LOAN
      AGREEMENT

     

    THIS
      AGREEMENT (as
      the
      same may be amended, restated or otherwise modified, the “Agreement”) is made
      this 8th day of March, 2007, between MOD-PAC
      CORP.,
      a New
      York corporation with offices at 1801 Elmwood Avenue, Buffalo, New York
      14207 (“Borrower”) and KEYBANK
      NATIONAL ASSOCIATION,
      a
      national banking association, with offices at 50 Fountain Plaza, Buffalo,
      New York 14202, and its successors and assigns (“Lender”).

    


    In
      consideration of the covenants and agreements contained herein, the Borrower
      and
      the Lender hereby mutually agree as follows:

    


    1. DEFINITIONS

     

    1.1. General.
      Any
      accounting term used but not specifically defined herein shall be construed
      in
      accordance with GAAP (as defined below). The definition of each agreement,
      document, and instrument set forth in Section 1.2 hereof shall be deemed to
      mean
      and include such agreement, document, or instrument as amended, restated, or
      modified from time to time.

     

    1.2. Defined
      Terms.
      As
      used
      in this Agreement:

     

    “Account”,
      “Account Debtor”. “Chattel Paper”, “Consumer Goods”, “Deposit Account”,
“Document”, “Equipment”, “Farm Products”, “General Intangible”, “Goods”,
“Instrument” and “Proceeds”, have the meanings as set forth in the New York
      Uniform Commercial Code, Sections 9-102(a) (2), (3) (11), (23), (29), (30),
      (33), (34), (42), (44), (47), (48) and (64) inclusive, as amended from time
      to
      time.

    


    “Affiliate”
      of any specified entity means any other entity directly or indirectly
      controlling or controlled by or under direct or indirect common control with
      such specified entity and “control”, when used with respect to any specified
      entity, means the power to direct the management and policies of such entity,
      directly or indirectly, whether through the ownership of voting securities,
      by
      contract or otherwise; and the terms “controlling” and “controlled” have
      meanings correlative to the foregoing.

    


    “Acquisition”
      means (whether in one transaction or a series of transactions) (i) any
      acquisition on a going concern basis (whether by purchase, lease or otherwise)
      of any assets (including, without limitation, Equipment), facility and/or
      business or business unit operated by any Person that is not a Subsidiary of
      Borrower, and (ii) acquisitions of a majority of the outstanding equity or
      other
      similar interests in any such Person (whether by merger, stock purchase or
      otherwise). 

    


    “Borrowing
      Base” means (a) 80% of Eligible Accounts plus (b) 40% of Eligible Inventory, but
      not to exceed One Million Five Hundred Thousand Dollars ($1,500,000.00),
      plus (c) 100% of Eligible Equipment, but not to exceed Two Million Dollars
      ($2,000,000.00).

    


    “Borrowing
      Base Certificate” means a certificate substantially in the form of attached
      Exhibit B.

    


    “Business
      Day” means a day of the year on which banks are not required or authorized to
      close in Cleveland, Ohio.

    


    “Capital
      Expenditures” means net fixed assets at the end of the period less net fixed
      assets at the beginning of the period plus depreciation expense for the period,
      excluding any fixed assets acquired through a Permitted
      Acquisition.

    


    “Cash
      Flow” means, with respect to any fiscal year, net income after taxes and/or
      dividends and other distributions (not including share repurchases permitted
      by
      this Agreement) , exclusive of extraordinary gains and losses, plus
      depreciation, amortization, non-cash goodwill impairment write-down, and
      non-cash option expense up to a maximum of $500,000.00, in each case for such
      fiscal year, minus current maturities of long term Indebtedness (but in no
      event
      the Revolving Credit) as of the last day of such fiscal year and Capital
      Expenditures, except to the extent financed by third-party debt, for such fiscal
      year.

    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    “Closing
      Costs” means costs and expenses incurred by Lender in connection with the
      closing of the transactions contemplated by this Agreement, including, without
      limitation, Lender’s attorneys’ fees and expenses, audit and appraisal
      expenses.

    


    “Code”
      shall mean the Internal Revenue Code of 1986, as amended, together with the
      rules and regulations promulgated thereunder.

    


    “Collateral”
      means the collateral in which Borrower has given the Lender a security interest
      pursuant to the Security Agreement dated of even date herewith, and any other
      instrument given to Lender to secure the Indebtedness and/or this
      Agreement.

    


    “Contract
      Right” means (a) any contract right, and (b) any right to payment under a
      contract not yet earned by performance and not evidenced by an Instrument or
      Chattel Paper.

    


    “Controlled
      Group” shall mean Borrower and each Person required to be aggregated with
      Borrower under Code Sections 414(b), (c), (m) or (o).

    


    “Deposit
      Account” means (a) any deposit account, and (b) any demand, time, savings,
      passbook, or a similar account maintained with a bank, savings and loan
      association, credit union, or similar organization, other than an account
      evidenced by a certificate of deposit.

    


    “EBITDA”
      means, with respect to any fiscal year, the net income of Borrower plus the
      aggregate amounts deducted in determining such net income in respect of interest
      expenses, taxes, depreciation, amortization, non-cash goodwill impairment
      write-down and non-cash option expense up to a maximum of $500,000.00, but
      not,
      however, giving effect to extraordinary losses or gains in calculating net
      income; in each case for such fiscal year. 

    


    “Eligible
      Accounts” mean all bona fide Accounts (up to 90 days from date of invoice) of
      Borrower, except the following:

    


    
      	 	
              (a)

            	
              Accounts
                subject to any pending claim for credit, allowance, or adjustment
                or any
                set off or counterclaim other than discounts granted in the ordinary
                course of business for prompt
                payment;

            


    

    
      	 	
              (b)

            	
              Intentionally
                Omitted.

            


    

    
      	 	
              (c)

            	
              Borrower
                has received notice of the financial impairment of the Account Debtor
                that
                may reasonably be expected to impact the Account Debtor’s ability to pay
                such Account;

            


    

    
      	 	
              (d)

            	
              Accounts
                subject to an assignment, pledge, claim, mortgage, Lien, or security
                interest of any type except that granted to or in favor of
                Lender;

            


    

    
      	 	
              (e)

            	
              the
                Goods which are the subject of the Account have been rejected, returned,
                or acceptance has been revoked or
                refused;

            


    

    
      	 	
              (f)

            	
              Accounts
                of the United States of America or any division or department thereof
                except if there has been compliance with the Assignment of Claims
                Act;

            


    

    
      	 	
              (g)

            	
              Accounts
                due from any Subsidiary, shareholder or employee of Borrower;
                

            


    

    
      	 	
              (h)

            	
              Accounts
                owed by Account Debtors that are not located in, and organized under
                the
                laws of, the United States or Canada, or a state or province thereof;
                

            


    

    
      	 	
              (i)

            	
              Accounts
                Lender deems unacceptable subject to standards of commercial
                reasonableness.

            


    

    


    “Eligible
      Equipment” means all Equipment except
      Equipment which is:

    


    
      	
            	(a)	
              located
                outside the United States;

            


    

    
      	
            	(b)	
              damaged,
                defective or obsolete;

            


    

    
      	
            	(c)	
              subject
                to a purchase money or other Lien except in favor of Lender;
                or

            


    

    
      	
            	(d)	
              determined
                by Lender, subject to standards of commercial reasonableness, to
                be
                unsatisfactory in any
                respect.

            


    

    


    
      
        
        

      

      
        -2-

        
          

        

      

      
        
        

      

    

    “Eligible
      Inventory” means all Inventory except
      Inventory which is:

    


    
      	 	
              (a)

            	
              work
                in process;

            


    

    
      	 	
              (b)

            	
              located
                outside the United States;

            


    

    
      	 	
              (c)

            	
              in
                the possession of a bailee or a third party, unless such bailee or
                third
                party has signed a waiver letter in form reasonably acceptable to
                Lender;

            


    

    
      	 	
              (d)

            	
              damaged,
                defective, or obsolete; 

            


    

    
      	 	
              (e)

            	
              held
                by Borrower or a third party on consignment;
                or

            


    

    
      	 	
              (f)

            	
              determined
                by Lender, subject to standards of commercial reasonableness, that
                the
                Inventory is unsatisfactory in any
                respect.

            


    

    


    “Environmental
      Law” means any federal, state or local statute, law, ordinance, code, rule,
      regulation, order or decree regulating, relating to, or imposing liability
      upon
      a Person in connection with the use, release or disposal of any hazardous,
      toxic
      or dangerous substance, waste or material.

    


    “ERISA”
      shall mean the Employee Retirement Income Security Act of 1974, as amended
      from
      time to time, and the regulations promulgated pursuant thereto.

    


    “ERISA
      Event” shall mean (a) with respect to an ERISA Plan, the imposition of an excise
      tax or any other liability on Borrower or the imposition of a Lien on the assets
      of Borrower; (b) the engagement by a Controlled Group member in a
      non-exempt “prohibited transaction” (as defined under ERISA Section 406 or Code
      Section 4975) or a breach of a fiduciary duty under ERISA that could result
      in
      liability to Borrower; (c) the application by a Controlled Group member for
      a waiver from the minimum funding requirements of Code Section 412 or ERISA
      Section 302 or the occurrence of an event or condition that requires a
      Controlled Group member to provide security under Code Section 401(a)(29) or
      ERISA Section 307; (d) the occurrence of a Reportable Event with respect to
      any
      Pension Plan as to which notice is required to be provided to the PBGC; (e)
      the
      withdrawal by a Controlled Group member from a Multiemployer Plan in a
“complete withdrawal” or a “partial withdrawal” (as such terms are defined in
      ERISA Sections 4203 and 4205, respectively); (f) the involvement of, or
      occurrence or existence of any event or condition that makes likely the
      involvement of, a Multiemployer Plan in any reorganization under ERISA Section
      4241; (g) the failure of an ERISA Plan (and any related trust) that is
      intended to be qualified under Code Sections 401 and 501 to be so qualified
      or
      any “cash or deferred arrangement” under any such ERISA Plan to meet the
      requirements of Code Section 401(k); (h) the taking by the PBGC of any steps
      to
      terminate a Pension Plan or appoint a trustee to administer a Pension Plan,
      or
      the taking by a Controlled Group member of any steps to terminate a Pension
      Plan; (i) the failure by a Controlled Group member or an ERISA Plan to
      satisfy any requirements of law applicable to an ERISA Plan; (j) the
      commencement, existence or threatening of the incurrence by a Controlled Group
      member of a claim, action, suit, audit or investigation with respect to an
      ERISA
      Plan, other than a routine claim for benefits; or (k)  the incurrence by a
      Controlled Group member of any liability for post-retirement benefits under
      any
      Welfare Plan, other than as required by ERISA Section 601, et. seq.
      or Code
      Section 4980B.

    


    “ERISA
      Affiliate” means each Person (whether or not incorporated) which together with
      Borrower would be treated as a single employer under ERISA.

    


    “ERISA
      Plan” shall mean an “employee benefit plan” (within the meaning of ERISA Section
      3(3)) that a Controlled Group member at any time sponsors, maintains, or with
      respect to which a Controlled Group member, makes, or is obligated to make
      contributions, or has otherwise incurred liability.

    


    “Event
      of
      Default” means any one or more of the occurrences described in Section 6
      hereof.

    


    “GAAP”
      means generally accepted accounting principles as in effect from time to time,
      which shall include the official interpretations thereof by the Financial
      Accounting Standards Board, consistently applied, except any changes in
      generally accepted accounting principles shall not be taken into consideration
      for the purposes of covenant calculations under Sections 5.22 and 5.23 until
      such time as the Lender and Borrower have amended such covenants in light of
      such changes in generally accepted accounting principles such that the
      performance standards reflected by such covenants as so amended are
      substantially equivalent to those in effect on the date hereof applying
      generally accepted accounting principles as in effect on the date hereof.


    


    
      
        
        

      

      
        -3-

        
          

        

      

      
        
        

      

    

    “Guarantor”
      means each Person that now or hereafter guarantees any portion of the Borrower’s
      Indebtedness payable to the Lender, and such Person’s heirs, administrators,
      successors and assigns.

    


    “Guaranty”
      means any guaranty agreement executed by a Guarantor and delivered to
      Lender.

    


    “Indebtedness”
      shall mean, for any Person (excluding in all cases trade payables payable and
      accrued liabilities in the ordinary course of business by such Person), (a)
      all
      obligations to repay borrowed money, direct or indirect, incurred, assumed,
      or
      guaranteed, (b) all obligations for the deferred purchase price of capital
      assets, (c) all obligations under conditional sales or other title retention
      agreements, (d) all obligations (contingent or otherwise) under any letter
      of
      credit, banker’s acceptance, currency swap agreement, or Interest Rate
      Agreement, (e) all synthetic leases, (f) all lease obligations that have been
      or
      should be capitalized on the books of such Person in accordance with GAAP,
      (g)
      all obligations of such Person with respect to asset securitization financing
      programs to the extent that there is recourse against such Person or such Person
      is liable (contingent or otherwise) under any such program, (h) all obligations
      to advance funds to, or to purchase assets, property or services from, any
      other
      Person in order to maintain the financial condition of such Person, and (i)
      any
      other transaction (including forward sale or purchase agreements) having the
      commercial effect of a borrowing of money entered into by such Person to finance
      its operations or capital requirements.

    


    “Interest
      Rate Agreement” means any agreement for a derivative or hedging product,
      including, without limitation, interest rate or equity swaps, futures, options,
      caps, floors, collars, or forwards now or hereafter executed by and between
      Borrower and Lender or any Lender Affiliate. 

    


    “Inventory”
      is as defined in the UCC and means, without limitation, goods, merchandise
      and
      other personal property furnished under any contract of service or intended
      for
      sale or lease, including, without limitation, and all raw materials, work in
      process, finished goods and materials and supplies, of any kind, nature or
      description, that are used or consumed by Borrower’s business, or are or might
      be used in connection with the manufacture, packing, shipping, advertising,
      selling or finishing such goods, merchandise and other personal property, and
      all returned or repossessed goods now or hereafter in the possession of or
      under
      the control of Borrower, wherever located.

    


    “L/C
      Sublimit” means the aggregate undrawn face value of all Letters of Credit
      permitted in Paragraph 2.4.

    


    “Lender
      Affiliate” means any one or more bank or non-bank subsidiaries (other than the
      Lender) of KeyCorp and its successors.

    


    “Letter
      of Credit” means any outstanding letter of credit issued by Lender on behalf of
      Borrower.

    


    “Lien”
      means any mortgage, security interest, lien, charge, encumbrance on, pledge
      or
      deposit of, or conditional sale or other title retention agreement with respect
      to any property or asset.

    


    “Loan”
or
      “Loans” means the credit to the Borrower extended by the Lender in accordance
      with Section 2 hereof.

    


    “Loan
      Documents” means the collective reference to this Agreement and all other
      instruments, agreements and documents entered into from time to time, evidencing
      or securing the Loan or any obligation of payment thereof or performance of
      Borrower’s or Guarantor’s obligations in connection with the transaction
      contemplated hereunder, each as amended.

    


    “Margin
      Stock” shall have the meaning given to it under Regulation U of the Board of
      Governors of the Federal Reserve System, as amended from time to
      time.

    


    “Material
      Adverse Effect” means any condition or event that Lender reasonably determines
      has had or is reasonably likely to have a material adverse effect on (a) the
      business, operations, property or condition (financial or otherwise) or
      prospects of Borrower, (b) the business, operations, property, condition
      (financial or otherwise) or prospects of Borrower and its Subsidiaries, if
      any,
      taken as a whole, or (c) the validity or enforceability of this Agreement or
      any
      of the other Loan Documents or the rights and remedies of Lender hereunder
      or
      thereunder.

    


    
      
        
        

      

      
        -4-

        
          

        

      

      
        
        

      

    

    “Multiemployer
      Plan” shall mean a Pension Plan that is subject to the requirements of Subtitle
      E of Title IV of ERISA.

    


    “Note”
or
      “Notes” means, as the case may be, the promissory note(s) signed and delivered
      by the Borrower to evidence its Indebtedness to the Lender pursuant to Section
      2
      hereof . 

    


    “Obligation”
      or “Obligations” means, collectively, (a) all Indebtedness and other obligations
      incurred by Borrower to Lender pursuant to this Agreement and includes the
      principal of and interest on all Notes; (b) each extension, renewal or
      refinancing thereof in whole or in part; (c) the commitment and other fees,
      and
      any prepayment fees payable under this Agreement or any other Loan Document;
      (d)
      every other liability, now or hereafter owing to any Lender Affiliate by
      Borrower under any Interest Rate Agreement entered into by Borrower with such
      Lender Affiliate; and (e) every other liability to Lender, whether owing by
      only
      Borrower or by Borrower with one or more others in a several, joint or joint
      and
      several capacity, whether owing absolutely or contingently, whether created
      by
      note, overdraft, guaranty of payment, Interest Rate Agreement or other contract
      or by quasi-contract, tort, statute or other operation of law, whether incurred
      directly to Lender or acquired by Lender by purchase, pledge or otherwise and
      whether participated to or from Lender in whole or in part; and (e) all Related
      Expenses.

    


    “Obligor”
      shall mean (a) a Person whose credit or any of whose property is pledged to
      the
      payment of the Obligations and includes, without limitation, any Guarantor,
      and
      (b) any signatory to a Loan Document.

    


    “Organization”
      means a corporation, government or government subdivision or agency, business
      trust, estate, trust, partnership, association, two or more Persons having
      a
      joint or common interest, and any other legal or commercial entity.

    


    “PBGC”
      shall mean the Pension Benefit Guaranty Corporation, or its
      successor.

    


    “Pension
      Plan” shall mean an ERISA Plan that is a “pension plan” within the meaning of
      ERISA Section 3(2).

    


    “Permitted
      Acquisitions” means any Acquisition as to which all of the following conditions
      are satisfied:

    


    
      	 	
              (a)

            	
              such
                Acquisition involves a line or lines of business that will not
                substantially change the general nature of the business in which
                Borrower
                is engaged on the date of this Agreement.


            


    

     

    
      	 	
              (b)

            	
              no
                Event of Default or Potential Default shall exist prior to or immediately
                after giving effect to such
                Acquisition;

            


    

     

    
      	 	
              (c)

            	
              after
                giving effect to such Acquisition, the purchase price for Borrower’s total
                Acquisitions will not exceed Two Million Five Hundred Thousand Dollars
                ($2,500,000.00). For this purpose, “purchase price” means the amount of
                cash paid in such Acquisition (excluding amounts to be paid under
                any
                earn-out or similar provisions based on performance), plus the amount
                of
                any liabilities assumed other than trade payables and accrued liabilities
                incurred in the ordinary course of
                business.

            


    

     

    “Permitted
      Encumbrances” means, as of any particular time, (a) liens for ad valorem taxes
      and special assessments not then delinquent, (b) this Agreement, and any
      security interest or other lien created thereby, (c) any Permitted Encumbrances
      defined in any of the Loan Documents, including, without limitation, as defined
      in any Security Instrument, (d) any liens permitted by Section 5.15 hereof,
      and
      (e) such minor defects, irregularities, encumbrances and clouds on title as
      normally exist with respect to property similar in character to the Collateral
      and as do not materially interfere with or impair the use or value of the
      property affected thereby.

    


    “Person”
      means an individual or an Organization.

    


    “Plan”
      means any ERISA Plan (other than a Multiemployer Plan) in which the Borrower
      or
      any Subsidiary is, or has been at any time during the preceding two (2) years,
      an “employer” or a “substantial employer” as such terms are defined in
      ERISA.

    


    
      
        
        

      

      
        -5-

        
          

        

      

      
        
        

      

    

    “Potential
      Default” means any condition, action, or failure to act which, with the passage
      of time, service of notice, or both, will constitute an Event of Default under
      this Agreement.

    


    “Proceeds”
      means (a) any proceeds, and (b) whatever is received upon the sale, exchange,
      collection, or other disposition of Collateral or Proceeds, whether cash or
      non-cash. Cash Proceeds includes, without limitation, moneys, checks, and
      Deposit Accounts. Proceeds includes, without limitation, any Account arising
      when the right to payment is earned under a Contract Right, any insurance
      payable by reason of loss or damage to the Collateral, and any return or
      unearned premium upon any cancellation of insurance. Except as expressly
      authorized in the Agreement or the Security Instruments, Lender's right to
      Proceeds specifically set forth herein or indicated in any financing statement
      shall never constitute an express or implied authorization on the part of Lender
      to Borrower’s sale, exchange, collection, or other disposition of any or all of
      the Collateral.

    


    “Prohibited
      Transaction” means a “prohibited transaction” within the meaning of ERISA
      Section 406 or Code Section 4975, other than any transaction subject to a
      statutory or administrative exemption.

     

    “Quarters”
      or “Quarterly” means calendar quarters, being each of the three (3) calendar
      month periods ending 3/31, 6/30, 9/30 and 12/31 of each calendar
      year.

    


    “Related
      Expenses” means any and all costs, liabilities, and expenses (including, without
      limitation, losses, damages, penalties, claims, actions, reasonable attorney’s
      fees, legal expenses, judgments, suits and disbursements) reasonably incurred
      by, or imposed upon, or asserted against, Lender in any attempt by
      Lender:

    


    (a) to
      obtain, preserve, perfect, or enforce any security interest evidenced by (i)
      this Agreement, or (ii) any other pledge agreement, mortgage, deed of trust,
      hypothecation agreement, guaranty, security agreement, assignment, or security
      instrument executed or given by Borrower to or in favor of Lender;

    


    (b) to
      obtain
      payment, performance, and observance of any and all of the
      Obligations;

    


    (c) to
      maintain, insure, audit, inspect, collect, preserve, repossess, and dispose
      of
      any of the Collateral, including, without limitation, costs and expenses for
      appraisals, assessments, and audits of Borrower or the Collateral;
      or

    


    (d) incidental
      or related to (a) through (c) above, including, without limitation, interest
      thereupon from the date due and payable by Borrower at the rate payable as
      set
      forth in the Note, but in no event greater than the highest rate permitted
      by
      law;

    


    provided,
      however, under no circumstance shall Related Expenses include any Closing
      Cost.

    


    “Related
      Person” means any Person who (i) now or hereafter owns an equity interest in
      Borrower or Guarantor or (ii) has warrants, debentures, or similar rights to
      own
      any equity interest in Borrower or Guarantor, whether or not the same has vested
      or been delivered or (iii) is owned, in whole or in part, by Borrower or
      Guarantor. 

    


    “Reportable
      Event” shall mean a reportable event as that term is defined in Title IV of
      ERISA, except actions of general applicability by the Secretary of Labor under
      Section 110 of ERISA

    


    “Revolving
      Credit” means the Revolving Credit Facility described in Section 2.2 hereof,
      which Revolving Credit shall be payable in accordance with the terms of such
      Revolving Credit Facility and this Agreement.

    


    “SEC”
      means the United States Securities and Exchange Commission.

    


    “Security
      Instrument(s)” means the written document(s) listed in Exhibit A attached
      hereto, signed and delivered from time to time to the Lender in connection
      with
      Indebtedness owed by Borrower to the Lender.

    


    “Subsidiary”
      means any Person of which more than fifty percent (50%) of the following is,
      at
      the time, owned or controlled, directly or indirectly, by Borrower or one or
      more other Subsidiaries: (i) the voting stock or units entitling the holders
      thereof to elect a majority of the board of directors, managers, or trustees
      thereof, or (ii) the interest in the capital or profits of such
      Person.

    


    
      
        
        

      

      
        -6-

        
          

        

      

      
        
        

      

    

    “Termination
      Date” means March 8, 2010, or such earlier date that Lender has terminated the
      Revolving Credit under Section 7.1 hereof, or Borrower has terminated the
      Revolving Credit under Section 2.5 hereof.

    


    “Total
      Funded Debt” means the sum without duplication for Borrower and/or any of its
      subsidiaries of (1) all indebtedness for borrowed money, whether maturing in
      less than or more than one year, plus (2) all bonds, notes, debentures or
      similar debt instruments plus (3) all capitalized lease obligations plus (4)
      the
      present value of all basic rental obligations under any synthetic
      lease.

    


    “Welfare
      Plan” means an ERISA Plan that is a “welfare plan” within the meaning of ERISA
      Section 3(1).

     

    The
      foregoing definitions shall be applicable to the singulars and plurals of the
      foregoing defined terms.

     

    2. CREDIT
      FACILITIES

     

    2.1. Intentionally
      Omitted.
      

     

    2.2. Revolving
      Credit Facility.
      The
      Lender hereby agrees, subject to the terms and conditions of this Agreement
      and
      the Promissory Note of Borrower to the Lender of even date herewith, to extend
      the Revolving Credit to Borrower, at any time on or before the Termination
      Date,
      as follows: Lender will, upon request from Borrower, make loan advances to
      or
      for the account of Borrower up to but not exceeding an aggregate unpaid
      principal amount outstanding at any one time equal to the lesser of
      (i) Eight Million Dollars ($8,000,000.00) or (ii) the Borrowing Base.


     

    2.3. Fees.
      The
      Borrower shall pay the Lender the following fees:

     

    
      	 	
              (a)

            	
              A
                commitment fee on the actual daily Unused Portion (as defined below)
                on
                and from the date hereof to and including the Termination Date, at
                the
                rate of thirty basis points (0.30%) per annum (using a day rate based
                upon
                a year of 360 days and charged for the actual number of days elapsed),
                payable on the last day of each month commencing March 31, 2007, and
                upon termination or reduction of the Revolving Credit. The “Unused
                Portion” means, on any day, the maximum amount of the Revolving Credit (as
                the same may be reduced pursuant to Section 2.5 below) on such day,
                less
                the aggregate principal amount of the Loans and Letters of Credit
                outstanding on such day.

            


    

    


    
      	 	
              (b)

            	
              A
                facility fee equal to $48,000.00, payable on or prior to the date
                of
                execution of this Agreement.

            


    

    


    
      	 	
              (c)

            	
              Borrower
                agrees to pay Lender a letter of credit fee of 1.5% per annum of
                the
                amount of any issued and outstanding standby Letters of Credit, payable
                for each day the letter of credit is outstanding at a rate of
                1/360th
                of
                the applicable per annum rate, quarterly in advance. Borrower agrees
                to
                pay Lender a letter of credit fee for any trade letter of credit
                consistent with Lender’s standard fees for trade letters of
                credit.

            


    

    


    2.4. Letter
      of Credit.
      So long
      as no event of default has occurred and/or no demand for payment of the Note
      has
      been made, and subject to the other conditions of the Loan Documents, Borrower
      may request Lender to issue Letters of Credit under the Revolving Credit for
      the
      account of Borrower, provided that (a) the aggregate undrawn face value of
      all
      such Letters of Credit at any time outstanding does not exceed $1,500,000.00
      (“L/C Sublimit”), and (b) the L/C Sublimit when combined with the amount of
      advances outstanding under the Note, does not exceed the amount of the
      Note.

     

    
      
        
        

      

      
        -7-

        
          

        

      

      
        
        

      

    

    
      	 	
              (a)

            	
              The
                following types of Letters of Credit can be issued hereunder:
                

            


    

    


    financial
      standby and trade Letters of Credit up to an aggregate of $1,500,000,


    


    
      	 	
              (b)

            	
              Whenever
                a Letter of Credit is drawn, unless the amount drawn is immediately
                reimbursed by Borrower, the amount of the draw shall be an advance
                under
                the Note. 

            


    

    


    
      	 	
              (c)

            	
              For
                each Letter of Credit required by Borrower and issued by Lender,
                Borrower
                agrees to execute and deliver to Lender an appropriate application
                and
                agreement in a form as required by Lender, and to pay such other
                service
                charges as are generally charged by Lender under its fee schedule
                in
                effect from time to time.

            


    

    


    
      	 	
              (d)

            	
              Each
                Letter of Credit issued hereunder shall be secured by any and all
                Collateral and any Guaranty agreement given to secure the
                Note.

            


    

    


    2.5
       Reduction
      of Line Limit.
      Borrower
      may, on written notice (each a “Reduction Notice”) to Lender, state its desire
      to reduce the maximum amount of the Revolving Credit available hereunder to
      any
      amount which is not less than the aggregate of the then outstanding principal
      amount of Loans and the undrawn face amount of Letters of Credit. Three (3)
      Business Days after receipt of such Reduction Notice, the obligation of Lender
      to make loans and issue Letters of Credit hereunder shall be limited to the
      amount set forth in such Reduction Notice. Any reductions of the maximum amount
      of the Revolving Credit shall be permanent and shall not be reinstated at any
      future date and any partial reduction shall be in the amount of not less than
      $1,000,000 and shall be in increments of $500,000 above such
      amount.

    


    3. WARRANTIES

     

    Borrower
      represents and warrants to the Lender (which representations and warranties
      will
      survive the delivery of the Note and the making of the Loans) that:

    


    3.1. Existence and Legal Authority.
      Borrower
      is a corporation duly organized, validly existing and in good standing under
      the
      laws of the State of New York and has all requisite power and authority to
      own
      its property and to carry on its business as now being conducted, to enter
      into
      the Loan Documents to which it is a party and the other agreements referred
      to
      herein and transactions contemplated thereby, and to carry out the provisions
      and conditions of such Loan Documents to which it is a party. Borrower is duly
      qualified to do business and is in good standing in every jurisdiction where
      the
      failure to so qualify would have a Material Adverse Effect.

     

    3.2. Due Execution and Delivery.
      Borrower
      has full power, authority and legal right to incur the obligations provided
      for
      in, and to execute and deliver and to perform and observe the terms and
      provisions of, the Loan Documents to which it is a party, and each of them
      has
      been duly executed and delivered by Borrower and has been authorized by all
      required action, and Borrower has obtained all requisite consents to the
      transactions contemplated thereby under any instrument to which it is a party,
      and the Loan Documents constitute the legal, valid and binding obligations
      of
      Borrower enforceable against Borrower in accordance with their respective terms,
      except as the enforceability thereof may be limited by applicable bankruptcy,
      insolvency or other similar laws affecting creditors' rights
      generally.

     

    3.3. No Breach of Other Instruments.
      Neither
      the execution and delivery of the Loan Documents, nor the compliance by Borrower
      with the terms and conditions of the Loan Documents, nor the consummation of
      the
      transactions contemplated thereby, will conflict with or result in a breach
      of
      the Articles of Incorporation or By-Laws, as applicable, or other governing
      documents of Borrower, or any of the terms, conditions or provisions of any
      agreement or instrument or any charter or other corporate restriction or law,
      regulation, rule or order of any governmental body or agency to which Borrower
      is now a party or is subject, or imposition of a lien, charge or encumbrance
      of
      any nature whatsoever upon any of the property or assets of Borrower pursuant
      to
      the terms of any such agreement or instrument.

     

    
      
        
        

      

      
        -8-

        
          

        

      

      
        
        

      

    

    3.4. Government Authorization.
      No
      consent, approval, authorization or order of any court or governmental agency
      or
      body is required for the consummation by Borrower of the transactions
      contemplated by the Loan Documents.

     

    3.5. Ownership
      of Property.
      Except
      for Permitted Encumbrances or as otherwise permitted in the Security Instruments
      or this Agreement, Borrower has and will have good and marketable fee title
      to,
      or valid leasehold interests in, its real properties in accordance with the
      laws
      of the jurisdiction where located, and good and marketable title to
      substantially all its other property and assets, subject, however, in the case
      of real property, to title defects and restrictions which do not materially
      interfere with the operations conducted thereon by Borrower. Except for
      Permitted Encumbrances, the real property and all other property and assets
      of
      the Borrower is free from any liens or encumbrance securing Indebtedness and
      from any other liens, encumbrances, charges or security interests of any kind.
      Each lease, if any, to which Borrower is a party is in full force and effect,
      and no material default on the part of Borrower or, to its knowledge, any other
      party thereto exists.

     

    3.6. Absence of Defaults, etc.
      The
      Borrower is not (i) in material default under any indenture or contract or
      agreement to which it is a party or by which it is bound, (ii) in violation
      of
      its articles of incorporation or by -laws, as applicable, or any other governing
      document, (iii) in default with respect to any order, writ, injunction or decree
      of any court, or (iv) in default under any order or license of any federal
      or
      state governmental department, which in the case of any such default described
      in clauses (i) through and including (iv) has had or could be reasonably
      expected to have Material Adverse Effect . There exists no condition, event
      or
      act which constitutes, or after notice or lapse of time or both would
      constitute, an Event of Default.

     

    3.7. Indebtedness of Borrower.
      Borrower
      does not have outstanding on the date hereof, any Indebtedness for borrowed
      money, except for such Indebtedness identified in the financial statements
      referred to in Section 3.8 hereof.

     

    3.8. Financial
      Condition.
      The
      Borrower has furnished to the Lender financial statements which, in the opinion
      of Borrower, fairly and accurately reflect the financial operations of Borrower
      for the period covered thereby, and there has been no material adverse change
      in
      the Borrower’s financial prospects since the date of such financial statements
      which would require revision of the same. 

     

    3.9. No Adverse Change.
      Subsequent
      to the date of the financial statements referred to in Section 3.8 hereof,
      Borrower has not incurred or agreed to incur any material liabilities or
      obligations, direct or contingent, and there has not been any material increase
      in the anticipated aggregate amount of debt of Borrower, or any other event
      or
      condition that has had or could reasonably be expected to have a Material
      Adverse Effect. 

     

    3.10. Taxes.
      Except
      as
      set forth on Schedule 3.10 attached , Borrower has filed all tax returns which
      are to be filed and has paid, or has made adequate provision for the payment
      of,
      all taxes which have or may become due pursuant to said returns or to
      assessments received by them (except nothing herein shall require Borrower
      to
      pay any tax or assessment that Borrower is diligently contesting in good faith,
      and with respect to which Borrower has established adequate reserves on its
      books. The provisions for taxes reflected in the financial statements referred
      to in Section 3.8 are believed adequate to cover any and all accrued and unpaid
      taxes for which Borrower is liable for the period ended on the date of such
      balance sheet and all prior periods. Borrower knows of no deficiency assessment
      or proposed deficiency assessment of taxes for which Borrower may be liable,
      except as may be otherwise disclosed in writing to the Lender prior to the
      date
      hereof.

     

    3.11. Litigation.
      Except
      as
      set forth on Schedule 3.11 attached, prior to the date hereof, there are no
      actions, suits or proceedings pending, or to the actual knowledge of Borrower,
      threatened against or affecting Borrower or its respective property in any
      court, or before or by any federal, state or municipal or other governmental
      department, commission, board, bureau, agency or other instrumentality, domestic
      or foreign, except for actions, suits or proceedings of a character normally
      incident to the kind of business conducted by Borrower, none of which, either
      individually or in the aggregate has had or reasonably could be expected to
      result in a Material Adverse Effect.

     

    
      
        
        

      

      
        -9-

        
          

        

      

      
        
        

      

    

    


    3.12. Environmental Matters.
      Borrower
      is in compliance with all Environmental Laws and all applicable federal, state
      and local health and safety laws, regulations, ordinances or rules, the failure
      to comply with has had or could be reasonably expected to have a Material
      Adverse Effect..

     

    3.13. Subsidiaries
      and Affiliates.
      Except
      as
      set forth on Schedule 3.13, Borrower does not have any Subsidiaries or any
      Affiliates. If Borrower has any additional Subsidiary or Affiliate at any time
      subsequent to the date of execution hereof, the term “Borrower” as used in
      Sections 5 and 6 shall include in its meaning Borrower and its Subsidiaries,
      for
      such period or periods that Borrower has any Subsidiaries, unless the context
      clearly requires otherwise. For any period during which Borrower has any
      Subsidiaries, all financial statements, accounts and reports submitted by the
      Borrower and all calculations hereunder based on same shall be consolidated
      and/or on a consolidating basis or combined and/or on a combining basis with
      such Subsidiaries, as the context required. 

     

    3.14. ERISA.
      No
      Reportable Event or Prohibited Transaction which could reasonably be expected
      to
      create a liability in excess of Five Hundred Thousand Dollars ($500,000.00)
      or
      result in a Material Adverse Effect has occurred and is continuing with respect
      to any Plan of Borrower, and Borrower has not incurred an “accumulated funding
      deficiency” (as that term is defined by ERISA) since the effective date of
      ERISA.

     

    3.15. Solvency.
      The
      Borrower is not insolvent as defined in any applicable state or federal
      fraudulent transfer, fraudulent conveyance or bankruptcy or similar creditors’
rights statute, nor will Borrower be rendered insolvent by the execution and
      delivery of this Agreement or any of the Loan Documents to Lender. The Borrower
      is not engaged or about to engage in any business or transaction for which
      the
      assets retained by it shall constitute an unreasonably small capital, taking
      into consideration the obligations to Lender incurred hereunder. Borrower does
      not intend to, nor does it believe that it will, incur debts beyond its ability
      to pay them as they mature.

     

    3.16. No
      Burdensome Restrictions.
      Borrower
      is not a party to any instrument or agreement or subject to any charter or
      other
      corporate restriction which would reasonably be expected to result in a Material
      Adverse Effect.

     

    3.17. Federal
      Reserve Regulations; Use of Loan Proceeds.
      Borrower is not engaged principally, or as one of its important activities,
      in
      the business of extending credit for the purpose of purchasing or carrying
      any
      Margin Stock. No part of the proceeds of the Loans will be used, directly or
      indirectly, for a purpose which violates any law, rule or regulation of any
      governmental body, including without limitation the provisions of Regulations
      G,
      U, or X of the Board of Governors of the Federal Reserve System, as amended.
      No
      part of the proceeds of the Loans will be used, directly or indirectly, to
      purchase or carry any Margin Stock or to extend credit to others for the purpose
      of purchasing or carrying any Margin Stock. 

     

    3.18. OFAC/USA
      PATRIOT Act Restrictions.
      Neither
      Borrower nor any Guarantor is (or will be) a person with whom Lender is
      restricted from doing business under regulations of the Office of Foreign Asset
      Control (“OFAC”) of the Department of the Treasury of the United States of
      America (“Treasury”) or under any list of known or suspected terrorists or
      terrorist organizations issued by any federal government agency and designated
      as such by Treasury in consultation with the federal functional regulators,
      or
      under any statute, executive order, or other governmental action, and neither
      Borrower nor any Guarantor is engaging, or shall engage, in any dealings or
      transactions or shall otherwise be associated with such persons. In addition,
      Borrower hereby agrees to provide to the Lender with any additional information
      that the Lender deems necessary from to time in order to ensure compliance
      with
      all applicable laws concerning money laundering and similar
      activities.

     

    4. CONDITIONS
      OF LENDING

     

    4.1. Loan
      Funding.
      The
      obligation of the Lender to close the transactions contemplated by this
      Agreement shall be subject to satisfaction of the following conditions, unless
      waived in writing by the Lender: (a) all legal matters and Loan Documents
      incident to the transactions contemplated hereby shall be reasonably
      satisfactory, in form and substance, to Lender's counsel; (b) the Lender shall
      have received (i) certificates by an authorized officer or representative of
      Borrower upon which the Lender may conclusively rely until superseded by similar
      certificates delivered to the Lender, certifying that (1) all requisite action
      taken in connection with the transactions contemplated hereby has been duly
      authorized and (2) the names, signatures, and authority of Borrower’s authorized
      signers executing the Loan Documents, and (ii) such other documents as the
      Lender may reasonably require to be executed by, or delivered on behalf of,
      Borrower to carry out the purposes of this Agreement; (c) the Lender shall
      have
      received the Note with all blanks appropriately completed, executed by an
      authorized signer for Borrower; (d) the Borrower shall have paid to the Lender
      the fee(s) then due and payable under this Agreement and the other Loan
      Documents; (e) no Material Adverse Effect shall have occurred; (f) the Lender
      shall have received the written opinion(s) of legal counsel for the Borrower
      selected by the Borrower and satisfactory to the Lender, dated the date of
      this
      Agreement and covering the Loan Documents and such other matter(s) as the Lender
      may reasonably require; (g) the Lender shall have received written instructions
      by the Borrower with respect to disbursement of the proceeds of the Loan; and
      (h) the Lender shall have received all Security Instruments duly executed by
      all
      parties thereto.

     

    
      
        
        

      

      
        -10-

        
          

        

      

      
        
        

      

    

    4.2. Security.
      No Loan
      shall be made hereunder unless and until Borrower shall have supplied to Lender
      as security for repayment of any and all Loans made hereunder the Security
      Instruments listed on Exhibit A hereto, in form and substance reasonably
      acceptable to Lender. 

     

    4.3. Each
      Loan.
      The
      obligation of the Lender to make any Loan shall be subject to initial compliance
      with Sections 4.1 and 4.2 herein and also subject to satisfaction of the
      following conditions that at the date of making such Loan, and after giving
      effect thereto: (a) no Event of Default shall have occurred and continue to
      exist, (b) each representation and warranty set forth in Section 3 above is
      true
      and correct as if then made, and (c) for Loans under the Revolving Credit
      Facility, a true, accurate and complete Borrowing Base Certificate has been
      provided.

     

    5. COVENANTS

     

    As
      long
      as credit is available hereunder or until all principal of and interest on
      the
      Note have been paid, the Borrower covenants and agrees that it will comply
      with
      the following provisions:

    


    5.1. Accounting;
      Financial Statements and Other Information.
      Borrower shall maintain a standard system of accounting, established and
      administered in accordance with GAAP consistently followed throughout the
      periods involved, and will set aside on its books for each fiscal quarter and
      fiscal year, the proper amounts or accruals for depreciation, obsolescence,
      amortization, bad debts, current and deferred taxes, prepaid expenses, and
      for
      other purposes as shall be required by GAAP. Borrower will deliver or cause
      to
      be delivered to the Lender:

     

    (a) As
      soon
      as practicable after the end of each quarter in each fiscal year, except the
      last, and in any event within 45 days thereafter, financial statements,
      including income statement, balance sheet, statement of condition of the
      Borrower as of the end of such quarter, and statements of cash flow, changes
      in
      financial position, and common shareholder’s equity for such quarter;


    


    (b) As
      soon
      as practicable after the end of each fiscal year, and in any event within
      120 days thereafter, financial statements, including income statement,
      balance sheet, statement of condition of the Borrower as of the end of such
      year, and statement of cash flow and changes in financial position of the
      Borrower for such year, setting forth in each case in comparative form the
      figures for the previous fiscal year, all in reasonable detail and prepared
      by
      an independent certified public accountant, accompanied by a report and
      unqualified opinion of an independent certified public accountant of recognized
      standing,
      selected
      by Borrower and satisfactory to the Lender, and prepared in accordance with
      generally accepted auditing standards;

    


    (c) Together
      with each set of financial statements required under subparagraphs (a) and
      (b) a
      certificate in the form of Exhibit C, substantially in the form attached hereto,
      of the principal financial officer or other appropriate officer of Borrower
      (in
      his capacity as such officer on behalf of Borrower and not individually) stating
      (i) that the representations and warranties contained in this Agreement are
      true
      and correct in all material respects as of the date of the certificate, and
      whether or not there exists any Event of Default or Potential Default,
      specifying the nature and period of existence thereof and what action, if any,
      the Borrower is taking or proposes to take with respect thereto, and (ii) if
      such financials statements are quarterly financial statements, that such
      financial statements are complete and accurate in all material respects, subject
      to changes resulting from year-end adjustments;

    


    (d) Promptly
      and in any event within five (5) Business Days after the occurrence of a
      Reportable Event with respect to a Plan, a copy of any materials required to
      be
      filed with the PBGC with respect to such Reportable Event or those that would
      have been required to be filed if the thirty (30) day notice requirement to
      PBGC
      were not waived;

    


    
      
        
        

      

      
        -11-

        
          

        

      

      
        
        

      

    

    (e) Promptly
      upon receipt, and in no event more 10 days after receipt, of a notice by
      Borrower or any ERISA Affiliate or any administrator of any Plan or
      Multiemployer Plan that the PBGC has instituted proceedings to terminate such
      Plan or to appoint a trustee to administer such Plan, a copy of such notice;
      

    


    (f) Promptly
      upon receipt thereof, copies of all written reports submitted to the Borrower
      by
      independent accountants in connection with any annual or interim compilation
      and/or review the books of Borrower;

    


    (g) At
      the
      time of each Loan request and within twenty (20) days of each month-end during
      which any amount of the revolving Credit is outstanding, a Borrowing Base
      Certificate in form attached hereto as Exhibit B, together with a detailed
      accounts receivable and inventory report in form satisfactory to
      Lender;

    


    (h) Promptly
      after transmission thereof or other filings with the SEC, copies of all annual,
      quarterly or current reports that Borrower is required to file with the SEC
      on
      Form 10-K, 10-Q or 8-K (or any successor form); and

    


    (i) Promptly
      after transmission thereof to its stockholders, copies of all annual, quarterly
      and other reports and all proxy statements that Borrower furnishes to its
      stockholders.

    


    5.2. Additional
      Financial Reports.
      Borrower shall, upon request of Lender, deliver to the Lender its annual
      federal, state and local tax returns and such other financial information as
      Lender may reasonably request. 

     

    5.3. Insurance;
      Maintenance of Properties.
      Borrower shall: (a) maintain with financially sound and reputable insurers,
      insurance with coverage and limits as may be required by law and of such
      character and amounts as are usually maintained by companies engaged in like
      business, including without limitation products liability insurance; (b) furnish
      to Lender upon the execution of this Agreement and, at the beginning of each
      fiscal year, insurance certificates and, if requested by Lender, copies of
      insurance policies; and (c) obtain other or additional insurance promptly,
      upon
      the reasonable request of Lender, to the extent that such insurance may be
      available and is customary for the type of business in which Borrower is
      engaged. Lender shall be named a loss payee under such policies to the extent
      of
      its interest. The policies shall provide that no cancellation shall occur
      without thirty (30) days prior written notice to Lender. Borrower shall provide
      to Lender updated insurance certificates at least fifteen (15) days prior to
      the
      date of expiration. Borrower will at least annually and upon any change, or
      more
      often upon the occurrence of an Event of Default, upon request of Lender,
      furnish to the Lender a schedule of all insurance carried by Borrower, setting
      forth in detail the amount and type of such insurance. Except as otherwise
      permitted in this Agreement, Borrower will maintain, in good repair, working
      order, and condition, all properties used in the business of the Borrower,
      subject to ordinary wear and tear. 

     

    5.4. Existence;
      Business.
      Borrower shall cause to be done all things necessary to preserve and keep in
      full force and effect its existence and rights, to conduct its business in
      a
      prudent manner, to maintain in full force and effect, and renew from time to
      time, its franchises, permits, licenses, patents, and trademarks that are
      necessary to operate its business. Borrower will comply in all material respects
      with all valid laws and regulations now in effect or hereafter promulgated
      by
      any properly constituted governmental authority having jurisdiction; provided,
      however, that Borrower shall not be required to comply with any law or
      regulation which it is contesting in good faith by appropriate proceedings
      as
      long as either the effect of such law or regulation is stayed pending the
      resolution of such proceedings or the effect of not complying with such law
      or
      regulation would not reasonably be expected to result in a Material Adverse
      Effect.

     

    5.5. Payment
      of Taxes.
      Borrower shall pay all taxes, assessments, and other governmental charges levied
      upon any of its properties or assets or in respect of its franchises, business,
      income, or profits before the same become delinquent, except that no such taxes,
      assessments, or other charges need be paid if contested in good faith and by
      appropriate proceedings promptly initiated and diligently conducted and if
      proper amounts, determined in accordance with GAAP, have been set aside for
      the
      payment of all such taxes, charges, and assessments.

     

    
      
        
        

      

      
        -12-

        
          

        

      

      
        
        

      

    

    5.6. Adverse
      Changes.
      Borrower shall promptly notify the Lender in writing of (a) the occurrence
      of
      any event which, if it had existed on the date of this Agreement, would have
      required qualification of the representations and warranties set forth in
      Section 3 hereof and (b) any Material Adverse Effect.

     

    5.7. Notice
      of Default.
      Borrower shall promptly notify (but in no event more than five (5) days after
      the occurrence thereof) the Lender of any Event of Default or Potential Default
      hereunder and any demands made upon the Borrower by any Person for the
      acceleration and immediate payment of any Indebtedness owed to such Person,
      if
      the amount of such Indebtedness exceeds $500,000.00

     

    5.8. Inspection.
      Borrower shall make available for inspection by duly authorized representatives
      of the Lender, or its designated agent, Borrower’s books, records, and
      properties when reasonably requested to do so, and will furnish the Lender
      such
      information regarding its business affairs and financial condition within a
      reasonable time after written request therefor. 

     

    5.9. Environmental
      Matters. Borrower:

     

    (a) Shall
      comply in all respects with all Environmental Laws where a failure to comply
      could have a Material Adverse Effect;

    


    (b) Shall
      deliver promptly to Lender (i) copies of any significant documents received
      from
      the United States Environmental Protection Agency or any state, county, foreign,
      provincial or municipal environmental or health agency, and (ii) copies of
      any
      significant documents submitted by Borrower or any of its Subsidiaries to the
      United States Environmental Protection Agency or any state, county, foreign,
      provincial or municipal environmental or health agency concerning its
      operations; and

    


    (c) Shall
      promptly undertake and diligently pursue to completion all action recommended
      by
      any environmental audit report(s) issued and all action(s) necessary to correct
      any environmental problem or defect identified in any environmental audit
      report(s), unless Borrower contests in good faith any such determination and
      establishes within a reasonable time frame support for Borrower’s position based
      on a report of a qualified professional reasonably acceptable to
      Lender.

    


    Borrower
      shall indemnify the Lender and hold it harmless against any loss, costs,
      damages, or expense, including, but not limited to, reasonable attorney’s fees,
      that Lender may incur, directly or indirectly, as a result of or in connection
      with the assertion against Lender of any claim relating to the presence or
      removal of any environmental contamination on any premises utilized by Borrower
      (except if resulting from the gross negligence or willful misconduct of
      Lender).

    


    5.10. Health
      and Safety.
      Borrower shall be in compliance with all requirements of applicable federal,
      state, foreign, provincial and local environmental, health and safety laws,
      regulations, ordinances or rules which would, in the aggregate, if not complied
      with, result in a Material Adverse Effect.

     

    5.11. Extraordinary
      Services.
      In
      the
      event extraordinary services are required by Lender for inspections, appraisals,
      or for securing estimates of costs which, in the Lender’s reasonable judgment
      are not regular or routine, Lender may deduct the reasonable expense of such
      extraordinary services from any moneys due to Borrower hereunder or from any
      account maintained by Borrower with Lender or any Lender Affiliate.

     

    
      
        
        

      

      
        -13-

        
          

        

      

      
        
        

      

    

    5.12. Commercial
      Operating Account.
      So long
      as credit is available hereunder or until all principal of and interest on
      the
      Note has been paid in full, the Borrower shall maintain with Lender and/or
      a
      Lender Affiliate, as its primary financial institution, corporate deposit,
      cash
      management and loan accounts, where applicable, except Borrower shall be allowed
      a commercially reasonable amount of time following the date of this Agreement
      to
      transfer its existing accounts to Lender. At the option of Lender, all Loan
      payments and fees will automatically be debited from the Borrower’s primary
      operating account and all disbursements of Loan proceeds shall be made by the
      Lender’s or Lender Affiliate’s crediting of such disbursements directly into the
      appropriate Borrower’s account. 

     

    5.13. Additional
      Assurance.
      Borrower shall upon request of Lender promptly take such action and promptly
      make, execute, and deliver all such additional and further items, deeds,
      assurances, and instruments as Lender may reasonably require, so as to
      completely vest in and ensure to Lender its rights hereunder and in or to the
      Collateral.

     

    


    5.14. Sale,
      Purchase of Assets.
      Borrower shall not, directly or indirectly, (a) purchase, lease, or otherwise
      acquire any assets except in the ordinary course of business (which shall not
      be
      deemed to include the purchase or acquisition of ten percent (10%) or more
      of
      the capital stock or assets of operating businesses unless expressly consented
      to by Lender in writing prior to such purchase or acquisition) except for
      Permitted Acquisitions, purchases of its shares pursuant to any share buy back
      program for an amount in the aggregate with all other Share purchases does
      not
      exceed $2,500,000 during the term of this Agreement, or as otherwise expressly
      permitted under this Agreement; or (b) sell, lease, transfer, or otherwise
      dispose of any assets except for (i) assets sold, leased, transferred or subject
      to other disposition for full and adequate consideration in the reasonable
      judgment of Borrower which Borrower has determined to be worn out or obsolete
      or
      not useful in the ordinary course of its business, and (ii) assets sold, leased,
      transferred or subject to other disposition in the ordinary course of business
      provided that Borrower receives full and adequate consideration in the
      reasonable judgment of Borrower in exchange for such assets sold, leased,
      transferred or otherwise subject to disposition. 

     

    5.15. Mortgages,
      Security Interests, and Liens.
      Borrower
      shall not, directly or indirectly, create, incur, assume, or permit to exist
      any
      Lien with respect to any property or assets of Borrower, whether now owned
      or
      hereafter acquired other than:

     

    (a) Liens
      for
      taxes, assessments, or governmental charges or levies the payment of which
      is
      not at the time required by Section 5.5 hereof;

     

    (b) Liens
      imposed by law, such as Liens of landlords, carriers, warehousemen, mechanics,
      and materialmen arising in the ordinary course of business for sums not yet
      due
      or being contested by appropriate proceedings promptly initiated and diligently
      conducted, provided other appropriate provision, if any, as shall be required
      by
      GAAP shall have been made therefor;

     

    (c) Liens
      incurred or deposits made in the ordinary course of business in connection
      with
      workers' compensation, unemployment insurance, and other types of social
      security, or to secure the performance of tenders, statutory obligations, and
      surety and appeal bonds, or to secure the performance and return of money bonds
      and other similar obligations, excluding obligations for the payment of borrowed
      money;

     

    (d) Any
      judgment Lien, provided that the judgment it secures shall, within thirty (30)
      days after the entry thereof, have been discharged or execution therefor stayed
      pending appeal, or shall have been discharged within thirty (30) days after
      the
      expiration of any such stay;

     

    (e) Liens
      that secure the Indebtedness of Borrower for the purchase price or improvement
      of any real or personal property and that only encumber the property purchased
      or improved, provided such Indebtedness is permitted under Section 5.16 hereof;
      

     

    (f) Liens
      that secure the repayment of Indebtedness of Borrower to the Lender or any
      Lender Affiliate; or

     

    (g) Liens
      set
      forth in Schedule 5.15, or evidenced by or permitted under the terms of Security
      Instruments only, and any other Permitted Encumbrances.

     

    
      
        
        

      

      
        -14-

        
          

        

      

      
        
        

      

    

    5.16. Indebtedness
      .
      Borrower shall not (a) create, incur or assume additional indebtedness for
      borrowed money (not outstanding on the date hereof), including capital leases,
      in excess of the aggregate amount of $1,500,000 outstanding at any one time
      for
      Borrower and its Subsidiaries, except indebtedness to (i) to Lender contemplated
      by this Agreement or (ii) to any
      Subsidiary that is a Guarantor that has granted to Lender a security interest
      in
      all of its personal property pursuant to a security agreement substantially
      equivalent to the security agreement executed and delivered by Borrower to
      Lender or owing by
      such
      Subsidiary to Borrower, or (b) sell with recourse any of Borrower’s accounts,
      except to Lender. 

     

    5.17. Assumptions;
      Guaranties.
      Borrower shall not assume, guarantee, endorse, or otherwise become directly
      or
      contingently liable for (including, without limitation, liable by way of
      agreement, contingent or otherwise, to purchase, to provide funds for payment,
      to supply funds to, or otherwise invest in any debtor or otherwise to assure
      the
      creditor against loss) any obligation or Indebtedness of any other Person,
      except (i) guaranties by endorsement of negotiable instruments for deposit,
      collection, or similar transactions in the ordinary course of business, (ii)
      Indebtedness of Borrower to the Lender or any Lender Affiliate; (iii) a guaranty
      of any Indebtedness of Borrower or a Subsidiary of Borrower that is permitted
      under Section 5.16; and (iv) Borrower’s guaranty of the obligations of 1803-1807
      Elmwood Avenue LLC to NewBuff Associates LLC pursuant to a Net Lease, dated
      November 10, 2003, as may be amended from time to time. 

     

    5.18. Mergers;
      Consolidation; Sale of Borrower.
      Borrower
      shall not merge or consolidate with any Person, dissolve, wind up its affairs,
      or sell, assign, lease, or otherwise dispose of (whether in one transaction
      or
      in a series of transactions), all or substantially all of its assets (whether
      now owned or hereafter acquired) to any Person, except (a) a merger of a
      Subsidiary into Borrower, (b) a merger of a Person into Borrower in connection
      with a Permitted Acquisition or (c) or a merger with another Person that is
      or
      becomes a Borrower hereunder as of the date of such transaction and such further
      assurances with respect to any such transaction satisfactory to the Lender
      are
      delivered on or before the effective date of such transaction. 

     

    5.19. Investments;
      Loans. Borrower
      shall not, directly or indirectly, (a) purchase or otherwise acquire or own
      any
      stock or other securities of any other Person (other than as permitted under
      this Agreement) or (b) make or permit to be outstanding any loan or advance
      (other than trade advances in the ordinary course of business or as otherwise
      permitted under this Agreement) or enter into any arrangement to provide funds
      or credit, to any other Person, except that (i) it may purchase or otherwise
      acquire and own marketable U.S. Treasury and Agency obligations, and
      certificates of deposit and bankers acceptances issued or created by any
      domestic commercial bank, and the stock of any Subsidiaries identified in
      Section 3.13, (ii) it may engage in Permitted Acquisitions, (iii) it may
      makes loans and advances to any Subsidiary that is a Guarantor that has granted
      to Lender a security interest in all of its personal property pursuant to a
      security agreement substantially equivalent to the security agreement executed
      and delivered by Borrower to Lender; and (iv) it may make loans and advances
      in
      the aggregate not exceeding $500,000.

     

    5.20. Payment
      of Subordinated Debt.
      Borrower
      shall not make any payment upon any outstanding indebtedness which is
      subordinated to the Lender in violation of the terms of any applicable
      subordination agreement or terms of subordination applicable
      thereto

     

    5.21. Related
      Expenses.
      Borrower
      hereby authorizes Lender or Lender’s designated agent (but without obligation by
      Lender to do so) to incur Related Expenses (whether prior to, upon, or
      subsequent to any Event of Default), and Borrower shall promptly repay,
      reimburse, and indemnify Lender for any and all Related Expenses. Lender may,
      at
      its option, debit Related Expenses directly to the Loan Accounts or any Account
      of Borrower maintained with Lender or any Lender Affiliate; provided that Lender
      shall provide to Borrower supporting documentation for any Related Expenses
      so
      debited; and provided further that Lender is not so authorized to incur Related
      Expenses to perform any matter that Borrower has an obligation to perform unless
      Lender has provided notice to Borrower of Borrower’s failure to so perform and
      Borrower has not promptly corrected such failure. Borrower acknowledges that
      Lender’s routine inspection fees relating to the Borrowing Base are Related
      Expenses reimbursable by Borrower.

     

    5.22. Cash
      Flow Requirements.
      Borrower shall maintain Cash Flow of not less than the amount set forth, tested
      at the end of any fiscal year set forth below for the preceding 12-month
      period:

     

    
      
        
        

      

      
        -15-

        
          

        

      

      
        
        

      

    

     

    
      
        	
                Fiscal
                  Year End

              	
                Operating
                  Cash Flow

              
	 	 
	
                December
                  31, 2007

              	
                $
                  750,000.00

              
	
                December
                  31, 2008

              	
                $1,500,000.00

              
	
                December
                  31, 2009

              	
                $2,250,000.00

              


      

    

    


    5.23. Total
      Funded Debt to EBITDA Ratio.
      Borrower shall maintain a ratio of Total Funded Debt to EBITDA of not greater
      than the amount set forth, tested as of the end of any fiscal year, set forth
      below for the period of the previous four fiscal quarters:

     

    
      
        	
                Fiscal
                  Year End

              	
                Ratio

              
	 	 
	
                December
                  31, 2007

              	
                4.25
                  to 1.0

              
	
                December
                  31, 2008

              	
                3.5
                  to 1.0

              
	
                December
                  31, 2009

              	
                3.0
                  to 1.0

              


      

    

     

    6. EVENTS
      OF DEFAULT

     

    The
      occurrence of any one or more of the following events shall constitute an Event
      of Default under this Agreement:

    


    6.1. Payments.
      If
      (a) the interest on any Note or any commitment or other fee shall not be
      paid in full punctually when due and payable, or (b) the principal of any
      Note shall not be paid in full punctually when due and payable.

     

    6.2. Covenants.
      If
      Borrower or any Obligor fails to perform or observe any covenant or agreement
      (other than as referred to in Section 6.1 hereof) contained in this Agreement
      or
      in any other of the Loan Documents, and such failure remains unremedied for
      thirty (30) days after the Lender gives notice thereof to such Borrower or
      Obligor.

     

    6.3. Representations
      and Warranties.
      If any
      representation, warranty or statement made in or pursuant to this Agreement
      or
      any Loan Document or any other material information furnished by Borrower or
      any
      Obligor to Lender or any other holder of any Note, shall be false or erroneous
      in any material respect.

     

    6.4. Validity
      Of Loan Documents.
      If (a)
      any material provision, in the reasonable judgment of Lender, of any Loan
      Document shall at any time for any reason cease to be valid, binding and
      enforceable against Borrower or any Obligor; (b) the validity, binding effect
      or
      enforceability of any Loan Document against Borrower or any Obligor shall be
      contested by Borrower or any Obligor; (c) Borrower or any Obligor shall deny
      that it has any or further liability or obligation thereunder; or (d) any Loan
      Document shall be terminated, invalidated or set aside, or be declared
      ineffective or inoperative or in any way cease to give or provide to Lender
      the
      benefits purported to be created thereby.

     

    6.5. Loan
      Document Default.
      If
      any
      event of default shall occur under any other Loan Document, or if under any
      Loan
      Document any payment is required to be made by Borrower or any Obligor on demand
      of Lender, and such demand is made and has not been timely satisfied.


     

    6.6. Cross
      Default.
      If
      Borrower shall default in the payment of principal or interest due and owing
      upon any other obligation for borrowed money of more than $500,000, beyond
      any
      period of grace provided with respect thereto or in the performance or
      observance of any other agreement, term or condition contained in any agreement
      under which such obligation is created, if the effect of such default is to
      allow the acceleration of the maturity of such Indebtedness or to permit the
      holder thereof to cause such Indebtedness to become due prior to its stated
      maturity.

     

    6.7. ERISA
      Default.
      The
      occurrence of one or more ERISA Events that (a) could be reasonably expected
      to
      have a Material Adverse Effect, or (b) results in a Lien on any of the assets
      of
      Borrower. 

     

    
      
        
        

      

      
        -16-

        
          

        

      

      
        
        

      

    

    6.8. Money
      Judgment.
      A
      final
      judgment or order for the payment of money in an amount in excess of $500,000
      shall be rendered against Borrower or any Obligor by a court of competent
      jurisdiction, that remains unpaid or unstayed and undischarged for a period
      (during which execution shall not be effectively stayed) of thirty (30) days
      after the date on which the right to appeal has expired.

     

    6.9. Intentionally
      Omitted.

     

    6.10. Intentionally
      Omitted.

     

    6.11. Solvency.
      If
      Borrower or any Obligor shall (a)  die or discontinue business,
      (b) generally not pay its debts as such debts become due, (c) make a
      general assignment for the benefit of creditors, (d) apply for or consent
      to the appointment of a receiver, a custodian, a trustee, an interim trustee
      or
      liquidator of all or a substantial part of its assets, (e) be adjudicated a
      debtor or have entered against it an order for relief under Title 11 of the
      United States Code, as the same may be amended from time to time, (f) file
      a voluntary petition in bankruptcy or file a petition or an answer seeking
      reorganization or an arrangement with creditors or seeking to take advantage
      of
      any other law (whether federal or state) relating to relief of debtors, or
      admit
      (by answer, by default or otherwise) the material allegations of a petition
      filed against it in any bankruptcy, reorganization, insolvency or other
      proceeding (whether federal or state) relating to relief of debtors,
      (g) suffer or permit to continue unstayed and in effect for 60 consecutive
      days any judgment, decree or order entered by a court of competent jurisdiction,
      that approves a petition seeking its reorganization or appoints a receiver,
      custodian, trustee, interim trustee or liquidator of all or a substantial part
      of its assets, or (h) take any action in order thereby to effect any of the
      foregoing, or omit to take, any action in order to prevent any of the
      foregoing.

     

    7. REMEDIES
      UPON DEFAULT

     

    7.1. Rights
      of Lender.
      If any
      Event of Default shall occur, Lender may, at its election, and without demand
      or
      notice of any kind, do any one or more of the following:

     

    (a)
       Declare
      all of the Borrower’s Obligations to Lender to be immediately due and payable,
      whereupon all unpaid principal, interest and fees in respect of such
      Obligations, together with all of Lender’s costs, expenses and attorneys’ fees
      related thereto, under the terms of the Loan Documents or otherwise, shall
      be
      immediately due and payable; 

    


    (b) Terminate
      any commitment to make any additional advances under any Loan;

    


    (c) Exercise
      any and all rights and remedies available to Lender under any applicable
      law;

    


    (d) Exercise
      any and all rights and remedies granted to Lender under the terms of this
      Agreement or any of the other Loan Documents; and/or

    


    (e) Set
      off
      the unpaid balance of the Obligations against any debt owing to Borrower by
      the
      Lender or by any Lender Affiliate, including, without limitation, any obligation
      under a repurchase agreement or any funds held at any time by the Lender or
      any
      Lender Affiliate, whether collected or in the process of collection, or in
      any
      time or demand deposit account maintained by Borrower at, or evidenced by any
      certificate of deposit issued by, the Lender or any Lender Affiliate. Borrower
      agrees, to the fullest extent it may effectively do so under applicable law,
      that any holder of a participation in the Note may exercise rights of set-off
      or
      counterclaim and other rights with respect to such participation as fully as
      if
      such holder of a participation were a direct creditor of Borrower pursuant
      to
      this Agreement in the amount of such participation.

    


    (f) With
      respect to Borrower’s Instruments, Documents and Chattel Paper, request in
      writing that Borrower immediately deliver or cause to be delivered to Lender
      or
      any Lender Affiliate, all of Borrower’s Instruments, Chattel Paper, and
      Documents, appropriately endorsed either, at Lender’s option, (i) to
      Lender’s order, without limitation or qualification. Lender, or Lender’s
      designated agent, is hereby constituted and appointed Borrower’s
      attorney-in-fact with authority and power to so endorse any and all Instruments,
      Documents, and Chattel Paper upon Borrower’s failure to do so. Such authority
      and power, being coupled with an interest, shall be (i) irrevocable until
      all Obligations are paid, performed and observed in full, (ii) exercisable
      by Lender at any time after the occurrence and during the continuance of an
      Event of Default and without any request upon Borrower by Lender to so endorse,
      and (iii) exercisable in Lender’s name or Borrower’s name.

    


    
      
        
        

      

      
        -17-

        
          

        

      

      
        
        

      

    

    7.2. No
      Waiver.
      The
      remedies in this Section 7 are in addition to, not in limitation of, any other
      right, power, privilege, or remedy, either in law, in equity, or otherwise,
      to
      which the Lender may be entitled. No failure or delay on the part of the Lender
      in exercising any right, power, or remedy will operate as a waiver thereof,
      nor
      will any single or partial exercise thereof preclude any other or further
      exercise thereof or the exercise of any other right hereunder. The remedies
      in
      this Agreement are in addition to, not in limitation of, any other right, power,
      privilege, or remedy, either in law, in equity, or otherwise, to which the
      Lender may be entitled. All Lender’s rights and remedies, whether evidenced by
      this Agreement or by any other agreement, instrument or document shall be
      cumulative and may be exercised singularly or concurrently. 

     

    8. MISCELLANEOUS

     

    8.1. Remedies;
      Waiver; Amendments.
      No
      waiver of any provision of this Agreement or the Note, or consent to departure
      therefrom, is effective unless in writing and signed by the Lender. No such
      consent or waiver extends beyond the particular case and purpose involved.
      No
      amendment to this Agreement is effective unless in writing and signed by the
      Borrower and the Lender. If at any time or times, by assignment or otherwise,
      Lender transfers any of the Obligations to another person, such transfer shall
      carry with it Lender’s powers and rights under this Agreement with respect to
      the Obligation or Collateral so transferred and the transferee shall have said
      powers and rights, whether or not they are specifically referred to in the
      transfer. 

     

    8.2. Expenses,
      Costs and Taxes.
      The
      Borrower shall pay on demand all of the following costs and expenses of Lender:
      (a) reasonable out of pocket expenses, including but not limited to attorneys’
fees and expenses, of Lender in connection with the administration of the Loan
      Documents, the collection and disbursement of all funds hereunder and the other
      instruments and documents to be delivered hereunder, (b) extraordinary expenses
      of Lender in connection with the administration of this Agreement, the Note
      and
      the other instruments and documents to be delivered hereunder following the
      occurrence and during the continuance of an Event of Default, (c) the reasonable
      fees and out-of-pocket expenses of special counsel for Lender, with respect
      to
      the foregoing, and of local counsel, if any, who may be retained by said special
      counsel with respect thereto, (d) all fees due hereunder or in any other Loan
      Documents, and (e) all costs and expenses, including reasonable attorneys’ fees,
      in connection with the determination of Lender’s lien priority in any collateral
      securing the Note, or the restructuring or enforcement of the Note or any other
      Loan Document. In addition, Borrower shall pay any and all stamp and other
      taxes
      and fees payable or determined to be payable in connection with the execution
      and delivery of any Loan Document, and the other instruments and documents
      to be
      delivered hereunder, and agrees to hold Lender harmless from and against any
      and
      all liabilities with respect to or resulting from any delay in paying or
      omission to pay such taxes or fees. Borrower authorizes Lender to debit such
      expenses, costs and taxes directly to Borrower’s Loan accounts or any account
      Borrower maintains with Lender or Lender Affiliate. Notwithstanding anything
      herein to the contrary, Borrower shall have no liability for Closing Costs
      incurred by Lender.

     

    8.3. Indemnification.
      The
      Borrower shall indemnify and hold the Lender harmless against any and all
      liabilities, losses, damages, costs, and expenses of any kind (including,
      without limitation, the reasonable fees and disbursements of counsel in
      connection with any investigative, administrative or judicial proceeding,
      whether or not the Lender shall be designated a party thereto) which may be
      incurred by the Lender relating to or arising out of this Agreement or any
      actual or proposed use of proceeds of any Loan hereunder; provided, that the
      Lender shall have no right to be indemnified hereunder for its own gross
      negligence or willful misconduct as determined by a court of competent
      jurisdiction. A certificate as to any such loss or expense shall be promptly
      submitted by the Lender to the Borrower and shall, in the absence of manifest
      error, be conclusive and binding as to the amount thereof.

     

    8.4. Construction.
      The
      provisions of this Agreement and the respective rights and duties of Borrower
      and Lender hereunder shall be governed by and construed in accordance with
      New
      York law and any applicable federal laws. Borrower hereby irrevocably submits
      to
      the non-exclusive jurisdiction of any New York state or federal court sitting
      in
      Erie County, over any action or proceeding arising out of or relating to this
      Agreement, or any document related to the Obligations, and Borrower hereby
      irrevocably agrees that all claims in respect of such action or proceeding
      may
      be heard and determined in such New York state or federal court. The Borrower
      hereby waives any objection that it may now or hereafter have to the venue
      of
      any such suit or any such court or that such suit is brought in an inconvenient
      court. The several captions to different Sections of this Agreement are inserted
      for convenience only and shall be ignored in interpreting the provisions hereof.
      Time is of the essence in the performance of the obligations under this
      Agreement. All grace periods in this Agreement and all other Loan Documents
      shall run concurrently. 

     

    
      
        
        

      

      
        -18-

        
          

        

      

      
        
        

      

    

    8.5. Extension
      of Time.
      If any
      payment comes due on a day that is not a Business Day, Borrower may make the
      payment on the first Business Day following the payment date and pay the
      additional interest accrued to the date of payment. 

     

    8.6. Notices.
      All
      notices, requests, demands or other communications provided for hereunder shall
      be in writing and, if to Borrower, mailed or delivered to it, addressed to
      it at
      the address specified on the signature pages of this Agreement, or if to Lender,
      mailed or delivered to it, addressed to the address of Lender specified on
      the
      signature pages of this Agreement. All notices, statements, requests, demands
      and other communications provided for hereunder shall be deemed to be given
      or
      made when delivered or three (3) Business Days after being deposited in the
      mails with postage prepaid by registered or certified mail, addressed as
      aforesaid, or sent by facsimile with telephonic confirmation of receipt, except
      that notices from Borrower to Lender pursuant to any of the provisions hereof
      shall not be effective until received by Lender. 

     

    8.7. Capital
      Adequacy.
      If
      Lender shall have determined, after the closing of the Loans, that the adoption
      of any applicable law, rule, regulation or guideline regarding capital adequacy,
      or any change therein, or any change in the interpretation or administration
      thereof by any governmental authority, central bank or comparable agency charged
      with the interpretation or administration thereof, or compliance by Lender
      (or
      its lending office) with any request or directive regarding capital adequacy
      (whether or not having the force of law) issued after the date hereof of any
      such authority, central bank or comparable agency, has or would have the effect
      of reducing the rate of return on Lender’s capital (or the capital of its
      holding company) as a consequence of its obligations hereunder to a level below
      that which Lender (or its holding company) could have achieved but for such
      adoption, change or compliance (taking into consideration Lender’s policies or
      the policies of its holding company with respect to capital adequacy) by an
      amount deemed by Lender to be material, then from time to time, within fifteen
      (15) days after demand by Lender, Borrower shall pay to Lender such additional
      amount or amounts as will compensate Lender (or its holding company) for such
      reduction. Lender shall designate a different lending office if such designation
      will avoid the need for, or reduce the amount of, such compensation and will
      not, in the judgment of Lender, be otherwise disadvantageous to Lender. A
      certificate of Lender claiming compensation under this Section and setting
      forth
      the additional amount or amounts to be paid to it hereunder shall be conclusive
      in the absence of manifest error. In determining such amount, Lender may use
      any
      reasonable averaging and attribution methods. Failure on the part of Lender
      to
      demand compensation for any reduction in return on capital with respect to
      any
      period shall not constitute a waiver of Lender’s rights to demand compensation
      for any reduction in return on capital in such period or in any other period.
      The protection of this Section shall be available to Lender regardless of any
      possible contention of the invalidity or inapplicability of the law, regulation
      or other condition that shall have been imposed but if so held invalid or
      inapplicable an adjustment shall be made with respect any period subsequent
      thereto, if Borrower has paid or would otherwise be paying such additional
      compensation for such period.

     

    8.8. Survival
      of Agreements; Relationship.
      All
      agreements, representations, and warranties made in this Agreement will survive
      the making of the extension of credit hereunder, and will bind and inure to
      the
      benefit of the Borrower and the Lender, and their respective successors and
      assigns; provided, that no subsequent holder of the Note shall by reason of
      acquiring that Note or Notes become obligated to make any Loan hereunder and
      no
      successor to or assignee of the Borrower may borrow hereunder without the
      Lender’s written assent. The Lender may transfer and assign this Agreement, and
      the Loans hereunder, and deliver the Collateral to the assignee, who shall
      thereupon have all of the rights of the Lender, provided, however, prior to
      the
      occurrence of an Event of Default, or event which, with the giving of notice
      or
      passage of time or both, would constitute an Event of Default, such assignment
      may be made only with the consent of Borrower, which consent shall not be
      unreasonably withheld. Borrower may not assign this Agreement or the right
      to
      receive any disbursements hereunder or any interest herein. The rights and
      powers given in this Agreement to the Lender are in addition to those otherwise
      created or existing in the same Collateral by virtue of other agreements or
      writings. The relationship between the Borrower and the Lender with respect
      to
      this Agreement, the Note and any other Loan Document is and shall be solely
      that
      of debtor and creditor, respectively, and the Lender has no fiduciary obligation
      toward the Borrower with respect to any such document or the transactions
      contemplated thereby.

     

    
      
        
        

      

      
        -19-

        
          

        

      

      
        
        

      

    

    8.9. Severability.
      If any
      provision of this Agreement or the Note, or any action taken hereunder, or
      any
      application thereof, is for any reason held to be illegal or invalid, such
      illegality or invalidity shall not affect any other provision of this Agreement
      or the Note, each of which shall be construed and enforced without reference
      to
      such illegal or invalid portion and shall be deemed to be effective or taken
      in
      the manner and to the full extent permitted by law.

     

    8.10. Entire
      Agreement.
      This
      Agreement, the Note, the Security Instruments and any other Loan Document
      executed in connection herewith integrate all the terms and conditions mentioned
      herein or incidental hereto and supersede all oral representations and
      negotiations and supersede, amend and restate prior writings with respect to
      the
      subject matter hereof. In this Agreement unless the context otherwise requires,
      words in the singular number include the plural, and in the plural number
      include the singular.

     

    8.11. Participation/Syndication.
      Borrower
      acknowledges that the Lender reserves the right to syndicate and/or participate
      its interest in the Loans and Borrower agrees to, at Lender’s reasonable
      request, execute such additional promissory notes and other instruments as
      may
      be appropriate to evidence its obligation under the Loans to such syndicate
      Lenders as may commit, in the future, to fund a portion of the Loans according
      to the terms of this Agreement; provided, however, prior to the occurrence
      of an
      Event of Default, or event which, with the giving of notice or passage of time
      or both, would constitute an Event of Default, Borrower shall have the right
      to
      approve any bank or other lender that is brought into the syndicate or as a
      participant, which approval shall not be unreasonably withheld.

     

    8.12. JURY
      TRIAL WAIVER.
      BORROWER AND LENDER EACH WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING
      ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, BETWEEN LENDER
      AND
      BORROWER ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE
      RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT OR
      ANY
      NOTE OR OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN
      CONNECTION HEREWITH OR THE TRANSACTIONS RELATED THERETO. 

     

    IN
      WITNESS WHEREOF, the Borrower and the Lender have each caused this Agreement
      to
      be executed by their duly authorized officers on the date first set forth
      above.

    


          

    
      	 	 	 
	Address:	Borrower:
	 	 
	1801
              Elmwood Avenue	MOD-PAC CORP.
	Buffalo,
              New York 14207	 
 	 
 
	 	By:  	/s/ David B. Lupp
	 	
              
David
              B. Lupp
	 	Vice
              President - Finance and Chief Financial
              Officer


    

     

    
      
        	 	 	 
	Address:	Lender:
	 	 
	50
                Fountain Plaza	KEYBANK NATIONAL ASSOCIATION
	Buffalo,
                New York	 
 	 
 
	
              	By:  	/s/ Mark F. Wachowiak
	 	
                
Mark
                F. Wachowiak
	 	Vice
                President


      

       

      
        
          
          

        

        
          -20-

          
            

          

        

        
          
          

        

      

    

     

    Exhibit
      A

    


    Security
      Instruments

     

    


    Security
      Agreement between Borrower and Lender dated of even date herewith.

    


    


    


    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    



    Exhibit
      B

    


    


    BORROWING
      BASE CERTIFICATE

    


    


    The
      undersigned hereby certifies to KEYBANK
      NATIONAL ASSOCIATION
      (“Lender”), in accordance with the terms of the Loan Agreement between
MOD-PAC
      CORP.
      (“Borrower”) and Lender dated March 8, 2007, as may be amended from time to time
      (AAgreement@),
      that:

    


    A. RECEIVABLES       

     

    
      
        	
                (i)
                  Total Receivables

              	 	 	
              	 	
                $

              	
                 
                  

              	 
	
                Less:

              	 	 	 	 	 	 	 
	
                Ineligible
                  Receivables:

              	 	 	 	 	 	 	 
	
                Specific
                  Receivables > 90 days

              	 	 	 	 	 	 	 
	
                from
                  invoice date

              	 	 	  
	 	 	 	 
	 	 	 	 	 	 	 	 
	
                Credit
                  Balances

              	 	 	
                 
                  

              	 	 	 	 
	 	 	 	 	 	 	 	 
	
                Contra
                  Account

              	 	 	
                  
                  

              	 	 	 	 
	 	 	 	 	 	 	 	 
	
                Accounts
                  Subject to Liens

              	 	 	
                 
                  

              	 	 	 	 
	 	 	 	 	 	 	 	 
	
                Subsidiary,
                  Shareholder 

              	 	 	 	 	 	 	 
	
                or
                  Employee

              	 	 	
                  
                  

              	 	 	 	 
	 	 	 	 	 	 	 	 
	
                Foreign
                  Receivables except

              	 	 	 	 	 	 	 
	
                from
                  a Canadian Account 

              	 	 	 	 	 	 	 
	
                Debtor

              	 	 	
                  
                  

              	 	 	 	 
	 	 	 	 	 	 	 	 
	
                Government
                  Receivables (without

              	 	 	 	 	 	 	 
	
                Assignment
                  of Claims Act

              	 	 	 	 	 	 	 
	
                Compliance)

              	 	 	
                  
                  

              	 	 	 	 
	 	 	 	 	 	 	 	 
	
                Other
                  Ineligibles

              	 	 	
                  
                  

              	 	 	 	 
	 	 	 	 	 	 	 	 
	
                Total
                  for Ineligibles:

              	 	 	
              	 	<$	
                 >
                  

              	 
	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 
	
                Total
                  Eligible Receivables

              	 	 	
                   
                  

              	 	 	 	 
	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 
	
                x
                  80% Advance Rate

              	 	 	
              	 	
                x

              	
                 .80

              	 
	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 
	
                RECEIVABLES
                  BORROWING BASE

              	 	 	
              	 	
                $

              	
                  
                  

              	 


      

    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    


    
      
        B. 
          INVENTORY 

      

    

     

    
      
        	
                (i)
                  Total Inventory

              	 	
                $

              	
                  
                  

              	 	 	 
	 	 	 	 	 	 	 
	
                Less:

              	 	 	 	 	 	 
	
                Ineligible
                  Inventory

              	 	<$	
                 >

              	 	 	 
	 	 	 	 	 	 	 
	
                Total
                  Eligible Inventory

              	 	
                $

              	
                 
                  

              	 	 	 
	 	 	 	 	 	 	 
	
                x
                  40% Advance Rate  

              	 	
                x

              	.40	 	 	 
	 	 	 	 	 	 	 
	 	 	 	 	 	 	 
	
                INVENTORY
                  BORROWING BASE

              	 	
                $

              	
                   
                  

              	 	
                =
                  B

              	 
	
                INVENTORY
                  CAP

              	 	
                $

              	
                1,500,000

              	 	
                =
                  C

              	 
	
                LESSER
                  OF B OR C

              	 	
                $

              	 
 	
                 

              	
                =
                  D

              	 
	 	 	 	 	 	 	 
	
                C.
                  EQUIPMENT 

              	 	 	 	 	 	 
	 	 	 	 	 	 	 
	
                EQUIPMENT
                  BORROWING BASE

              	 	
                $

              	
                2,000,000

              	 	
                =
                  E

              	 
	 	 	 	 	 	 	 
	
                D.
                  BORROWING CAPACITY 

              	 	 	 	 	 	 
	 	 	 	 	 	 	 
	
                (i)Maximum
                  Loan = A+D+E above =

              	 	
                $

              	
                    
                  

              	 	 	 
	
                (not
                  in excess of $8,000,000)

              	 	 	 	 	 	 
	 	 	 	 	 	 	 
	
                Less:
                  Face Amount of Outstanding 

              	 	 	 	 	 	 
	
                Letters
                  of Credit

              	 	<$	
                 >

              	 	 	 
	 	 	 	 	 	 	 
	
                Sub-Total

              	 	
                $

              	
                 
                      

              	 	 	 
	 	 	 	 	 	 	 
	
                Less:
                  Current Balance

              	 	<$	
                 
                  >

              	 	 	 
	 	 	 	 	 	 	 
	
                Total
                  Availability

              	 	
                $

              	
                   
                  

              	 	 	 


      

    

     

     

    The
      undersigned certifies that to the best of the knowledge of the undersigned,
      the
      value of the undersigned’s Eligible Equipment has not fallen below
      $2,000,000.

    


    To
      the
      best knowledge of the undersigned, the undersigned is in compliance with all
      of
      the terms and provisions on its part to be observed or performed under the
      Agreement, and no event or circumstance which upon notice, lapse of time or
      both
      has occurred or is continuing would cause the undersigned to be out of
      compliance with the Agreement.

    


       

    


    
      	Dated: ______________________,
              ______	MOD-PAC CORP.
	 	 
	 	 
	 	By_________________________________
	 	Name:______________________________
	 	Title:_______________________________
	 	 
	 	 


    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    Exhibit
      C

    


    COMPLIANCE
      CERTIFICATE

     

    MOD-PAC
      CORP.
      (“Borrower”) hereby certifies to KEYBANK
      NATIONAL ASSOCIATION
      (“Lender”) pursuant to the Loan Agreement between Borrower and Lender dated as
      of March 8, 2007, as may be amended from time to time (“Agreement”)
      that:

     

    A. General:

    


    1. Capitalized
      terms not defined herein shall have the meanings set forth in the
      Agreement.

    


    2. There
      does not exist an Event of Default or an event which would with notice or the
      lapse of time, or both, constitutes an Event of Default .

    


    3. The
      representations and warranties contained in the Agreement are true, correct
      and
      complete in all material respects with the same effect as though such
      representations and warranties had been made on the date hereof.

    


    B. Financial
      Statements: 

    


    1. Any
      quarterly financial statements delivered with this Certificate are complete
      and
      accurate in all material respects, subject to changes resulting from year-end
      adjustments.

    


    C. Financial
      Covenants (Complete for Fiscal Year End Only Beginning FYE
      12/31/07):

    


    1. As
      of the
      date hereof or, for any fiscal year as may be designated below, the
      computations, ratios and calculations as set forth below in accordance with
      Sections 5.22 and 5.23 of the Agreement, are true and correct in all material
      respects:

     

    
      
        	
                (a)

              	
                Cash
                  Flow

              	 
	 	
                as
                  of __________________, _____:

              	
                $__________

              
	 	 	 
	
                (b)

              	
                Total
                  Funded Debt to EBITDA Ratio

              	 
	
              	
                as
                  of __________________, _____:

              	
                ___
                  to 1.0

              


      

    

     

    IN
      WITNESS WHEREOF, the undersigned, a duly authorized officer of Borrower, has
      executed and delivered this certificate in the name and on behalf of the
      Borrower on _______________________, 20___.

     

    
      
        	 	MOD-PAC CORP.
	 	 
	 	 
	 	By_________________________________
	 	Name:______________________________
	 	Title:_______________________________
	 	 
	 	 


      

    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    



    Schedule
      3.10

    


    


    Federal
      income tax audit in process of tax years 2003, 2004, and 2005 

    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    



    Section
      3.11

    


    


    None.
      

    


    

 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    Schedule
      3.13

    


    


    1803
      -1807 Elmwood Avenue LLC, a New York Limited Liability Company

    


    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    Schedule
      5.15

     

    


    
      	 	
              1.

            	
              HSBC
                Business Credit (USA) Inc. :
                Operating lease covering Heidelberg
                press;

            


    

    
      	 	
              2.

            	
              Kodak
                Polychrome Graphics, LLC:
                The following equipment is owned by Kodak, and the Borrower is permitted
                to use it in consideration of purchasing Kodak products --one thermal
                line, which includes 1 each of pre-bake oven, developer unit, post-bake
                oven, gum unit, plate stacker and 3 conveyor sections; and two sword
                lines, each includes 1 each of developer & gum unit, plate stacker and
                transfer conveyor;

            


    

    
      	 	
              3.

            	
              Hewlett-Packard
                Financial Services Company:
                Operating lease covering digital printing press;
                and

            


    

    
      	 	
              4.

            	
              Xpedx:
                Consignment of materials for use by Borrower -- consisting of aluminum
                plates and chemicals that are processed on the above Kodak-owned
                equipment. In addition, a similar consignment for use of paper products
                is
                under negotiation.

            


    

    
      	 	
              5.

            	
              HSBC
                Bank USA
                -
                Liens on equipment in favor of HSBC Bank USA securing obligations
                owing to
                HSBC Bank USA with respect to two letters of credit being replaced
                by
                Letters of Credit being issued by the Lender following signing of
                this
                Loan Agreement. These liens will be terminated once the HSBC letters
                of
                credit are returned to HSBC Bank
                USA.

            


    

    


    


    Certain
      of the above items may not constitute “Liens” that are required to be disclosed,
      but have been added to this disclosure schedule for informational
      purposes.