Exhibit 10.16

SECOND

MODIFICATION AGREEMENT

THIS SECOND MODIFICATION AGREEMENT (“AGREEMENT”) is made as of December 31,
2006, by and among AVATECH SOLUTIONS, INC., a Delaware corporation, and AVATECH
SOLUTIONS SUBSIDIARY, INC., a Delaware corporation, jointly and severally
(collectively, the “BORROWERS”), TECHNICAL LEARNINGWARE COMPANY, INC., a
Delaware corporation (“TLC”), and MERCANTILE-SAFE DEPOSIT AND TRUST COMPANY
(“LENDER”). The BORROWERS and TLC are collectively referred to herein as the
“OBLIGORS”.

RECITALS

In accordance with the terms and conditions set forth in a Loan and Security
Agreement dated as of January 27, 2006 between the BORROWERS and the LENDER
(“ORIGINAL LOAN AGREEMENT”), the LENDER extended to the BORROWERS a revolving
line of credit in the maximum principal amount outstanding at any one time of
Five Million Dollars ($5,000,000.00) (the “LOAN”). Pursuant to the ORIGINAL LOAN
AGREEMENT, the BORROWERS’ obligations to the LENDER are secured by all of the
BORROWERS’ tangible and intangible assets. Pursuant to a Guaranty Agreement
dated as of January 27, 2006 from TLC to the LENDER (“TLC GUARANTY AGREEMENT”),
TLC absolutely, unconditionally, and jointly and severally guaranteed the
payment and performance of the BORROWERS’ obligations to the LENDER. Pursuant to
a Security Agreements of even date with the TLC GUARANTY AGREEMENT (“TLC
SECURITY AGREEMENT”), the obligations of TLC to the LENDER are secured by all of
TLC’s tangible and intangible assets. Pursuant to a Guaranty Agreement dated
January 27, 2006, from W. JAMES HINDMAN (“HINDMAN”) to the LENDER (the “HINDMAN
GUARANTY”), HINDMAN guaranteed the BORROWERS’ obligations up to a specified
amount set forth in such Guaranty Agreement.

Pursuant to a Modification Agreement dated as of May 30, 2006 (collectively with
the ORIGINAL LOAN AGREEMENT, the “LOAN AGREEMENT”), the LENDER extended to the
BORROWERS a short term bridge loan, in the amount of Six Million Five Hundred
Thousand ($6,500,000.00) (“BRIDGE LOAN”), and the terms of the ORIGINAL LOAN
AGREEMENT were modified in certain respects. All sums due in connection with the
BRIDGE LOAN have been repaid by the BORROWERS.

The maturity date of the LOAN is December 31, 2006. The BORROWERS have requested
that the LENDER extend the maturity date of the LOAN, release the HINDMAN
GUARANTY, and modify the terms of the LOAN in certain additional respects. The
LENDER has agreed to the BORROWERS’ request, but only upon the terms and
conditions set forth herein. As used herein, the term “LOAN DOCUMENTS” shall
mean the LOAN AGREEMENT, the TLC GUARANTY AGREEMENT, the TLC SECURITY AGREEMENT,
and all other documents and agreements evidencing or securing the LOAN. Unless
otherwise defined herein, any terms appearing in all capital letters in this
AGREEMENT shall have the respective meanings ascribed to such terms in the LOAN
AGREEMENT.

NOW, THEREFORE, in consideration of the foregoing premises, the terms and
conditions set forth herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:

1. Representations And Warranties Of Obligors. To induce the LENDER to enter
into this AGREEMENT and to provide the OBLIGORS with the accommodations
described herein, the OBLIGORS make the representations and warranties set forth
below and acknowledge the LENDER’S justifiable right to rely upon these
representations and warranties.

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a. No Litigation. There is no action, suit, investigation, or proceeding pending
against any of the OBLIGORS or any other assets of any of the OBLIGORS, except
for those proceedings previously disclosed to the LENDER in writing.

b. Organization; Good Standing; Authorization. Each of the OBLIGORS: (a) has the
power to enter into this AGREEMENT and all other documents, and agreements
required to be executed pursuant to this AGREEMENT, and has the power to perform
all of its obligations hereunder and thereunder; (b) has duly authorized the
entry into and performance of this AGREEMENT and all other documents and
agreements required to be executed by such OBLIGOR; and (c) is in good standing
in the state of its incorporation or organization, as applicable, and is in good
standing and qualified as a foreign corporation or limited liability company, as
applicable, in all other states in which such qualification is required.

c. Valid, Binding And Enforceable. This AGREEMENT and all of the other documents
and agreements executed pursuant to this AGREEMENT are the valid and binding
obligations of the OBLIGORS and are fully enforceable against each of the
OBLIGORS in accordance with their terms.

d. Subsidiaries. The BORROWERS have no subsidiaries except for the following
entities, each of which is a wholly-owned subsidiary of AVATECH SOLUTIONS, INC.:
(i) AVATECH SOLUTIONS SUBSIDIARY, INC., (ii) TLC, (iii) STERLING SYSTEMS &
CONSULTING, INC., a Michigan corporation (“STERLING SYSTEMS”), (iv) STERLING
OHIO MANAGEMENT, INC., a Michigan corporation (“STERLING MANAGEMENT”),
(v) STERLING SYSTEMS-INDIANA, L.L.C., a Michigan limited liability company
(“STERLING INDIANA”), and (vi) STERLING SYSTEMS-OHIO, L.L.C., a Michigan limited
liability company (“STERLING OHIO”).

2. Amendments To Loan Agreement. The LOAN AGREEMENT is hereby modified and
amended as follows:

a. Amendments to Definitions. The definitions contained in Article 1 of the LOAN
AGREEMENT are hereby modified as follows:

i. The definition of “APPLICABLE MARGIN” set forth in Section 1.7 is modified by
replacing the existing provision with the following:

Section 1.7. Applicable Margin. The term “APPLICABLE MARGIN” means the following
percentages corresponding to the STOCKHOLDERS EQUITY, TANGIBLE NET WORTH and
ratio of LIABILITIES to STOCKHOLDERS EQUITY in effect as of the most recent
CALCULATION DATE.

 

Tier
Level    STOCKHOLDERS
EQUITY    TANGIBLE
NET WORTH    RATIO OF
LIABILITIES TO
STOCKHOLDERS
EQUITY    APPLICABLE
MARGIN FOR
BASE RATE
BORROWINGS     APPLICABLE
MARGIN FOR
LIBOR
BORROWINGS   1    > $ 7,500,000    > $ 400,000    <3.00    2.00 %   4.75 % 2   
> $ 7,500,000    > $ 600,000    <2.25    1.50 %   4.25 % 3    > $ 8,000,000    >
$ 800,000    <1.50    1.25 %   4.00 % 4    > $ 8,500,000    > $ 1,000,000   
<1.25    1.00 %   3.75 % 5    > $ 9,000,000    > $ 1,500,000    <1.00    0.50 %
  3.25 % 6    > $ 10,000,000    > $ 2,500,000    <0.80    0.00 %   3.00 %

 

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Effective as of the end of each calendar quarter, the APPLICABLE MARGINS shall
be determined and adjusted based upon the then current STOCKHOLDERS EQUITY,
TANGIBLE NET WORTH and ratio of LIABILITIES to STOCKHOLDERS EQUITY, as
determined in accordance with the quarterly COMPLIANCE CERTIFICATES to be
provided by the BORROWER in accordance with Section 5.12.7 of this AGREEMENT.
The lowest tier at which the BORROWER satisfies each of the STOCKHOLDERS EQUITY,
TANGIBLE NET WORTH and ratio of LIABILITIES to STOCKHOLDERS EQUITY for such tier
shall be applicable. If the BORROWER fails to timely provide a COMPLIANCE
CERTIFICATE for any fiscal quarter of the BORROWER as required by and within the
time limitations set forth in Section 5.12.7, the APPLICABLE MARGIN from the
applicable date of such failure shall be based on Tier Level 1 until five
(5) BUSINESS DAYS after a COMPLIANCE CERTIFICATE has been provided, whereupon
the Tier Level shall be determined as set forth above. Except as set forth
above, each APPLICABLE MARGIN shall be effective from a CALCULATION DATE until
the next CALCULATION DATE.

ii. The definition of “GUARANTOR” set forth in Section 1.48 is modified by
replacing the existing provision with the following:

“Section 1.48. Guarantor. The term “GUARANTOR” means TLC.”

iii. The definition of “LOAN DOCUMENTS” contained in Section 1.66 shall also
include, without limitation, this AGREEMENT.

iv. The definition of “MATURITY DATE” contained in Section 1.70 is modified by
replacing “December 31, 2006” with “December 31, 2008”.

v. The definitions of “OBLIGATIONS” contained in Section 1.75 is modified by
deleting the reference therein to the BRIDGE LOAN.

vi. The definitions of “BRIDGE LOAN” and “BRIDGE LOAN NOTE” set forth in
Sections 1.87 and 1.88 of the LOAN AGREEMENT are hereby deleted.

b. Additional Definitions. The following additional definitions are hereby added
to Article 1 of the LOAN AGREEMENT:

Section 1.87. Liabilities. The term “LIABILITIES” means all liabilities of the
BORROWERS, as determined in accordance with GAAP.

Section 1.88. Stockholders Equity. The term “STOCKHOLDERS EQUITY” means the
total stockholders equity of AVATECH, as determined in accordance with GAAP. In
the event that any preferred stock is not otherwise included in the total
stockholders equity of AVATECH in accordance with the requirements of GAAP, such
preferred stock shall be included for the purposes of this definition.

 

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c. Advances under the Revolving Loan. Section 2.1 of the LOAN AGREEMENT is
hereby modified by replacing the existing provision with the following:

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

d. Bridge Loan. Sections 2.15 through 2.15.4 are hereby deleted in their
entirety.

e. Financial Covenants. Section 5.19 is hereby deleted, Sections 5.20, 5.21 and
5.23 of the LOAN AGREEMENT are hereby modified by replacing the existing
provisions with the provisions set forth below, and the following additional
Sections 5.24 and 5.25 are hereby added to the LOAN AGREEMENT:

5.20. Minimum Tangible Net Worth. The BORROWERS, on a consolidated basis, shall
at all times maintain TANGIBLE NET WORTH in an amount greater than Four Hundred
Thousand Dollars ($400,000.00), measured quarterly.

5.21. Leverage Ratio. The BORROWERS, on a consolidated basis, shall maintain a
LEVERAGE RATIO, measured quarterly, of less than 22:1 as of the end of each
fiscal quarter.

5.23. EBITDA Ratio. The BORROWERS, on a consolidated basis, shall maintain a
ratio of (a) EBITDA to (b) INTEREST EXPENSE plus the total amount of cash
payments of principal on account of LONG TERM DEBT, of greater than 1.25:1.00,
measured semi-annually on a year-to-date basis at December 31 and June 30 of
each year.

5.24. Stockholders Equity. STOCKHOLDERS EQUITY shall at all times be greater
than Seven Million Five Hundred Thousand Dollars ($7,500,000.00), measured
quarterly.

5.25. Ratio of Liabilities to Stockholders Equity. The ratio of LIABILITIES to
STOCKHOLDERS EQUITY shall at all time be less than 3.00:1.00, measured
quarterly.

 

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3. No Novation; No Refinance; No Adverse Effect On Liens. The parties hereto do
not intend that a novation of the LOAN or any of the LOAN DOCUMENTS shall be
created or effected because of the modification of the LOAN AGREEMENT, as
described herein. The parties hereto do not intend that the execution of this
AGREEMENT, and the amendments and modifications to be made to the LOAN
AGREEMENT, as described herein, shall: (a) constitute a refinance of the LOAN;
or (b) affect or impair the validity, enforceability, or priority of any of the
liens or security interests imposed by or granted in the LOAN DOCUMENTS.

4. Other Terms; Confirmation Of Obligations. Other than the foregoing, all other
terms and conditions of the LOAN DOCUMENTS shall remain in full force and effect
and are incorporated herein by reference. The OBLIGORS acknowledge, ratify and
confirm their respective obligations under the LOAN DOCUMENTS and further
acknowledge and confirm that the OBLIGORS are and shall remain absolutely and
unconditionally obligated to pay the LENDER all present and future indebtedness
that is owed to the LENDER under the LOAN DOCUMENTS, as modified hereby, in the
manner provided therein, notwithstanding the LENDER’S execution of this
AGREEMENT and any documents to be executed pursuant to this AGREEMENT, and
notwithstanding the various agreements the LENDER has set forth herein and
therein.

5. Confirmation of Subsidiary Guarantor. TLC consents to the modification and
amendment of the LOAN AGREEMENT pursuant to the terms of this AGREEMENT,
including without limitation the extension of additional financing to the
BORROWERS. TLC hereby acknowledges, ratifies and confirms that all of its
obligations under the TLC GUARANTY AGREEMENT and TLC SECURITY AGREEMENT shall
continue in full force and effect, notwithstanding the execution of this
AGREEMENT and any documents to be executed pursuant to this AGREEMENT, and
notwithstanding the various agreements of the LENDER as set forth herein and
therein. TLC hereby confirms and acknowledges that it is jointly and severally
liable, in accordance with the terms of the TLC GUARANTY AGREEMENT, for the
payment and performance of the BORROWERS’ obligations under the LOAN DOCUMENTS.

6. Guaranty and Security Agreement of Sterling Subsidiaries. STERLING SYSTEMS,
STERLING MANAGEMENT, STERLING INDIANA, and STERLING OHIO shall execute and
deliver to the LENDER a Guaranty Agreement pursuant to which they shall
guarantee, among other things, the absolute full payment and performance by
BORROWERS of their obligations to the LENDER. Each such subsidiary shall also
execute and deliver to the LENDER a Security Agreement granting to the LENDER a
lien and security in and to all of the tangible and intangible assets of such
subsidiaries.

7. Release of Hindman Guaranty. The LENDER hereby releases the HINDMAN GUARANTY,
and HINDMAN shall have no further liability under such document.

8. Security. Except as expressly modified herein, the OBLIGORS’ obligations
under the LOAN DOCUMENTS, as modified hereby, shall continue to be secured by
all of the liens, assignments, and security interests provided in the LOAN
DOCUMENTS.

9. Miscellaneous.

a. Incorporation; Limited Modification. The terms and conditions of the LOAN
DOCUMENTS are incorporated herein by reference and made a part hereof as if
fully set forth herein. Except as specifically modified by or pursuant to this
AGREEMENT, all terms and conditions of the LOAN DOCUMENTS remain unchanged, in
full force and effect, and are hereby ratified and confirmed in all respects. In
the event of any inconsistencies between the terms and conditions of this
AGREEMENT and any of the terms and conditions of the other LOAN DOCUMENTS
(except as to the specific modifications contained herein), the LENDER shall
determine, in its sole discretion, which of the terms and conditions shall
control.

 

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b. Integration. This AGREEMENT, the LOAN DOCUMENTS (as modified), and any other
documents executed pursuant to or in connection with this AGREEMENT constitute
the entire agreement between the LENDER and the OBLIGORS with respect to the
subject matter hereof, and any term or condition not expressed therein does not
constitute a part of the agreement of the LENDER and the OBLIGORS with respect
to such subject matter.

c. Severability. If any provision or part of any provision of this AGREEMENT
shall for any reason be held invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provision of this AGREEMENT and this AGREEMENT 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.

d. Number, Gender, And Captions. As used herein, the singular shall include the
plural and the plural may refer to only the singular. The use of any gender
shall be applicable to all genders. The captions contained herein are for
purposes of convenience only and are not a part of this AGREEMENT.

e. Further Assurances. As part of this AGREEMENT, and in consideration for the
agreements of the LENDER as set forth therein, each OBLIGOR agrees to execute
and deliver to the LENDER such other and further documents as may, from time to
time, in the sole opinion of the LENDER and the LENDER’S counsel, be necessary
or appropriate to carry out the terms and conditions of this AGREEMENT and the
LOAN DOCUMENTS. If any OBLIGOR fails to execute any such documents within ten
(10) days of being requested to do so by the LENDER, such OBLIGOR hereby
appoints the LENDER or any officer of the LENDER as the attorney in fact for
such OBLIGOR for purposes of executing such documents in the name, place and
stead of such OBLIGOR, which power of attorney shall be considered as coupled
with an interest and irrevocable.

f. Waivers. No failure or delay by the LENDER in the exercise or enforcement of
any of its rights under any LOAN DOCUMENT shall be a waiver of such right or
remedy, nor shall a single or partial exercise or enforcement thereof preclude
any other or further exercise or enforcement thereof or the exercise or
enforcement of any other right or remedy. The LENDER may at any time or from
time to time waive all or any rights under this AGREEMENT or any of the LOAN
DOCUMENTS, but any such waiver must be specific and in writing and no such
waiver shall constitute, unless specifically so expressed by the LENDER in
writing, a future waiver of performance or exact performance by any OBLIGOR. No
notice to or demand upon any OBLIGOR in any instance shall entitle such OBLIGOR
(or any other OBLIGOR) to any other or further notice or demand in the same,
similar or other circumstance.

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

h. Consent To Jurisdiction; Agreement As To Venue. Each OBLIGOR 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. Each OBLIGOR 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 waive 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.

 

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i. Binding Effect; No Oral Modification. This AGREEMENT shall be binding upon
and shall inure to the benefit of the parties and their respective personal
representatives, successors and assigns. This AGREEMENT may not be altered,
modified or amended unless such alteration, modification or amendment is in
writing and executed by the LENDER.

j. Time. Time is of the essence with respect to all of the obligations of the
OBLIGORS under this AGREEMENT and the LOAN DOCUMENTS.

k. Costs Of Transaction. All costs of the transactions contemplated by this
AGREEMENT, including without limitation all of attorneys’ fees and expenses
incurred by the LENDER, shall be paid by the BORROWER, regardless of whether
such costs are incurred before or after the execution and delivery of this
AGREEMENT.

10. Release; Waiver. As part of the agreements set forth herein, and in
consideration of the same, each OBLIGOR hereby releases the LENDER and all of
the LENDER’S past, present and future directors, officers, employees, agents and
attorneys from any and all claims, causes of action, suits and damages
(including claims for attorneys’ fees) which any of the OBLIGORS, jointly or
severally or otherwise, ever had or now have against the LENDER or any of the
LENDER’S past, present and future directors, officers, employees, agents or
attorneys. Without limiting the generality of the foregoing, each OBLIGOR
acknowledges and agrees that there exists no offset or defense to the
obligations of any OBLIGOR as stated in the LOAN DOCUMENTS.

11. 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 AGREEMENT, or any of their successors or assigns, on or with respect to
this AGREEMENT or any LOAN DOCUMENT or which in any way relates, directly or
indirectly, to the obligations of the OBLIGORS to the LENDER under this
AGREEMENT or any LOAN DOCUMENT, 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 PROCEEDINGS. The
parties acknowledge and agree that this provision is a specific and material
aspect of the agreement between the parties and that the parties would not enter
into this AGREEMENT if this provision were not contained herein.

[SIGNATURES BEGIN ON FOLLOWING PAGE]

 

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IN WITNESS WHEREOF, the parties have executed this AGREEMENT as of the date
first above written with the specific intention of creating a document under
seal.

 

WITNESS/ATTEST:     BORROWERS:       AVATECH SOLUTIONS, INC.,       A Delaware
Corporation   /s/ Stephen D. Palmer     By:   /s/ Lawrence Rychlak   (SEAL)    
    Lawrence Rychlak,           Executive Vice President and Chief Financial
Officer       AVATECH SOLUTIONS SUBSIDIARY, INC.,       A Delaware Corporation  
/s/ Stephen D. Palmer     By:   /s/ Lawrence Rychlak   (SEAL)         Lawrence
Rychlak,           Executive Vice President and Chief Financial Officer      
TLC:       TECHNICAL LEARNINGWARE COMPANY, INC.,       A Delaware Corporation  
/s/ Stephen D. Palmer     By:   /s/ Lawrence Rychlak   (SEAL)         Lawrence
Rychlak,           Executive Vice President and Chief Financial Officer      
LENDER:       MERCANTILE-SALE DEPOSIT AND TRUST COMPANY /s/ Lawrence Rychlak    
By:   /s/ Stephen D. Palmer   (SEAL)         Stephen D. Palmer, Senior Vice
President  

 

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