10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2004

OR

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

Commission file number: 001-31265

Avatech Solutions, Inc.

(Exact Name of Registrant as Specified in its Charter)

Delaware	84-1035353
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)
10715 Red Run Blvd., Suite 101, Owings Mills, MD	21117
(Address of Principal Executive Offices)	(Zip Code)

(410) 581 - 8080

(Registrant’s telephone number, including area code)

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.

Class	Outstanding at October 31, 2004
Common Stock, par value $.01 per share	9,617,333

AVATECH SOLUTIONS, INC. AND SUBSIDIARIES

INDEX

		Page
PART I	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements
	Consolidated Balance Sheets – June 30, 2004 and September 30, 2004 (Unaudited)	3
	Consolidated Statements of Operations – Three months ended September 30, 2003 and 2004 (Unaudited)	5
	Consolidated Statement of Stockholders’ Deficit – Three months ended September 30, 2004 (Unaudited)	6
	Consolidated Statements of Cash Flows – Three months ended September 30, 2003 and 2004 (Unaudited)	7
	Notes to Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Results of Operations and Financial Condition	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	19
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3.	Defaults Upon Senior Securities	20
Item 4.	Submission of Matters to a Vote of Security Holders	20
Item 5.	Other Information	20
Item 6.	Exhibits	20
SIGNATURES		23

2

Part I. Financial Information

Avatech Solutions, Inc. and Subsidiaries

Consolidated Balance Sheets

	June 30, 2004		September 30, 2004
	(audited)		(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	689,995	$	238,786
Accounts receivable, less allowance of $100,000 at June 30, 2004 and $109,000 at September 30, 2004		3,906,724		3,500,764
Other receivables		366,475		160,355
Inventory		215,321		307,150
Prepaid expenses		398,815		372,538
Other current assets		70,775		78,571
Total current assets		5,648,105		4,658,164
Property and equipment:
Computer software and equipment		2,396,593		2,416,867
Office, furniture and equipment		881,036		880,943
Leasehold improvements		197,245		224,897
		3,474,874		3,522,707
Less accumulated depreciation and amortization		2,921,705		2,982,204
		553,169		540,503
Goodwill		52,272		52,272
Other assets		313,073		398,654
Total assets	$	6,566,619	$	5,649,593

See accompanying notes.

3

Avatech Solutions, Inc. and Subsidiaries

Consolidated Balance Sheets (continued)

	June 30, 2004			September 30, 2004
	(audited)			(unaudited)
Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable and accrued expenses	$	5,257,848		$	4,664,043
Accrued compensation and related benefits		347,020			257,214
Borrowings under line-of-credit		1,640,180			2,133,115
Note payable to related party		—			884,586
Current portion of long-term debt		92,544			1,672,499
Deferred revenue		956,636			1,022,576
Other current liabilities		333,106			386,803
Total current liabilities		8,627,334			11,020,836
Long-term debt		1,606,206			—
Note payable to related party		878,725			—
Other long-term liabilities		318,316			283,446
Commitments and contingencies		—			—
Minority interest		1,525,000			1,525,000
Stockholders’ deficit:
Series D Convertible Preferred Stock, $0.01 par value; 1,297,537 shares authorized, issued and outstanding at June 30, 2004 and September 30, 2004		12,975			12,975
Common stock, $0.01 par value; 80,000,000 shares authorized; 9,460,380 and 9,596,455 shares issued and outstanding at June 30, 2004 and September 30, 2004, respectively		94,605			95,965
Additional paid-in capital		3,737,574			3,758,935
Accumulated deficit		(10,234,116	)		(11,047,564	)
Total stockholders’ deficit		(6,388,962	)		(7,179,689	)
Total liabilities and stockholders’ deficit	$	6,566,619		$	5,649,593

See accompanying notes.

4

Avatech Solutions, Inc. and Subsidiaries

Consolidated Statements of Operations

	Three Months Ended September 30,
	2003			2004
	(unaudited)			(unaudited)
Revenues:
Product sales	$	3,504,948		$	4,479,400
Service revenue		1,476,568			1,304,481
Commission revenue		884,796			968,182
		5,866,312			6,752,063
Cost of revenue:
Cost of product sales		2,481,328			3,119,461
Cost of service revenue		1,059,698			970,162
		3,541,026			4,089,623
Gross margin		2,325,286			2,662,440
Other operating expenses:
Selling, general and administrative		2,502,958			3,277,167
Depreciation and amortization		67,189			61,261
		2,570,147			3,338,428
Operating loss		(244,861	)		(675,988	)
Other income (expense):
Minority interest		(38,125	)		(38,125	)
Interest and other income (expense)		(713	)		12,426
Interest expense		(66,525	)		(103,661	)
		(105,363	)		(129,360	)
Loss from continuing operations before income taxes		(350,224	)		(805,348	)
Income tax expense		11,000			8,100
Loss from continuing operations		(361,224	)		(813,448	)
Loss from operations of discontinued operating segments		(142,252	)		—
Net loss	$	(503,476	)	$	(813,448	)
Loss from continuing operations per share, basic and diluted	$	(0.04	)	$	(0.09	)
Loss per common share, basic and diluted	$	(0.06	)	$	(0.09	)
Shares used in computation		9,127,160			9,599,659

See accompanying notes.

5

Avatech Solutions, Inc. and Subsidiaries

Consolidated Statement of Stockholders’ Deficit (Unaudited)

	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, 2004	1,297,537	$	12,975	9,460,380		$	94,605		$	3,737,574		$	(10,234,116	)	$	(6,388,962	)
Issuance of common stock as compensation				18,346			183			15,411						15,594
Sale of common stock to employees under Employee Stock Purchase Plan				147,729			1,477			25,113						26,590
Forfeiture of restricted common stock				(30,000	)		(300	)		300						—
Preferred stock dividends										(19,463	)					(19,463	)
Net loss for the three months ended September 30, 2004													(813,448	)		(813,448	)
Balance at September 30, 2004	1,297,537	$	12,975	9,596,455		$	95,965		$	3,758,935		$	(11,047,564	)	$	(7,179,689	)

See accompanying notes.

6

Avatech Solutions, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

	Three Months Ended September 30,
	2003			2004
	(unaudited)
Cash flows from operating activities
Net loss	$	(503,476	)	$	(813,448	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for bad debts		17,737			8,527
Depreciation and amortization		67,189			61,261
Non-cash stock compensation expense		50,225			15,594
Loss on disposal of property and equipment		47,293			—
Amortization of debt discount charged to interest expense		8,374			6,497
Amortization of financing costs charged to interest expense		10,744			5,276
Changes in operating assets and liabilities:
Accounts and other receivables		558,754			603,553
Inventory		48,226			(91,829	)
Prepaid expenses and other current assets		(25,490	)		18,481
Other assets		—			(90,857	)
Accounts payable and accrued expenses		(513,711	)		(593,805	)
Accrued compensation and related benefits		(115,688	)		(89,806	)
Deferred revenue		(257,202	)		65,940
Other current liabilities		(70,327	)		53,697
Other long-term liabilities		(23,712	)		—
Net cash used in operating activities		(701,064	)		(840,919	)
Cash flows from investing activities
Purchase of property and equipment		(14,531	)		(48,596	)
Proceeds from sale of property and equipment		12,100			—
Net cash used in investing activities		(2,431	)		(48,596	)
Cash flows from financing activities
Proceeds from borrowings under line-of-credit		6,143,175			9,686,000
Repayments of borrowings under line-of-credit		(6,573,916	)		(9,193,701	)
Proceeds from issuance of debt		1,000,000			—
Repayments of long-term debt		—			(26,250	)
Proceeds from sale of common stock to employees		—			26,590
Payment of preferred stock dividends		(7,257	)		(19,463	)
Change in other assets related to financing costs		(41,866	)		—
Change in other long-term liabilities		—			(34,870	)
Net cash provided by financing activities		520,136			438,306
Net change in cash and cash equivalents		(183,359	)		(451,209	)
Cash and cash equivalents - beginning of period		540,384			689,995
Cash and cash equivalents - end of period	$	357,025		$	238,786

See accompanying notes.

7

Avatech Solutions, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2004

1. Basis of Presentation

Avatech Solutions, Inc. (the “Company”) provides design automation and data management software, hardware, training, technical support and professional services to corporations, government agencies and educational institutions throughout the United States.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules or regulations. The interim financial statements are unaudited, but reflect all adjustments (consisting of normal recurring accruals), which are, in management’s opinion, necessary to present a fair statement of results of the interim periods presented. These financial statements should be read in conjunction with the financial statements and the notes thereto in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004. Operating results for the three months ended September 30, 2004 are not necessarily indicative of results for any future period.

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.

2. Discontinued Operations of Certain Operating Segments

In June 2003, due to poor operating results, the Company closed a total of three offices located 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 areas.

Additionally, the Company closed another office located in California in August 2003, which was also an authorized software dealer for which the Company is no longer authorized to market or distribute software products subject to the channel partner agreement with its principal supplier. In connection with the closing of the California office in August 2003, the Company did not incur a gain or loss.

The discontinued operations were components of the Company as the 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 2003 consolidated statement of operations as a separate component of operations classified as discontinued operations.

8

Avatech Solutions, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2004 (continued)

2. Discontinued Operations of Certain Operating Segments (continued)

Summarized operating results of the discontinued operations for the three months ended September 30, 2003 are as follows:

Revenue	$	51,485
Net loss	$	(142,252	)

3. Stock Options

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 statement if the fair value method is not adopted.

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

	Three Months Ended September 30,
	2003			2004
Net loss, as reported	$	(503,476	)	$	(813,448	)
Add: Stock-based compensation cost included in net loss, net of taxes		50,225			15,594
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of taxes		(51,323	)		(69,892	)
Pro forma net loss		(504,574	)		(867,746	)
Preferred stock dividends		(7,257	)		(19,463	)
Pro forma net loss attributable to common stockholders	$	(511,831	)	$	(887,209	)
Net loss per common share:
Basic and diluted – as reported	$	(0.06	)	$	(0.09	)
Basic and diluted – pro forma	$	(0.06	)	$	(0.09	)

9

Avatech Solutions, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2004 (continued)

3. Stock Options (continued)

A summary of stock option activity during the three months ended September 30, 2004 and related information is included in the table below:

	Options		Weighted- Average Exercise Price
Outstanding at July 1, 2004	1,529,893		$	0.67
Granted	100,000			0.42
Forfeited	(44,352	)		0.54
Outstanding at September 30, 2004	1,585,541		$	0.66
Exercisable at September 30, 2004	669,394		$	0.92
Weighted-average remaining contractual life	8.5 Years

4. Borrowings Under Line-of-Credit

The Company maintains a $3.0 million revolving line-of-credit limited to 85% of the Company’s aggregate outstanding eligible accounts receivable, payable within 60 days of demand by the lender, and expiring in September 2006. Borrowings under this line-of-credit bear interest at the greater of 7.5%, or the prime rate plus 2.0% (7.5% at September 30, 2004) and are secured by the assets of the Company. In addition, the bank has the right to restrict any prepayment of other indebtedness by the Company. The balance outstanding under this line-of-credit was $1,640,180 and $2,133,115, at June 30, 2004 and September 30, 2004, respectively.

Because the interest rate adjusts with changes in the prime rate, the estimated fair value of the borrowings under the line of credit is equal to the carrying amount.

On October 28, 2004, the Company entered into a loan agreement with the bank to provide for another $0.7 million revolving credit facility expiring on December 15, 2004. Borrowings under this credit facility bear interest at the greater of 7.5%, or the prime rate plus 2.0%, and are secured by the assets of the Company and the guaranties of the Company and the Chairman of the Board of Directors. In connection with this new loan agreement, a modification was made to the existing revolving credit facility agreement to limit the outstanding balance on the line-of-credit to the lessor of $2.3 million or 85% of eligible accounts receivable until November 1, 2004. On that date, the limit was reduced to $2.0 million, as required under the Company’s loan agreement with a software vendor (see Note 5).

Violations of covenants contained in a loan agreement with a software vendor (see Note 5) constitute an event of default under the terms of both the primary line-of-credit and the additional $0.7 million line-of-credit with the bank. The Company obtained waivers of the covenant violations dating back to and including September 30, 2004.

10

Avatech Solutions, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2004 (continued)

5. Long-Term Debt

On July 22, 2003, the Company entered into a loan agreement with a software vendor to fund working capital needs related to the distribution of their products. The terms of the agreement provide for a $1.5 million loan, with repayment of principal plus interest accruing at 6% per annum due in thirty-five equal quarterly installments commencing in January 2005. The entire $1.5 million loan was outstanding at September 30, 2004. The Company is required to meet certain financial and non-financial covenants in connection with this agreement. As of September 30, 2004, the Company was not in compliance with a financial covenant requiring the Company to maintain its adjusted funded debt to tangible asset ratio at 50% or less. The adjusted funded debt to tangible asset ratio was 52% as of September 30, 2004. Furthermore, the Company’s borrowings under the additional $0.7 million line-of-credit violate non-financial covenants, which prohibit the Company from incurring additional debt. The Company has not obtained a waiver of these covenant violations, and under the terms of its loan agreement, if the violations are not cured within 30 days of receiving notice of default, the lender may demand immediate repayment of all principal and $109,000 of accrued interest. To date, demand has not been made, but no assurance can be given that the Company will have sufficient cash to either cure the covenant violations or repay the loan if the lender demands immediate repayment. Accordingly, the Company has reclassified $1.4 million of the long-term balance of this loan agreement as current portion of long-term debt on the September 30, 2004 consolidated balance sheet.

6. Loss Per Share

Basic loss per common share is computed as net loss available to common stockholders 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 and the conversion of preferred stocks. Basic and diluted loss per common share are equal for all periods presented because the assumed exercise of options and warrants and the conversion of preferred stocks is antidilutive. As of September 30, 2004, 7,012,618 shares of common stock were issuable upon the conversion or exercise of options, warrants and preferred stock.

11

Avatech Solutions, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2004 (continued)

6. Loss Per Share

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

	Three Months Ended September 30,
	2003			2004
Numerator used in basic and diluted loss per common share:
Loss from continuing operations	$	(361,224	)	$	(813,448	)
Less: preferred stock dividends		7,257			19,463
Loss from continuing operations available to common stockholders		(368,481	)		(832,911	)
Loss from discontinued operations, net of income taxes		(142,252	)		—
Net loss attributable to common stockholders	$	(510,733	)	$	(832,911	)
Denominator:
Weighted average shares outstanding		9,127,160			9,599,659
Loss per common share:
Loss from continuing operations	$	(0.04	)	$	(0.09	)
Income (loss) from operations of discounted operations, net of income taxes		(0.02	)		0.00
Loss per common share, basic and diluted	$	(0.06	)	$	(0.09	)

7. Liquidity and Capital Resources

Since its inception, the Company incurred significant losses from its operations that depleted its capital resources. Although the Company has a net stockholders’ deficit of $7.2 million and a working capital deficit of $6.4 million, the Company believes that its working capital needs will stabilize in the second quarter of fiscal 2005, it will be able to secure sufficient additional funding to repay the loan with a software vendor in the near future, and meet its other near-term needs from its available cash resources, cash flows from operations, and lines of credit. Management is taking actions to initiate new revenue programs and significantly reduce operating expenses, and management believes these actions will allow the Company to aggressively pursue its business plan and return to profitability in the near term.

These financial statements have been prepared assuming the Company will continue to operate as a going concern. If the Company is unsuccessful in the aforementioned efforts, and even if the Company is successful in curing the existing violations of covenants related to the loan agreement with a software vendor, in the event that the Company’s operating results decline and it is unable to generate cash flows from operations in the near term, the Company may be unable to meet its existing obligations in the normal course of business or expand its operations to allow for continued long-term improvement in operating results.

Based on an evaluation of the likely cash to be 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 for the next twelve months.

12

ITEM 2. 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. These forward-looking statements may generally be identified by the use of the words “may”, “will”, “believe”, “should”, “expects”, “anticipates”, “estimates”, and similar expressions. 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 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.

In the later part of fiscal 2004 and continuing in the first quarter of fiscal 2005, we have increased our efforts to attract and employ highly qualified professionals in specialized areas throughout the organization, including salespeople, applications engineers, and consultants. Our portfolio of products and services has been expanded to include new relationships with other software manufacturers and additional service offerings, particularly in 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. By implementing these strategies, we expect to show profitable operating results over the next two quarters. Continuing operations for fiscal 2005 are anticipated to generate a 5% operating income on revenues of $36 – $40 million. Our goals for fiscal 2006, if met, will generate a 9% operating income on $55 million of revenues.

During fiscal 2003 and in August 2003, we closed certain offices due to operating performance issues. These office locations were authorized software dealer subject to a channel partner agreement with our principal suppliers. In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, the results of operations of these operating units are treated as discontinued operations, and reported as a separate component of operating results in our consolidated statements of 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 2 – Discontinued Operations of Certain Operating Segments to the Consolidated Financial Statements a more comprehensive discussion about our discontinued operations.

In July 2003, we entered into an Authorized Reseller Agreement with Dassault Systemes Corp., a French developer and distributor of PLM application software and services, whereby we will market and distribute Dassault’s SMARTEAM PLM products in the United States. In connection with this agreement, Dassault provided us with certain financial assistance to create a dedicated PLM sales force and related marketing efforts through June 30, 2004.

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

13

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 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.

Commission Revenue. We generate commission revenue from the resale of Autodesk software to various customers, a number of which Autodesk considers to be “strategic accounts.” Autodesk designates these customers as strategic 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 strategic 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.

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.

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.

Three Months Ended September 30, 2003 Compared to the Three Months Ended September 30, 2004

The following tables set forth a comparison of the three month period ended September 30, 2003 to the three month period ended September 30, 2004. The amounts are derived from selected items reflected in our unaudited Consolidated Statements of Operations included elsewhere in this report. The three months financial results are not necessarily indicative of future results.

14

Revenues

Our total revenues include product sales, service revenue and commission revenue.

	Three Months Ended September 30,
	2003		2004		%
Revenues:
Product sales	$	3,504,948	$	4,479,400	27.8	%
Service revenue		1,476,568		1,304,481	(11.7	)%
Commission revenue		884,796		968,182	9.4	%
Total revenues	$	5,866,312	$	6,752,063	15.1	%

Revenues. Our total revenues increased $886,000 or 15.1% for the three months ended September 30, 2004 as compared to the same period in the prior fiscal year. For the three months ended September 30, 2004, revenues in two of three categories – product sales and commission revenues – increased while service revenue decreased.

Product sales increased $975,000 or 27.8% due primarily to a general turnaround in the U.S. economy, coupled with certain promotional campaigns initiated by Autodesk. During fiscal 2004, Autodesk’s new product releases and promotional activities caused an increase in customer demand for upgraded software products, which had a favorable impact on revenues for the three month period ended September 30, 2004. In addition, there was an increase in the number of customers to which we sell directly. In the past, revenues generated from these customers were reported as commission revenues under the Autodesk strategic account program.

Service revenues decreased $172,000 or 11.7% for the three months ended September 30, 2004 as compared to the same period in the prior fiscal year. We continue to experience the effects of our unusually high turnover of service professionals during fiscal 2004. The higher turnover rate occurred as we terminated certain service employees due to performance issues. We continue to grow our professional service organization with highly qualified personnel and we expect the majority of new service employees will be trained and billable by December 2004.

Commission revenues increased $83,000 or 9.4% for the three months ended September 30, 2004, compared to the same period in the prior fiscal year. The increase in commission revenues was a result of a significant industry-wide increase in sales volume, offset by a decrease in commissions from Autodesk strategic accounts. Autodesk has implemented more restrictive criteria for end users to qualify as a strategic customer account, a status that results in special discounts and other benefits for customers who qualify. As a result, there has been a reduction in the number of strategic accounts to which we sell and therefore generate commission revenues.

Cost of Revenues

	Three Months Ended September 30,
	2003		2004		%
Cost of revenue:
Cost of product sales	$	2,481,328	$	3,119,461	25.7	%
Cost of service revenue		1,059,698		970,162	(8.4	)%
Total cost of revenue		3,541,026		4,089,623	15.5	%
Gross margin	$	2,325,286	$	2,662,440	14.5	%

Costs of revenue. Our total cost of revenue increased $549,000 or 15.5% for the three months ended September 30, 2004 as compared to the same period in the prior fiscal year.

Cost of product sales increased $638,000 or 25.7% for the three months ended September 30, 2004 as compared to the same period in the prior fiscal year. The increase in cost of product sales is consistent with the increase in product revenues. The cost of product sales as a percentage of related revenue for the three months ended September 30, 2004 was 69.6%, compared to 70.8% in the same period in 2003.

15

Cost of service revenue decreased $90,000 or 8.4% for the three months ended September 30, 2004 compared to the same period in the prior fiscal year. Cost of service revenue as a percentage of related revenue for the three months ended September 30, 2004 increased to 74.4% from 71.8% in the same period in the prior fiscal year. We attribute this increase in cost of service revenue primarily to our need to subcontract certain work to third party providers. During fiscal 2005, we continued to perform professional services as part of a few large facilities management software implementation projects. In order to provide the appropriate expertise and services, we subcontracted some of this work to third party providers, which results in an increase in related the cost of service revenues.

Gross margin. Overall, the gross margin percentage remained relatively consistent at 39.4% for the three months ended September 30, 2004 compared to 39.6% for the same period in the prior fiscal year. Currently, we are focused on developing our PLM and facilities management markets for products and related services, and until such time as we generate significant revenue from these new markets, our margins will be affected by our investment in a professional, well-trained service staff. We ultimately expect our service revenue from PLM and F/AM to increase which will allow our gross margins to return to historical levels.

Other Operating Expenses

	Three Months Ended September 30,
	2003		2004		%
Other operating expenses:
Selling, general and administrative	$	2,502,958	$	3,277,167	30.9	%
Depreciation and amortization		67,189		61,261	(8.8	)%
Total other expenses	$	2,570,147	$	3,338,428	29.9	%

Selling, General and Administrative Expense. Selling, general and administrative expenses increased $774,000 or 30.9% for the three months ended September 30, 2004 compared to the same period in the prior fiscal year. Selling, general and administrative expense as a percent of total revenues was 48.5% for the three months ended September 30, 2004, and 42.7% for the same period in the prior fiscal year. We attribute the increase in selling, general and administrative expenses to a number of factors, including an increase of approximately $400,000 in salaries and associated benefits of certain management personnel hired during the latter part of fiscal 2004. Additionally, we incurred increases of approximately $153,000 for our national sales meeting costs, $130,000 of travel expenses and $95,000 of marketing expenses, when compared to the same period in fiscal 2004.

Depreciation and Amortization. Depreciation and amortization expenses decreased $6,000 or 8.8% for the three months ended September 30, 2004 compared to the same period in the prior fiscal year. Depreciation and amortization expenses of property and equipment decreased as a result of an increase in the number of fully depreciated assets compared to the prior period.

Other income (expense)

	Three Months Ended September 30,
	2003			2004			%
Other income (expense):
Minority interest	$	(38,125	)	$	(38,125	)	—
Interest and other income (expense)		(713	)		12,426		—
Interest expense		(66,525	)		(103,661	)	55.8	%
Total other income (expense)	$	(105,363	)	$	(129,360	)	22.8	%

Other Income (Expense). Other income (expense) increased $24,000, or 22.8%, for the three months ended September 30, 2004 compared to the same period in the prior fiscal year. This increase is attributable to an increase in interest expense primarily due to a $1.5 million loan from a software vendor, which was outstanding for the entire three-month period ended September 30, 2004.

16

Income tax expense

	Three Months Ended September 30,
	2003		2004		%
Income tax expense	$	11,000	$	8,100	(26.4	)%

Income Tax Expense. Income tax expense decreased $3,000 or 26.4% for the three months ended September 30, 2004 compared to the same period in the prior fiscal year. Our tax expense relates solely to state and local income taxes. Because we have significant net operating loss carry forwards, we do not expect to pay federal income taxes for the foreseeable future.

Liquidity and Capital Resources

Historically, we have financed our operations and met our capital expenditure requirements primarily through cash flows provided by operations, borrowings under short-term and long-term debt arrangements, and the sale of preferred stock. During the three months ended September 30, 2004, we incurred negative cash flow from operations of $(841,000), which is attributable principally to our net loss for the period. Profitability of our design automation practice depends upon maintaining high sales volume, and although our revenue has increased, our net cash flow has not increased proportionally due to expenses incurred in developing our PLM practice and salaries for newly-hired service personnel who require several months to achieve full productivity.

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 customers demand. Our primary expenditure is for the purchase of inventory. 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 approximately 90% of our product from one principal supplier which provides us with the ability to purchase up to $3 million of product under 60 to 90 day payment terms. Because our credit availability with this supplier remains capped at $3 million, we need additional sources of cash to fund growth in our sales.

Our investing activities consist principally of investments in computer and office equipment, which totaled $49,000 for the three months ended September 30, 2004. If funds from operations are sufficient, or if additional investment capital becomes available, we intend to make additional investments in our infrastructure during the remainder of fiscal 2005. If neither occurs, we will defer these capital expenditures to future years.

Our ability to meet our daily cash flow needs is also impacted by our borrowing base under our $3 million revolving line-of-credit agreement with our senior lender, which is limited to 85% of our eligible accounts receivable. Borrowings under this line-of-credit bear interest at the higher of 7.5% or the prime rate plus 2.0%. Accounts receivable are not eligible if the accounts are 90 days or greater past due; additionally, our borrowing base is reduced by outstanding receivables for revenue which has been deferred. As of September 30, 2004, the maximum amount available under our revolving line-of-credit was $254,000. Our day sales outstanding (DSO’s) were 50 as of September 30, 2004, which is higher than the previous four quarters’ average of 47 days. Our customary collection terms are 30 days for all of our customers and management is in the process of implementing new credit and collection policies, which we anticipate will improve our cash flow in the near future.

Current liabilities at September 30, 2004 include $2.1 million of borrowings under our senior lender revolving line-of-credit. This line-of-credit expires in September 2006 and is payable within 60 days of demand. On October 28, 2004, we also obtained an additional $0.7 million line-of-credit from our senior lender, which expires on December 15, 2004. This additional line-of-credit bears interest at the greater of 7.5% or the prime rate plus 2%, is secured in part by the assets of our operating subsidiary, and is guaranteed by the Chairman of our Board of Directors. On July 22, 2003, we entered into a loan agreement with a software vendor to borrow $1.5 million for working capital purposes, secured by the assets of our operating subsidiary (the “Subordinate Loan”). The loan agreement requires repayment of principal plus interest at 6% per annum in thirty-five equal quarterly installments beginning in January 2005. Both the Subordinate Loan and our existing outstanding indebtedness to our senior lender restrict our ability to, among other things, incur additional debt, repay certain other debt, pay dividends, and make certain investments, mergers or acquisitions without lender approval. These restrictions significantly restrict our ability to raise additional capital, and our ability to receive the necessary approvals is largely dependent upon our relationship with our lenders. Further, the terms of the Subordinate Loan require us to comply with a financial covenant and additional non-financial covenants.

The terms of the Subordinate Loan prohibit our adjusted funded debt to tangible asset ratio to exceed 50%, and at September 30, 2004, this ratio was at 52%. Furthermore, our borrowings under the additional $0.7 million line-of-credit from our senior lender, secured in part by the assets of our operating subsidiary, violate non-financial covenants of the Subordinate Loan. If we do not cure the violations within 30 days of receiving notice from the Subordinate Loan lender, the lender may demand immediate repayment of all principal and accrued interest under the Subordinate Loan, currently $1.6 million. As a result, we have reclassified $1.4 million of the Subordinate Loan as a current liability.

17

Absent a waiver, violations of covenants of the Subordinate Loan constitute a cross-default under the terms of both our primary line-of-credit and the additional $0.7 million line-of-credit from our senior lender. Our senior lender has waived any cross-default which may have occurred due to the additional $0.7 million line-of-credit or our failure to comply with the financial covenant of the Subordinate Loan. We are actively negotiating for additional funding from a third party, to repay the outstanding principal and accrued interest under the Subordinate Loan. This additional funding will also allow us to reduce our total outstanding indebtedness and continue to fund development of our PLM sales practice.

Our total outstanding debt was $4.7 million at September 30, 2004, and we had a deficiency of working capital of $6.4 million. Our deficiency of working capital is in large part caused by the classification of the line-of-credit from our senior lender as a current liability due to its 60-day demand provision and reclassification of the Subordinate Loan as a current liability due to noncompliance with covenants in the Subordinate Loan’s loan agreement. Our relationship with our senior lender is good and they recently extended additional credit to us. As a result, we do not believe it is likely that our senior lender will exercise the demand provisions.

We believe that our working capital needs will stabilize in the second quarter of fiscal 2005, we will be able to secure sufficient additional capital to repay the Subordinate Loan in the near future, and we will be able to meet our other near-term needs from our available cash resources, cash flows from operations, and line of credit. Because of our reliance on a single vendor to supply us with the products that we sell, and due to the concentration of our revenues from the sale of Design Automation products, we cannot readily predict our ability to generate sufficient cash from our operations to meet our obligations beyond the next twelve months. We are actively pursuing funding that would enable us to repay the Subordinate Loan. However, if we are not able to secure this additional funding, there is no guaranty that we will be able to cure existing violations of covenants or repay the Subordinate Loan. Even if we are successful in curing the existing violations of covenants related to the Subordinate Loan, in the event that our operating results decline and we are unable to generate cash flows from our operations in the near term, we may be unable to meet our existing obligations in the normal course of business or expand our operations to allow for continued long-term improvement in operating results.

18

Below is a summary of our contractual obligations and commitments at September 30, 2004:

	Payments due by Period
	Total		Less than 1 year		1 – 3 years		3 – 5 years		More than 5 years
Contractual Obligations
Long-term debt and line of credit*	$	4,690,200	$	4,690,200	$	—	$	—	$	—
Operating leases		4,015,276		707,913		1,553,603		1,095,347		658,413
Other liabilities		486,969		159,227		290,424		37,318		—
Total obligations	$	9,192,445	$	3,066,549	$	3,186,943	$	1,454,650	$	1,484,303

* Due to certain violations of loan covenants, $1.4 million of long-term debt has been reclassified as a current liability at September 30, 2004.

ITEM 3. 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 September 30, 2004, 45.4% of our outstanding debt bears interest at variable rates. Accordingly, our earnings and cash flow are affected by changes in interest rates. Assuming our current level of borrowings at variable rates and assuming a 100 basis point change in the 2004 average interest rate under these borrowings, we estimate that our 2004 interest expense and net loss 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 this exposure. However, due to the uncertainty of the actions that would be taken and their possible effects, the analysis assumes no such actions. Further, the analysis does not consider the effects of the change in the level of overall economic activity that could exist in such an environment.

ITEM 4. CONTROLS AND PROCEDURES

We maintain a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be disclosed by us in reports that we file or submit under the Securities and Exchange Act of 1934, as amended, is accumulated and communicated to management in a timely manner. Our Chief Executive Officer and Interim Chief Financial Officer have evaluated this system of disclosure controls and procedures as of the end of the period covered by this quarterly report, and believe that the system is operating effectively to ensure appropriate disclosure. There have been no changes in our internal controls over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

19

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are involved in legal matters or named as a defendant in legal actions arising from normal operations, or are presented with claims for damages arising out of our actions. Management believes that these matters will not have a material adverse effect on our financial statements.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None

Item 6. Exhibits

(a) 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 Stockc
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	Certificate of Amendment to Certificate of Designation of Series C Convertible Preferred Stockf
3.9	Certificate of Designation, Preferences and Rights of Series D Convertible Preferred Stockf
3.10	Certificate of Elimination of Series A Junior Participating Preferred Stockf
3.11	Certificate of Elimination of Series C Convertible Preferred Stockf
3.12	Certificate of Amendment to Certificate of Designation of Series D Convertible Preferred Stockf
3.13	Certificate of Amendment to Amended and Restated Certificate of Incorporationj
3.14	By-Laws b
10.01	Autodesk Authorized Channel Partner Agreement by and among Avatech Solutions, Inc. and Autodesk, Inc. effective as of February 1, 2003 e
10.02	Autodesk Authorized Channel Partner Agreement by and among Avatech Solutions, Inc. and Autodesk, Inc. effective as of February 1, 2004 f
10.03	Loan Agreement by and between Avatech Solutions Subsidiary, Inc. and a Strategic Partner dated July 22, 2003, as amended (portions of this exhibit have been omitted and filed separately with the U.S. Securities and Exchange Commission pursuant to a request for confidential treatment) g
10.04	Security Agreement by and between Avatech Solutions Subsidiary, Inc. and a Strategic Partner dated July 22, 2003 (portions of this exhibit have been omitted and filed separately with the U.S. Securities and Exchange Commission pursuant to a request for confidential treatment) g
10.05	Demand Promissory Note by Avatech Solutions Subsidiary, Inc. in favor of Key Bank and Trust in the amount of $2,000,000 dated September 11, 2003 g

20

10.06	Loan and Security Agreement by and between Avatech Solutions Subsidiary, Inc. and Key Bank and Trust dated September 11, 2003 g
10.07	Amended and Restated Demand Promissory Note by Avatech Solutions Subsidiary, Inc. in favor of K Bank (formerly known as Key Bank and Trust) in the amount of $2,500,000 dated November 24, 2003*
10.08	Modification Agreement by and between Avatech Solutions Subsidiary, Inc., Avatech Solutions, Inc., Technical Learningware, Inc., and K Bank (formerly known as Key Bank and Trust) dated November 24, 2003*
10.09	Second Amended and Restated Demand Promissory Note by Avatech Solutions Subsidiary, Inc. in favor of K Bank (formerly known as Key Bank and Trust) in the amount of $3,000,000 dated October 22, 2004*
10.10	Second Modification Agreement by and between Avatech Solutions Subsidiary, Inc., Avatech Solutions, Inc., Technical Learningware, Inc., and K Bank (formerly known as Key Bank and Trust) dated October 22, 2004*
10.11	Business Loan Agreement by and between Avatech Solutions Subsidiary, Inc. and K Bank dated October 27, 2004*
10.12	Promissory Note by Avatech Solutions Subsidiary, Inc. in favor of K Bank dated October 27, 2004 in the amount of $700,000*
10.13	Commercial Security Agreement by Avatech Solutions Subsidiary, Inc. in favor of K Bank dated October 27, 2004*
10.14	Guaranty by Avatech Solutions, Inc. in favor of K Bank dated October 27, 2004*
10.15	Guaranty by W. James Hindman in favor of K Bank dated October 27, 2004*
10.16	Lease by and between Merritt-DM1, LLC and Avatech Solutions, Inc. effective June 1, 2004 j
10.17	Form of Promissory Note, principal amount $500,000.00, issued by Avatech Solutions, Inc. in favor of W. James Hindman dated May 28, 2003 g
10.18	Warrants to purchase up to 32,400 shares of common stock issued by Avatech to W. James Hindman dated May 28, 2003 g
10.19	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 January 1, 2004f
10.20	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 January 1, 2004f
10.21	Form of Purchase Agreement for Series D Convertible Preferred Stockf
10.22	2002 Stock Option Plan a
10.23	Restricted Stock Award Plan e
10.24	Avatech Solutions, Inc. Employee Stock Purchase Plan h
10.25	Employment Agreement by and between Donald R. “Scotty” Walsh and Avatech Solutions, Inc. dated July 1, 2003 g
10.26	Employment Agreement by and between Beth O. MacLaughlin and Avatech Solutions Subsidiary, Inc. dated as of August 7, 2003 j
10.27	Employment Agreement by and between W. Scott Harris and Avatech Solutions Subsidiary, Inc. dated as of June 1, 2004 j
10.28	Employment Agreement by and between Christopher D. Olander and Avatech Solutions Subsidiary, Inc. dated June 18, 2004 j
10.29	Form of Promissory Note, principal amount $902,168.80, issued by Avatech Solutions, Inc. in favor of W. James Hindman dated April 1, 2004 i

21

10.30	Warrants to purchase up to 51,828 shares of common stock issued by Avatech to W. James Hindman dated April 1, 2004 j
31.1	Rule 15d-14(a) Certification of Chief Executive Officer*
31.2	Rule 15d-14(a) Certification of Chief Financial Officer*
32.1	Section 1350 Certifications*

* Filed herewith

a. Incorporated by reference to our Registration Statement on form S-4 filed on May 30, 2002, File No. 333-89386.

b. Incorporated by reference to our Registration Statement on form SB-2 filed on November 21, 2000, File No. 333-50426.

c. Incorporated by reference to our Registration Statement on form 8-A filed on March 11, 2002, File No. 001-31265.

d. Incorporated by reference to our Current Report on form 8-K, filed on May 28, 2002, File No. 001-31265.

e. Incorporated by reference to our Amended Registration Statement on form S-1, filed on April 11, 2003, File No. 333-104035.

f. Incorporated by reference to our Quarterly Report on form 10-Q, filed on February 13, 2004, File No. 001-31265.

g. Incorporated by reference to our Annual Report on form 10-K, filed on October 3, 2003, File No. 001-31265.

h. Incorporated by reference to our Definitive Proxy Statement on form 14A, filed on May 7, 2004, File No. 001-31265.

i. Incorporated by reference to our Quarterly Report on form 10-Q, filed on May 17, 2004, File No. 001-31265.

j. Incorporated by reference to our Registration Statement on form S-1, filed on July 19, 2004, File No. 333-114230.

22

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	AVATECH SOLUTIONS, INC. AND SUBSIDIARIES
Date: November 15, 2004	By	/s/ Donald R. “Scotty” Walsh
		Donald R. “Scotty” Walsh
		Chief Executive Officer
Date: November 15, 2004	By	/s/ Catherine Dodson
		Catherine Dodson
		Interim Chief Financial Officer (principal financial and accounting officer)

23

EX-10.7

Exhibit 10.7

Baltimore, Maryland	$	2,500,000.00
November 24, 2003

AMENDED AND RESTATED

DEMAND PROMISSORY NOTE

FOR VALUE RECEIVED, the undersigned, AVATECH SOLUTIONS SUBSIDIARY, INC., a Delaware corporation (“BORROWER”), promises to pay to the order of K BANK, formerly known as 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 Five Hundred Thousand Dollars ($2,500,000.00), 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”) dated September 11, 2003 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 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 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 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.

25. Amendment and Restatement. This Promissory Note amends and restates in its entirety the Demand Promissory Note dated September 11, 2003 in the principal amount of Two Million Dollars ($2,000,000.00) (“ORIGINAL NOTE”). This Promissory Note does not constitute a novation of the BORROWER’S obligations under the ORIGINAL NOTE but an amendment and restatement of such obligations and an increase in the maximum amount of such obligations.

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
/s/	By:	/s/ Beth O. MacLaughlin	(SEAL)
	Name:	Beth O. MacLaughlin
	Title:	VP/CFO

EX-10.8

Exhibit 10.8

MODIFICATION AGREEMENT

THIS MODIFICATION AGREEMENT (“MODIFICATION”) is made as of the 24th day of November, 2003, by and between AVATECH SOLUTIONS SUBSIDIARY, INC. (“BORROWER”), K BANK, formerly known as KEY BANK AND TRUST (“LENDER”), AVATECH SOLUTIONS, INC. and TECHNICAL LEARNINGWARE COMPANY, INC. (collectively “GUARANTORS”).

RECITALS

Pursuant to the terms and provisions of a Loan And Security Agreement dated September 11, 2003 by and between the BORROWER and the LENDER (“LOAN AGREEMENT”), the LENDER is providing to the BORROWER a revolving line of credit (“LOAN”) which is evidenced by the Demand Promissory Note dated September 11, 2003 from the BORROWER to the order of the LENDER in the stated principal amount of Two Million Dollars ($2,000,000.00) (“NOTE”).

The BORROWER’S obligations to the LENDER under the LOAN, have been absolutely and unconditionally guaranteed by the GUARANTORS pursuant to the terms and provisions of: (a) Guaranty Agreement dated as of September 11, 2003 from Avatech Solutions, Inc. to and for the benefit of the LENDER; and (b) Guaranty Agreement dated as of September 11, 2003 from Technical Learningware Company, Inc. to and for the benefit of the LENDER (collectively, “GUARANTIES”).

The BORROWER has requested that the LENDER increase the maximum principal amount of the LOAN. The LENDER is willing to consent to the BORROWER’S request subject to the terms and provisions of this MODIFICATION.

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

Section 1. Recitals. The parties hereby acknowledge the accuracy of the above Recitals and hereby incorporate the Recitals into this MODIFICATION.

Section 2. Amendment To Loan Agreement. The LOAN AGREEMENT is hereby amended as follows:

(a) Section 1.15. Section 1.15 of the LOAN AGREEMENT is hereby amended by deleting its present language in its entirety and substituting in lieu thereof the following:

Section 1.15. Dollar Cap. The term “DOLLAR CAP” means: (a) Two Million Five Hundred Thousand

Dollars ($2,500,000.00) during the period between November 15, 2003 and January 31, 2004, inclusive; and (b) Two Million Dollars ($2,000,000.00) at all other times.

(b) Section 1.43. Section 1.43 of the LOAN AGREEMENT is hereby amended by inserting at the end thereof immediately preceding the period the following:

, as amended and restated pursuant to the terms and provisions of the Amended and Restated Demand Promissory Note dated November     , 2003 from the BORROWER the maker thereof which is payable to order of the LENDER the state principal amount of Two Million Five Hundred Thousand Dollars ($2,500,000.00).

Section 3. Consent Of Guarantors. The GUARANTORS hereby consent to the modifications contained in this MODIFICATION. The GUARANTORS hereby ratify their obligations under the GUARANTIES and hereby confirm that pursuant to the terms of the GUARANTIES, the GUARANTORS are absolutely and unconditionally guaranteeing all of the BORROWER’S obligations to the LENDER, whether now owed or hereafter incurred, including, but not limited to all of the BORROWER’S obligations to the LENDER under the LOAN, as modified herein.

Section 4. Amendment To Note. The NOTE is hereby amended and restated in its entirety in accordance with the terms and provisions of the Amended And Restated Demand Promissory Note of even date herewith from the BORROWER to the order of the LENDER in the stated principal amount of Two Million Five Hundred Thousand Dollars ($2,500,000.00).

Section 5. Security. All of the BORROWER’S obligations to the LENDER under the LOAN shall continue to be secured by all of the security interests and liens granted to the LENDER in the LOAN AGREEMENT.

Section 6. Other Terms. Except as specifically modified herein, all other terms and provisions of the LOAN AGREEMENT and all other documents evidencing, securing or otherwise documenting the terms and provisions of the LOAN (collectively, “LOAN DOCUMENTS”) remain in full force and effect.

Section 7. Ratification Of Obligations Under Loan Documents. The BORROWER and the GUARANTORS (collectively, “OBLIGORS”) hereby ratify and confirm all their respective obligations, liabilities and indebtedness under the provisions of the LOAN DOCUMENTS. The LENDER and the OBLIGORS agree that it is their intention that nothing herein shall be construed to extinguish, release,

discharge or constitute, create or effect a novation of, or an agreement to extinguish any of the obligations, indebtedness or liabilities of any of the OBLIGORS under the provisions of the LOAN DOCUMENTS, or the assignment or pledge to the LENDER of, or to any security interest or lien granted to the LENDER in or on, any of the security for such obligations, indebtedness and liabilities.

Section 8. Waiver Of Jury Trial. The parties hereto agree that any suit, action or proceeding, whether claim or counterclaim, brought or instituted by any party to this MODIFICATION, or any other successors or assigns on or with respect to this MODIFICATION or any of the other LOAN DOCUMENTS, or which in any way relates, directly or indirectly to the obligations of the OBLIGORS to the LENDER under the LOAN DOCUMENTS or the dealings of the parties with respect thereto, shall be tried only by a court and not by a jury. The parties expressly waive any right to a trial by jury in any such action or proceeding.

Section 9. Fee. In consideration for the LENDER’S agreements contained herein, the BORROWER shall pay to the LENDER on the date of this MODIFICATION a fee in the amount of Five Thousand Dollars ($5,000,00). In addition, the BORROWER shall pay to the LENDER all fees and expenses incurred by the LENDER in connection with the preparation of this MODIFICATION and the documents to be executed in connection herewith.

Section 10. Release. The OBLIGORS release, acquit and forever discharge the LENDER and the LENDER’S subsidiaries, affiliates, officers, directors, agents, employees, servants, attorneys and representatives from any and all claims, demands, debts, actions, causes of action, suits, contracts, agreements, accounts, defenses, offsets against the LOAN, and liabilities of any kind or character whatsoever, which any OBLIGOR ever had or has through the date of this MODIFICATION.

Section 11. 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 MODIFICATION and the rights and obligations of the parties hereto, including the validity, construction, interpretation, and enforceability of this MODIFICATION and its various provisions and the consequences and legal effect of all transactions and events which resulted in the execution of this MODIFICATION or which occurred or were to occur as a direct or indirect result of this MODIFICATION having been executed.

Section 12. Consent To Jurisdiction; Agreement As To Venue. Each of the OBLIGORS irrevocably consent 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 OBLIGORS agree 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.

IN WITNESS WHEREOF, the parties have executed this MODIFICATION with the specific intention of creating a document under seal.

WITNESS/ATTEST:	BORROWER:
	AVATECH SOLUTIONS SUBSIDIARY, INC.,
	A Delaware Corporation
/s/	By:	/s/ Beth O. MacLaughlin	(SEAL)
	Name:	Beth O. MacLaughlin
	Title:	VP/CFO

	LENDER:
	K BANK
/s/	By:	/s/ Patrick E. Kilpatrick	(SEAL)
	Name:	Patrick E. Kilpatrick
	Title:	Vice President
	GUARANTORS:
	AVATECH SOLUTIONS SUBSIDIARY, INC.
/s/	By:	/s/ Beth O. MacLaughlin	(SEAL)
	Name:	Beth O. MacLaughlin
	Title:	VP/CFO
	TECHNICAL LEARNINGWARE COMPANY, INC.
/s/	By:	/s/ Beth O. MacLaughlin	(SEAL)
	Name:	Beth O. MacLaughlin
	Title:	VP/CFO

ACKNOWLEDGMENTS

STATE OF MARYLAND, COUNTY OF CARROLL, TO WIT:

I HEREBY CERTIFY that on this 24th day of November, 2003, before me, the undersigned Notary Public of the jurisdiction aforesaid, personally appeared BETH O. MACLAUGHLIN, and acknowledged himself to be the VP/CFO of AVATECH SOLUTIONS SUBSIDIARY, INC., a Delaware corporation, and that he, as such VP/CFO, being authorized so to do, executed the foregoing instrument for the purposes therein contained by signing the name of AVATECH SOLUTIONS SUBSIDIARY, INC., by himself as VP/CFO.

IN WITNESS MY Hand and Notarial Seal.

/s/	(SEAL)
	NOTARY PUBLIC
My Commission Expires:
Sept. 1, 2005

STATE OF MARYLAND, COUNTY OF CARROLL, TO WIT:

I HEREBY CERTIFY that on this 24th day of November, 2003, before me, the undersigned Notary Public of the jurisdiction aforesaid, personally appeared PATRICK E. KILPATRICK, and acknowledged himself to be the VP of K BANK, a Maryland banking

and trust company, and that he, as such VP, being authorized so to do, executed the foregoing instrument for the purposes therein contained by signing the name of K BANK, by himself as VP.

IN WITNESS MY Hand and Notarial Seal.

/s/	(SEAL)
	NOTARY PUBLIC
My Commission Expires:
Sept. 1, 2005

STATE OF MARYLAND, COUNTY OF CARROLL, TO WIT:

I HEREBY CERTIFY that on this 24th day of November, 2003, before me, the undersigned Notary Public of the jurisdiction aforesaid, personally appeared BETH O. MACLAUGHLIN, and acknowledged himself to be the VP/CFO of AVATECH SOLUTIONS SUBSIDIARY, INC., a VP/CFO corporation, and that he, as such VP/CFO, being authorized so to do, executed the foregoing instrument for the purposes therein contained by signing the name of AVATECH SOLUTIONS SUBSIDIARY, INC., by himself as VP/CFO.

IN WITNESS MY Hand and Notarial Seal.

/s/	(SEAL)
	NOTARY PUBLIC
My Commission Expires:
Sept. 1, 2005

STATE OF MARYLAND, COUNTY OF CARROLL, TO WIT:

I HEREBY CERTIFY that on this 24th day of November, 2003, before me, the undersigned Notary Public of the jurisdiction aforesaid, personally appeared BETH O. MACLAUGHLIN, and acknowledged himself to be the VP/CFO of TECHNICAL LEARNINGWARE COMPANY, INC., a Delaware corporation, and that he, as such VP/CFO, being authorized so to do, executed the foregoing instrument for the purposes therein contained by signing the name of TECHNICAL LEARNINGWARE COMPANY, INC., by himself as VP/CFO.

IN WITNESS MY Hand and Notarial Seal.

/s/	(SEAL)
	NOTARY PUBLIC
My Commission Expires:
Sept. 1, 2005

EX-10.9

Exhibit 10.9

Baltimore, Maryland	$	3,000,000.00
October 22, 2004

SECOND AMENDED AND RESTATED

DEMAND PROMISSORY NOTE

FOR VALUE RECEIVED, the undersigned, AVATECH SOLUTIONS SUBSIDIARY, INC., a Delaware corporation (“BORROWER”), promises to pay to the order of K BANK, formerly known as 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 Three Million Dollars ($3,000,000.00), 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”) dated September 11, 2003 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 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 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 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.

25. Amendment and Restatement. This Promissory Note amends and restates in its entirety the Amended and Restated Demand Promissory Note dated November     , 2003 in the principal amount of Two Million Five Hundred Thousand Dollars ($2,500,000.00) (“ORIGINAL NOTE”). This Promissory Note does not constitute a novation of the BORROWER’S obligations under the ORIGINAL NOTE but an amendment and restatement of such obligations and an increase in the maximum amount of such obligations.

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
/s/	By:	/s/ Christopher D. Olander	(SEAL)
	Name:	Christopher D. Olander
	Title:	Executive Vice President

EX-10.10

Exhibit 10.10

SECOND MODIFICATION AGREEMENT

THIS SECOND MODIFICATION AGREEMENT (“MODIFICATION”) is made as of the 22nd day of October, 2004, by and between AVATECH SOLUTIONS SUBSIDIARY, INC. (“BORROWER”), K BANK, formerly known as KEY BANK AND TRUST (“LENDER”), AVATECH SOLUTIONS, INC. and TECHNICAL LEARNINGWARE COMPANY, INC. (collectively “GUARANTORS”).

RECITALS

Pursuant to the terms and provisions of a Loan And Security Agreement dated September 11, 2003 by and between the BORROWER and the LENDER, as previously amended (“LOAN AGREEMENT”), the LENDER is providing to the BORROWER a revolving line of credit (“LOAN”) which is evidenced by the Amended and Restated Demand Promissory Note dated November 24, 2003 from the BORROWER to the order of the LENDER in the stated principal amount of Two Million Five Hundred Thousand Dollars ($2,500,000.00) (“NOTE”).

The BORROWER’S obligations to the LENDER under the LOAN, have been absolutely and unconditionally guaranteed by the GUARANTORS pursuant to the terms and provisions of: (a) Guaranty Agreement dated as of September 11, 2003 from Avatech Solutions, Inc. to and for the benefit of the LENDER; and (b) Guaranty Agreement dated as of September 11, 2003 from Technical Learningware Company, Inc. to and for the benefit of the LENDER (collectively, “GUARANTIES”).

The BORROWER has requested that the LENDER increase the maximum principal amount of the LOAN. The LENDER is willing to consent to the BORROWER’S request subject to the terms and provisions of this MODIFICATION.

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

Section 1. Recitals. The parties hereby acknowledge the accuracy of the above Recitals and hereby incorporate the Recitals into this MODIFICATION.

Section 2. Amendment To Loan Agreement. The LOAN AGREEMENT is hereby amended as follows:

(a) Section 1.5. Section 1.5 of the LOAN AGREEMENT is hereby amended by deleting its present language in its entirety and substituting in lieu thereof the following:

Section 1.5. Borrowing Base. The term “BORROWING BASE” means: (a) eighty-five percent

(85%) of the face amount (less maximum discounts, credits and allowances which may be taken by or are granted to ACCOUNT DEBTORS of the BORROWER) of billed ELIGIBLE ACCOUNTS; minus (b) such reserves as the LENDER deems appropriate from time to time; minus (c) the aggregate stated amount of all outstanding LETTERS OF CREDIT and unsatisfied reimbursement obligations of the BORROWER arising out of LETTERS OF CREDIT and such reserves as the LENDER deems appropriate from time to time.

(b) Section 1.15. Section 1.15 of the LOAN AGREEMENT is hereby amended by deleting its present language in its entirety and substituting in lieu thereof the following:

Section 1.15. Dollar Cap. The term “DOLLAR CAP” means: (a) Three Million Dollars ($3,000,000.00) during the period between July 28, 2004 and November 1, 2004; and (b) Two Million Dollars ($2,000,000.00) at all other times; provided, however, if the BORROWER delivers to the LENDER evidence that all sums owed by the BORROWER to Dassault Systemes Corp. (“Dassault”) are repaid in full or delivers to the LENDER an agreement (in a form reasonably acceptable to LENDER) executed by Dassault pursuant to which Dassault agrees that the limit on the amount of the senior loan under the Subordination Agreement dated September 11, 2003 between Dassault and the LENDER is increased from Two Million Dollars ($2,000,000.00) to Three Million Dollars ($3,000,000.00), then the amount of the “DOLLAR CAP” shall be increased to Three Million Dollars ($3,000,000.00).

(c) Section 1.16. Section 1.16 of the LOAN AGREEMENT is hereby amended by inserting at the end thereof the following new sentence:

Notwithstanding anything contained herein to the contrary, no ACCOUNTS acquired in connection with a PERMITTED ACQUISITION shall be an ELIGIBLE ACCOUNT unless the LENDER specifically agrees in writing to permit such ACCOUNTS to be ELIGIBLE ACCOUNTS if the other criteria as set forth herein are satisfied.

(d) Section 1.43. Section 1.43 of the LOAN AGREEMENT is hereby amended by inserting at the end thereof immediately preceding the period the following:

, as further amended and restated pursuant to the terms and provisions of the Second Amended and Restated Demand Promissory Note dated October     , 2004 from the BORROWER as the maker thereof which is payable to order of the LENDER in the stated principal amount of Three Million Dollars ($3,000,000.00).

(e) Article 1. Article 1 of the LOAN AGREEMENT is hereby amended by inserting at the end thereof the following new Sections:

Section 1.57. Letters of Credit. The term “LETTERS OF CREDIT” means collectively letters of credit issued from time to time by the LENDER for the account or benefit of the BORROWER.

Section 1.58. Permitted Acquisitions. The term “PERMITTED ACQUISITIONS” means any acquisition, whether by purchase, merger or otherwise, of all or substantially all of the assets of, all of the equity interest of, or a business line or division of any PERSON; provided, (i) immediately prior to, and after giving effect thereto, no DEFAULT or EVENT OF DEFAULT shall have occurred and be continuing or would result therefrom; (ii) all transactions in connection therewith shall be consummated in accordance with all applicable laws; (iii) any PERSON or assets or division acquired in accordance herewith shall be predominantly in the same business as presently conducted by the BORROWER or businesses which are complimentary to the lines of business in which the BORROWER is currently engaged; (iv) any and all assets acquired in connection with such transaction shall be acquired free and clear of all liens and encumbrances other than liens of the LENDER or other liens specifically approved by the LENDER in writing; (v) any indebtedness incurred in connection with such acquisition is subordinated to the OBLIGATIONS pursuant to a written subordination agreement in a form acceptable to the LENDER; (vi) the aggregate amount of indebtedness incurred plus cash paid in connection with any single transaction shall not exceed Five Hundred Thousand Dollars ($500,000.00) without the LENDER’S prior written consent; (vii) the aggregate amount of indebtedness incurred and cash paid in connection with all acquisitions shall not exceed Two

Million Dollars ($2,000,000.00) without the LENDER’S prior written consent; and (viii) no proceeds of the LOAN shall be used to pay for any such acquisition.

(f) Article 2. Article 2 of the LOAN AGREEMENT is hereby amended by inserting at the end thereof immediately after the presently existing Section 2.4 the following new Section:

Section 2.5. Letters Of Credit.

2.5.1. Issuance Of Letters Of Credit. The LENDER may in its discretion issue LETTERS OF CREDIT as requested by the BORROWER, provided that: (a) no DEFAULT or EVENT OF DEFAULT has occurred and is continuing, and (b) the aggregate amount of all LETTERS OF CREDIT issued and outstanding and any reimbursement obligations owed to the LENDER arising out of any LETTERS OF CREDIT do not exceed Five Hundred Thousand Dollars ($500,000.00); and (c) the aggregate amount of all LETTERS OF CREDIT issued and outstanding, any reimbursement obligations owed to the LENDER arising out of LETTERS OF CREDIT and the outstanding amount of advances made under Section 2.1, shall not exceed the MAXIMUM LOAN AMOUNT. No LETTER OF CREDIT shall have an expiry date which occurs after the stated maturity date or termination date of the LOAN. Any amounts paid by the LENDER in connection with any LETTER OF CREDIT shall be treated as an advance of proceeds of the LOAN, shall be secured by all of the COLLATERAL, and shall bear interest (including the default rate of interest) and be payable at the same rate and in the same manner as the LOAN.

2.5.2. Indemnification. The BORROWER unconditionally and irrevocably agrees to indemnify the LENDER and to hold the LENDER harmless from any and all losses, claims or liabilities arising from any transactions or occurrences relating to LETTERS OF CREDIT issued, established, opened or accepted for the account of the BORROWER, and any drafts or acceptances thereunder, and all OBLIGATIONS incurred in connection therewith, other than losses, claims or liabilities arising from the gross negligence or wanton misconduct of the LENDER.

2.5.3. Reimbursement Obligations. The BORROWER agrees that the LENDER is irrevocably authorized to advance proceeds of the LOAN to make payment of all draws made under any LETTER OF CREDIT. In the event there is insufficient availability under the LOAN to make payment on a draw under a LETTER OF CREDIT, the BORROWER agrees to reimburse the LENDER on the day of drawing (or upon such later date as the BORROWER receives notice of the payment of the presented draft by the LENDER) upon any LETTER OF CREDIT (either with the proceeds of the LOAN obtained hereunder or otherwise) in same day funds in the amount of the drawing. If the BORROWER fails to reimburse the LENDER as provided herein or as provided in any separate letter of credit application agreements or other LOAN DOCUMENTS, the unreimbursed amount of such drawing shall bear interest at the same rate (including the default rate of interest) applicable to the LOAN. The BORROWER’S reimbursement obligations hereunder shall be absolute and unconditional under all circumstances irrespective of any rights of set-off, counterclaim or defense to payment the BORROWER may claim or have against the LENDER, the beneficiary of the LETTER OF CREDIT or any other PERSON, including, without limitation, any defense based on any failure of the BORROWER to receive consideration or the legality, validity, regularity or unenforceability of the LETTER OF CREDIT or any irregularities in the presentment of the draft presented upon the LETTER OF CREDIT.

2.5.4. Fees, Charges And Other Terms. The BORROWER agrees to pay to the LENDER such issuance, amendment, extension and other fees as the LENDER quotes from time to time with respect to each LETTER OF CREDIT upon the issuance thereof, and shall execute such applications, reimbursement agreements, or other documents as the LENDER requires from time to time with respect to the issuance, extension, amendment, or any other requested or required action concerning a LETTER OF CREDIT.

(g) Article 6. Article 6 of the LOAN AGREEMENT is hereby amended by deleting Sections 6.1, 6.2, 6.4, 6.5, 6.8, 6.9, 6.11 and 6.14 in their entirety and substituting in lieu thereof the following:

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 without the consent of the LENDER, which consent shall not be unreasonably withheld, provided, however, that the BORROWER may in connection with PERMITTED ACQUISITIONS, without the LENDER’S consent, issue shares of its capital stock at not less than seventy-five percent (75%) of the then-current market price therefor.

Section 6.2. No Sale or Transfer of Assets. Without the consent of the LENDER, which consent shall not be unreasonably withheld, the BORROWER shall not sell, transfer, lease or otherwise dispose of all or any part of the COLLATERAL, or all or any party of its other assets, except that, without the consent of the LENDER (a) INVENTORY may be sold to ACCOUNT DEBTORS in the ordinary course of the BORROWER’S business, (b) software of which BORROWER is the owner may be sold at not less than its fair market value, and (c) EQUIPMENT of BORROWER may be sold if such sales occur in the ordinary course of the BORROWER’S business and the proceeds thereof are used either to make a principal payment on the LOAN or for such other purpose as the LENDER may hereafter agree.

Section 6.4. No Indebtedness. Without the consent of the LENDER, which consent shall not be unreasonably withheld, the BORROWER shall not incur, create, assume, or permit to exist and INDEBTEDNESS except (a) the OBLIGATIONS, (b) INDEBTEDNESS secured by PERMITTED LIENS, (c) the SUBORDINATED DEBT, and (d) any indebtedness to institutional or accredited investors in the form of notes or convertible notes issued by BORROWER in a financing transaction, so long as such indebtedness is subordinated to the OBLIGATIONS pursuant to an intercreditor or subordination agreement reasonably acceptable to LENDER.

Section 6.5. Restricted Payments. Without the consent of the LENDER, which consent shall not be unreasonably withheld, the BORROWER shall not make any RESTRICTED PAYMENTS, except that BORROWER may, without the consent of LENDER, and so long as no other covenant in this AGREEMENT is violated or breached, (a) pay dividends on any

series of preferred stock issued by BORROWER, (b) issue common stock upon conversion of shares of any series of preferred stock of BORROWER, or upon exercise of any options or warrants issued by BORROWER, and (c) payments to consultants or other advisers so long as such payments are in amounts that are usual and customary for the services performed.

Section 6.8. Loans, Investments and Sale-Leasebacks. Without the consent of LENDER, which consent shall not be unreasonably withheld, the BORROWER shall not make any advance, loan, investment, or material acquisition of assets or enter into any sale-leaseback transactions, except that, without the consent of LENDER, the BORROWER may (a) make PERMITTED ACQUISITIONS, and (b) advance or loan money to, or make an investment in, any affiliate of the BORROWER so long as such advance, loan, or investment does not violate or constitute a breach under any other provision of this AGREEMENT and that the aggregate amount of such loans and investments outstanding at any time plus the aggregate amount of cash paid and indebtedness incurred in connection with PERMITTED ACQUISITIONS shall not exceed Two Million Dollars ($2,000,000.00).

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, other than in connection with PERMITTED ACQUISITIONS.

Section 6.11. No Alteration of Structure or Operations. Without the consent of the LENDER, which consent shall not be unreasonably withheld, 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, provided, however, that BORROWER may, without the consent of LENDER, (a) expand the scope of its business by entering into new product and service lines of business that are complementary to the lines of business in which the BORROWER currently is engaged, (b) increase the authorized shares of its common and preferred stock, (c) engage in business ventures with providers of goods and services similar or

complementary to the goods and services offered by BORROWER, provided that (i) the BORROWER does not transfer any assets to such business venture without the consent of the LENDER; and (ii) the BORROWER shall not incur any liability or indebtedness in connection with such business venture without the consent of the LENDER.

Section 6.14. Limitation on Issuance of Equity Interests. Without the consent of the LENDER, which consent shall not be unreasonably withheld, 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, provided, however, that the BORROWER may, without the consent of the LENDER, (i) issue securities that are redeemable, whether at the option of the holder thereof or the BORROWER, by the issuance of shares of the common stock of BORROWER without the payment of cash, or (ii) issue equity interests in the BORROWER that are convertible or exchangeable into a liability of the BORROWER so long as such liability is subordinate to the OBLIGATIONS pursuant to an intercreditor or subordination agreement with LENDER reasonably satisfactory to LENDER.

(h) Article 8. Article 8 of the LOAN AGREEMENT is hereby amended by inserting immediately after the presently existing Section 8.4 the following new Section:

Section 8.5. Letters Of Credit. Upon the request of the LENDER, at any time after the occurrence of an EVENT OF DEFAULT, the BORROWER shall immediately deposit in a cash collateral account at the LENDER, over which the LENDER has sole access, an amount equal to the aggregate then undrawn and unexpired amount of all LETTERS OF CREDIT. Amounts held in such cash collateral account shall be applied by the LENDER to the payment of drafts drawn under LETTERS OF CREDIT, and the unused portion thereof after all LETTERS OF CREDIT shall have expired or been fully drawn

upon shall be applied to repay the other OBLIGATIONS. After all LETTERS OF CREDIT shall have expired or have been fully drawn upon and all other OBLIGATIONS shall have been paid in full, the balance, if any, in such cash collateral account shall be returned to the BORROWER. In the event the BORROWER fails to deposit into the cash collateral account an amount equal to the then undrawn and unexpired amount of all LETTERS OF CREDIT, the LENDER shall be authorized to either: (a) make an advance under the LOAN in the amount of the undrawn and unexpired amount of all LETTERS OF CREDIT and deposit such advance in to the cash collateral account; or (b) deposit into such cash collateral account proceeds from the liquidation of the COLLATERAL until the balance in such account equals the aggregate then undrawn and unexpired amount of all LETTERS OF CREDIT.

Section 3. Consent Of Guarantors. The GUARANTORS hereby consent to the modifications contained in this MODIFICATION. The GUARANTORS hereby ratify their obligations under the GUARANTIES and hereby confirm that pursuant to the terms of the GUARANTIES, the GUARANTORS are absolutely and unconditionally guaranteeing all of the BORROWER’S obligations to the LENDER, whether now owed or hereafter incurred, including, but not limited to all of the BORROWER’S obligations to the LENDER under the LOAN, as modified herein.

Section 4. Amendment To Note. The NOTE is hereby amended and restated in its entirety in accordance with the terms and provisions of the Second Amended And Restated Demand Promissory Note of even date herewith from the BORROWER to the order of the LENDER in the stated principal amount of Three Million Dollars ($3,000,000.00).

Section 5. Security. All of the BORROWER’S obligations to the LENDER under the LOAN shall continue to be secured by all of the security interests and liens granted to the LENDER in the LOAN AGREEMENT.

Section 6. Other Terms. Except as specifically modified herein, all other terms and provisions of the LOAN AGREEMENT and all other documents evidencing, securing or otherwise documenting the terms and provisions of the LOAN (collectively, “LOAN DOCUMENTS”) remain in full force and effect.

Section 7. Ratification Of Obligations Under Loan Documents. The BORROWER and the GUARANTORS (collectively, “OBLIGORS”) hereby ratify and confirm all their respective

obligations, liabilities and indebtedness under the provisions of the LOAN DOCUMENTS. The LENDER and the OBLIGORS agree that it is their intention that nothing herein shall be construed to extinguish, release, discharge or constitute, create or effect a novation of, or an agreement to extinguish any of the obligations, indebtedness or liabilities of any of the OBLIGORS under the provisions of the LOAN DOCUMENTS, or the assignment or pledge to the LENDER of, or to any security interest or lien granted to the LENDER in or on, any of the security for such obligations, indebtedness and liabilities.

Section 8. Waiver Of Jury Trial. The parties hereto agree that any suit, action or proceeding, whether claim or counterclaim, brought or instituted by any party to this MODIFICATION, or any other successors or assigns on or with respect to this MODIFICATION or any of the other LOAN DOCUMENTS, or which in any way relates, directly or indirectly to the obligations of the OBLIGORS to the LENDER under the LOAN DOCUMENTS or the dealings of the parties with respect thereto, shall be tried only by a court and not by a jury. The parties expressly waive any right to a trial by jury in any such action or proceeding.

Section 9. Fee. In consideration for the LENDER’S agreements contained herein, the BORROWER shall pay to the LENDER on the date of this MODIFICATION a fee in the amount of Five Thousand Dollars ($5,000.00). In addition, the BORROWER shall pay to the LENDER all fees and expenses incurred by the LENDER in connection with the preparation of this MODIFICATION and the documents to be executed in connection herewith.

Section 10. Release. The OBLIGORS release, acquit and forever discharge the LENDER and the LENDER’S subsidiaries, affiliates, officers, directors, agents, employees, servants, attorneys and representatives from any and all claims, demands, debts, actions, causes of action, suits, contracts, agreements, accounts, defenses, offsets against the LOAN, and liabilities of any kind or character whatsoever, which any OBLIGOR ever had or has through the date of this MODIFICATION.

Section 11. 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 MODIFICATION and the rights and obligations of the parties hereto, including the validity, construction, interpretation, and enforceability of this MODIFICATION and its various provisions and the consequences and legal effect of all transactions and events which resulted in the execution of this MODIFICATION or which occurred or were to occur as a direct or indirect result of this MODIFICATION having been executed.

Section 12. Consent To Jurisdiction; Agreement As To Venue. Each of the OBLIGORS irrevocably consent 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 OBLIGORS agree 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.

IN WITNESS WHEREOF, the parties have executed this MODIFICATION with the specific intention of creating a document under seal.

WITNESS/ATTEST:	BORROWER :
	AVATECH SOLUTIONS SUBSIDIARY, INC.,
	A Delaware Corporation
/s/	By:	/s/ Christopher D. Olander	(SEAL)
	Name:	Christopher D. Olander
	Title:	Executive Vice President
	LENDER:
	K BANK
/s/	By:	/s/ Patrick E. Kilpatrick	(SEAL)
	Name:	Patrick E. Kilpatrick
	Title:	Vice President
	GUARANTORS:
	AVATECH SOLUTIONS, INC.
/s/	By:	/s/ Christopher D. Olander	(SEAL)
	Name:	Christopher D. Olander
	Title:	Executive Vice President
	TECHNICAL LEARNINGWARE COMPANY, INC.
/s/	By:	/s/ Christopher D. Olander	(SEAL)
	Name:	Christopher D. Olander
	Title:	Executive Vice President

ACKNOWLEDGMENTS

STATE OF MARYLAND, COUNTY OF CARROLL, TO WIT:

I HEREBY CERTIFY that on this 22nd day of October, 2004, before me, the undersigned Notary Public of the jurisdiction aforesaid, personally appeared CHRISTOPHER D. OLANDER, and acknowledged himself to be the EVP of AVATECH SOLUTIONS SUBSIDIARY, INC., a Delaware corporation, and that he, as such EVP, being authorized so to do, executed the foregoing instrument for the purposes therein contained by signing the name of AVATECH SOLUTIONS SUBSIDIARY, INC., by himself as EVP.

IN WITNESS MY Hand and Notarial Seal.

/s/	(SEAL)
	NOTARY PUBLIC
My Commission Expires:
7/1/2005

STATE OF MARYLAND, COUNTY OF CARROLL, TO WIT:

I HEREBY CERTIFY that on this 22nd day of October, 2004, before me, the undersigned Notary Public of the jurisdiction aforesaid, personally appeared CHRISTOPHER D. OLANDER, and acknowledged himself to be the EVP of K BANK, a Maryland banking and trust company, and that he, as such EVP, being authorized so to do, executed the foregoing instrument for the purposes therein contained by signing the name of K BANK, by himself as EVP.

IN WITNESS MY Hand and Notarial Seal.

/s/	(SEAL)
	NOTARY PUBLIC
My Commission Expires:
7/1/2005

STATE OF MARYLAND, COUNTY OF CARROLL, TO WIT:

I HEREBY CERTIFY that on this 22nd day of October, 2004, before me, the undersigned Notary Public of the jurisdiction aforesaid, personally appeared CHRISTOPHER D. OLANDER, and acknowledged himself to be the EVP of AVATECH SOLUTIONS, INC., a EVP corporation, and that he, as such EVP, being authorized so to do, executed the foregoing instrument for the purposes therein contained by signing the name of AVATECH SOLUTIONS, INC., by himself as EVP.

IN WITNESS MY Hand and Notarial Seal.

/s/	(SEAL)
	NOTARY PUBLIC
My Commission Expires:
7/1/2005

STATE OF MARYLAND, COUNTY OF CARROLL, TO WIT:

I HEREBY CERTIFY that on this 22nd day of October, 2004, before me, the undersigned Notary Public of the jurisdiction aforesaid, personally appeared CHRISTOPHER D. OLANDER, and acknowledged himself to be the EVP of TECHNICAL LEARNINGWARE COMPANY, INC., a EVP corporation, and that he, as such EVP, being authorized so to do, executed the foregoing instrument for the purposes therein contained by signing the name of TECHNICAL LEARNINGWARE COMPANY, INC., by himself as EVP.

IN WITNESS MY Hand and Notarial Seal.

/s/	(SEAL)
	NOTARY PUBLIC
My Commission Expires:
7/1/2005

EX-10.11

Exhibit 10.11

K BANK

BUSINESS LOAN AGREEMENT

Principal $700,000.00	Loan Date 10-28-2004	Maturity 12-15-2004	Loan No 220583814	Call / Coll	Account	Officer PK	Initials
References in the shaded area are for Lender’s use only and do not limit the applicability of this document to any particular loan or item. Any item above containing “***” has been omitted due to text length limitations.

Borrower: Avatech Solutions Subsidiary, Inc. 10715 Red Run Blvd, Ste 101 Owings Mills, MD 21117 Lender: K Bank 7F GWYNNS MILL COURT OWINGS MILLS, MD 21117

THIS BUSINESS LOAN AGREEMENT dated October 28, 2004, is made and executed between Avatech Solutions Subsidiary, Inc. (“Borrower”) and K Bank (“Lender”) on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans or other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement (“Loan”). Borrower understands and agrees that: (A) in granting, renewing, or extending any Loan, Lender is relying upon Borrower’s representations, warranties, and agreements as set forth in this Agreement; (B) the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender’s sole judgment and discretion; and (C) all such Loans shall be and remain subject to the terms and conditions of this Agreement.

TERM. This Agreement shall be effective as of October 28, 2004, and shall continue in full force and effect until such time as all of Borrower’s Loans in favor of Lender have been paid in full, including principal, interest, costs, expenses, attorneys’ fees, and other fees and charges, or until December 15, 2004.

ADVANCE AUTHORITY. The following persons currently are authorized to request advances and authorize payments under the line of credit until Lender receives from Borrower, at Lender’s address shown above, written notice of revocation of their authority: Christopher D. Olander, Exec. V.P. of Avatech Solutions Subsidiary, Inc.; Donald R. Walsh, Chief Exec Officer; Beth O. Maclaughlin, V.P. Fiance; Karen L. Strayer, Tax and Compliance Mgr.; and Catherine Dodson, Controller.

CONDITIONS PRECEDENT TO EACH ADVANCE. Lender’s obligation to make the initial Advance and each subsequent Advance under this Agreement shall be subject to the fulfillment to Lender’s satisfaction of all of the conditions set forth in this Agreement and in the Related Documents.

Loan Documents. Borrower shall provide to Lender the following documents for the Loan: (1) the Note; (2) Security Agreements granting to Lender security interests in the Collateral; (3) financing statements and all other documents perfecting Lender’s Security Interests; (4) evidence of insurance as required below; (5) guaranties; (6) together with all such Related Documents as Lender may require for the Loan; all in form and substance satisfactory to Lender and Lender’s counsel.

Borrower’s Authorization. Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents. In addition, Borrower shall have provided such other resolutions, authorizations, documents and instruments as Lender or its counsel, may require.

Payment of Fees and Expenses. Borrower shall have paid to Lender all fees, charges, and other expenses which are then due and payable as specified in this Agreement or any Related Document.

Representations and Warranties. The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct.

No Event of Default. There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement or under any Related Document.

REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists:

Organization. Borrower is a corporation for profit which is, and at all times shall be, duly organized, validly existing, and in good standing under and by virtue of the laws of the State of Delaware. Borrower is duly authorized to transact business in all other states in which Borrower is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in which Borrower is doing business. Specifically, Borrower is, and at all times shall be, duly qualified as a foreign corporation in all states in which the failure to so qualify would have a material adverse effect on its business or financial condition. Borrower has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently proposes to engage. Borrower maintains an office at 10715 Red Run Blvd, Ste 101, Owings Mills, MD 21117. Unless Borrower has designated otherwise in writing, the principal office is the office at which Borrower keeps its books and records including its records concerning the Collateral. Borrower will notify Lender prior to any change in the location of Borrower’s state of organization or any change in Borrower’s name. Borrower shall do all things necessary to preserve and to keep in full force and effect its existence, rights and privileges, and shall comply with all regulations, rules, ordinances, statutes, orders and decrees of any governmental or quasi-governmental authority or court applicable to Borrower and Borrower’s business activities.

Assumed Business Names. Borrower has filed or recorded all documents or filings required by law relating to all assumed business names used by Borrower. Excluding the name of Borrower, the following is a complete list of all assumed business names under which Borrower does business: None.

Authorization. Borrower’s execution, delivery, and performance of this Agreement and all the Related Documents have been duly authorized by all necessary action by Borrower and do not conflict with, result in a violation of, or constitute a default under (1) any provision of (a) Borrower’s articles of incorporation or organization, or bylaws, or (b) any agreement or other instrument binding upon Borrower or (2) any law, governmental regulation, court decree, or order applicable to Borrower or to Borrower’s properties.

Financial Information. Each of Borrower’s financial statements supplied to Lender truly and completely disclosed Borrower’s financial condition as of the date of the statement, and there has been no material adverse change in Borrower’s financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements.

Legal Effect. This Agreement constitutes, and any instrument or agreement Borrower is required to give under this Agreement when delivered will constitute legal, valid, and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms.

Properties. Except as contemplated by this Agreement or as previously disclosed in Borrower’s financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower’s properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrowers properties are titled in Borrower’s legal name, and Borrower has not used or filed a financing statement under any other name for at least the last five (5) years.

Hazardous Substances. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (1) During the period of Borrower’s ownership of Borrower’s Collateral, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance by any person on, under, about or from any of the Collateral. (2) Borrower has no knowledge of, or reason to believe that there has been (a) any breach or violation of any Environmental Laws; (b) any use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance on, under, about or from the Collateral by any prior owners or occupants of any of the Collateral; or (c) any actual or threatened litigation or claims of any kind by any person relating to such matters. (3) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the Collateral shall use, generate, manufacture, store, treat, dispose of or release any Hazardous Substance on, under, about or from any of the Collateral; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation all Environmental Laws. Borrower authorizes Lender and its agents to enter upon the Collateral to make such inspections and tests as Lender may deem appropriate to determine compliance of the Collateral with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower’s expense and for Lender’s purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower’s due diligence in investigating the Collateral for hazardous waste and Hazardous Substances. Borrower hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (2) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release of a hazardous waste or substance on the Collateral. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the Indebtedness and the termination, expiration or satisfaction of this Agreement and shall not be affected by Lender’s acquisition of any interest in any of the Collateral, whether by foreclosure or otherwise.

Loan No: 220583814 BUSINESS LOAN AGREEMENT (Continued) Page 2

Litigation and Claims. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower’s financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing.

Taxes. To the best of Borrower’s knowledge, all of Borrower’s tax returns and reports that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided.

Lien Priority. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower’s Loan and Note, that would be prior or that may in any way be superior to Lender’s Security Interests and rights in and to such Collateral.

Binding Effect. This Agreement, the Note, all Security Agreements (if any), and all Related Documents are binding upon the signers thereof, as well as upon their successors, representatives and assigns, and are legally enforceable in accordance with their respective terms.

AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, so long as this Agreement remains in effect, Borrower will:

Notices of Claims and Litigation. Promptly inform Lender in writing of (1) all material adverse changes in Borrower’s financial condition, and (2) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor.

Financial Records. Maintain its books and records in accordance with GAAP, applied on a consistent basis, and permit Lender to examine and audit Borrower’s books and records at all reasonable times.

Financial Statements. Furnish Lender with the following:

Annual Statements. As soon as available, but in no event later than one-hundred-twenty (120) days after the end of each fiscal year, Borrower’s balance sheet and income statement for the year ended, audited by a certified public accountant satisfactory to Lender.

Interim Statements. As soon as available, but in no event later than thirty (30) days after the end of each month, Borrower’s balance sheet and profit and loss statement for the period ended, prepared by Borrower.

Tax Returns. As soon as available, but in no event later than thirty (30) days after the applicable filing date for the tax reporting period ended, Federal and other governmental tax returns, prepared by a certified public accountant satisfactory to Lender.

All financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Borrower as being true and correct.

Additional Information. Furnish such additional information and statements, as Lender may request from time to time.

Insurance. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower’s properties and operations, in form, amounts, coverages and with insurance companies acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such lender’s loss payable or other endorsements as Lender may require.

Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the properties insured; (5) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (6) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower.

Guaranties. Prior to disbursement of any Loan proceeds, furnish executed guaranties of the Loans in favor of Lender, executed by the guarantors named below, on Lender’s forms, and in the amounts and under the conditions set forth in those guaranties.

Names of Guarantors	Amounts
Avatech Solutions, Inc.	Unlimited
William James Hindman	**$700,000.00

Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements.

Loan Proceeds. Use all Loan proceeds solely for the following specific purposes: Short Term working capital.

Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower’s properties, income, or profits.

Performance. Perform and comply, in a timely manner, with all terms, conditions, and provisions set forth in this Agreement, in the Related Documents, and in all other instruments and agreements between Borrower and Lender. Borrower shall notify Lender immediately in writing of any default in connection with any agreement.

Operations. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner.

Environmental Studies. Promptly conduct and complete, at Borrower’s expense, all such investigations, studies, samplings and testings as may be requested by Lender or any governmental authority relative to any substance, or any waste or by-product of any substance defined as toxic or a hazardous substance under applicable federal, state, or local law, rule, regulation, order or directive, at or affecting any property or any facility owned, leased or used by Borrower.

Compliance with Governmental Requirements. Comply with all laws, ordinances, and regulations, now or hereafter in effect, of all governmental authorities applicable to the conduct of Borrower’s properties, businesses and operations, and to the use or occupancy of the Collateral, including without limitation, the Americans With Disabilities Act. Borrower may contest in good faith any such law, ordinance, or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Borrower has notified Lender in writing prior to doing so and so long as, in Lender’s sole opinion, Lender’s interests in the Collateral are not jeopardized. Lender may require Borrower to post adequate security or a surety bond, satisfactory to Lender, to protect Lender’s interest.

Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower’s other properties and to examine or audit Borrower’s books, accounts, and records and to make copies and memoranda of Borrower’s books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower’s expense.

Environmental Compliance and Reports. Borrower shall comply in all respects with any and all Environmental Laws; not cause or permit to exist, as a result of an intentional or unintentional action or omission on Borrower’s part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower’s part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources.

Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, assignments, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests.

LENDER’S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender’s interest in the Collateral or if Borrower fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Borrower’s failure to discharge or pay when due any amounts Borrower is required to discharge or pay under this Agreement or any Related Documents, Lender on Borrower’s behalf may (but

BUSINESS LOAN AGREEMENT

(Continued)

Loan No: 220583814 Page 3

shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on any Collateral and paying all costs for insuring, maintaining and preserving any Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Borrower. All such expenses will become a part of the Indebtedness and, at Lender’s option, will (A) be payable on demand; or (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note.

NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender:

Indebtedness and Liens. (1) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (2) sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower’s assets (except as allowed as Permitted Liens), or (3) sell with recourse any of Borrower’s accounts, except to Lender.

Continuity of Operations. (1) Engage in any business activities substantially different than those in which Borrower is presently engaged, (2) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, or (3) pay any dividends on Borrower’s stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a “Subchapter S Corporation” (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of Borrower’s stock, or purchase or retire any of Borrower’s outstanding shares or alter or amend Borrower’s capital structure.

Loans, Acquisitions and Guaranties. (1) Loan, invest in or advance money or assets to any other person, enterprise or entity, (2) purchase, create or acquire any interest in any other enterprise or entity, or (3) incur any obligation as surety or guarantor other than in the ordinary course of business.

Agreements. Borrower will not enter into any agreement containing any provisions which would be violated or breached by the performance of Borrower’s obligations under this Agreement or in connection herewith.

CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (A) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (B) Borrower or any Guarantor dies, becomes incompetent or becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (C) there occurs a material adverse change in Borrower’s financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (D) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor’s guaranty of the Loan or any other loan with Lender.

RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower’s accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts, and, at Lender’s option, to administratively freeze all such accounts to allow Lender to protect Lender’s charge and setoff rights provided in this paragraph.

DEFAULT. Each of the following shall constitute an Event of Default under this Agreement:

Payment Default. Borrower fails to make any payment when due under the Loan.

Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower.

Default in Favor of Third Parties. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower’s or any Grantor’s property or Borrower’s or any Grantor’s ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents.

False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower’s behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.

Insolvency. The dissolution or termination of Borrower’s existence as a going business, or a trustee or receiver is appointed for Borrower or for all or a substantial portion of the assets of Borrower, or Borrower makes a general assignment for the benefit of Borrower’s creditors, or Borrower files for bankruptcy, or an involuntary bankruptcy petition is filed against Borrower and such involuntary petition remains undismissed for sixty (60) days.

Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason.

Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the Loan. This includes a garnishment of any of Borrower’s accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.

Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness.

Change in Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower.

Adverse Change. A material adverse change occurs in Borrower’s financial condition, or Lender believes the prospect of payment or performance of the Loan is impaired.

EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make further Loan Advances or disbursements), and, at Lender’s option, all sums owing in connection with the Loans, including all principal, interest, and all other fees, costs and charges, if any, will become immediately due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the “Insolvency” subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender’s rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender’s right to declare a default and to exercise its rights and remedies.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement:

Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.

Attorneys’ Fees; Expenses. Borrower agrees that if Lender hires an attorney to help enforce this Agreement, Borrower will pay, subject to any limits under applicable law, Lender’s attorneys’ fees and all of Lender’s other collection expenses, whether or not there is a lawsuit and including without limitation additional legal expenses for bankruptcy proceedings.

Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement.

Consent to Jurisdiction. Borrower irrevocably submits to the jurisdiction of any state or federal court sitting in the State of Maryland over any suit, action, or proceeding arising out of or relating to this Agreement. Borrower irrevocably waives, to the fullest extent permitted by law, any objection that Borrower may now or hereafter have to the laying of venue of any such suit, action, or proceeding brought in any such court and

BUSINESS LOAN AGREEMENT

(Continued)

Loan No: 220583814 Page 4

any claim that any such suit, action, or proceeding brought in any such court has been brought in an inconvenient forum. Final judgment in any such suit, action, or proceeding brought in any such court shall be conclusive and binding upon Borrower and may be enforced in any court in which Borrower is subject to jurisdiction by a suit upon such judgment provided that service of process is effected upon Borrower as provided in this Agreement or as otherwise permitted by applicable law.

Consent to Loan Participation. Borrower agrees and consents to Lender’s sale or transfer, whether now or later, of one or more participation interests in the Loan to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy Borrower may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loan and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower’s obligation under the Loan irrespective of the failure or insolvency of any holder of any interest in the Loan. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender.

Governing Law. This Agreement will be governed by, construed and enforced in accordance with federal law and the laws of the State of Maryland. This Agreement has been accepted by Lender in the State of Maryland.

JURY WAIVER. LENDER AND BORROWER EACH HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH LENDER OR BORROWER MAY BE PARTIES, ARISING OUT OF, OR IN ANY WAY PERTAINING TO, THIS AGREEMENT. IT IS AGREED THAT THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS. THIS WAIVER IS KNOWINGLY, WILLINGLY AND VOLUNTARILY MADE BY LENDER AND BORROWER, AND LENDER AND BORROWER EACH HEREBY REPRESENT THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. BORROWER FURTHER REPRESENTS THAT BORROWER HAS BEEN REPRESENTED IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF BORROWER’S OWN FREE WILL, AND THAT BORROWER HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL.

No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender’s right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender’s rights or of any of Borrower’s or any Grantor’s obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender.

Notices. Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, if hand delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party’s address. For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower’s current address. Unless otherwise provided or required by law, if there is more than one Borrower, any notice given by Lender to any Borrower is deemed to be notice given to all Borrowers.

Severability. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement.

Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word “Borrower” as used in this Agreement shall include all of Borrower’s subsidiaries and affiliates. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any of Borrower’s subsidiaries or affiliates.

Successors and Assigns. All covenants and agreements by or on behalf of Borrower contained in this Agreement or any Related Documents shall bind Borrower’s successors and assigns and shall inure to the benefit of Lender and its successors and assigns. Borrower shall not, however, have the right to assign Borrower’s rights under this Agreement or any interest therein, without the prior written consent of Lender.

Survival of Representations and Warranties. Borrower understands and agrees that in extending Loan Advances, Lender is relying on all representations, warranties, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement or the Related Documents. Borrower further agrees that regardless of any investigation made by Lender, all such representations, warranties and covenants will survive the extension of Loan Advances and delivery to Lender of the Related Documents, shall be continuing in nature, shall be deemed made and redated by Borrower at the time each Loan Advance is made, and shall remain in full force and effect until such time as Borrower’s Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur.

Time is of the Essence. Time is of the essence in the performance of this Agreement.

DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. Accounting words and terms not otherwise defined in this Agreement shall have the meanings assigned to them in accordance with generally accepted accounting principles as in effect on the date of this Agreement:

Advance. The word “Advance” means a disbursement of Loan funds made, or to be made, to Borrower or on Borrower’s behalf on a line of credit or multiple advance basis under the terms and conditions of this Agreement.

Agreement. The word “Agreement” means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time.

Borrower. The word “Borrower” means Avatech Solutions Subsidiary, Inc. and includes all co-signers and co-makers signing the Note.

Collateral. The word “Collateral” means all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, collateral mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor’s lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise.

Environmental Laws. The words “Environmental Laws” mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. (“CERCLA”), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 (“SARA”), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto.

Event of Default. The words “Event of Default” mean any of the events of default set forth in this Agreement in the default section of this Agreement.

GAAP. The word “GAAP” means generally accepted accounting principles.

Grantor. The word “Grantor” means each and all of the persons or entities granting a Security Interest in any Collateral for the Loan, and their personal representatives, successors and assigns.

Guarantor. The word “Guarantor” means any guarantor, surety, or accommodation party of any or all of the Loan.

Guaranty. The word “Guaranty” means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note.

Hazardous Substances. The words “Hazardous Substances” mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated,

BUSINESS LOAN AGREEMENT

Loan No: 220583814 (Continued) Page 5

stored, disposed of, generated, manufactured, transported or otherwise handled. The words “Hazardous Substances” are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term “Hazardous Substances” also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos.

Indebtedness. The word “Indebtedness” means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents.

Lender. The word “Lender” means K Bank, its successors and assigns.

Loan. The word “Loan” means any and all loans and financial accommodations from Lender to Borrower whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time.

Note. The word “Note” means the Note executed by Avatech Solutions Subsidiary, Inc. in the principal amount of $700,000.00 dated October 28, 2004, together with all modifications of and renewals, replacements, and substitutions for the note or credit agreement.

Permitted Liens. The words “Permitted Liens” mean (1) liens and security interests securing Indebtedness owed by Borrower to Lender; (2) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (3) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (4) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled “Indebtedness and Liens”; (5) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (6) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower’s assets.

Related Documents. The words “Related Documents” mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Loan.

Security Agreement. The words “Security Agreement” mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest.

Security Interest. The words “Security Interest” mean, without limitation, any and all types of collateral security, present and future, whether in the form of a lien, charge, encumbrance, mortgage, deed of trust, security deed, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor’s lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever whether created by law, contract, or otherwise.

BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT AND BORROWER AGREES TO ITS TERMS. THIS BUSINESS LOAN AGREEMENT IS DATED OCTOBER 28, 2004.

THIS AGREEMENT IS GIVEN UNDER SEAL AND IT IS INTENDED THAT THIS AGREEMENT IS AND SHALL CONSTITUTE AND HAVE THE EFFECT OF A SEALED INSTRUMENT ACCORDING TO LAW.

BORROWER:
AVATECH SOLUTIONS SUBSIDIARY, INC.
By:	/s/ Christopher D. Olander	(Seal)
	Christopher D. Olander, Executive Vice President of Avatech Solutions Subsidiary, Inc.
LENDER:
K BANK
By:	/s/ Patrick Killpatrick	(Seal)
	Authorized Signer

LASER PRO Lending, Ver. 5.24.00.003 Copr. Harland Financial Solutions, Inc. 1997, 2004.

All Rights Reserved. - MD L:\CFI\LPL\C40.FC    TR-701 PR-LOC

EX-10.12

Exhibit 10.12

K BANK

PROMISSORY NOTE

Principal $700,000.00	Loan Date 10-28-2004	Maturity 12-15-2004	Loan No 220583814	Call / Coll	Account	Officer PK	Initials
References in the shaded area are for Lender’s use only and do not limit the applicability of this document to any particular loan or item. Any item above containing “***” has been omitted due to text length limitations.

Borrower:	Avatech Solutions Subsidiary, Inc.	Lender:	K Bank
	10715 Red Run Blvd, Ste 101		7F GWYNNS MILL COURT
	Owings Mills, MD 21117		OWINGS MILLS, MD 21117

Principal Amount: $700,000.00 Initial Rate: 7.500% Date of Note: October 28, 2004

PROMISE TO PAY. Avatech Solutions Subsidiary, Inc. (“Borrower”) promises to pay to K Bank (“Lender”), or order, in lawful money of the United States of America, the principal amount of Seven Hundred Thousand & 00/100 Dollars ($700,000.00) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance.

PAYMENT. Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on December 15, 2004. Unless otherwise agreed or required by applicable law, payments will be applied first to any accrued unpaid interest; then to principal; then to any unpaid collection costs; and then to any late charges. The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender’s address shown above or at such other place as Lender may designate in writing.

VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an independent index which is the Wall Street Prime rate (the “Index”). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notice to Borrower. Lender will tell Borrower the current Index rate upon Borrower’s request. The interest rate change will not occur more often than each day. Borrower understands that Lender may make loans based on other rates as well. The Index currently is 4.750% per annum. The Interest rate to be applied to the unpaid principal balance of this Note will be at a rate of 2.000 percentage points over the Index, adjusted if necessary for any minimum and maximum rate limitations described below, resulting in an initial rate of 7.500% per annum. Notwithstanding the foregoing, the variable interest rate or rates provided for in this Note will be subject to the following minimum and maximum rates. NOTICE: Under no circumstances will the interest rate on this Note be less than 7.500% per annum or more than the maximum rate allowed by applicable law.

PREPAYMENT. Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower’s obligation to continue to make payments. Rather, early payments will reduce the principal balance due. Borrower agrees not to send Lender payments marked “paid in full”, “without recourse”, or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender’s rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes “payment in full” of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: K Bank, 7F GWYNNS MILL COURT, OWINGS MILLS, MD 21117.

LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged 5.000% of the regularly scheduled payment or $100.00, whichever is greater.

INTEREST AFTER DEFAULT. Upon default, including failure to pay upon final maturity, at Lender’s option, and if permitted by applicable law, Lender may add any unpaid accrued interest to principal and such sum will bear interest therefrom until paid at the rate provided in this Note (including any increased rate). Upon default, Lender, at its option, may, if permitted under applicable law, increase the variable interest rate on this Note to 4.000 percentage points over the Index. The interest rate will not exceed the maximum rate permitted by applicable law.

DEFAULT. Each of the following shall constitute an event of default (“Event of Default”) under this Note:

Payment Default. Borrower fails to make any payment when due under this Note.

Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Note or in any of the related documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower.

Default in Favor of Third Parties. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower’s property or Borrower’s ability to repay this Note or perform Borrower’s obligations under this Note or any of the related documents.

False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower’s behalf under this Note or the related documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.

Insolvency. The dissolution or termination of Borrower’s existence as a going business, or a trustee or receiver is appointed for Borrower or for all or a substantial portion of the assets of Borrower, or Borrower makes a general assignment for the benefit of Borrower’s creditors, or Borrower files for bankruptcy, or an involuntary bankruptcy petition is filed against Borrower and such involuntary petition remains undismissed for sixty (60) days.

Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the loan. This includes a garnishment of any of Borrower’s accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.

Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any guaranty of the indebtedness evidenced by this Note.

Change In Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower.

Adverse Change. A material adverse change occurs in Borrower’s financial condition, or Lender believes the prospect of payment or performance of this Note is impaired.

LENDER’S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest, together with all other applicable fees, costs and charges, if any, immediately due and payable, and then Borrower will pay that amount.

ATTORNEYS’ FEES; EXPENSES. Subject to any limits under applicable law, upon default, Borrower agrees to pay Lender’s attorneys’ fees and all of Lender’s other collection expenses, whether or not there is a lawsuit, including without limitation legal expenses for bankruptcy proceedings.

JURY WAIVER. LENDER AND BORROWER EACH HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH LENDER OR BORROWER MAY BE PARTIES, ARISING OUT OF, OR IN ANY WAY PERTAINING TO, THIS NOTE. IT IS AGREED THAT THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS. THIS WAIVER IS KNOWINGLY, WILLINGLY AND VOLUNTARILY MADE BY LENDER AND BORROWER, AND LENDER AND BORROWER EACH HEREBY REPRESENT THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. BORROWER FURTHER REPRESENTS THAT BORROWER HAS BEEN REPRESENTED IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL SELECTED OF BORROWER’S OWN FREE WILL, AND THAT BORROWER HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL.

GOVERNING LAW. This Note will be governed by, construed and enforced in accordance with federal law and the laws of the State of Maryland. This Note has been accepted by Lender in the State of Maryland.

CONFESSED JUDGMENT. UPON THE OCCURRENCE OF A DEFAULT, BORROWER HEREBY AUTHORIZES ANY ATTORNEY DESIGNATED BY LENDER OR ANY CLERK OF ANY COURT OF RECORD TO APPEAR FOR BORROWER IN ANY COURT OF RECORD AND CONFESS JUDGMENT WITHOUT PRIOR HEARING AGAINST BORROWER IN FAVOR OF LENDER FOR, AND IN THE AMOUNT OF, THE UNPAID BALANCE OF THE PRINCIPAL AMOUNT OF THIS NOTE, ALL INTEREST ACCRUED AND UNPAID THEREON, ALL OTHER AMOUNTS PAYABLE BY BORROWER TO LENDER UNDER THE TERMS OF THIS NOTE OR ANY OTHER AGREEMENT, DOCUMENTS, INSTRUMENT EVIDENCING, SECURING OR

	PROMISSORY NOTE
Loan No: 220583814	(Continued)	Page 2

GUARANTYING THE OBLIGATIONS EVIDENCED BY THIS NOTE, COSTS OF SUIT, AND ATTORNEYS’ FEES OF FIFTEEN PERCENT (15%) OF THE UNPAID BALANCE OF THE PRINCIPAL AMOUNT OF THIS NOTE AND INTEREST THEN DUE HEREUNDER.

Borrower hereby releases, to the extent permitted by applicable law, all errors and all rights of exemption, appeal, stay of execution, inquisition, and other rights to which Borrower may otherwise be entitled under the laws of the United States or of any state or possession of the United States now in force and which may hereafter be enacted. The authority and power to appear for and enter judgment against Borrower shall not be 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 may be exercised on one or more occasions or from time to time in the same or different jurisdictions as often as Lender shall deem necessary or desirable, for all of which this Note shall be a sufficient warrant.

DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $28.00 if Borrower makes a payment on Borrower’s loan and the check with which Borrower pays is dishonored on the second presentment.

RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower’s accounts with Lender (whether checking savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts, and, at Lender’s option, to administratively freeze all such accounts to allow Lender to protect Lender’s charge and setoff rights provided in this paragraph.

LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under this Note may be requested only in writing by Borrower or as provided in this paragraph. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender’s office shown above. The following persons currently are authorized to request advances and authorize payments under the line of credit until Lender receives from Borrower, at Lender’s address shown above, written notice of revocation of their authority: Christopher D. Olander, Exec. V.P. of Avatech Solutions Subsidiary, Inc.; Donald R. Walsh, Chief Exec Officer; Beth O. Maclaughlin, V.P. Fiance; Karen L. Strayer, Tax and Compliance Mgr.; and Catherine Dodson, Controller. Borrower agrees to be liable for all sums either: (A) advanced in accordance with the instructions of an authorized person or (B) credited to any of Borrower’s accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender’s internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Note if: (A) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Note; (B) Borrower or any guarantor ceases doing business or is insolvent; (C) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor’s guarantee of this Note or any other loan with Lender; or (D) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender.

CONSENT TO JURISDICTION. Borrower irrevocably submits to the jurisdiction of any state or federal court sitting in the State of Maryland over any suit, action, or proceeding arising out of or relating to this Note. Borrower irrevocably waives, to the fullest extent permitted by law, any objection that Borrower may now or hereafter have to the laying of venue of any such suit, action, or proceeding brought in any such court and any claim that any such suit, action, or proceeding brought in any such court has been brought in an inconvenient forum. Final judgment in any such suit, action, or proceeding brought in any such court shall be conclusive and binding upon Borrower and may be enforced in any court in which Borrower is subject to jurisdiction by a suit upon such judgment provided that service of process is effected upon Borrower as provided in this Note or as otherwise permitted by applicable law.

SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and upon Borrower’s heirs, personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successors and assigns.

NOTIFY US OF INACCURATE INFORMATION WE REPORT TO CONSUMER REPORTING AGENCIES. Please notify us if we report any inaccurate information about your account(s) to a consumer reporting agency. Your written notice describing the specific inaccuracy(ies) should be sent to us at the following address: K Bank 7F GWYNNS MILL COURT OWINGS MILLS, MD 21117

GENERAL PROVISIONS. If any part of this Note cannot be enforced, this fact will not affect the rest of the Note. Borrower does not agree or intend to pay, and Lender does not agree or intend to contract for, charge, collect, take, reserve or receive (collectively referred to herein as “charge or collect”), any amount in the nature of interest or in the nature of a fee for this loan, which would in any way or event (including demand, prepayment, or acceleration) cause Lender to charge or collect more for this loan than the maximum Lender would be permitted to charge or collect by federal law or the law of the State of Maryland (as applicable). Any such excess interest or unauthorized fee shall, instead of anything stated to the contrary, be applied first to reduce the principal balance of this loan, and when the principal has been paid in full, be refunded to Borrower. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender’s security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made.

APPLICABLE LENDING LAW. This loan is being made under the terms and provisions of Subtitle 9 of Title 12 of the Maryland Commercial Law Article.

PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE.

BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE.

THIS NOTE IS GIVEN UNDER SEAL AND IT IS INTENDED THAT THIS NOTE IS AND SHALL CONSTITUTE AND HAVE THE EFFECT OF A SEALED INSTRUMENT ACCORDING TO LAW.

BORROWER:

AVATECH SOLUTIONS SUBSIDIARY, INC.
By:	/s/ Christopher D. Olander	(Seal)
	Christopher D. Olander, Executive Vice President of
	Avatech Solutions Subsidiary, Inc.

LASER PRO Landing. Ver 6.24.00.003 Copr. Harland Financial Solutions. Inc. 1997, 2004. All Rlghts Reserved. - MD L:\CFI\LPLD20.FC TR-701 PR-LOC

EX-10.13

Exhibit 10.13

K    BANK

COMMERCIAL SECURITY AGREEMENT

Principal $700,000.00	Loan Date 10-28-2004	Maturity 12-15-2004	Loan No 220583814	Call/Coll	Account	Officer PK	Initials
References in the shaded area are for Lender’s use only and do not limit the applicability of this document to any particular loan or item. Any item above containing “***” has been omitted due to text length limitations.

Grantor:	Avatech Solutions Subsidiary, Inc.	Lender:	K Bank
	10715 Red Run Blvd, Ste 101		7F GWYNNS MILL COURT
	Owings Mills, MD 21117		OWINGS MILLS, MD 21117

THIS COMMERCIAL SECURITY AGREEMENT dated October 28, 2004, is made and executed between Avatech Solutions Subsidiary, Inc. (“Grantor”) and K Bank (“Lender”).

GRANT OF SECURITY INTEREST. For valuable consideration, Grantor grants to Lender a security interest in the Collateral to secure the Indebtedness and agrees that Lender shall have the rights stated in this Agreement with respect to the Collateral, in addition to all other rights which Lender may have by law.

COLLATERAL DESCRIPTION. The word “Collateral” as used in this Agreement means the following described property, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located, in which Grantor is giving to Lender a security interest for the payment of the Indebtedness and performance of all other obligations under the Note and this Agreement:

All Inventory, Chattel Paper, Accounts, Equipment and General Intangibles

In addition, the word “Collateral” also includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located:

(A) All accessions, attachments, accessories, tools, parts, supplies, replacements of and additions to any of the collateral described herein, whether added now or later.

(B) All products and produce of any of the property described in this Collateral section.

(C) All accounts, general intangibles, instruments, rents, monies, payments, and all other rights, arising out of a sale, lease, consignment or other disposition of any of the property described in this Collateral section.

(D) All proceeds (including insurance proceeds) from the sale, destruction, loss, or other disposition of any of the property described in this Collateral section, and sums due from a third party who has damaged or destroyed the Collateral or from that party’s insurer, whether due to judgment, settlement or other process.

(E) All records and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph, microfilm, microfiche, or electronic media, together with all of Grantor’s right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic media.

Despite any other provision of this Agreement, Lender is not granted, and will not have, a nonpurchase money security interest in household goods, to the extent such a security interest would be prohibited by applicable law. In addition, if because of the type of any Property, Lender is required to give a notice of the right to cancel under Truth in Lending for the Indebtedness, then Lender will not have a security interest in such Collateral unless and until such a notice is given.

CROSS-COLLATERALIZATION. In addition to the Note, this Agreement secures all obligations, debts and liabilities, plus interest thereon, of Grantor to Lender, or any one or more of them, as well as all claims by Lender against Grantor or any one or more of them, whether now existing or hereafter arising, whether related or unrelated to the purpose of the Note, whether voluntary or otherwise, whether due or not due, direct or indirect, determined or undetermined, absolute or contingent, liquidated or unliquidated whether Grantor may be liable individually or jointly with others, whether obligated as guarantor, surety, accommodation party or otherwise, and whether recovery upon such amounts may be or hereafter may become barred by any statute of limitations, and whether the obligation to repay such amounts may be or hereafter may become otherwise unenforceable.

RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Grantor’s accounts with Lender (whether checking, savings, or some other account). This includes all accounts Grantor holds jointly with someone else and all accounts Grantor may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Grantor authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts, and, at Lender’s option, to administratively freeze all such accounts to allow Lender to protect Lender’s charge and setoff rights provided in this paragraph.

GRANTOR’S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL. With respect to the Collateral, Grantor represents and promises to Lender that:

Perfection of Security Interest. Grantor agrees to take whatever actions are requested by Lender to perfect and continue Lender’s security interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender’s interest upon any and all chattel paper and instruments if not delivered to Lender for possession by Lender. This is a continuing Security Agreement and will continue in effect even though all or any part of the Indebtedness is paid in full and even though for a period of time Grantor may not be indebted to Lender.

Notices to Lender. Grantor will promptly notify Lender in writing at Lender’s address shown above (or such other addresses as Lender may designate from time to time) prior to any (1) change in Grantor’s name; (2) change in Grantor’s assumed business name(s); (3) change in the management of the Corporation Grantor; (4) change in the authorized signer(s); (5) change in Grantor’s principal office address; (6) change in Grantor’s state of organization; (7) conversion of Grantor to a new or different type of business entity; or (8) change in any other aspect of Grantor that directly or indirectly relates to any agreements between Grantor and Lender. No change in Grantor’s name or state of organization will take effect until after Lender has received notice.

No Violation. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement.

Enforceability of Collateral. To the extent the Collateral consists of accounts, chattel paper, or general intangibles, as defined by the Uniform Commercial Code, the Collateral is enforceable in accordance with its terms, is genuine, and fully complies with all applicable laws and regulations concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. At the time any account becomes subject to a security interest in favor of Lender, the account shall be a good and valid account representing an undisputed, bona fide indebtedness incurred by the account debtor, for merchandise held subject to delivery instructions or previously shipped or delivered pursuant to a contract of sale, or for services previously performed by Grantor with or for the account debtor. So long as this Agreement remains in effect, Grantor shall not, without Lender’s prior written consent, compromise, settle, adjust, or extend payment under or with regard to any such Accounts. There shall be no setoffs or counterclaims against any of the Collateral, and no agreement shall have been made under which any deductions or discounts may be claimed concerning the Collateral except those disclosed to Lender in writing.

Location of the Collateral. Except in the ordinary course of Grantor’s business, Grantor agrees to keep the Collateral (or to the extent the Collateral consists of intangible property such as accounts or general intangibles, the records concerning the Collateral) at Grantor’s address shown above or at such other locations as are acceptable to Lender. Upon Lender’s request, Grantor will deliver to Lender in form satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor’s operations, including without limitation the following: (1) all real property Grantor owns or is purchasing; (2) all real property Grantor is renting or leasing; (3) all storage facilities Grantor owns, rents, leases, or uses; and (4) all other properties where Collateral is or may be located.

Removal of the Collateral. Except in the ordinary course of Grantor’s business, including the sales of inventory, Grantor shall not remove the Collateral from its existing location without Lender’s prior written consent. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the State of Delaware, without Lender’s prior written consent. Grantor shall, whenever requested, advise Lender of the exact location of the Collateral.

Transactions Involving Collateral. Except for inventory sold or accounts collected in the ordinary course of Grantor’s business, or as otherwise provided for in this Agreement, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor’s business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest,

Loan No: 220583814 COMMERCIAL SECURITY AGREEMENT (Continued) Page 2

encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender.

Title. Grantor represents and warrants to Lender that Grantor holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend Lender’s rights in the Collateral against the claims and demands of all other persons.

Repairs and Maintenance. Grantor agrees to keep and maintain, and to cause others to keep and maintain, the Collateral in good order, repair and condition at all times while this Agreement remains in effect. Grantor further agrees to pay when due all claims for work done on, or services rendered or material furnished in connection with the Collateral so that no lien or encumbrance may ever attach to or be filed against the Collateral.

Inspection of Collateral. Lender and Lender’s designated representatives and agents shall have the right at all reasonable times to examine and inspect the Collateral wherever located.

Taxes, Assessments and Liens. Grantor will pay when due all taxes, assessments and liens upon the Collateral, its use or operation, upon this Agreement, upon any promissory note or notes evidencing the Indebtedness, or upon any of the other Related Documents. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender’s interest in the Collateral is not jeopardized in Lender’s sole opinion. If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, costs, reasonable attorneys’ fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. Grantor further agrees to furnish Lender with evidence that such taxes, assessments, and governmental and other charges have been paid in full and in a timely manner. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender’s interest in the Collateral is not jeopardized.

Compliance with Governmental Requirements. Grantor shall comply promptly with all laws, ordinances, rules and regulations of all governmental authorities, now or hereafter in effect, applicable to the ownership, production, disposition, or use of the Collateral, including all laws or regulations relating to the undue erosion of highly-erodible land or relating to the conversion of wetlands for the production of an agricultural product or commodity. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Lender’s interest in the Collateral, in Lender’s opinion, is not jeopardized.

Hazardous Substances. Grantor represents and warrants that the Collateral never has been, and never will be so long as this Agreement remains a lien on the Collateral, used in violation of any Environmental Laws or for the generation, manufacture, storage, transportation treatment disposal, release or threatened release of any Hazardous Substance. The representations and warranties contained herein are based on Grantor’s due diligence in investigating the Collateral for Hazardous Substances. Grantor hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any Environmental Laws, and (2) agrees to indemnify and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This obligation to indemnify shall survive the payment of the Indebtedness and the satisfaction of this Agreement.

Maintenance of Casualty Insurance. Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days’ prior written notice to Lender and not including any disclaimer of the insurer’s liability for failure to give such a notice. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if Lender so chooses “single interest insurance,” which will cover only Lender’s interest in the Collateral

Application of Insurance Proceeds. Grantor shall promptly notify Lender of any loss or damage to the Collateral. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the Indebtedness.

Insurance Reserves. Lender may require Grantor to maintain with Lender reserves for payment of insurance premiums, which reserves shall be created by monthly payments from Grantor of a sum estimated by Lender to be sufficient to produce, at least fifteen (15) days before the premium due date, amounts at least equal to the insurance premiums to be paid. If fifteen (15) days before payment is due, the reserve funds are insufficient, Grantor shall upon demand pay any deficiency to Lender. The reserve funds shall be held by Lender as a general deposit and shall constitute a non-interest-bearing account which Lender may satisfy by payment of the insurance premiums required to be paid by Grantor as they become due. Lender does not hold the reserve funds in trust for Grantor, and Lender is not the agent of Grantor for payment of the insurance premiums required to be paid by Grantor. The responsibility for the payment of premiums shall remain Grantor’s sole responsibility.

Insurance Reports. Grantor, upon request of Lender, shall furnish to Lender reports on each existing policy of insurance showing such information as Lender may reasonably request including the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the property insured; (5) the then current value on the basis of which insurance has been obtained and the manner of determining that value; and (6) the expiration date of the policy. In addition, Grantor shall upon request by Lender (however not more often than annually) have an independent appraiser satisfactory to Lender determine, as applicable, the cash value or replacement cost of the Collateral.

Financing Statements. Grantor authorizes Lender to file a UCC financing statement, or alternatively, a copy of this Agreement to perfect Lender’s security interest. At Lender’s request, Grantor additionally agrees to sign all other documents that are necessary to perfect, protect and continue Lender’s security interest in the Property. Grantor will pay all filing fees, title transfer fees, and other fees and costs involved unless prohibited by law or unless Lender is required by law to pay such fees and costs. Grantor irrevocably appoints Lender to execute documents necessary to transfer title if there is a default. Lender may file a copy of this Agreement as a financing statement. If Grantor changes Grantor’s name or address, or the name or address of any person granting a security interest under this Agreement changes, Grantor will promptly notify the Lender of such change.

GRANTOR’S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except as otherwise provided below with respect to accounts, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor’s right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender’s security interest in such Collateral. Until otherwise notified by Lender, Grantor may collect any of the Collateral consisting of accounts. At any time and even though no Event of Default exists Lender may exercise its rights to collect the accounts and to notify account debtors to make payments directly to Lender for application to the Indebtedness If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender in Lender’s sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties nor to protect, preserve or maintain any security interest given to secure the Indebtedness.

LENDER’S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender’s interest in the Collateral or if Grantor fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Grantor’s failure to discharge or pay when due any amounts Grantor is required to discharge or pay under this Agreement or any Related Documents, Lender on Grantor’s behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests encumbrances and other claims, at any time levied or placed on the Collateral and paying all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses will become a part of the Indebtedness and, at Lender’s option will (A) be payable on demand; or (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note. The Agreement also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon Default.

2

	COMMERCIAL SECURITY AGREEMENT
Loan No: 220583814	(Continued)	Page 3

DEFAULT. Each of the following shall constitute an Event of Default under this Agreement:

Payment Default. Grantor fails to make any payment when due under the Indebtedness.

Other Defaults. Grantor fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Grantor.

Default in Favor of Third Parties. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Grantor’s property or Grantor’s or any Grantor’s ability to repay the Indebtedness or perform their respective obligations under this Agreement or any of the Related Documents.

False Statements. Any warranty, representation or statement made or furnished to Lender by Grantor or on Grantor’s behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.

Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason.

Insolvency. The dissolution or termination of Grantor’s existence as a going business, the insolvency of Grantor, the appointment of a receiver for any part of Grantor’s property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Grantor.

Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Grantor or by any governmental agency against any collateral securing the Indebtedness. This includes a garnishment of any of Grantor’s accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Grantor as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Grantor gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.

Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or Guarantor dies or becomes incompetent or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness.

Adverse Change. A material adverse change occurs in Grantor’s financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired.

RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under the Delaware Uniform Commercial Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies:

Accelerate Indebtedness. Lender may declare the entire Indebtedness, including any prepayment penalty which Grantor would be required to pay, immediately due and payable, without notice of any kind to Grantor.

Assemble Collateral. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession.

Sell the Collateral. Lender shall have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in Lender’s own name or that of Grantor. Lender may sell the Collateral at public auction or private sale. Unless the Collateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor, and other persons as required by law, reasonable notice of the time and place of any public sale, or the time after which any private sale or any other disposition of the Collateral is to be made. However, no notice need be provided to any person who, after Event of Default occurs, enters into and authenticates an agreement waiving that person’s right to notification of sale. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days before the time of the sale or disposition. All expenses relating to the disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring, preparing for sale and selling the Collateral, shall become a part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid.

Appoint Receiver. Lender shall have the right to have a receiver appointed to take possession of all or any part of the Collateral, with the power to protect and preserve the Collateral, to operate the Collateral preceding foreclosure or sale, and to collect the Rents from the Collateral and apply the proceeds, over and above the cost of the receivership, against the Indebtedness. The receiver may serve without bond if permitted by law. Lender’s right to the appointment of a receiver shall exist whether or not the apparent value of the Collateral exceeds the Indebtedness by a substantial amount. Employment by Lender shall not disqualify a person from serving as a receiver.

Collect Revenues, Apply Accounts. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may at any time in Lender’s discretion transfer any Collateral into Lender’s own name or that of Lender’s nominee and receive the payments, rents, income, and revenues therefrom and hold the same as security for the Indebtedness or apply it to payment of the Indebtedness in such order of preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, choses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine, whether or not Indebtedness or Collateral is then due. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender may notify account debtors and obligors on any Collateral to make payments directly to Lender.

Obtain Deficiency. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Grantor for any deficiency remaining on the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Grantor shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper.

Other Rights and Remedies. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in equity, or otherwise.

Election of Remedies. Except as may be prohibited by applicable law, all of Lender’s rights and remedies, whether evidenced by this Agreement, the Related Documents, or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor’s failure to perform, shall not affect Lender’s right to declare a default and exercise its remedies.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement:

Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.

Attorneys’ Fees; Expenses. Grantor agrees to pay upon demand all of Lender’s costs and expenses, including Lender’s reasonable attorneys’ fees and Lender’s legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Grantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender’s reasonable attorneys’ fees and legal expenses whether or not there is a lawsuit, including reasonable attorneys’ fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Lender may also recover from Grantor all court, alternative dispute resolution or other collection costs (including, without limitation, fees and charges of collection agencies) actually incurred by Lender.

Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement.

Governing Law. This Agreement will be governed by, construed and enforced in accordance with federal law and the laws of the State of Maryland, except and only to the extent of procedural matters related to the perfection and enforcement of Lender’s rights and remedies against the Collateral, which matters shall be governed by the laws of the State of Delaware. However, in the event that the enforceability or validity of any provision of this Agreement is challenged or questioned, such provision shall be governed by whichever applicable state or federal law would uphold or would enforce such challenged or questioned provision. The loan transaction which is evidenced by the Note and this Agreement has been applied for, considered, approved and made, and all necessary loan documents have been accepted by Lender in the State of Maryland.

3

COMMERCIAL SECURITY AGREEMENT

Loan No: 220583814 (Continued) Page 4

No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender’s right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender’s rights or of any of Grantor’s obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender.

Notices. Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party’s address. For notice purposes, Grantor agrees to keep Lender informed at all times of Grantor’s current address. Unless otherwise provided or required by law, if there is more than one Grantor, any notice given by Lender to any Grantor is deemed to be notice given to all Grantors.

Power of Attorney. Grantor hereby appoints Lender as Grantor’s irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect, amend, or to continue the security interest granted in this Agreement or to demand termination of filings of other secured parties. Lender may at any time, and without further authorization from Grantor, file a carbon, photographic or other reproduction of any financing statement or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection and the continuation of the perfection of Lender’s security interest in the Collateral.

Severability. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement.

Successors and Assigns. Subject to any limitations stated in this Agreement on transfer of Grantor’s interest, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. If ownership of the Collateral becomes vested in a person other than Grantor, Lender, without notice to Grantor, may deal with Grantor’s successors with reference to this Agreement and the Indebtedness by way of forbearance or extension without releasing Grantor from the obligations of this Agreement or liability under the Indebtedness.

Survival of Representations and Warranties. All representations, warranties, and agreements made by Grantor in this Agreement shall survive the execution and delivery of this Agreement, shall be continuing in nature, and shall remain in full force and effect until such time as Grantor’s Indebtedness shall be paid in full.

Time is of the Essence. Time is of the essence in the performance of this Agreement.

Waive Jury. All parties to this Agreement hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by any party against any other party.

DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code:

Agreement. The word “Agreement” means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Commercial Security Agreement from time to time.

Borrower. The word “Borrower” means Avatech Solutions Subsidiary, Inc. and includes all co-signers and co-makers signing the Note.

Collateral. The word “Collateral” means all of Grantor’s right, title and interest in and to all the Collateral as described in the Collateral Description section of this Agreement.

Default. The word “Default” means the Default set forth in this Agreement in the section titled “Default”.

Environmental Laws. The words “Environmental Laws” mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. (“CERCLA”), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 (“SARA”), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto.

Event of Default. The words “Event of Default” mean any of the events of default set forth in this Agreement in the default section of this Agreement.

Grantor. The word “Grantor” means Avatech Solutions Subsidiary, Inc

Guarantor. The word “Guarantor” means any guarantor, surety, or accommodation party of any or all of the Indebtedness.

Guaranty. The word “Guaranty” means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note.

Hazardous Substances. The words “Hazardous Substances” mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words “Hazardous Substances” are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term “Hazardous Substances” also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos.

Indebtedness. The word “Indebtedness” means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents. Specifically, without limitation, Indebtedness includes all amounts that may be indirectly secured by the Cross-Collateralization provision of this Agreement.

Lender. The word “Lender” means K Bank, its successors and assigns.

Note. The word “Note” means the Note executed by Avatech Solutions Subsidiary, Inc. in the principal amount of $700,000.00 dated October 28, 2004, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement.

Property. The word “Property” means all of Grantor’s right, title and interest in and to all the Property as described in the “Collateral Description” section of this Agreement.

Related Documents. The words “Related Documents” mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness.

GRANTOR HAS READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED OCTOBER 28, 2004.

THIS AGREEMENT IS GIVEN UNDER SEAL AND IT IS INTENDED THAT THIS AGREEMENT IS AND SHALL CONSTITUTE AND HAVE THE EFFECT OF A SEALED INSTRUMENT ACCORDING TO LAW.

COMMERCIAL SECURITY AGREEMENT

Loan No: 220583814 (Continued) Page 5

GRANTOR:

AVATECH SOLUTIONS SUBSIDIARY, INC.

By:	/s/ Christopher D. Olander	(Seal)
	Christopher D. Olander, Executive Vice President of Avatech Solutions Subsidiary, Inc.

LASER PRO Lending, Ver. 5.24.00.003 Copr. Harland Financial Solutions, Inc. 1997, 2004. All Rights Reserved - DE/MD L:/CFI/LPL/E40.FC TR-701 PR- LOC

EX-10.14

Exhibit 10.14

K     BANK

COMMERCIAL GUARANTY

Principal	Loan Date	Maturity	Loan No	Call / Coll	Account	Officer PK	Initials
References in the shaded area are for Lender’s use only and do not limit the applicability of this document to any particular loan or item. Any item above containing “***” has been omitted due to text length limitations.

Borrower: Avatech Solutions Subsidiary, Inc.     10715 Red Run Blvd, Ste 101     Owings Mills, MD 21117 Lender: K Bank 7F GWYNNS MILL COURT OWINGS MILLS, MD 21117

Guarantor: Avatech Solutions, Inc. 10715 Red Run Blvd Owings Mills, MD 21117

AMOUNT OF GUARANTY. The amount of this Guaranty is Unlimited.

CONTINUING UNLIMITED GUARANTY. For good and valuable consideration, Avatech Solutions, Inc. (“Guarantor”) absolutely and unconditionally guarantees and promises to pay to K Bank (“Lender”) or its order, in legal tender of the United States of America, the Indebtedness (as that term is defined below) of Avatech Solutions Subsidiary, Inc. (“Borrower”) to Lender on the terms and conditions set forth in this Guaranty. Under this Guaranty, the liability of Guarantor is unlimited and the obligations of Guarantor are continuing.

INDEBTEDNESS GUARANTEED. The Indebtedness guaranteed by this Guaranty includes any and all of Borrower’s indebtedness to Lender and is used in the most comprehensive sense and means and includes any and all of Borrower’s liabilities, obligations and debts to Lender, now existing or hereinafter incurred or created, including, without limitation, all loans, advances, interest, costs, debts, overdraft indebtedness, credit card indebtedness, lease obligations, other obligations, and liabilities of Borrower, or any of them, and any present or future judgments against Borrower, or any of them; and whether any such Indebtedness is voluntarily or involuntarily incurred, due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined; whether Borrower may be liable individually or jointly with others, or primarily or secondarily, or as guarantor or surety; whether recovery on the Indebtedness may be or may become barred or unenforceable against Borrower for any reason whatsoever; and whether the Indebtedness arises from transactions which may be voidable on account of infancy, insanity, ultra vires, or otherwise.

DURATION OF GUARANTY. This Guaranty will take effect when received by Lender without the necessity of any acceptance by Lender, or any notice to Guarantor or to Borrower, and will continue in full force until all Indebtedness incurred or contracted before receipt by Lender of any notice of revocation shall have been fully and finally paid and satisfied and all of Guarantor’s other obligations under this Guaranty shall have been performed in full. If Guarantor elects to revoke this Guaranty, Guarantor may only do so in writing. Guarantor’s written notice of revocation must be mailed to Lender, by certified mail, at Lender’s address listed above or such other place as Lender may designate in writing. Written revocation of this Guaranty will apply only to advances or new Indebtedness created after actual receipt by Lender of Guarantor’s written revocation. For this purpose and without limitation, the term “new Indebtedness” does not include Indebtedness which at the time of notice of revocation is contingent, unliquidated, undetermined or not due and which later becomes absolute, liquidated, determined or due. This Guaranty will continue to bind Guarantor for all Indebtedness incurred by Borrower or committed by Lender prior to receipt of Guarantor’s written notice of revocation, including any extensions, renewals, substitutions or modifications of the Indebtedness. All renewals, extensions, substitutions, and modifications of the Indebtedness granted after Guarantor’s revocation, are contemplated under this Guaranty and, specifically will not be considered to be new Indebtedness. This Guaranty shall bind Guarantor’s estate as to Indebtedness created both before and after Guarantor’s death or incapacity, regardless of Lender’s actual notice of Guarantor’s death. Subject to the foregoing, Guarantor’s executor or administrator or other legal representative may terminate this Guaranty in the same manner in which Guarantor might have terminated it and with the same effect. Release of any other guarantor or termination of any other guaranty of the Indebtedness shall not affect the liability of Guarantor under this Guaranty. A revocation Lender receives from any one or more Guarantors shall not affect the liability of any remaining Guarantors under this Guaranty. It is anticipated that fluctuations may occur in the aggregate amount of Indebtedness covered by this Guaranty, and Guarantor specifically acknowledges and agrees that reductions in the amount of Indebtedness, even to zero dollars ($0.00), prior to Guarantor’s written revocation of this Guaranty shall not constitute a termination of this Guaranty. This Guaranty is binding upon Guarantor and Guarantor’s heirs, successors and assigns so long as any of the guaranteed Indebtedness remains unpaid and even though the Indebtedness guaranteed may from time to time be zero dollars ($0.00).

GUARANTOR’S AUTHORIZATION TO LENDER. Guarantor authorizes Lender, either before or after any revocation hereof, without notice or demand and without lessening Guarantor’s liability under this Guaranty, from time to time: (A) prior to revocation as set forth above, to make one or more additional secured or unsecured loans to Borrower, to lease equipment or other goods to Borrower, or otherwise to extend additional credit to Borrower; (B) to alter, compromise, renew, extend, accelerate, or otherwise change one or more times the time for payment or other terms of the Indebtedness or any part of the Indebtedness, including increases and decreases of the rate of interest on the Indebtedness; (C) to take and hold security for the payment of this Guaranty or the Indebtedness, and exchange, enforce, waive, subordinate, fail or decide not to perfect, and release any such security, with or without the substitution of new collateral; (D) to release, substitute, agree not to sue, or deal with any one or more of Borrower’s sureties, endorsers, or other guarantors on any terms or in any manner Lender may choose; (E) to determine how, when and what application of payments and credits shall be made on the Indebtedness (F) to apply such security and direct the order or manner of sale thereof, including without limitation, any nonjudicial sale permitted by the terms of the controlling security agreement or deed of trust, as Lender in its discretion may determine; (G) to sell, transfer, assign or grant participations in all or any part of the Indebtedness; and (H) to assign or transfer this Guaranty in whole or in part.

GUARANTOR’S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to Lender that (A) no representations or agreements of any kind have been made to Guarantor which would limit or qualify in any way the terms of this Guaranty; (B) this Guaranty is executed at Borrower’s request and not at the request of Lender; (C) Guarantor has full power, right and authority to enter into this Guaranty; (D) the provisions of this Guaranty do not conflict with or result in a default under any agreement or other instrument binding upon Guarantor and do not result in a violation of any law, regulation, court decree or order applicable to Guarantor; (E) Guarantor has not and will not, without the prior written consent of Lender, sell, lease, assign, encumber, hypothecate, transfer, or otherwise dispose of all or substantially all of Guarantor’s assets, or any interest therein; (F) upon Lender’s request, Guarantor will provide to Lender financial and credit information in form acceptable to Lender, and all such financial information which currently has been, and all future financial information which will be provided to Lender is and will be true and correct in all material respects and fairly present Guarantor’s financial condition as of the dates the financial information is provided; (G) no material adverse change has occurred in Guarantor’s financial condition since the date of the most recent financial statements provided to Lender and no event has occurred which may materially adversely affect Guarantor’s financial condition; (H) no litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Guarantor is pending or threatened; (I) Lender has made no representation to Guarantor as to the creditworthiness of Borrower; and (J) Guarantor has established adequate means of obtaining from Borrower on a continuing basis information regarding Borrower’s financial condition. Guarantor agrees to keep adequately informed from such means of any facts, events, or circumstances which might in any way affect Guarantor’s risks under this Guaranty, and Guarantor further agrees that, absent a request for information, Lender shall have no obligation to disclose to Guarantor any information or documents acquired by Lender in the course of its relationship with Borrower.

GUARANTOR’S FINANCIAL STATEMENTS. Guarantor agrees to furnish Lender with the following:

Annual Statements. As soon as available, but in no event later than one-hundred-twenty (120) days after the end of each fiscal year, Guarantor’s balance sheet and income statement for the year ended, audited by a certified public accountant satisfactory to Lender.

Interim Statements. As soon as available, but in no event later than thirty (30) days after the end of each fiscal quarter, Guarantor’s balance sheet and profit and loss statement for the period ended, prepared by Guarantor.

Tax Returns. As soon as available, but in no event later than thirty (30) days after the applicable filing date for the tax reporting period ended, Federal and other governmental tax returns, prepared by a certified public accountant satisfactory to Lender.

All financial reports required to be provided under this Guaranty shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Guarantor as being true and correct.

GUARANTOR’S WAIVERS. Except as prohibited by applicable law, Guarantor waives any right to require Lender (A) to continue lending money or to extend other credit to Borrower; (B) to make any presentment, protest, demand, or notice of any kind, including notice of any nonpayment of the Indebtedness or of any nonpayment related to any collateral, or notice of any action or nonaction on the part of Borrower, Lender, any surety, endorser, or other guarantor in connection with the Indebtedness or in connection with the creation of new or additional loans or obligations; (C) to resort for payment or to proceed directly or at once against any person, including Borrower or any other guarantor; (D) to proceed directly against or exhaust any collateral held by Lender from Borrower, any other guarantor, or any other person; (E) to give notice of the terms, time, and place of any public or private sale of personal property security held by Lender from Borrower or to comply with any other applicable provisions of the Uniform Commercial Code; (F) to pursue any other remedy within Lender’s power; or (G) to commit any act or omission of any kind, or at any time, with respect to any matter whatsoever.

In addition to the waivers set forth herein, if now or hereafter Borrower is or shall become insolvent and the Indebtedness shall not at all times until paid

COMMERCIAL GUARANTY

(Continued)

Loan No: 220583814

be fully secured by collateral pledged by Borrower, Guarantor hereby forever waives and gives up in favor of Lender and Borrower, and Lender’s and Borrower’s respective successors, any claim or right to payment Guarantor may now have or hereafter have or acquire against Borrower, by subrogation or otherwise, so that at no time shall Guarantor be or become a “creditor” of Borrower within the meaning of 11 U.S.C. section 547(b), or any successor provision of the Federal bankruptcy laws.

Guarantor also waives any and all rights or defenses arising by reason of (1) any election of remedies by Lender which destroys or otherwise adversely affects Guarantor’s subrogation rights or Guarantor’s rights to proceed against Borrower for reimbursement, including without limitation, any loss of rights Guarantor may suffer by reason of any law limiting, qualifying, or discharging the Indebtedness; (2) any disability or other defense of Borrower, of any other guarantor, or of any other person, or by reason of the cessation of Borrower’s liability from any cause whatsoever, other than payment in full in legal tender, of the Indebtedness; (3) any right to claim discharge of the Indebtedness on the basis of unjustified impairment of any Collateral for the Indebtedness; or (4) any statute of limitations, if at any time any action or suit brought by Lender against Guarantor is commenced, there is outstanding Indebtedness of Borrower to Lender which is not barred by any applicable statute of limitations. Guarantor acknowledges and agrees that Guarantor’s obligations under this Guaranty shall apply to and continue with respect to any amount paid to Lender which is subsequently recovered from Lender for any reason whatsoever (including without limitation as a result of bankruptcy, insolvency or fraudulent conveyance proceeding), notwithstanding the fact that all or a part of the Indebtedness may have been previously paid, or this Guaranty may have been terminated, or both.

Guarantor further waives and agrees not to assert or claim at any time any deductions to the amount guaranteed under this Guaranty for any claim of setoff, counterclaim, counter demand, recoupment or similar right, whether such claim, demand or right may be asserted by the Borrower, the Guarantor, or both.

Guarantor’s Understanding With Respect To Waivers. Guarantor warrants and agrees that each of the waivers set forth above is made with Guarantor’s full knowledge of its significance and consequences and that, under the circumstances, the waivers are reasonable and not contrary to public policy or law. If any such waiver is determined to be contrary to any applicable law or public policy, such waiver shall be effective only to the extent permitted by law or public policy.

Right of Setoff. To the extent permitted by applicable law, Lender reserves a right of setoff in all Guarantor’s accounts with Lender (whether checking, savings, or some other account). This includes all accounts Guarantor holds jointly with someone else and all accounts Guarantor may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Guarantor authorizes Lender, to the extent permitted by applicable law, to hold these funds if there is a default, and Lender may apply the funds in these accounts to pay what Guarantor owes under the terms of this Guaranty.

Subordination of Borrower’s Debts to Guarantor. Guarantor agrees that the Indebtedness of Borrower to Lender, whether now existing or hereafter created, shall be superior to any claim that Guarantor may now have or hereafter acquire against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby expressly subordinates any claim Guarantor may have against Borrower, upon any account whatsoever, to any claim that Lender may now or hereafter have against Borrower. In the event of insolvency and consequent liquidation of the assets of Borrower, through bankruptcy, by an assignment for the benefit of creditors, by voluntary liquidation, or otherwise, the assets of Borrower applicable to the payment of the claims of both Lender and Guarantor shall be paid to Lender and shall be first applied by Lender to the Indebtedness of Borrower to Lender. Guarantor does hereby assign to Lender all claims which it may have or acquire against Borrower or against any assignee or trustee in bankruptcy of Borrower; provided however, that such assignment shall be effective only for the purpose of assuring to Lender full payment in legal tender of the Indebtedness. If Lender so requests, any notes or credit agreements now or hereafter evidencing any debts or obligations of Borrower to Guarantor shall be marked with a legend that the same are subject to this Guaranty and shall be delivered to Lender. Guarantor agrees, and Lender is hereby authorized, in the name of Guarantor, from time to time to file financing statements and continuation statements and to execute documents and to take such other actions as Lender deems necessary or appropriate to perfect, preserve and enforce its rights under this Guaranty.

CONFESSED JUDGMENT. UPON THE OCCURRENCE OF A DEFAULT ON THE INDEBTEDNESS, GUARANTOR HEREBY AUTHORIZES ANY ATTORNEY DESIGNATED BY LENDER OR ANY CLERK OF ANY COURT OF RECORD TO APPEAR FOR GUARANTOR IN ANY COURT OF RECORD AND CONFESS JUDGMENT WITHOUT PRIOR HEARING AGAINST GUARANTOR IN FAVOR OF LENDER FOR, AND IN THE AMOUNT OF, THE UNPAID BALANCE OF THE PRINCIPAL AMOUNT OF THIS GUARANTY, ALL INTEREST ACCRUED AND UNPAID THEREON, ALL OTHER AMOUNTS PAYABLE BY GUARANTOR TO LENDER UNDER THE TERMS OF THIS GUARANTY OR ANY OTHER AGREEMENT, DOCUMENTS, INSTRUMENT EVIDENCING, SECURING OR GUARANTYING THE OBLIGATIONS EVIDENCED BY THIS GUARANTY, COSTS OF SUIT, AND ATTORNEYS’ FEES OF FIFTEEN PERCENT (15%) OF THE UNPAID BALANCE OF THE PRINCIPAL AMOUNT OF THIS GUARANTY AND INTEREST THEN DUE HEREUNDER.

Guarantor hereby releases, to the extent permitted by applicable law, all errors and all rights of exemption, appeal, stay of execution, inquisition, and other rights to which Borrower may otherwise be entitled under the laws of the United States or of any state or possession of the United States now in force and which may hereafter be enacted. The authority and power to appear for and enter judgment against Guarantor shall not be 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 may be exercised on one or more occasions or from time to time in the same or different jurisdictions as often as Lender shall deem necessary or desirable, for all of which this Guaranty shall be a sufficient warrant.

Miscellaneous Provisions. The following miscellaneous provisions are a part of this Guaranty:

Amendments. This Guaranty, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Guaranty. No alteration of or amendment to this Guaranty shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.

Attorneys’ Fees; Expenses. Guarantor agrees that if Lender hires an attorney to help enforce this Guaranty, Guarantor will pay, subject to any limits under applicable law, Lender’s attorneys’ fees and all of Lender’s other collection expenses, whether or not there is a lawsuit and including without limitation additional legal expenses for bankruptcy proceedings.

Caption Headings. Caption headings in this Guaranty are for convenience purposes only and are not to be used to interpret or define the provisions of this Guaranty.

Governing Law. This Guaranty will be governed by, construed and enforced in accordance with federal law and the laws of the State of Maryland. This Guaranty has been accepted by Lender in the State of Maryland.

Integration. Guarantor further agrees that Guarantor has read and fully understands the terms of this Guaranty; Guarantor has had the opportunity to be advised by Guarantor’s attorney with respect to this Guaranty; the Guaranty fully reflects Guarantor’s intentions and parol evidence is not required to interpret the terms of this Guaranty. Guarantor hereby indemnifies and holds Lender harmless from all losses, claims, damages, and costs (including Lender’s attorneys’ fees) suffered or incurred by Lender as a result of any breach by Guarantor of the warranties, representations and agreements of this paragraph.

Interpretation. In all cases where there is more than one Borrower or Guarantor, then all words used in this Guaranty in the singular shall be deemed to have been used in the plural where the context and construction so require; and where there is more than one Borrower named in this Guaranty or when this Guaranty is executed by more than one Guarantor, the words “Borrower” and “Guarantor” respectively shall mean all and any one or more of them. If a court finds that any provision of this Guaranty is not valid or should not be enforced, that fact by itself will not mean that the rest of this Guaranty will not be valid or enforced. Therefore, a court will enforce the rest of the provisions of this Guaranty even if a provision of this Guaranty may be found to be invalid or unenforceable. If any one or more of Borrower or Guarantor are corporations, partnerships, limited liability companies, or similar entities, it is not necessary for Lender to inquire into the powers of Borrower or Guarantor or of the officers, directors, partners, managers, or other agents acting or purporting to act on their behalf, and any indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed under this Guaranty.

JURY WAIVER. LENDER AND BORROWER AND GUARANTOR EACH HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH LENDER OR BORROWER OR GUARANTOR MAY BE PARTIES, ARISING OUT OF, OR IN ANY WAY PERTAINING TO, THIS GUARANTY. IT IS AGREED THAT THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS. THIS WAIVER IS KNOWINGLY, WILLINGLY AND VOLUNTARILY MADE BY LENDER AND BORROWER AND GUARANTOR, AND LENDER AND BORROWER AND GUARANTOR EACH HEREBY REPRESENT THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. BORROWER AND GUARANTOR EACH FURTHER REPRESENT THAT EACH HAS BEEN REPRESENTED IN THE SIGNING OF THIS GUARANTY AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF EACH’S OWN FREE WILL, AND THAT EACH HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL.

Notices. Any notice required to be given under this Guaranty shall be given in writing, and, except for revocation notices by Guarantor, shall be effective when actually delivered, if hand delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Guaranty. All revocation notices by Guarantor

COMMERCIAL GUARANTY

(Continued)

Loan No: -,220583814 Page 3

shall be in writing and shall be effective upon delivery to Lender as provided in the section of this Guaranty entitled “DURATION OF GUARANTY.” Any party may change its address for notices under this Guaranty by giving formal written notice to the other parlies, specifying that the purpose of the notice is to change the party’s address. For notice purposes, Guarantor agrees to keep Lender informed at all times of Guarantor’s current address. Unless otherwise provided or required by law, if there is more than one Guarantor, any notice given by Lender to any Guarantor is deemed to be notice given to all Guarantors.

No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Guaranty unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Guaranty shall not prejudice or constitute a waiver of Lender’s right otherwise to demand strict compliance with that provision or any other provision of this Guaranty. No prior waiver by Lender, nor any course of dealing between Lender and Guarantor, shall constitute a waiver of any of Lender’s rights or of any of Guarantor’s obligations as to any future transactions. Whenever the consent of Lender is required under this Guaranty, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender.

Successors and Assigns. Subject to any limitations stated in this Guaranty on transfer of Guarantor’s interest, this Guaranty shall be binding upon and inure to the benefit of the parties, their heirs, personal representatives, successors and assigns.

Definitions. The following capitalized words and terms shall have the following meanings when used in this Guaranty. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Guaranty shall have the meanings attributed to such terms in the Uniform Commercial Code:

Borrower. The word “Borrower” means Avatech Solutions Subsidiary, Inc. and includes all co-signers and co-makers signing the Note.

GAAP. The word “GAAP” means generally accepted accounting principles.

Guarantor. The word “Guarantor” means each and every person or entity signing this Guaranty, including without limitation Avatech Solutions, Inc..

Guaranty: The word “Guaranty” means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note.

Indebtedness. The word “Indebtedness” means Borrower’s indebtedness to Lender as more particularly described in this Guaranty.

Lender. The word “Lender” means K Bank, its successors and assigns.

Note. The word “Note” means and includes without limitation all of Borrower’s promissory notes and/or credit agreements evidencing Borrower’s loan obligations in favor of Lender, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of and substitutions for promissory notes or credit agreements.

Related Documents. The words “Related Documents” mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness.

EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT THIS GUARANTY IS EFFECTIVE UPON GUARANTOR’S EXECUTION AND DELIVERY OF THIS GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE MANNER SET FORTH IN THE SECTION TITLED “DURATION OF GUARANTY”. NO FORMAL ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS GUARANTY IS DATED OCTOBER 28, 2004.

THIS GUARANTY IS GIVEN UNDER SEAL AND IT IS INTENDED THAT THIS GUARANTY IS AND SHALL CONSTITUTE AND HAVE THE EFFECT OF A SEALED INSTRUMENT ACCORDING TO LAW.

GUARANTOR:

AVATECH SOLUTIONS, INC.

By:	/s/ Christopher D. Olander                    (Seal)
	Christopher D. Olander, Executive Vice President of Avatech Solutions, Inc.

LASER PRO Lending, Ver. 6.24.00.003 Copt. Harland Financial Solutions, Inc. 1997, 2004. All Rights Reserved. • MO L:\CFI\LPL\E20.FC TR-701 PR-LOG

EX-10.15

Exhibit 10.15

K    BANK

COMMERCIAL GUARANTY

Principal	Loan Date	Maturity	Loan No	Call/Coll	Account	Officer PK	Intials
References in the shaded area are for Lender’s use only and do not limit the applicability of this document to any particular loan or item. Any item above containing “***” has been omitted due to text length limitations.

Borrower:	Avatech Solutions Subsidiary, Inc.     10715 Red Run Blvd, Ste 101     Owings Mills, MD 21117	Lender:	K BANK 7F GWYNNS MILL COURT OWINGS MILLS, MD 21117
Guarantor:	William James Hindman     2322 Nicodemus Rd     Westminster, MD 21157

AMOUNT OF GUARANTY. This is a guaranty of payment of the Note, including without limitation the principal Note amount of Seven Hundred Thousand & 00/100 Dollars ($700,000.00).

GUARANTY. For good and valuable consideration, William James Hindman (“Guarantor”) absolutely and unconditionally guarantees and promises to pay to K Bank (“Lender”) or its order, in legal tender of the United States of America, the Indebtedness (as that term is defined below) of Avatech Solutions Subsidiary, Inc. (“Borrower”) to Lender on the terms and conditions set forth in this Guaranty.

MAXIMUM LIABILITY. The maximum liability of Guarantor under this Guaranty shall not exceed at any one time the amount of the Indebtedness described herein, plus all costs and expenses of (A) enforcement of this Guaranty and (B) collection and sale of any collateral securing this Guaranty.

The above limitation on liability is not a restriction on the amount of the Indebtedness of Borrower to Lender either in the aggregate or at any one time. If Lender presently holds one or more guaranties, or hereafter receives additional guaranties from Guarantor, Lender’s rights under all guaranties shall be cumulative. This Guaranty shall not (unless specifically provided below to the contrary) affect or invalidate any such other guaranties. Guarantor’s liability will be Guarantor’s aggregate liability under the terms of this Guaranty and any such other unterminated guaranties.

INDEBTEDNESS GUARANTEED. The Indebtedness guaranteed by this Guaranty includes the Note, including (a) all principal, (b) all interest, (c) all late charges, (d) all loan fees and loan charges, and (e) all collection costs and expenses relating to the Note or to any collateral for the Note. Collection costs and expenses include without limitation all of Lender’s attorneys’ fees.

DURATION OF GUARANTY. This Guaranty will take effect when received by Lender without the necessity of any acceptance by Lender, or any notice to Guarantor or to Borrower, and will continue in full force until all Indebtedness shall have been fully and finally paid and satisfied and all of Guarantor’s other obligations under this Guaranty shall have been performed in full. Release of any other guarantor or termination of any other guaranty of the Indebtedness shall not affect the liability of Guarantor under this Guaranty. A revocation Lender receives from any one or more Guarantors shall not affect the liability of any remaining Guarantors under this Guaranty. This Guaranty covers a revolving line of credit and it is specifically anticipated that fluctuations will occur in the aggregate amount of Indebtedness owing from Borrower to Lender. Guarantor specifically acknowledges and agrees that fluctuations in the amount of Indebtedness, even to zero dollars ($ 0.00), shall not constitute a termination of this Guaranty. Guarantor’s liability under this Guaranty shall terminate only upon (A) termination in writing by Borrower and Lender of the line of credit, (B) payment of the Indebtedness in full in legal tender, and (C) payment in full in legal tender of all of Guarantor’s other obligations under this Guaranty.

GUARANTOR’S AUTHORIZATION TO LENDER. Guarantor authorizes Lender, without notice or demand and without lessening Guarantor’s liability under this Guaranty, from time to time: (A) to make one or more additional secured or unsecured loans to Borrower, to lease equipment or other goods to Borrower, or otherwise to extend additional credit to Borrower; (B) to alter, compromise, renew, extend, accelerate, or otherwise change one or more times the time for payment or other terms of the Indebtedness or any part of the Indebtedness, including increases and decreases of the rate of interest on the Indebtedness; (C) to take and hold security for the payment of this Guaranty or the Indebtedness, and exchange, enforce, waive, subordinate, fail or decide not to perfect, and release any such security, with or without the substitution of new collateral; (D) to release, substitute, agree not to sue, or deal with any one or more of Borrower’s sureties, endorsers, or other guarantors on any terms or in any manner Lender may choose; (E) to determine how, when and what application of payments and credits shall be made on the Indebtedness (F) to apply such security and direct the order or manner of sale thereof, including without limitation, any nonjudicial sale permitted by the terms of the controlling security agreement or deed of trust, as Lender in its discretion may determine; (G) to sell, transfer, assign or grant participations in all or any part of the Indebtedness; and (H) to assign or transfer this Guaranty in whole or in part.

GUARANTOR’S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to Lender that (A) no representations or agreements of any kind have been made to Guarantor which would limit or qualify in any way the terms of this Guaranty; (B) this Guaranty is executed at Borrower’s request and not at the request of Lender; (C) Guarantor has full power, right and authority to enter into this Guaranty; (D) the provisions of this Guaranty do not conflict with or result in a default under any agreement or other instrument binding upon Guarantor and do not result in a violation of any law, regulation, court decree or order applicable to Guarantor; (E) Guarantor has not and will not, without the prior written consent of Lender, sell, lease, assign, encumber, hypothecate, transfer, or otherwise dispose of all or substantially all of Guarantor’s assets, or any interest therein; (F) upon Lender’s request, Guarantor will provide to Lender financial and credit information in form acceptable to Lender, and all such financial information which currently has been, and all future financial information which will be provided to Lender is and will be true and correct in all material respects and fairly present Guarantor’s financial condition as of the dates the financial information is provided; (G) no material adverse change has occurred in Guarantor’s financial condition since the date of the most recent financial statements provided to Lender and no event has occurred which may materially adversely affect Guarantor’s financial condition; (H) no litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Guarantor is pending or threatened; (I) Lender has made no representation to Guarantor as to the creditworthiness of Borrower; and (J) Guarantor has established adequate means of obtaining from Borrower on a continuing basis information regarding Borrower’s financial condition. Guarantor agrees to keep adequately informed from such means of any facts, events, or circumstances which might in any way affect Guarantor’s risks under this Guaranty, and Guarantor further agrees that, absent a request for information, Lender shall have no obligation to disclose to Guarantor any information or documents acquired by Lender in the course of its relationship with Borrower.

GUARANTOR’S FINANCIAL STATEMENTS. Guarantor agrees to furnish Lender with the following:

Annual Statements. As soon as available, but in no event later than one-hundred-twenty (120) days after the end of each fiscal year, Guarantor’s balance sheet and income statement for the year ended, prepared by Guarantor.

Tax Returns. As soon as available, but in no event later than thirty (30) days after the applicable filing date for the tax reporting period ended, Federal and other governmental tax returns, prepared by a certified public accountant satisfactory to Lender.

All financial reports required to be provided under this Guaranty shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Guarantor as being true and correct.

GUARANTOR’S WAIVERS. Except as prohibited by applicable law, Guarantor waives any right to require Lender (A) to continue lending money or to extend other credit to Borrower; (B) to make any presentment, protest, demand, or notice of any kind, including notice of any nonpayment of the Indebtedness or of any nonpayment related to any collateral, or notice of any action or nonaction on the part of Borrower, Lender, any surety, endorser, or other guarantor in connection with the Indebtedness or in connection with the creation of new or additional loans or obligations; (C) to resort for payment or to proceed directly or at once against any person, including Borrower or any other guarantor; (D) to proceed directly against or exhaust any collateral held by Lender from Borrower, any other guarantor, or any other person; (E) to give notice of the terms, time, and place of any public or private sale of personal property security held by Lender from Borrower or to comply with any other applicable provisions of the Uniform Commercial Code; (F) to pursue any other remedy within Lender’s power; or (G) to commit any act or omission of any kind, or at any time, with respect to any matter whatsoever.

In addition to the waivers set forth herein, if now or hereafter Borrower is or shall become insolvent and the Indebtedness shall not at all times until paid be fully secured by collateral pledged by Borrower, Guarantor hereby forever waives and gives up in favor of Lender and Borrower, and Lender’s and Borrower’s respective successors, any claim or right to payment Guarantor may now have or hereafter have or acquire against Borrower, by subrogation or otherwise, so that at no time shall Guarantor be or become a “creditor” of Borrower within the meaning of 11 U.S.C. section 547(b), or any successor provision of the Federal bankruptcy laws.

Guarantor also waives any and all rights or defenses arising by reason of (1) any election of remedies by Lender which destroys or otherwise adversely affects Guarantor’s subrogation rights or Guarantor’s rights to proceed against Borrower for reimbursement, including without limitation, any loss of rights Guarantor may suffer by reason of any law limiting, qualifying, or discharging the Indebtedness; (2) any disability or other defense of Borrower, of any other guarantor, or of any other person, or by reason of the cessation of Borrower’s liability from any cause whatsoever, other than payment in full in legal tender, of the Indebtedness; (3) any right to claim discharge of the Indebtedness on the basis of unjustified impairment of any Collateral for the Indebtedness; or (4) any statute of limitations, if at any time any action or suit brought by Lender against Guarantor is commenced,

COMMERCIAL GUARANTY

(Continued)

Loan No: 220583814

there is outstanding Indebtedness of Borrower to Lender which is not barred by any applicable statute of limitations. Guarantor acknowledges and agrees that Guarantor’s obligations under this Guaranty shall apply to and continue with respect to any amount paid to Lender which is subsequently recovered from Lender for any reason whatsoever (including without limitation as a result of bankruptcy, insolvency or fraudulent conveyance proceeding), notwithstanding the fact that all or a part of the Indebtedness may have been previously paid, or this Guaranty may have been terminated, or both.

Guarantor further waives and agrees not to assert or claim at any time any deductions to the amount guaranteed under this Guaranty for any claim of setoff, counterclaim, counter demand, recoupment or similar right, whether such claim, demand or right may be asserted by the Borrower, the Guarantor, or both.

Guarantor’s Understanding With Respect To Waivers. Guarantor warrants and agrees that each of the waivers set forth above is made with Guarantor’s full knowledge of its significance and consequences and that, under the circumstances, the waivers are reasonable and not contrary to public policy or law. If any such waiver is determined to be contrary to any applicable law or public policy, such waiver shall be effective only to the extent permitted by law or public policy.

Right of Setoff. To the extent permitted by applicable law, Lender reserves a right of setoff in all Guarantor’s accounts with Lender (whether checking, savings, or some other account). This includes all accounts Guarantor holds jointly with someone else and all accounts Guarantor may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Guarantor authorizes Lender, to the extent permitted by applicable law, to hold these funds if there is a default, and Lender may apply the funds in these accounts to pay what Guarantor owes under the terms of this Guaranty.

Subordination of Borrower’s Debts to Guarantor. Guarantor agrees that the Indebtedness of Borrower to Lender, whether now existing or hereafter created, shall be superior to any claim that Guarantor may now have or hereafter acquire against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby expressly subordinates any claim Guarantor may have against Borrower, upon any account whatsoever, to any claim that Lender may now or hereafter have against Borrower. In the event of insolvency and consequent liquidation of the assets of Borrower, through bankruptcy, by an assignment for the benefit of creditors, by voluntary liquidation, or otherwise, the assets of Borrower applicable to the payment of the claims of both Lender and Guarantor shall be paid to Lender and shall be first applied by Lender to the Indebtedness of Borrower to Lender. Guarantor does hereby assign to Lender all claims which it may have or acquire against Borrower or against any assignee or trustee in bankruptcy of Borrower; provided however, that such assignment shall be effective only for the purpose of assuring to Lender full payment in legal tender of the Indebtedness. If Lender so requests, any notes or credit agreements now or hereafter evidencing any debts or obligations of Borrower to Guarantor shall be marked with a legend that the same are subject to this Guaranty and shall be delivered to Lender. Guarantor agrees, and Lender is hereby authorized, in the name of Guarantor, from time to time to file financing statements and continuation statements and to execute documents and to take such other actions as Lender deems necessary or appropriate to perfect, preserve and enforce its rights under this Guaranty.

CONFESSED JUDGMENT. UPON THE OCCURRENCE OF A DEFAULT ON THE INDEBTEDNESS, GUARANTOR HEREBY AUTHORIZES ANY ATTORNEY DESIGNATED BY LENDER OR ANY CLERK OF ANY COURT OF RECORD TO APPEAR FOR GUARANTOR IN ANY COURT OF RECORD AND CONFESS JUDGMENT WITHOUT PRIOR HEARING AGAINST GUARANTOR IN FAVOR OF LENDER FOR, AND IN THE AMOUNT OF, THE UNPAID BALANCE OF THE PRINCIPAL AMOUNT OF THIS GUARANTY, ALL INTEREST ACCRUED AND UNPAID THEREON, ALL OTHER AMOUNTS PAYABLE BY GUARANTOR TO LENDER UNDER THE TERMS OF THIS GUARANTY OR ANY OTHER AGREEMENT, DOCUMENTS, INSTRUMENT EVIDENCING, SECURING OR GUARANTYING THE OBLIGATIONS EVIDENCED BY THIS GUARANTY, COSTS OF SUIT, AND ATTORNEYS’ FEES OF FIFTEEN PERCENT (15%) OF THE UNPAID BALANCE OF THE PRINCIPAL AMOUNT OF THIS GUARANTY AND INTEREST THEN DUE HEREUNDER.

Guarantor hereby releases, to the extent permitted by applicable law, all errors and all rights of exemption, appeal, stay of execution, inquisition, and other rights to which Borrower may otherwise be entitled under the laws of the United States or of any state or possession of the United States now in force and which may hereafter be enacted. The authority and power to appear for and enter judgment against Guarantor shall not be 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 may be exercised on one or more occasions or from time to time in the same or different jurisdictions as often as Lender shall deem necessary or desirable, for all of which this Guaranty shall be a sufficient warrant.

Miscellaneous Provisions. The following miscellaneous provisions are a part of this Guaranty:

Amendments. This Guaranty, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Guaranty. No alteration of or amendment to this Guaranty shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.

Attorneys’ Fees; Expenses. Guarantor agrees that if Lender hires an attorney to help enforce this Guaranty, Guarantor will pay, subject to any limits under applicable law, Lender’s attorneys’ fees and all of Lender’s other collection expenses, whether or not there is a lawsuit and including without limitation additional legal expenses for bankruptcy proceedings.

Caption Headings. Caption headings in this Guaranty are for convenience purposes only and are not to be used to interpret or define the provisions of this Guaranty.

Governing Law. This Guaranty will be governed by, construed and enforced in accordance with federal law and the laws of the State of Maryland. This Guaranty has been accepted by Lender in the State of Maryland.

Integration. Guarantor further agrees that Guarantor has read and fully understands the terms of this Guaranty; Guarantor has had the opportunity to be advised by Guarantor’s attorney with respect to this Guaranty; the Guaranty fully reflects Guarantor’s intentions and parol evidence is not required to interpret the terms of this Guaranty. Guarantor hereby indemnifies and holds Lender harmless from all losses, claims, damages, and costs (including Lender’s attorneys’ fees) suffered or incurred by Lender as a result of any breach by Guarantor of the warranties, representations and agreements of this paragraph.

Interpretation. In all cases where there is more than one Borrower or Guarantor, then all words used in this Guaranty in the singular shall be deemed to have been used in the plural where the context and construction so require; and where there is more than one Borrower named in this Guaranty or when this Guaranty is executed by more than one Guarantor, the words “Borrower” and “Guarantor” respectively shall mean all and any one or more of them. If a court finds that any provision of this Guaranty is not valid or should not be enforced, that fact by itself will not mean that the rest of this Guaranty will not be valid or enforced. Therefore, a court will enforce the rest of the provisions of this Guaranty even if a provision of this Guaranty may be found to be invalid or unenforceable. If any one or more of Borrower or Guarantor are corporations, partnerships, limited liability companies, or similar entities, it is not necessary for Lender to inquire into the powers of Borrower or Guarantor or of the officers, directors, partners, managers, or other agents acting or purporting to act on their behalf, and any indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed under this Guaranty.

JURY WAIVER. LENDER AND BORROWER AND GUARANTOR EACH HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO WHICH LENDER OR BORROWER OR GUARANTOR MAY BE PARTIES, ARISING OUT OF, OR IN ANY WAY PERTAINING TO, THIS GUARANTY. IT IS AGREED THAT THIS WAIVER CONSTITUTES A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS OR PROCEEDINGS. THIS WAIVER IS KNOWINGLY, WILLINGLY AND VOLUNTARILY MADE BY LENDER AND BORROWER AND GUARANTOR, AND LENDER AND BORROWER AND GUARANTOR EACH HEREBY REPRESENT THAT NO REPRESENTATIONS OF FACT OR OPINION HAVE BEEN MADE BY ANY INDIVIDUAL TO INDUCE THIS WAIVER OF TRIAL BY JURY OR TO IN ANY WAY MODIFY OR NULLIFY ITS EFFECT. BORROWER AND GUARANTOR EACH FURTHER REPRESENT THAT EACH HAS BEEN REPRESENTED IN THE SIGNING OF THIS GUARANTY AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF EACH’S OWN FREE WILL, AND THAT EACH HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL.

Notices. Any notice required to be given under this Guaranty shall be given in writing, and shall be effective when actually delivered, if hand delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Guaranty. Any party may change its address for notices under this Guaranty by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party’s address. For notice purposes, Guarantor agrees to keep Lender informed at all times of Guarantor’s current address. Unless otherwise provided or required by law, if there is more than one Guarantor, any notice given by Lender to any Guarantor is deemed to be notice given to all Guarantors.

No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Guaranty unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Guaranty shall not prejudice or constitute a waiver of Lender’s right otherwise to demand strict compliance with that provision or any other provision of this Guaranty. No prior waiver by Lender, nor any course of dealing between Lender and Guarantor, shall constitute a waiver of any of Lender’s rights or of any of Guarantor’s obligations as to any future transactions. Whenever the consent of Lender is required under this Guaranty, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender.

COMMERCIAL GUARANTY

(Continued)

Loan No: 220583814 Page 3

Successors and Assigns. Subject to any limitations stated in this Guaranty on transfer of Guarantor’s interest, this Guaranty shall be binding upon and inure to the benefit of the parties, their heirs, personal representatives, successors and assigns.

Definitions. The following capitalized words and terms shall have the following meanings when used in this Guaranty. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Guaranty shall have the meanings attributed to such terms in the Uniform Commercial Code:

Borrower. The word “Borrower” means Avatech Solutions Subsidiary, Inc. and includes all co-signers and co-makers signing the Note.

GAAP. The word “GAAP” means generally accepted accounting principles.

Guarantor. The word “Guarantor” means each and every person or entity signing this Guaranty, including without limitation William James Hindman.

Guaranty. The word “Guaranty” means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note.

Indebtedness. The word “Indebtedness” means Borrower’s indebtedness to Lender as more particularly described in this Guaranty.

Lender. The word “Lender” means K Bank, its successors and assigns.

Note. The word “Note” means the promissory note dated October 28, 2004, in the original principal amount of $700,000.00 from Borrower to Lender, together with all modifications of and renewals, replacements, and substitutions for the promissory note or agreement.

Related Documents. The words “Related Documents” mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the indebtedness.

EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT THIS GUARANTY IS EFFECTIVE UPON GUARANTOR’S EXECUTION AND DELIVERY OF THIS GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE MANNER SET FORTH IN THE SECTION TITLED “DURATION OF GUARANTY”. NO FORMAL ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS GUARANTY IS DATED OCTOBER 28, 2004.

THIS GUARANTY IS GIVEN UNDER SEAL AND IT IS INTENDED THAT THIS GUARANTY IS AND SHALL CONSTITUTE AND HAVE THE EFFECT OF A SEALED INSTRUMENT ACCORDING TO LAW.

GUARANTOR:

William James Hindman

LASER PRO Lending, Ver. 5.24.00.003 Copr. Harland Financial Solutions, Inc. 1997, 2004. All Rights Reserved. - MD L:\CFI\LPL\E20.FC TR-701 PR-LOC

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Donald R. Walsh, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q 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: November 15, 2004	/s/ Donald R. Walsh
	Donald R. Walsh
	Chief Executive Officer

24

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Catherine Dobson, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q 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: November 15, 2004	/s/ Catherine Dodson
	Catherine Dodson
	Interim Chief Financial Officer

25

EX-32.1

Exhibit 32.1

SECTION 1350 CERTIFICATIONS

In connection with the Quarterly Report of Avatech Solutions, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2004 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: November 15, 2004	/s/ Donald R. Walsh
	Donald R. Walsh
	Chief Executive Officer
	/s/ Catherine Dodson
	Catherine Dodson
	Interim Chief Financial Officer

26