial checking account to be established and maintained by the BORROWER
with the LENDER and which may be utilized as the means of advancing funds under
the LOAN.

     Section 1.14. Default. The term "DEFAULT" means any event, occurrence or
omission which, with the giving of notice, the passage of time, or both, would
constitute an EVENT OF DEFAULT.

     Section 1.15. Dollar Cap. The term "DOLLAR CAP" means Two Million Dollars
($2,000,000.00).

     Section 1.16. Eligible Accounts. The term "ELIGIBLE ACCOUNTS" means those
ACCOUNTS which are acceptable to the LENDER. The criteria for eligibility may be
fixed and revised from time to time by the LENDER in its discretion. An ACCOUNT
in no event shall be deemed eligible unless: (a) the ACCOUNT arises from goods
sold or leased or from services performed in the ordinary course of business of
the BORROWER; (b) the delivery of the goods or the performance of the services
(other than installation of goods sold or leased) has been completed except to
the extent the LENDER specifically agrees to make certain progress billings
eligible; (c) no return, rejection, or repossession has occurred; (d) the goods
delivered or the services performed have been finally and unconditionally
accepted by the ACCOUNT DEBTOR without dispute, objection, complaint, offset,
defense, counterclaim, adjustment or allowance; (e) the ACCOUNT DEBTOR'S
obligation to pay the ACCOUNT is not subject to any repurchase obligation or
return right, as with sales made on a bill-and-hold, guaranteed sale,
sale-and-return, sale on approval (except with respect to ACCOUNTS in connection
with which ACCOUNT DEBTORS are entitled to return INVENTORY solely on the basis
of the quality of such INVENTORY) or consignment basis; (f) no more than ninety
(90) days have elapsed from the billing or invoice date; (g) no prior,
contemporaneous, or subsequent assignment, claim, lien, or security interest,
other than that of the LENDER, applies to the ACCOUNT; (h) no bankruptcy or
insolvency proceedings or payment moratoriums of any kind apply to the ACCOUNT;
(i) the ACCOUNT DEBTOR is not, in the LENDER'S sole opinion, unlikely to pay
because of death, incompetency, disappearance, potential bankruptcy, insolvency,
damage to or disposition of the goods, default, or any other reason whatsoever;
(j) the LENDER has not, by notice to the BORROWER, in the LENDER'S sole
discretion, deemed the ACCOUNT unsatisfactory for any reason; (k) no bonding
company or surety asserts or has the ability to assert any claim based upon the
legal doctrine of equitable subrogation, or under any other right to claim a
lien into or right to payment of the ACCOUNT; (l) the ACCOUNT does not arise
from or pertain to any transaction with any AFFILIATE or employee; (m) the
ACCOUNT is not payable from any ACCOUNT DEBTOR located outside of the geographic
boundaries of the United States of America (unless such ACCOUNT is fully secured
by a letter of credit or credit insurance acceptable to the LENDER); (n) the
BORROWER is legally empowered to collect the ACCOUNT against the ACCOUNT DEBTOR
in the jurisdiction in which the ACCOUNT DEBTOR is located; (o) the ACCOUNT is
not payable by an ACCOUNT DEBTOR with respect to which more than fifty percent
(50%) of the dollar amount of that ACCOUNT DEBTOR'S RECEIVABLES to the BORROWER
are more than ninety (90) days from the date of invoice; (p) the ACCOUNT does
not arise from any contract with any federal, state, local or foreign government
unless such governmental authority is the United States of America or an agency
or representative thereof and either the LENDER has obtained full compliance to
its complete satisfaction with all provisions necessary to protect the LENDER'S
interests under The Assignment of Claims Act of 1940, as amended, and all
regulations promulgated thereunder, and all other applicable federal procurement
laws and regulations; or the payments under the contract giving rise to such
ACCOUNT cannot be assigned under The Assignment of Claims Act; and (q) the
LENDER has a perfected first priority security interest therein. An ACCOUNT
which otherwise satisfies the

                                      -3-



LENDER'S criteria for eligibility shall also be subject to the following
eligibility limitations: (i) if the ACCOUNT is payable by an ACCOUNT DEBTOR to
whom the BORROWER owes money, only the portion of the ACCOUNT in excess of the
amount owed by any or the BORROWER to the ACCOUNT DEBTOR may be eligible; (ii)
to the extent the ACCOUNT contains finance charges, such finance charges shall
not be eligible; and (iii) if the BORROWER has unearned income in regard to an
ACCOUNT DEBTOR or has received a deposit from an ACCOUNT DEBTOR the amount of
ELIGIBLE ACCOUNTS owed from such ACCOUNT DEBTOR shall be reduced by the amount
of such unearned income or deposit. In determining the aggregate amount of
ACCOUNTS owed by an ACCOUNT DEBTOR which are ineligible due to being more than
ninety (90) days from the billing date credit balances in excess of ninety (90)
days shall not reduce such aggregate amount of ineligible ACCOUNTS.

     Section 1.17. Employee Benefit Plan. The term "EMPLOYEE BENEFIT PLAN" means
an "employee benefit plan" as defined in Section 3(3) of ERISA.

     Section 1.18. Environmental Laws. The term "ENVIRONMENTAL LAWS" means
individually or collectively any local, state or federal LAW, statute, rule,
regulation, order, ordinance, common law, permit or license term or condition,
or state superlien or environmental clean-up or disclosure statutes pertaining
to the environment or to environmental contamination, regulation, management,
control, treatment, storage, disposal, containment, removal, clean-up,
reporting, or disclosure, including, but not limited to, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as now or
hereafter amended (including, but not limited to, the Superfund Amendments and
Reauthorization Act); the Resource Conservation and Recovery Act, as now or
hereafter amended (including, but not limited to, the Hazardous and Solid Waste
Amendments of 1984); the Toxic Substances Control Act, as now or hereafter
amended; the Clean Water Act, as now or hereafter amended; the Safe Drinking
Water Act, as now or hereafter amended; or the Clean Air Act, as now or
hereafter amended.

     Section 1.19. EPA Permit. The term "EPA PERMIT" has the meaning given that
term in Section 4.23 of this AGREEMENT.

     Section 1.20. ERISA. The term "ERISA" means the Employee Retirement Income
Security Act of 1974 and regulations issued thereunder, as amended from time to
time and any successor statute.

     Section 1.21. ERISA Affiliate. The term "ERISA AFFILIATE" means, in
relation to any PERSON, any trade or business (whether or not incorporated)
which is a member of a group of which that PERSON is a member and which is under
common control within the meaning of the regulations promulgated under Section
414 of the CODE.

     Section 1.22. ERISA Liabilities. The term "ERISA LIABILITIES" means the
aggregate of all unfunded vested benefits under any employee pension benefit
plan, within the meaning of Section 3(2) of ERISA, of the BORROWER or any ERISA
AFFILIATE of the BORROWER under any plan covered by ERISA that is not a
MULTIEMPLOYER PLAN and all potential withdrawal liabilities of the BORROWER or
any ERISA AFFILIATE under all MULTIEMPLOYER PLANS.

     Section 1.23. Event Of Default. The term "EVENT OF DEFAULT" means any of
the events set forth in Article 7 of this AGREEMENT, provided that any
requirement for the giving of notice, the lapse of time, or both, or any other
expressly stated condition, has been satisfied.

                                      -4-



     Section 1.24. Facilities. The term "FACILITIES" means all real property and
the improvements thereon used or occupied or leased by the BORROWER or otherwise
used at any time by the BORROWER in the operation of its business or for the
manufacture, storage, or location of any of the COLLATERAL.

     Section 1.25. Fiscal Year. The term "FISCAL YEAR" means the fiscal year of
the BORROWER which is the twelve (12) month accounting period commencing July
1st of each calendar year and ending June 30th of the following calendar year.

     Section 1.26. G.A.A.P. The term "G.A.A.P." means, with respect to any date
of determination, generally accepted accounting principles as used by the
Financial Accounting Standards Board and/or the American Institute of Certified
Public Accountants consistently applied and maintained throughout the periods
indicated.

     Section 1.27. Guaranteed Pension Plan. The term "GUARANTEED PENSION PLAN"
means any pension plan maintained by the BORROWER or an ERISA AFFILIATE of the
BORROWER, or to which the BORROWER or an ERISA AFFILIATE contributes, some or
all of the benefits under which are guaranteed by the United States Pension
Benefit Guaranty Corporation.

     Section 1.28. Guarantors. The term "GUARANTORS" means collectively, AVATECH
SOLUTIONS, INC., a Delaware corporation, and Technical Learningware Company,
Inc., a Delaware corporation.

     Section 1.29. Guaranty Agreements. The term "GUARANTY AGREEMENTS" means
collectively the Guaranty Agreements executed by the GUARANTORS for the benefit
of the LENDER.

     Section 1.30. Guaranty Indebtedness. The term "GUARANTY INDEBTEDNESS" means
any obligation, contingent or otherwise, of any referenced PERSON directly or
indirectly guaranteeing any debt or obligation of any other PERSON and, without
limiting the generality of the foregoing, any obligation, direct or indirect,
contingent or otherwise, of such PERSON: (a) to purchase or pay (or advance or
supply funds for the purchase or payment of) such debt or obligation (whether
arising by virtue of partnership arrangements, by agreement to keep-well, to
purchase assets, goods, securities or services, to take-or-pay, or to maintain
financial statement conditions or otherwise, other than agreements to purchase
goods at an arm's length price in the ordinary course of business); or (b)
entered into for the purpose of assuring in any other manner the holder of such
debt or obligation of the payment thereof or to protect such holder against loss
in respect thereof (in whole or in part). The term GUARANTY INDEBTEDNESS shall
not include endorsements for collection or deposit in the ordinary course of
business.

     Section 1.31. Indebtedness. The term "INDEBTEDNESS" means, as to any
referenced PERSON (determined without duplication): (a) indebtedness of such
PERSON for borrowed money (whether by loan or by the issuance and sale of debt
securities), or for the deferred purchase or acquisition price of property or
services (other than accounts payable incurred in the ordinary course of
business); (b) obligations of such PERSON in respect of letters of credit or
similar instruments issued or accepted by financial institutions for the account
of such PERSON (whether or not such obligations are contingent); (c) CAPITAL
LEASE OBLIGATIONS of such PERSON; (d) obligations of such PERSON to redeem or
otherwise retire equity interests in such PERSON; (e) indebtedness of others of
the type described in clause (a), (b), (c) or (d) above secured by a lien on any
of the property of such PERSON, whether or not the respective obligation so
secured has been assumed by such PERSON; and (f) GUARANTY INDEBTEDNESS.

                                      -5-



     Section 1.32. Insolvency Proceedings. The term "INSOLVENCY PROCEEDINGS"
means, with respect to any referenced PERSON, any case or proceeding commenced
by or against such PERSON, under any provision of the United States Bankruptcy
Code, as amended, or under any other federal or state bankruptcy or insolvency
law, or any assignments for the benefit of creditors, formal or informal
moratoriums, receiverships, compositions or extensions with some or all
creditors with respect to any indebtedness of such PERSON.

     Section 1.33. Interest Rate Protection Agreement. The term "INTEREST RATE
PROTECTION AGREEMENT" means, with respect to any referenced PERSON, an interest
rate swap, hedge, cap or collar agreement or similar arrangement between such
PERSON and one or more financial institutions providing for the transfer or
mitigation of interest risks either generally or under specific contingencies.

     Section 1.34. Inventory. The term "INVENTORY" shall have the same meaning
as provided to such term in the Uniform Commercial Code, as adopted and in
effect in the State of Maryland, together with all of the BORROWER'S goods,
merchandise, materials, raw materials, goods in process, finished goods, work in
progress, bindings or component materials, packaging and shipping materials and
other tangible or intangible personal property, now owned or hereafter acquired
and held for sale or lease or furnished or to be furnished under contracts of
service or which contribute to the finished products or the sale, promotion,
storage and shipment thereof, whether located at facilities owned or leased by
the BORROWER, in the course of transport to or from ACCOUNT DEBTORS, used for
demonstration, placed on consignment, or held at storage locations.

     Section 1.35. Laws. The term "LAWS" means all ordinances, statutes, rules,
regulations, orders, injunctions, writs or decrees of any government or
political subdivision or agency thereof, or any court or similar entity
established by any thereof.

     Section 1.36. Lender Expenses. The term "LENDER EXPENSES" means the
reasonable out-of-pocket expenses or costs incurred by the LENDER arising out
of, pertaining to, or in any way connected with this AGREEMENT, any of the other
LOAN DOCUMENTS or the OBLIGATIONS, or any documents executed in connection
herewith or transactions hereunder. The term "LENDER EXPENSES" shall include,
without limitation: (a) the reasonable costs or expenses required to be paid by
the BORROWER pursuant to this AGREEMENT or any of the LOAN DOCUMENTS; (b) taxes
and insurance premiums advanced or otherwise paid by the LENDER in connection
with the COLLATERAL or on behalf of the BORROWER; (c) filing, recording, title
insurance, environmental and consulting fees, audit fees, search fees and other
expenses paid or incurred by the LENDER in connection with the LENDER'S
transactions with the BORROWER; (d) reasonable costs and expenses incurred by
the LENDER in the collection of the ACCOUNTS (with or without the institution of
legal action), or to enforce any provision of this AGREEMENT, or in gaining
possession of, maintaining, handling, evaluating, preserving, storing, shipping,
selling, preparing for sale and/or advertising to sell the COLLATERAL or any
other property of the BORROWER whether or not a sale is consummated; (e)
reasonable costs and expenses of litigation incurred by the LENDER, or any
participant of the LENDER in any of the OBLIGATIONS, in enforcing or defending
this AGREEMENT or any portion hereof or in collecting any of the OBLIGATIONS;
(f) reasonable attorneys' fees and expenses incurred by the LENDER in obtaining
advice or the services of its attorneys with respect to the structuring,
drafting, negotiating, reviewing, amending, terminating, enforcing or defending
of this AGREEMENT, or any portion hereof or any agreement or matter related
hereto, whether or not litigation is instituted; and (g) reasonable travel
expenses related to any of the foregoing. Notwithstanding anything contained
above, the BORROWER shall not be required to pay any LENDER EXPENSES until the
GUARANTOR receives copies of invoices, bills,

                                      -6-



receipts or other documentation evidencing the LENDER EXPENSES for which the
LENDER is requesting payment.

     Section 1.37. Loan. The term "LOAN" means the revolving credit facility
extended by the LENDER to the BORROWER in accordance with the terms set forth in
this AGREEMENT.

     Section 1.38. Loan Documents. The term "LOAN DOCUMENTS" means all
agreements, instruments and documents, including without limitation each
document listed as a "Loan Document" on a Closing Index of even date herewith,
together with all other loan agreements (including without limitation this
AGREEMENT), notes (including without limitation the NOTE), guarantees,
subordination agreements, intercreditor agreements, pledges, affidavits, powers
of attorney, consents, assignments, landlord and mortgage waivers, legal
opinions, collateral assignments, reimbursement agreements, contracts, notices,
leases, financing statements, mortgages, deeds of trust, assignments of rents or
contract proceeds, intellectual property security agreements, pledges, letter of
credit applications, INTEREST RATE PROTECTION AGREEMENTS, and all other written
matter, whether heretofore, now or hereafter executed by or on behalf of the
BORROWER, the GUARANTOR, or by any other PERSON in connection with any of the
OBLIGATIONS.

     Section 1.39. Lock Box. The term "LOCK BOX" has the meaning given that term
in Section 3.5 of this AGREEMENT.

     Section 1.40. Material Adverse Event. The term "MATERIAL ADVERSE EVENT"
means the occurrence of any event, condition, or omission which the LENDER in
the good faith reasonable exercise of the LENDER'S discretion determines could
be expected to have a material adverse effect upon: (a) the condition (financial
or otherwise), results of operations, properties, assets, liabilities
(including, without limitation, tax liabilities, liabilities under ENVIRONMENTAL
LAWS, and ERISA LIABILITIES), businesses, operations, capitalization, equity,
licenses or franchises of the BORROWER or of the GUARANTOR; (b) the ability of
the BORROWER or the GUARANTOR to perform any of the OBLIGATIONS when and as
required by the terms of the LOAN DOCUMENTS; (c) the rights and remedies of the
LENDER as provided by the LOAN DOCUMENTS; or (d) the value, condition, use, or
availability of any of the COLLATERAL or upon any of the LENDER'S liens and
security interests securing the OBLIGATIONS.

     Section 1.41. Maximum Loan Amount. The term "MAXIMUM LOAN AMOUNT" means the
lesser of the BORROWING BASE or the DOLLAR CAP.

     Section 1.42. Multiemployer Plan. The term "MULTIEMPLOYER PLAN" means a
"multiemployer plan" as defined in Section 4001(a)(3) of ERISA which is
maintained for employees of the BORROWER, or any ERISA AFFILIATE of the
BORROWER.

     Section 1.43. Note. The term "NOTE" means the Demand Promissory Note of
even date herewith from the BORROWER as maker thereof which is payable to the
order of the LENDER in the stated principal amount of Two Million Dollars
($2,000,000.00).

     Section 1.44. Obligations. The term "OBLIGATIONS" means collectively all of
the obligations of the BORROWER to pay to the LENDER: (a) sums due to the LENDER
arising out of or in connection with the LOAN or otherwise pursuant to the terms
of the LOAN DOCUMENTS; (b) indemnification obligations owed by the BORROWER to
the LENDER in accordance with the terms of the LOAN DOCUMENTS; (c) LENDER
EXPENSES; (d) overdrafts of the BORROWER upon any accounts with the LENDER; (e)
payments, duties or obligations owed to the LENDER

                                      -7-



arising from or with respect to INTEREST RATE PROTECTION AGREEMENTS, foreign
exchange facilities or currency transactions, existing or arising from time to
time; (f) any sums owed to the LENDER arising out of or relating to any letters
of credit including, without limitation, all reimbursement and indemnification
obligations, and obligations to pay fees; (g) all duties of payment and
performance owed to the LENDER in connection with any guaranties; (h) all other
indebtedness or liability of the BORROWER to the LENDER, whether direct or
indirect, joint or several, absolute or contingent, contemplated or not
presently contemplated, now existing or hereafter arising; and (i) any
indebtedness or liability which may exist or arise as a result of any payment
made by or for the benefit of the BORROWER being avoided or set aside for any
reason including, without limitation, any payment being avoided as a preference
under Sections 547 and 550 of the United States Bankruptcy Code, as amended, or
under any state law governing insolvency or creditors' rights.

     Section 1.45. Perfection Certificate. The term "PERFECTION CERTIFICATE"
means the Perfection Certificate executed by the BORROWER and attached hereto as
Exhibit A.

     Section 1.46. Permitted Liens. The term "PERMITTED LIENS" means: (a) liens
for taxes, assessments, or similar charges incurred in the ordinary course of
business that are not yet due and payable; (b) liens in favor of the LENDER; (c)
any existing liens specifically described on Schedule 1.46 hereof; (d) any lien
on specifically allocated money or securities to secure payments under workmen's
compensation, unemployment insurance, social security and other similar LAWS, or
to secure the performance of bids, tenders or contracts (other than for the
repayment of borrowed money) or to secure statutory obligations or appeal bonds,
or to secure indemnity, performance or other similar bonds in the ordinary
course of business; (e) purchase money security interests for EQUIPMENT not to
exceed in aggregate amount outstanding at any one time the sum of One Hundred
Thousand Dollars ($100,000.00), provided that such purchase money security
interests do not attach to any to any assets other than the specific item(s) of
EQUIPMENT acquired with the proceeds of the loan secured by such purchase money
security interests; (f) liens securing SUBORDINATED DEBT provided such liens are
specifically subordinated to the liens of the LENDER securing the OBLIGATIONS
pursuant to terms acceptable to the LENDER; and (g) subsequently arising liens
which are expressly approved in advance of the creation of any such liens by the
LENDER in writing.

     Section 1.47. Person. The term "PERSON" means any individual, corporation,
partnership, limited liability company, association, joint-stock company, trust,
estate, unincorporated organization, joint venture, court, government or
political subdivision or agency thereof, or other legal entity.

     Section 1.48. Receivables. The term "RECEIVABLES" means all of the
ACCOUNTS, INSTRUMENTS, DOCUMENTS, GENERAL INTANGIBLES, CHATTEL PAPER, notes,
notes receivable, drafts, acceptances, and choses in action, of the BORROWER,
now existing or hereafter created or acquired, and all proceeds and products
thereof, and all rights thereto, arising from the sale or lease of or the
providing of INVENTORY, GOODS, or services by the BORROWER to ACCOUNT DEBTORS,
as well as all other rights, contingent or non-contingent, of any kind of the
BORROWER to receive payment, benefit, or credit from any PERSON.

     Section 1.49. Records. The term "RECORDS" means correspondence, memoranda,
tapes, discs, papers, books and other documents, or transcribed information of
any type, whether expressed in ordinary, computer or machine language.

                                      -8-



     Section 1.50. Regulated Substance. The term "REGULATED SUBSTANCE" means any
substance which, pursuant to any ENVIRONMENTAL LAW, is identified as a hazardous
substance (or other term having similar import) or is otherwise subject to
special requirements in connection with the use, storage, transportation,
disposition or other handling thereof.

     Section 1.51. Release. The term "RELEASE" means a "release" as defined in
Section 101(22) of the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as now or hereafter amended.

     Section 1.52. Restricted Payment. The term "RESTRICTED PAYMENT" means
collectively: (a) any dividend or other payment or distribution, direct or
indirect, on account of any equity interest in the BORROWER now or hereafter
outstanding, except a dividend or distribution payable solely in the same class
or type of equity interest to the holders of that class or type; (b) any
redemption, conversion, exchange, retirement, sinking fund or similar payment,
purchase or other acquisition for value, direct or indirect, by the BORROWER of
any equity interest in the BORROWER now or hereafter outstanding; (c) any
payment made by the BORROWER to retire, or to obtain the surrender of, any
outstanding warrants, options or other rights to acquire equity interests in the
BORROWER now or hereafter outstanding; (d) any payment by the BORROWER of any
management, consulting or similar fees which are not salary payments in amounts
comparable to sums paid in the marketplace for similar services to unrelated
employees for services actually performed; or (e) any payment by the BORROWER
with respect to SUBORDINATED DEBT which is not permitted by the terms of the
Subordination Agreement relating to such SUBORDINATED DEBT which was executed by
the LENDER.

     Section 1.53. Solvent. The term "SOLVENT" means, as to any referenced
PERSON, that as of the date of determination both: (a) (i) the then fair
saleable value of the property of such PERSON is greater than the total amount
of liabilities (including contingent liabilities) of such PERSON and is not less
than the amount that will be required to pay the probable liabilities on such
PERSON'S then existing debts as they become absolute and matured considering all
financing alternatives and potential asset sales reasonably available to such
PERSON; (ii) such PERSON'S capital is not unreasonably small in relation to its
business or any contemplated or undertaken transaction; and (iii) such PERSON
does not intend to incur, or believe (nor should it reasonably believe) that it
will incur, debts beyond its ability to pay such debts as they become due; and
(b) such PERSON is "solvent" within the meaning given that term and similar
terms under applicable laws relating to fraudulent transfers and conveyances.
For purposes of this definition, the amount of any contingent liability at any
time shall be computed as the amount that, in light of all the facts and
circumstances existing at such time, represents the amount that can reasonably
be expected to become an actual or matured liability.

     Section 1.54. Subordinated Debt. The term "SUBORDINATED DEBT" means the
INDEBTEDNESS of the BORROWER described on Schedule 1.54 which has been
subordinated to the OBLIGATIONS pursuant to a written agreement executed by the
holder of such INDEBTEDNESS and the LENDER.

     Section 1.55. Subsidiary. The term "SUBSIDIARY" means, with respect to any
PERSON, any other PERSON of which securities or other ownership interests
representing an aggregate of fifty percent (50%) or more of the equity or the
ordinary voting power are, at the time as of which any determination is being
made, owned or controlled directly, or indirectly through one or more
intermediaries, by such PERSON.

                                      -9-



     Section 1.56. Termination Event. The term "TERMINATION EVENT" means: (a) a
"Reportable Event" described in Section 4043 of ERISA and the regulations issued
thereunder, but not including any such event for which the 30-day notice
requirement has been waived by applicable regulation; (b) the withdrawal of the
BORROWER or an ERISA AFFILIATE of the BORROWER from a GUARANTEED PENSION PLAN
during a plan year in which it was a "substantial employer" as defined in
Section 4001(a)(2) of ERISA; (c) the filing of a notice of intent to terminate a
GUARANTEED PENSION PLAN or the treatment of a GUARANTEED PENSION PLAN amendment
as a termination under Section 4041 of ERISA; (d) the institution of proceedings
to terminate a GUARANTEED PENSION PLAN by the Pension Benefit Guaranty
Corporation; (e) the withdrawal or partial withdrawal of the BORROWER or an
ERISA AFFILIATE of the BORROWER from a MULTIEMPLOYER PLAN; or (f) any other
event or condition which might reasonably be expected to constitute grounds
under ERISA for the termination of, or the appointment of a trustee to
administer, any GUARANTEED PENSION PLAN.

                                    ARTICLE 2
                                TERMS OF THE LOAN

     Section 2.1. Agreement To Extend The Loan. Subject to the terms and
conditions stated herein, the LENDER agrees to extend the LOAN to the BORROWER.
The LENDER shall advance proceeds of the LOAN to the BORROWER by depositing into
the COMMERCIAL ACCOUNT or in accordance with such other procedures as may be
mutually agreed to between the LENDER and the BORROWER, such sums as the
BORROWER may request, provided that the aggregate outstanding principal balance
of the LOAN shall never exceed at any time the MAXIMUM LOAN AMOUNT. The BORROWER
shall not request or permit any advance of proceeds of the LOAN which would
cause the aggregate amount of advances made to or for the BORROWER and
outstanding under the LOAN DOCUMENTS to exceed the MAXIMUM LOAN AMOUNT. In the
event that the principal balance outstanding under the LOAN ever exceeds the
MAXIMUM LOAN AMOUNT, the BORROWER shall immediately, upon the demand of the
LENDER, reduce the principal balance of the LOAN to an amount which is not in
excess of the MAXIMUM LOAN AMOUNT. Any termination of the LOAN by the LENDER
shall relieve the LENDER of the LENDER'S obligation to lend money or to make
financial accommodations to or for the BORROWER and the BORROWER'S accounts, and
shall in no way release, terminate, discharge or excuse the BORROWER from its
absolute duty to pay or perform the OBLIGATIONS.

          Section 2.1.1. Conditions Precedent To Each Advance. The obligation of
the LENDER to make any advances under the LOAN, including the initial advance,
shall be subject to each of the following conditions precedent:

               a. No Defaults Or Events Of Default. No event shall have occurred
on or prior to such date and be continuing on such date, and no condition shall
exist on such date, which constitutes a DEFAULT or EVENT OF DEFAULT.

               b. Continuing Accuracy Of Representations And Warranties. Each of
the representations and warranties made by or on behalf of the BORROWER and the
GUARANTOR to the LENDER in the LOAN DOCUMENTS shall be true and correct in all
material respects when made.

               c. Receipt Of Reports. The LENDER shall be in receipt of all
reports, financial statements, financial information and financial disclosures
required by the LOAN DOCUMENTS, except to the extent that the LENDER has waived
the receipt thereof.

                                      -10-



               d. No Illegalities. It shall not be unlawful for the LENDER to
perform any of the agreements or obligations imposed upon the LENDER by any of
the LOAN DOCUMENTS or for the BORROWER or the GUARANTORS to perform any of their
respective agreements or obligations as provided by the LOAN DOCUMENTS.

               e. No Material Adverse Event. No MATERIAL ADVERSE EVENT shall
have occurred and be then continuing.

          Section 2.1.2. Interest And Lender's Records. All sums advanced under
the LOAN shall be evidenced by, and shall be repaid with interest in accordance
with, the provisions of the NOTE, the terms and conditions of which are
incorporated herein by reference. The date and amounts of each advance made by
the LENDER and each payment made by the BORROWER shall be recorded by the LENDER
on the books and records of the LENDER, but any failure to record such dates or
amounts shall not relieve the BORROWER of its duties and obligations under the
LOAN DOCUMENTS. Interest accrued upon the LOAN shall be computed on outstanding
balances as reflected on the LENDER'S books and records.

          Section 2.1.3. Facility Fee. On each annual anniversary of the date of
CLOSING, while the LOAN is in existence and has not been terminated, until the
termination of the LOAN, the BORROWER shall pay to the LENDER a facility fee of
one-quarter of one percent (1/4%) of the DOLLAR CAP. The facility fee is not to
be considered a fee being paid by the BORROWER to the LENDER as an inducement to
the LENDER to make advances, nor shall it be considered to modify or limit the
ability of the LENDER to terminate in accordance with the provisions of this
AGREEMENT the ability of the BORROWER to borrow under the LOAN, but is instead
intended as part of the compensation which is earned by the LENDER for agreeing
to provide the LOAN in accordance with the terms of the LOAN DOCUMENTS.

          Section 2.1.4. Commitment Fee. The BORROWER shall pay to the LENDER on
or before CLOSING a non-refundable and unconditional commitment fee of Twenty
Thousand Dollars ($20,000.00), which shall be the absolute property of the
LENDER upon payment. The commitment fee shall not be considered to be a payment
of any of the LENDER'S expenses incurred in connection with the LOAN and shall
be paid independent of the amount of proceeds of the LOAN ultimately advanced to
the BORROWER, even if that amount is less than the stated principal amount of
the LOAN.

          Section 2.1.5. Administration Fee. On the first day of each month
until the LOAN is terminated and paid in full, the BORROWER shall pay to the
LENDER an administration fee of Five Hundred Dollars ($500.00) per month.

          Section 2.1.6. Term. All sums outstanding under the LOAN shall be paid
in full on the earlier of: (a) the demand of the LENDER at any time following an
EVENT OF DEFAULT; or (b) sixty (60) calendar days after the demand of the LENDER
made when there are no EVENTS OF DEFAULT.

          Section 2.1.7. Purpose. The proceeds of the LOAN shall be used by the
BORROWER solely for funding the general working capital needs of the BORROWER.

     Section 2.2. Payments. All payments received by the LENDER which are to be
applied to reduce the OBLIGATIONS shall be credited to the balances due from the
BORROWER pursuant to the normal and customary practices of the LENDER, but shall
be provisional and shall not be considered final unless and until such payment
is not subject to avoidance under any provision of

                                      -11-



the United States Bankruptcy Code, as amended, including Sections 547 and 550,
or any state law governing insolvency or creditors' rights. If any payment is
avoided or set aside under any provision of the United States Bankruptcy Code,
including Sections 547 and 550, or any state law governing insolvency or
creditors' rights, the payment shall be considered not to have been made for all
purposes of this AGREEMENT and the LENDER shall adjust its records to reflect
the fact that the avoided payment was not made and has not been credited against
the OBLIGATIONS.

     Section 2.3. Advancements. If the BORROWER fails to materially perform any
of its agreements or covenants contained in this AGREEMENT or if the BORROWER
fails to protect or preserve the COLLATERAL or the status and priority of the
security interest of the LENDER in the COLLATERAL, the LENDER may make advances
to perform the same on behalf of the BORROWER to protect or preserve the
COLLATERAL or the status and priority of the security interest of the LENDER in
the COLLATERAL, and all sums so advanced shall immediately upon advance become
secured by the security interests granted in this AGREEMENT, and shall become
part of the principal amount owed to the LENDER with interest to be assessed at
the applicable rate thereon in accordance with the NOTE and subject to the terms
and provisions of this AGREEMENT and all of the LOAN DOCUMENTS. The BORROWER
shall repay on demand all sums so advanced on the BORROWER'S behalf, plus all
expenses or costs incurred by the LENDER, including reasonable legal fees, with
interest thereon at the highest rate authorized in the NOTE. The provisions of
this Section shall not be construed to prevent the institution of the rights and
remedies of the LENDER upon the occurrence of an EVENT OF DEFAULT. The
authorization contained in this Section is not intended to impose any duty or
obligation on the LENDER to perform any action or make any advancement on behalf
of the BORROWER and is intended to be for the sole benefit and protection of the
LENDER.

     Section 2.4. Automatic Debit. The BORROWER hereby irrevocably authorizes
the LENDER to debit the COMMERCIAL ACCOUNT to make payment of any and all sums
due under the NOTE when and as such sums are due and payable.

                                    ARTICLE 3
                          SECURITY FOR THE OBLIGATIONS

     The payment, performance and satisfaction of the OBLIGATIONS shall be
secured by the following assurances of payment and security.

     Section 3.1. Grant Of Security Interest. In order to secure the repayment
and performance of all OBLIGATIONS, both currently existing and arising in the
future, the BORROWER grants to the LENDER an immediate and continuing security
interest in and to the COLLATERAL. The BORROWER further pledges, hypothecates
and grants to the LENDER a continuing security interest in and to, all amounts
that may be owing at any time and from time to time by the LENDER to the
BORROWER in any capacity, including but not limited to any balance or share
belonging to the BORROWER of any deposit or other account with the LENDER, which
security interest shall be independent of and in addition to any right of
set-off to which the LENDER may be entitled. The LENDER shall have the right to
require the BORROWER to pledge and grant a security interest to the LENDER in
such additional security as the LENDER may request from time to time in the
event that the LENDER deems itself to be insecure.

     Section 3.2. Proceeds And Products. The LENDER'S security interests
provided for herein shall apply to the proceeds, including but not limited to
insurance proceeds, and the products of the COLLATERAL.

                                      -12-



     Section 3.3. Priority Of Security Interests. Each of the security
interests, pledges, and liens granted by the BORROWER to the LENDER pursuant to
any of the LOAN DOCUMENTS shall be perfected first priority security interests,
pledges, and liens, except for: (a) the security interest in the BORROWER'S
INVENTORY which will be subordinate to the security interest of AutoDesk, Inc.
in the BORROWER'S INVENTORY; and (b) the LENDER'S liens will be subject to the
existing liens set forth on Schedule 1.46 hereof.

     Section 3.4. Future Advances. The security interests, liens, and pledges
granted by the BORROWER to the LENDER pursuant to the LOAN DOCUMENTS shall
secure all current and all future advances made by the LENDER to the BORROWER,
or for the account or benefit of the BORROWER, and the LENDER may advance or
readvance upon repayment by the BORROWER all or any portion of the sums loaned
to the BORROWER and any such advance or readvance shall be fully secured by the
security interests, liens, and pledges created by the LOAN DOCUMENTS.

     Section 3.5. Receivable Collections. The BORROWER shall establish a lock
box in the control of a financial institution acceptable to the LENDER ("LOCK
BOX") who will agree to deposit all items of payment received in the LOCK BOX to
a blocked account in which the LENDER shall have control for purposes of
perfecting its interest in such account ("LOCK-BOX ACCOUNT"). The BORROWER shall
move the LOCK BOX to a different financial institution selected by the LENDER
within thirty (30) days after the written request of the LENDER which request
may be made at any time. All funds deposited in the LOCK-BOX ACCOUNT shall be
transferred to the COLLECTION ACCOUNT each BUSINESS DAY. The BORROWER shall
deposit into the COLLECTION ACCOUNT, immediately upon receipt thereof, all cash,
checks, drafts, and other instruments for the payment of money, properly
endorsed, which have been received by it in full or partial payment of any
RECEIVABLE. Prior to any such deposit by the BORROWER into the COLLECTION
ACCOUNT the BORROWER will commingle such items of payment with any of its other
funds or property but will hold them separate and apart. The LENDER, from time
to time, shall apply all of the collected funds held in the COLLECTION ACCOUNT
toward payment of all or any part of the OBLIGATIONS, whether or not then due,
in such order of application as the LENDER may determine. The LENDER shall have
no obligation to provide any provisional or other credit for any deposited funds
which are not collected funds free of any rights of return.

     Section 3.6. Collection Of Receivables By Lender. The LENDER shall have the
right during any continuing DEFAULT or EVENT OF DEFAULT to send notices of
assignment or notices of the LENDER'S security interest to any and all ACCOUNT
DEBTORS or any third party holding or otherwise concerned with any of the
COLLATERAL, and thereafter the LENDER shall have the sole right to collect the
RECEIVABLES and to take possession of the COLLATERAL and RECORDS relating
thereto. All of the LENDER'S collection expenses shall be charged to the
BORROWER'S accounts and added to the OBLIGATIONS. During any continuing DEFAULT
or EVENT OF DEFAULT the LENDER shall have the right to receive, indorse, assign
and deliver in the LENDER'S name or the BORROWER'S name any and all checks,
drafts and other instruments for the payment of money relating to the
RECEIVABLES, and the BORROWER hereby waives notice of presentment, protest and
non-payment of any instrument so endorsed. If the LENDER is collecting the
RECEIVABLES, the BORROWER hereby constitutes the LENDER or the LENDER'S designee
as its attorney-in-fact with power with respect to the RECEIVABLES: (a) to
indorse its name upon all notes, acceptances, checks, drafts, money orders or
other evidences of payment of COLLATERAL that may come into the LENDER'S
possession; (b) to sign its name on any invoices relating to any of the
RECEIVABLES, drafts against ACCOUNT DEBTORS, assignments and verifications of
RECEIVABLES and notices to ACCOUNT DEBTORS; (c) to send verifications of
RECEIVABLES to any ACCOUNT DEBTOR; (d) to notify the Post Office to change the
address for delivery of mail addressed to it to such address as the LENDER may
designate; (e) to receive

                                      -13-



and open all mail addressed to it and to remove therefrom all cash, checks,
drafts and other payments of money; and (f) to do all other acts and things
reasonably necessary, proper, or convenient to carry out the terms and
conditions and purposes and intent of this AGREEMENT. All acts of such attorney
or designee are hereby ratified and approved, and such attorney or designee
shall not be liable for any acts of omission or commission, nor for any error of
judgment or mistake of fact or law in accordance with this AGREEMENT, with the
exception of acts arising from actual fraud, wilful or wanton misconduct or
gross negligence. The power of attorney hereby granted, being coupled with an
interest, is irrevocable while any of the OBLIGATIONS remain unpaid. The LENDER,
without notice to or consent from the BORROWER, may sue upon or otherwise
collect, extend the time of payment of or compromise or settle for cash, credit
or otherwise upon any terms, any of the RECEIVABLES or any securities,
instruments or insurances applicable thereto or release the obligor thereon. The
LENDER is authorized and empowered to accept the return of the goods represented
by any of the RECEIVABLES, without notice to or consent by the BORROWER, all
without discharging or in any way affecting the liability of the BORROWER under
the LOAN DOCUMENTS. The LENDER does not, by anything herein or in any assignment
or otherwise, assume any of the obligations of the BORROWER under any contract
or agreement assigned to the LENDER, and the LENDER shall not be responsible in
any way for the performance by the BORROWER of any of the terms and conditions
thereof.

     Section 3.7. Maintenance Of Principal Accounts. As further security for the
OBLIGATIONS, the BORROWER shall maintain its principal transaction accounts with
the LENDER.

     Section 3.8. Guaranty Agreement. The GUARANTORS shall execute and deliver a
GUARANTY AGREEMENTS which shall guarantee, among other things, the absolute full
payment and performance by the BORROWER of the OBLIGATIONS.

     Section 3.9. Subordination Agreements. The BORROWER shall deliver to the
LENDER Subordination And Intercreditor Agreements in form and substance
acceptable to the LENDER with respect to the SUBORDINATED DEBT.

     Section 3.10. Warrants. In consideration of the LENDER providing the LOAN
to the BORROWER, Avatech Solutions, Inc. shall grant to the LENDER warrants to
acquire 15,000 shares of the common stock of Avatech Solutions, Inc. for a
purchase price of $.01 per share, all pursuant to terms and provisions of a
warrant agreement in the form attached hereto as Exhibit B.

     Section 3.11. Landlord Agreements. The BORROWER shall deliver to the LENDER
Landlord Agreements in form and substance acceptable to the LENDER with respect
to the properties described on Schedule 3.11 to this AGREEMENT.

     Section 3.12. Further Assurances. The BORROWER will, at its expense,
promptly execute and deliver all further instruments and documents and take all
further action that may be necessary or desirable and that the LENDER may
reasonably request in writing from time to time in order: (a) to perfect and
protect the security interests to be created hereby; (b) to enable the LENDER to
exercise and enforce its rights and remedies hereunder in respect of the
COLLATERAL; or (c) otherwise to effect the purposes of this AGREEMENT,
including, without limitation: (i) upon the BORROWER'S acquisition thereof,
delivering to the LENDER each item of CHATTEL PAPER of the BORROWER, (ii) if any
RECEIVABLES are evidenced by an INSTRUMENT delivering and pledging to the LENDER
such INSTRUMENT duly endorsed and accompanied by executed instruments of
transfer or assignment, all in form and substance satisfactory to the LENDER,
(iii) executing and filing such financing statements or amendments

                                      -14-



thereto as may be necessary or desirable or that the LENDER may request in order
to perfect and preserve the security interests purported to be created hereby,
(iv) upon the acquisition after the date hereof by the BORROWER of any EQUIPMENT
covered by a certificate of title or ownership, cause the LENDER to be listed as
the lienholder on such certificate of title and within sixty (60) days of the
acquisition thereof deliver evidence of the same to the LENDER, and (v) upon the
acquisition after the date hereof of any asset for which an assignment, pledge,
mortgage, or other document is required to be filed in order to grant or perfect
a lien therein for the benefit of the LENDER, execute and deliver to the LENDER
such assignment, pledge, mortgage, or other INSTRUMENT within thirty (30) days
of the acquisition thereof. If the BORROWER fails to execute any instrument or
document described above within five (5) BUSINESS DAYS of being requested to do
so by the LENDER, the BORROWER hereby appoints the LENDER or any officer of the
LENDER as the BORROWER'S attorney in fact for purposes of executing such
instruments or documents in the BORROWER'S name, place and stead, which power of
attorney shall be considered as coupled with an interest and irrevocable.

                                    ARTICLE 4
                         REPRESENTATIONS AND WARRANTIES

     To induce the LENDER to extend the LOAN and to enter into this AGREEMENT,
the BORROWER makes the representations and warranties set forth in this Article
4. The BORROWER acknowledges the LENDER'S justifiable right to rely upon these
representations and warranties.

     Section 4.1. Accuracy Of Information. All information submitted by or on
behalf of the BORROWER or the GUARANTORS in connection with any of the
OBLIGATIONS is true, accurate and, to the best of the BORROWER'S knowledge,
complete in all material respects as of the date made and contain no knowingly
false, incomplete or misleading statements.

     Section 4.2. No Litigation. There are no actions, suits, investigations, or
proceedings pending or, to the knowledge of the BORROWER, threatened against the
BORROWER or the assets of the BORROWER, except as specifically disclosed on
Schedule 4.2 attached hereto.

     Section 4.3. No Liability Or Adverse Change. The BORROWER has no direct or
contingent liability known to the BORROWER and not previously disclosed to the
LENDER, nor does the BORROWER know of or have any reason to expect any material
adverse change in the BORROWER'S assets, liabilities, properties, business, or
condition, financial or otherwise.

     Section 4.4. Title To Collateral. The BORROWER has good and marketable
title to the COLLATERAL. The liens granted by the BORROWER to the LENDER in the
COLLATERAL will have the priority provided by the LOAN DOCUMENTS.

     Section 4.5. Authority; Approvals And Consents.

          Section 4.5.1. Authority. The BORROWER has the legal authority to
enter into each of the LOAN DOCUMENTS and to perform, observe and comply with
all of the BORROWER'S agreements and obligations thereunder, including, without
limitation the borrowings contemplated hereby.

          Section 4.5.2. Approvals. The execution and delivery by the BORROWER
of each of the LOAN DOCUMENTS, the performance by the BORROWER of all of its
agreements and

                                      -15-



obligations under the LOAN DOCUMENTS, and the borrowings contemplated by this
AGREEMENT, have been duly authorized by all necessary action on the part of the
BORROWER and do not and will not (i) contravene any provision of the
organizational documents of the BORROWER; (ii) conflict with, or result in a
breach of the terms, conditions or provisions of, or constitute a default under,
or result in the creation of any lien upon any of the property of the BORROWER
under any agreement, trust deed, indenture, mortgage or other instrument to
which the BORROWER is a party or by which the BORROWER or any property of the
BORROWER is bound or affected (except for liens created for the benefit of the
LENDER); (iii) violate or contravene any provision of any LAW, rule or
regulation (including, without limitation, Regulations G, T, U or X of the Board
of Governors of the Federal Reserve System) or any order, ruling or
interpretation thereunder or any decree, order of judgment of any court or
governmental or regulatory authority, bureau, agency or official (all as from
time to time in effect and applicable to the BORROWER); or (iv) require any
waivers, consents or approvals by any of the creditors of the BORROWER.

          Section 4.5.3. Consents. Other than filings and recordings required to
perfect the security interests and liens granted hereunder, no approval,
consent, order, authorization or license by, or giving notice to, or taking any
other action with respect to, any governmental or regulatory authority or agency
is required for the execution and delivery by the BORROWER of the LOAN DOCUMENTS
or for the performance by the BORROWER of any of the agreements and obligations
thereunder.

     Section 4.6. Binding Effect Of Documents, Etc. Each of the LOAN DOCUMENTS
which the BORROWER has executed and delivered as contemplated and required to be
executed and delivered as of the date of CLOSING by this AGREEMENT, has been
duly executed and delivered by the BORROWER and is the legal, valid and binding
obligation of the BORROWER and is enforceable against the BORROWER in accordance
with all stated terms.

     Section 4.7. Other Names. The BORROWER has not changed its name, been the
surviving entity in a merger, or changed the location of its chief executive
office within the last twelve (12) years, except as is disclosed on the
PERFECTION CERTIFICATE. The BORROWER does not trade under any trade or
fictitious names except as set forth on the PERFECTION CERTIFICATE.

     Section 4.8. No Events Of Default. There is not currently existing any
action, event, or condition which presently constitutes a DEFAULT or an EVENT OF
DEFAULT.

     Section 4.9. Guaranty Agreements. The GUARANTY AGREEMENTS are the valid and
binding obligation of the GUARANTORS and are fully enforceable against the
GUARANTORS in accordance with all outstanding terms.

     Section 4.10. Taxes. The BORROWER: (a) has filed all federal, state and
local tax returns and other reports which the BORROWER is required by LAW to
file prior to the date hereof and which are material to the conduct of the
business of the BORROWER; (b) has paid or caused to be paid all taxes,
assessments and other governmental charges that are due and payable prior to the
date hereof; and (c) has made adequate provision for the payment of such taxes,
assessments or other charges accruing but not yet payable. The BORROWER has no
knowledge of any deficiency or additional assessment in connection with any
taxes, assessments or charges not provided for on the BORROWER'S books of
account or reflected in the BORROWER'S financial statements.

                                      -16-



     Section 4.11. Compliance With Laws. The BORROWER has complied in all
material respects with all applicable LAWS, including, but not limited to, all
LAWS with respect to: (a) all restrictions, specifications, or other
requirements pertaining to products that it sells or to the services it
performs; (b) the conduct of its business; and (c) the use, maintenance, and
operation of the real and personal properties owned or leased by it in the
conduct of its business.

     Section 4.12. Chief Place Of Business. The chief executive office, chief
place of business, and the place where the BORROWER keeps its RECORDS concerning
the COLLATERAL is 11400 Cronridge Drive, Suite A, Owings Mills, Maryland 21117.

     Section 4.13. Location Of Inventory. The INVENTORY is and shall be kept
solely at the BORROWER'S locations set forth in the PERFECTION CERTIFICATE and
shall not be moved, sold or otherwise disposed of without prior notification to
the LENDER, except for sales of INVENTORY to ACCOUNT DEBTORS in the ordinary
course of the BORROWER'S businesses. None of the INVENTORY is currently stored
with or in the possession of any bailee, warehouseman, or other similar PERSON,
except as specifically disclosed on the Perfection Certificate delivered to the
LENDER.

     Section 4.14. No Subsidiaries. The BORROWER has no SUBSIDIARIES other than
Technical Learningware Company, Inc.

     Section 4.15. No Labor Agreements. The BORROWER is not subject to any
collective bargaining agreement or any agreement, contract, decree or order
requiring it to recognize, deal with or employ any PERSONS organized as a
collective bargaining unit or other form of organized labor.

     Section 4.16. Eligible Accounts. Each ACCOUNT which the BORROWER contends
should be included in the calculation of the BORROWING BASE from time to time
will be an ELIGIBLE ACCOUNT. At the time each ELIGIBLE ACCOUNT is listed on or
included in (whether singularly or in the aggregate with other ELIGIBLE
ACCOUNTS) a schedule or report delivered to the LENDER to be included in the
calculation of the BORROWING BASE, all of such ELIGIBLE ACCOUNTS will have been
generated in compliance with the BORROWER'S normal credit policies as
historically in effect (or as modified from time to time on prior written notice
of the LENDER), or on such other reasonable terms disclosed in writing to the
LENDER in advance of the creation of such ACCOUNTS, and such terms shall be
expressly set forth on the face of all invoices.

     Section 4.17. Approvals. The BORROWER possesses all franchises, approvals,
licenses, contracts, merchandising agreements, merchandising contracts and
governmental approvals, registrations and exemptions necessary for it lawfully
to conduct its business and operation as presently conducted and as anticipated
to be conducted after CLOSING.

     Section 4.18. Financial Statements. The financial statements of the
BORROWER which have been delivered to the LENDER prior to the date of this
AGREEMENT, fairly present the financial condition of the BORROWER as of the
respective dates thereof and the results and operations of the BORROWER for the
fiscal periods ended on such respective dates, all in accordance with G.A.A.P.
The BORROWER has no direct or contingent liability or obligation known to the
BORROWER and not disclosed on the financial statements delivered to the LENDER.
There has been no adverse change in the financial condition of the BORROWER
since the financial statements of the BORROWER most recently delivered to the
LENDER, and the BORROWER does not know of or have any reason to expect any
material adverse change in the assets, liabilities, properties, business, or
condition, financial or otherwise, of the BORROWER.

                                      -17-



     Section 4.19. Solvency. The BORROWER will be SOLVENT both before and after
CLOSING, after giving full effect to the OBLIGATIONS and all of the BORROWER'S
liabilities.

     Section 4.20. Fair Labor Standards Act. The BORROWER has complied in all
material respects with the Fair Labor Standards Act of 1938, as amended.

     Section 4.21. Employee Benefit Plans.

          Section 4.21.1. Compliance. The BORROWER and its ERISA AFFILIATES are
in compliance in all material respects with all applicable provisions of ERISA
and the regulations thereunder and of the CODE with respect to all EMPLOYEE
BENEFIT PLANS.

          Section 4.21.2. Absence Of Termination Event. No TERMINATION EVENT has
occurred or is reasonably expected to occur with respect to any GUARANTEED
PENSION PLAN.

          Section 4.21.3. Actuarial Value. The actuarial present value (as
defined in Section 4001 of ERISA) of all benefit commitments (as defined in
Section 4001 of ERISA) under each GUARANTEED PENSION PLAN does not exceed the
assets of that plan.

          Section 4.21.4. No Withdrawal Liability. Neither the BORROWER nor any
of its ERISA AFFILIATES has incurred or reasonably expects to incur any
withdrawal liability under ERISA in connection with any MULTIEMPLOYER PLANS.

     Section 4.22. Environmental Conditions.

          Section 4.22.1. Existence Of Permits. The BORROWER has obtained all
legally required permits, licenses, variances, clearances and all other
necessary approvals (collectively, the "EPA PERMITS") for use of the FACILITIES
and the operation and conduct of its business from all applicable federal,
state, and local governmental authorities, utility companies or
development-related entities including, but not limited to, any and all
appropriate Federal or State environmental protection agencies and other county
or city departments, public water works and public utilities in regard to the
use of the FACILITIES, the operation and conduct of its business, and the
handling, transporting, treating, storage, disposal, discharge, or RELEASE of
REGULATED SUBSTANCES, if any, into, on or from the environment (including, but
not limited to, any air, water, or soil).

          Section 4.22.2. Compliance With Permits. Each issued EPA PERMIT is in
full force and effect, has not expired or been suspended, denied or revoked, and
is not under challenge by any PERSON. The BORROWER is in compliance in all
material aspects with each issued EPA PERMIT.

          Section 4.22.3. No Litigation. Neither the BORROWER nor any of the
FACILITIES are subject to any private or governmental litigation, or to the
knowledge of the BORROWER, threatened litigation, lien or judicial or
administrative notice, order or action involving the BORROWER or any of the
FACILITIES relating to REGULATED SUBSTANCES or environmental problems,
impairments or liabilities.

          Section 4.22.4. No Releases. To the best knowledge of the BORROWER,
there has been no RELEASE into, on or from any of the FACILITIES and no
REGULATED SUBSTANCES are located on or have been treated, stored, processed,
disposed of, handled or transported to or from, any of the FACILITIES in
violation of any ENVIRONMENTAL LAWS. To the best knowledge

                                      -18-



of the BORROWER, no REGULATED SUBSTANCES have been treated, stored, disposed,
RELEASED, located, discharged, possessed, managed, processed, or otherwise
handled in the operation or conduct of the BORROWER'S business in violation of
any ENVIRONMENTAL LAWS. The BORROWER has complied in all material respects with
all ENVIRONMENTAL LAWS affecting the FACILITIES and the BORROWER'S businesses.

          Section 4.22.5. Transportation. The BORROWER does not transport, in
any manner, any REGULATED SUBSTANCES except in the ordinary course of the
BORROWER'S business in material compliance with all ENVIRONMENTAL LAWS.

          Section 4.22.6. No Violation Notices. The BORROWER has not received
any notices that any REGULATED SUBSTANCES transported from any FACILITY have
been disposed of in violation of any ENVIRONMENTAL LAWS.

          Section 4.22.7. No Notice Of Violations. The BORROWER has not received
written notice of any circumstances which would be likely to result in any
obligation under any ENVIRONMENTAL LAW to investigate or remediate any REGULATED
SUBSTANCES in, on or under any of the FACILITIES.

                                    ARTICLE 5
                              AFFIRMATIVE COVENANTS

     The BORROWER agrees during the term of this AGREEMENT and while any
OBLIGATIONS are outstanding and unpaid to do and perform each of the acts and
promises set forth in this Article 5:

     Section 5.1. Payment. All OBLIGATIONS shall be paid in full when and as
due.

     Section 5.2. Insurance. The BORROWER shall obtain and maintain such
insurance coverages as are reasonable, customary and prudent for businesses
engaged in activities similar to the business activities of the BORROWER.
Without limitation to the foregoing, the BORROWER shall maintain for all of its
assets and properties, whether real, personal, or mixed and including but not
limited to the COLLATERAL, fire and extended coverage casualty insurance in
amounts satisfactory to the LENDER and sufficient to prevent any co-insurance
liability (which amount shall be the full insurable value of the assets and
properties insured unless the LENDER in writing agrees to a lesser amount),
naming the LENDER as sole loss payee with respect to the COLLATERAL, with
insurance companies and upon policy forms containing standard mortgagee clauses
which are acceptable to and approved by the LENDER. The BORROWER shall submit to
the LENDER the originals of the casualty insurance policies and paid receipts
evidencing payment of the premiums due on the same. The casualty insurance
policies shall be endorsed so as to make them noncancellable unless thirty (30)
days prior notice of cancellation is provided to the LENDER. The proceeds of any
insured loss shall be applied by the LENDER to the OBLIGATIONS, in such order of
application as determined by the LENDER, unless the LENDER in its sole
discretion permits the use thereof to repair or replace damaged or destroyed
COLLATERAL.

     Section 5.3. Books And Records. The BORROWER shall notify the LENDER in
writing if the BORROWER modifies or changes its method of accounting or enters
into, modifies, or terminates any agreement presently existing, or at any time
hereafter entered into with any third party accounting firm for the preparation
and/or storage of the BORROWER'S accounting records.

                                      -19-



     Section 5.4. Collection Of Accounts; Sale Of Inventory. The BORROWER shall
only collect its RECEIVABLES and sell its INVENTORY in the ordinary course of
the BORROWER'S business.

     Section 5.5. Notice Of Litigation And Proceedings. The BORROWER shall give
prompt notice to the LENDER of any action, suit, citation, violation, direction,
notice or proceeding before any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, affecting the
BORROWER, or the assets or properties thereof, which, if determined adversely to
the BORROWER: (a) could require the BORROWER to pay over more than Twenty-Five
Thousand Dollars ($25,000.00) or deliver assets the value of which exceeds that
sum (whether or not the claim is considered to be covered by insurance); or (b)
could reasonably be expected to have a material adverse effect upon the
financial condition or business operations of the BORROWER.

     Section 5.6. Payment Of Liabilities To Third Persons. The BORROWER shall
pay when and as due, or within applicable grace periods, all liabilities due to
third persons, except when the amount thereof is being contested in good faith
by appropriate proceedings and with adequate reserves therefor being set aside
by the BORROWER.

     Section 5.7. Notice Of Change Of Business Location. The BORROWER shall
notify the LENDER thirty (30) days in advance of: (a) any change in the location
of its existing offices or place of business; (b) the establishment of any new,
or the discontinuation of any existing, place of business; and (c) any change in
or addition to the locations at which the COLLATERAL is kept. Prior to moving
any COLLATERAL to any location not owned by the BORROWER (other than deliveries
to ACCOUNT DEBTORS of sold or leased items), the BORROWER shall obtain and
deliver to the LENDER an agreement, in the form attached hereto as Exhibit C
executed by the owner of such location. In the event any COLLATERAL is stored
with a warehousemen or other bailee, and the COLLATERAL is evidenced by a
negotiable document of title, the BORROWER shall immediately deliver the
document of title to the LENDER.

     Section 5.8. Payment Of Taxes. The BORROWER shall pay or cause to be paid
when and as due all taxes, assessments and charges or levies imposed upon it or
on any of its property or which it is required to withhold and pay over to the
taxing authority or which it must pay on its income, except where contested in
good faith, by appropriate proceedings and at its own cost and expense;
provided, however, that the BORROWER shall not be deemed to be contesting in
good faith by appropriate proceedings unless: (a) such proceedings operate to
prevent the taxing authority from attempting to collect the taxes, assessments
or charges; (b) the COLLATERAL is not subject to sale, forfeiture or loss during
such proceedings; (c) the BORROWER'S contest does not subject the LENDER to any
claim by the taxing authority or any other person; (d) the BORROWER establishes
appropriate reserves, satisfactory to the LENDER in its sole discretion, for the
payment of all taxes, assessments, charges, levies, legal fees, court costs and
other expenses for which the BORROWER would be liable if unsuccessful in the
contest; (e) the BORROWER prosecutes the contest continuously to its final
conclusion; and (f) at the conclusion of the proceedings, the BORROWER promptly
pays all amounts determined to be payable, including but not limited to all
taxes, assessments, charges, levies, legal fees and court costs.

     Section 5.9. Inspections Of Records. The BORROWER shall permit
representatives of the LENDER access to the BORROWER'S places of business, at
intervals and at such times as determined by the LENDER, to inspect the
COLLATERAL and to review and make extracts from or photocopies of the books and
records of the BORROWER; provided, however, that prior to an EVENT OF DEFAULT,
the LENDER shall provide the BORROWER with at least twenty-four (24)

                                      -20-



hours prior notice before entering the BORROWER'S place of business, shall not
be there prior to 8:00 A.M. or stay later than 6:00 P.M., and shall not
materially interfere with the BORROWER'S business. The BORROWER agrees to pay to
the LENDER a Two Thousand Dollar ($2,000.00) fee for each field examination
conducted by the LENDER, as well as reimburse the LENDER for all reasonable
expenses incurred by the LENDER in connection with any field examinations
conducted at any of the BORROWER'S locations outside of the State of Maryland.

     Section 5.10. Notice Of Events Affecting Collateral; Compromise Of
Receivables; Returned Or Repossessed Goods. The BORROWER shall promptly report
to the LENDER: (a) any reclamation, return or repossession of goods; (b) all
claims or disputes asserted by any ACCOUNT DEBTOR or other obligor involving in
excess of Twenty-Five Thousand Dollars ($25,000.00); and (c) all matters
materially affecting the value, enforceability or collectibility of any of the
COLLATERAL. Without the LENDER'S consent, the BORROWER shall not compromise or
adjust any of the RECEIVABLES which have been included by the BORROWER in the
determination of the BORROWING BASE, extend the time for payment thereof, or
grant any additional discounts, allowances or credits thereon; provided,
however, that the BORROWER may grant, in the ordinary course of business, to any
party obligated on any of the RECEIVABLES, any rebate, refund, or adjustment to
which such party may be lawfully entitled, and may accept, in connection
therewith, the return of goods, sale, or lease of which shall have given rise to
such RECEIVABLES. If any goods, the sale of which has resulted in RECEIVABLES
included in determining the BORROWING BASE, are returned by the ACCOUNT DEBTOR
for credit or repossessed by the BORROWER, the BORROWER shall receive and hold
such goods as trustee for the LENDER and as additional security for the payment
of the OBLIGATIONS, and make disposition thereof as required by the LENDER.

     Section 5.11. Documentation Of Collateral. The BORROWER agrees that upon
the request of the LENDER, the BORROWER will provide the LENDER with: (a)
written statements or schedules identifying and describing the COLLATERAL, and
all additions, substitutions, and replacements thereof, in such detail as the
LENDER may reasonably require; (b) copies of ACCOUNT DEBTORS' invoices or
billing statements; (c) evidence of shipment or delivery of goods or merchandise
to or performance of services for ACCOUNT DEBTORS; and (d) such other schedules
and information as the LENDER reasonably may require. The items to be provided
under this Section shall be in form satisfactory to the LENDER and are to be
executed and delivered to the LENDER from time to time solely for the LENDER'S
convenience in maintaining RECORDS of the COLLATERAL. The failure of the
BORROWER to give any of such items to the LENDER shall not affect, terminate,
modify or otherwise limit the LENDER'S security interests in the COLLATERAL. The
LENDER shall have the right, at any time and from time to time, to verify the
eligibility of the BORROWER' RECEIVABLES, including obtaining verification of
the RECEIVABLES directly from ACCOUNT DEBTORS. The LENDER agrees to comply with
the nondisclosure requirements of Sections 1-301, 1-302, 1-303, 1-304 and 1-305
of the Financial Institutions Article, Annotated Code of Maryland.

     Section 5.12. Reporting Requirements. The BORROWER shall submit the
following items to the LENDER:

          Section 5.12.1. Inventory Reports. On the 15th day of each calendar
month, reports of INVENTORY on such reporting forms as are required by the
LENDER from time to time, certified to be accurate and correct by the chief
financial officer of the BORROWER, which reports shall be compiled in a manner
acceptable to the LENDER.

                                      -21-



          Section 5.12.2. Receivables And Accounts Payable Reports. On or before
the 15th day of each calendar month: (i) a RECEIVABLES report and aging,
together with a calculation of ineligible RECEIVABLES; and (ii) an accounts
payable report and aging, both in form reasonably acceptable to the LENDER and
containing such information as the LENDER may specify from time to time. Such
reports shall be accompanied by such reports, copies of sales journals,
remittance reports, and other documentation as the LENDER may reasonably request
from time to time.

          Section 5.12.3. Borrowing Base Report. Once each week (on the same day
each week) as well as on the last day of each month, or more frequently if
requested by the LENDER, a collateral and loan report in such form and context
as may be specified by the LENDER from time to time. This report shall include
updated ACCOUNTS balance and LOAN balance figures as well as detail on the
activity which resulted in the updated ACCOUNTS and LOAN balance figures as of
the date of the report.

          Section 5.12.4. Monthly Financial Statements. As soon as available and
in any event within thirty (30) calendar days after the end of each calendar
month, the BORROWER shall submit to the LENDER a consolidated and consolidating
balance sheet of the BORROWER and its SUBSIDIARIES as of the end of such month
and a consolidated and consolidating statement of income and retained earnings
of the BORROWER and its SUBSIDIARIES for such month, and a consolidated and
consolidating statement of cash flow of the BORROWER and its SUBSIDIARIES for
such month, all in reasonable detail and stating in comparative form the
respective consolidated and consolidating figures for the corresponding date and
period in the previous FISCAL YEAR and all prepared in accordance with G.A.A.P.
and certified by the Chief Financial Officer of the BORROWER (subject to
year-end adjustment).

          Section 5.12.5. SEC Reports. Within forty-five (45) days after the end
of each fiscal quarter, the BORROWER shall deliver to the LENDER a copy of the
10Q report filed by Avatech Solutions, Inc. for such fiscal quarter; and within
one hundred twenty (120) days after the end of each FISCAL YEAR the BORROWER
shall deliver to the LENDER a copy of the 10K report filed by Avatech Solutions,
Inc.

          Section 5.12.6. Annual Financial Statements. As soon as available and
in any event within one hundred twenty (120) calendar days after the end of each
FISCAL YEAR of the BORROWER, the BORROWER shall submit to the LENDER a
consolidated and consolidating balance sheet of the BORROWER and its
SUBSIDIARIES as of the end of such FISCAL YEAR and a consolidated and
consolidating statement of income and retained earnings of the BORROWER and its
SUBSIDIARIES for such FISCAL YEAR, and a consolidated and consolidating
statement of cash flow of the BORROWER and its SUBSIDIARIES for such FISCAL
YEAR, all in reasonable detail and stating in comparative form the respective
consolidated and consolidating figures for the corresponding date and period in
the prior FISCAL YEAR and all prepared in accordance with G.A.A.P. and
accompanied by an audited opinion thereon acceptable to the LENDER by
independent accountants selected by the BORROWER and acceptable to the LENDER.

          Section 5.12.7. Budget. Within thirty (30) days prior to the end of
each FISCAL YEAR, the BORROWER shall submit to the LENDER an annual budget and
cash flow forecast for the next FISCAL YEAR.

          Section 5.12.8. Tax Returns. Within five (5) days after filing with
the Internal Revenue Service which shall be no more than one hundred fifty (150)
days after the end of the applicable FISCAL YEAR end, the BORROWER shall deliver
to the LENDER copies of the BORROWER'S income tax returns together with all
schedules thereto.

                                      -22-



          Section 5.12.9. Management Letters. Promptly upon receipt thereof, the
BORROWER shall submit to the LENDER copies of any reports submitted to the
BORROWER or any SUBSIDIARY by independent certified public accountants in
connection with the examination of the financial statements of the BORROWER or
any SUBSIDIARY made by such accountants.

          Section 5.12.10. Reports To Other Creditors. Promptly after the
furnishing thereof, the BORROWER shall submit to the LENDER copies of any
statement or report furnished to any other PERSON pursuant to the terms of any
indenture, loan, or credit or similar agreement and not otherwise required to be
furnished to the LENDER pursuant to any other provisions of this AGREEMENT.

          Section 5.12.11. Management Changes. The BORROWER shall notify the
LENDER immediately of any changes in the personnel holding the positions of
Chief Executive Officer, President or Chief Financial Officer of the BORROWER.

          Section 5.12.12. General Information. In addition to the items set
forth in subparagraphs 5.12.1 through 5.12.10 above, the BORROWER agrees to
submit to the LENDER such other information respecting the condition or
operations, financial or otherwise, of the BORROWER as the LENDER may reasonably
request from time to time.

     Section 5.13. Employee Benefit Plans And Guaranteed Pension Plans. The
BORROWER will, and will cause each of its ERISA AFFILIATES to: (a) comply with
all requirements imposed by ERISA and the CODE, applicable from time to time to
any of its GUARANTEED PENSION PLANS or EMPLOYEE BENEFIT PLANS; (b) make full
payment when due of all amounts which, under the provisions of EMPLOYEE BENEFIT
PLANS or under applicable LAW, are required to be paid as contributions thereto;
(c) not permit to exist any material accumulated funding deficiency, whether or
not waived; (d) file on a timely basis all reports, notices and other filings
required by any governmental agency with respect to any of its EMPLOYEE BENEFITS
PLANS; (e) make any payments to MULTIEMPLOYER PLANS required to be made under
any agreement relating to such MULTIEMPLOYER PLANS, or under any LAW pertaining
thereto; (f) not amend or otherwise alter any GUARANTEED PENSION PLAN if the
effect would be to cause the actuarial present value of all benefit commitments
under any GUARANTEED PENSION PLAN to be less than the current value of the
assets of such GUARANTEED PENSION PLAN allocable to such benefit commitments;
(g) furnish to all participants, beneficiaries and employees under any of the
EMPLOYEE BENEFIT PLANS, within the periods prescribed by LAW, all reports,
notices and other information to which they are entitled under applicable LAW;
and (h) take no action which would cause any of the EMPLOYEE BENEFIT PLANS to
fail to meet any qualification requirement imposed by the CODE. As used in this
Section, the term "accumulated funding deficiency" has the meaning specified in
Section 302 of ERISA and Section 412 of the CODE, and the terms "actuarial
present value", "benefit commitments" and "current value" have the meaning
specified in Section 4001 of ERISA.

     Section 5.14. Maintenance Of Fixed Assets. The BORROWER shall maintain and
preserve all of its fixed assets in a state of good and efficient working order.

     Section 5.15. Federal Assignment Of Claims Act. The BORROWER shall notify
the LENDER if any RECEIVABLE arises out of a contract with the United States of
America, or any department, agency or instrumentality thereof, and shall execute
all documents or instruments and shall take all steps or actions required by the
LENDER so that all monies due or to become due under such contract are assigned
to the LENDER and notice given thereof to the United States in accordance with
the requirements of the Federal Assignment of Claims Act, as amended.

                                      -23-



     Section 5.16. Compliance With Laws. The BORROWER shall comply in all
material respects with all applicable LAWS, including, but not limited to, all
LAWS with respect to: (a) all restrictions, specifications, or other
requirements pertaining to products that it sells or to the services it
performs; (b) the conduct of its business; (c) the use, maintenance, and
operation of the real and personal properties owned or leased by it in the
conduct of its business; and (d) the obtaining and maintenance of all necessary
licenses, franchises, permits and governmental approvals, registrations and
exemptions necessary to engage in its business. Without limiting the generality
of the preceding sentence, the BORROWER shall: (i) comply in all material
respects with, and ensure such compliance by all tenants and subtenants, if any,
with, all applicable ENVIRONMENTAL LAWS and obtain and comply in all material
respects with and maintain, and ensure that all tenants and subtenants obtain
and comply with and maintain, any and all licenses, approvals, notifications,
registrations or permits required by applicable ENVIRONMENTAL LAWS; (ii) conduct
and complete all investigations, studies, sampling and testing, and all
remedial, removal and other actions required under ENVIRONMENTAL LAWS, and
promptly comply with all lawful orders and directives of any governmental
authority regarding ENVIRONMENTAL LAWS; and (iii) defend, indemnify and hold
harmless the LENDER, and its employees, agents, officers and directors, from and
against any claims, demands, penalties, fines, liabilities, settlements,
damages, costs and expenses of whatever kind or nature known or unknown,
contingent or otherwise, arising out of, or in any way relating to the violation
of, noncompliance with or liability under any ENVIRONMENTAL LAWS applicable to
the operations of the BORROWER, or any orders, requirements or demands of
governmental authorities related thereto, including, without limitation,
reasonable attorney's and consultant's fees, investigation and laboratory fees,
response costs, court costs and litigation expenses, except to the extent that
any of the foregoing directly result from the gross negligence or willful
misconduct of the party seeking indemnification therefor. The BORROWER agrees to
promptly notify the LENDER of any RELEASE of a REGULATED SUBSTANCE on, to or
from any FACILITY in violation of any ENVIRONMENTAL LAWS or of any notice
received by the BORROWER that the BORROWER or any FACILITY is not in compliance
with any ENVIRONMENTAL LAWS.

     Section 5.17. Depository Accounts. The BORROWER shall maintain its
principal depository and operating accounts with the LENDER.

                                    ARTICLE 6
                               NEGATIVE COVENANTS

     The BORROWER covenants while any OBLIGATIONS are outstanding and unpaid not
to do or to permit to be done or to occur any of the acts or occurrences set
forth in this Article 6 without the prior written authorization of the LENDER,
which shall not be unreasonably withheld.

     Section 6.1. No Change Of Name, Merger, Etc. The BORROWER shall not change
its name or enter into any merger, consolidation, reorganization or
recapitalization.

     Section 6.2. No Sale Or Transfer Of Assets. The BORROWER shall not sell,
transfer, lease or otherwise dispose of all or any part of the COLLATERAL, or
all or any part of any of its other assets, except that INVENTORY may be sold to
ACCOUNT DEBTORS in the ordinary course of the BORROWER'S business.

     Section 6.3. No Encumbrance Of Assets. The BORROWER shall not mortgage,
pledge, grant or permit to exist a security interest in or lien upon any of its
assets of any kind, now owned or hereafter acquired, except for PERMITTED LIENS.

                                      -24-



     Section 6.4. No Indebtedness. The BORROWER shall not incur, create, assume,
or permit to exist any INDEBTEDNESS except: (a) the OBLIGATIONS; (b)
INDEBTEDNESS secured by PERMITTED LIENS; and (c) the SUBORDINATED DEBT.

     Section 6.5. Restricted Payments. The BORROWER shall not make any
RESTRICTED PAYMENTS.

     Section 6.6. No Amendments Of Subordinated Debt. The BORROWER shall not
modify any material terms of any of the SUBORDINATED DEBT.

     Section 6.7. Transactions With Affiliates. The BORROWER shall not make any
contract for the purchase of any items from any AFFILIATE or the performance of
any services (including employment services) by any AFFILIATE, unless such
contract is on terms which fairly represent generally available terms to be
obtained in transactions of a similar nature with independent third PERSONS.

     Section 6.8. Loans, Investments And Sale-Leasebacks. The BORROWER shall not
make any advance, loan, investment, or material acquisition of assets or enter
into any sale-leaseback transactions.

     Section 6.9. No Acquisition Of Equity In Or Assets Of Third Persons. The
BORROWER shall not acquire any equity interests in, or all or substantially all
of the assets of, any PERSON.

     Section 6.10. No Assignment. The BORROWER shall not assign or attempt to
assign its rights under this AGREEMENT.

     Section 6.11. No Alteration Of Structure Or Operations. The BORROWER shall
not amend or change materially its capital structure or its line or scope of
business, nor shall it engage in business ventures other than those in which it
is presently engaged.

     Section 6.12. Unpermitted Uses Of Loan Proceeds. The BORROWER shall not use
any part of the proceeds of the LOAN hereunder for any purpose which constitutes
a violation of, or is inconsistent with, regulations of the Board of Governors
of the Federal Reserve System, including without limitation, the purchase or
carrying of (or refinancing of indebtedness originally incurred to purchase or
carry) margin securities.

     Section 6.13. Changes In Fiscal Year. The BORROWER shall not change its
FISCAL YEAR.

     Section 6.14. Limitation On Issuance Of Equity Interests. The BORROWER
shall not issue or sell any equity interest in the BORROWER that, by its terms
or by the terms of any security into which it is convertible or exchangeable,
is, or upon the happening of an event or passage of time would be: (a)
convertible or exchangeable into a liability of the BORROWER; or (b) required to
be redeemed or repurchased, including at the option of the holder, in whole or
in part, or has, or upon the happening of an event or passage of time would
have, a redemption or similar payment due.

                                    ARTICLE 7
                               EVENTS OF DEFAULT

     The occurrence of any of the following events shall constitute an EVENT OF
DEFAULT.

                                      -25-



     Section 7.1. Failure To Pay. The failure by the BORROWER to pay any of the
OBLIGATIONS when and as due.

     Section 7.2. Violation Of Covenants. The failure by the BORROWER to perform
or a violation of any of the covenants or agreements provided in this AGREEMENT
or in any of the other LOAN DOCUMENTS.

     Section 7.3. Representation Or Warranty. The failure of any representation
or warranty made by the BORROWER or by a GUARANTOR to be true in any material
respect, as of the date made.

     Section 7.4. Default Under Loan Documents. A breach of or default by the
BORROWER under the terms, covenants, and conditions set forth in any other LOAN
DOCUMENT.

     Section 7.5. Cross-Default. A breach of or default under the terms,
covenants, or conditions of any agreement, loan, guaranty, or other transaction
of the BORROWER or the GUARANTOR with the LENDER or with any other lender,
including without limitation, the SUBORDINATED DEBT.

     Section 7.6. Judgments. The BORROWER or a GUARANTOR shall suffer final
judgments for the payment of money aggregating in excess of Ten Thousand Dollars
($10,000.00) and shall not discharge the same within a period of thirty (30)
days unless, pending further proceedings, execution has not been commenced or if
commenced has been effectively stayed.

     Section 7.7. Levy By Judgment Creditor. A judgment creditor of the BORROWER
shall obtain possession of any of the COLLATERAL by any means, including but not
limited to levy, distraint, replevin or self-help, and the BORROWER shall not
remedy same within thirty (30) days thereof; or a writ of garnishment is served
on the LENDER relating to any of the accounts of the BORROWER maintained by the
LENDER.

     Section 7.8. Failure To Pay Liabilities. The BORROWER shall fail to pay any
of its debts, in any material amount, due any third PERSON and such failure
shall continue beyond any applicable grace period, unless the applicable
BORROWER holds a good faith defense to payment and has set aside reasonable
reserves for the payment thereof.

     Section 7.9. Involuntary Insolvency Proceedings. The institution of
involuntary INSOLVENCY PROCEEDINGS against the BORROWER and the failure of any
such INSOLVENCY PROCEEDINGS to be dismissed before the earliest to occur of: (a)
the date which is ninety (90) days after the institution of such INSOLVENCY
PROCEEDINGS; (b) the entry of any order for relief in the INSOLVENCY PROCEEDING
or any order adjudicating the BORROWER insolvent; or (c) the impairment (as to
validity, priority or otherwise) of any security interest or lien of the LENDER
in any of the COLLATERAL.

     Section 7.10. Voluntary Insolvency Proceedings. The commencement by the
BORROWER of INSOLVENCY PROCEEDINGS.

     Section 7.11. Insolvency Proceedings Pertaining To Guarantor. The
occurrence of any of the events listed in Sections 7.9 and 7.10 above to either
GUARANTOR.

     Section 7.12. Material Adverse Event. The occurrence of a MATERIAL ADVERSE
EVENT.

                                      -26-



     Section 7.13. Default By Guarantor. The failure by either GUARANTOR to
satisfy any obligation imposed upon either GUARANTOR in the GUARANTY AGREEMENTS
or any other document executed in connection therewith.

     Section 7.14. Attempt To Terminate Guaranties. The receipt by the LENDER of
notice from a GUARANTOR that such GUARANTOR is attempting to terminate or limit
any portion of its obligations under a GUARANTY AGREEMENT.

     Section 7.15. ERISA. If any TERMINATION EVENT shall occur and as of the
date thereof or any subsequent date, the sum of the various liabilities of the
BORROWER and its ERISA AFFILIATES (such liabilities to include, without
limitation, any liability to the Pension Benefit Guaranty Corporation (or any
successor thereto) or to any other party under Sections 4062, 4063, or 4064 of
ERISA or any other provision of LAW and to be calculated after giving effect to
the tax consequences thereof) resulting from or otherwise associated with such
event exceeds Twenty-Five Thousand Dollars ($25,000.00); or the BORROWER or any
of its ERISA AFFILIATES as an employer under any MULTIEMPLOYER PLAN shall have
made a complete or partial withdrawal from such MULTIEMPLOYER PLANS and the plan
sponsors of such MULTIEMPLOYER PLANS shall have notified such withdrawing
employer that such employer has incurred a withdrawal liability requiring a
payment in an amount exceeding Twenty-Five Thousand Dollars ($25,000.00).

     Section 7.16. Indictment Of Borrower Or Guarantor. The indictment of the
BORROWER or of either GUARANTOR for a felony under any federal, state or other
LAW.

     Section 7.17. Injunction. The issuance of any injunction against the
BORROWER which enjoins or restrains the BORROWER from continuing to conduct any
material part of the BORROWER'S business affairs.

                                    ARTICLE 8
                      RIGHTS AND REMEDIES ON THE OCCURRENCE
                             OF AN EVENT OF DEFAULT

     Section 8.1. Lender's Specific Rights And Remedies. In addition to all
other rights and remedies provided by LAW and the LOAN DOCUMENTS, upon the
occurrence of any EVENT OF DEFAULT, the LENDER may: (a) accelerate and call
immediately due and payable all or any part of the OBLIGATIONS; (b) seek
specific performance or injunctive relief to enforce performance of the
undertakings, duties, and agreements provided in the LOAN DOCUMENTS, whether or
not a remedy at law exists or is adequate; and (c) exercise any rights of a
secured creditor under the Uniform Commercial Code, as adopted and amended in
Maryland, including the right to take possession of the COLLATERAL without the
use of judicial process or hearing of any kind and the right to require the
BORROWER to assemble the COLLATERAL at such place as the LENDER may specify.

     Section 8.2. Automatic Acceleration. Upon the occurrence of an EVENT OF
DEFAULT as described in Sections 7.9 or 7.10 of this AGREEMENT, the OBLIGATIONS
shall be automatically accelerated and due and payable without any notice,
demand or action of any type on the part of the LENDER.

     Section 8.3. Sale Of Collateral. In addition to any other remedy provided
herein, upon the occurrence of an EVENT OF DEFAULT, the LENDER, in a
commercially reasonable fashion, may sell at public or private sale or otherwise
realize upon, in Baltimore, Maryland, or elsewhere,

                                      -27-



the whole or, from time to time, any part of all COLLATERAL which is personal
property, or any interest which the BORROWER may have therein. Pending any such
action, the LENDER may collect and liquidate the COLLATERAL. After deducting
from the proceeds of sale or other disposition of such COLLATERAL all expenses,
including all reasonable expenses for legal services, the LENDER shall apply
such proceeds toward the satisfaction of the OBLIGATIONS. Any remainder of the
proceeds after satisfaction in full of the OBLIGATIONS shall be distributed as
required by applicable LAW. Notice of any sale or other disposition (other than
sales or other dispositions of COLLATERAL which is perishable or threatens to
decline speedily in value or is of a type customarily sold on a recognized
market) shall be given to the BORROWER not less than ten (10) calendar days
before the time of any intended public sale or of the time after which any
intended private sale or other disposition of the COLLATERAL is to be made,
which the BORROWER hereby agrees shall be commercially reasonable notice of such
sale or other disposition. The BORROWER shall assemble, or shall cause to be
assembled, at the BORROWER'S own expense, the COLLATERAL at such place or places
as the LENDER shall designate. At any such sale or other disposition, the LENDER
may, to the extent permissible under applicable law, purchase the whole or any
part of the COLLATERAL, free from any right of redemption on the part of the
BORROWER, which right is hereby waived and released to the extent lawfully
permitted. Without limiting the generality of any of the rights and remedies
conferred upon the LENDER under this Section, the LENDER may, to the full extent
permitted by applicable law: (a) enter upon the premises of the BORROWER,
exclude therefrom the BORROWER or any PERSON connected therewith, and take
immediate possession of the COLLATERAL, either personally or by means of a
receiver appointed by a court of competent jurisdiction, using all necessary
force to do so; (b) at the LENDER'S option, use, operate, manage, and control
the COLLATERAL in any lawful manner; (c) collect and receive all income,
revenue, earnings, issues, and profits therefrom; and (d) maintain, alter or
remove the COLLATERAL as the LENDER may determine in the LENDER'S discretion.

     Section 8.4. Remedies Cumulative. The rights and remedies provided in this
AGREEMENT and in the other LOAN DOCUMENTS or otherwise under applicable LAWS
shall be cumulative and the exercise of any particular right or remedy shall not
preclude the exercise of any other rights or remedies in addition to, or as an
alternative of, such right or remedy.

                                    ARTICLE 9
                          GENERAL CONDITIONS AND TERMS

     Section 9.1. Obligations Are Unconditional. The payment and performance of
the OBLIGATIONS shall be the absolute and unconditional duty and obligation of
the BORROWER, and shall be independent of any defense or any rights of set-off,
recoupment or counterclaim which the BORROWER might otherwise have against the
LENDER. The BORROWER shall pay the payments of the principal and interest to be
made upon the OBLIGATIONS, free of any deductions and without abatement,
diminution or set-off other than those herein expressly provided. Until such
time as the OBLIGATIONS have been fully paid and performed, the BORROWER shall
not: (a) suspend or discontinue any payments required by the LOAN DOCUMENTS; and
(b) fail to perform and observe all of the BORROWER'S covenants and agreements
set forth in the LOAN DOCUMENTS.

     Section 9.2. Indemnity. The BORROWER agrees to defend, indemnify and hold
harmless the LENDER and the entities affiliated with the LENDER and all of the
LENDER'S and its affiliated entities' employees, agents, officers and directors,
from and against any losses, penalties, fines, liabilities, settlements,
damages, costs and expenses, suffered in connection with any claim,

                                      -28-



investigation, litigation or other proceeding (whether or not the LENDER or an
affiliated entity is a party thereto) and the prosecution and defense thereof,
arising out of or in any way connected with any LOAN DOCUMENT, including without
limitation reasonable attorneys' and consultant's fees, except to the extent
that any of the foregoing directly result from the gross negligence or willful
misconduct of the party seeking indemnification therefor. Notwithstanding any
termination of this AGREEMENT or payment and performance of the OBLIGATIONS, the
indemnities provided for herein shall continue in full force and effect and
shall protect all of the above-described PERSONS against events arising after
such termination, payment or performance as well as before.

     Section 9.3. Lender Expenses. All LENDER EXPENSES shall be paid by the
BORROWER, whether incurred prior to or after CLOSING, such that the subject
transactions shall at all times be cost free to the LENDER.

     Section 9.4. Authorization To Obtain Financial Information. The BORROWER
hereby irrevocably authorizes its accounting firm to provide the LENDER from
time to time with such information as may be requested by the LENDER, and hereby
authorizes the LENDER to contact directly such accounting firm in order to
obtain such information.

     Section 9.5. Incorporation; Construction Of Inconsistent Provisions. The
terms and conditions of the LOAN DOCUMENTS are incorporated by reference and
made a part hereof, as if fully set forth herein. In the event of any
inconsistency between this AGREEMENT and any other LOAN DOCUMENT, such
inconsistency shall be construed, interpreted, and resolved so as to benefit the
LENDER, independent of whether this AGREEMENT or another LOAN DOCUMENT controls,
and the LENDER'S election of which interpretation or construction is for the
LENDER'S benefit shall govern.

     Section 9.6. Waivers. The LENDER at any time or from time to time may waive
all or any rights under this AGREEMENT or any other LOAN DOCUMENT, but any
waiver or indulgence by the LENDER at any time or from time to time shall not
constitute a future waiver of performance or exact performance by the BORROWER.

     Section 9.7. Continuing Obligation Of Borrower. The terms, conditions, and
covenants set forth herein and in the LOAN DOCUMENTS shall survive CLOSING and
shall constitute a continuing obligation of the BORROWER during the course of
the transactions contemplated herein. The security interests, liens and other
security provided by this AGREEMENT shall remain in effect so long as any
OBLIGATION, whether direct or contingent, is outstanding, unpaid or unsatisfied.
Upon the full and absolute payment (which payment is not subject to any possible
challenge or contest) of all of the OBLIGATIONS, the termination of any
agreement or relationship which may give rise to any future OBLIGATIONS, the
termination of any commitment or agreement of the LENDER to provide additional
credit to the BORROWER and the written request of the BORROWER, the LENDER shall
execute any document reasonably requested by BORROWER to authorize the BORROWER
to file terminations of all UCC-1 financing statements recorded evidencing the
liens granted herein, and terminate all of the LOAN DOCUMENTS, at which time the
BORROWER shall have no further duties or obligations to the LENDER thereunder.

     Section 9.8. Choice Of Law. The laws of the State of Maryland (excluding,
however, conflict of law principles) shall govern and be applied to determine
all issues relating to this AGREEMENT and the rights and obligations of the
parties hereto, including the validity, construction, interpretation, and
enforceability of this AGREEMENT and its various provisions and the consequences
and legal effect of all transactions and events which resulted in the execution
of this

                                      -29-



AGREEMENT or which occurred or were to occur as a direct or indirect result of
this AGREEMENT having been executed.

     Section 9.9. Submission To Jurisdiction; Venue; Actions Against Lender. For
purposes of any action, in law or in equity, which is based directly or
indirectly on this AGREEMENT, any other LOAN DOCUMENT or any matter related to
this AGREEMENT or any other LOAN DOCUMENT, including any action for recognition
or enforcement of any of the LENDER'S rights under the LOAN DOCUMENTS or any
judgment obtained by the LENDER in respect thereof, the BORROWER hereby:

          Section 9.9.1. Jurisdiction. Irrevocably submits to the non-exclusive
general jurisdiction of the courts of the State of Maryland and, if a basis for
federal jurisdiction exists at any time, the courts of the United States of
America for the District of Maryland.

          Section 9.9.2. Venue. Agrees that venue shall be proper in the Circuit
Court for Baltimore City, Maryland, the Circuit Court for any county in the
state of Maryland, as selected by the LENDER, and, if a basis for federal
jurisdiction exists, the courts of the United States of America for the District
of Maryland.

          Section 9.9.3. Waiver Of Objections To Venue. Waives any right to
object to the maintenance of any suit in any of the courts specified in Section
9.9.2 above on the basis of improper venue or convenience of forum. The BORROWER
further agrees that it shall not institute any suit or other action against the
LENDER, in law or in equity, which is based directly or indirectly on this
AGREEMENT, any other LOAN DOCUMENT or any matter related to this AGREEMENT or
any other LOAN DOCUMENT, in any court other than a court specified in Section
9.9.2 above; provided, that in any instance in which there is then pending a
suit instituted by the LENDER against the BORROWER in a court other than a court
specified in Section 9.9.2 above, the BORROWER may file in such suit any
counterclaim which it has against the LENDER but only if such counterclaim is a
compulsory counterclaim and would be barred if not filed as a counterclaim in
such suit. The BORROWER agrees that any suit brought by it against the LENDER
not in accordance with this paragraph should be forthwith dismissed or
transferred to a court specified in Section 9.9.2 above.

     Section 9.10. Notices. Any notice required or permitted by or in connection
with this AGREEMENT shall be in writing and shall be made by facsimile
(confirmed on the date the facsimile is sent by one of the other methods of
giving notice provided for in this Section) or by electronic mail, by hand
delivery, by Federal Express, or other similar overnight delivery service, or by
certified mail, unrestricted delivery, return receipt requested, postage
prepaid, addressed to the LENDER or the BORROWER at the appropriate address set
forth below or to such other address as may be hereafter specified by written
notice by the LENDER or the BORROWER. Notice shall be considered given as of the
date of the facsimile or the hand delivery, as of the date of receipt of
confirmation that the electronic mail was received and opened, one (1) calendar
day after delivery to Federal Express or similar overnight delivery service, or
three (3) calendar days after the date of mailing, independent of the date of
actual delivery or whether delivery is ever in fact made, as the case may be,
provided the giver of notice can establish the fact that notice was given as
provided herein. If notice is tendered pursuant to the provisions of this
Section and is refused by the intended recipient thereof, the notice,
nevertheless, shall be considered to have been given and shall be effective as
of the date herein provided.

     If to the LENDER:

                                      -30-



          KEY BANK AND TRUST
          7F Gwynns Mill Court
          Owings Mills, Maryland 21117
          Attention: Commercial Lending Division
          Fax No.: (410) 363-3569
          E-Mail: pkillpatrick@keyb-t.com with a mandatory copy to
                  shough@keyb-t.com

     If to the BORROWER:

          AVATECH SOLUTIONS SUBSIDIARY, INC.
          11400 Cronridge Drive, Suite A
          Owings Mills, Maryland 21117
          Attn.: Donald R. Walsh, Chief Executive Officer
          Fax No.: (____)
                          --------------
          E-Mail: swalsh@avat.com

     Section 9.11. Participations. The LENDER reserves the right to assign all
or any portion of its interests in any of the OBLIGATIONS or the LOAN DOCUMENTS
or to participate with other lending institutions any of the OBLIGATIONS and the
LOAN DOCUMENTS on such terms and at such times as the LENDER may determine from
time to time, all without any consent thereto or notice thereof to the BORROWER.
The BORROWER hereby grants to each participating lending institution, to the
full extent of the OBLIGATIONS, the right to set off deposit accounts maintained
by the BORROWER with such institution, and the BORROWER agrees to pay the LENDER
EXPENSES of any such participating lending institution which arise or are
incurred as a result of the occurrence of an EVENT OF DEFAULT.

     Section 9.12. Miscellaneous Provisions. The parties agree that: (a) this
AGREEMENT shall be effective as of the date first above written, independent of
the date of execution or delivery hereof; (b) this AGREEMENT shall be binding
upon the parties and their successors and assigns, contains the final and entire
agreement and understanding of the parties, and may neither be amended or
altered except by a writing signed by the parties; (c) time is strictly of the
essence of this AGREEMENT; (d) as used herein, the singular includes the plural
and the plural includes the singular, the use of any gender applies to all
genders; (e) the captions contained herein are for purposes of convenience only
and are not a part of this AGREEMENT; (f) a carbon, photographic, photocopy or
other reproduction of a security agreement and financing statement shall be
sufficient as a financing statement; (g) this AGREEMENT may be delivered by
facsimile, and a facsimile of any party's signature to this AGREEMENT shall be
deemed an original signature for all purposes; and (h) this AGREEMENT may be
executed in several counterparts, each of which shall be an original, but all of
which, when taken together, shall constitute one and the same document.

     Section 9.13. Waiver Of Trial By Jury. Each party to this AGREEMENT agrees
that any suit, action, or proceeding, whether claim or counterclaim, brought or
instituted by either party hereto or any successor or assign of any party on or
with respect to this AGREEMENT or any other LOAN DOCUMENT or which in any way
relates, directly or indirectly, to the OBLIGATIONS or any event, transaction,
or occurrence arising out of or in any way connected with any of the
OBLIGATIONS, or the dealings of the parties with respect thereto, shall be tried
only by a court and not by a jury. EACH PARTY HEREBY EXPRESSLY WAIVES ANY RIGHT
TO A TRIAL BY JURY IN ANY SUCH SUIT, ACTION, OR PROCEEDING.

     IN WITNESS WHEREOF, the LENDER and the BORROWER have duly executed this
AGREEMENT under seal as of the date first above written.

                                      -31-



WITNESS/ATTEST:                         KEY BANK AND TRUST


                                        By:                               (SEAL)
- -----------------------------               ------------------------------
                                            Patrick Killpatrick,
                                            Vice President


                                        AVATECH SOLUTIONS SUBSIDIARY, INC.,
                                        A Delaware Corporation


                                        By:                               (SEAL)
- -----------------------------               ------------------------------
                                            Donald R. Walsh
                                            Chief Executive Officer

                                      -32-

EX-10.11

                                                                   EXHIBIT 10.11

                               GUARANTY AGREEMENT

     THIS GUARANTY AGREEMENT ("GUARANTY") is dated as of September    , 2003, by
                                                                   ---
AVATECH SOLUTIONS, INC., a Delaware corporation ("GUARANTOR") for the benefit of
KEY BANK AND TRUST ("LENDER"), with respect to the obligations of AVATECH
SOLUTIONS SUBSIDIARY, INC., a Delaware corporation ("BORROWER").

                                    RECITALS

     The BORROWER has requested certain credit accommodations from the LENDER.
The LENDER has agreed to provide the requested credit accommodations to the
BORROWER, but only if the GUARANTOR provides to the LENDER the guaranties of
payment and performance set forth in this GUARANTY. The GUARANTOR is willing to
provide this GUARANTY to the LENDER in order to induce the LENDER to provide the
requested credit accommodations to the BORROWER.

     NOW, THEREFORE, in consideration of these premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the GUARANTOR hereby agrees to provide to the LENDER the following
guaranties and indemnifications.

     Section 1. Guaranty. The GUARANTOR guarantees: (a) the payment of any and
all sums now or hereafter due and owing to the LENDER by the BORROWER as a
result of or in connection with any and all existing or future indebtedness,
liability, or obligation of every kind, nature, type, and variety owed by the
BORROWER to the LENDER from time to time, arising out of or related to any
credit accommodation, loan, letter of credit, guaranty, depository relationship,
transaction, event, or occurrence, whether direct or indirect, absolute or
contingent, primary or secondary, joint or several, unconditional or
conditional, known or unknown, liquidated or unliquidated, contractual or
tortious, including all renewals, refinancings, extensions, substitutions,
amendments, and modifications thereof, no matter when or how created, arising,
evidenced, or acquired, and whether or not presently contemplated or
anticipated, including, but not limited to, all amounts of principal, interest,
charges, reimbursements, advancements, escrows, and fees; (b) that all sums now
or hereafter due and owing by the BORROWER to the LENDER shall be paid when and
as due, whether by reason of installment, maturity, acceleration or otherwise,
time being of the essence; and (c) the timely, complete, continuous, and strict
performance and observance by the BORROWER of each of the terms, covenants,
agreements and conditions contained in any and all existing or future documents,
instruments, agreements, and writings of every kind, nature, type, and variety
which evidence, reflect, embody, give rise to or secure any and all existing and
future indebtedness, liabilities, and obligations of any kind of the BORROWER to
the LENDER ("LOAN DOCUMENTS"). As used in this GUARANTY, the term "OBLIGATIONS"
shall refer to the obligations of payment, performance, and indemnification
which the GUARANTOR has undertaken and assumed pursuant to this GUARANTY, both
as described in this Section and in other Sections of this GUARANTY.

     Section 2. Nature Of Guaranty. This GUARANTY: (a) is (i) irrevocable, (ii)
absolute and unconditional, (iii) direct, immediate, and primary, and (iv) one
of payment and not just collection; and (b) makes the GUARANTOR a surety to the
LENDER with respect to the OBLIGATIONS and the equivalent of a co-obligor with
the BORROWER. Without limiting the foregoing, it is specifically understood that
any modification, limitation or discharge of any of the liabilities or
obligations of the BORROWER, any other guarantor or any other obligor under any
of the LOAN DOCUMENTS,



arising out of, or by virtue of, any bankruptcy, arrangement, reorganization or
similar proceeding for relief of debtors under federal or state law initiated by
or against the BORROWER, any other guarantor or any obligor under any of the
LOAN DOCUMENTS shall not modify, limit, lessen, reduce, impair, discharge, or
otherwise affect the liability of the GUARANTOR hereunder in any manner
whatsoever, and this GUARANTY shall remain and continue in full force and
effect.

     Section 3. Accuracy Of Representations. The GUARANTOR guaranties that all
representations and warranties made by the BORROWER or by the GUARANTOR to the
LENDER prior to or after the date of this GUARANTY are and will be true,
correct, accurate, and, to the best of the GUARANTOR'S knowledge, complete and
not knowingly misleading, and the GUARANTOR agrees to indemnify and hold the
LENDER harmless from any loss, cost, or expense which the LENDER may suffer,
sustain or incur as a result of any representation or statement of the BORROWER
or of the GUARANTOR being materially false, incorrect, inaccurate, incomplete,
or knowingly misleading.

     Section 4. Representations Of Guarantor. To induce the LENDER to accept
this GUARANTY for the purposes for which it is given, the GUARANTOR represents
and warrants to the LENDER as follows:

          (a) The GUARANTOR is a corporation duly organized, validly existing
and in good standing under the laws of the state of its incorporation, and each
subsidiary of the GUARANTOR is a corporation duly organized, validly existing
and in good standing under the laws of the state of its incorporation. The
GUARANTOR and its subsidiaries have the lawful power to own their properties and
to engage in the businesses they conduct, and each is duly qualified and in good
standing as a foreign corporation in the jurisdictions wherein the nature of the
business transacted by it or property owned by it makes such qualification
necessary.

          (b) Any financial statements submitted by the GUARANTOR to the LENDER,
including any schedules and notes pertaining thereto, have been prepared in
accordance with generally accepted accounting principles consistently applied,
and fully and fairly present the financial condition of the GUARANTOR and its
subsidiaries at the dates thereof and the results of operations for the periods
covered thereby, and there has been no material adverse change in the
consolidated financial condition or businesses of the GUARANTOR and its
subsidiaries from the dates thereof to the date hereof, other than as disclosed
to the LENDER.

          (c) Neither the GUARANTOR nor any of its subsidiaries is in default
with respect to any of its existing indebtedness, and the making and performance
of this GUARANTY will not (immediately, with the passage of time, the giving of
notices, or both), (i) violate the charter or bylaws of the GUARANTOR, (ii)
violate any laws, (iii) result in a default under any contract, agreement, or
instrument to which the GUARANTOR or any of its subsidiaries is a party or by
which the GUARANTOR or any of its subsidiaries or its property is bound, or (iv)
result in the creation or imposition of any security interest in, or lien or
encumbrance upon, any of the assets of the GUARANTOR or any of its subsidiaries
except in favor of the LENDER.

          (d) The GUARANTOR has the power and authority to enter into and
perform this GUARANTY, and to incur the OBLIGATIONS, and has taken all corporate
action necessary to authorize the execution, delivery, and performance of this
GUARANTY.

          (e) This GUARANTY when delivered will be, valid, binding, and
enforceable in accordance with its terms.

                                       2



          (f) The incurring or satisfaction of the OBLIGATIONS has not left and
will not leave the GUARANTOR insolvent, with an unreasonably small capital, or
unable to pay existing or future debts as they mature.

     Section 5. Reporting Requirements. The GUARANTOR shall submit the following
items to the LENDER:

          (a) Within forty-five (45) calendar days after the end of each fiscal
quarter of the GUARANTOR, the GUARANTOR shall submit a copy of its 10Q filing
made with the Securities and Exchange Commission for such fiscal year.

          (b) Within one hundred twenty (120) calendar days after the end of
each fiscal year of the GUARANTOR, the GUARANTOR shall submit: (i) a
consolidated and consolidating statement of stockholders' equity and a
consolidated and consolidating statement of changes in the financial position of
the GUARANTOR and subsidiaries for such fiscal year; (ii) a consolidated and
consolidating income statement of the GUARANTOR and subsidiaries for such fiscal
year; and (iii) a consolidated and consolidating balance sheet of the GUARANTOR
and subsidiaries as of the end of such fiscal year. All financial statements
shall be in reasonable detail, including all supporting schedules and comments
necessary to verify or confirm entries in the financial statements. All
financial statements shall be prepared in accordance with generally accepted
accounting principles consistently applied and audited by an independent
certified public accountant, reasonably acceptable to the LENDER. The costs of
supplying the financial statements shall be paid by the GUARANTOR.

     Section 6. Lender Need Not Pursue Other Rights. The LENDER shall be under
no obligation to pursue any of the LENDER'S rights and remedies against the
BORROWER or any of the collateral of the BORROWER securing the obligations of
the BORROWER to the LENDER or against any other guarantor or any collateral of
any other guarantor before pursuing the LENDER'S rights and remedies against the
GUARANTOR.

     Section 7. Certain Rights Of Lender. The GUARANTOR hereby assents to any
and all terms and agreements between the LENDER and the BORROWER or between the
LENDER and any other guarantor, and all amendments and modifications thereof,
whether presently existing or hereafter made and whether oral or in writing. The
LENDER may, without compromising, impairing, diminishing, or in any way
releasing the GUARANTOR from the OBLIGATIONS and without notifying or obtaining
the prior approval of the GUARANTOR, at any time or from time to time: (a) waive
or excuse a default by the BORROWER or any other guarantor, or delay in the
exercise by the LENDER of any or all of the LENDER'S rights or remedies with
respect to such default or defaults; (b) grant extensions of time for payment or
performance by the BORROWER or any other guarantor; (c) release, substitute,
exchange, surrender, or add collateral of the BORROWER or of any other
guarantor, or waive, release, or subordinate, in whole or in part, any lien or
security interest held by the LENDER on any real or personal property securing
payment or performance, in whole or in part, of the obligations of the BORROWER
to the LENDER or of any other guarantor; (d) release the BORROWER or any other
guarantor; (e) apply payments made by the BORROWER or by any other guarantor to
any sums owed by the BORROWER to the LENDER, in any order or manner, or to any
specific account or accounts, as the LENDER may elect; and (f) modify, change,
renew, extend, or amend in any respect the LENDER'S agreement with the BORROWER
or any other guarantor, or any document, instrument, or writing embodying or
reflecting the same, including without limitation modifications which increase
the amount of the OBLIGATIONS or extend the maturity of the OBLIGATIONS.

                                       3



     Section 8. Waivers By Guarantor. The GUARANTOR waives: (a) any and all
notices whatsoever with respect to this GUARANTY or with respect to any of the
obligations of the BORROWER to the LENDER, including, but not limited to, notice
of (i) the LENDER'S acceptance hereof or the LENDER'S intention to act, or the
LENDER'S action, in reliance hereon, (ii) the present existence or future
incurring of any of the obligations of the BORROWER to the LENDER or any terms
or amounts thereof or any change therein, (iii) any default by the BORROWER or
any surety, pledgor, grantor of security, guarantor or any person who has
guarantied or secured in whole or in part the obligations of the BORROWER to the
LENDER, and (iv) the obtaining or release of any guaranty or surety agreement,
pledge, assignment, or other security for any of the obligations of the BORROWER
to the LENDER; (b) presentment and demand for payment of any sum due from the
BORROWER or any other guarantor and protest of nonpayment; (c) demand for
performance by the BORROWER or any other guarantor; and (d) any and all defenses
based on suretyship or impairment of collateral.

     Section 9. Unenforceability Of Obligations Of Borrower. This GUARANTY shall
be valid, binding, and enforceable even if the obligations of the BORROWER to
the LENDER which are guarantied hereby are now or hereafter become invalid or
unenforceable for any reason.

     Section 10. No Conditions Precedent. This GUARANTY shall be effective and
enforceable immediately upon its execution. The GUARANTOR acknowledges that no
unsatisfied conditions precedent to the effectiveness and enforceability of this
GUARANTY exist as of the date of its execution and that the effectiveness and
enforceability of this GUARANTY is not in any way conditioned or contingent upon
any event, occurrence, or happening, or upon any condition existing or coming
into existence either before or after the execution of this GUARANTY.

     Section 11. No Duty To Disclose. The LENDER shall have no present or future
duty or obligation to discover or to disclose to the GUARANTOR any information,
financial or otherwise, concerning the BORROWER, any other guarantor, or any
collateral securing either the obligations of the BORROWER to the LENDER or of
any other person who may have guarantied in whole or in part the obligations of
the BORROWER to the LENDER. The GUARANTOR waives any right to claim or assert
any such duty or obligation on the part of the LENDER. The GUARANTOR agrees to
obtain all information which the GUARANTOR considers either appropriate or
relevant to this GUARANTY from sources other than the LENDER and to become and
remain at all times current and continuously apprised of all information
concerning the BORROWER, other guarantors, and any collateral which is material
and relevant to the obligations of the GUARANTOR under this GUARANTY.

     Section 12. Existing Or Future Guaranties. The execution of this GUARANTY
shall not discharge, terminate or in any way impair or adversely affect the
validity or enforceability of any other guaranty given by the GUARANTOR to the
LENDER. The execution and delivery by the GUARANTOR of any future guaranty for
the benefit of the LENDER shall not discharge, terminate, or in any way impair
or adversely affect the validity or enforceability of this GUARANTY. All
guaranties provided by the GUARANTOR to the LENDER are intended to be cumulative
and shall remain in full force and effect unless and until discharged and
terminated in accordance with any expressly stated termination provisions set
forth therein.

     Section 13. Cumulative Liability. The liability of the GUARANTOR under this
GUARANTY shall be cumulative to, and not in lieu of, the GUARANTOR'S liability
under any other LOAN DOCUMENT or in any capacity other than as GUARANTOR
hereunder.

                                       4



     Section 14. Obligations Are Unconditional. The payment and performance of
the OBLIGATIONS shall be the absolute and unconditional duty and obligation of
the GUARANTOR, and shall be independent of any defense or any rights of setoff,
recoupment or counterclaim which the GUARANTOR might otherwise have against the
LENDER, and the GUARANTOR shall pay and perform these OBLIGATIONS, free of any
deductions and without abatement, diminution or setoff. Until such time as the
OBLIGATIONS have been fully paid and performed, the GUARANTOR: (a) shall not
suspend or discontinue any payments provided for herein; (b) shall perform and
observe all of the covenants and agreements contained in this GUARANTY; and (c)
shall not terminate or attempt to terminate this GUARANTY for any reason. No
delay by the LENDER in making demand on the GUARANTOR for satisfaction of the
OBLIGATIONS shall prejudice or in any way impair the LENDER'S ability to enforce
this GUARANTY.

     Section 15. Defenses Against Borrower. The GUARANTOR waives any right to
assert against the LENDER any defense (whether legal or equitable), claim,
counterclaim, or right of setoff or recoupment which the GUARANTOR may now or
hereafter have against the BORROWER or any other guarantor.

     Section 16. Events Authorizing Acceleration Of The Obligations. The
occurrence of any of the following (each an "EVENT OF DEFAULT") shall entitle
the LENDER, without notice or demand, to accelerate and call due the
OBLIGATIONS, even if the LENDER has not accelerated and called due the sums owed
to the LENDER by the BORROWER: (a) the commencement by the BORROWER or the
GUARANTOR of a voluntary case or proceeding under any federal or state
bankruptcy, insolvency or similar law; (b) the commencement of an involuntary
case or proceeding against the BORROWER or the GUARANTOR under any federal or
state bankruptcy, insolvency, or similar law, and either (i) such case or
proceeding is not dismissed within ninety (90) calendar days after commencement,
or (ii) an order for relief is entered in such case; (c) the appointment of a
receiver, assignee, custodian, trustee or similar official under any federal or
state insolvency or creditors' rights law for any property of the BORROWER or
the GUARANTOR; (d) the entry of a judgment against the GUARANTOR or the BORROWER
and the failure to satisfy such judgment within thirty (30) days either by
payment or by the filing of a supersedeas bond; (e) a default by the BORROWER
under any of the LOAN DOCUMENTS or under any other agreement between the
BORROWER and the LENDER, and such default is not cured within any applicable
cure period; (f) a failure of the GUARANTOR to perform any covenant or agreement
contained in this GUARANTY or in any other agreement between the GUARANTOR and
the LENDER; (g) any representation or warranty made in this GUARANTY or in any
report or financial statement furnished in connection with this GUARANTY, shall
prove to have been false or misleading when made; (h) the LENDER in its sole
discretion determines in good faith that a material adverse change has occurred
in the financial condition of the GUARANTOR; (i) the death or the liquidation or
dissolution of the BORROWER or of the GUARANTOR; or (j) a failure of the
GUARANTOR to satisfy any of the obligations of the GUARANTOR to the LENDER with
respect to any loan or extension of credit by the LENDER to the GUARANTOR or
under any other guaranty given by the GUARANTOR to the LENDER.

     Section 17. Expenses Of Collection And Attorneys' Fees. Should this
GUARANTY be referred to an attorney for collection, the GUARANTOR shall pay all
of the holder's reasonable costs, fees and expenses resulting from such
referral, including reasonable attorneys' fees, which the holder may incur, even
though judgment has not been confessed or suit has not been filed.

     Section 18. Confession Of Judgment. Upon the occurrence of an EVENT OF
DEFAULT, the GUARANTOR authorizes any attorney admitted to practice before any
court of record in the

                                       5



United States, or the clerk of such court, to appear on behalf of the GUARANTOR
and to confess judgment in any such court against the GUARANTOR in the full
amount due on this GUARANTY at such time plus an attorneys' fee equal to fifteen
percent (15%) of the amount due. The GUARANTOR waives any right to notice or a
hearing prior to the entry of judgment and to the benefit of any and every
statute, ordinance, or rule of court which may be lawfully waived conferring
upon the GUARANTOR any right or privilege of exemption, appeal, stay of
execution, or supplementary proceedings, or other relief from the enforcement or
immediate enforcement of a judgment or related proceedings on a judgment. The
authority and power which the GUARANTOR has given for any attorney admitted to
practice before any court of record in the United States, or the clerk of such
court, to appear for and confess judgment against the GUARANTOR shall be a
continuous authority which shall not be exhausted or extinguished by any one or
more exercises or imperfect exercises thereof or by any one or more judgments
entered pursuant thereto and may be exercised on one or more occasions and at
such times and from time to time after default and in the same or different
courts or jurisdictions as the LENDER may consider necessary or advisable. In
the event that the LENDER receives, as a result of execution on a judgment
confessed hereunder, attorneys' fees which exceed the actual legal fees incurred
by the LENDER in connection with the enforcement of this GUARANTY, then upon
full and final payment of all other sums due and owing to the LENDER in
accordance with this GUARANTY and the payment to the LENDER of the actual
attorneys' fees incurred by the LENDER, the LENDER shall remit such excess
amount of attorneys' fees to the GUARANTOR.

     Section 19. Interest Rate After Judgment. If judgment is entered against
the GUARANTOR on this GUARANTY, the amount of the judgment entered (which,
unless applicable law specifically provides to the contrary, includes all
principal, prejudgment interest, late charges, prepayment charges if any are
provided for, collection expenses, attorneys' fees, and court costs) shall bear
interest at the highest rate after default authorized by the LOAN DOCUMENTS as
of the date of entry of the judgment to the extent permitted by applicable law.
In the event any statute or rule of court specifies the rate of interest which a
judgment on this GUARANTY may bear or the amount on which such interest rate may
apply and such rate or amount is less than that called for in the preceding
sentence absent a restriction under applicable law, the GUARANTOR: (a) agrees to
pay to the order of the LENDER an amount as will equal the interest computed at
the highest rate after default provided for in the LOAN DOCUMENTS which would be
due on the judgment amount (which, for this purpose, shall be considered to
include all principal, prejudgment interest, late charges, prepayment charges if
any are provided for, collection expense fees, attorneys' fees, and court costs)
less the interest due on the amount of the judgment which bears judgment
interest; and (b) authorizes the confession of judgment pursuant to the
confession of judgment provision of this GUARANTY if the GUARANTOR fails to make
payment thereof.

     Section 20. Enforcement During Bankruptcy. Enforcement of this GUARANTY
shall not be stayed or in any way delayed as a result of the filing of a
petition under the United States Bankruptcy Code, as amended, by or against the
BORROWER. Should the LENDER be required to obtain an order of the United States
Bankruptcy Court to begin enforcement of this GUARANTY after the filing of a
petition under the United States Bankruptcy Code, as amended, by or against the
BORROWER, the GUARANTOR hereby consents to this relief and agrees to file or
cause to be filed all appropriate pleadings to evidence and effectuate such
consent and to enable the LENDER to obtain the relief requested.

     Section 21. Remedies Cumulative. All of the LENDER'S rights and remedies
shall be cumulative and any failure of the LENDER to exercise any right
hereunder shall not be construed

                                       6



as a waiver of the right to exercise the same or any other right at any time,
and from time to time, thereafter.

     Section 22. Continuing Guaranty. This GUARANTY is a continuing guaranty of
all existing and future obligations of the BORROWER to the LENDER and may not be
terminated by the GUARANTOR until the LOAN DOCUMENTS are terminated, in
accordance with the provisions thereof, and the payment (which payment shall not
be subject to challenge or contest) in full of all of the OBLIGATIONS and all of
the BORROWER'S obligations and liabilities to the LENDER under the LOAN
DOCUMENTS.

     Section 23. Reinstatement. If at any time any payment, or portion thereof,
made by, or for the account of, the BORROWER or the GUARANTOR on account of any
of the obligations and liabilities under any of the LOAN DOCUMENTS is set aside
by any court or trustee having jurisdiction as a voidable preference, or
fraudulent conveyance or must otherwise be restored or returned by the LENDER to
the BORROWER or any other person or entity under any insolvency, bankruptcy or
other federal and/or state laws or as a result of any dissolution, liquidation
or reorganization of the BORROWER or any other person or entity, or for any
other reason, the GUARANTOR hereby agrees that this GUARANTY shall continue and
remain in full force and effect or be reinstated, as the case may be, all as
though such payment(s) had not been made.

     Section 24. Rights Of Subrogation, Etc. In the event the GUARANTOR pays any
sum to or for the benefit of the LENDER pursuant to this GUARANTY, the GUARANTOR
may not enforce any right of contribution, indemnification, exoneration,
reimbursement, subrogation or other right or remedy against the BORROWER, any
other guarantor, or any collateral, whether real, personal, or mixed, securing
the obligations of the BORROWER to the LENDER or the obligations of any other
guarantor to the LENDER until such time as the LENDER has been paid in full and
has no further claim against the BORROWER, any other guarantor, or any
collateral. The GUARANTOR waives and releases any claim which the GUARANTOR
hereafter may have against the LENDER if some action of the LENDER, whether
intentional or negligent, impairs, destroys, or in any way adversely affects any
right of contribution, indemnification, exoneration, reimbursement, subrogation,
or the like which the GUARANTOR may have upon the payment of any sum to or for
the benefit of the LENDER pursuant to this GUARANTY.

     Section 25. Subordination Of Certain Indebtedness. If the GUARANTOR
advances any sums to the BORROWER or its successors or assigns or if the
BORROWER or its successors or assigns shall hereafter become indebted to the
GUARANTOR, such sums and indebtedness shall be subordinate in all respects to
the amounts then or thereafter due and owing to the LENDER by the BORROWER.

     Section 26. Setoff. The LENDER shall have the right to setoff and apply
against the OBLIGATIONS any sums which the GUARANTOR at any time has on deposit
with the LENDER whether such deposits are general or special, time or demand,
provisional or final, and the GUARANTOR hereby pledges and grants to the LENDER
a security interest in all such deposits.

     Section 27. Renewals, Etc. This GUARANTY shall apply to all sums now or
hereafter owed by the BORROWER to the LENDER and to all extensions,
modifications, amendments, renewals, substitutions, and refinancings thereof.

     Section 28. Choice Of Law. The laws of the State of Maryland (excluding,
however, conflict of law principles) shall govern and be applied to determine
all issues relating to this

                                       7



GUARANTY and the rights and obligations of the parties hereto, including the
validity, construction, interpretation, and enforceability of this GUARANTY and
its various provisions and the consequences and legal effect of all transactions
and events which resulted in the issuance of this GUARANTY or which occurred or
were to occur as a direct or indirect result of this GUARANTY having been
executed.

     Section 29. Consent To Jurisdiction; Agreement As To Venue. The GUARANTOR
irrevocably consents to the non-exclusive jurisdiction of the courts of the
State of Maryland and of the United States District Court for the District of
Maryland, if a basis for federal jurisdiction exists. The GUARANTOR agrees that
venue shall be proper in any circuit court of the State of Maryland selected by
the LENDER or in the United States District Court for the District of Maryland
if a basis for federal jurisdiction exists and waives any right to object to the
maintenance of a suit in any of the state or federal courts of the State of
Maryland on the basis of improper venue or of inconvenience of forum.

     Section 30. Proofs Of Sums Due On Guaranty. In any action or proceeding
brought by the LENDER to collect the sums owed on this GUARANTY, a certificate
signed by an officer of the LENDER setting forth the unpaid balances of
principal, and any accrued interest, default interest, attorneys' fees, and late
charges owed with respect hereto shall be presumed correct and shall be
admissible in evidence for the purpose of establishing the truth of what it
asserts.

     Section 31. Actions Against Lender. Any action brought by the GUARANTOR
against the LENDER which is based, directly or indirectly, on this GUARANTY or
any matter in or related to this GUARANTY, including but not limited to the
obligations of the BORROWER to the LENDER, the administration, collection, or
enforcement thereof, shall be brought only in the courts of the State of
Maryland. The GUARANTOR may not file a counterclaim against the LENDER in a suit
brought by the LENDER against the GUARANTOR in a state other than the State of
Maryland unless under the rules of procedure of the court in which the LENDER
brought the action or the counterclaim is mandatory, and not merely permissive,
and will be considered waived unless filed as a counterclaim in the action
instituted by the LENDER. The GUARANTOR agrees that any forum other than the
State of Maryland is an inconvenient forum and that a suit brought by the
GUARANTOR against the LENDER in a court of any state other than the State of
Maryland should be forthwith dismissed or transferred to a court located in the
State of Maryland by that court.

     Section 32. Invalidity Of Any Part. If any provision or part of any
provision of this GUARANTY shall for any reason be held invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provisions or the remaining part of any effective
provisions of this GUARANTY, and this GUARANTY shall be construed as if such
invalid, illegal, or unenforceable provision or part thereof had never been
contained herein, but only to the extent of its invalidity, illegality, or
unenforceability.

     Section 33. Amendment Or Waiver. This GUARANTY may be amended only by a
writing duly executed by the GUARANTOR and the LENDER. No waiver by the LENDER
of any of the provisions of this GUARANTY or any of the rights or remedies of
the LENDER with respect hereto shall be considered effective or enforceable
unless in writing.

     Section 34. Notices. Any notice required or permitted by or in connection
with this GUARANTY shall be in writing and shall be made by facsimile (confirmed
on the date the facsimile is sent by one of the other methods of giving notice
provided for in this Section) or by electronic mail, by hand delivery, by
Federal Express, or other similar overnight delivery service, or by certified
mail,

                                       8



unrestricted delivery, return receipt requested, postage prepaid, addressed to
the LENDER or the GUARANTOR at the appropriate address set forth below or to
such other address as may be hereafter specified by written notice by the LENDER
or the GUARANTOR. Notice shall be considered given as of the date of the
facsimile or the hand delivery, as of the date of receipt of confirmation that
the electronic mail was received and opened, one (1) calendar day after delivery
to Federal Express or similar overnight delivery service, or three (3) calendar
days after the date of mailing, independent of the date of actual delivery or
whether delivery is ever in fact made, as the case may be, provided the giver of
notice can establish the fact that notice was given as provided herein. If
notice is tendered pursuant to the provisions of this Section and is refused by
the intended recipient thereof, the notice, nevertheless, shall be considered to
have been given and shall be effective as of the date herein provided.

     If to the LENDER:

          KEY BANK AND TRUST
          7F Gwynns Mill Court
          Owings Mills, Maryland 21117
          Attention: Commercial Lending Division
          Fax No.: (410) 363-3569
          E-Mail: pkillpatrick@keyb-t.com with a mandatory copy to
                  shough@keyb-t.com

     If to the GUARANTOR:

          AVATECH SOLUTIONS, INC.
          11400 Cronridge Drive, Suite A
          Owings Mills, Maryland 21117
          Attn.: Donald R. Walsh, Chief Executive Officer
          Fax No.: (____)
                          -------------
          E-Mail: swalsh@avat.com

     Section 35. Binding Nature. This GUARANTY shall inure to the benefit of and
be enforceable by the LENDER and the LENDER'S successors and assigns and any
other person to whom the LENDER may grant an interest in the obligations of the
BORROWER to the LENDER, and shall be binding upon and enforceable against the
GUARANTOR and the GUARANTOR'S successors, and assigns.

     Section 36. Joint And Several Nature. In the event there exists more than
one GUARANTOR, all liabilities hereunder shall be joint and several. The
liability of the GUARANTOR shall be joint and several with the liability of any
other guarantor not a party to this GUARANTY.

     Section 37. Assignability. This GUARANTY or an interest therein may be
assigned by the LENDER, or by any other holder, at any time or from time to
time, without any prior notice to or consent from the GUARANTOR.

     Section 38. Final Agreement. This GUARANTY contains the final and entire
agreement between the LENDER and the GUARANTOR with respect to the guaranty by
the GUARANTOR of the BORROWER'S obligations to the LENDER. There are no separate
oral or written understandings between the LENDER and the GUARANTOR with respect
thereto.

                                       9



     Section 39. Tense, Gender, Defined Terms, Captions. As used herein, the
plural includes the singular, and the singular includes the plural. The use of
any gender applies to any other gender. If more than one person has executed
this GUARANTY, the term "GUARANTOR" means all such persons collectively or any
one or more of such persons individually or collectively, as the case may be and
as the context may require. All defined terms are completely capitalized
throughout this GUARANTY. All captions are for the purpose of convenience only.

     Section 40. Seal And Effective Date. This GUARANTY is an instrument
executed under seal and is to be considered effective and enforceable as of the
date set forth on the first page hereof, independent of the date of actual
execution.

     Section 41. Waiver Of Trial By Jury. The GUARANTOR and the LENDER, by their
execution and acceptance, respectively, of this GUARANTY, agree that any suit,
action, or proceeding, whether claim or counterclaim, brought or instituted by
either party hereto or any successor or assign of any party on or with respect
to this GUARANTY or which in any way relates, directly or indirectly, to this
GUARANTY or any event, transaction, or occurrence arising out of or in any way
connected with this GUARANTY, or the dealings of the parties with respect
thereto, shall be tried only by a court and not by a jury. EACH PARTY HEREBY
EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH SUIT, ACTION, OR
PROCEEDING.

     IN WITNESS WHEREOF, the GUARANTOR has executed this GUARANTY with the
specific intention of creating a document under seal.

WITNESS/ATTEST:                         GUARANTOR:

                                        AVATECH SOLUTIONS, INC.,
                                        A Delaware Corporation


                                        By:                               (SEAL)
- -----------------------                     ------------------------------
                                            Donald R. Walsh,
                                            Chief Executive Officer

                                       10

EX-10.12

                                                                   EXHIBIT 10.12

                           Dated: September    , 2003
                                            ---

                                     WARRANT

               To Purchase 15,000 Shares of Voting Common Stock of

                             AVATECH SOLUTIONS, INC

     THIS IS TO CERTIFY THAT, for value received, KEY BANK AND TRUST or
registered assigns ("Holder") is entitled to purchase from AVATECH SOLUTIONS,
INC., a Delaware corporation ("Avatech") , at any time or from time to time
after 9:00 a.m., Baltimore, Maryland time, on the date hereof and prior to 5:00
p.m., Baltimore, Maryland time, on the earlier of August 31, 2013 and the
Business Day preceding the date of redemption of this Warrant (the Exercise
Period"), at the place where the Warrant Agency is located, at the Exercise
Price, the number of shares of Common Stock, par value $0.01 per share (the
"Voting Common Stock") of Avatech shown above, all subject to adjustment and
upon the terms and conditions hereinafter provided, and is entitled also to
exercise the other appurtenant rights, powers and privileges hereinafter
described.

     This Warrant is one of one or more warrants (the "Warrants") of the same
form and having the same terms as this Warrant, entitling the holders initially
to purchase up to an aggregate of 15,000 shares of Voting Common Stock. The
Warrants have been issued pursuant to the Loan and Security Agreement dated as
of September    , 2003 (as may be amended from time to time, the "Financing
             ---
Agreement") between Avatech Solutions Subsidiary, Inc., and Key Bank and Trust,
as lender ("Key Bank"). Avatech Solutions Subsidiary is a subsidiary of Avatech
and Avatech has guaranteed all of Avatech Solutions Subsidiary, Inc.'s
obligations to Key Bank.

     Certain terms used in this Warrant are defined in Article VI.

                                    ARTICLE I

                              EXERCISE OF WARRANTS

     SECTION 1.1 METHOD OF EXERCISE.

     To exercise this Warrant in whole on in part, the Holder shall deliver on
any Business Day to Avatech, at the Warrant Agency, (a) this Warrant, (b) a
written notice of such Holder's election to exercise this Warrant, which notice
shall specify the number of shares of Voting Common Stock to be purchased (which
shall be a whole number of shares if for less than all the shares then issuable
hereunder), the denominations of the share certificate or certificates desired
and the name or names in which such certificates are to be registered, and (c)
payment of the Exercise Price with respect to such shares. Such payment may be
made, at the option of the Holder, either (a) by cash, certified

                                        1



or bank cashier's check or wire transfer in an amount equal to the product of
(i) the Exercise Price times (ii) the number of Warrant Shares as to which this
Warrant is being exercised or (b) by receiving from Avatech the number of
Warrant Shares equal to (i) the number of Warrant Shares as to which this
Warrant is being exercised minus (ii) the number of Warrant Shares having a
value, based on the Closing Price on the trading day immediately prior to the
date of such exercise, equal to the product of (x) the Exercise Price times (y)
the number of Warrant Shares as to which this Warrant is being exercised.

     Avatech shall, as promptly as practicable and in any event within seven
days after receipt of such notice and payment, execute and deliver or cause to
be executed and delivered, in accordance with such notice, a certificate or
certificates representing the aggregate number of shares of Voting Common Stock
specified in said notice together with cash in lieu of any fractions of a share
as provided in Section 1.3. The share certificate or certificates so delivered
shall be in such denominations as may be specified in such notice, and shall be
issued in the name of the Holder or such other name or names as shall be
designated in such notice. This Warrant shall be deemed to have been exercised
and such certificate or certificates shall be deemed to have been issued, and
such Holder or any other Person so designated to be named therein shall be
deemed for all purposes to have become a holder of record of shares, as of the
date the aforementioned notice and payment is received by Avatech. If this
Warrant shall have been exercised only in part, Avatech shall, at the time of
delivery of such certificate or certificates, deliver to the Holder a new
Warrant evidencing the rights to purchase the remaining shares of Voting Common
Stock called for by this Warrant, which new Warrant shall in all other respects
be identical with this Warrant, or, at the request of the Holder, appropriate
notation may be made on this Warrant which shall then be returned to the Holder.
Avatech shall pay all expenses, taxes and other charges payable in connection
with the preparation, issuance and delivery of share certificates and new
Warrants, except that, if share certificates or new Warrants shall be registered
in a name or names other than the name of the Holder, funds sufficient to pay
all transfer taxes payable as a result of such transfer shall be paid by the
Holder at the time of delivery of the aforementioned notice of exercise or
promptly upon receipt of a written request of Avatech for payment.

     SECTION 1.2. SHARES TO BE FULLY PAID AND NONASSESSABLE.

     All shares of Voting Common Stock issued upon the exercise of this Warrant
and all shares of Voting Common Stock issued upon the conversion of such voting
Common Stock shall be validly issued, fully paid and nonassessable and, if such
class of Common Stock is then listed on any national securities exchange (as
defined in the Exchange Act) or quoted on NASDAQ, shall be duly listed or quoted
thereon, as the case may be.

     SECTION 1.3. NO FRACTIONAL SHARES REQUIRED TO BE ISSUED.

     Avatech shall not be required to issue fractions of shares of Voting Common
Stock upon exercise of this Warrant. If any fraction of a share would, but for
this Section, be issuable upon final exercise of this Warrant, in lieu of such
fractional share Avatech shall pay to the Holder, in cash, an amount equal to
the same fraction of the Fair Market Value of Avatech per share of outstanding
Common Stock on the Business Day immediately prior to the date of such exercise.

                                        2



     SECTION 1.4. RESERVATION.

     Avatech has duly reserved and will keep available for issuance upon
exercise of the Warrants the total number of Warrant Shares deliverable from
time to time upon exercise of all Warrants from time to time outstanding and the
total number of shares of Voting Common Stock deliverable upon conversion of
such Warrant Shares to Voting Common Stock. Avatech will not change the Voting
Common Stock from par value $0.01 per share to any higher par value which
exceeds the Exercise Price then in effect, and will reduce the par value of the
Voting Common Stock upon any event described in Article IV that provides for an
increase in the number of shares of Voting Common Stock subject to purchase upon
exercise of this Warrant, in inverse proportion to and effective at the same
time as such number of shares is increased, but only to the extent that such
increase in the number of shares, together with all other such increases after
the date hereof, causes the aggregate Exercise Price of all Warrants (without
giving effect to any exercise or redemption thereof) to be greater than $1,000.

                                   ARTICLE II

                                 WARRANT AGENCY;
                 TRANSFER, EXCHANGE AND REPLACEMENT OF WARRANTS

     SECTION 2.1 WARRANT AGENCY.

     As long as any of the Warrants remain outstanding, Avatech shall perform
the obligations of and be the warrant agency with respect to the Warrants (the
"Warrant Agency") with an address at 11400 Cronridge Drive, Suite A, Owings
Mills, Maryland 21117 or at such other address as Avatech shall specify by
notice to all Warrantholders.

     SECTION 2.2. OWNERSHIP OF WARRANT.

     Avatech may deem and treat the person in whose name this Warrant is
registered as the holder and owner hereof notwithstanding any notations of
ownership or writing hereon made by any person other than Avatech) for all
purposes and shall not be affected by any notice to the contrary, until due
presentment of this Warrant for registration of transfer as provided in this
Article II.

     SECTION 2.3. TRANSFER OF WARRANT.

     Avatech agrees to maintain at the Warrant Agency books for the registration
of transfers of the Warrants, and transfer of this Warrant and all rights
hereunder shall be registered, in whole or in part, on such books, upon
surrender of this Warrant at the Warrant Agency, together with a written
assignment of this Warrant duly executed by the Holder or its duly authorized
agent or attorney, with (if the Holder is a natural person) signatures
guaranteed by a bank or trust company or a broker or dealer registered with the
NASD, and funds sufficient to pay any transfer taxes payable upon such transfer.
Upon surrender and, if required, such payment, Avatech shall execute and deliver
a new Warrant or Warrants in the name of the assignee or assignees and in the

                                        3



denominations specified in the instrument of assignment (which shall be whole
numbers of shares only) and shall issue to the assignor a new Warrant evidencing
the portion of this Warrant not so assigned, and this Warrant shall promptly be
canceled.

     SECTION 2.4. DIVISION OF COMBINATION OF WARRANTS.

     This Warrant may be divided or combined with other Warrants upon
presentment hereof and of any Warrant or Warrants with which this Warrant is to
be combined at the Warrant Agency, together with a written notice specifying the
names and denominations (which shall be whole numbers of shares only) in which
the new Warrant or Warrants are to be issued, signed by the holders hereof and
thereof or their respective duly authorized agents or attorneys. Subject to
compliance with Section 2.3 as to any transfer or assignment which may be
involved in the division or combination, Avatech shall execute and deliver a new
Warrant or Warrants in exchange for the Warrant or Warrants to be divided or
combined in accordance with such notice.

     SECTION 2.5. LOSS, THEFT, DESTRUCTION OF WARRANT CERTIFICATES.

     Upon receipt of evidence satisfactory to Avatech of the ownership of and
the loss, theft, destruction or mutilation of any Warrant and, in the case of
any such loss, theft or destruction, upon receipt of indemnity or security
satisfactory to Avatech (it being understood and agreed that if the holder of
such Warrant is Key Bank, then a written agreement of indemnity given by Key
Bank alone shall be satisfactory to Avatech and no further security shall be
required) or, in the case of any such mutilation, upon surrender and
cancellation of such Warrant, Avatech will make and deliver, in lieu of such
lost, stolen, destroyed or mutilated Warrant, a new Warrant of like tenor and
representing the right to purchase the same aggregate number of shares of Voting
Common Stock.

     SECTION 2.6. EXPENSES OF DELIVERY OF WARRANTS.

     Avatech shall pay all expenses, taxes (other than transfer taxes) and other
charges payable in connection with the preparation, issuance and delivery of
Warrants hereunder.

                                   ARTICLE III

                                 CERTAIN RIGHTS

     SECTION 3.1. DETERMINATION OF FAIR MARKET VALUE.

     Each determination of Fair Market Value hereunder shall be made in good
faith by Avatech. Upon each determination of Fair Market Value by Avatech
hereunder, Avatech shall promptly give notice thereof to all Warrantholders,
setting forth in reasonable detail the calculation of such Fair Market Value and
the method and basis of determination thereof (the "Avatech Determination").

                                        4



                                   ARTICLE IV

                             ANTIDILUTION PROVISIONS

     SECTION 4.1. ADJUSTMENT GENERALLY.

     The Exercise Price and the number of shares of Voting Common Stock (or
other securities or property) issuable upon exercise of this Warrant shall be
subject to adjustment from time to time upon the occurrence of certain events as
provided in this Article IV; PROVIDED that notwithstanding anything to the
contrary contained herein, the Exercise Price shall not be less than the par
value of the Voting Common Stock, as such par value is reduced from time to time
in accordance with Section 1.4.

     SECTION 4.2. COMMON STOCK REORGANIZATION.

     If Avatech shall subdivide its outstanding shares of Common Stock (or any
class thereof) into a greater number of shares or consolidate its outstanding
shares of Common Stock (or any class thereof) into a smaller number of shares
(any such event being called a "Common Stock Reorganization"), then (a) the
Exercise Price shall be adjusted, effective immediately after the effective date
of such Common Stock Reorganization, to a price determined by multiplying the
Exercise Price in effect immediately prior to such effective date by a fraction,
the numerator of which shall be the number of shares of Common Stock outstanding
on such effective date before giving effect to such Common Stock Reorganization
and the denominator of which shall be the number of shares of Common Stock
outstanding after giving effect to such Common Stock Reorganization, and (b) the
number of shares of Voting Common Stock subject to purchase upon exercise of
this Warrant shall be adjusted, effective at such time, to a number determined
by multiplying the number of shares of Voting Common Stock subject to purchase
immediately before such Common Stock Reorganization by a fraction, the numerator
of which shall be the number of shares of Common Stock outstanding after giving
effect to such Common Stock Reorganization and the denominator of which shall be
the number of shares of Common Stock outstanding immediately before such Common
Stock Reorganization.

     SECTION 4.3. COMMON STOCK DISTRIBUTION.

     (a) If Avatech shall issue, sell or otherwise distribute any shares of
Common Stock, other than pursuant to a Common Stock Reorganization (which is
governed by Section 4.2 hereof) (any such event, including any event described
in paragraphs (b) and (c) below, being herein called a "Common Stock
Distribution"), for a consideration per share less than the Exercise Price then
in effect or less than the Fair Market Value of Avatech per share of outstanding
Common Stock on a Fully Diluted Basis on the date of such Common Stock
Distribution (before giving effect to such Common Stock Distribution), then,
effective upon such Common Stock Distribution, the Exercise Price shall be
reduced, if such consideration per share shall be less than the Exercise Price
then in effect but not less than such Fair Market Value per share, to the lower
of the prices (calculated to the nearest one-thousandth of one cent) determined
as provided in clauses (i) and (ii) below or, if

                                        5



such consideration per share shall be less than such Fair Market Value per
share, to the lowest of the prices (calculated to the nearest one-thousandth of
one cent) determined as provided in clauses (i) and (ii) below:

          (i) by dividing (A) an amount equal to the sum of (1) the number of
     shares of Common Stock outstanding immediately prior to such Common Stock
     Distribution multiplied by the then existing Exercise Price, plus (2) the
     consideration, if any, received by Avatech upon such Common Stock
     Distribution by (B) the total number of shares of Common Stock outstanding
     immediately after such Common Stock Distribution; and

          (ii) by multiplying the Exercise Price in effect immediately prior to
     such Common Stock Distribution by a fraction, the numerator of which shall
     be the sum of (A) the number of shares of Common Stock outstanding
     immediately prior to such Common Stock Distribution multiplied by such Fair
     Market Value per share on the date of such Common Stock Distribution, plus
     (B) the consideration, if any, received by Avatech upon such Common Stock
     Distribution, and the denominator of which shall be the product of (1) the
     total number of shares of Common Stock outstanding immediately after such
     Common Stock Distribution multiplied by (2) such Fair Market Value per
     share on the date of such Common Stock Distribution.

     If any Common Stock Distribution shall require an adjustment to the
Exercise Price pursuant to the foregoing provisions of this paragraph (a),
including by operation of paragraph (b) or (c) below, then, effective at the
time such adjustment is made, the number of shares of Voting Common Stock
subject to purchase upon exercise of this Warrant shall be increased to a number
determined by multiplying the number of shares of Voting Common Stock subject to
purchase immediately before such Common Stock Distribution by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately after giving effect to such Common Stock Distribution and the
denominator of which shall be the sum of the number of shares outstanding
immediately before giving effect to such Common Stock Distribution (both
calculated on a Fully Diluted Basis) plus the number of shares of Common Stock
which the aggregate consideration received by Avatech with respect to such
Common Stock Distribution would purchase at the Fair Market Value of Avatech per
share of outstanding Common Stock on a Fully Diluted Basis on the date of such
Common Stock Distribution (before giving effect to such Common Stock
Distribution). In computing adjustments under this paragraph, fractional
interests in Common Stock shall be taken into account to the nearest
one-thousandth of a share.

     The provisions of this paragraph (a), including by operation of paragraph
(b) or (c) below, shall not operate to increase the Exercise Price or reduce the
number of shares of Voting Common Stock subject to purchase upon exercise of
this Warrant.

     (b) If Avatech shall issue, sell, distribute or otherwise grant in any
manner (including by assumption) any rights to subscribe for or to purchase, or
any warrants or options for the purchase of Common Stock or any stock or
securities convertible into or exchangeable for Common Stock (such rights,
warrants or options being herein called "Options" and such convertible or
exchangeable stock or securities being herein called "Convertible Securities"),
whether or not such Options or the

                                        6



rights to convert or exchange any such Convertible Securities in respect of such
Options are immediately exercisable, and the price per share for which Common
Stock is issuable upon the exercise of such Options or upon conversion or
exchange of such Convertible Securities in respect of such Options (determined
by dividing (i) the aggregate amount, if any, received or receivable by Avatech
as consideration for the granting of such Options, plus the minimum aggregate
amount of additional consideration payable to Avatech upon the exercise of all
such Options, plus, in the case of Options to acquire Convertible Securities,
the minimum aggregate amount of additional consideration, if any, payable upon
the issuance or sale of such Convertible Securities and upon the conversion or
exchange thereof, by (ii) the total maximum number of shares of Common Stock
issuable upon the exercise such Options or upon the conversion or exchange of
all such Convertible Securities issuable upon the exercise of such Options)
shall be less than the Exercise Price then in effect or less than the Fair
Market Value of Avatech per share of outstanding Common Stock on a Fully Diluted
Basis on the date of granting such Options (before giving effect to such grant),
then, for purposes of paragraph (a) above, the total maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon conversion or
exchange of the total maximum amount of such Convertible Securities issuable
upon the exercise of such Options shall be deemed to have been issued as of the
date of granting of such Options and thereafter shall be deemed to be
outstanding and Avatech shall be deemed to have received as consideration such
price per share, determined as provided above, therefor. Except as otherwise
provided in paragraph (d) below, no additional adjustment of the Exercise Price
shall be made upon the actual exercise of such Options or upon conversion or
exchange of such Convertible Securities.

     (c) If Avatech shall issue, sell or otherwise distribute (including by
assumption) any Convertible Securities, whether or not the rights to exchange or
convert thereunder are immediately exercisable, and the price per share for
which Common Stock is issuable upon such conversion or exchange (determined by
dividing (i) the aggregate amount received or receivable by Avatech as
consideration for the issuance, sale or distribution of such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to Avatech upon the conversion or exchange thereof, by (ii) the
total maximum number of shares of Common Stock issuable upon the conversion or
exchange of all such Convertible Securities) shall be less than the Exercise
Price then in effect or less than the Fair Market Value of Avatech per share of
outstanding Common Stock on a Fully Diluted Basis on the date of such issuance,
sale or distribution (before giving effect to such issuance, sale or
distribution) , then, for purposes of paragraph (a) above, the total maximum
number of shares of Common Stock issuable upon conversion or exchange of all
such Convertible Securities shall be deemed to have been issued as of the date
of the issuance, sale or distribution of such Convertible Securities and
thereafter shall be deemed to be outstanding and Avatech shall be deemed to have
received as consideration such price per share, determined as provided above,
therefor. Except as otherwise provided in paragraph (d) below, no additional
adjustment of the Exercise Price shall be made upon the actual conversion or
exchange of such Convertible Securities.

     (d) If (i) the purchase price provided for in any Option referred to in
paragraph (b) above or the additional consideration, if any, payable upon the
conversion or exchange of any Convertible Securities referred to in paragraph
(b) or (c) above or the rate at which any Convertible Securities referred to in
paragraph (b) or (c) above are convertible into or exchangeable for Common Stock
shall change at any time (other than under or by reason of provisions designed
to protect against

                                        7



dilution upon an event which results in a related adjustment pursuant to this
Article IV), or (ii) any of such Options or Convertible Securities shall have
terminated, lapsed or expired, the Exercise Price then in effect shall forthwith
be readjusted (effective only with respect to any exercise of this Warrant after
such readjustment) to the Exercise Price which would then be in effect had the
adjustment made upon the issuance, sale, distribution or grant of such Options
or Convertible Securities been made based upon such changed purchase price,
additional consideration or conversion rate, as the case may be (in the case of
any event referred to in clause (i) of this paragraph (d)) or had such
adjustment not been made (in the case of any event referred to in clause (ii) of
this paragraph (d)).

     (e) If Avatech shall pay a dividend or make any other distribution upon any
capital stock of Avatech payable in Common Stock, Options or Convertible
Securities, then, for purposes of paragraph (a) above, such Common Stock,
Options or Convertible Securities shall be deemed to have been issued or sold
without consideration.

     (f) If any shares of Common Stock, Options or Convertible Securities shall
be issued, sold or distributed for cash, the consideration received therefor
shall be deemed to be the amount received by Avatech therefor, after deduction
therefrom of any expenses incurred in connection therewith. If any shares of
Common Stock, Options or Convertible Securities shall be issued sold or
distributed for a consideration other than cash, the amount of the consideration
other than cash received by Avatech shall be deemed to be the Fair Market Value
of such consideration, after deduction of any expenses incurred in connection
therewith. If any shares of Common Stock, Options or Convertible Securities
shall be issued in connection with any merger in which Avatech is the surviving
corporation, the amount of consideration therefor shall be deemed to be the Fair
Market Value of such portion of the assets and business of the non-surviving
corporation as shall be attributable to such Common Stock, Options or
Convertible Securities, as the case may be. If any Options shall be issued in
connection with the issuance and sale of other securities of Avatech, together
comprising one integral transaction in which no specific consideration is
allocated to such Options by the parties thereto, such Options shall be deemed
to have been issued without consideration.

     SECTION 4.4. SPECIAL DIVIDENDS.

     If Avatech shall issue or distribute to any holder or holders of shares of
Common Stock evidences of indebtedness, any other securities of Avatech or any
cash, property or other assets (excluding a Common Stock Reorganization or a
Common Stock Distribution), whether or not accompanied by a purchase, redemption
or other acquisition of shares of Common Stock (any such nonexcluded event being
herein called a "Special Dividend"), (a) the Exercise Price shall be decreased,
effective immediately after the effective date of such Special Dividend, to a
price determined by multiplying the Exercise Price then in effect by a fraction,
the numerator of which shall be the Fair Market Value of Avatech per share of
outstanding Common Stock as of such effective date less any cash and the then
Fair Market Value of any evidences of indebtedness, securities or property or
other assets issued or distributed in such Special Dividend with respect to one
share of Common Stock, and the denominator of which shall be such Fair Market
Value per share and (b) the number of shares of Voting Common Stock subject to
purchase upon exercise of

                                        8



this Warrant shall be increased to a number determined by multiplying the number
of shares of Voting Common Stock subject to purchase immediately before such
Special Dividend by a fraction, the numerator of which shall be the Exercise
Price in effect immediately before such Special Dividend and the denominator of
which shall be the Exercise Price in effect immediately after such Special
Dividend. A reclassification of Common Stock (other than a change in par value,
or from par value to no par value or from no par value to par value) into shares
of Common Stock and shares of any other class of stock shall be deemed a
distribution by Avatech to the holders of such Common stock of such shares of
such other class of stock and, if the outstanding shares of Common Stock shall
be changed into a larger or smaller number of shares of Common Stock as part of
such reclassification, a Common Stock Reorganization.

     SECTION 4.5. CAPITAL REORGANIZATIONS.

     If there shall be (i) any consolidation or merger to which Avatech is a
party, other than a consolidation or a merger of which Avatech is the continuing
corporation and which does not result in any reclassification of, or change
(other than a Common Stock Reorganization) in, outstanding shares of Common
Stock, or (ii) any sale or conveyance of the property of Avatech as an entirety
or substantially as an entirety, or (iii) any recapitalization of Avatech (any
such event being called a "Capital Reorganization"), then, effective upon the
effective date of such Capital Reorganization, the Holder shall no longer have
the right to purchase Voting Common Stock, but shall have instead the right to
purchase, upon exercise of this Warrant, the kind and amount of shares of stock
and other securities and property (including cash) which the Holder would have
owned or have been entitled to receive pursuant to such Capital Reorganization
if this Warrant had been exercised immediately prior to the effective date of
such Capital Reorganization. As a condition to effecting any Capital
Reorganization, Avatech or the successor or surviving corporation, as the case
may be, shall (a) execute and deliver to each Warrantholder and to the Warrant
Agency an agreement as to the Warrantholders' rights in accordance with this
Section 4.5, providing, to the extent of any right to purchase equity securities
hereunder, for subsequent adjustments as nearly equivalent as may be practicable
to the adjustments provided for in this Article IV and (b) provide each
Regulated Holder with an opinion of counsel reasonably satisfactory to such
Regulated Holder and such other assurances as any Regulated Holder may
reasonably request to the effect that the ownership and exercise by any
Regulated Holder of this Warrant after giving effect to such Capital
Reorganization shall not be prohibited by the BHC Act or the regulations
thereunder. The provisions of this Section 4.5 shall similarly apply to
successive Capital Reorganizations.

     SECTION 4.6. ADJUSTMENT RULES.

     Any adjustments pursuant to this Article IV shall be made successively
whenever an event referred to herein shall occur, except that, notwithstanding
any other provision of this Article IV, no adjustment shall be made to the
number of shares of Voting Common Stock to be delivered to each Holder (or to
the Exercise Price) if such adjustment represents less than 1% of the number of
shares previously required to be so delivered, but any lesser adjustment shall
be carried forward and shall be made at the time and together with the next
subsequent adjustment which together with any adjustments so carried forward
shall amounts to 1% or more of the number of shares to be so delivered. No
adjustment shall be made pursuant to this Article IV in respect of (x) the
issuance of

                                        9



stock options or Common Stock to employees of Avatech pursuant to employee stock
ownership plans or otherwise, or the exercise of any such options, PROVIDED that
the aggregate amount of all such Common Stock and Common Stock for which such
options are exercisable does not exceed 15% of the Common Stock on a Fully
Diluted Basis on the date hereof and (y) the issuance from time to time of
shares of Common Stock upon the exercise of any of the Warrants. If Avatech
shall take a record of the holders of its Common Stock for any purpose referred
to in this Article IV, then (i) such record date shall be deemed to be the date
of the issuance, sale, distribution or grant in question and (ii) if Avatech
shall legally abandon such action prior to effecting such action, no adjustment
shall be made pursuant to this Article IV in respect of such action.

     SECTION 4.7. PROCEEDINGS PRIOR TO ANY ACTION REQUIRING ADJUSTMENT

     As a condition precedent to the taking of any action which would require an
adjustment pursuant to this Article IV, Avatech shall take any action which may
be necessary, including obtaining regulatory approvals or exemptions, in order
that (a) Avatech may thereafter validly and legally issue as fully paid and
nonassessable all shares of Voting Common Stock which the holders of Warrants
are entitled to receive upon exercise thereof and (b) the ownership and exercise
of any Warrant by any Regulated Holder shall not be prohibited by any Regulatory
Requirement.

     SECTION 4.8. NOTICE OF ADJUSTMENT.

     Not less than 10 nor more than 30 days prior to the record date or
effective date, as the case may be, of any action which requires or might
require an adjustment or readjustment pursuant to this Article IV, Avatech shall
give notice to each Warrantholder of such event, describing such event in
reasonable detail and specifying the record date or effective date, as the case
may be, and, if determinable, the required adjustment and the computation
thereof. If the required adjustment is not determinable at the time of such
notice, Avatech shall give notice to each Warrantholder of such adjustment and
computation promptly after such adjustment becomes determinable.

                                    ARTICLE V

                PURCHASE, REDEMPTION AND CANCELLATION OF WARRANTS

     SECTION 5.1. PURCHASE OF WARRANTS BY AVATECH.

     Avatech shall have the right or obligation to purchase or otherwise acquire
Warrants at such times, in such manner and for such consideration as set forth
below.

     SECTION 5.2. MANDATORY REDEMPTION OF WARRANTS.

     The Holder may at any time after the earlier to occur of (a) the repayment
in full of all principal of and premium and interest on the Note (as defined in
the Financing Agreement) and the termination of the Commitment to make advances
under the Financing Agreement, (b) the date on which Avatech shall have
delivered a Refinancing Notice to the Holder (any such redemption

                                       10



pursuant to this clause (b) (a "Refinancing Redemption"), or (c) the third (3rd)
anniversary of the date hereof, demand a determination of the Redemption Price
(a "Determination Notice") for purposes of this Section 5.2. Within 30 days (or,
in the case of a Refinancing Redemption, 5 days) after the receipt of any
Determination Notice from the Holder, Avatech shall give to the Holder notice of
the Redemption Price, including a reasonably detailed description of the method
of calculation thereof, determined as of the day preceding such notice of the
Redemption Price. At any time within 30 days (or, in the case of a Refinancing
Redemption, 15 days) after receipt of notice of the Redemption Price the Holder
may demand redemption of this Warrant, in whole or in part, at the Redemption
Price by notice to Avatech, payable on the third Business Day after receipt of
notice of such demand (or, in the case of a Refinancing Redemption, on the
closing date of such refinancing) (any such date, the "Redemption Due Date") in
immediately available funds to the Holder upon surrender of this Warrant at the
Warrant Agency or, if requested by the Holder, without surrender of this
Warrant, by wire transfer to any account in Baltimore, Maryland, specified by
written notice to Avatech. Thereupon, the right to purchase shares of Voting
Common Stock theretofore represented by this Warrant as to which the Holder has
demanded (and Avatech may effect) redemption shall terminate, and this Warrant
shall represent the right of the Holder to receive the full Redemption Price
from Avatech in accordance with this Section. The Holder's right to demand
redemption of this Warrant pursuant to this Section 5.2 shall be referred to
hereinafter as the Holder's "Mandatory Redemption Right".

     SECTION 5.3. OPTIONAL REDEMPTION.

     At any time and from time to time after the later to occur of (a) the
fourth (4th) anniversary of the Closing Date (as defined in the Financing
Agreement) and (b) the date on which all amounts outstanding under the Financing
Agreement have been paid in full and the Commitments thereunder have been
terminated, Avatech shall have the right to redeem up to one-hundred percent
(100%) of the outstanding Warrants at the Optional Redemption Price, determined
as of the day preceding the notice of redemption. Irrevocable notice of such
right of redemption shall be given by Avatech to all Warrantholders not more
than 30 days nor less than 15 days prior to the date scheduled for redemption,
stating the date and price, including a reasonably detailed description of the
method of calculation thereof, of redemption. Warrantholders may exercise
Warrants until 5:00 p.m., Baltimore, Maryland time, on the Business Day
preceding the date of redemption set forth in a valid notice of redemption, at
which time the right to purchase shares of Voting Common Stock theretofore
represented by this Warrant shall terminate, and this Warrant shall represent
the right of the Holder to receive the Optional Redemption Price from Avatech in
immediately available funds upon surrender of this Warrant at the Warrant
Agency.

     SECTION 5.4. CANCELLATION OF WARRANTS.

     All Warrants purchased, redeemed or otherwise acquired by Avatech shall
thereupon be canceled and retired. The Warrant Agency shall cancel any Warrant
surrendered for exercise or registration of' transfer or exchange and deliver
such canceled Warrants to Avatech.

                                       11



     SECTION 5.5. NOTICE OF REFINANCING.

     Avatech shall give notice to each of the Warrantholders of any intent by
Avatech Subsidiary Solutions, Inc. to refinance in their entirety the Note (as
defined in the Financing Agreement) not less than 60 days prior to the proposed
closing date of such refinancing, setting forth such proposed closing date and
notifying each Warrantholder of its rights under Section 5.2 (such notice, the
"Refinancing Notice").

                                   ARTICLE VI

                                   DEFINITIONS

     The following terms, as used in this Warrant, have the following meanings:

     "Avatech" has the meaning set forth in the first paragraph of this Warrant.

     "Avatech Determination" has the meaning set forth in Section 3.2.

     "BHC Act" means the Bank Holding Company Act of 1956, as amended.

     "Business Day" means any day excluding Saturday, Sunday and any day on
which banking institutions located in Baltimore, Maryland or New York City are
authorized by law or other governmental action to be closed, unless there shall
have been an offering of Common Stock registered under the Securities Act, in
which case "Business Day" means (a) if Common Stock is listed or admitted to
trading on a national securities exchange, a day on which the principal national
securities exchange on which the Common Stock is listed or admitted to trading
is open for business or (b) if Common Stock is not so listed or admitted to
trading, a day on which the New York Stock Exchange is open for business.

     "Capital Reorganization" has the meaning set forth in Section 4.5.

     "Closing Price" on any day means (a) if Common Stock is listed or admitted
for trading on a national securities exchange, the reported last sales price
regular way or, if no such reported sale occurs on such day, the average of the
closing bid and asked prices regular way on such day, in each case on the
principal national securities exchange on which Common Stock is listed or
admitted to trading, or (b) if Common Stock is not listed or admitted to trading
on any national securities exchange, the average of the closing bid and asked
prices in the over-the-counter market on such day as reported by NASDAQ or any
comparable system or, if not so reported, as reported by any New York Stock
Exchange member firm selected by Avatech for such purpose.

     "Common Stock" means the Voting Common Stock.

     "Common Stock Distribution" has the meaning set forth in Section 4.3(a).

     "Common Stock Reorganization" has the meaning set forth in Section 4.2.

                                       12



     "Consolidated Total Debt" means all liabilities of Avatech and its wholly
owned subsidiaries determined on a consolidated basis and in accordance with
generally accepted accounting principles.

     "Convertible Securities" has the meaning set forth in Section 4.3(b).

     "Determination Notice" has the meaning set forth in Section 5.2.

     "Exchange Act" means the Securities Exchange Act of 1934, as amended, and
any successor Federal statute, and the rules and regulations of the Securities
and Exchange Commission (or its successor) thereunder, all as the small shall be
in effect at the time.

     "Exercise Period" has the meaning specified in the first paragraph.

     "Exercise Price" means $.01 per share of the Voting Common Stock, subject
to adjustment pursuant to Article IV.

     "Financing Agreement" has the meaning set forth in the second paragraph of
this Warrant.

     "Fair Market Value" as at any date of determination means the fair market
value of the business or property or services in question as of such date, as
determined in good faith by the Board of Directors of Avatech. The Fair Market
Value of Avatech as at any date of determination shall be the greatest of (i)
the Fair Market Value at such date of Avatech and its Subsidiaries as a going
concern, (ii) the liquidation value at such date of Avatech and its
Subsidiaries, and (iii) the consolidated net worth of Avatech and its
Subsidiaries as shown on its latest available consolidated balance sheet.
Notwithstanding the foregoing, if, at any date of determination of the Fair
Market Value of Avatech, the Common Stock shall then be publicly traded, the
Fair Market Value of Avatech on such date shall be the greater of (a) the amount
determined in accordance with the immediately preceding sentence and (b) the
Market Price on such date multiplied by the number of shares of Common Stock
then outstanding. Determination of the Fair Market Value of Avatech per share of
Common Stock shall be made without giving effect to any discount for (i)
minority interest or (ii) any lack of liquidity of the Common Stock due to the
fact that there may be no public market for the Common Stock.

     "Fully Diluted Basis" means, with respect to any determination or
calculation, that such determination or calculation is performed on a fully
diluted basis determined in accordance with generally accepted accounting
principles as in effect from time to time.

     "Holder" has the meaning set forth in the first paragraph of this Warrant.

     "Mandatory Redemption Right" has the meaning set forth in Section 5.2.

     "Market Price" as at any date of determination means the average of the
daily Closing Prices of a share of Common Stock for the shorter of (i) the 20
consecutive Business Days ending on the most recent Business Day prior to the
Time of Determination and (ii) the period commencing on the date next succeeding
the first public announcement of the issuance, sale, distribution, grant or

                                       13



exercise in question through such most recent Business Day prior to the Time of
Determination. "Time of Determination" means the time and date of the earliest
of (x) the determination of the stockholders entitled to receive such issuance.
sale, distribution or grant, (y) the determination of the Holders or Avatech to
exercise their respective rights set forth in Sections 5.2 or 5.3 hereof and (z)
the commencement of "ex-dividend" trading in respect thereof.

     "NASD" means The National Association of Securities Dealers, Inc.

     "NASDAQ" means The National Association of Securities Dealers, Inc
Automated Quotation System.

     "Optional Redemption Price" means, as of any date of determination, a price
for each share of Voting Common Stock issuable upon exercise of the Warrants
equal to 110% of the Redemption Price, determined as of such date.

     "Options" has the meaning set forth in Section 4.3(b).

     "Person" means any natural person, corporation, limited partnership,
general partnership, joint stock company, joint venture, association, company,
trust, bank, trust company, land trust, business trust or other organization,
whether or not a legal entity, and any government agency or political
subdivision thereof.

     "Redemption Due Date" has the meaning set forth in Section 5.2 hereof.

     "Redemption Price" means, as of any date of determination, a price for each
share of voting Common Stock issuable upon exercise of the Warrants equal to the
excess of (a) (i) the Fair Market Value of Avatech plus the aggregate Exercise
Price of all Warrants either being redeemed or then outstanding and not being
redeemed divided by (ii) the number of shares of Common Stock outstanding on a
Fully Diluted Basis over (b) the Exercise Price then in effect.

     "Refinancing Notice" has the meaning set forth in Section 5.5 hereof.

     "Regulated Holder" means the Holder or a holder of Warrant Shares, if such
Holder or holder of Warrant Shares is effectively restricted or prohibited from
holding, exercising or transferring, in whole or in part, this Warrant or
Warrant Shares by reason of any Regulatory Requirement, including without
limitation if such Holder or holder of Warrant Shares is a bank holding company
within the meaning of the BHC Act or a subsidiary thereof subject to Regulation
y under the BHC Act.

     "Regulatory Requirement" means any existing or future Federal or state
statute, rule, regulation, guideline, order, request or directive (whether or
not having the force of law and whether or not failure to comply therewith would
be unlawful) , including without limitation, the BHC Act and the regulations
thereunder.

                                       14



     "Securities Act" means the Securities Act of 1933, as amended, and rules
and regulations of the Securities and Exchange Commission thereunder.

     "Special Dividend" has the meaning set forth in Section 4.4.

     "Subsidiary" of any Person means any corporation, partnership, joint
venture, association, limited liability company or other business entity of
which more than 50% of the total voting power of shares of stock or other
interests therein entitled to vote in the election of members of the board of
directors, partnership committee, board of managers or trustees or other
managerial body thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of such
Person or a combination thereof. Unless otherwise specified, "Subsidiary" means
a Subsidiary of Avatech and "Subsidiaries" means all Subsidiaries of Avatech.

     "Voting Common Stock" has the meaning set forth in the first paragraph of
this Warrant, subject to change pursuant to Article IV.

     "Warrant Agency" has the meaning set forth in Section 2.1.

     "Warrant Shares" means the shares of Voting Common Stock issuable upon the
exercise of the Warrants.

     "Warrantholder" means a holder of a Warrant.

     "Warrants" has the meaning set forth in the second paragraph of this
Warrant.

     All references herein to "days" shall mean calendar days unless otherwise
specified.

                                   ARTICLE VII

                                  MISCELLANEOUS

     SECTION 7.1. NOTICES.

     Notices and other communications provided for herein shall be in writing
and may be given by mail, courier, confirmed telex, facsimile transmission or
confirmed electronic mail (i.e., confirmed that it has been received and opened)
and shall, unless otherwise expressly required, be deemed given when received
or, if mailed, four Business Days after being deposited in the United States
mail with postage prepaid and properly addressed. In the case of the Holder,
such notices and communications shall be addressed to its address as shown on
the books maintained by the Warrant Agency, unless the Holder shall notify the
Warrant Agency that notices and communications should be sent to a different
address (or telex or facsimile number), in which case such notices and
communications shall be sent to the address (or telex or facsimile number)
specified by the Holder.

                                       15



     SECTION 7.2. WAIVERS; AMENDMENTS.

     No failure or delay of the Holder in exercising any power or right
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right or power, or any" abandonment or discontinuance of
steps to enforce such a right or power, preclude any other or further exercise
thereof or the exercise of any other right or power. No notice or demand on
Avatech in any case shall entitle Avatech to any other or future notice or
demand in similar or other circumstances. The rights and remedies of the Holder
are cumulative and not exclusive of any rights or remedies which it would
otherwise have. The provisions of this Warrant may be amended, modified, or
waived with (and only with) the written consent of Avatech and the
Warrantholders. The provisions of the Financing Agreement may be amended,
modified or waived only in accordance with the respective provisions thereof.

     Any such amendment, modifications or waiver effected pursuant to and in
accordance with the provisions of this Section or the applicable provisions of
the Financing Agreement shall be binding upon the holders of all Warrants and
Warrant Shares, upon each future holder thereof and upon Avatech. In the event
of any such amendment, modifications or waiver Avatech shall give prompt notice
thereof to all holders of Warrants and Warrant shares and, if appropriate,
notation thereof shall be made on all Warrants thereafter surrendered for
registration of transfer or exchange.

     SECTION 7.3. GOVERNING LAW.

     THIS WARRANT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS
OF THE STATE OF MARYLAND.

     SECTION 7.4. TRANSFER; COVENANTS TO BIND SUCCESSOR AND ASSIGNS.

     All covenants, stipulations, promises and agreements in this Warrant
contained by or on behalf of Avatech or the Holder shall bind its successors and
assigns, whether so expressed or not. This Warrant shall be transferable and
assignable by the Holder hereof in whole or from time to time in part of any
other Person and the provisions of this Warrant shall be binding upon and inure
to the benefit of the Holder hereof and its successors and assigns.

     SECTION 7.5. SEVERABILITY.

     In case anyone or more of the provisions contained in this Warrant shall be
invalid, illegal or unenforceable in any" respect, the validity, legality and
enforceability of the remaining provisions contained herein shall not in any way
be affected or impaired thereby. The parties shall endeavor in good faith
negotiations to replace the invalid, illegal or unenforceable provisions with
valid provisions the economic effect of which comes as close as possible to that
of the invalid, illegal or unenforceable provisions.

                                       16



     SECTION 7.6. SECTION HEADINGS.

     The section headings used herein are for convenience of reference only, are
not part of this Warrant and are not to affect the construction of or be taken
into consideration in interpreting this Warrant.

     SECTION 7.7. TAX BASIS.

     Avatech and the Holder agree that the Loan (as defined in the Financing
Agreement) and the Warrants issued in accordance with this Warrant constitute an
"investment unit" for the purposes of Section 1273(c)(2)(A) of the Internal
Revenue Code ("Code"). In accordance with Sections 1273(c)(2)(A) and 1273(b)(2)
of the Code, the issue price of the investment unit is the face principal amount
of the Loan. Allocating that issue price among the Loan and Warrants in
proportion to their fair market value, as required by Section 1273(c)(2)(B) of
the Code and Treasury Regulation 1.1273-2(h)(1), results in the Warrant having
an issue price of zero and the Loan having a principal amount of $2,000,000.00.
Accordingly, Avatech believes that the original issue discount that will accrue
on the Warrant is zero.

                     [rest of page intentionally left blank]

                                       17



     IN WITNESS WHEREOF, Avatech has caused this Warrant to be executed in its
corporate name by one of its officers thereunto duly authorized, and its
corporate seal to be hereunto affixed, attested by its Secretary or an Assistant
Secretary, all as of the day and year first above written.

                                               AVATECH SOLUTIONS, INC


                                               By:                        (SEAL)
                                                   -----------------------

[Corporate Seal]

ATTEST:


- ----------------------------

                                       18

EX-10.14

                                                                   EXHIBIT 10.14

     THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION
STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT AND APPLICABLE
LAWS OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND
APPLICABLE LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED.

                       Avatech Solutions Subsidiary, Inc.
                              10% SUBORDINATED NOTE

                with Warrant - W-                         Owings Mills, Maryland
- ---------------                                               As of June 1, 2003

     Avatech Solutions Subsidiary, Inc., a Delaware corporation (the "Company"),
the principal office of which is located at 11403A Cronhill Drive, Owings Mills,
Maryland 21117, for value received, hereby promises to pay to
                             or his registered assigns, the sum of
- ----------------------------
                                         ($       ), or such lesser amount as
- ----------------------------------------   -------
shall then equal the outstanding principal amount hereof. Any unpaid accrued
interest hereon, as set forth below, shall be due and payable on the earlier to
occur of (i) the maturity date, which is July 1, 2004, or (ii) when declared due
and payable by the Holder upon the occurrence of an Event of Default (as defined
below). Payment for all amounts due hereunder shall be made by mail to the
registered address of the Holder. This Note is one of an issue of the Company's
10% Subordinated Notes in the aggregate principal amount of $1,500,000.

     The following is a statement of the rights of the Holder of this Note and
the conditions to which this Note is subject, and to which the Holder hereof, by
the acceptance of this Note, agrees:

     1. Definitions. As used in this Note, the following terms, unless the
context otherwise requires, have the following meanings:

          (i)  "Company" includes any corporation which shall succeed to or
               assume the obligations of the Company under this Note.

          (ii) "Holder," when the context refers to a holder of this Note, shall
               mean any person who shall at the time be the registered holder of
               this Note.

     2. Interest. The Company shall pay simple interest at the rate of ten
percent (10%) per annum on the principal of this Note outstanding during the
period beginning on the date of issuance of this Note and ending on the date
that the principal amount of this Note becomes due and payable. Interest shall
be payable on the calendar quarter, commencing on September 1, 2003 until
maturity or earlier prepayment.

                                       -1-



     3. Events of Default. If any of the events specified in this Section 3
shall occur (herein individually referred to as an "Event of Default"), the
Holder of the Note may, so long as such condition exists, declare the entire
principal and unpaid accrued interest hereon immediately due and payable, by
notice in writing to the Company:

          (i) Default in the payment of the principal and unpaid accrued
     interest of this Note when due and payable if such default is not cured by
     the Company within ten (10) days after the Holder has given the Company
     written notice of such default; or

          (ii) The institution by the Company of proceedings to be adjudicated
     as bankrupt or insolvent, or the consent by it to the institution of
     bankruptcy or insolvency proceedings against it or the filing by it of a
     petition or answer or consent seeking reorganization or release under the
     federal Bankruptcy Act, or any other applicable federal or state law, or
     the consent by it to the filing of any such petition or the appointment of
     a receiver, liquidator, assignee, trustee or other similar official of the
     Company, or of any substantial part of its property, or the making by it of
     an assignment for the benefit of creditors, or the taking of corporate
     action by the Company in furtherance of any such action; or

          (iii) If within sixty (60) days after the commencement of an action
     against the Company (and service of process in connection therewith on the
     Company) seeking any bankruptcy, insolvency, reorganization, liquidation,
     dissolution or similar relief under any present or future statute, law or
     regulation, such action shall not have been resolved in favor of the
     Company or all orders or proceedings thereunder affecting the operations or
     the business of the Company stayed, or if the stay of any such order or
     proceeding shall thereafter be set aside, or if, within sixty (60) days
     after the appointment without the consent or acquiescence of the Company of
     any trustee, receiver or liquidator of the Company or of all or any
     substantial part of the properties of the Company, such appointment shall
     not have been vacated; or

          (iv) Any declared default of the Company under any Senior Indebtedness
     (as defined below) that gives the holder thereof the right to accelerate
     such Senior Indebtedness, and such Senior Indebtedness is in fact
     accelerated by the holder.

     4. Subordination. The indebtedness evidenced by this Note is hereby
expressly subordinated, to the extent and in the manner hereinafter set forth,
in right of payment to the prior payment in full of all of the Company's Senior
Indebtedness, as hereinafter defined.

          4.1 Senior Indebtedness. As used in this Note, the term "Senior
Indebtedness" shall mean the principal of and unpaid accrued interest on: (i)
all indebtedness of the Company to banks, commercial finance lenders, insurance
companies, other financial institutions regularly engaged in the business of
lending money or affiliates of the Company, which is for money borrowed by the
Company (whether or not secured), and (ii) any such indebtedness or any
debentures, notes or other evidence of indebtedness issued in exchange for or to
refinance such

                                       -2-



Senior Indebtedness, or any indebtedness arising from the satisfaction of such
Senior Indebtedness by a guarantor.

          4.2 Default on Senior Indebtedness. If there should occur any
receivership, insolvency, assignment for the benefit of creditors, bankruptcy,
reorganization or arrangements with creditors (whether or not pursuant to
bankruptcy or other insolvency laws), sale of all or substantially all of the
assets, dissolution, liquidation or any other marshalling of the assets and
liabilities of the Company, or if this Note shall be declared due and payable
upon the occurrence of an Event of Default with respect to any Senior
Indebtedness, then (i) no amount shall be paid by the Company in respect of the
principal of or interest on this Note at the time outstanding, unless and until
the principal of and interest on the Senior Indebtedness then outstanding shall
be paid in full, and (ii) no claim or proof of claim shall be filed with the
Company by or on behalf of the Holder of this Note that shall assert any right
to receive any payments in respect of the principal of and interest on this
Note, except subject to the payment in full of the principal of and interest on
all of the Senior Indebtedness then outstanding. If there occurs an event of
default that has been declared in writing with respect to any Senior
Indebtedness, or in the instrument under which any Senior Indebtedness is
outstanding, permitting the holder of such Senior Indebtedness to accelerate the
maturity thereof, then, unless and until such event of default shall have been
cured or waived or shall have ceased to exist, or all Senior Indebtedness shall
have been paid in full, no payment shall be made in respect of the principal of
or interest on this Note, unless within three (3) months after the happening of
such event of default, the maturity of such Senior Indebtedness shall not have
been accelerated.

          4.3 Effect of Subordination. Subject to the rights, if any, of the
holders of Senior Indebtedness under this Section 4 to receive cash, securities
or other properties otherwise payable or deliverable to the Holder of this Note,
nothing contained in this Section 4 shall impair, as between the Company and the
Holder, the obligation of the Company, subject to the terms and conditions
hereof, to pay to the Holder the principal hereof and interest hereon as and
when the same become due and payable, or shall prevent the Holder of this Note,
upon default hereunder, from exercising all rights, powers and remedies
otherwise provided herein or by applicable law.

          4.4 Subrogation. Subject to the payment in full of all Senior
Indebtedness and until this Note shall be paid in full, the Holder shall be
subrogated to the rights of the holders of Senior Indebtedness (to the extent of
payments or distributions previously made to such holders of Senior Indebtedness
pursuant to the provisions of Section 4.2 above) to receive payments or
distributions of assets of the Company applicable to the Senior Indebtedness. No
such payments or distributions applicable to the Senior Indebtedness shall, as
between the Company and its creditors, other than the holders of Senior
Indebtedness and the Holder, be deemed to be a payment by the Company to or on
account of this Note; and for the purposes of such subrogation, no payments or
distributions to the holders of Senior Indebtedness to which the Holder would be
entitled except for the provisions of this Section 4 shall, as between the
Company and its creditors, other than the holders of Senior Indebtedness and the
Holder, be deemed to be a payment by the Company to or on account of the Senior
Indebtedness.

                                       -3-



          4.5 Undertaking. By its acceptance of this Note, the Holder agrees to
execute and deliver such documents as may be reasonably requested from time to
time by the Company or the lender of any Senior Indebtedness in order to
implement the foregoing provisions of this Section 4.

     5. Prepayment. Prior to January 1, 2004, this Note may not be prepaid
except with the express written consent of Holders whose Notes the Company
desires to prepay. Subject to the preceding sentence, upon twenty (20) days'
prior written notice to the Holder, the Company may at any time prepay in whole
or in part the principal sum, plus accrued interest to date of payment, of this
Note.

     6. Assignment. Subject to the restrictions on transfer described in Section
8 below, the rights and obligations of the Company and the Holder of this Note
shall be binding upon and benefit the successors, assigns, heirs, personal and
legal representatives, and transferees of the parties.

     7. Waiver and Amendment. Any provision of this Note may be amended, waived
or modified upon the written consent of the Company and holders of all then
outstanding Notes.

     8. Transfer of this Note. With respect to any offer, sale or other
disposition of this Note, the Holder will give written notice to the Company
prior thereto, describing briefly the manner thereof, together with a written
opinion of such Holder's counsel, to the effect that such offer, sale or other
distribution may be effected without registration or qualification (under any
federal or state law then in effect). Promptly upon receiving such written
notice and reasonably satisfactory opinion, if so requested, the Company, as
promptly as practicable, shall notify such Holder that such holder may sell or
otherwise dispose of this Note or such securities, all in accordance with the
terms of the notice delivered to the Company. If a determination has been made
pursuant to this Section 8 that the opinion of counsel for the holder is not
reasonably satisfactory to the Company, the Company shall so notify the Holder
promptly after such determination has been made. Each Note thus transferred and
each certificate representing the securities thus transferred shall bear a
legend as to the applicable restrictions on transferability in order to ensure
compliance with the Act, unless in the opinion of counsel for the Company such
legend is not required in order to ensure compliance with the Act. The Company
may issue stop transfer instructions to its transfer agent in connection with
such restrictions.

     9. Treatment of Note. To the extent permitted by generally accepted
accounting principles, the Company will treat, account and report the Note as
debt and not equity for accounting purposes and with respect to any returns
filed with federal, state or local tax authorities.

     10. Notices. Any notice, request or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or if telegraphed or mailed by registered or
certified mail, postage prepaid, at the respective addresses of the parties as
set forth herein. Any party hereto maybe notice so given change its address for
future notice hereunder. Notice shall conclusively be deemed to have been given

                                       -4-



when personally delivered or when deposited in the mail or telegraphed in the
manner set forth above and shall be deemed to have been received when delivered.

     11. No Stockholder Rights. Nothing contained in this Note shall be
construed as conferring upon the Holder or any other person the right to vote or
to consent or to receive notice as a stockholder in respect of meetings of
stockholders for the election of directors of the Company or any other matters
or any rights whatsoever as a stockholder of the Company; and no dividends or
interest shall be payable or accrued in respect of this Note or the interest
represented hereby.

     12. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, excluding that body of law
relating to conflict of laws.

     13. Heading; References. All headings used herein are used for convenience
only and shall not be used to construe or interpret this Note. Except where
otherwise indicated, all references herein to Sections refer to Sections hereof.

     IN WITNESS WHEREOF, the Company has caused this Note to be issued as of
this 1st day of June, 2003.

                                        AVATECH SOLUTIONS SUBSIDIARY, INC.


                                        By:
                                            ------------------------------------
                                            Donald R. (Scotty) Walsh,
                                            Chief Executive Officer


Name of Holder:
                --------------------

Address:
         ---------------------------

         ---------------------------

                                       -5-



           Do not detach this warrant without consulting the Company.

No. W -                                                                   Shares
                                                                 --------

                             Avatech Solutions, Inc.
                             A Delaware Corporation
                     Common Stock, Par Value $.01 per share
                             Stock Purchase Warrant

          This warrant is issued to the registered holder of $
                                                              ------------
principal amount of the 10% Subordinated Notes (individually, a "Note" and
collectively, the "Notes"), of Avatech Solutions Subsidiary, Inc., a Delaware
corporation (the "Company"), dated as of June 1, 2003, bearing (except for the
prefix letter "W") the same designating number as noted above and to which note
this warrant pertains. The Note is one of an issue of Notes of the Company with
an aggregate principal amount of $1,500,000.

          The bearer of this warrant is entitled, upon presentation of the Note
(if the Note is then outstanding) and upon surrender of this warrant at the
offices of the Company, to subscribe for, purchase and receive
                                                               -------------
thousand (          ) shares of the Common Stock of Avatech Solutions, Inc.
          ----------
("Avatech") for a purchase price of One Dollar and Five Cents ($1.05) per share
provided, however, no fractional shares will be issued. Upon such payment,
Avatech agrees to cause to be issued in the name of the registered holder, or
his or her nominee, a certificate or certificates duly representing the shares
so purchased.

          In the event of the declaration and payment of share dividends by
Avatech on its Common Stock, or any split-up of the Common Stock, or
recapitalization of Avatech which changes the issued and outstanding shares of
Common Stock, additional shares of Avatech may be deliverable to the holder of
this warrant upon the exercise of it without additional consideration, or the
exercise price per share may be adjusted in the appropriate manner.

          The purchase privilege herein contained shall expire on July 1, 2004.
If the Note to which this warrant is attached shall be prepaid, the purchase
privilege shall nevertheless continue until said date.

          Nothing contained in this warrant shall affect or limit the Note to
which it pertains.

          Dated as of June 1, 2003

                                        Avatech Solutions, Inc.


                                        By:
                                            ------------------------------------
                                            Donald R. (Scotty) Walsh
                                            Chief Executive Officer

EX-10.15

                                                                   EXHIBIT 10.15

     THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THEY MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION
STATEMENT IN EFFECT WITH RESPECT TO THE SECURITIES UNDER SUCH ACT AND APPLICABLE
LAWS OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND
APPLICABLE LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED.

                       Avatech Solutions Subsidiary, Inc.
                              12% SUBORDINATED NOTE

                                                          Owings Mills, Maryland
- ---------------                                               As of June 1, 2003

     Avatech Solutions Subsidiary, Inc., a Delaware corporation (the "Company"),
the principal office of which is located at 11400A Cronridge Drive, Owings
Mills, Maryland 21117, for value received, hereby promises to pay to
                             or his registered assigns, the sum of
- ----------------------------
                                         ($_______), or such lesser amount as
- ----------------------------------------
shall then equal the outstanding principal amount hereof. Any unpaid accrued
interest hereon, as set forth below, shall be due and payable on the earlier to
occur of (i) the maturity date, which is July 1, 2004, or (ii) when declared due
and payable by the Holder upon the occurrence of an Event of Default (as defined
below). Payment for all amounts due hereunder shall be made by mail to the
registered address of the Holder. This Note is one of an issue of the Company's
10% Subordinated Notes in the aggregate principal amount of $1,500,000.

     The following is a statement of the rights of the Holder of this Note and
the conditions to which this Note is subject, and to which the Holder hereof, by
the acceptance of this Note, agrees:

     1. Definitions. As used in this Note, the following terms, unless the
context otherwise requires, have the following meanings:

          (i)  "Company" includes any corporation which shall succeed to or
               assume the obligations of the Company under this Note.

          (ii) "Holder," when the context refers to a holder of this Note, shall
               mean any person who shall at the time be the registered holder of
               this Note.

     2. Interest. The Company shall pay simple interest at the rate of twelve
percent (12%) per annum on the principal of this Note outstanding during the
period beginning on the date of issuance of this Note and ending on the date
that the principal amount of this Note becomes due and payable. Interest shall
be payable on the calendar quarter, commencing on September 1, 2003 until
maturity or earlier prepayment.



     3. Events of Default. If any of the events specified in this Section 3
shall occur (herein individually referred to as an "Event of Default"), the
Holder of the Note may, so long as such condition exists, declare the entire
principal and unpaid accrued interest hereon immediately due and payable, by
notice in writing to the Company:

          (i) Default in the payment of the principal and unpaid accrued
     interest of this Note when due and payable if such default is not cured by
     the Company within ten (10) days after the Holder has given the Company
     written notice of such default; or

          (ii) The institution by the Company of proceedings to be adjudicated
     as bankrupt or insolvent, or the consent by it to the institution of
     bankruptcy or insolvency proceedings against it or the filing by it of a
     petition or answer or consent seeking reorganization or release under the
     federal Bankruptcy Act, or any other applicable federal or state law, or
     the consent by it to the filing of any such petition or the appointment of
     a receiver, liquidator, assignee, trustee or other similar official of the
     Company, or of any substantial part of its property, or the making by it of
     an assignment for the benefit of creditors, or the taking of corporate
     action by the Company in furtherance of any such action; or

          (iii) If within sixty (60) days after the commencement of an action
     against the Company (and service of process in connection therewith on the
     Company) seeking any bankruptcy, insolvency, reorganization, liquidation,
     dissolution or similar relief under any present or future statute, law or
     regulation, such action shall not have been resolved in favor of the
     Company or all orders or proceedings thereunder affecting the operations or
     the business of the Company stayed, or if the stay of any such order or
     proceeding shall thereafter be set aside, or if, within sixty (60) days
     after the appointment without the consent or acquiescence of the Company of
     any trustee, receiver or liquidator of the Company or of all or any
     substantial part of the properties of the Company, such appointment shall
     not have been vacated; or

          (iv) Any declared default of the Company under any Senior Indebtedness
     (as defined below) that gives the holder thereof the right to accelerate
     such Senior Indebtedness, and such Senior Indebtedness is in fact
     accelerated by the holder.

     4. Subordination. The indebtedness evidenced by this Note is hereby
expressly subordinated, to the extent and in the manner hereinafter set forth,
in right of payment to the prior payment in full of all of the Company's Senior
Indebtedness, as hereinafter defined.

          4.1 Senior Indebtedness. As used in this Note, the term "Senior
Indebtedness" shall mean the principal of and unpaid accrued interest on: (i)
all indebtedness of the Company to banks, commercial finance lenders, insurance
companies, other financial institutions regularly engaged in the business of
lending money or affiliates of the Company, which is for money borrowed by the
Company (whether or not secured), and (ii) any such indebtedness or any
debentures, notes or other evidence of indebtedness issued in exchange for or to
refinance such

                                       -2-



Senior Indebtedness, or any indebtedness arising from the satisfaction of such
Senior Indebtedness by a guarantor.

          4.2 Default on Senior Indebtedness. If there should occur any
receivership, insolvency, assignment for the benefit of creditors, bankruptcy,
reorganization or arrangements with creditors (whether or not pursuant to
bankruptcy or other insolvency laws), sale of all or substantially all of the
assets, dissolution, liquidation or any other marshalling of the assets and
liabilities of the Company, or if this Note shall be declared due and payable
upon the occurrence of an Event of Default with respect to any Senior
Indebtedness, then (i) no amount shall be paid by the Company in respect of the
principal of or interest on this Note at the time outstanding, unless and until
the principal of and interest on the Senior Indebtedness then outstanding shall
be paid in full, and (ii) no claim or proof of claim shall be filed with the
Company by or on behalf of the Holder of this Note that shall assert any right
to receive any payments in respect of the principal of and interest on this
Note, except subject to the payment in full of the principal of and interest on
all of the Senior Indebtedness then outstanding. If there occurs an event of
default that has been declared in writing with respect to any Senior
Indebtedness, or in the instrument under which any Senior Indebtedness is
outstanding, permitting the holder of such Senior Indebtedness to accelerate the
maturity thereof, then, unless and until such event of default shall have been
cured or waived or shall have ceased to exist, or all Senior Indebtedness shall
have been paid in full, no payment shall be made in respect of the principal of
or interest on this Note, unless within three (3) months after the happening of
such event of default, the maturity of such Senior Indebtedness shall not have
been accelerated.

          4.3 Effect of Subordination. Subject to the rights, if any, of the
holders of Senior Indebtedness under this Section 4 to receive cash, securities
or other properties otherwise payable or deliverable to the Holder of this Note,
nothing contained in this Section 4 shall impair, as between the Company and the
Holder, the obligation of the Company, subject to the terms and conditions
hereof, to pay to the Holder the principal hereof and interest hereon as and
when the same become due and payable, or shall prevent the Holder of this Note,
upon default hereunder, from exercising all rights, powers and remedies
otherwise provided herein or by applicable law.

          4.4 Subrogation. Subject to the payment in full of all Senior
Indebtedness and until this Note shall be paid in full, the Holder shall be
subrogated to the rights of the holders of Senior Indebtedness (to the extent of
payments or distributions previously made to such holders of Senior Indebtedness
pursuant to the provisions of Section 4.2 above) to receive payments or
distributions of assets of the Company applicable to the Senior Indebtedness. No
such payments or distributions applicable to the Senior Indebtedness shall, as
between the Company and its creditors, other than the holders of Senior
Indebtedness and the Holder, be deemed to be a payment by the Company to or on
account of this Note; and for the purposes of such subrogation, no payments or
distributions to the holders of Senior Indebtedness to which the Holder would be
entitled except for the provisions of this Section 4 shall, as between the
Company and its creditors, other than the holders of Senior Indebtedness and the
Holder, be deemed to be a payment by the Company to or on account of the Senior
Indebtedness.

                                       -3-



          4.5 Undertaking. By its acceptance of this Note, the Holder agrees to
execute and deliver such documents as may be reasonably requested from time to
time by the Company or the lender of any Senior Indebtedness in order to
implement the foregoing provisions of this Section 4.

     5. Prepayment. The Company may at any time prepay in whole or in part the
principal sum, plus accrued interest to date of payment, of this Note..

     6. Assignment. Subject to the restrictions on transfer described in Section
8 below, the rights and obligations of the Company and the Holder of this Note
shall be binding upon and benefit the successors, assigns, heirs, personal and
legal representatives, and transferees of the parties.

     7. Waiver and Amendment. Any provision of this Note may be amended, waived
or modified upon the written consent of the Company and holders of all then
outstanding Notes.

     8. Transfer of this Note. With respect to any offer, sale or other
disposition of this Note, the Holder will give written notice to the Company
prior thereto, describing briefly the manner thereof, together with a written
opinion of such Holder's counsel, to the effect that such offer, sale or other
distribution may be effected without registration or qualification (under any
federal or state law then in effect). Promptly upon receiving such written
notice and reasonably satisfactory opinion, if so requested, the Company, as
promptly as practicable, shall notify such Holder that such holder may sell or
otherwise dispose of this Note or such securities, all in accordance with the
terms of the notice delivered to the Company. If a determination has been made
pursuant to this Section 8 that the opinion of counsel for the holder is not
reasonably satisfactory to the Company, the Company shall so notify the Holder
promptly after such determination has been made. Each Note thus transferred and
each certificate representing the securities thus transferred shall bear a
legend as to the applicable restrictions on transferability in order to ensure
compliance with the Act, unless in the opinion of counsel for the Company such
legend is not required in order to ensure compliance with the Act. The Company
may issue stop transfer instructions to its transfer agent in connection with
such restrictions.

     9. Treatment of Note. To the extent permitted by generally accepted
accounting principles, the Company will treat, account and report the Note as
debt and not equity for accounting purposes and with respect to any returns
filed with federal, state or local tax authorities.

     10. Notices. Any notice, request or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or if telegraphed or mailed by registered or
certified mail, postage prepaid, at the respective addresses of the parties as
set forth herein. Any party hereto maybe notice so given change its address for
future notice hereunder. Notice shall conclusively be deemed to have been given
when personally delivered or when deposited in the mail or telegraphed in the
manner set forth above and shall be deemed to have been received when delivered.

                                       -4-



     11. No Stockholder Rights. Nothing contained in this Note shall be
construed as conferring upon the Holder or any other person the right to vote or
to consent or to receive notice as a stockholder in respect of meetings of
stockholders for the election of directors of the Company or any other matters
or any rights whatsoever as a stockholder of the Company; and no dividends or
interest shall be payable or accrued in respect of this Note or the interest
represented hereby.

     12. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, excluding that body of law
relating to conflict of laws.

     13. Heading; References. All headings used herein are used for convenience
only and shall not be used to construe or interpret this Note. Except where
otherwise indicated, all references herein to Sections refer to Sections hereof.

     IN WITNESS WHEREOF, the Company has caused this Note to be issued as of
this 1st day of June, 2003.

                                        AVATECH SOLUTIONS SUBSIDIARY, INC.


                                        By:
                                            ------------------------------------
                                            Donald R. (Scotty) Walsh,
                                            Chief Executive Officer


Name of Holder:
                ----------------------

Address:
         -----------------------------

         -----------------------------

                                       -5-

EX-10.18

                                                                   Exhibit 10.18

                       SENIOR SUBORDINATED PROMISSORY NOTE

$500,000.00                                                         May 28, 2003
                                                          Owings Mills, Maryland

     FOR VALUE RECEIVED, Avatech Solutions, Inc., a Delaware corporation
("Borrower"), hereby unconditionally promises to pay to the order of W. James
Hindman, a Maryland resident ("Lender"), in lawful money of the United States of
America and in immediately available funds, the principal sum of $500,000.00 and
any unpaid accrued interest thereon, as set forth below.

     The following is a statement of the rights of Lender under this Senior
Subordinated Promissory Note (this "Note") and the conditions to which this Note
is subject, and to which Lender, by the acceptance of this Note, agrees:

     1. Principal Repayment. This Note shall mature, and the entire unpaid
principal balance of this Note, together with all accrued and unpaid interest,
late charges and other fees hereon, shall be due and payable on July 1, 2004
(the "Maturity Date"), if not paid earlier as hereinafter provided. At any time
upon prior written notice to Lender, the Borrower may prepay without penalty, in
whole or in part, the principal sum, plus accrued interest to the date of
payment, of this Note.

     2. Interest Rate. Borrower further promises to pay interest on the unpaid
principal balance of this Note, which interest shall accrue at a simple rate of
12% per annum beginning on the date hereof. Quarterly interest payments shall be
paid to Lender on or before each of September 1, 2003; and on January 2 and
April 1, 2004 or on such earlier date as the entire principal amount shall
become due and payable and shall be calculated on the basis of a 365-day year
for the actual number of days elapsed. All principal of, and accrued and unpaid
interest on, this Note shall be paid to the Lender on the Maturity Date.

     3. Place of Payment. All amounts payable hereunder shall be payable to
Lender at the following address: 2322 Nicodemus Road, Westminster, Maryland
21157.

     4. Application of Payments. All payments on this Note shall first be
applied to accrued interest and thereafter to the outstanding principal balance
hereof.

     5. Default.

          5.1 Event of Default. The occurrence of any one or more of the
following events shall constitute an event of default ("Event of Default")
hereunder:

          (a) Failure to pay, when due, the principal, any interest, or any
other sum payable hereunder;

                                       1



          (b) The admission by Borrower in writing of its inability to pay its
debts as such debts become due, or the making by Borrower of any general
assignment for the benefit of creditors;

          (c) The commencement by Borrower of any case, proceeding, or other
action seeking reorganization, arrangement, adjustment, liquidation,
dissolution, or composition of its debts under any law relating to bankruptcy,
insolvency, or reorganization, or relief of debtors, or seeking appointment of a
receiver, trustee, custodian, or other similar official for it or for all or any
substantial part of its property;

          (d) The commencement of any case, proceeding, or other action against
Borrower seeking to have any order for relief entered against it as debtor, or
seeking reorganization, arrangement, adjustment, liquidation, dissolution, or
composition of Borrower's debts under any law relating to bankruptcy,
insolvency, reorganization, or relief of debtors, or seeking appointment of a
receiver, trustee, custodian, or other similar official for it or for all or any
substantial part of the property of Borrower, and (i) Borrower, by any act or
omission, indicates its consent to, approval of, or acquiescence in such case,
proceeding, or action, or (ii) such case, proceeding, or action results in the
entry of an order for relief which is not fully stayed within 60 days after the
entry thereof, or (iii) such case, proceeding, or action remains undismissed for
a period of 60 days or more; or

          (e) Default in the performance of any obligation, covenant or
agreement contained or referred to herein.

          5.2 Consequences of Default. Upon the occurrence of any Event of
Default, the entire principal amount hereof, and all accrued and unpaid interest
thereon, shall be accelerated, and shall be due and payable, at the option of
Lender, on the fifth day after Lender provides notice of such Event of Default,
provided that such Event of Default is not cured to Lender's satisfaction in
that five-day period, and in addition thereto, and not in substitution therefor,
Lender shall be entitled to exercise any one or more of the rights and remedies
provided by applicable law. Failure to exercise said option or to pursue such
other remedies shall not constitute a waiver of such option or such other
remedies or of the right to exercise any of the same in the event of any
subsequent Event of Default hereunder. Lender shall be entitled to collect all
reasonable costs and expenses of collection and/or suit, including, but not
limited to, reasonable attorneys' fees.

     6. Priority. All rights and priorities of the authorized holder of this
Note and the indebtedness evidenced hereby shall rank in all respects (i) junior
to Borrower's obligations under that certain Financing Agreement dated October
25, 2000 between The CIT Group/Business Credit, Inc. ("CIT") and Borrower as set
forth in that certain subordination agreement between Lender and CIT and any
successor senior lender to Borrower (ii) and senior to all other indebtedness of
the Borrower, including, without limitation, amounts owed under those
obligations known as the 10% Subordinated Notes. Borrower shall not incur any
indebtedness outside the ordinary course of business after the date hereof
without Lender's prior written consent.

     7. IF ANY OF THE PAYMENTS OF PRINCIPAL AND/OR INTEREST ON THIS NOTE HAVE
NOT BEEN PAID ON OR BEFORE THE DATE ON WHICH THE SAME ARE

                                       2



DUE AND PAYABLE (EXCEPT WITH RESPECT TO THE PERMISSIBLE SUSPENSION OF INTEREST
PAYMENTS DESCRIBED HEREIN), WHETHER AS ORIGINALLY SCHEDULED, BY ACCELERATION, OR
OTHERWISE, AND SUCH FAILURE TO PAY SHALL CONTINUE FOR TEN (10) DAYS AFTER
WRITTEN NOTICE THEREOF, OR ANY OTHER DEFAULT OCCURS HEREUNDER, THE BORROWER DOES
HEREBY AUTHORIZE AND EMPOWER THE CLERK OR ANY ATTORNEY OF ANY COURT OF RECORD
HAVING JURISDICTION (INCLUDING FEDERAL COURT, IF APPROPRIATE JURISDICTION
EXISTS) TO APPEAR FOR THE BORROWER BEFORE ANY SUCH COURT AND CONFESS JUDGMENT IN
FAVOR OF THE LENDER AGAINST THE BORROWER FOR THE UNPAID PRINCIPAL BALANCE OF
THIS NOTE, TOGETHER WITH ALL ACCRUED AND UNPAID INTEREST THEREON INCLUDING LATE
CHARGES, AND TOGETHER WITH ALL COSTS OF SUIT AND ACTUAL ATTORNEYS' FEES INCURRED
AT STANDARD HOURLY RATES.

     8. Waiver; Amendment. No delay or omission on the part of the Lender in the
exercise of any right or remedy hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any right or remedy preclude any other
or further exercise thereof or the exercise of any other right or remedy. The
Borrower hereby waives demand, presentment and protest and notices thereof as
well as notice of non-payment. The provisions of this Note may be amended with
the written consent of Borrower and Lender. The obligations of Borrower and the
rights of Lender under this agreement may be waived by written notice delivered
to Borrower.

     9. Expenses. The Borrower agrees to pay on demand all costs and expenses,
including, without limitation, reasonable attorney's fees, incurred by the
Lender in connection with this Note. In addition, the Borrower agrees to pay on
demand all costs and expenses, including, without limitation, reasonable
attorney's fees, incurred by the Lender in endeavoring to enforce the rights of
the Lender hereunder.

     10. Governing Law. This Note shall be governed by, and construed and
enforced in accordance with, the laws of the State of Maryland, excluding
conflict of laws principles that would cause the application of laws of any
other jurisdiction.

     11. Assignment. This Note shall inure to the benefit of and be enforceable
by Lender's successors and authorized assigns, and shall be binding and
enforceable against Borrower's successors and assigns.

     IN WITNESS WHEREOF, Borrower has executed this Note as of the date first
written above.

     WITNESS/ATTEST:                          BORROWER:
                                              Avatech Solutions, Inc.


                                              By:
     -------------------------------------        ------------------------------

                                       3

EX-10.19

                                                                   EXHIBIT 10.19

                       SENIOR SUBORDINATED PROMISSORY NOTE

$500,000.00                                                         May 28, 2003
                                                          Owings Mills, Maryland

     FOR VALUE RECEIVED, Avatech Solutions, Inc., a Delaware corporation
("Borrower"), hereby unconditionally promises to pay to the order of W. James
Hindman, a Maryland resident ("Lender"), in lawful money of the United States of
America and in immediately available funds, the principal sum of $500,000.00 and
any unpaid accrued interest thereon, as set forth below.

     The following is a statement of the rights of Lender under this Senior
Subordinated Promissory Note (this "Note") and the conditions to which this Note
is subject, and to which Lender, by the acceptance of this Note, agrees:

     1. Principal Repayment. This Note shall mature, and the entire unpaid
principal balance of this Note, together with all accrued and unpaid interest,
late charges and other fees hereon, shall be due and payable on July 1, 2004
(the "Maturity Date"), if not paid earlier as hereinafter provided. At any time
upon prior written notice to Lender, the Borrower may prepay without penalty, in
whole or in part, the principal sum, plus accrued interest to the date of
payment, of this Note.

     2. Interest Rate. Borrower further promises to pay interest on the unpaid
principal balance of this Note, which interest shall accrue at a simple rate of
12% per annum beginning on the date hereof. Quarterly interest payments shall be
paid to Lender on or before each of September 1, 2003; and on January 2 and
April 1, 2004 or on such earlier date as the entire principal amount shall
become due and payable and shall be calculated on the basis of a 365-day year
for the actual number of days elapsed. All principal of, and accrued and unpaid
interest on, this Note shall be paid to the Lender on the Maturity Date.

     3. Place of Payment. All amounts payable hereunder shall be payable to
Lender at the following address: 2322 Nicodemus Road, Westminster, Maryland
21157.

     4. Application of Payments. All payments on this Note shall first be
applied to accrued interest and thereafter to the outstanding principal balance
hereof.

     5. Default.

          5.1 Event of Default. The occurrence of any one or more of the
following events shall constitute an event of default ("Event of Default")
hereunder:

          (a) Failure to pay, when due, the principal, any interest, or any
other sum payable hereunder;

                                       1



          (b) The admission by Borrower in writing of its inability to pay its
debts as such debts become due, or the making by Borrower of any general
assignment for the benefit of creditors;

          (c) The commencement by Borrower of any case, proceeding, or other
action seeking reorganization, arrangement, adjustment, liquidation,
dissolution, or composition of its debts under any law relating to bankruptcy,
insolvency, or reorganization, or relief of debtors, or seeking appointment of a
receiver, trustee, custodian, or other similar official for it or for all or any
substantial part of its property;

          (d) The commencement of any case, proceeding, or other action against
Borrower seeking to have any order for relief entered against it as debtor, or
seeking reorganization, arrangement, adjustment, liquidation, dissolution, or
composition of Borrower's debts under any law relating to bankruptcy,
insolvency, reorganization, or relief of debtors, or seeking appointment of a
receiver, trustee, custodian, or other similar official for it or for all or any
substantial part of the property of Borrower, and (i) Borrower, by any act or
omission, indicates its consent to, approval of, or acquiescence in such case,
proceeding, or action, or (ii) such case, proceeding, or action results in the
entry of an order for relief which is not fully stayed within 60 days after the
entry thereof, or (iii) such case, proceeding, or action remains undismissed for
a period of 60 days or more; or

          (e) Default in the performance of any obligation, covenant or
agreement contained or referred to herein.

          5.2 Consequences of Default. Upon the occurrence of any Event of
Default, the entire principal amount hereof, and all accrued and unpaid interest
thereon, shall be accelerated, and shall be due and payable, at the option of
Lender, on the fifth day after Lender provides notice of such Event of Default,
provided that such Event of Default is not cured to Lender's satisfaction in
that five-day period, and in addition thereto, and not in substitution therefor,
Lender shall be entitled to exercise any one or more of the rights and remedies
provided by applicable law. Failure to exercise said option or to pursue such
other remedies shall not constitute a waiver of such option or such other
remedies or of the right to exercise any of the same in the event of any
subsequent Event of Default hereunder. Lender shall be entitled to collect all
reasonable costs and expenses of collection and/or suit, including, but not
limited to, reasonable attorneys' fees.

     6. Priority. All rights and priorities of the authorized holder of this
Note and the indebtedness evidenced hereby shall rank in all respects (i) junior
to Borrower's obligations under that certain Financing Agreement dated October
25, 2000 between The CIT Group/Business Credit, Inc. ("CIT") and Borrower as set
forth in that certain subordination agreement between Lender and CIT and any
successor senior lender to Borrower (ii) and senior to all other indebtedness of
the Borrower, including, without limitation, amounts owed under those
obligations known as the 10% Subordinated Notes. Borrower shall not incur any
indebtedness outside the ordinary course of business after the date hereof
without Lender's prior written consent.

     7. IF ANY OF THE PAYMENTS OF PRINCIPAL AND/OR INTEREST ON THIS NOTE HAVE
NOT BEEN PAID ON OR BEFORE THE DATE ON WHICH THE SAME ARE

                                       2



DUE AND PAYABLE (EXCEPT WITH RESPECT TO THE PERMISSIBLE SUSPENSION OF INTEREST
PAYMENTS DESCRIBED HEREIN), WHETHER AS ORIGINALLY SCHEDULED, BY ACCELERATION, OR
OTHERWISE, AND SUCH FAILURE TO PAY SHALL CONTINUE FOR TEN (10) DAYS AFTER
WRITTEN NOTICE THEREOF, OR ANY OTHER DEFAULT OCCURS HEREUNDER, THE BORROWER DOES
HEREBY AUTHORIZE AND EMPOWER THE CLERK OR ANY ATTORNEY OF ANY COURT OF RECORD
HAVING JURISDICTION (INCLUDING FEDERAL COURT, IF APPROPRIATE JURISDICTION
EXISTS) TO APPEAR FOR THE BORROWER BEFORE ANY SUCH COURT AND CONFESS JUDGMENT IN
FAVOR OF THE LENDER AGAINST THE BORROWER FOR THE UNPAID PRINCIPAL BALANCE OF
THIS NOTE, TOGETHER WITH ALL ACCRUED AND UNPAID INTEREST THEREON INCLUDING LATE
CHARGES, AND TOGETHER WITH ALL COSTS OF SUIT AND ACTUAL ATTORNEYS' FEES INCURRED
AT STANDARD HOURLY RATES.

     8. Waiver; Amendment. No delay or omission on the part of the Lender in the
exercise of any right or remedy hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any right or remedy preclude any other
or further exercise thereof or the exercise of any other right or remedy. The
Borrower hereby waives demand, presentment and protest and notices thereof as
well as notice of non-payment. The provisions of this Note may be amended with
the written consent of Borrower and Lender. The obligations of Borrower and the
rights of Lender under this agreement may be waived by written notice delivered
to Borrower.

     9. Expenses. The Borrower agrees to pay on demand all costs and expenses,
including, without limitation, reasonable attorney's fees, incurred by the
Lender in connection with this Note. In addition, the Borrower agrees to pay on
demand all costs and expenses, including, without limitation, reasonable
attorney's fees, incurred by the Lender in endeavoring to enforce the rights of
the Lender hereunder.

     10. Governing Law. This Note shall be governed by, and construed and
enforced in accordance with, the laws of the State of Maryland, excluding
conflict of laws principles that would cause the application of laws of any
other jurisdiction.

     11. Assignment. This Note shall inure to the benefit of and be enforceable
by Lender's successors and authorized assigns, and shall be binding and
enforceable against Borrower's successors and assigns.

     IN WITNESS WHEREOF, Borrower has executed this Note as of the date first
written above.

     WITNESS/ATTEST:                          BORROWER:
                                              Avatech Solutions, Inc.


                                              By:
     -------------------------------------        ------------------------------

                                       3

EX-10.20

                                                                   EXHIBIT 10.20

No. W-100                                                          14,400 Shares

                            Avatech Solutions, Inc.
                             A Delaware Corporation
                     Common Stock, Par Value $.01 per share
                             Stock Purchase Warrant

     W. James Hindman, or bearer of this warrant, is entitled, upon presentation
of this Warrant and upon surrender of this warrant at the offices of the
Company, to subscribe for, purchase and receive Fourteen Thousand, Four Hundred
(14,400) shares of the Company's Common Stock for a purchase price of Eighty
Cents ($.80) per share provided, however, no fractional shares will be issued.
Upon such payment, the Company agrees to cause to be issued in the name of the
registered holder, or his or her nominee, a certificate or certificates duly
representing the shares so purchased.

     In the event of the declaration and payment of share dividends by the
Company on its Common Stock, or any split-up of the Common Stock, or
recapitalization of the Company which changes the issued and outstanding shares
of Common Stock, additional shares of the Company may be deliverable to the
holder of this warrant upon the exercise of it without additional consideration,
or the exercise price per share may be adjusted in the appropriate manner.

     The purchase privilege herein contained shall expire on June 1, 2008.

     Dated as of May 28, 2003.

                                         Avatech Solutions, Inc.


                                         By:
                                             -----------------------------------
                                             Donald R. (Scotty) Walsh, CEO



No. W-101                                                          18,000 Shares

                            Avatech Solutions, Inc.
                             A Delaware Corporation
                     Common Stock, Par Value $.01 per share
                             Stock Purchase Warrant

     W. James Hindman, or bearer of this warrant, is entitled, upon presentation
of this Warrant and upon surrender of this warrant at the offices of the
Company, to subscribe for, purchase and receive Eighteen Thousand (18,000)
shares of the Company's Common Stock for a purchase price of Eighty Cents ($.80)
per share provided, however, no fractional shares will be issued. Upon such
payment, the Company agrees to cause to be issued in the name of the registered
holder, or his or her nominee, a certificate or certificates duly representing
the shares so purchased.

     In the event of the declaration and payment of share dividends by the
Company on its Common Stock, or any split-up of the Common Stock, or
recapitalization of the Company which changes the issued and outstanding shares
of Common Stock, additional shares of the Company may be deliverable to the
holder of this warrant upon the exercise of it without additional consideration,
or the exercise price per share may be adjusted in the appropriate manner.

     The purchase privilege herein contained shall expire on June 1, 2008.

     Dated as of May 28, 2003.

                                         Avatech Solutions, Inc.


                                         By:
                                             -----------------------------------
                                             Donald R. (Scotty) Walsh, CEO

EX-10.21

                                                                   EXHIBIT 10.21

                    Affadavit and Discharge of Indebtedness

     The undersigned, W. James Hindman, does hereby affirm and represent that
the certain Senior Subordinated Promissory Note of Avatech Solutions, Inc.
("Borrower") payable to the order of W. James Hindman ("Lender"), dated August
13, 2002 in the principal amount of $500,000 (the "2002 Note"), has been lost or
misplaced, and that the indebtedness evidenced by the 2002 Note has been
discharged by the delivery to the undersigned of a senior subordinated
promissory note, dated May 28, 2003, made by the Borrower and payable to the
order of the Lender in the principal amount of $500,000

Witness:


- ---------------------------           ---------------------------------------
                                                  W. James Hindman

EX-10.30

                                                                   EXHIBIT 10.30

                              Employment Agreement

     This Employment Agreement ("Agreement") is made as of the 4th day of April,
2003 (the "Effective Date"), by and between Avatech Solutions Subsidiary, Inc.,
a Delaware corporation (the "Company") and Debra Keith ("Executive").

     Whereas, the Company desires to employ Executive as a Senior Vice President
for Sales and Marketing, and Executive desires to be so employed.

     Now, Therefore, in consideration of the mutual promises of the parties and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Company and Executive agree as follows:

          Section 1. Employment. The Company agrees to employ Executive, and
Executive agrees to be employed, as Senior Vice President for Sales and
Marketing of the Company on the terms and subject to the conditions of this
Agreement.

          Section 2. Term. The term of Executive's employment under this
Agreement (the "Term") will commence on the Effective Date and will continue for
one (1) year (the "Initial Term"). The Term will be extended automatically in
successive one-year periods unless either party gives notice of nonextension to
the other not less than thirty (30) days before the end of the then-current
Term. Notwithstanding the foregoing, Executive's employment is subject to
termination during the Term as provided in Section 5 of this Agreement.

          Section 3. Duties. Executive will report to, and Executive's specific
responsibilities and authority will be established by, the Chief Executive
Officer of the Company. Executive will diligently and conscientiously devote her
full and exclusive business time and attention and best efforts in discharging
her duties to the Company.

          Section 4. Compensation and Benefits.

               4.1 Base Compensation. During the Initial Term, the Company will
pay Executive a base salary (the "Base Salary") at an annual rate of $125,000.
During each succeeding year during the Term, Executive's Base Salary may be
increased (but may not be decreased) by an amount determined by the Company's
Chief Executive Officer and its Board of Directors based upon the Executive's
performance during the prior year.

               4.2 Incentive Compensation.

                    4.2.1 The Company will pay Executive an incentive bonus (the
"Incentive Compensation") in an amount determined by the Company in its sole
discretion and based on Executive's achievement of specific performance measures
during the company's fiscal year, ending June 30. The Company and the Executive
will agree on each fiscal year's performance measures on or before July 1 of
each year, except that the Company and Executive have agreed to the performance
measures set forth as Exhibit A for the period of time between the Effective
Date and June 30, 2003.



                    4.2.2 The Company will pay Incentive Compensation, if any,
to the Executive in quarterly installments, as soon as administratively feasible
after the end of each of the Company's fiscal quarters, in an amount equal to
one-quarter of the incentive compensation that Executive would earn if
Executive's performance in all four quarters of the fiscal year were identical
to Executive's performance in the most-recently completed fiscal quarter.

               4.3 Benefit Plans and Fringe Benefits.

                    4.3.1 During the Term, Executive will be entitled to
participate in any and all employee benefit programs (including but not limited
to medical, vision, prescription drug, dental, disability, employee and group
life, accidental death and travel accident, and section 401(k) plans and
programs) offered by the Company to its executives or to its employees
generally, and Executive may receive such other benefits as the Company may
determine from time to time.

                    4.3.2 Executive will accrue three weeks of paid time off
annually to be taken at times reasonably agreed upon between Executive and the
Company's Chief Executive Officer. Executive will be paid a pro rata portion of
her salary for each week of accrued and unused paid time off, in accordance
first with the provisions of Section 5 and otherwise with Company policies of
general application in effect at the time of the termination of her employment.

                    4.3.3 Executive will be entitled to perquisites comparable
to those that the Company from time to time extends to its senior executive
staff.

                    4.3.4 The Company will reimburse Executive for business,
travel, lodging, meals, and other reasonable business expenses incurred by her
in the performance of services hereunder subject to submission of documentation
in accordance with the Company's business expense reimbursement policies from
time to time applicable to its senior executives.

               4.4 Payments; Withholding of Taxes, etc. The Company will make
payments of Base Salary in accordance with the Company's general payroll
practices from time to time in effect. All payments to Executive pursuant to
this Agreement will be reduced by taxes and other amounts that the Company is
required by law or authorized by Executive to withhold.

          Section 5. Termination. The Company may, at its election and upon
written notice to the Executive, terminate the Executive's employment for any
reason or no reason, with or without cause. Where this Agreement or plan
provides for payment other than by cash lump sum, the Company may, in its sole
discretion, choose to make payment in whole or in part by cash lump sum,
including converting any benefits due to be provided over a period of time into
a cash lump sum equal to the present value, computed at the short-term
applicable federal rate under (S) 1274 of the Internal Revenue Code, of the cost
of the cost of providing such benefit(s) to the Executive over a period of time.

               5.1 Change in Control. For purposes of this Agreement, "Change of
Control" means:

                                      -2-



          (a)  a merger, acquisition, consolidation or other transaction
               involving the Company after which the individuals who constituted
               members of the Board of Directors of the Company or Avatech
               twelve (12) months before the consummation of such transaction do
               not constitute a majority of the Board of Directors or other
               similar governing body of the most senior resulting business
               entity after such transaction;

          (b)  a sale, lease or exchange of more than 50% of the assets of
               Avatech, the Company, or any subsidiaries of either, or more than
               50% of the stock or other equity interests in Avatech, the
               Company, or any subsidiaries of either, to one or more
               organizations or entities not more than 50% owned by the Avatech,
               the Company, or any subsidiaries of either after the consummation
               of such transaction; or

          (c)  during any period of twenty four (24) consecutive months,
               individuals who at the beginning of such period constituted the
               Board of the Company or Avatech cease for any reason to
               constitute at least a majority thereof unless the election of
               each new director was approved by a vote of at least two-thirds
               of the directors then still in office who were directors at the
               beginning of the twenty-four-month period.

Notwithstanding the foregoing, a Change Of Control will in no event be deemed to
have occurred if the Company is placed in receivership or files for protection
under title 11 of the United States Code, and Executive will not receive any
severance pay under Section 5 of this Employment Agreement if any local, state,
or federal regulator assumes control of the Company.

               5.2 Without a Change in Control (including Nonextension). Except
as provided in Section 5.3, the Company may elect not to extend the Term as
provided in Section 2 or may elect, at any time, to terminate Executive's
employment under this Agreement upon written notice of such termination to
Executive for any reason or no reason, with or without cause. The Executive may
terminate her employment at any time and for any reason upon thirty (30) days'
written notice to the Company.

                    5.2.1 If the Executive's employment terminates under this
Section 5.2, then the Company will pay Executive her Base Salary through the
effective date of termination and any other compensation and benefits that may
be accrued, due, or provided to the Executive upon termination of employment
under such circumstances in accordance with the terms and conditions of any
applicable employee benefit plans of the Company.

                    5.2.2 Notwithstanding any provisions of this Agreement to
the contrary, if Executive's employment is terminated by reason of her death,
then the Company will make any payments due under this Agreement to the
Executive's estate or other successor in interest, and will continue any
benefits to her surviving spouse or other successor in interest in accordance
with the terms of the Company's benefit plans and programs then in effect.

                                      -3-



               5.3 Change in Control. If the Executive's employment is
terminated during the term this Agreement and within twelve (12) months before
or twelve (12) months following a Change of Control, the Company will pay
Executive through six (6) months after the effective date of such termination.
Such severance pay will be at a rate equal to Executive's Base Salary in effect
on the effective date of termination and will be paid in accordance with the
Company's general payroll practices.

               5.4 Release. As a condition to receiving payment of amounts
payable under this Section 5, Executive will execute a release of all claims
against the Company in form reasonably satisfactory to the Company.

          Section 6. Certain Restrictions.

               6.1 Confidentiality. Executive acknowledges that she will acquire
confidential information relating to the business of Avatech, the Company, its
subsidiaries and affiliates, including but not limited to business plans, sales
and marketing plans, financial information, acquisition prospects, and
"customer" and "supplier" lists (as such terms may relate to the business or the
systems and other trade secrets or know-how of Avatech, the Company, its
subsidiaries and affiliates) as they may exist from time to time (collectively,
"Confidential Information"), which are valuable, special, and unique assets of
the Company's business, access to or knowledge of which is essential to the
performance of Executive's duties hereunder. Accordingly, Executive will not
disclose at any time (during her employment under this Agreement or thereafter)
any such Confidential Information other than in connection with and reasonably
required for the performance of her duties under this Agreement, unless required
to do so pursuant to law, subpoena, court order, or other legal process. These
restrictions will not apply to, and Confidential Information will not be deemed
to include, information that is then in the public domain (other than as a
result of action by the Executive).

               6.2 Competitive Activity. Due to the unique position of Executive
in her role of Senior Vice President of the Company, Executive agrees that if
she voluntarily resigns from her employment, Executive will not, for a period of
six (6) months after the effective date of her termination of employment,
without prior written consent of the Company:

                    6.2.1 Directly or indirectly, knowingly engage or be
interested in (as owner, partner, shareholder, employee, director, officer,
agent, consultant or otherwise), with or without compensation, any business
entity or operation that engages in the business of selling computer-aided
design software or providing professional, consulting, technical or training
services related to computer-aided design software within fifty (50) miles of
any location where the Company, its affiliates or subsidiaries, maintains a
place of business, except that Executive may own up to a five percent (5%)
interest in the publicly-traded securities of a publicly traded corporation;

                    6.2.2 Employ or retain or participate in or arrange the
employment or retention of any person who was employed or retained by the
Company, any successor to the Company's business, or any of their affiliates or
subsidiaries during the period of Executive's employment; or

                    6.2.3 Directly or indirectly solicit any customers or
clients of the Company, its affiliates, or subsidiaries.

                                      -4-



               6.3 Remedy for Breach and Modification. Executive acknowledges
that the provisions of this Section 6 are reasonable and necessary for the
protection of the Company and that the Company will be irrevocably damaged if
these provisions are not specifically enforced. Accordingly, Executive agrees
that, in addition to any other relief or remedies available to the Company,
including reasonable attorneys' fees and costs, the Company is entitled to seek
and obtain an appropriate injunction or other equitable remedy for the purposes
of restraining the Executive from any actual or threatened breach of or
otherwise enforcing these provisions and no bond or security will be required in
connection with such equitable remedy. If any provision of this Section 6 is
deemed invalid or unenforceable in any jurisdiction, such provision will be
deemed modified and limited in such jurisdiction to the extent necessary to make
it valid and enforceable in such jurisdiction.

          Section 7. Arbitration of Certain Disputes. Any dispute or controversy
arising under or in connection with this Agreement, other than with respect to
an alleged breach of any of any of the provisions of Section 6, shall be
resolved by binding arbitration held in Baltimore, Maryland. before a single
arbitrator. Such arbitration will be conducted in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then in effect and
otherwise in accordance with principles that would be applied by a court of law
or equity. Judgment on any award may be entered and enforced in any court having
jurisdiction.

          Section 8. Miscellaneous.

               8.1 Certain Permitted Changes in Executive's Position. Anything
in this Agreement to the contrary notwithstanding, in the event of a merger,
consolidation, reorganization, sale of substantially all of the Company's
assets, or similar transaction (a "Transaction") (whether or not such
Transaction constitutes a Change of Control as defined in Section 5.1) a change
only in Executive's title (but not a material reduction in the actual scope of
Executive's responsibilities, authority, or duties) does not constitute a
failure by the Company to perform any term or provision of this Agreement. In
the event of such a change in the Executive's title, any reference, whether
express or implied, in this Agreement to Executive's title will be deemed to
refer to Executive's title as so changed.

               8.2 Entire Agreement; Amendment. This Agreement supersedes all
prior agreements between the parties with respect to its subject matter, is
intended as a complete and exclusive statement of the terms of the agreement
between the parties with respect thereto, and may be amended only by a writing
signed by both parties hereto.

               8.3 Nonwaiver. The failure of either party to insist upon strict
adherence to any term of this Agreement on any occasion will not operate as a
waiver or deprive that party of the right thereafter to insist upon strict
adherence to that term or any other term of this Agreement. Any waiver must be
in a writing signed by the party to be charged therewith.

               8.4 Assignment. This Agreement will inure to the benefit of and
be binding upon the parties hereto and their respective heirs, representatives,
successors and assigns. This Agreement may not be assigned by either party
without the consent of the other, except that the Company may assign all of its
rights and delegate performance of all of its obligations hereunder in
connection with a Transaction.

                                      -5-



               8.5 Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be an original, but all of which together will
constitute the same instrument.

               8.6 Headings. The headings in this Agreement are for convenience
of reference only and should not be given any effect in the interpretation of
this Agreement.

               8.7 Governing Law. This Agreement is governed by the laws of the
State of Maryland, without regard to any provision that would result in the
application of the laws of any other state or jurisdiction.

               8.8 Severability. The invalidity or unenforceability of any
provision of this Agreement will not affect the validity or enforceability of
any other provision of this Agreement.

               8.9 Company Policies, Plans and Programs. Whenever any rights
under this Agreement depend on the terms of a policy, plan, or program
established or maintained by the Company, any determination of these rights will
be made on the basis of the policy, plan, or program in effect at the time as of
which such determination is made. No reference in this Agreement to any policy,
plan, or program established or maintained by the Company precludes the Company
from prospectively or retroactively changing or amending or terminating that
policy, plan, or program or adopting a new policy, plan, or program in lieu of
the then existing policy, plan, or program.

               8.10 Board Action. Any action that may be taken hereunder by the
Board of Directors of the Company with respect to the compensation and benefits
of Executive may be taken by an authorized committee of the Board.

                                      -6-



In Witness Whereof, the parties have executed this Agreement under seal as of
the date first above written.

Witness/Attest:                               Avatech Solutions Subsidiary, Inc.


                                              By: /s/                     (SEAL)
                                                  ------------------------
                                                  Donald R. "Scotty" Walsh,
                                                  Chief Executive Officer


                                              Avatech Solutions, Inc.


                                              By: /s/                     (SEAL)
                                                  ------------------------
                                                  Donald R. "Scotty" Walsh,
                                                  Chief Executive Officer


                                              /s/
                                              ----------------------------------
                                              Debra Keith

                                      -7-

EX-10.32

                                                                   EXHIBIT 10.32

                              Employment Agreement

     This Employment Agreement ("Agreement") is made as of the 17th day of
March, 2003 (the "Effective Date"), by and between Avatech Solutions Subsidiary,
Inc., a Delaware corporation (the "Company") and Scott Fischer ("Executive").

     Whereas, the Company desires to employ Executive as an Executive Vice
President for Strategy and Business Development, and Executive desires to be so
employed.

     Now, Therefore, in consideration of the mutual promises of the parties and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Company and Executive agree as follows:

          Section 1. Employment. The Company agrees to employ Executive, and
Executive agrees to be employed, as Executive Vice President for Strategy and
Business Development of the Company on the terms and subject to the conditions
of this Agreement.

          Section 2. Term. The term of Executive's employment under this
Agreement (the "Term") will commence on the Effective Date and will continue for
one (1) year (the "Initial Term"). The Term will be extended automatically in
successive one-year periods unless either party gives notice of nonextension to
the other not less than thirty (30) days before the end of the then-current
Term. Notwithstanding the foregoing, Executive's employment is subject to
termination during the Term as provided in Section 5 of this Agreement.

          Section 3. Duties. Executive will report to, and Executive's specific
responsibilities and authority will be established by, the Chief Executive
Officer of the Company. Executive will diligently and conscientiously devote his
full and exclusive business time and attention and best efforts in discharging
his duties to the Company.

          Section 4. Compensation and Benefits.

               4.1 Base Compensation. During the Initial Term, the Company will
pay Executive a base salary (the "Base Salary") at an annual rate of $180,000.
During each succeeding year during the Term, Executive's Base Salary may be
increased (but may not be decreased) by an amount determined by the Company's
Chief Executive Officer and its Board of Directors based upon the Executive's
performance during the prior year.

               4.2 Incentive Compensation. The Company will pay Executive a
quarterly incentive bonus within one (1) month after the end of each calendar
quarter, in an amount determined by the Company in its sole discretion and based
on performance measures to be agreed upon between the Company and the Executive.

               4.3 Benefit Plans and Fringe Benefits.

                    4.3.1 During the Term, Executive will be entitled to
participate in any and all employee benefit programs (including but not limited
to medical, vision, prescription



drug, dental, disability, employee and group life, accidental death and travel
accident, and section 401(k) plans and programs) offered by the Company to its
executives or to its employees generally, and Executive may receive such other
benefits as the Company may determine from time to time.

                    4.3.2 Executive will accrue four (4) weeks of paid time off
annually to be taken at times reasonably agreed upon between Executive and the
Company's Chief Executive Officer. Executive will be paid a pro rata portion of
his salary for each week of accrued and unused paid time off, in accordance
first with the provisions of Section 5 and otherwise with Company policies of
general application in effect at the time of the termination of his employment.

               4.4 Executive will be entitled to perquisites comparable to those
that the Company from time to time extends to its senior executive staff.

                    4.4.1 The Company will reimburse Executive for business,
travel, lodging, meals, and other reasonable business expenses incurred by him
in his performance of services hereunder subject to submission of documentation
in accordance with the Company's business expense reimbursement policies from
time to time applicable to its senior executives.

               4.5 Payments; Withholding of Taxes, etc. The Company will make
payments of Base Salary in accordance with the Company's general payroll
practices from time to time in effect. All payments to Executive pursuant to
this Agreement will be reduced by taxes and other amounts that the Company is
required by law or authorized by Executive to withhold.

          Section 5. Termination. The Company may, at its election and upon
written notice to the Executive, terminate the Executive's employment for any
reason or no reason, with or without cause. Where this Agreement or plan
provides for payment other than by cash lump sum, the Company may, in its sole
discretion, choose to make payment in whole or in part by cash lump sum,
including converting any benefits due to be provided over a period of time into
a cash lump sum equal to the present value, computed at the short-term
applicable federal rate under (S) 1274 of the Internal Revenue Code, of the cost
of the cost of providing such benefit(s) to the Executive over a period of time.

               5.1 Change in Control. For purposes of this Agreement, "Change of
Control" means:

          (a)  a merger, acquisition, consolidation or other transaction
               involving the Company after which the individuals who constituted
               members of the Board of Directors of the Company or Avatech
               twelve (12) months before the consummation of such transaction do
               not constitute a majority of the Board of Directors or other
               similar governing body of the most senior resulting business
               entity after such transaction;

                                      -2-



          (b)  a sale, lease or exchange of more than 50% of the assets of
               Avatech, the Company, or any subsidiaries of either, or more than
               50% of the stock or other equity interests in Avatech, the
               Company, or any subsidiaries of either, to one or more
               organizations or entities not more than 50% owned by the Avatech,
               the Company, or any subsidiaries of either after the consummation
               of such transaction; or

          (c)  during any period of twenty four (24) consecutive months,
               individuals who at the beginning of such period constituted the
               Board of the Company or Avatech cease for any reason to
               constitute at least a majority thereof unless the election of
               each new director was approved by a vote of at least two-thirds
               of the directors then still in office who were directors at the
               beginning of the twenty-four-month period.

Notwithstanding the foregoing, a Change Of Control will in no event be deemed to
have occurred if the Company is placed in receivership or files for protection
under title 11 of the United States Code, and Executive will not receive any
severance pay under Section 5 of this Employment Agreement if any local, state,
or federal regulator assumes control of the Company.

               5.2 Without a Change in Control (including Nonextension). Except
as provided in Section5.3, the Company may elect not to extend the Term as
provided in Section 2 or may elect, at any time, to terminate Executive's
employment under this Agreement upon written notice of such termination to
Executive for any reason or no reason, with or without cause. The Executive may
terminate his employment at any time and for any reason upon thirty (30) days'
written notice to the Company.

                    5.2.1 If the Executive's employment terminates under this
Section 5.2, then the Company will pay Executive his Base Salary through the
effective date of termination and any other compensation and benefits that may
be accrued, due, or provided to the Executive upon termination of employment
under such circumstances in accordance with the terms and conditions of any
applicable employee benefit plans of the Company.

                    5.2.2 Notwithstanding any provisions of this Agreement to
the contrary, if Executive's employment is terminated by reason of his death,
then the Company will make any payments due under this Agreement to the
Executive's estate or other successor in interest, and will continue any
benefits to his surviving spouse or other successor in interest in accordance
with the terms of the Company's benefit plans and programs then in effect.

               5.3 Change in Control. If the Executive's employment is
terminated during the term this Agreement and within twelve (12) months before
or twelve (12) months following a Change of Control, the Company will pay
Executive through six (6) months after the effective date of such termination.
Such severance pay will be at a rate equal to Executive's Base Salary in effect
on the effective date of termination and will be paid in accordance with the
Company's general payroll practices.

                                      -3-



               5.4 Release. As a condition to receiving payment of amounts
payable under this Section 5, Executive will execute a release of all claims
against the Company in form reasonably satisfactory to the Company.

          Section 6. Certain Restrictions.

               6.1 Confidentiality. Executive acknowledges that he will acquire
confidential information relating to the business of Avatech, the Company, its
subsidiaries and affiliates, including but not limited to business plans, sales
and marketing plans, financial information, acquisition prospects, and
"customer" and "supplier" lists (as such terms may relate to the business or the
systems and other trade secrets or know-how of Avatech, the Company, its
subsidiaries and affiliates) as they may exist from time to time (collectively,
"Confidential Information"), which are valuable, special, and unique assets of
the Company's business, access to or knowledge of which is essential to the
performance of Executive's duties hereunder. Accordingly, Executive will not
disclose at any time (during his employment under this Agreement or thereafter)
any such Confidential Information other than in connection with and reasonably
required for the performance of his duties under this Agreement, unless required
to do so pursuant to law, subpoena, court order, or other legal process. These
restrictions will not apply to, and Confidential Information will not be deemed
to include, information that is then in the public domain (other than as a
result of action by the Executive).

               6.2 Competitive Activity. Due to the unique position of Executive
in his role of Executive Vice President of the Company, Executive agrees that if
he voluntarily resigns from his employment Executive will not, for a period of
one (1) year after the effective date of his termination of employment, without
prior written consent of the Company:

                    6.2.1 Directly or indirectly, knowingly engage or be
interested in (as owner, partner, shareholder, employee, director, officer,
agent, consultant or otherwise), with or without compensation, any business
entity or operation that engages in the business of selling computer-aided
design software or providing professional, consulting, technical or training
services related to computer-aided design software within fifty (50) miles of
any location where the Company, its affiliates or subsidiaries, maintains a
place of business, except that Executive may own up to a five percent (5%)
interest in the publicly-traded securities of a publicly traded corporation;

                    6.2.2 Employ or retain or participate in or arrange the
employment or retention of any person who was employed or retained by the
Company, any successor to the Company's business, or any of their affiliates or
subsidiaries during the period of Executive's employment; or

                    6.2.3 Directly or indirectly solicit any customers or
clients of the Company, its affiliates, or subsidiaries.

               6.3 Remedy for Breach and Modification. Executive acknowledges
that the provisions of this Section 6 are reasonable and necessary for the
protection of the Company and that the Company will be irrevocably damaged if
these provisions are not

                                      -4-



specifically enforced. Accordingly, Executive agrees that, in addition to any
other relief or remedies available to the Company, including reasonable
attorneys' fees and costs, the Company is entitled to seek and obtain an
appropriate injunction or other equitable remedy for the purposes of restraining
the Executive from any actual or threatened breach of or otherwise enforcing
these provisions and no bond or security will be required in connection with
such equitable remedy. If any provision of this Section 6 is deemed invalid or
unenforceable in any jurisdiction, such provision will be deemed modified and
limited in such jurisdiction to the extent necessary to make it valid and
enforceable in such jurisdiction.

          Section 7. Arbitration of Certain Disputes. Any dispute or controversy
arising under or in connection with this Agreement, other than with respect to
an alleged breach of any of any of the provisions of Section 6, shall be
resolved by binding arbitration held in Baltimore, Maryland. before a single
arbitrator. Such arbitration will be conducted in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then in effect and
otherwise in accordance with principles that would be applied by a court of law
or equity. Judgment on any award may be entered and enforced in any court having
jurisdiction.

          Section 8. Miscellaneous.

               8.1 Certain Permitted Changes in Executive's Position. Anything
in this Agreement to the contrary notwithstanding, in the event of a merger,
consolidation, reorganization, sale of substantially all of the Company's
assets, or similar transaction (a "Transaction") (whether or not such
Transaction constitutes a Change of Control as defined in Section 5.1) a change
only in Executive's title (but not a material reduction in the actual scope of
Executive's responsibilities, authority, or duties), does not constitute a
failure by the Company to perform any term or provision of this Agreement. In
the event of such a change in the Executive's title, any reference, whether
express or implied, in this Agreement to Executive's title will be deemed to
refer to Executive's title as so changed.

               8.2 Entire Agreement; Amendment. This Agreement supersedes all
prior agreements between the parties with respect to its subject matter, is
intended as a complete and exclusive statement of the terms of the agreement
between the parties with respect thereto, and may be amended only by a writing
signed by both parties hereto.

               8.3 Nonwaiver. The failure of either party to insist upon strict
adherence to any term of this Agreement on any occasion will not operate as a
waiver or deprive that party of the right thereafter to insist upon strict
adherence to that term or any other term of this Agreement. Any waiver must be
in a writing signed by the party to be charged therewith.

               8.4 Assignment. This Agreement will inure to the benefit of and
be binding upon the parties hereto and their respective heirs, representatives,
successors and assigns. This Agreement may not be assigned by either party
without the consent of the other, except that the Company may assign all of its
rights and delegate performance of all of its obligations hereunder in
connection with a Transaction.

                                      -5-



               8.5 Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be an original, but all of which together will
constitute the same instrument.

               8.6 Headings. The headings in this Agreement are for convenience
of reference only and should not be given any effect in the interpretation of
this Agreement.

               8.7 Governing Law. This Agreement is governed by the laws of the
State of Maryland, without regard to any provision that would result in the
application of the laws of any other state or jurisdiction.

               8.8 Severability. The invalidity or unenforceability of any
provision of this Agreement will not affect the validity or enforceability of
any other provision of this Agreement.

               8.9 Company Policies, Plans and Programs. Whenever any rights
under this Agreement depend on the terms of a policy, plan, or program
established or maintained by the Company, any determination of these rights will
be made on the basis of the policy, plan, or program in effect at the time as of
which such determination is made. No reference in this Agreement to any policy,
plan, or program established or maintained by the Company precludes the Company
from prospectively or retroactively changing or amending or terminating that
policy, plan, or program or adopting a new policy, plan, or program in lieu of
the then existing policy, plan, or program.

               8.10 Board Action. Any action that may be taken hereunder by the
Board of Directors of the Company with respect to the compensation and benefits
of Executive may be taken by an authorized committee of the Board.

                  [NO FURTHER INFORMATION APPEARS ON THIS PAGE]

                                      -6-



          In Witness Whereof, the parties have executed this Agreement under
seal as of the date first above written.

Witness/Attest:                               Avatech Solutions Subsidiary, Inc.


/s/                                           By: /s/                     (SEAL)
- ----------------------------                      ------------------------
                                              Donald R. "Scotty" Walsh,
                                              Chief Executive Officer


                                              Avatech Solutions, Inc.


/s/                                           By: /s/                     (SEAL)
- ----------------------------                      ------------------------
                                              Donald R. "Scotty" Walsh,
                                              Chief Executive Officer


/s/                                           /s/
- ----------------------------                  ----------------------------------
                                              Scott Fischer

                                      -7-

EX-10.34

                                                                   EXHIBIT 10.34

                              EMPLOYMENT AGREEMENT

     This Employment Agreement ("Agreement") is made and entered into as of July
1, 2003 by and between Donald R. "Scotty" Walsh (the "Executive") and Avatech
Solutions, Inc., a Delaware corporation ("Avatech").

                              EXPLANATORY STATEMENT

     Executive has served as the Chief Executive Officer of Avatech since
December 2, 2002, and Avatech desires to continue to employ Executive, and
Executive desires to perform services for Avatech and to be employed as
Avatech's Chief Executive Officer on the terms and conditions set forth herein.
Both parties wish to terminate their obligations under an Employment Agreement
between Avatech and Executive dated December 2, 2002 and replace that Agreement
with this Agreement.

     Now, therefore, in consideration of the Explanatory Statement, which is
incorporated by reference herein, the mutual covenants, agreements,
representations and warranties herein set forth, and other good and valuable
consideration, the adequacy and sufficiency of which are hereby acknowledged,
the parties hereto do hereby agree as follows:

     Section 1. Employment and Duties. From and after July 1, 2003 (the
"Commencement Date"), Avatech shall employ Executive as the Chief Executive
Officer of Avatech. Executive shall perform such duties as may be assigned to
him from time to time by the Board of Directors of Avatech (the "Board"), and
shall report directly to the Board. Executive shall use his best efforts on a
full time basis (at least 40 hours per week) in the performance of his duties on
behalf of Avatech.

     Section 2. Compensation and Benefits.

          2.1. Salary. Executive's base annual salary ("Base Salary") shall be
two hundred and twelve thousand dollars ($212,000), payable in accordance with
Avatech's customary payroll policies in force at the time of payment.

          2.2. Incentive Compensation and Bonuses. Prior to the end of each of
Avatech's fiscal quarters, the Compensation Committee of the Board of Directors
of Avatech shall determine an amount of cash incentive compensation and a stated
performance measure ("Performance Goal") for the next following fiscal quarter.
Such cash incentive compensation shall be paid to Executive after the close of
the fiscal quarter if the Executive has met the Performance Goal for that fiscal
quarter, in accordance with Avatech's customary payroll policies in force at the
time of payment.

          2.3. Annual Review. Commencing with July 1, 2003, and on each July 1
thereafter, the Board shall conduct an annual performance review of Executive
and, at that time, consider increases in Executive's base compensation.



          2.4. Stock Options and Incentive Stock Grants. Avatech shall grant to
Executive options to purchase 100,000 shares of Avatech's Common Stock under
Avatech's Incentive Stock Option Plan, subject to the terms and conditions
contained in the Stock Option attached hereto as Annex A. In addition, Avatech
shall award to Executive 50,000 shares of common stock, pursuant to Avatech's
Restricted Stock Award Plan, subject to the terms and conditions contained in
the Restricted Stock Award attached hereto as Annex B.

          2.5. Benefits. Executive shall be entitled to participate in Avatech's
standard benefits provided to other management level employees of Avatech, as
established or modified by Avatech from time to time, including but not limited
to life insurance, health insurance, and dental insurance, to the extent not
provided to Executive from another business or corporation.

          2.6. Vacation. Executive shall be entitled to four calendar weeks of
vacation during each fiscal year of Avatech, which vacation weeks shall not
accrue if they are not used.

          2.7. Business Expenses. Pursuant to Avatech's customary policies in
force at the time of payment, Executive shall be promptly reimbursed, against
presentation of vouchers or receipts, for all authorized expenses properly
incurred by him in the performance of his duties hereunder.

     Section 3. Term and Termination.

          3.1. Term. This Agreement shall have a term beginning on the
Commencement Date and ending on the date of a Termination for Cause (as defined
in Section 3.2) or the date of a Termination Other than for Cause (as defined
and described in Section 3.3), whichever shall first occur.

          3.2. Termination for Cause. Executive shall be entitled to payment of
his Base Salary earned, accrued bonus earned (if any), and benefits existing at
the time of termination of his employment if such termination is a Termination
for Cause. "Termination for Cause" means (except as described in section 3.4)
one or more of: (a) voluntary termination of employment by Executive for any
reason; (b) death of Executive; (c) Executive having been unable to render
services required of him hereunder for a consecutive period of six months or for
any period in the aggregate of six months in any twelve month period because of
a serious and continuing health impairment, which impairment will most likely
result in Executive's continued inability to render the services required of him
hereunder; (d) Executive's misappropriation of corporate funds; (e) Executive's
conviction of a felony; (f) Executive's conviction of any crime involving theft,
dishonesty, or moral turpitude; (g) Executive's failure to devote substantially
his full business time and attention to Avatech as provided in Section 1 hereof;
(h) Executive's willful violation of directions of the Board of Directors of
Avatech which are consistent with Executive's duties as Chief Executive Officer;
(i) material misrepresentation made by Executive to Avatech; (j) verifiable
evidence that Executive has engaged in sexual harassment of a nature that could
give rise to liability on the part of Avatech; and (k) the commission by
Executive of a material breach of the terms of this Agreement.

          3.3. Termination Other Than for Cause. If Executive's employment with
Avatech is terminated and such termination is not a Termination for Cause,
Executive shall be

                                       -2-



entitled to payment of his Base Salary and other benefits existing at the time
of such termination for a period of twelve months thereafter, with all such
payments to be made periodically pursuant to Avatech's policies in force at the
time of payment, provided, however, that Avatech shall not be obligated to
continue any benefit if the plan or policy under which such benefit is provided
limits the provision of the benefit to full-time employees of Avatech, or if the
validity of the plan or policy would be adversely impacted by the continuation
of the benefit.

          3.4. Change in Control. If, upon a Change in Control, Executive is
either terminated or elects to resign, such termination shall be treated as a
termination under Section 3.3. As used in this Agreement, "Change in Control"
shall mean (a) a dissolution or liquidation of Avatech; (b) a merger of
consolidation in which Avatech is not the surviving corporation or the party to
the merger or consolidation whose shareholders do not own 50% or more of the
voting stock of the resulting corporation; or (c) the acquisition of more than
50% of the outstanding voting stock of Avatech by any person, or group of
persons acting in concert, in a single transaction or series of transactions.

     Section 4. Confidential Information.

          4.1. Definition of Confidential Information. For purposes of this
Agreement, the term "Confidential Information" means that secret, proprietary
information of Avatech not otherwise publicly disclosed (whether or not
discovered or developed by Executive) and known by Executive as a consequence of
Executive's employment with Avatech or as a consequence of Executive's position
as a director of Avatech. Without limiting the generality of the foregoing, such
proprietary information shall include information not generally known in the
industry or related industries which concerns customer lists; computer programs
and routines; the identity of specialized consultants and contractors and
confidential information developed by them for Avatech; operating and other cost
data, including information regarding salaries and benefits of employees; cost
and pricing data; acquisition, expansion, marketing, financial, strategic, and
other business plans; Avatech manuals, files, records, memoranda, plans,
drawings and designs, specifications and computer programs and records; and all
information that is a "trade secret" as defined in the Uniform Trade Secrets
Act.

          4.2. Confidential Information. During Executive's employment with
Avatech, Executive shall have access to and become familiar with Confidential
Information of Avatech. Executive acknowledges that such Confidential
Information is owned and shall continue to be owned solely by Avatech. During
the term of Executive's employment with Avatech and after termination of such
employment for any reason, Executive shall not use or divulge Confidential
Information to any person or entity other than Avatech, or persons to whom
Avatech has given its written consent, unless such information has become
publicly available and is not longer Confidential Information.

          4.3. Return of Documents. Upon termination of Executive's employment
with Avatech for any reason, all procedural manuals, guides, specifications,
plans, drawings, designs, records, lists, notebooks, software, diskettes,
customer lists, pricing documentation and other property which is or contains
Confidential Information, including all copies thereof, in the possession or
control of Executive, whether prepared by Executive or others, shall be
forthwith delivered by Executive to Avatech.

                                       -3-



     Section 5. Covenants Not to Compete.

          5.1. Restrictive Covenant. Avatech and Executive agree and acknowledge
that Avatech has legitimate business interests to support the restrictive
covenants set forth hereinafter, including, but not limited to, trade secrets,
Confidential Information that otherwise does not qualify as trade secrets, and
Executive's substantial relationships with prospective or existing customers.
Executive covenants and agrees that during Executive's employment with Avatech
and for a period of one year following Executive's cessation of employment for
any reason, Executive shall not in any manner start or join any business which,
as of or after the date of this Agreement, enters into a line of business or is
engaged in a line of business that is a line of business conducted by Avatech.

               This Section 5.1 shall prevent Executive, directly or indirectly,
on Executive's own behalf or as an executive, officer, employee, agent,
director, partner, consultant, lender, or advisor, from forming, owning,
joining, controlling, financing, or otherwise participating in the ownership or
management of or being otherwise affiliated with any person or entity engaged in
the type of business prohibited by this Section. Executive shall not permit any
person or entity (other than Avatech) of which Executive is a shareholder,
partner or director, or in which Executive has an ownership interest, to engage
in any type of business prohibited by this Section. Notwithstanding any other
provision herein to the contrary, the parties agree that Executive may invest
Executive's personal, private assets as a passive investor in not more than one
percent of the total outstanding shares of any publicly traded company engaged
in a competing business, so long as Executive does not participate in the
management or operations of such company.

          5.2. Solicitation of Employees. During the one-year period following
Executive's cessation of employment for any reason, Executive shall not, without
the prior written approval of the Chairman of the Board of Directors of Avatech,
directly or indirectly solicit, raid, entice, or induce any person who is, or
was at any time within six months prior to such cessation, an employee of
Avatech, to become employed by any other person, firm, or corporation in any
business which is in any manner in competition with Avatech. Furthermore,
Executive shall inform Avatech in writing if any other person employed by
Avatech contacts Executive for the purpose of seeking employment during such one
year period.

          5.3. New Developments. Executive agrees that, with respect to his work
for Avatech, any developments made by Executive or under Executive's direction
in connection with the work of Avatech shall be the sole and absolute property
of Avatech, and that any and all copyrights, patent rights, and other
proprietary rights therein shall belong to Avatech. Executive shall cooperate
with Avatech and execute any documents prepared by Avatech to secure or protect
any such rights.

     6. Representations of Executive. Executive hereby represents and warrants
that he has the unrestricted right to accept employment with Avatech on the
terms and conditions set forth herein and to execute and perform this Agreement
without being in conflict with any other agreement, obligation or understanding
with any third party. Executive represents that he is not bound by any agreement
or by any other existing or previous business relationship which

                                       -4-



conflicts with, or may conflict with, the performance of his obligations
hereunder, or prevent the full performance of his duties and obligations
hereunder.

     Section 7. Miscellaneous.

          7.1 Notices. Any notice permitted or required to be given under this
Agreement shall be sufficient if in writing and delivered personally or by
certified mail, return receipt requested, if to Executive, to Mr. Donald R.
Walsh at his residence address as reflected in Avatech's payroll records, and if
to Avatech, to the attention of Mr. W. James Hindman, at Avatech's principal
corporate office address. A party may change his or its address for receipt of
notices by complying with this Section.

          7.2. Entire Agreement. This Agreement contains the entire
understanding of the parties in respect of its subject matter and supersedes all
prior agreements and understandings between the parties with respect to such
subject matter.

          7.3. Amendment; Waiver. This Agreement may not be amended,
supplemented, canceled or discharged except by a written instrument executed by
the party affected thereby. No failure to exercise, and no delay in exercising,
any right, power or privilege hereunder shall operate as a waiver thereof. No
waiver of any breach of any provision of this Agreement shall be deemed to be a
waiver of any preceding or succeeding breach of the same or any other provision.

          7.4. Binding Effect; Assignment. The rights and obligations set forth
in this Agreement shall bind and inure to the benefit of any successor of
Avatech by reorganization, merger or consolidation, or any assignee of all or
substantially all of Avatech's business and properties. Executive's rights or
obligations hereunder may not be assigned by Executive, except that upon
Executive's death, all rights to compensation hereunder shall pass to
Executive's executor or administrator.

          7.5. Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect the meaning or interpretation of
this Agreement.

          7.6. Governing Law; Interpretation. This Agreement shall be construed
in accordance with, and governed by, the laws of the State of Maryland and, to
the extent it involves any United States statute, by the laws of the United
States.

          7.7. Further Assurances. Each of the parties agrees to execute,
acknowledge, deliver and perform, or caused to be executed, acknowledged,
delivered and performed, at any time and from time to time, all such further
acts, documents, transfers, conveyances, or assurances as may be necessary or
appropriate to carry out the provisions or intent of this Agreement.

          7.8. Severability. If any one or more of the terms, provisions,
covenants, or restriction contained in this Agreement shall be determined by a
court of competent jurisdiction to be invalid, void, or unenforceable, the
remainder of the terms, provisions, covenants and restrictions of this Agreement
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated.

                                       -5-



     In witness whereof, the parties hereto have entered into this Agreement as
of the day and year first above written.

                                        Avatech Solutions, Inc.


                                        By: /s/
                                            ------------------------------------
                                            W. James Hindman, Chairman


                                        /s/
                                        ----------------------------------------
                                        Donald R. "Scotty" Walsh

                                       -6-



     Neither the securities represented by this Option nor the shares of common
     stock issuable upon exercise hereof have been registered under the
     Securities Act of 1933, as amended (the "Securities Act"), or the
     securities laws of any state; therefore, the transfer of this Option or the
     shares of common stock issuable upon exercise hereof is subject to
     compliance with the conditions specified below, and no such transfer of
     this Option or such shares shall be valid until such conditions have been
     fulfilled.

                                    EXHIBIT A

                             AVATECH SOLUTIONS, INC.

                                  STOCK OPTION

     This Stock Option is granted by Avatech Solutions, Inc., a Delaware
corporation, to Donald R. "Scotty" Walsh effective as of July 30, 2003.

                              EXPLANATORY STATEMENT

     The Optionee is the Chief Executive Officer of the Company and as such is
important to the Company's continued success. In exchange for the Optionee's
continued services, pursuant to an Employment Agreement between the Optionee and
the Company dated as of July 1, 2003, the Board of Directors of the Company has
determined to grant to the Optionee an option, pursuant to the Company's 2002
Stock Option Plan, to purchase one hundred thousand (100,000) shares of the
Company's common stock, par value $.01 per share, on the terms and conditions
set forth in this Stock Option, and at an exercise price of $0.35 per share
which price the Board has determined to be the fair market value of the Common
Stock as of the Grant Date.

     Now, therefore, to evidence the grant of the option and to set forth the
terms and conditions governing the exercise thereof and the parties' other
agreements relative thereto, Optionee and the Company agree as follows:

     Section 1. Definitions.

          1.1. "Aggregate Exercise Price" at any give time means the Exercise
Price multiplied by the number of Option Shares with respect to which the Option
is being exercised at that time.

          1.2. "Board" means the Company's board of directors.

          1.3. "Committee" means the compensation committee of the Board.

          1.4. "Common Stock" means the common stock of the Company, par value
$.01 per share.

          1.5. "Company" means Avatech Solutions, Inc., a Delaware corporation.



                                                           ANNEX A: STOCK OPTION

          1.6. "Disability" means a physical or mental disease, injury, or
infirmity that prevents the Optionee from performing the substantial duties of
his or her position with the Company for a period of one hundred eighty (180)
consecutive days as certified by a physician designated by or acceptable to the
Board or the Committee.

          1.7. "Employment" means employment by the Company or any of its
subsidiaries.

          1.8. "Employment Agreement" means an Employment Agreement between the
Optionee and the Company dated as of July 1, 2003.

          1.9. "Exercise Price" means $0.35 per share.

          1.10. "Expiration Date" means 5:00 p.m. Baltimore time on the 10th
anniversary of the Grant date.

          1.11. "Fair Market Value" on a given date means:

               (a) if the Common Stock is listed on a national securities
exchange, the mean between the highest and lowest sale prices reported as having
occurred on the primary exchange with which the Stock is listed and traded on
the date prior to such date, or, if there is no such sale on that date, then on
the last preceding date on which such a sale was reported;

               (b) if the Common Stock is not listed on any national securities
exchange but is quoted in the National Market System of the National Association
of Securities Dealers Automated Quotation System on a last sale basis, the
average between the high bid price and low ask price reported on the date prior
to such date, or, if there is no such sale on that date, then on the last
preceding date on which a sale was reported; or

               (c) If the Common Stock is not listed on a national securities
exchange nor quoted in the National Market System of the National Association of
Securities Dealers Automated Quotation System on a last sale basis, the amount
determined by the Committee to be the fair market value based upon a good faith
attempt to value the Stock accurately and computed in accordance with applicable
regulations of the Internal Revenue Service; or

               (d) in the event of a Change in Control (as defined in the Plan)
which results in receipt of value by the stockholders, then the same amount
received by the stockholders.

          1.12. "Grant Date" means the effective date of this Option written
above.

          1.13. "Mature Stock" means shares of stock which are mature for
purposes of generally accepted accounting principles, i.e., that the shares:

               (a) have been held by the Optionee free and clear for at least
six months prior to the use thereof to pay part of an Option exercise price;

               (b) have been purchased by the Optionee on the open market; or

                                       -2-



                                                           ANNEX A: STOCK OPTION

               (c) meet any other requirements for "mature" shares as may exist
on the date of the use of the shares to pay part of an Option exercise price.

          1.14. "Option" means this Stock Option granted by the Company to the
Optionee.

          1.15. "Option Shares" means the shares common stock that the Optionee
will receive on exercise of this Option, as may be adjusted from time to time
pursuant to the terms of this Option. Initially and before any adjustments, the
Optionee may purchase the number of Option Shares granted by the Company in
Section 2.

          1.16. "Optionee" means Donald R. "Scotty" Walsh or his heirs or
assigns, as permitted by the Plan and the terms and conditions of this Option.

          1.17. "Plan" means the Avatech Solutions, Inc. 2002 Stock Option Plan.

          1.18. "Reorganization Event" means means (a) a dissolution or
liquidation of Avatech; (b) a merger of consolidation in which Avatech is not
the surviving corporation or the party to the merger or consolidation whose
shareholders do not own 50% or more of the voting stock of the resulting
corporation; or (c) the acquisition of more than 50% of the outstanding voting
stock of Avatech by any person, or group of persons acting in concert, in a
single transaction or series of transactions. Neither the subdivision or
combination of the authorized shares of Common Stock into a greater or lesser
number of shares of Common Stock (whether with or without par value) nor any
financing transaction will be deemed a Reorganization Event.

          1.19. "Retire," "Retirement" means the Optionee's termination of
employment at or after his "normal retirement date" as defined in the Company's
Retirement Savings Plan (or any successor plan).

          1.20. "Termination for Cause," "Cause" means (a) Optionee's
misappropriation of corporate funds; (b) Optionee's conviction of a felony; (c)
Optionee's conviction of any crime involving theft, dishonesty, or moral
turpitude; (d) Optionee's failure to devote substantially his full business time
and attention to Avatech as provided in Section 1 hereof; (e) Optionee's willful
violation of directions of the Board of Directors of Avatech which are
consistent with Optionee's duties as Chief Executive Officer; (f) falsification
of any material representation made by Optionee to Avatech; (g) verifiable
evidence that Optionee has engaged in sexual harassment of a nature that could
give rise to liability on the part of Avatech; and (g) the commission by
Optionee of a material breach of the terms of the Employment Agreement or any
successor employment agreement between Optionee and the Company.

          1.21. "Transfer" means the assignment, hypothecation, sale, transfer,
or other encumbrance or disposal, either voluntarily or by operation of law
(whether by virtue of execution, attachment or similar process), of all or any
part of the Optionee's rights under this Option.

                                       -3-



                                                           ANNEX A: STOCK OPTION

     Section 2. Grant, Term, and Vesting of Option.

          2.1. In General. The Company hereby grants to the Optionee the right,
and the Optionee shall be entitled, to purchase from the Company ("Exercise") at
any time and from time to time after the Grant date but in no event later than
the Expiration Date, up to one hundred thousand (100,000) shares of Common Stock
at the Exercise Price on the terms and subject to the conditions hereinafter set
forth.

          2.2. Right to Exercise.

               2.2.1. In General. Except as otherwise set forth (and subject to
all of the other conditions and limitations contained) in this Section 2, this
Option shall be immediately exercisable beginning on July 1, 2009.

               2.2.2. Accelerated Vesting Provisions. On or after the occurrence
of one (but not both) of the following ("Incentive Targets"):

                    (a) PLM Revenue Target. the close of any calendar quarter
next following the date on which the Company's revenues from sales of Product
Lifecycle Management (PLM) products reach three million dollars ($3,000,000),
provided that such date is on or before December 31, 2004; or

                    (b) Operating Income Target. June 30, 2004, provided that
the Company receives four hundred and thirty-six thousand, five hundred dollars
($436,500) of net income, before extraordinary items, during the fiscal year
ending June 30, 2004,

this Option shall be immediately exercisable at any time with respect to fifty
thousand (50,000) Option Shares plus the Vested Percentage (as set forth in
section 2.2.1 above) of the remaining fifty thousand (50,000) Option Shares. On
or after the occurrence of both Incentive Targets (whether simultaneously or
not), this Option shall become immediately exercisable at any time with respect
to all of the Option Shares. If either of (a) or (b) are not met on or before
the dates indicated, the Board will establish new goals and dates upon which
this Option shall become immediately exercisable, in whole, or in part.

          2.3. Reorganization Event. In the event of a Reorganization Event,
this Option shall become immediately exercisable at any time on or after such
event with respect to all of the Option Shares, provided that, at the time of
such Reorganization Event, the Company has achieved at least 80% of its forecast
revenue, expenses, and net income on an annualized basis.

          2.4. Termination for Cause; Resignation. In the event that (i) the
Optionee's employment is Terminated for Cause or (ii) the Optionee resigns or
otherwise voluntarily terminates his or her employment other than as a result of
Retirement (as defined below), then all rights under this Option shall terminate
effective as of the date of such termination of employment.

          2.5. Termination without Cause. In the event that the Optionee's
employment is terminated by the Company without Cause other than by reason of
the Optionee's Retirement, Death, or Disabiltiy, the Optionee shall be entitled
to exercise this Option for a period of twelve

                                       -4-



                                                           ANNEX A: STOCK OPTION

(12) months thereafter (but in no event later than the Expiration Date), at the
time or times and with respect to the total number of Option Shares provided
herein as though his or her employment had not terminated unless the Board or
the Committee in its sole and absolute discretion determines that this Option
should be exercisable to some greater extent or remain exercisable for some
longer period (ending in no event later than the Expiration Date); provided
however, that on the occurrence of either of the following events, this Option
shall no longer be considered an Incentive Stock Option within the meaning of
Section 422 of the Internal Revenue Code of 1986:

               2.5.1. the Optionee exercises this option later than three (3)
months after the termination of his employment without Cause; or

               2.5.2. the occurrence of either of the Incentive Targets.

          2.6. Retirement. In the event that the Optionee Retires, the Optionee
shall be entitled to exercise this Option to the same extent that it would have
been exercisable on the effective date of Retirement for a period of twelve (12)
months thereafter (but in no event later than the Expiration Date).

          2.7. Disability. In the event that the Optionee's employment is
terminated as a result of Disability, the Optionee shall remain entitled to
exercise this Option for a period of twenty-four (24) months thereafter, at the
time or times and with respect to the total number of Option Shares provided
herein as though his or her employment had not terminated.

          2.8. Death. In the event that the Optionee remains employed by the
Company at the time of his or her death, the Optionee's personal representative
or other successor in interest shall be entitled to exercise this Option to the
same extent that it would have been exercisable on the date of the Optionee's
death for a period of twelve (12) months thereafter (but in no event later than
the Expiration Date), unless the Board or the Committee in its sole and absolute
discretion determines that this Option should be exercisable to some greater
extent or remain exercisable for some longer period (ending in no event later
than the Expiration Date).

     Section 3. Exercise of Option.

          3.1. In General. To exercise this Option with respect to all or any
portion of the Option Shares, the Optionee must give notice to the Company in
substantially the form of Schedule 1, stating the number of Option Shares with
respect to which this Option is being exercised. In order to exercise this
Option, the notice must be accompanied by payment of the Aggregate Exercise
Price.

          3.2. Payment Options. The Optionee may pay the Aggregate Exercise
Price by any combination of:

               3.2.1. currency or certified or cashier's check;

               3.2.2. if permitted in the sole discretion of the Committee,
shares of Mature Stock of the Company valued at their Fair Market Value on the
date of exercise of the Option;

                                       -5-



                                                           ANNEX A: STOCK OPTION

               3.2.3. unless prohibited by applicable law, including with the
written notice of exercise referred to in section 3.1, instructions to the
Company to treat the Optionee as having exercised:

                    (a) the number of shares to be issued to the Optionee; and

                    (b) that number of shares so that the aggregate difference
between the full market value of a share and the Exercise Price is equal to the
Aggregate Exercise Price.

               3.2.4. any other means or method acceptable to the Committee.

          3.3. Withholding Taxes. As a condition of delivery of the certificate
representing the shares to be acquired upon exercise of this Option, the Company
may require that the Optionee remit to the Company an amount sufficient to
satisfy all federal, state, and other taxes or withholding requirements that may
be imposed upon the Company.

          3.4. Fractional Shares. The Company is not required to issue fractions
of shares upon exercise of this Option. If any fractional interest in a share is
otherwise deliverable upon the exercise of this Option, the Company will
purchase the fractional interest for an amount in cash equal to the Fair Market
Value of the fractional interest.

          3.5. Limitation on Exercise. Notwithstanding any other provision of
this Option or of the Plan, in the event of any attempted exercise at any time
when (i) the Optionee is a director, officer or employee of the Company and (ii)
such exercise or issuance is prohibited by applicable law or regulation or the
Company's policies then in effect concerning transactions by officers,
directors, and employees in securities of the Company, this Option is not
exercisable in whole or in part and no shares of Common Stock will be issued by
the Company.

          3.6. Issuance Taxes. The Company will issue stock certificates to the
Optionee upon exercise of this Option without charge to the Optionee for any
stamp or similar tax imposed with respect to the exercise of this Option. The
Company is not, however, required to pay any such tax that may be payable on
account of the issuance and delivery of stock certificates in any name other
than that of the registered holder of this Option, and the Company is not
required to issue or deliver any such stock certificate unless and until the
person or persons requesting the issue thereof have paid the amount of such tax
to the Company or have established to the satisfaction of the Company that such
tax has been paid.

          3.7. Delivery of Option Shares. Subject to and promptly after the
Optionee's compliance with all of the provisions of this Section 3, the Company
will deliver or cause to be delivered to the Optionee a certificate for the
number of Option Shares then being purchased by the Optionee. If any law or
applicable regulation of the Securities and Exchange Commission or other body
having jurisdiction over the transaction requires the Company or the Optionee to
take any action in connection with Option Shares purchased by the exercise of
the Option, exercise of the Option and delivery of the certificate or
certificates for such shares (including, without limitation, any exercise of the
Option and delivery of the certificate or certificate for such shares in
accordance with the procedures set forth in Section 3.2.3) may be postponed
until completion of the necessary action, which will be taken at the Company's
expense.

                                       -6-



                                                           ANNEX A: STOCK OPTION

          3.8. Reduction in Number of Option Shares. The number of Option Shares
subject to each outstanding Option shall be reduced by one share for each Option
Share purchased upon exercise of the Option.

     Section 4. Restrictions on Transfer; Legends.

          4.1. Transfer Restrictions; Opinion of Counsel. The Optionee may not
Transfer all or any part of his rights under this Option except by will or by
operation of the laws of descent and distribution or as expressly provided by
the Plan. No shares issued upon the exercise of this Option may be Transferred,
other than by will or by operation of the laws of descent and distribution,
unless or until such shares are registered pursuant to section 5.8 or the
transferor first delivers to the Company an opinion of counsel reasonably
satisfactory to counsel for the Company to the effect that such Transfer is
permitted under applicable federal and state securities laws. Any purported
Transfer in violation of the foregoing restrictions shall be null and void and
without effect.

          4.2. Option Legends. This Option and each option issued in exchange
for or upon transfer of this Option will (unless otherwise permitted by the
provisions of this Section 4) be stamped or otherwise imprinted with a legend in
substantially the following form:

     Neither the securities represented by this Option nor the shares of common
     stock issuable upon exercise hereof have been registered under the
     Securities Act of 1933, as amended (the "Securities Act"), or the
     securities laws of any state; therefore, the transfer of this Option or the
     shares of common stock issuable upon exercise hereof is subject to
     compliance with the conditions specified below, and no such transfer of
     this Option or such shares shall be valid until such conditions have been
     fulfilled.

          4.3 Stock Certificate Legends. Unless and until the shares issued on
exercise of this Option are registered as provided in Section 5.8, each
certificate evidencing shares issued upon the exercise of this Option or to any
subsequent transferee of such shares will be stamped with the following legend:

     The shares represented by this certificate have not been registered under
     the Securities Act of 1933, as amended, (the "Securities Act") or the
     securities laws of any state and no interest therein may be sold,
     distributed, assigned, offered, pledged or otherwise transferred unless (a)
     there is an effective registration statement under the Securities Act or
     the state securities laws covering any such transaction involving said
     securities or (b) this corporation receives an opinion of legal counsel for
     the holder of these securities (concurred in by legal counsel for this
     corporation) stating that such transaction is exempt from such registration
     or this corporation otherwise satisfies itself that such transaction is
     exempt from registration. Neither the offering of the securities

                                       -7-



                                                           ANNEX A: STOCK OPTION

     nor any offering of materials have been reviewed by any administrator under
     any applicable state or Federal law.

     Section 5. Adjustment of Exercise price and Number of Shares Issuable Upon
Exercise.

          5.1. Stock Dividends, Splits, Etc. In the event that (i) the
authorized shares of Common Stock are subdivided into a greater, or combined
into a lesser, number of shares of Common Stock (whether with or without par
value) or (ii) the Company issues additional Common Stock as a dividend:

               5.1.1. the Exercise Price shall be decreased or increased, as the
case may be, to an amount which bears the same relation to the Exercise Price in
effect immediately before such subdivision, combination, or dividend as the
total number of shares of Common Stock outstanding immediately before such
subdivision, combination, or dividend bears to the total number of shares of
Common Stock outstanding immediately after such subdivision, combination, or
dividend; and

               5.1.2. the number of Option Shares shall be adjusted by
multiplying the number of shares so issuable immediately before the adjustment
of the Exercise Price described in subsection (a) by the Exercise Price
immediately before such adjustment and dividing the product so obtained by the
Exercise Price after such adjustment.

          5.2. Reorganization Events. In case a Reorganization Event, this
Option shall, after such Reorganization Event, be exercisable for the number of
shares of stock or other securities or property of the Company, or of the
corporation or entity resulting from or surviving, or acquiring the assets of
the Company pursuant to, such Reorganization Event to which the Optionee (at the
time of the Reorganization Event) would have been entitled as a result of the
Reorganization Event had this Option been exercised in full immediately before
such Reorganization Event. In any such case, if necessary, the provisions set
forth in this Section 5 regarding the rights and interests thereafter of the
Optionee shall be appropriately adjusted so as to be applicable, as nearly as
may reasonably be, to any shares of stock or other securities or property
thereafter deliverable upon the exercise of this Option.

          5.3. Fractional Shares. In the event of an adjustment to the number of
Option Shares under this Section 5 results in a fractional Option Share, such
fraction will be adjusted to the nearest smaller whole number of shares.

          5.4. Notice of Certain Actions. If any date before the Exercise Date
is fixed by the Company as the date as of which holders of Common Stock (i) are
entitled to receive any dividend or any distribution upon the Common Stock of
the Company other than a dividend payable in cash or in Common Stock, (ii) are
offered any subscription or other rights, or (iii) are entitled to participate
in any Reorganization Event or in any liquidation, dissolution, or winding up of
the Company, the Company shall cause notice thereof (specifying such date) to be
mailed to the registered holder of this Option at the Optionee's address
appearing on the books of the Company at least thirty (30) days before the date
as of which such holders of Common Stock are to be determined.

                                       -8-



                                                           ANNEX A: STOCK OPTION

          5.5. Notice of Adjustment. The Company will mail a notice setting
forth the adjusted Exercise Price and the adjusted number of shares for which
this Option is exercisable whenever the Exercise Price or the number or shares
issuable upon exercise of this option is adjusted as required by the provisions
of this Section 5 to the registered holder of this Option at the holder's last
address as it appears on the books of the Company. The Optionee's failure to
waive or receive such notice, or any defects therein or in the mailing thereof,
will not affect the adjustments.

          5.6. Reservation of Sufficient Shares. The Company will at all times
reserve and keep available out of its authorized but unissued Common Stock the
number of its duly authorized shares of Common Stock as shall from time to time
be sufficient for the purpose of effecting the issuance of shares upon the
exercise of this Option. If at any time the number of authorized but unissued
shares of Common Stock is not sufficient to effect the issuance of the Option
Shares, the Company will take such corporate action as may, in the opinion of
its counsel, be necessary to increase its authorized but unissued shares of
Common Stock to at least the number of shares as is sufficient for this purpose.

          5.7. Exercise Price Not Less Than Par Value. As a condition precedent
to taking of any action that would cause an adjustment reducing the
then-prevailing Exercise Price below the then-par value per share of the Option
Shares, the Company shall take such corporate action as may, in the opinion of
its counsel, be necessary in order that the Company may validly and legally
issue its Common Stock at the adjusted Exercise Price upon any subsequent
exercise of this Option.

          5.8. Registration and Approval. If any shares of the Common Stock
reserved or to be reserved for the purpose of issuance upon the exercise of this
Option require registration with or approval of any governmental authority under
any federal or state law before such shares may be validly issued upon exercise
of this Option, then the Company covenants that it will in good faith and as
expeditiously as possible endeavor to secure such registration or approval, as
the case may be; provided, however, that this provision shall not require the
Company to endeavor to secure such registration or approval in order (i) to
issue shares upon exercise of this Option if such shares can lawfully be issued
pursuant to one or more exemptions from registration under applicable federal
and state securities laws (whether or not as a consequence thereof such shares
constitute "restricted securities" or the holder of such shares is unable to
transfer such shares absent registration or the availability of a suitable
exemption from registration under such laws) or (ii) to enable any person to
sell or distribute shares received upon exercise of this Option in a transaction
involving a public offering within the meaning of the Securities Act as then in
effect.

          5.9. Shares Fully Paid and Nonassessable. The Company covenants that
all shares issued upon exercise of this Option will upon issuance be fully paid
and nonassessable.

     Section 6. Miscellaneous.

          6.1. Notices. Any notice or communication required or permitted by
this Option will be deemed to be received by the party to whom the notice or
communication is addressed if delivered in person or by commercial courier
service or sent by first class mail,

                                       -9-



                                                           ANNEX A: STOCK OPTION

postage prepaid: if to the Company, addressed to it at 11400A Cronridge Drive,
Owings Mills, Maryland 21117, marked for the attention of the Chairman of the
Board; and if to the Optionee, addressed to him at the address reflected in the
Company's payroll records; or in either case to such other address as any party
notifies the other in accordance with this section.

          6.2. No Rights of Stockholder. The Optionee shall not be deemed a
stockholder of the Company for any purpose until the shares issuable upon
exercise of this Option have been issued to the Optionee upon exercise of this
Option. The existence of this Option shall not affect in any way the right or
power of the Company or its stockholders to make or authorize any adjustments,
recapitalizations, reorganizations, or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or any
issue of bonds, debentures, or shares of capital stock with a preference ahead
of, or convertible into, or otherwise affecting the Common Stock or rights
thereof, or dissolution or liquidation of the Company, or any sale or transfer
of all or any part of its assets or business, or any other corporate act or
proceeding, whether of a similar character or otherwise.

          6.3. Entire Agreement. This Option contains the entire agreement
between the Parties and is a complete written integration of the Option and
supercedes any prior agreements between them relating to the subject of this
Option.

          6.4. Governing Law. The Parties agree that this Option shall be
construed, interpreted and enforced in accordance with the laws of the State of
Maryland without reference to the rules governing conflict of laws.

          6.5. Jurisdiction and Venue. The Parties irrevocably submit to
personal jurisdiction and venue in the State of Maryland for the purpose of any
suit, action or proceeding arising out of or relating to this Option.

          6.6. Severability. In the event that a court of competent jurisdiction
deems any provision of this Option is deemed illegal, invalid or otherwise
unenforceable, the remainder of this Option shall be valid and enforced to the
fullest extent permitted by law.

          6.7. Conflicts with Plan; Amendments. This Option has been granted
pursuant to the Plan and shall be construed consistently therewith. In the event
of any conflict between the provisions of the Plan and this Option, the
provisions of the Plan shall control. The Board or the Committee, as the case
may be, shall have the right, in its sole discretion, to alter or amend this
Option from time to time in any manner for the purpose of promoting the
objectives of the Plan but only if all other options to purchase shares of the
Company's Common Stock pursuant to the Plan which are then in effect and not
wholly exercised at the time of such alteration or amendment are also similarly
altered or amended with substantially the same effect. Any such alteration or
amendment of this Option shall, upon adoption by the Board or the Committee, as
the case may be, become and be binding and conclusive on all persons affected
thereby without requirement for consent or other action with respect thereto by
any such person. The Company shall give written notice to the Optionee of any
such alteration or amendment of this Option as promptly as practicable after the
adoption thereof.

                                      -10-



                                                           ANNEX A: STOCK OPTION

          6.8. Future Amendment. Except as provided in Section 6.7, this Option
may not be amended except in writing and executed by all Parties, and no course
of conduct by any parties or among the Parties will be deemed to amend the terms
and conditions of this Option, except if such amendment is reduced to writing
and executed by all Parties.

          6.9. Waiver. The waiver of any breach of any provision of this Option
by any of the Parties does not constitute or operate as a waiver of any other
breach of any provision of this Option, and any failure to enforce any provision
of this Option does not operate as a waiver of any existing or future rights,
duties, or obligations arising out of this Option.

          6.10. Headings. The headings of the sections of this Option are for
convenience of reference only and do not constitute a part of this Option.

          6.11. Execution. This Option may be executed in one or more
counterparts, each of which constitutes a duplicate original.

     In witness whereof, the parties have caused this Stock Option to be signed
under seal as of the date first above written.

                                        Avatech Solutions, Inc.


                                        By: /s/                           (SEAL)
                                            ------------------------------
                                            W. James Hindman, Chairman


                                        /s/                               (SEAL)
                                        ----------------------------------
                                        Donald R. "Scotty" Walsh

                                      -11-



                                                           ANNEX A: STOCK OPTION

                             AVATECH SOLUTIONS, INC.

                                  STOCK OPTION

                               Notice of Exercise

                         ------------------------------
                                     (Date)

TO:  Avatech Solutions, Inc.
     11400A Cronridge Drive
     Owings Mills, Maryland 21117
     Attn: Chairman of the Board of Directors

     I am the holder of a Stock Option dated July 30, 2003 to purchase shares of
the Common Stock of Avatech Solutions, Inc., a Delaware corporation (the
"Company") at a price of $0.35 per share. I hereby exercise that Stock Option
with respect to         shares, for an aggregate exercise price of
                -------
$               . Payment of the aggregate exercise price accompanies this
 ---------------
Notice of Exercise.

     I acknowledge that the Company is entitled to require as a condition of
delivering the certificate representing these shares that I remit to the Company
an amount sufficient to satisfy all federal, state, and other taxes or
withholding requirements that may be imposed upon the Company. Whether or not
the Company requires me to remit any such amounts, the Company shall have the
right to withhold such amounts from any compensation or other payments otherwise
due to me.

                                        Very truly yours,


                                        ----------------------------------------
                                        Donald R. "Scotty" Walsh

                                        Address:
                                                 -------------------------------

                                        ----------------------------------------

                                        ----------------------------------------



                                     ANNEX B

                             AVATECH SOLUTIONS, INC.

                             RESTRICTED STOCK AWARD

     This Restricted Stock Award ("Award") is made as of the 30th day of July,
2003 (the "Award Date"), by and between Avatech Solutions, Inc., a Delaware
corporation (the "Company"), and Donald R. "Scotty" Walsh (the "Grantee").

                                    RECITALS

     The Grantee is the Chief Executive Officer of the Company and as such is
important to the Company's continued success. In exchange for the Grantee's past
and future services, the Board of Directors of the Company (the "Board") has
determined to grant to the Grantee a restricted stock award, pursuant to the
Company's Restricted Stock Award Plan (the "Plan"), to grant 50,000 shares (the
"Award Shares") of the Company's common stock, par value $.01 per share ("Common
Stock"), subject to the restrictions and conditions set forth in this Award.

     Now, therefore, in consideration for the mutual agreements, promises and
releases set forth below, and for other good and valuable consideration, the
receipt and sufficiency of which is are hereby acknowledged, and to evidence the
grant of and to set forth the terms and conditions governing the grant and
ownership of the Award Shares, and the parties' other agreements related
thereto, Grantee and the Company agree as follows:

                                    AGREEMENT

     Section 1. Grant. The Company hereby grants to the Grantee and the Grantee
hereby accepts the Award Shares, consisting of 50,000 shares of the Company's
Common Stock, subject to the following terms and conditions and to the
provisions of the Plan, the terms of which are incorporated by reference herein.

     Section 2. Restrictions on Transfer.

          2.1. Definitions.

               2.1.1. Vested Shares. The Grantee may sell, assign, pledge, or
otherwise transfer Vested Shares in any manner not prohibited by state or
federal law, and no provision of this Award or of the Plan shall restrict the
Grantee from transferring, pledging, or otherwise disposing of Vested Shares.

               2.1.2. Unvested Shares. Except as provided in Section 3, the
Grantee may not sell, assign, pledge, or otherwise transfer, either voluntarily
or involuntarily, any shares designated as Unvested Shares. The restrictions on
transfer imposed by the Plan and this Section 2.1.2 on the Unvested Shares may
lapse, and Unvested Shares may become Vested Shares, according to Section 2.2
below.



                                                 ANNEX B: RESTRICTED STOCK AWARD

          2.2. Vesting of Shares. Provided that the Grantee is an officer of the
Company or one of its affiliates or subsidiaries on such date, on the last day
of each calendar month, beginning with July 2003, the restrictions on transfer
imposed by this Agreement and the Plan on one-twelfth (1/12) of Unvested Shares
shall lapse, and such number of Unvested Shares shall become Vested Shares, so
that all of the Award Shares shall have become Vested Shares on or before June
30, 2004.

          2.3. Forfeiture of Unvested Shares. If the Grantee ceases to be an
officer of the Company while the restrictions on transfer imposed by this
Section 2 apply to any Unvested Shares, such Unvested Shares will be immediately
forfeited and returned to the Company.

     Section 3. Tender Offer; Merger; Adjustment of Shares. Notwithstanding
anything contained herein to the contrary, including but not limited to the
restrictions on transfer imposed by Section 2:

          3.1. Award Shares (i) may be tendered in response to a tender offer
for a request or invitation to tenders of greater than 50 percent of the
outstanding Common Stock of the Company or (ii) may be surrendered in a merger,
consolidation or share exchange involving the Company; provided, in each case,
that the securities or other consideration (including any cash) received in
exchange for the Award Shares shall no longer be subject to the restrictions and
conditions set forth in this Award.

          3.2. In the event of any change in the outstanding Common Stock
resulting from a subdivision or consolidation of shares, whether through
reorganization, recapitalization, share split, reverse share split, share
distribution or combination of shares or the payment of a share dividend, the
Award Shares, either Vested or Unvested Shares, shall be treated in the same
manner in any such transaction as other Common Stock. Any Common Stock or other
securities received by the Grantee with respect to the Award Shares in any such
transaction shall not be subject to the restrictions and conditions, including
any vesting restrictions, set forth in this Award.

     Section 4. Valuation. The fair market value of the Award Shares on any
given day will be:

          4.1. if the Common Stock is listed on a national securities exchange,
the mean between the highest and lowest sale prices reported as having occurred
on the primary exchange with which the Stock is listed and traded on the date
prior to such date, or, if there is no such sale on that date, then on the last
preceding date on which such a sale was reported;

          4.2. if the Common Stock is not listed on any national securities
exchange but is quoted in the National Market System of the National Association
of Securities Dealers Automated Quotation System on a last sale basis, the
average between the high bid price and low ask price reported on the date prior
to such date, or, if there is no such sale on that date, then on the last
preceding date on which a sale was reported;

          4.3. if the common stock is listed on the OTC Bulletin Board, the last
closing price of the common stock of the Company on the OTC Bulletin Board as of
the close of business on the last business day prior to the date on which the
shares are to be valued.

                                       -2-



                                                 ANNEX B: RESTRICTED STOCK AWARD

          4.4. if the Common Stock is not listed on a national securities
exchange nor quoted in the National Market System of the National Association of
Securities Dealers Automated Quotation System on a last sale basis, nor listed
on the OTC Bulletin Board, the most recent price at which shares of the
Company's common stock traded in any recognized securities market.

          4.5. if the Common Stock is not listed on a national securities
exchange nor quoted in the National Market System of the National Association of
Securities Dealers Automated Quotation System on a last sale basis, nor listed
on the OTC Bulletin Board, nor traded in any recognized securities market, the
amount determined by the Board to be the fair market value based upon a good
faith attempt to value the Stock accurately and computed in accordance with
applicable regulations of the Internal Revenue Service; or

          4.6. in the event of a transaction pursuant to judicial order, state
law, or a vote of the majority of the Company's shareholders which results in
receipt of value by the shareholders in exchange for their shares of common
stock, that same amount received by the shareholders.

     Section 5. Rights as Stockholder. The Grantee shall be entitled to all of
the rights of a stockholder with respect to the Award Shares including the right
to vote such shares and to receive dividends and other distributions payable
with respect to such shares after the Award Date.

     Section 6. Certificates.

          6.1. Escrow of Certificates. Certificates for the Award Shares will be
issued in the Grantee's name and will be held in escrow by the Company until all
restrictions lapse or such shares are forfeited as provided in Section 2 of this
Award; provided, however, that the terms of such escrow shall make allowance for
the transactions contemplated by Section 3 above.

          6.2. Delivery of Certificates. A certificate or certificates
representing the Award Shares as to which restrictions have lapsed shall be
delivered to the Grantee upon such lapse. Notwithstanding anything contained
herein to the contrary, the Company's obligation to issue or deliver
certificates evidencing the Award Shares shall be subject to all applicable
laws, rules and regulations and to such restrictions, conditions or approvals by
any governmental agencies or national securities exchanges as may be required.

          6.3. Restrictive Legends.

               6.3.1. Each certificate representing an Unvested Award Share will
be stamped with the following legend:

     The Sale or transfer of the shares represented by this Certificate is
     subject to an Agreement between the Corporation and the Shareholder dated
     April 1, 2003. A copy of this Agreement is on file in the principal office
     of the Corporation and will be furnished, upon request and without charge
     to any holder hereto.

                                       -3-



                                                 ANNEX B: RESTRICTED STOCK AWARD

               6.3.2. Unless and until the Award Shares are registered as
provided in Section 6.4, each certificate representing an Award Share will be
stamped with the following legend:

     The shares represented by this certificate have not been registered under
     the Securities Act of 1933, as amended, (the "Securities Act") or the
     securities laws of any state and no interest therein may be sold,
     distributed, assigned, offered, pledged or otherwise transferred unless (a)
     there is an effective registration statement under the Securities Act or
     the state securities laws covering any such transaction involving said
     securities or (b) this corporation receives an opinion of legal counsel for
     the holder of these securities (concurred in by legal counsel for this
     corporation) stating that such transaction is exempt from such registration
     or this corporation otherwise satisfies itself that such transaction is
     exempt from registration. Neither the offering of the securities nor any
     offering of materials have been reviewed by any administrator under any
     applicable state or Federal law.

          6.1. Registration of Award Shares. If, on the date that some or all of
the Award Shares become transferable and no longer subject to the risk of
forfeiture as provided in Section 2 (the "Vested Award Shares"), the Vested
Award Shares must be registered with any state or federal authority before they
may be resold by the Grantee, the Company, at its expense, will take any and all
reasonable steps necessary to register the Vested Award Shares with the
applicable state or Federal authority. The Grantee will provide any reasonable
assistance requested by the Company in connection with such registration.

     Section 7. Withholding and Taxes. The Company shall have the right to
require the Grantee to remit to the Company, or to withhold from other amounts
payable to the Grantee, as compensation or otherwise, an amount sufficient to
satisfy any and all federal, state and local withholding tax requirements when
such amounts become due.

          7.1. Notice to Grantee. The Company shall give written notice to the
Grantee no later than thirty (30) days prior to the date on which the Company
must collect or withhold any taxes relating to this Award of the date any such
taxes must be received by the Company and an estimate of the amount of such
taxes.

          7.2. Surrender of Award Shares to Pay Taxes. The Grantee may elect, by
written notice to the Company at least ten (10) days prior to the date on which
such taxes must be received by the Company, to surrender a whole number of Award
Shares to the Company, such that the fair market value of the Award Shares
surrendered is equal to or greater than the amount of the withholding taxes. The
Company will remit in cash the difference (if any) between the value of the
Award Shares surrendered and the withholding taxes due to the Grantee as soon as
administratively feasible after the Grantee surrenders the Award Shares. The
Board of Directors, in the exercise of its sole discretion, shall determine both
the fair market value of the Award Shares surrendered pursuant to this paragraph
and the date on which such valuation occurs.

                                       -4-



                                                 ANNEX B: RESTRICTED STOCK AWARD

     Section 8. Miscellaneous.

          8.1. Notices. Any notice or communication required or permitted by
this Option will be deemed to be received by the party to whom the notice or
communication is addressed if delivered in person or by commercial courier
service or sent by first class mail, postage prepaid: if to the Company,
addressed to it at 11400A Cronridge Drive, Owings Mills, Maryland 21117, marked
for the attention of the Chairman of the Board; and if to the Grantee, addressed
to the Grantee at the address reflected in the Company's payroll records; or in
either case to such other address as any party notifies the other in accordance
with this section.

          8.2. Entire Agreement. This Award and the Plan contain the entire
agreement between the Parties and are a complete written integration of the
Award and supercede any prior agreements between them relating to the subject of
this Award.

          8.3. No Employment Agreement. Neither this Award nor the Plan are, nor
should either be construed to embody or contain, an agreement or promise of
future employment of the Grantee by the Company or any of its affiliates or
subsidiaries. The Grantee's right, if any, to continue to serve the Company or
any of its affiliates or subsidiaries as an officer, employee or otherwise,
shall not be enlarged or otherwise affected by this Award.

          8.4. Governing Law. The Parties agree that this Award shall be
construed, interpreted and enforced in accordance with the laws of the State of
Maryland without reference to the rules governing conflict of laws.

          8.5. Jurisdiction and Venue. The Parties irrevocably submit to
personal jurisdiction and venue in the State of Maryland for the purpose of any
suit, action or proceeding arising out of or relating to this Award.

          8.6. Severability. In the event that a court of competent jurisdiction
deems any provision of this Award is deemed illegal, invalid or otherwise
unenforceable, the remainder of this Award shall be valid and enforced to the
fullest extent permitted by law.

          8.7. Conflicts with Plan; Amendments. This Award has been granted
pursuant to the Plan and shall be construed consistently therewith. In the event
of any conflict between the provisions of the Plan and this Award, the
provisions of the Plan shall control. The Board of Directors of the Company
shall have the right, in its sole discretion, to alter or amend the Plan from
time to time, as governed by the terms of the Plan. Any such alteration or
amendment of the Plan shall, upon adoption by the Board become and be binding
and conclusive on all persons affected thereby without requirement for consent
or other action with respect thereto by any such person. The Company shall give
written notice to the Grantee of any such alteration or amendment affecting this
Award as promptly as practicable after the adoption thereof.

          8.8. Future Amendment. This Award may not be amended except in writing
and executed by all parties hereto, and no course of conduct by any parties or
among the parties will be deemed to amend the terms and conditions of this
Award, except if such amendment is reduced to writing and executed by all
parties.

          8.9. Waiver. The waiver of any breach of any provision of this Award
by any of the Parties does not constitute or operate as a waiver of any other
breach of any provision of

                                       -5-



                                                 ANNEX B: RESTRICTED STOCK AWARD

this Award, and any failure to enforce any provision of this Award does not
operate as a waiver of any existing or future rights, duties, or obligations
arising out of this Award.

          8.10. Headings. The headings of the sections of this Award are for
convenience of reference only and do not constitute a part of this Award.

          8.11. Pronouns. The masculine shall be deemed to include the feminine
or neuter, as appropriate.

          8.12. Execution. This Award may be executed in one or more
counterparts, each of which constitutes a duplicate original.

     In witness whereof, the parties have caused this Restricted Stock Award to
be signed under seal as of the date first above written.

                                        AVATECH SOLUTIONS, INC.


                                        By: /s/                           (SEAL)
                                            ------------------------------
                                            W. James Hindman, Chairman


                                        /s/                               (SEAL)
                                        ----------------------------------
                                        Donald R. "Scotty" Walsh

                                       -6-

EX-10.35

                                                                   EXHIBIT 10.35

                                  A V A T E C H
                                S O L U T I O N S

                                 August 21, 2003

Henry D. Felton
13001 Dover Road
Reisterstown, MD 21136

     Re: Letter of Employment

Dear Mr. Felton:

     This Letter Agreement contains the terms of your continued employment with
Avatech Solutions, Inc. (together with its affiliates, subsidiaries,
successors-in-interest, and their affiliates and subsidiaries, "Avatech"). This
Letter Agreement is the entire agreement between you and Avatech relating to
your employment, and replaces all other employment or severance agreements
between you and Avatech, including, but not limited to, the Severance Agreement
between you and Avatech dated January 1, 1998. By signing below, you agree to be
bound by the terms and conditions contained in this Letter Agreement, effective
as of the date of your signature.

     In addition to your continued service as the Vice-Chairman of Avatech's
Board of Directors, you agree to perform all reasonable duties assigned to you
by the Board of Directors or one of Avatech's officers on a substantially
full-time basis. The term of your employment under this Letter Agreement shall
be for six (6) years, and may be extended or modified by a written agreement
between you and Avatech.

     In exchange for your services, Avatech will pay you an annual salary and
bonuses determined each year by the Compensation Committee of the Board of
Directors, commensurate with the amount and quality of the services you perform
or are expected to perform, but your annual salary will not, in any year, be
less than two thousand dollars ($2,000) plus the annual amount of the employee
contribution to Avatech's health benefit plans necessary to maintain the maximum
amount of medical coverage available to you through Avatech's health benefit
plans for you and your family. In addition, Avatech will continue to maintain
coverage substantially similar to the existing supplemental health insurance
policy it maintains, covering you for cancer-related expenses. You will be
entitled to perquisites comparable to those that Avatech extends to other
employees with similar responsibilities. Avatech will reimburse you for your
business, travel, lodging, meals, and any other ordinary and necessary business
expenses you incur in the course of your employment duties, in accordance with
Avatech's ordinary expense reimbursement policies.

     You may terminate your employment at any time, effective thirty (30) days
after you give Avatech written notice of your intent to terminate your
employment. Avatech may terminate your employment at any time for Cause (as
defined below), effective immediately on oral or



Henry D. Felton
Letter Agreement
August 21, 2003
Page 2 of 3

written notice to you from one of Avatech's officers or a member of Avatech's
Board of Directors. For purposes of this Letter Agreement, "Cause" means: (a)
your conviction of, or plea of guilty or nolo contendere to, a crime
constituting a felony or a crime involving moral turpitude, embezzlement or
criminal diversion of funds; (b) your knowing and willful violation of Avatech's
company policies that can reasonably be expected to result in material detriment
to Avatech; or (c) your failure to perform the duties or discharge the
responsibilities of your position to Avatech's material detriment, unless you
cure such failure within fifteen (15) days after you receive written notice of
the failure, or within thirty (30) days, if the failure is such that it cannot
reasonably be cured within fifteen (15) days and you begin and diligently
continue to cure such failure within the fifteen-day period.

     You acknowledge that you have acquired and will acquire confidential
information relating to Avatech which includes, but is not limited to, business
plans, sales and marketing plans, financial information, acquisition prospects,
and "customer" and "supplier" lists (as such terms may relate to Avatech's
business or the systems or other trade secrets or know-how) (collectively
"Confidential Information"), which is a valuable asset of Avatech's business,
and access to or knowledge of which is essential to the performance of your
duties. Accordingly, you will not disclose any Confidential Information at any
time, except in connection with and as reasonably required to perform your
employment duties or your duties or responsibilities as a member of Avatech's
Board of Directors, or unless you are required to do so by applicable law,
subpoena, court order, or other legal process. These restrictions do not apply
to, and the definition of Confidential Information does not include, information
that is in the public domain at the time you disclose such information, unless
the information is in the public domain as a result of your actions. Your
obligation not to disclose any Confidential Information continues for your
lifetime and survives the termination or expiration of this Agreement, your
employment with Avatech, or any current future agreement between you and Avatech
or its successors-in-interest.

     Because of your unique position as an employee of Avatech, you agree that
during the course of your employment and for a period of one (1) year after the
termination of such employment, you will not, without Avatech's prior written
consent: (a) Directly or indirectly, knowingly engage or be interested in (as
owner, partner, shareholder, employee, director, officer, agent, consultant or
otherwise), with or without compensation, any business entity or operation that
engages in the business of selling computer-aided design software or providing
professional, consulting, technical, or training services related to
computer-aided design software within fifty (50) miles of any location where
Avatech maintains a place of business, except that you Employee own up to a five
percent (5%) interest in the publicly-traded securities of a publicly traded
corporation; (b) Employ or retain, or participate in or arrange the employment
or retention of any person who Avatech employed or retained during the term of
Employee's employment with or retention by Avatech under any arrangement or
agreement; or (c) Directly or indirectly solicit any of Avatech's customers or
clients.

     You acknowledge that the provisions of this Letter Agreement are reasonable
and necessary for Avatech's protection and that Avatech will be irrevocably
damaged if these provisions are not specifically enforced. Accordingly, you
agree that, in addition to any other



Henry D. Felton
Letter Agreement
August 21, 2003
Page 3 of 3

relief or remedies available to Avatech, Avatech is entitled to seek and obtain
an appropriate injunction or other equitable remedy for the purposes of
restraining you from any actual or threatened breach of or otherwise enforcing
these provisions and no bond or security will be required in connection with
such equitable remedy.

     You and Avatech agree that this Letter Agreement shall be construed,
interpreted and enforced as a contract governed by the laws of the State of
Maryland without reference to the rules governing conflict of laws, and
irrevocably submit to personal jurisdiction and venue in the State of Maryland
for the purpose of any suit, action or proceeding arising out of or relating to
this Letter Agreement. The waiver of any breach of this Letter Agreement by
either you or Avatech does not constitute or operate as a waiver of any other
breach of any provision of this Letter Agreement, and any failure to enforce any
provision of this Letter Agreement does not operate as a waiver of any existing
or future right, duty, or obligation arising out of this Letter Agreement. If
any provision of this Letter Agreement is deemed invalid or unenforceable in any
jurisdiction, such provision will be deemed modified and limited in such
jurisdiction to the extent necessary to make it valid and enforceable in such
jurisdiction, and the remainder of this Letter Agreement shall be valid and
enforced to the fullest extent permitted by law.


/s/                                        AVATECH SOLUTIONS, INC.
- --------------------------------
Henry D. Felton


                                           By: /s/
                                               ---------------------------------
Date: 8/21/03                                  Donald "Scotty" Walsh,
                                               Chief Executive Officer

EX-23.1

                                                                  Exhibit 23.1

               Consent of Ernst & Young LLP, Independent Auditors

         We consent to the incorporation by reference in the following
Registration Statements of our report dated September 18, 2003, with respect to
the consolidated financial statements and schedule of Avatech Solutions, Inc.
included in the Annual Report (Form 10-K) for the year ended June 30, 2003.

Registration Statements on Form S-3:

Registration Number                    Date Filed

333-50426                              November 28, 2001

Registration Statements on Form S-8:



Registration Number      Name                                                  Date Filed
- -------------------      ----                                                  ----------
                                                                      
333-14429                1996 Amended and Restated 1987 Stock Option Plan      October 18, 1996
                         1996 Equity Incentive Plan
                         1996 Non-Employee Directors' Stock Option Plan
                         Employee Stock Purchase Plan
333-56079                1996 Equity Incentive Plan                            June 4, 1998
                         Employee Stock Purchase Plan
333-59569                1998 Non-Officer Stock Option Plan                    July 22, 1998
333-85939                1996 Equity Incentive Plan                            August 26, 1999
                         Employee Stock Purchase Plan
                         1998 Non-Officer Stock Option Plan
333-107017               Restricted Stock Award Plan                           July 14, 2003
333-108354               2002 Stock Option Plan                                August 29, 2003


Baltimore, Maryland
September 26, 2003

EX-23.2

                                                                    Exhibit 23.2

             Consent of Walpert & Wolpoff, LLP, Independent Auditors

We consent to the incorporation by reference in the following Registration
Statements of our report dated September 18, 2003, with respect to the
consolidated financial statements and schedule of Avatech Solutions, Inc.
included in the Annual Report (Form 10-K) for the year ended June 30, 2001.

Registration Statements on Form S-3:

Registration Number                    Date Filed

333-50426                              November 28, 2001

Registration Statements on Form S-8:



Registration Number     Name                                                 Date Filed
- -------------------     ----                                                 ----------
                                                                    
333-14429               1996 Amended and Restated 1987 Stock Option Plan     October 18, 1996
                        1996 Equity Incentive Plan
                        1996 Non-Employee Directors' Stock Option Plan
                        Employee Stock Purchase Plan
333-56079               1996 Equity Incentive Plan                           June 4, 1998
                        Employee Stock Purchase Plan
333-59569               1998 Non-Officer Stock Option Plan                   July 22, 1998
333-85939               1996 Equity Incentive Plan                           August 26, 1999
                        Employee Stock Purchase Plan
                        1998 Non-Officer Stock Option Plan
333-107017              Restricted Stock Award Plan                          July 14, 2003
333-108354              2002 Stock Option Plan                               August 29, 2003





Baltimore, Maryland
September 26, 2003

EX-31.1

                                                                    EXHIBIT 31.1

                                  CERTIFICATION

     I, Donald R. (Scotty) Walsh, certify that:

     1. I have reviewed this Annual Report on Form 10-K of Avatech Solutions,
Inc.;

     2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in this report;

     4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;

Evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and

Disclosed in this report any change in the Registrant's internal control over
financial reporting that occurred during the Registrant's most recent fiscal
quarter (the Registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting; and

     5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of Registrant's board of directors
(or persons performing the equivalent function):

All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect the Registrant's ability to record, process, summarize and
report financial information; and

Any fraud, whether or not material, that involves management or other employees
who have a significant role in the Registrant's internal control over financial
reporting.


Date: September 29, 2003                       /s/ Donald R. (Scotty) Walsh
                                               ---------------------------------
                                               Donald R. (Scotty) Walsh
                                               Chief Executive Officer

EX-31.2

                                                                    EXHIBIT 31.2

                                  CERTIFICATION

     I, Beth O. MacLaughlin, certify that:

     1. I have reviewed this Annual Report on Form 10-K of Avatech Solutions,
Inc.;

     2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in this report;

     4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:

          (a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;

          (b) Evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and

          (c) Disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the Registrant's most
recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial reporting;
and

     5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of Registrant's board of directors
(or persons performing the equivalent function):

          (a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial information; and

          (b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's internal control
over financial reporting.


Date: September 29, 2003                 /s/ Beth O. MacLaughlin
                                         --------------------------------
                                         Beth O. MacLaughlin
                                         Chief Financial Officer

EX-32.1

                                                                    EXHIBIT 32.1

                           SECTION 1350 CERTIFICATIONS

     In connection with the Annual Report of Avatech Solutions, Inc. (the
"Company") on Form 10-K for the fiscal year ended June 30, 2003 as filed with
the Securities and Exchange Commission and to which this Certification is an
exhibit (the "Report"), the undersigned hereby certify, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:

          (1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and

          (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company for the periods reflected therein.


Date: September 29, 2003                   /s/ Donald R. (Scotty) Walsh
                                           -------------------------------------
                                           Donald R. (Scotty) Walsh
                                           Chief Executive Officer


                                           /s/ Beth O. MacLaughlin
                                           -------------------------------------
                                           Beth O. MacLaughlin
                                           Chief Financial Officer