Document:

Exhibit
      10.1 

     

    LOAN
      AGREEMENT

     

    THIS
      LOAN
      AGREEMENT (this “Agreement”) is made as of the 25th of September, 2008, by and
      between The PrivateBank and Trust Company (“Lender”) and Advanced Photonix,
      Inc., a Delaware corporation (“Borrower”) having an address of 2925 Boardwalk,
      Ann Arbor, Michigan 48104.

     

    RECITALS

     

    A. Lender
      is
      providing Borrower a term loan in the Term Loan Amount (the “Term Loan”), which
      shall be evidenced by the Term Note, subject to the terms and conditions set
      forth in this Agreement.

     

    B. Lender
      is
      providing Borrower a revolving line of credit in the Line of Credit Loan Amount
      (the “Line of Credit”), which shall be evidenced by the Line of Credit Note,
      subject to the terms and conditions set forth in this Agreement.

     

    NOW,
      THEREFORE, for good and valuable consideration, the receipt and sufficiency
      of
      which are hereby acknowledged, Borrower and Lender agree as
      follows:

     

    ARTICLE
      1.

    DEFINITIONS

     

    1.1 Definition
      of Certain Terms.
      (a) As
      used in this Agreement, the following terms shall have the meanings set forth
      below:

     

    “Account”
shall
      mean any right of a Borrowing Base Obligor to payments for services that have
      been fully performed, acknowledged and accepted by the Account Debtor or from
      the sale or lease of goods, which goods are in accordance with Account Debtor’s
      specifications (if any) and delivered to and accepted by the Account Debtor,
      and
      such Borrowing Base Obligor has possession of, or has delivered to Lender at
      Lender’s request, shipping and delivery receipts evidencing such delivery. An
      Account which is at any time an Eligible Account but which subsequently fails
      to
      meet any of the requirements for eligibility shall forthwith cease to be an
      Eligible Account.

     

    “Adjusted
      EBITDA”
shall
      mean for any period of determination Net Income for such period plus, to the
      extent deducted in determining Net Income, depreciation, amortization (including
      non-cash impairment charges related to goodwill or intangible assets or other
      non-cash impairment charges as may be approved by Lender, in the exercise of
      its
      reasonable credit judgment, from time to time), interest and income tax expense,
      minus cash taxes during such period, minus dividends to shareholders during
      such
      period, plus non-cash expenses related to stock grants and options during such
      period, all as determined on a consolidated basis for Borrower and its
      consolidated Subsidiaries in accordance with GAAP.

     

    “Affiliate”
of
      any
      person or entity shall mean (a) any other person or entity which, directly
      or
      indirectly, controls or is controlled by or is under common control with such
      person or entity, (b) any officer or director of such entity, and (c) with
      respect to Lender, any entity administered or managed by Lender, or an Affiliate
      or investment advisor thereof and which is engaged in making, purchasing,
      holding or otherwise investing in commercial loans. A person or entity shall
      be
      deemed to be “controlled by” any other person or entity if such person or entity
      possesses, directly or indirectly, power to direct or cause the direction of
      the
      management and policies of such person or entity whether by contract, ownership
      of voting securities, membership interests or otherwise.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    “Base
      Net Worth”
shall
      initially be Eighteen Million Dollars ($18,000,000). On the last day of each
      fiscal year of Borrower, Base Net Worth shall increase by ten percent (10%)
      of
      Net Income for the fiscal year then ended. If Net Income for any fiscal year
      is
      less than $0, it shall be deemed to be $0 for purposes of this calculation
      and
      the calculation of Net Income for purposes of this covenant shall exclude the
      impact of non-cash impairment charges for intangible assets.

     

    “Borrowing
      Base Amount”
shall
      mean an amount equal to the sum of the following: 

     

    (a) eighty
      percent (80%) of the then net book value (after deducting any discount or
      incentive for early payment or any issued or unissued credit memos but without
      deducting any bad debt reserve) of all Eligible Accounts; plus

     

    (b) the
      lesser of: (i) fifty percent (50%) of the lower of cost or market value (after
      deduction of such reserves and allowances as the Lender deems proper and
      necessary) of Eligible Inventory; and (ii) $750,000.

     

    “Borrowing
      Base Certificate”
shall
      mean a certificate to be signed by Borrower certifying the accuracy of the
      Borrowing Base Amount in form and substance satisfactory to Lender.

     

    “Borrowing
      Base Obligor”
shall
      mean Borrower and each of Borrower’s Subsidiaries which is a
      Guarantor.

     

    “Business
      Day”
shall
      mean any day other than Saturday or Sunday on which commercial banking
      institutions are open for business in Chicago, Illinois and Bloomfield Hills,
      Michigan.

     

    “Capital
      Securities”
shall
      mean all shares, interests, participations or other equivalents (however
      designated, whether voting or non-voting) of capital, whether now outstanding
      or
      issued or acquired after the date hereof, including common shares, preferred
      shares, membership interests in a limited liability company, limited or general
      partnership interests in a partnership or any other equivalent of such ownership
      interest.

     

    “Capitalized
      Lease”
shall
      mean, as applied to any Person, any lease of any property (whether real,
      personal or mixed) with respect to which the discounted present value of the
      rental obligations of such Person as lessee thereunder, in conformity with
      GAAP,
      is required to be capitalized on the balance sheet of that Person.

     

    “Change
      in Control”
shall
      mean at any time the occurrence of any of the following events: (a) any “person”
or “group” (as such terms are used in Section 13(d) and 14(d) of the Securities
      Exchange Act of 1934, as amended (the “Exchange Act”)) is or becomes the
“beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act),
      except that a person shall be deemed to have “beneficial ownership” of all
      securities that such person has the right to acquire, whether such right is
      exercisable immediately or only after the passage of time), directly or
      indirectly, of 35% or more of the then outstanding Capital Securities of
      Borrower; or (b) the replacement of a majority of the Board of Directors of
      Borrower and such replacement shall not have been approved by a vote of at
      least
      a majority of the Board of Directors of Borrower then still in office who either
      were members of such Board of Directors prior to such replacement or whose
      election as a member of such Board of Directors was previously so
      approved.

     

    
      
         

      

      
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    “Closing
      Date”
shall
      mean the date on which this Agreement and all of the other Loan Documents
      required to be delivered concurrently with this Agreement shall have been
      executed and delivered to Lender, the conditions precedent to the closing of
      the
      Loans shall have been satisfied and the proceeds of the Loans, as requested
      by
      Borrower in accordance with this Agreement, shall have been disbursed to or
      for
      the benefit of Borrower.

     

    “Consolidated
      and Consolidating”
shall
      mean, when used with reference to any financial term in this Agreement, the
      aggregate for two or more Persons of the amounts signified by such term for
      all
      such Persons determined on a consolidated or combined, as applicable, basis
      in
      accordance with GAAP. Unless otherwise specified herein, references to
      Consolidated financial statements or data of a Person includes consolidation
      with its Subsidiaries in accordance with GAAP.

     

    “Debt”
shall
      mean, as of any date of determination, the total liabilities of a Person at
      such
      date, as determined in accordance with GAAP.

     

    “Debt
      Service Coverage Ratio”
shall
      mean as of any date of determination thereof a ratio the numerator of which
      is
      Adjusted EBITDA for the applicable measuring period, plus the net cash proceeds
      of the issuance by Borrower of any Eligible Capital Securities during such
      period and the denominator of which is all payments of principal with respect
      to
      interest bearing debt during such period (including the principal component
      of
      Capitalized Lease obligations), plus interest expense for such period (including
      the interest component of Capitalized Lease obligations), all as determined
      on a
      consolidated basis for Borrower and its consolidated Subsidiaries in accordance
      with GAAP. The applicable measuring period shall be (i) the fiscal year to
      date
      period for any determination date occurring before March 31, 2009 and (ii)
      the
      preceding twelve (12) months ending on such date for any date of determination
      occurring on or after March 31, 2009.

     

    “Dividend”
shall
      mean a payment made, liability incurred, or other consideration given by any
      Person (other than any stock dividend or stock split payable solely in Capital
      Securities of that Person) for the purchase, acquisition, redemption or
      retirement of any Capital Securities of that entity or as a dividend, return
      of
      capital, or other distribution in respect of that Person’s Capital
      Securities.

     

    “Eligible
      Account”
and
      “Eligible
      Accounts”
shall
      mean any duly invoiced Account (as hereinafter defined, but exclusive of sales,
      excise or other similar taxes) of which a Borrowing Base Obligor is the sole
      owner, acceptable to Lender in its sole discretion, and in which Lender has
      an
      enforceable and duly perfected first priority security interest, except any
      such
      Account:

     

    (a) which
      is
      not payable in installments and which shall not have been paid in full within
      ninety (90) days after the original due date or the date first invoiced to
      the
      Account Debtor, whichever first elapses;

     

    (b) which
      is
      payable in installments: 

     

    (i) if
      it was
      not by its terms so payable when first invoiced to the Account Debtor,

     

    (ii) if
      any
      installment thereof shall not have been paid in full within sixty (60) days
      after its original due date, or 

     

    
      
         

      

      
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    (iii) to
      the
      extent that any installment thereof is not payable within ninety (90) days
      after
      the date of determination;

     

    (c) if
      the
      Account Debtor thereon is then obligated to a Borrowing Base Obligor on other
      Accounts and if more than twenty five percent (25%), by amount, of all Accounts
      on which that Account Debtor is then obligated to such Borrowing Base Obligor
      are excepted under clauses (a) and (b) above;

     

    (d) If
      the
      Account Debtor thereon is then obligated to any Borrowing Base Obligor on other
      Accounts, to the extent that the aggregate amount of all Accounts upon which
      that Account Debtor is then obligated to a Borrowing Base Obligor exceeds twenty
      five percent (25%) of all Eligible Accounts;

     

    (e) if
      the
      payment of which by the Account Debtor is not, or does not remain,
      unconditional; 

     

    (f) if
      and to
      the extent that the Account Debtor has asserted a defense or offset of any
      kind
      against the payment thereof;

     

    (g) which
      according to its terms may be paid by the Account Debtor by an offset of any
      claim of the Account Debtor or any other Person against any Borrowing Base
      Obligor;

     

    (h) which
      arises other than from a sale or lease of Inventory or performance of services
      in the ordinary course of a Borrowing Base Obligor’s business;

     

    (i) if
      the
      Account Debtor thereon is an Affiliate, director, officer, employee, or agent
      of
      any Borrowing Base Obligor or of any Affiliate of any
      Borrowing Base Obligor;

     

    (j) if
      the
      Account Debtor thereon is insolvent or is the subject of any bankruptcy
      proceeding, or has had a receiver appointed for any part of Account Debtor’s
      property, or is, at the time in question, in default in any way on an existing
      obligation (except any obligation classified as an Account) to any Borrowing
      Base Obligor;

     

    (k) except
      for Account Debtors approved in advance by Lender on a case-by-case basis,
      if
      the Account Debtor thereon is not a resident of the United States of America
      or
      is not subject to service of legal process in the United States of America
      or
      Canada unless payment of the Account is assured by an irrevocable letter of
      credit in form and substance satisfactory to Lender and issued by a financial
      institution that is a resident of the United States of America, is subject
      to
      service of legal process in the United States of America, and is otherwise
      satisfactory to Lender, or, if the Account Debtor is a resident of Canada,
      unless Borrower shall have taken or caused to be taken all actions from time
      to
      time requested by Lender in order to assure the attachment, enforceability,
      and
      perfection of Lender’s security interest under the law of such province in which
      the Account Debtor resides, and shall have furnished to Lender such written
      evidence (including, without limitation, one or more opinions of legal counsel
      rendered to Lender by counselors authorized to practice law in each such
      province), in form and substance satisfactory to Lender, that all such actions
      have been taken; 

     

    (l) if
      the
      Account Debtor thereon is a resident of any jurisdiction denying creditors
      access to its courts in the absence of qualification to transact business
      therein or the filing of a so-called “notice of business activities report” or
      other similar filing, unless Borrower has taken all action required by the
      jurisdiction in question to have access to its courts;

     

    
      
         

      

      
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    (m) which
      is
      subject to any law (including, without limitation, the Federal Assignment of
      Claims Act of 1940), rule, regulation, order, or agreement now or hereafter
      in
      effect which restricts or requires notice of or consent to assignment, unless
      all such required notices shall have been given, all such required consents
      shall have been obtained, and all other requirements shall have been complied
      with in order that Lender shall have the unconditional right to enforce the
      Account against the Account Debtor thereon or unless arising from tool and
      die
      projects for the federal government and not taxes or licensing obligations;
      

     

    (n) is
      subject to any mortgage, security interest, or other lien securing payment
      or
      performance of any obligation other than indebtedness owing to Lender;

     

    (o) which
      is
      described in any financing statement naming any Person other than Lender as
      the
      secured party of record;

     

    (p) the
      collection of which Lender, in the exercise of its good faith judgment,
      determines to have become impaired for any reason;

     

    (q) which
      is
      billed in advance, payable on delivery, for consigned goods, for guaranteed
      sales, on a sale and approval, sale or return or bill and hold basis, for
      unbilled sales, for progress billings, or payable at a future date in accordance
      with its terms;

     

    (r) which
      is
      subject to any retention or retainage payment, trade or volume discount,
      allowance, discount, rebate, or adjustment; 

     

    (s) which
      arises out of a contract or order, whether by its terms or any other reason,
      that is unassignable to Lender; 

     

    (t) which
      is
      evidenced by chattel paper or an instrument and such original chattel paper
      or
      instrument has not been endorsed and delivered by Borrowing Base Obligor to
      Lender, or in the case of electronic chattel paper, is not in Lender’s control,
      in each case as determined by Lender in its sole discretion; or

     

    (u) which
      is
      a bonded receivable.

     

    “Eligible
      Capital Securities”
shall
      mean Capital Securities of Borrower classified as equity securities in
      accordance with GAAP, including any issued in connection with stock options
      granted under Borrower’s 2007 Equity Incentive Plan or any plan successor
      thereto, excluding, however, any Capital Securities which are subject to
      mandatory or optional redemption prior to the maturity date of the Term
      Loan.

     

    “Eligible
      Inventory”
shall
      mean all finished goods and raw materials Inventory of a Borrowing Base Obligor
      which meets each of the following requirements:

     

    (a) it
      is
      subject to a perfected, first priority security interest in favor of Lender
      and
      is not subject to any other assignment, claim or security interest;

     

    (b) it
      is
      salable and not slow-moving, obsolete or discontinued, as determined in the
      reasonable credit judgment of Lender;

     

    (c) it
      is in
      the possession and control of a Borrowing Base Obligor and it is stored and
      held
      in facilities owned by Borrower or the applicable Borrowing Base Obligor or,
      if
      such facilities are not so owned by Borrower or the applicable Borrowing Base
      Obligor, Lender is in possession of executed landlord waivers, other access
      agreements or bailee’s letters, each in form and substance acceptable to Lender,
      with respect thereto;

     

    
      
         

      

      
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    (d) it
      is not
      Inventory produced in violation of the Fair Labor Standards Act and subject
      to
      the “hot goods” provisions contained in Title 29 U.S.C. §215;

     

    (e) it
      is not
      subject to any agreement or license which would restrict Lender’s ability to
      sell or otherwise dispose of such Inventory;

     

    (f) it
      is
      located in the United States or in any territory or possession of the United
      States that has adopted Article 9 of the Uniform Commercial Code;

     

    (g) it
      is not
“in transit” to the Borrowing Base Obligor or held by the Borrowing Base Obligor
      on consignment;

     

    (h) it
      is not
“work-in-progress” or “work-in-process” Inventory;

     

    (i) it
      is not
      supply items, packaging or any other similar materials;

     

    (j) it
      is not
      identified to any purchase order or contract to the extent progress or advance
      payments are received with respect to such Inventory; 

     

    (k) it
      does
      not breach any of the representations, warranties or covenants pertaining to
      Inventory set forth in the Loan Documents;

     

    (l) Lender
      shall not have determined in its reasonable discretion that it is unacceptable
      due to age, type, category, quality, quantity and/or any other reason
      whatsoever; and

     

    (m) it
      is not
      consigned.

     

    Inventory
      which is at any time Eligible Inventory but which subsequently fails to meet
      any
      of the foregoing requirements shall forthwith cease to be Eligible
      Inventory.

     

    “ERISA”
shall
      mean the Employee Retirement Income Security Act of 1974, as amended, or any
      successor act or code.

     

    “Environmental
      Laws”
shall
      mean all laws, statutes, ordinances, rules, regulations, orders, and
      determinations of any Governmental Authority pertaining to health, hazardous
      substances, natural resources, conservation, wildlife, pollution or the
      environment.

     

    “Event
      of Default”
shall
      mean any of the events specified in Section 7.1.

     

    “GAAP”
shall
      mean generally accepted accounting principles of the United States as in effect
      on the date of this Agreement, using the accrual basis of accounting and
      consistently applied.

     

    “Governmental
      Authorities”
shall
      mean, collectively, all Federal, state and local or regional governmental
      agencies, boards, tribunals, courts or instrumentalities having jurisdiction
      over Borrower or the Property.

     

    
      
         

      

      
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    “Governmental
      Obligations”
mean
      noncallable direct general obligations of the United States of America or
      obligations the payment of principal of and interest on which is unconditionally
      guaranteed by the United States of America.

     

    “Guarantor”
shall
      mean each Subsidiary of Borrower listed below and any other Person who executes
      a Guaranty and “Guarantors” shall mean all of them: Picometrix LLC and Silicon
      Sensors, Inc.

     

    “Guaranty”
shall
      mean a guaranty in form and substance satisfactory to Lender pursuant to which
      a
      Guarantor guaranties payment of all or any portion of the
      Obligations.

     

    “Hazardous
      Materials”
shall
      mean any substance that is defined or listed as a hazardous, toxic or dangerous
      substance under any Environmental Law or is otherwise regulated or prohibited
      or
      subject to investigation or remediation under any Environmental Law because
      of
      its hazardous, toxic or dangerous properties, including (i) any substance that
      is a “hazardous substance” under applicable Environmental Law, and (ii)
      asbestos, petroleum, petroleum products and polychlorinated
      biphenyls.

     

    “Head
      Office”
shall
      mean the Lender’s headquarters, located at 38505 Woodward Avenue, Suite 1300,
      Bloomfield Hills, Michigan 48304, or such other location as the Lender may
      designate by providing Borrower with not less than ten (10) days’ prior written
      notice.

     

    “Insurance
      Policies”
shall
      mean the following insurance policies, in each case acceptable to
      Lender:

     

    (a) Commercial
      General Liability Insurance for owners, including blanket contractual liability,
      products and completed operations, personal injury (including employees),
      independent contractors, explosion, collapse and underground hazards for bodily
      injury and property damage not less than One Million Dollars ($1,000,000)
      arising out of any single occurrence and Two Million Dollars ($2,000,000.00)
      in
      the aggregate; 

     

    (b) Workers’
      Compensation Insurance for statutory limits; 

     

    (c) Such
      other insurance as is required by any other Loan Document or as the Lender
      may
      otherwise reasonably require. 

     

    All
      Insurance Policies shall be “occurrence” based policies, issued on forms, by
      companies and in amounts satisfactory to Lender. All insurance policies shall
      contain loss-payable clauses in favor of Lender and its successors and assigns,
      as loss payee under a lender’s loss payable endorsement or mortgagee, as
      applicable, together with a non-contributing mortgagee clause acceptable to
      Lender. All policies of liability insurance shall name Lender and its successors
      and assigns as additional insureds. All insurance policies and certificates
      of
      insurance provided to Lender shall require (30) days’ prior written notice of
      cancellation or material diminution in coverage. All insurance policies shall
      be
      issued by insurers acceptable to Lender. Borrower may satisfy the insurance
      requirements of this Agreement and the other Loan Documents by using “blanket”
policies which cover the property (or the other risks required to be insured
      hereby or thereby) and other properties or risks of Borrower, provided that
      any
      such blanket policy shall comply with the specific requirements set forth herein
      or therein.

     

    “Inventory”
shall
      have the meaning given such term in the UCC.

     

    
      
         

      

      
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    “Legal
      Requirements”
shall
      mean all applicable laws, rules, regulations, ordinances, judgments, orders,
      decrees, injunctions, arbitral awards, permits, licenses, authorizations,
      directions and requirements of all Governmental Authorities.

     

    “Line
      of Credit”
is
      defined in Recital B on page one of this Agreement.

     

    “Line
      of Credit Availability”
shall
      mean the lesser of: (a) the Line of Credit Loan Amount and (b) the Borrowing
      Base Amount.

     

    “Line
      of Credit Loan Amount”
shall
      mean $3,000,000.

     

    “Line
      of Credit Note”
shall
      mean the promissory note executed by Borrower to evidence the Line of Credit,
      together with any and all modifications and amendments thereto and any note
      issued in substitution or replacement therefore.

     

    “Loans”
shall
      mean the Term Loan and the Line of Credit and “Loan” shall mean either of them,
      as applicable.

     

    “Loan
      Documents”
shall
      mean, collectively, this Agreement, the Notes, the Guaranties, the Security
      Agreement, any swap agreements, derivative agreements, interest rate protection
      agreements, or similar agreements entered into by Borrower with the Lender
      or
      any Affiliates of Lender, and any other document, instrument or agreement
      evidencing or securing the Loans, together with any and all modifications and
      amendments to any of the foregoing.

     

    “Material
      Adverse Effect”
shall
      mean a material, adverse effect on (i) the business, property or condition
      (financial or otherwise) of Borrower, any Subsidiary or any Guarantor; (ii)
      Borrower’s, any Subsidiary’s or any Guarantor’s, ability to perform its
      obligations hereunder or any other Loan Document to which it is a party, or
      (iii) the validity or enforceability of this Agreement or any other Loan
      Document.

     

    “Net
      Income”
shall
      mean net income as determined in accordance with GAAP, after taxes, if any,
      and
      after extraordinary items, but without giving effect to any gain resulting
      from
      any reappraisal or write up of any asset.

     

    “Net
      Worth” shall mean, as of any date of determination, the excess of (i) the net
      book value of the assets of Borrower
      and its consolidated Subsidiaries as
      of
      such date, after all appropriate deductions in accordance with GAAP (including,
      without limitation, reserves for doubtful receivables, obsolescence,
      depreciation and amortization) over (ii) Debt of Borrower and its consolidated
      Subsidiaries as of such date, all as determined in accordance with
      GAAP.

     

    “Notes”
shall
      mean the Term Note and the Line of Credit Note, and “Note” shall mean either of
      them, as applicable.

     

    “Obligations”
shall
      mean, collectively, Borrower’s obligations for the payment of all sums advanced
      or to be advanced hereunder, together with interest on the outstanding principal
      balance of such sums and with any and all other sums payable by Borrower to
      the
      Lender pursuant to this Agreement, the Note or any other Loan Document, along
      with Borrower’s obligation for the payment of any letters of credit issued by
      Lender and payment and performance of all of the warranties, representations,
      covenants and agreements to be paid, fulfilled, observed and performed by
      Borrower under each Loan Document to which Borrower is a party.

     

    
      
         

      

      
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    “Outstanding
      Amount”
shall
      mean, as of any date, the outstanding principal balance of the Loans advanced
      to
      or for the account of Borrower under this Agreement.

     

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

     

    “Person”
shall
      mean an individual, partnership, corporation, limited liability company, trust,
      unincorporated association, or other entity or association.

     

    “Permitted
      Investments”
shall
      mean with respect to any Person:

     

    (a) Governmental
      Obligations;

     

    (b) Obligations
      of a state of the United States, the District of Columbia or any possession
      of
      the United States, or any political subdivision thereof, which are described
      in
      Section 103(a) of the Internal Revenue Code and are graded in any of the highest
      three (3) major grades as determined by at least one Rating Agency; or secured,
      as to payments of principal and interest, by a letter of credit provided by
      a
      financial institution or insurance provided by a bond insurance company which
      in
      each case is itself or its debt is rated in one of the highest three (3) major
      grades as determined by Moody’s Investors Services or Standard &
Poor’s;

     

    (c) Banker’s
      acceptances, commercial accounts, demand deposit accounts, certificates of
      deposit, or depository receipts issued by or maintained with any Bank or a
      bank,
      trust company, savings and loan association, savings bank or other financial
      institution whose deposits are insured by the Federal Deposit Insurance
      Corporation and whose reported capital and surplus equal at least $100,000,000,
      provided that such minimum capital and surplus requirement shall not apply
      to
      demand deposit accounts maintained by the Company or any of its Subsidiaries
      in
      the ordinary course of business;

     

    (d) Commercial
      paper rated at the time of purchase within the two highest classifications
      established by not less than two Rating Agencies, and which matures within
      270
      days after the date of issue;

     

    (e) Secured
      repurchase agreements against obligations itemized in paragraph (a) above,
      and
      executed by a bank or trust company or by members of the association of primary
      dealers or other recognized dealers in United States government securities,
      the
      market value of which must be maintained at levels at least equal to the amounts
      advanced; and

     

    (f) Any
      fund
      or other pooling arrangement which exclusively purchases and holds the
      investments itemized in (a) through (e) above.

     

    “Permitted
      Liens”
shall
      mean with respect to any Person:

     

    (a) liens
      for
      taxes or assessments or governmental charges or levies not yet due or
      delinquent, or which can thereafter be paid without penalty, or which are being
      contested in good faith by proceedings diligently pursued;

     

    (b) existing
      liens described in attached Schedule 1;

     

    (c) liens
      imposed by law, such as mechanics’, materialmen’s, landlords’, warehousemen’s
      and carriers’ liens, and other similar liens, securing obligations incurred in
      the ordinary course of business or which are being contested in good faith
      by
      appropriate proceedings and for which appropriate reserves have been
      established; 

     

    
      
         

      

      
        9

        
          

        

      

      
         

      

    

     

    (d) liens
      under workers’ compensation, unemployment insurance, Social Security or similar
      Legal Requirement; 

     

    (e) liens,
      deposits or pledges to secure the performance of bids, tenders, contracts (other
      than contracts for the payment of money), leases permitted under this Agreement,
      public or statutory obligations, surety, stay, appeal, indemnity, performance
      or
      other similar bonds, or other similar obligations arising in the ordinary course
      of business; 

     

    (f) judgment
      and other similar liens arising in connection with court proceedings, provided
      that the execution or other enforcement of such liens is effectively stayed
      and
      the claims secured thereby are being actively contested in good faith and by
      appropriate proceedings; 

     

    (g) easements,
      rights-of-way, restrictions (including zoning restrictions), minor defects
      or
      irregularities in title and other similar charges or encumbrances which, in
      the
      aggregate, do not materially interfere with the use of such property or its
      intended purpose;

     

    (h) liens
      and
      encumbrances arising under the Loan Documents; and 

     

    (i) any
      other
      lien, encumbrance or charge acceptable to and approved in writing by
      Lender.

     

    “Security
      Agreement”
shall
      mean the security agreement executed by Borrower in favor of
      Lender.

     

    “Subordinated
      Debt”
shall
      mean, as to any Person, all Debt of which is subordinated to the indebtedness
      of
      such Person to Lender pursuant to written subordination agreements satisfactory
      to Lender in its sole discretion.

     

    “Subordination
      Agreements”
shall
      mean all subordination agreements entered into by and between a Person and
      Lender with respect to any Subordinated Debt.

     

    “Subsidiary(ies)”
shall
      mean, in respect of any Person, any corporation, association, joint stock
      company, limited liability company, partnership (whether general, limited or
      both), or business trust (in any case, whether now existing or hereafter
      organized or acquired), of which more than fifty percent (50%) of the
      outstanding voting Capital Securities or other ownership interest is owned
      either directly or indirectly by such Person and/or one or more of its
      Subsidiaries, or the management of which is otherwise controlled either directly
      or indirectly by such Person and/or one or more of its Subsidiaries. Unless
      otherwise specified to the contrary herein or the context otherwise expressly
      requires, the term Subsidiary(ies) shall refer to the Subsidiary(ies) of
      Borrower.

     

    “Term
      Loan Amount”
shall
      mean $1,735,716.61.

     

    “Term
      Note”
shall
      mean the promissory note executed by Borrower to evidence the Term Loan,
      together with any and all modifications and amendments thereto and any note
      issued in substitution or replacement therefore.

     

    “UCC”
shall
      mean the Uniform Commercial Code in effect in the State of Michigan from time
      to
      time.

     

    
      
         

      

      
        10

        
          

        

      

      
         

      

    

     

    1.2 Accounting
      Terms.
      Any
      accounting terms used in this Agreement which are not specifically defined
      herein shall have the meanings customarily given them in accordance with GAAP.
      Calculations and determinations of financial and accounting terms used and
      not
      otherwise specifically defined hereunder and the preparation of financial
      statements to be furnished to Lender pursuant hereto shall be made and prepared,
      both as to classification of items and as to amount, in accordance with sound
      accounting practices and GAAP as used in the preparation of the financial
      statements of Borrower on the date of this Agreement. If any changes in
      accounting principles or practices from those used in the preparation of the
      financial statements are hereafter occasioned by the promulgation of rules,
      regulations, pronouncements and opinions by or required by the Financial
      Accounting Standards Board or the American Institute of Certified Public
      Accountants (or any successor thereto or agencies with similar functions),
      which
      results in a material change in the method of accounting in the financial
      statements required to be furnished to Lender hereunder or in the calculation
      of
      financial covenants, standards or terms contained in this Agreement, the parties
      hereto agree to enter into good faith negotiations to amend such provisions
      so
      as equitably to reflect such changes to the end that the criteria for evaluating
      the financial condition and performance of Borrower will be the same after
      such
      changes as they were before such changes; and if the parties fail to agree
      on
      the amendment of such provisions, Borrower will furnish financial statements
      in
      accordance with such changes, but shall provide calculations, which are reviewed
      and certified by Borrower’s accountants, for all financial covenants, shall
      perform all financial covenants and shall otherwise observe all financial
      standards and terms in accordance with applicable accounting principles and
      practices in effect immediately prior to such changes. Calculations with respect
      to financial covenants required to be stated in accordance with applicable
      accounting principles and practices in effect immediately prior to such changes
      shall be reviewed and certified by the Borrower’s accountants.

     

    1.3 Other
      Terms Defined in UCC.
      All
      other capitalized words and phrases used in this Agreement and not otherwise
      specifically defined in this Agreement shall have the respective meanings
      assigned to such terms in the UCC, to the extent the same are used or defined
      in
      the UCC.

     

    ARTICLE
      2.

    THE
      LINE
      OF CREDIT

     

    2.1 Loan.
      Lender
      agrees to make advances under the Line of Credit upon the terms, covenants
      and
      conditions set forth in this Agreement and in the Line of Credit Note. The
      Line
      of Credit shall be in the Line of Credit Loan Amount and shall accrue interest,
      mature and be repaid as set forth in the Line of Credit Note. Aggregate advances
      under the Line of Credit shall not exceed the Line of Credit Availability.
      

     

    2.2 Commitment.
      Provided no Event of Default exists during the term of the Line of Credit that
      has not been cured or waived, Lender agrees to make advances of the Line of
      Credit to or for the benefit of Borrower up to an amount equal to the then
      applicable Line of Credit Availability subject to the terms of this Agreement
      and the Line of Credit Note. Any amounts advanced and repaid by Borrower under
      the Line of Credit may thereafter be re-advanced by Lender to Borrower, subject
      to the terms of this Agreement and the Line of Credit Note.

     

    2.3 Use
      of
      Proceeds:
      The
      proceeds of the Line of Credit will be used for working capital purposes of
      Borrower or its Subsidiaries.

     

    2.4 Interest.

     

    (a) Interest
      Rate.
      The
      outstanding principal balance of the Line of Credit shall bear interest as
      set
      forth in the Line of Credit Note and interest shall be computed, assessed and
      payable as set forth in the Line of Credit Note. 

     

    
      
         

      

      
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    (b) Interest
      on Overdue Payments; Default Interest Rate.
      If any
      payment of principal or interest is not paid when due or prior to the expiration
      of the applicable period of grace (if any) therefor, Lender may charge and
      collect a late charge as set forth in the Line of Credit Note. No failure by
      Lender to charge or collect any late charge in respect of any delinquent payment
      shall be considered to be a waiver of any rights that Lender may have under
      this
      Agreement, including without limitation the right subsequently to impose a
      late
      charge for such delinquent payment or to take such other action as may then
      be
      available to it hereunder or at law or in equity. If any Note has been
      accelerated or if an Event of Default shall have occurred and be continuing,
      the
      outstanding principal balance of the Line of Credit Note, together with all
      accrued interest thereon and any and all other Obligations not evidenced by
      a
      Note, shall bear interest from the date on which such amount shall have first
      become due and payable to the date on which such amount shall be paid (whether
      before or after judgment) at the default interest rate set forth in the Line
      of
      Credit Note. Interest at the default interest rate will continue to accrue
      until
      the Obligations in respect of such payment are discharged (whether before or
      after judgment).

     

    2.5 Repayment;
      Prepayment.
      The
      Line of Credit shall be repaid as set forth in the Line of Credit Note, and
      may
      be prepaid as set forth in the Line of Credit Note. In the event the aggregate
      outstanding principal balance of the Line of Credit exceeds the Line of Credit
      Availability, Borrower shall, without notice or demand of any kind, immediately
      upon becoming aware of such excess make such repayments of the Line of Credit
      or
      take such other action as are satisfactory to Lender to eliminate such
      excess.

     

    2.6 Promissory
      Note.
      Borrower will evidence its obligation to repay the Line of Credit by executing
      the Line of Credit Note dated of even date herewith.

     

    2.7 Commitment
      Fee.
      Borrower
      shall pay to Lender on the date of execution of this Agreement a commitment
      fee
      in the amount of Forty Eight Thousand Dollars ($48,000) for the Line of Credit
      and the Term Loan. Such commitment fee shall be non-refundable upon payment.
      Lender acknowledges the prior receipt of $10,000 of such fee. 

     

    2.8 Unused
      Fee.
      Borrower shall pay to the Lender an unused commitment fee for the period from
      the date of this Agreement to and including the maturity date of the Line of
      Credit equal to one quarter of one percent (0.25%) per annum on the average
      daily excess of Three Million Dollars ($3,000,000) over the average daily
      aggregate unpaid principal balance of the advances under the Line of Credit.
      Such commitment fee shall be payable on the first Business Day of each calendar
      quarter, beginning January 2, 2009 and on the maturity date of the Line of
      Credit, for the periods ending on such dates. The fee under this Section 2.8
      shall be computed on the basis of the actual number of days elapsed using a
      year
      of 360 days.

     

    ARTICLE
      2.A

    THE
      TERM LOAN

     

    2.A.1 Term
      Loan.
      Lender
      agrees to loan to Borrower and Borrower agrees to borrow, on the date of
      execution of this Agreement, a sum equal to the Term Loan Amount. At the time
      of
      borrowing, Borrower agrees to execute the Term Note. The loan under this Article
      2.A shall be subject to the terms and conditions of this Agreement and the
      Term
      Note. 

     

    2.A.2 Interest.
      The
      outstanding principal balance of the Term Loan shall bear interest as set forth
      in the Term Note and interest shall be computed, assessed and payable as set
      forth in the Term Note.

     

    
      
         

      

      
        12

        
          

        

      

      
         

      

    

     

    2.A.3 Repayment;
      Prepayment.
      The
      indebtedness represented by the Term Note shall be repaid as set forth in the
      Term Note, and may be prepaid as set forth in the Term Note. Borrower
      may prepay the Term Note only as set forth in the Term Note.

     

    2.A.4 Use
      of
      Proceeds:
      The
      proceeds of the Term Loan will be used to refinance a lease with Fifth Third
      Bank.

     

    ARTICLE
      2.B

    ACCELERATED
      MATURITY DATE

     

    2.B.1 MEDC.
      If the
      existing loans by the Michigan Economic Development Corporation to Borrower
      have
      not been converted to equity on or before August 31, 2011, then the Line of
      Credit and the Term Loan shall mature on August 31, 2011 and on such date,
      Borrower shall prepay in full the aggregate unpaid principal of, and accrued
      interest on, the Notes.

     

    ARTICLE
      3.

    ADDITIONAL
      COSTS; INDEMNIFICATION

     

    3.1 Additional
      Costs; Regulatory Change.

     

    (a) Notwithstanding
      any conflicting provision of this Agreement to the contrary, if any applicable
      law or regulation not in effect as of the date hereof shall (i) subject Lender
      to any tax, levy, impost, duty, charge, fee, deduction or withholding of any
      nature with respect to any Loan, this Agreement, any Note, or any other Loan
      Document or the payment by Borrower of any amounts payable to Lender with
      respect to any Loan, this Agreement, any Note or any other Loan Documents;
      or
      (ii) materially change, in the reasonable opinion of Lender, the basis of
      taxation of payments to Lender of the principal of or the interest on any Note
      or any other amounts payable to Lender under this Agreement or any other Loan
      Document; or (iii) impose or increase, or render applicable, any special or
      supplementary special deposit or reserve or similar requirements against assets
      held by, or deposits in or for the account of, or any eligible liabilities
      of,
      or loan by any office or branch of Lender; or (iv) impose on Lender any other
      condition or requirement with respect to this Agreement, any Note or any other
      Loan Document, and if the result of any of the foregoing is (A) to increase
      the
      cost to Lender of making, funding or maintaining all or any part of the
      principal of any of the Loans, or (B) to reduce the amount of principal,
      interest or any other sum payable by Borrower to Lender under this Agreement,
      any Note or any other Loan Document, or (C) to require Lender to make any
      payment or to forego any interest or other sum payable by Borrower to Lender
      under this Agreement, any Note or any other Loan Document, the amount of which
      payment or foregone interest or other sum is measured by or calculated by
      reference to the gross amount of any sum receivable or deemed received by Lender
      from Borrower under this Agreement, any Note or any other Loan Document, then,
      and in each such case, Borrower will pay to Lender, within ten (10) days of
      written notice (such notice to include the statement described in Section 3.3),
      such additional amounts as will (in the reasonable opinion of Lender) be
      sufficient to compensate Lender for such additional cost, reduction, payment
      or
      foregone interest or other sum. Anything in this paragraph to the contrary
      notwithstanding, the foregoing provisions of this paragraph shall not apply
      in
      the case of any additional cost, reduction, payment or foregone interest or
      other sum resulting solely from or arising solely as a consequence of any taxes
      charged upon or by reference to the overall net income, profits or gains of
      Lender.

     

    
      
         

      

      
        13

        
          

        

      

      
         

      

    

     

    (b) If
      any
      present or future applicable law shall make it unlawful for Borrower to perform
      any of its agreements or obligations under this Agreement, any Note or any
      other
      Loan Document, and Lender shall reasonably determine (which determination shall
      be conclusive and binding on Borrower) (i) that as a consequence of the effect
      or operation (whether direct or indirect) of any such applicable law, any of
      the
      rights, remedies, powers or privileges of Lender under or in respect of this
      Agreement, any Note or any other Loan Document shall be or become invalid,
      unenforceable, or materially restricted; and (ii) that any of the rights,
      remedies, powers and privileges so affected are of material importance to Lender
      (as determined by Lender), then Lender may, by giving notice to Borrower (such
      notice to include the statement described in Section 3.3), declare all of the
      Obligations, including without limitation the entire unpaid principal of the
      Notes, all of the unpaid interest accrued on the Notes and any and all other
      sums due and payable by Borrower to Lender under this Agreement, the Notes
      and
      any other Loan Document, to be immediately due and payable, and, thereupon,
      such
      Obligations shall (if not already due and payable) forthwith become and be
      due
      and payable without further notice or other formalities of any kind, all of
      which are hereby expressly waived.

     

    3.2 Indemnification
      for Losses.
      Without
      derogating from any of the other provisions of this Agreement or any other
      Loan
      Document, Borrower hereby absolutely and unconditionally agrees to indemnify
      Lender, at any time and as often as the occasion therefor may require (within
      15
      days of written demand for such indemnification), against any and all claims,
      demands, suits, actions, damages, losses, costs, expenses and all other
      liabilities whatsoever which Lender or any of its directors or officers may
      sustain or incur as a consequence of (a) any failure by Borrower to pay any
      amount payable under this Agreement, any Note or any other Loan Document as
      and
      when such amount shall first have become due and payable (giving effect,
      however, to expiration of the period of grace (if any) applicable thereto),
      or
      (b) the acceleration of the maturity of any of the Obligations, or (c) any
      failure by Borrower to perform or comply with any of the terms and provisions
      of
      this Agreement, any Note or any other Loan Document to which Borrower are a
      party. Such claims, demands, suits, actions, damages, losses, costs or expenses
      shall include, without limitation (a) any costs incurred by Lender in carrying
      funds to cover any overdue principal, overdue interest or any other overdue
      sums
      payable by Borrower under this Agreement, any Note, or any other Loan Document;
      (b) any interest payable by Lender to the lenders of the funds borrowed by
      Lender in order to carry the funds referred to in clause (a) of this Section;
      and (c) any losses (but excluding losses of anticipated profit) incurred or
      sustained by Lender in liquidating or re-employing funds acquired from third
      parties to make, fund or maintain all or any part of the Loans.

     

    3.3 Statements
      by Lender.
      A
      statement signed by an officer of Lender setting forth any amount required
      to be
      paid by Borrower under Sections 3.1 and 3.2 and a reasonably detailed
      description of such amount and Lender’s claim for such amount shall be submitted
      by Lender to Borrower in connection with each demand made at any time by Lender
      under either such Section. A claim by Lender for all or any part of any
      additional amounts required to be paid by Borrower under such Sections may
      be
      made before or after any payment to which such claim relates. Each such
      statement shall, in the absence of manifest error, constitute presumptive
      evidence of the additional amount required to be paid to Lender.

     

    ARTICLE
      4.

    CONDITIONS
      PRECEDENT

     

    4.1 General.
      Lender
      shall not be required to consummate the transactions contemplated by this
      Agreement or to disburse the proceeds of any of the Loans to or for the account
      of Borrower unless the conditions set forth in this Article
      4
      shall
      have been completed to the satisfaction of Lender.

     

    (a) Borrower
      shall have executed the Loan Documents and shall have delivered the same to
      Lender and shall have caused each Guarantor to execute its respective Guaranty
      and to deliver the same to the Lender. All of the Loan Documents shall be in
      full force and effect.

     

    
      
         

      

      
        14

        
          

        

      

      
         

      

    

     

    (b) Borrower
      shall have provided Lender with a certificate from a duly authorized
      representative of Borrower: (i) attaching true and complete copies of Borrower’s
      Articles of Incorporation and Bylaws, and certifying that the same are in full
      force and effect and unmodified; (ii) attaching a resolution authorizing
      Borrower’s execution and delivery of this Agreement and the other Loan Documents
      to which Borrower is a party and its performance of its obligations under this
      Agreement and the other Loan Documents, and thereunder, and confirming that
      such
      resolution is in full force and effect; and (iii) identifying the officers
      of
      Borrower who are authorized to execute and deliver this Agreement for and on
      behalf of Borrower, and providing specimen signatures for such
      officers;

     

    (c) Each
      Guarantor shall have provided Lender with a certificate of its existence and
      authority authorizing such Guarantor’s execution and delivery of the Guaranty
      and such other Loan Documents to which it is a party;
      and

     

    (d) Borrower
      shall have paid all costs and expenses of Lender in connection with this
      Agreement or the closing of the transactions contemplated hereby including,
      without limitation, reasonable attorneys fees.

     

    4.2 Conditions
      for the Benefit of the Lender.
      All of
      the foregoing conditions are imposed for the benefit of Lender. No party other
      than Lender shall have standing to require the satisfaction of any such
      conditions, and no party shall be entitled to assume that Lender would refuse
      to
      make advances of Loan proceeds if any one or more of such conditions were to
      remain unfulfilled. No party other than Lender shall be or be deemed to be
      the
      beneficiary of any such conditions; any one or more, or all, of such conditions
      may be waived if Lender shall deem it advisable to do so.

     

    ARTICLE
      5.

    GENERAL
      REPRESENTATIONS AND WARRANTIES

     

    Borrower
      represents and warrants to Lender, and such representations and warranties
      shall
      be deemed to be continuing representations and warranties during the entire
      life
      of this Agreement, and thereafter, so long as any Obligations remain unpaid
      and
      outstanding:

     

    5.1 Organization
      and Existence.

     

    (a) Borrower
      (i) is duly organized, validly existing and in good standing as a corporation
      under the laws of the State of Delaware; (ii) has all necessary power and
      authority and full legal right to own its property and to carry on its
      businesses; and (iii) has all necessary power and authority, and full legal
      right, to enter into this Agreement and each of the other Loan Documents to
      which it is a party, and to perform, observe and comply with all of its
      agreements and obligations under this Agreement and the other Loan
      Documents.

     

    (b) Borrower
      has provided Lender with true, correct and complete copies of its Articles
      of
      Incorporation and Bylaws and all of the exhibits thereto (collectively, each
      “Borrower’s Organizational Documents”). All of Borrower’s Organizational
      Documents are unmodified (from the copies of such documents previously furnished
      to Lender) and in full force and effect.

     

    (c) Each
      Subsidiary (i) is duly organized, validly existing and in good standing as
      a
      corporation and/or limited liability company under the laws of the state in
      which it is organized; (ii) has all necessary power and authority and full
      legal
      right to own its property and to carry on its businesses; and (iii) has all
      necessary power and authority, and full legal right, to enter into each of
      the
      applicable Loan Documents to which it is a party, and to perform, observe and
      comply with all of its agreements and obligations under this Agreement and
      the
      other Loan Documents.

     

    
      
         

      

      
        15

        
          

        

      

      
         

      

    

     

    (d) Each
      Subsidiary has provided Lender with true, correct and complete copies of its
      Articles of Incorporation and Bylaws and/or Articles of Organization and
      Operating Agreement and all of the exhibits thereto (collectively, each
“Borrower’s Organizational Documents”). Each Subsidiary’s Organizational
      Documents are unmodified and in full force and effect.

     

    5.2 Due
      Authorization.

     

    (a) The
      execution and delivery by Borrower of this Agreement and the other Loan
      Documents to which Borrower is a party, the performance by Borrower of all
      of
      its agreements and obligations under such documents and the making of the
      borrowings contemplated by this Agreement have been duly authorized by all
      necessary action on the part of Borrower and do not and will not (i) contravene
      any provision of Borrower’s Organizational Documents; (ii) conflict with, or
      result in a breach of the terms, conditions or provisions of, or constitute
      a
      default under, or result in the creation of any lien (other than those in favor
      of Lender pursuant to the Loan Documents) upon any of its property under any
      agreement, indenture, mortgage or other instrument to which Borrower is a party
      or by which Borrower is bound or affected; (iii) to Borrower’s knowledge,
      violate or contravene any provision of any law, rule or regulation (including,
      without limitation, the Regulations of the Board of Governors of the Federal
      Reserve System) or any order, ruling or interpretation thereunder or any decree,
      order or judgment of any court or governmental or regulatory authority, bureau,
      agency or official binding on Borrower; or (iv) to Borrower’s knowledge, require
      any waivers, consents or approvals by any of the creditors or trustees for
      creditors of Borrower.

     

    (b) Each
      Guarantor (i) is duly organized, validly existing and in good standing as
      corporation and/or limited liability company under the laws of the state in
      which it is organized; (ii) has all necessary power and authority and full
      legal
      right to own its property and to carry on its businesses; and (iii) has all
      necessary power and authority, and full legal right, to enter into each of
      the
      Loan Documents to which it is a party, and to perform, observe and comply with
      all of their agreements and obligations under each of the Loan Documents to
      which it is a party.

     

    (c) Except
      as
      to matters which Borrower has procured, obtained or performed prior to or
      concurrently with its execution and delivery of this Agreement, no approval,
      consent, order, authorization or license by, or giving notice to, or taking
      any
      other action with respect to, any governmental or regulatory authority or agency
      is required under any provision of any applicable law:

     

    (i) for
      Borrower’s execution and delivery of this Agreement and the other Loan Documents
      to which it is a party or Borrower’s performance of its obligations under this
      Agreement and the other Loan Documents, for the making by Borrower of the
      borrowings contemplated by this Agreement; or

     

    (ii) for
      the
      continuing legality, validity, binding effect, enforceability or admissibility
      in evidence of this Agreement and the other Loan Documents.

     

    5.3 General.
      There
      are no actions, suits or proceedings pending or, to the actual knowledge of
      Borrower, threatened against Borrower, any Subsidiary, any Guarantor, which
      could, if determined adversely to Borrower, such Subsidiary or such Guarantor,
      reasonably be expected to have a Material Adverse Effect upon Borrower, such
      Subsidiary or such Guarantor.

     

    
      
         

      

      
        16

        
          

        

      

      
         

      

    

     

    5.4 Loan
      Documents.
      On or
      before the Closing Date, Borrower will have duly executed and delivered each
      of
      the Loan Documents to which Borrower is a party and each such Loan Document
      will
      be in full force and effect. Each Loan Document to which Borrower is a party
      shall constitute the legal, valid and binding obligation of Borrower,
      enforceable against Borrower in accordance with its terms (except as such
      enforceability may be limited by bankruptcy, insolvency or similar laws
      generally affecting the enforcement of creditor’s rights). 

     

    5.5 No
      Default.
      No
      event has occurred and is continuing, and no condition exists, which constitutes
      (or would, with the provision of notice or the passage of time, or both,
      constitute) an Event of Default. Borrower has no right to rescind, cancel or
      terminate this Agreement or any other Loan Document.

     

    5.6 Financial
      Statements.
      All of
      the financial statements of Borrower, each Subsidiary and each Guarantor
      delivered to Lender in connection with the transactions contemplated by this
      Agreement have been prepared in accordance with GAAP, and fairly present in
      all
      material respects the financial condition of Borrower, such Subsidiary and
      such
      Guarantor as of the dates on which the same were prepared. There are no material
      liabilities or obligations, secured or unsecured (whether accrued, absolute
      or
      actual, contingent or otherwise), not reflected in such financial statements,
      which, in accordance with GAAP, should have been reflected therein. From the
      date of the most recent financial statements provided to Lender until the date
      hereof, there has been no materially adverse change in the financial condition
      of Borrower, any Subsidiary or any Guarantor.

     

    5.7 Tax
      Returns.
      Each of
      Borrower, each Subsidiary and each Guarantor has filed all federal, state and
      other tax returns required to be filed in respect of all taxing periods prior
      to
      the date of this Agreement (or has been granted extensions with respect to
      same), and has paid or made reasonable provision, in accordance with applicable
      laws for the payment of all taxes (if any) which have or may become due and
      payable pursuant to any such returns (or pursuant to any matters raised by
      audits). In addition, Borrower, each Subsidiary and each Guarantor has paid
      or
      caused to be paid all real and personal property taxes and assessments and
      other
      governmental charges lawfully levied or imposed on or against Borrower, such
      Subsidiary or such Guarantor, or its property (other than those presently
      payable without payment of interest or penalty and those which are subject
      to
      contests initiated in good faith and diligently prosecuted and as to which
      adequate reserves have been provided).

     

    5.8 Solvency.
      Borrower does not intend to, and does not believe that it will, incur debts
      beyond its ability to pay as they mature, taking into account the timing of
      and
      amounts of cash to be received by it and the timing of the amounts of cash
      to be
      payable on or in respect of its Indebtedness. Borrower is solvent, and, giving
      effect to the closing of the transactions contemplated by this Agreement and
      the
      disbursement of the proceeds of the Loans, shall remain solvent.

     

    5.9 Business
      Loan.
      The
      Loans are intended solely for business purposes, and no proceeds of the Loans
      shall be used for personal, family or household purposes.

     

    5.10 Locations.
      Schedule 5.10
      sets
      forth all locations which Borrower owns, leases, at which Borrower conducts
      business or at which Borrower’s assets are located. 

     

    5.11 Subsidiaries.
      Except
      as listed on Schedule 5.11,
      Borrower has no Subsidiaries. 

     

    5.12 Encumbrances.
      There
      are no security interests in, or liens, mortgages, or other encumbrances on,
      any
      of Borrower’s property or assets, except Permitted Liens.

     

    
      
         

      

      
        17

        
          

        

      

      
         

      

    

     

    5.13 Environmental.
      Neither
      Borrower nor any Subsidiary has used Hazardous Materials on, in, under or
      otherwise affecting any real or personal property now or at any time owned,
      occupied or operated by Borrower or such Subsidiary or upon which Borrower
      or
      such Subsidiary has a place of business (collectively and severally the
“Property”) in any manner which violates any Environmental Law(s), to the extent
      that any such violation could result in a Material Adverse Effect; and that,
      to
      the best of Borrower’s knowledge, no prior owner, occupant or operator of any of
      the Property, or any current or prior owner, occupant or operator thereof,
      has
      used any Hazardous Materials on or affecting the Property in any manner which
      violates any Environmental Law(s), to the extent that any such violation could
      result in a Material Adverse Effect. Neither Borrower nor any Subsidiary has
      ever received any notice of any violation of any Environmental Law(s), and
      to
      the best of Borrower’s knowledge, there have been no actions commenced or
      threatened by any party against Borrower or any Subsidiary or any of the
      Property for non-compliance with any Environmental Law(s), which, in any case,
      could result in a Material Adverse Effect.

     

    ARTICLE
      6.

    COVENANTS
      OF BORROWER

     

    Borrower
      covenants with and warrants to the Lender that until all of the Obligations
      are
      paid and satisfied in full, Borrower shall comply with, observe, perform or
      fulfill, and shall cause each Subsidiary to comply with, observe, perform or
      fulfill, all of the covenants set forth in this Article 6.

     

    6.1 Financial
      Statements and Reports.
      

     

    (a) Borrower
      and each Subsidiary shall keep complete and accurate books and records, in
      accordance with GAAP, consistently applied at all times during the pendency
      of
      the Loan, and shall permit Lender and its representatives to examine and make
      copies of the same at any reasonable time upon reasonable notice during normal
      business hours.

     

    (b) Borrower
      shall deliver its annual consolidated financial statements, including a
      consolidated balance sheet, a consolidated profit and loss statement and a
      consolidated cash-flow statement, in a form acceptable to Lender. The foregoing
      financial statements shall be prepared by independent certified public
      accountants satisfactory to Lender in accordance with GAAP, consistently
      applied, and will be furnished not later than one hundred twenty (120) days
      from
      the end of such fiscal year of Borrower. Simultaneously with the delivery of
      the
      annual audited financial statements, Borrower shall deliver a covenant
      compliance certificate setting forth all computations necessary to show
      compliance by Borrower with the covenants in Section 6.5
      of this
      Agreement and stating that no Event of Default has occurred and is continuing.
      The foregoing financial statements shall be prepared in accordance with
      GAAP.

     

    (c) Borrower
      shall deliver, within sixty (60) days after and as of the end of each fiscal
      quarter, its management-prepared financial statement, including a consolidated
      balance sheet as of the end of such month, a consolidated profit and loss
      statement for such month and fiscal year to date, certified by a responsible
      authorized officer of Borrower, in a form acceptable to Lender, together with
      a
      covenant compliance certificate from such authorized officer setting forth
      all
      computations necessary to show compliance by Borrower with the covenants in
      Section
      6.5
      of this
      Agreement and stating that no Event of Default has occurred and is continuing.
      The foregoing financial statements shall be prepared in accordance with
      GAAP.

     

    (d) Borrower
      shall provide Lender, within fifteen (15) days after and as of the end of each
      month, agings of Borrower’s and each other Borrowing Base Obligor’s accounts
      receivable, accounts payable, an inventory report (including a work in process
      schedule) and a Borrowing Base Certificate for Borrower and each other Borrowing
      Base Obligor, all in form and detail satisfactory to Lender, and certified
      by a
      responsible authorized officer of Borrower.

     

    
      
         

      

      
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    (e) Borrower
      will deliver and cause each of its Subsidiaries and each Guarantor to deliver
      such other information regarding its (or his) financial matters as the Lender
      may reasonably request promptly after the Lender’s request
      therefor.

     

    6.2 Insurance.
      Borrower shall maintain, and cause each of its Subsidiaries to maintain,
      insurance coverage pursuant to the Insurance Policies.

     

    6.3 Borrower’s
      Existence.
      Except
      as a result of or in connection with a consolidation or merger permitted under
      Section 6.17, Borrower shall, and cause each of its Subsidiaries to, preserve
      and maintain its existence and all of its rights, franchises and
      privileges.

     

    6.4 Compliance
      with Legal Requirements.
      Borrower shall, and shall cause each of its Subsidiaries to, comply with all
      applicable Legal Requirements, and will promptly notify Lender in the event
      that
      Borrower or any of its Subsidiaries receives any notice, claim or demand from
      any Governmental Authority asserting the violation of any applicable Legal
      Requirement which could reasonably be expected to have a Material Adverse Effect
      upon Borrower or any of its Subsidiaries. The receipt of any such assertion
      shall not be deemed in and of itself a violation of this Section 6.4, provided
      (a) that Borrower shall provide Lender with written notice of such contest;
      (b)
      that there shall then be no uncured Event of Default; (c) that such contest
      shall be initiated in good faith in accordance with the appropriate legal or
      administrative procedure therefor and diligently prosecuted to a timely
      completion; (d) that such contest shall not, in Lender’s judgment, jeopardize
      the security for the Loan or any portion of Borrower’s assets to imminent risk
      of loss or forfeiture; and (e) Borrower shall indemnify Lender from and against
      any and all liability, loss, cost, damage and expense which may be incurred
      by
      or asserted against any such party in connection with or arising from such
      contest.

     

    6.5 Financial
      Covenants.

     

    (a) Borrower
      shall maintain at all times a Debt Service Coverage Ratio of not less than
      1.25
      to 1.00.

     

    (b) Borrower
      shall maintain at all times Adjusted EBITDA of not less than the following
      amounts of the periods specified below:

    

      
        	
                September
                  30, 2008

              	 	
                $

              	
                1,500,000

              	 
	
                December
                  31, 2008

              	 	
                $

              	
                2,750,000

              	 
	
                March
                  31, 2009 and thereafter

              	 	
                $

              	
                4,300,000

              	 

      

    

    

    Adjusted
      EBITDA shall be determined on a fiscal year to date basis for the September
      30,
      2008 and December 31, 2008 test dates and thereafter on a trailing twelve month
      basis.

     

    (c) Borrower
      shall maintain at all times Net Worth of not less than the Base Net
      Worth.

     

    6.6 Notice
      of Litigation.
      Borrower shall, and shall cause each of its Subsidiaries to, furnish or cause
      to
      be furnished to Lender within five (5) Business Days after Borrower or any
      of
      its Subsidiaries shall have first become aware of the same, a written notice
      identifying, and describing Borrower’s or such Subsidiary’s proposed response to
      the commencement or institution of any legal or administrative action, suit,
      proceeding or investigation by or against Borrower or such Subsidiary in or
      before any court, governmental or regulatory body, agency, commission or
      official, board of arbitration or arbitrator which could reasonably be expected
      to have a Material Adverse Effect on Borrower or any Subsidiary. For the
      purposes of this Agreement, any such litigation or other matter in which the
      sum
      in dispute is Two Hundred Fifty Thousand Dollars ($250,000) or more will be
      deemed to be material.

     

    
      
         

      

      
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    6.7 Notice
      of Other Events.

     

    (a) If
      (and
      on each occasion that) any Event of Default shall occur, Borrower shall,
      promptly after becoming aware of the same, furnish Lender with a written notice
      specifying the nature of such Event of Default and describing Borrower’s
      proposed response thereto.

     

    (b) Immediately
      upon Borrower first becoming aware of any of the following occurrences, Borrower
      will notify Lender in writing thereof: (i) the business failure, insolvency
      or
      bankruptcy of Borrower, any Subsidiary or any Guarantor; (ii) the rescission,
      cancellation or termination of, or the occurrence of a breach, default or event
      of default under or with respect to any material agreement or contract to which
      Borrower or any of its Subsidiaries is a party; or (iii) any events of default
      under any material agreement of Borrower or any of its Subsidiaries or any
      material violations of any laws, regulations, rules or ordinances of any
      governmental or regulatory body.

     

    6.8 Payment
      of Taxes and Other Claims.
      Borrower shall, and shall cause each of its Subsidiaries to, pay and discharge
      promptly before interest and penalties accrue, all taxes, assessments and other
      governmental charges or levies at any time imposed upon it or upon its income,
      revenues or property, as well as all claims of any kind (including claims for
      labor, material or supplies) which, if unpaid, might by law become a Lien or
      charge upon all or any part of its income, revenues or property. 

     

    6.9 Payment
      of Indebtedness.
      Borrower will duly and punctually pay or cause to be paid the principal and
      interest on the Loans and all fees and other amounts payable hereunder or under
      the Loan Documents as and when required by this Agreement and the other Loan
      Documents. 

     

    6.10 Governmental
      Consents and Approvals.
      

     

    (a) Borrower
      will obtain, and will cause each of its Subsidiaries to obtain, all such
      approvals, consents, orders, authorizations and licenses from, give all such
      notices promptly to, register, enroll or file all such agreements, instruments
      or documents promptly with, and promptly take all such other action with respect
      to, any Governmental Authority, regulatory agency or official or any central
      bank or other fiscal or monetary authority, agency or official, as may be
      required from time to time under any provision of any applicable
      law:

     

    (i) for
      the
      performance by Borrower or such Subsidiary of any of its agreements or
      obligations under the Notes, this Agreement or any other Loan Document to which
      it is a party or for the payment by Borrower to the Lender at its Head Office
      of
      any sums which shall become due and payable by Borrower thereunder;

     

    (ii) to
      ensure
      the continuing legality, validity, binding effect or enforceability of the
      Notes
      or any other Loan Document; 

     

    (iii) to
      continue the proper operation of the business and operations of
      Borrower.

     

    
      
         

      

      
        20

        
          

        

      

      
         

      

    

     

    6.11 Pension
      and Benefit Plans.
      Borrower will, and will cause each of its Subsidiaries to, at all times meet
      the
      minimum funding requirements of ERISA with respect to Borrower’s and each of its
      Subsidiaries employee benefit plans subject to ERISA; promptly after Borrower
      or
      any of its Subsidiaries knows or has reason to know of the occurrence of any
      event, which would constitute a reportable event or prohibited transaction
      under
      ERISA, or that the PBGC, Borrower or any of its Subsidiaries has instituted
      or
      will institute proceedings to terminate an employee pension plan, deliver to
      Lender a certificate of an authorized officer of Borrower setting forth details
      as to such event or proceedings and the action which Borrower proposes to take
      with respect thereto, together with a copy of any notice of such event which
      may
      be required to be filed with the PBGC; and upon the request of Lender, furnish
      to Lender (or cause the plan administrator to furnish Lender) a copy of the
      annual return (including all schedules and attachments) for each plan covered
      by
      ERISA, and filed with the Internal Revenue Service by Borrower or any of its
      Subsidiaries, as applicable, not later than ten (10) days after such report
      has
      been so filed. Borrower shall be permitted to voluntarily terminate employee
      pension or benefit plans, so long as any such voluntary termination is done
      in
      accordance with ERISA and does not result in a Material Adverse Effect or a
      Lien
      on the assets of Borrower or any of its Subsidiaries.

     

    6.12 Further
      Assurances.
      Borrower will execute, acknowledge and deliver, or cause to be executed,
      acknowledged and delivered, any and all further assurances reasonably requested
      by the Lender from time to time in order to give full effect to any of the
      Loan
      Documents.

     

    6.13 Use
      of
      Proceeds.
      Borrower shall use all Loan proceeds only for the uses and purposes permitted
      by
      this Agreement.

     

    6.14 Environmental
      Matters.

     

    (a) Borrower
      shall timely comply, and shall cause each of its Subsidiaries and Affiliates
      to
      timely comply, in all material respects with all applicable Environmental
      Laws.

     

    (b) Borrower
      shall provide to Lender, as soon as practicable after receipt, copies of any
      correspondence, notice, pleading, citation, indictment, complaint, order,
      decree, or other document from any source asserting or alleging a circumstance
      or condition which requires or may require a financial contribution by Borrower
      or any of its Subsidiaries or Affiliates or a cleanup, removal, remedial action,
      or other response by or on the part of Borrower or any of its Subsidiaries
      or
      Affiliates under applicable Environmental Laws or which seeks damages or civil,
      criminal or punitive penalties from Borrower or any of its Subsidiaries or
      Affiliates for an alleged violation of Environmental Laws.

     

    (c) Borrower
      shall promptly notify Lender in writing as soon as it becomes aware of any
      condition or circumstance which makes the environmental warranties contained
      in
      this Agreement incomplete or inaccurate in any material respect as of any
      date.

     

    (d) Borrower
      hereby indemnifies, saves and holds Lender and any of its past, present and
      future officers, directors, shareholders, employees, representatives and
      consultants harmless from any and all loss, damages, suits, penalties, costs,
      liabilities and expenses (including but not limited to reasonable investigation,
      environmental audit(s), and legal expenses) arising out of any claim, loss
      or
      damage of any property, injuries to or death of persons, contamination of or
      adverse affects on the environment, or any violation of any applicable
      Environmental Laws, caused by or in any way related to any property owned,
      leased or operated by Borrower, or due to any acts of Borrower, or any of its
      Subsidiaries or Affiliates or any of their officers, directors, shareholders,
      employees, consultants and/or representatives. In no event shall Borrower be
      liable hereunder for any loss, damages, suits, penalties, costs, liabilities
      or
      expenses (i) arising from any act of gross negligence or willful misconduct
      of
      Lender, or its officers, directors, shareholders or employees, representatives
      or consultants or (ii) arising from any action taken by Lender while it is
      in
      sole possession of any such property.

     

    
      
         

      

      
        21

        
          

        

      

      
         

      

    

     

    (e) Borrower
      and each of its Subsidiaries and Affiliates have and shall maintain all permits,
      licenses and approvals required under applicable Environmental
      Laws.

     

    (f) Borrower
      shall promptly conduct and complete, at Borrower’s expense, all such
      investigations, studies, samplings and testings as may be reasonably requested
      by Lender or any governmental authority relative to any Hazardous Material
      at or
      affecting any property or any facility owned, leased or used by Borrower or
      any
      of its Subsidiaries.

     

    (g) The
      provisions of this Section 6.14
      shall
      survive the payment of the Loans and the termination, expiration or satisfaction
      of this Agreement and shall not be affected by Lender’s acquisition of any
      interest in any of the assets of Borrower, whether by foreclosure or
      otherwise.

     

    6.15 Acquisition
      of Margin Securities.
      Other
      then with respect to Permitted Liens, Borrower shall not own, purchase or
      acquire (or enter into any contract to purchase or acquire) any “margin
      security” as defined by any regulation of the Federal Reserve Board as now in
      effect or as the same may hereafter be in effect.

     

    6.16 Payment
      of Claims; Encumbrances.
      Borrower shall, and shall cause each of its Subsidiaries to, (i) keep its
      assets, whether now owned or hereafter acquired, free of any lien, charge or
      claim; and (ii) not encumber its assets, whether now owned or hereafter
      acquired, or any portion thereof or interest therein, permit any lien, levy,
      attachment or restraint to be made or filed against its assets, whether now
      owned or hereafter acquired, or any portion thereof or interest therein or
      permit any receiver or assignee for the benefit of creditors to be appointed
      to
      take possession of its assets, whether now owned or hereafter acquired, or
      any
      portion thereof. 

     

    6.17 Borrower’s
      Organizational Documents.
      Borrower shall not, and shall cause each of its Subsidiaries not to, modify,
      amend or terminate any of Borrower’s or any of its Subsidiaries’ Organizational
      Documents, or permit any of Borrower’s or any of its Subsidiaries’
Organizational Documents to be modified, amended or terminated, without the
      prior written consent of the Lender if such modification, amendment or
      termination would materially adversely affect Lender’s rights under the Loan
      Documents.

     

    6.18 Prohibition
      of Assignments, Transfers and Encumbrances.
      Without
      first obtaining Lender’s express, written consent in each instance, Borrower
      shall not, and shall cause each of its Subsidiaries not to, directly or
      indirectly (i) except in the ordinary course of business, sell, transfer, lease
      or otherwise dispose of all or any portion of its assets or any interest therein
      except for transfers of assets by a Guarantor to Borrower or another Guarantor
      or by Borrower to a Guarantor; (ii) except for Permitted Liens, encumber,
      hypothecate, create a security interest or create or permit any lien upon or
      affecting its assets or any portion thereof or interest therein; (iii) assign,
      transfer or encumber any interest of Borrower or any of its Subsidiaries under
      this Agreement or under any other Loan Document, or delegate any of Borrower’s
      or any of its Subsidiaries’ duties or obligations hereunder or thereunder; (iv)
      purchase, acquire, issue or redeem any of its Capital Securities or make any
      material change in its capital structure; (v) consolidate with or merge into
      any
      other Person or permit any other Person to merge into it, except for mergers
      of
      a Person into Borrower Guarantor so long as the Borrower or Guarantor, as
      applicable, is the surviving entity; or (vi) enter into any sale-leaseback
      transaction. Furthermore, Borrower shall not, and shall cause its Subsidiaries
      not to, change its name without giving Lender fifteen (15) days prior written
      notice.

     

    
      
         

      

      
        22

        
          

        

      

      
         

      

    

     

    6.19 Prohibition
      of Other Indebtedness.
      Without
      first obtaining Lender’s express, written consent in each instance, Borrower
      shall not, and shall cause each of its Subsidiaries not to, directly or
      indirectly, become or remain obligated for any indebtedness for borrowed money,
      or for any indebtedness incurred in connection with the acquisition of any
      property, real or personal, tangible or intangible, except: (i) indebtedness
      to
      Lender, (ii) current unsecured trade payables and accrued liabilities arising
      in
      the ordinary course of Borrower’s or any of its Subsidiaries’ business, (iii)
      purchase money indebtedness for the acquisition of fixed assets not exceeding
      Two Hundred Fifty Thousand Dollars ($250,000), and (iv) indebtedness of Borrower
      to any Subsidiary of Borrower or of any Subsidiary of Borrower which is a
      Guarantor to Borrower; and (v) existing indebtedness described on Schedule
      6.19.

     

    6.20 Loans,
      Acquisitions, Guaranties, Affiliate Transactions.
      Without
      first obtaining Lender’s express, written consent in each instance, Borrower
      shall not, and shall cause each of its Subsidiaries not to, directly or
      indirectly, (i) make any loan, investment, advance or extension of credit to
      any
      Person except for loans, advances and extensions of credit by the Borrower
      to a
      Guarantor and except for investments consisting of Permitted Investments, (ii)
      purchase, create or acquire all or substantially all of the properties or assets
      of any other Person or any interest in any other Person, (iii) incur any
      obligation as surety or guarantor, other than in the ordinary course of business
      or in favor of Lender, (iv) enter into any transaction with an Affiliate that
      in
      not on terms and conditions as favorable to Borrower as would be obtainable
      in a
      transaction with a Person that is not an Affiliate or (v) subordinate any
      indebtedness due it from any Person to indebtedness of other creditors of such
      Person.

     

    6.21 Dividends;
      Distributions.
      Borrower shall not, and shall cause each of its Subsidiaries not to, pay any
      Dividends on its capital stock without Lender’s prior written consent, except
      (i) Borrower may pay cash Dividends or distributions to its shareholders from
      time to time during a year to the extent necessary to enable such shareholder
      to
      pay income taxes for such year and make estimated income tax payments to satisfy
      its liabilities under federal and state law for such year which arise solely
      from such shareholders’ status as shareholder of Borrower, (ii) Borrower may
      make dividends payable solely in the same class of Capital Securities or, to
      the
      extent no cash payments are paid, another class of Capital Securities; and
      (iii)
      Subsidiaries may pay Dividends to Borrower.

     

    6.22 Expenses;
      Taxes; Indemnity.

     

    (a) Borrower
      agrees to pay or cause to be paid, and to save Lender harmless against liability
      for the payment of, all reasonable out-of-pocket costs and expenses (including
      but not limited to reasonable fees and expenses of counsel) (i) incurred by
      Lender arising from or relating to the negotiation, preparation, execution
      and
      delivery of this Agreement and the other Loan Documents, (ii) incurred by Lender
      arising from or relative to the administration or performance of this Agreement
      and the other Loan Documents or any requested amendments, modifications,
      supplements, waivers or consents (without regard to whether any of the same
      is
      ultimately entered into or granted) to this Agreement or any Loan Document,
      and
      (iii) incurred by Lender in connection with the enforcement or preservation
      of
      rights under this Agreement or any other Loan Document. 

     

    (b) Borrower
      hereby agrees to pay all stamp, document, transfer, recording, filing,
      registration, search, sales and excise fees and taxes and all similar
      impositions (excluding taxes on the overall net income or gross receipts of
      Lender) now or hereafter determined by Lender to be payable in connection with
      this Agreement or any other Loan Document or any other documents, instruments
      or
      transactions pursuant to or in connection herewith or therewith, and Borrower
      agrees to save Lender harmless from and against any and all present or future
      claims, liabilities or losses with respect to or resulting from any omission
      to
      pay or delay in paying any such fees, taxes or impositions. 

     

    
      
         

      

      
        23

        
          

        

      

      
         

      

    

     

    (c) Borrower
      hereby agrees to reimburse and indemnify Lender and its officers and directors
      (collectively, the “Indemnified Parties”) from and against any and all losses,
      liabilities, claims, damages, expenses, obligations, penalties, actions,
      judgments, suits, costs or disbursements of any kind or nature whatsoever
      (including, without limitation, the reasonable fees and disbursements of counsel
      for such Indemnified Party in connection with any investigative, administrative
      or judicial proceeding commenced or threatened that may at any time be imposed
      on, asserted against or incurred by such Indemnified Party as a result of,
      or
      arising out of, or in any way related to or by reason of, this Agreement or
      any
      other Loan Document or any transaction from time to time contemplated hereby
      or
      thereby, but excluding any such losses, liabilities, claims, damages, expenses,
      obligations, penalties, actions, judgments, suits, costs or disbursements
      resulting solely from the gross negligence or willful misconduct of such
      Indemnified Party or its Affiliates, shareholders, employees, representatives
      and consultants, as finally determined by a court of competent jurisdiction.
      

     

    6.23 Pension
      or Profit Sharing Plans.
      Borrower shall not, and
      shall
      cause each of its Subsidiaries not to,
      allow
      any fact, condition or event to occur or exist with respect to any employee
      pension or profit sharing plan established or maintained by Borrower or any
      of
      its Subsidiaries which might constitute grounds for termination of any such
      plan
      or for the court appointment of a trustee to administer any such plan; or permit
      any such plan to be the subject of termination proceedings (whether voluntary
      or
      involuntary) which may result in a liability of Borrower or any of its
      Subsidiaries to the PBGC which, in the reasonable opinion of Lender, could
      have
      a Material Adverse Effect.

     

    6.24 Bank
      Accounts.
      Borrower shall and shall
      cause each of its Subsidiaries to maintain
      all primary deposit accounts at Lender and Borrower shall maintain at all times
      compensating balances in non-interest bearing accounts with Lender of not less
      than $500,000.

     

    6.25 Field
      Audits.
      Borrower agrees that Lender, upon not less than three (3) days written notice
      (which shall not be required following the occurrence and during the continuance
      of an Event of Default) may during normal business hours conduct audits of
      Borrower, its Subsidiaries and their operations (provided that Lender shall
      use
      good faith efforts to not interfere with the normal operations of Borrower
      and
      its Subsidiaries), the results of which shall be reasonably satisfactory to
      Lender, and the costs of which shall be paid by Borrower.

     

    6.26 Landlord
      Waivers; Collateral Access Agreements; Bailee Letters.
      Borrower shall use commercially reasonable efforts (which shall not require
      Borrower to pay the applicable lessor or bailee anything other than
      reimbursement of such person’s out of pocket expenses) deliver to Lender the
      following, each of which shall be in form and substance reasonably acceptable
      to
      Lender: (a) executed landlord waivers or other collateral access agreements
      with
      respect to all locations leased by Borrower; and (b) executed bailee letters
      with respect to all locations at which Borrower stores any inventory or other
      assets. Thereafter, Borrower shall use commercially reasonable efforts (subject
      to the limitation stated above) to deliver such agreements for any new leased
      locations or storage or warehouse locations that come into existence after
      the
      date of this Agreement upon request by Lender.

     

    6.27 Intellectual
      Property Security Interest.
      Borrower shall within ten (10) days after the payment in full of its existing
      indebtedness to the former shareholders of Picometrix grant to Lender, and
      cause
      its Subsidiaries to grant to Lender, a first priority security interest in
      all
      of its intellectual property collateral pursuant to the Patent, Trademark and
      Security Agreements in the form attached to this Agreement as Exhibit
      A.

     

    6.28 Picometrix
      Debt.
      Borrower shall not and shall cause its Subsidiaries not to make any payment
      with
      respect to the existing indebtedness owed to the former shareholders of
      Picometrix unless (a) Borrower is in pro forma compliance with all financial
      covenants under this Agreement both before and after giving effect to such
      payment and (b) no Event of Default (or event which with the giving of notice
      or
      the passage of time or both would constitute an Event of Default) has occurred
      and is continuing. At least ten (10) days prior to making any such payment,
      Borrower shall provide to Lender a covenant compliance certificate giving pro
      forma effect to such payment.

     

    
      
         

      

      
        24

        
          

        

      

      
         

      

    

     

    ARTICLE
      7.

    DEFAULTS
      AND REMEDIES

     

    7.1 Events
      of Default.
      Any of
      the following events shall constitute an “Event of Default” under this
      Agreement:

     

    (a) Borrower
      shall default in the payment of any sum which is or becomes due and payable
      under any Note or any other Loan Document; provided that, if such payments
      relating to a non-recurring payment (e.g. reimbursement of expenses), such
      default continues for a period of ten (10) days.

     

    (b) Any
      representation or warranty made by Borrower, any of its Subsidiaries or any
      Guarantor in this Agreement or in any certificate or document furnished under
      the terms of this Agreement shall prove untrue in any material respect at the
      time such representation or warranty was made or deemed made. 

     

    (c) Borrower,
      any of its Subsidiaries or any Guarantor shall fail (i) to observe or perform
      any condition, covenant or agreement of Borrower, such Subsidiary or such
      Guarantor set forth in Section 2.5, 6.1(d), 6.5, 6.7(a), 6.13, 6.16 through
      6.21, 6.24, 6.25 or 6.27, (ii) to observe or perform any condition, covenant
      or
      agreement of Borrower, such Subsidiary or such Guarantor set forth in Section
      6.1(a), (b) or (c) and continuance thereof for ten (10) days or (iii) to observe
      or perform any other condition, agreement or covenant of Borrower, such
      Subsidiary or such Guarantor set forth in this Agreement and continuance thereof
      for thirty (30) days after notice thereof by Lender to Borrower.

     

    (d) Borrower,
      any of its Subsidiaries or any Guarantor shall default in the performance of
      any
      of its obligations under
      any
      other Loan Document to which Borrower, such
      Subsidiary or such Guarantor is
      a
      party, and such default shall not be cured or remedied by Borrower, such
      Subsidiary or such Guarantor within
      ten (10) Business Days after notice thereof by Lender to Borrower.

     

    (e) Default
      in the payment of any other obligation of Borrower, any of its Subsidiaries
      or
      any Guarantor for borrowed money, or in the observance or performance of any
      conditions, covenants or agreements related or given with respect to any
      obligations for borrowed money sufficient (after giving effect to any grace
      period) to permit the holder thereof to accelerate the maturity of such
      obligation, including, without limitation, obligations of Borrower, such
      Subsidiary or such Guarantor or to
      Lender.

     

    (f) Judgments
      for the payment of money in excess of the sum of Ten Thousand Dollars ($10,000)
      in the aggregate shall be rendered against Borrower, any of its Subsidiaries
      or
      any Guarantor and such judgments shall remain unpaid, unvacated, unbonded or
      unstayed by appeal or otherwise for a period of thirty (30) consecutive days
      from the date of its entry and such judgment is not covered by insurance from
      a
      solvent insurer who has acknowledged coverage.

     

    (g) Borrower,
      any of its Subsidiaries or any Guarantor or (i) shall admit in writing the
      inability to pay its or his debts as they become due and payable; or (ii) shall
      make an assignment for the benefit of creditors; or (iii) shall be adjudicated
      a
      bankrupt; or (iv) shall file a voluntary petition in bankruptcy or effect a
      plan
      or other arrangement with creditors; or (v) shall have applied for, or permitted
      the appointment of, a receiver or trustee or custodian for all or substantially
      all of the property or assets of Borrower, such
      Subsidiary or such Guarantor,
      or a
      trustee, receiver or custodian shall have been appointed for all or
      substantially all of the property or assets of Borrower, any of its Subsidiaries
      or any Guarantor who shall not have been discharged within sixty (60) days
      after
      the date of his appointment.

     

    
      
         

      

      
        25

        
          

        

      

      
         

      

    

     

    (h) Any
      Guarantor shall deny its liability or obligations under its Guaranty or shall
      notify the Lender of its intention to attempt to cancel, revoke or terminate
      its
      Guaranty, or shall fail to observe or comply with any term, covenant, condition
      and requirement under its Guaranty.

     

    (i) The
      revocation, termination or attempted revocation or termination of any
      Subordination Agreement.

     

    (j) The
      occurrence of any “reportable event”, as defined in ERISA, which (i) is
      determined by Borrower or the PBGC to constitute grounds for (A) termination
      by
      the PBGC of any pension plan of Borrower, any of its Subsidiaries or any
      guarantor or (B) the appointment by the appropriate United States District
      Court
      of a trustee to administer such plan and (ii) is reasonably likely in the
      opinion of Borrower or Lender to result in a Material Adverse Effect, and (iii)
      such reportable event is not corrected and such determination is not revoked
      within thirty (30) days after (A) notice thereof has been given to the plan
      administrator, Borrower,
      such
      Subsidiary or such Guarantor;
      or (B)
      the institution of proceedings by the PBGC to terminate any such pension plan
      or
      to appoint a trustee to administer such plan; or (C) the appointment of a
      trustee by the appropriate United States District Court to administer any such
      pension plan.

     

    (k) Any
      breach or default by Borrower of any material term or condition under any swap
      agreement, interest rate protection agreement, derivatives agreement, or similar
      agreements now or hereafter entered into by Borrower with Lender or any
      Affiliate of Lender.

     

    (l) The
      occurrence of any event which Lender determines, in the exercise of its
      reasonable discretion, would have a Material Adverse Effect, or if Lender deems
      itself to be insecure.

     

    (m) A
      Change
      in Control. 

     

    7.2 Certain
      Remedies.
      

     

    (a) If
      any
      Event of Default shall occur and be continuing:

     

    (i) Lender
      may, by giving notice to Borrower, declare all of the Obligations, including
      the
      entire unpaid principal balance of the indebtedness evidenced by the Notes,
      all
      interest accrued thereon, and any and all other sums payable by Borrower under
      this Agreement, the Notes or any other Loan Document, to be immediately due
      and
      payable. Thereupon, all of such Obligations which are not already due and
      payable shall forthwith become absolutely and unconditionally due and payable,
      without presentment, demand, protest or any further notice or any other
      formalities of any kind, all of which are hereby expressly and irrevocably
      waived.
      Any
      commitment or obligation, if any, on the part of Lender to make loans or
      otherwise extend credit to or in favor of Borrower shall immediately
      terminate

     

    (ii) Lender
      may proceed to protect and enforce all or any of its rights, remedies, powers
      and privileges under this Agreement, the Note or any other Loan Document by
      action at law, suit in equity or other appropriate proceedings, whether for
      specific performance of any covenant contained. 

     

    
      
         

      

      
        26

        
          

        

      

      
         

      

    

     

    (b) Upon
      the
      occurrence and at any time during the continuance or existence of an Event
      of
      Default under Section 7.1(g) of this Agreement, then the Obligations and all
      indebtedness then outstanding thereunder shall automatically become immediately
      due and payable without any notice by Lender to Borrower and any commitment
      or
      obligation, if any, on the part of Lender to make loans or otherwise extend
      credit to or in favor of Borrower shall immediately terminate. Further, upon
      the
      occurrence or at any time during the continuance or existence of any default
      hereunder, Lender may collect, deal with and dispose of all or any part of
      any
      security in any manner permitted or authorized by the Michigan Uniform
      Commercial Code or other applicable law (including public or private sale),
      and
      after deducting expenses (including, without limitation, reasonable attorneys’
fees and expenses), Lender may apply the proceeds thereof in part or full
      payment of any of the Obligations, whether due or not, in any manner or order
      Lender elects. In addition to the foregoing, upon the occurrence and at any
      time
      during the continuance or existence of any default hereunder, Lender may
      exercise any and all rights.

     

    7.3 No
      Implied Waiver; Rights Cumulative.
      No
      delay by Lender in exercising any right, remedy, power or privilege hereunder
      or
      under any other Loan Document, or available to it at law or in equity, shall
      impair, prejudice or constitute a waiver of any such right, remedy, power or
      privilege or be construed as a waiver of (or acquiescence to) any Event of
      Default. No right, remedy, power or privilege conferred on or reserved to Lender
      under any of the Loan Documents, in equity or at law is intended to be exclusive
      of any other right, remedy, power or privilege which may then be, or may
      thereafter become, available to Lender. All rights, remedies, powers and
      privileges available to Lender shall be cumulative; any of the same may be
      exercised at such time or times and in such order and manner as Lender shall
      (in
      its sole discretion) deem expedient.

     

    ARTICLE
      8.

    MISCELLANEOUS
      PROVISIONS

     

    8.1 Consent
      or Approval.
      

     

    (a) In
      all
      instances in which Lender’s approval of or consent to any item, matter or
      circumstance is contemplated by the terms of this Agreement or any other Loan
      Document, such approval or consent or the exercise of such judgment shall
      (unless otherwise specified) (i) be within the absolute discretion of Lender,
      and (ii) be expressed only by a specific writing intended for such purpose
      and
      signed by Lender.

     

    (b) Lender
      shall not, by reason of its consent or approval of any item or matter submitted
      to it, be deemed to have assumed or undertaken any responsibility or obligation
      for the adequacy, accuracy, completeness, efficacy, form or content of any
      such
      matter or item.

     

    8.2 Duration.
      This
      Agreement shall continue in full force and effect and the duties, covenants,
      and
      liabilities of Borrower hereunder and all the terms, conditions, and provisions
      hereof relating thereto shall continue to be fully operative until all
      Obligations have been satisfied in full, provided, however that notwithstanding
      the provisions of this Section all Loans shall be due and payable as set forth
      in the Notes.

     

    8.3 Survival
      of Representations.
      All
      representations and warranties made by or on behalf of Borrower in this
      Agreement or any other Loan Document shall be deemed to have been relied upon
      by
      Lender notwithstanding any investigation which may be made by Lender. All such
      representations and warranties shall survive the closing of the transactions
      described herein and the disbursement of the proceeds of the Loans until all
      of
      the Obligations shall have been fully, finally and indefeasibly paid in
      full.

     

    
      
         

      

      
        27

        
          

        

      

      
         

      

    

     

    8.4 Binding
      Effect.
      This
      Agreement shall inure to the benefit of and be binding upon Borrower, Lender,
      and their respective successors and assigns; provided, however, that this
      Agreement may not be assigned by Borrower without the consent of
      Lender.

     

    8.5 Counterparts.
      This
      Agreement may be executed in any number of counterparts, all of which shall
      constitute a single agreement.

     

    8.6 Notices.
      Except
      for any notice required under applicable law to be given in another manner,
      any
      notice, demand, request or other communication to be given by either party
      to
      the other shall be in writing and shall be deemed to have been properly given
      (a) if hand delivered or if sent by telecopy, effective upon receipt; (b) if
      delivered by overnight courier service, effective on the day following delivery
      to such courier service; or (c) if mailed by United States registered or
      certified mail, postage prepaid, return receipt requested, effective two (2)
      days after deposit in the United States mails, addressed in each case to the
      parties at their addresses set forth herein, or at such other address or to
      such
      other addressee as a party may have so furnished to the other:

     

    (a) If
      to
      Borrower:

    

    Advanced
      Photonix, Inc.

    2925
      Boardwalk

    Ann
      Arbor, Michigan 48104

    Attention:
      _____________________ 

    Facsimile
      No.: __________________

    

    (b)
       If
      to
      Lender:

    

    The
      PrivateBank and Trust Company

    70
      W. Madison Street

    Chicago,
      Illinois 60602

    Attention:
      _____________________ 

    Facsimile
      No.:
      __________________ 

    

    With
      a
      copy to:

    

    The
      PrivateBank

    38505
      Woodward Avenue

    Suite
      1300

    Bloomfield
      Hills, Michigan 48304

    Attn: Eric
      Haege

    Facsimile
      No.: __________________

    

    8.7 Waiver
      of Jury Trial.
      AS A
      SPECIFICALLY BARGAINED-FOR CONSIDERATION FOR LENDER’S EXTENSION OF CREDIT TO
      BORROWER AND AFTER HAVING THE OPPORTUNITY TO CONSULT WITH LEGAL COUNSEL,
      BORROWER HEREBY EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN CONNECTION
      WITH
      ANY DISPUTE WHICH MAY ARISE UNDER OR IN CONNECTION WITH THIS
      AGREEMENT.

     

    8.8 Entire
      Agreement.
      This
      Agreement, together with other Loan Documents, constitutes the entire agreement
      between Borrower and Lender with respect to the making and funding of the Loans,
      and no representations or agreements, express or implied, have been made to
      or
      with Borrower not herein or therein contained. This Agreement shall not be
      amended or modified, nor may any of its terms or conditions be waived, except
      by
      an instrument in writing duly executed by Lender and Borrower.

     

    
      
         

      

      
        28

        
          

        

      

      
         

      

    

     

    8.9 Jurisdiction;
      Governing Law.
      This
      Agreement shall be governed by the laws of the State of Michigan. Borrower
      hereby waives any plea of jurisdiction or venue on the ground that Borrower
      is
      not a resident of Oakland County, Michigan, and hereby specifically authorizes
      any action brought to enforce Borrower’s obligations to Lender to be instituted
      and prosecuted in either the Circuit Court of Oakland County, Michigan, or
      in
      the United States District Court for the Eastern District of Michigan at the
      election of Lender, and Borrower hereby submits to the jurisdiction of such
      Court. Borrower further agree and consent that, in addition to any methods
      of
      service of process provided for under applicable law, all service of process
      in
      any proceeding in any Michigan State or United States Court sitting in Oakland
      County, Michigan may be made by certified or registered mail, return receipt
      requested, directed to Borrower, as applicable, at the address indicated herein,
      and service so made shall be complete upon receipt; except that if Borrower
      shall refuse to accept delivery, service shall be deemed complete five (5)
      days
      after the same shall have been so mailed.

     

    8.10 Headings. Paragraph
      headings used in this Agreement are intended for convenience of reference only,
      and shall not be deemed to alter, affect or limit the meaning of any provision
      of this Agreement.

     

    8.11 Severability. If
      any
      provision of this Agreement, or the application of any provision to any person
      or circumstance, shall be invalid or unenforceable to any extent, the balance
      of
      this Agreement and the application of all provisions of this Agreement to all
      other persons and circumstances shall not be affected thereby; each provision
      of
      this Agreement shall remain valid and enforceable to the fullest extent
      permitted by law.

     

    8.12 Relationship. The
      relationship between Borrower and Lender is strictly contractual in nature,
      and
      is governed entirely by this Agreement and the other Loan Documents. Nothing
      contained in this Agreement, and no action which Lender may take hereunder
      or in
      respect of the Loan, will create any agent, partnership, co-venture or joint
      venture between Borrower and Lender or will make Lender liable in any manner
      to
      any party dealing with Borrower.

     

    8.13 Patriot
      Act.
      Borrower,
      each of its Subsidiaries and each Guarantor is not (or will not 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 (including, those Persons named on OFAC’s Specially
      Designated and Blocked Persons list) or under any statute, executive order
      (including, the September 24, 2001 Executive Order Blocking Property and
      Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support
      Terrorism), or other governmental action and is not and shall not engage in
      any
      dealings or transactions or otherwise be associated with such persons. In
      addition, Borrower hereby agrees to provide to Lender with any additional
      information that Lender deems necessary from time to time in order to ensure
      compliance with all applicable Laws concerning money laundering and similar
      activities.

     

    8.14 USA
      Patriot Act Notice of Customer Identification.
      To help
      the government fight the funding of terrorism and money laundering activities,
      Federal law requires all financial institutions to obtain, verify, and record
      information that identifies each person who opens an account. Therefore, when
      you open an account, we will ask your name, address, date of birth, and other
      information that will allow us to identify you. We may also ask to see your
      driver’s license or other identifying documents.

     

    8.15 Confidentiality.
      Lender
      agrees that it will not disclose without the prior consent of Borrower (other
      than to its employees, its Affiliates, or to its auditors or counsel on a need
      to know basis) any information with respect to Borrower, which is furnished
      pursuant to this Agreement or any of the Loan Documents; provided that Lender
      may disclose any such information (a) as has become generally available to
      the
      public or has been lawfully obtained by Lender from any third party under no
      duty of confidentiality to Borrower, (b) as may be required in any report,
      statement or testimony submitted to, or in respect to any inquiry, by, any
      municipal, state or federal regulatory body having or claiming to have
      jurisdiction over Lender, including the Board of Governors of the Federal
      Reserve System of the United States, the Office of the Comptroller of the
      Currency or the Federal Deposit Insurance Corporation or similar organizations
      (whether in the United States or elsewhere) or their successors, (c) as may
      be
      required in respect to any summons or subpoena or in connection with any
      litigation (provided, that to the extent it is legally permitted to do so,
      Lender will give Borrower prompt notice of any such requests for disclosure
      of
      information), (d) in order to comply with any law, order, regulation or ruling
      applicable to Lender, and (e) to any transferee or assignee or to any
      participant of, or with respect to, the Note, who agrees in writing to be
      subject to the provisions of this Section 8.15.

     

    [Remainder
      of Page Intentionally Left Blank]

    
      
         

      

      
        29

        
          

        

      

      
         

      

    

    IN
      WITNESS WHEREOF, the parties have caused this Agreement to be executed and
      delivered of the day and ear first set forth above.

    

      
        	
                BORROWER:

              
	 
	
                ADVANCED
                  PHOTONIX, INC.

              
	 
	 
	
                By:

              	
                 
                  /s/ Richard D. Kurtz

              
	 	 
	
                Its:

              	
                 
                  CEO and President

              
	 	 
	
                By:

              	
                 
                  /s/ Robin F. Risser

              
	 	 
	
                Its:

              	
                 
                  Chief Financial Officer

              
	 
	 
	
                LENDER:

              
	 
	
                THE
                  PRIVATEBANK AND TRUST

              
	
                COMPANY

              
	 
	 
	
                By:

              	
                 
                  /s/ Eric Haege

              
	 	 
	
                Its:

              	
                 
                  Assistant Managing Director

              

      

    

     

    
      
         

      

      
        30Exhibit
      10.2

    

    PROMISSORY
      NOTE 

    (Term
      Loan-Prime)

     

    
      	
              $1,735,716.61

            	
              Chicago,
                Illinois

            
	 	 
	
              Maturity
                Date: September 25, 2012

            	
              Dated:
                September 25, 2008

            

    

    

    FOR
      VALUE RECEIVED on
      or
      before the Maturity Date stated above (or such earlier Maturity Date as may
      apply in accordance with the provisions of the Loan Agreement referred to
      below), the undersigned (hereinafter referred to as “Borrower”), promises to pay
      to the order of The PrivateBank and Trust Company, an Illinois banking
      corporation (hereinafter referred to as “Lender”), at its offices located at 70
      W. Madison Street, Chicago, Illinois 60602, or at such other place as Lender
      may
      designate in writing, the principal sum of One Million Seven Hundred Thirty
      Five
      Thousand Seven Hundred Sixteen and 61/100 Dollars ($1,735,716.61), plus interest
      as hereinafter provided, in lawful money of the United States. This Note is
      entered into pursuant to the terms of that certain Loan Agreement dated
      September 25, 2008 by and between Borrower and Lender, as may be amended,
      restated or replaced from time to time (the “Loan Agreement”). Capitalized terms
      in this Note and not otherwise defined herein shall have the meanings given
      to
      them in the Loan Agreement.

     

    The
      unpaid principal balance outstanding from time to time under this Note shall
      bear interest at the Prime-based Rate. Interest shall be calculated on the
      basis
      of a 360 day year for the actual number of days elapsed. The Prime-based Rate
      shall be adjusted on the effective date of each change in the Prime Rate. Lender
      shall not be required to notify Borrower of any adjustment in the Prime-based
      Rate. 

     

    This
      Note
      shall be repaid by consecutive monthly installments of principal, each in the
      amount of Thirty Six Thousand One Hundred Sixty and 76/100 Dollars ($36,160.76)
      plus interest, commencing on the third day of November, 2008 and continuing
      on
      the first Business Day of each month thereafter, calculated using an original
      four (4) year amortization from the date of this Note. The unpaid principal
      balance and all accrued interest thereon shall be due and payable in full on
      the
      Maturity Date (or earlier upon acceleration). Amounts repaid may not be
      readvanced.

     

    If
      any
      payment of principal or interest hereunder is not paid within ten (10) Business
      Days from the date same is due, then, at the option of Lender, in addition
      to
      all other sums due hereunder, the Borrower shall pay a late charge in an amount
      equal to the greater of: (a) $250 or (b) one cent (1¢) per dollar ($1.00) for
      each such payment that is delinquent ten (10) Business Days or
      more.

     

    The
      sums
      advanced hereunder shall be charged to a loan account in Borrower’s name on
      Lender’s books (the “Loan Account”), and Lender shall credit to such account the
      amount of each repayment hereunder. Lender shall render Borrower, from time
      to
      time, or upon Borrower’s request, a statement of account setting forth the
      Borrower’s loan balance in said Loan Account which shall be presumed to be
      correct and accepted by and binding upon Borrower, unless Lender receives a
      written statement of exceptions within ten (10) Business Days after such
      statement has been rendered to Borrower. Such statement of account shall be
      prima facie evidence of the loan and amounts owing to Lender by Borrower
      hereunder.

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    Any
      payment made by mail will be deemed tendered and received only upon actual
      receipt (time being of the essence), at the address of Lender designated for
      such payment whether or not Lender has authorized payment by mail or any other
      manner. Borrower hereby expressly assumes all risk of loss or liability
      resulting from non-delivery or delay in delivery of any payment transmitted
      by
      mail or in any other manner.

     

    No
      delay
      or failure of Lender in exercising any right, remedy, power or privilege
      hereunder shall affect such right, remedy, power or privilege, nor shall any
      single or partial exercise thereof preclude the exercise of any other right,
      remedy, power or privilege. No delay or failure of Lender at any time to demand
      strict adherence to the terms of this Note shall be deemed to constitute a
      course of conduct inconsistent with the Lender’s right at any time, before or
      after any Event of Default, to demand strict adherence to the terms of this
      Note.

     

    At
      any
      time and from time to time, Borrower may prepay the principal balance of this
      Note in whole or in part before the original due date of that principal. There
      shall be no prepayment penalty or premium in the event of such prepayment,
      except as otherwise provided in any interest rate protection or swap agreement
      now or hereafter entered into by Borrower with Lender or any affiliate of
      Lender.

     

    Nothing
      herein contained, nor any transaction relating thereto, or hereto, shall be
      construed or so operate as to require the Borrower to pay, or be charged,
      interest at a greater rate than the maximum allowed by the applicable law
      relating to this Note. Should any interest or other charges, charged, paid
      or
      payable by the Borrower in connection with this Note, or any other document
      delivered in connection herewith, result in the charging, compensation, payment
      or earning of interest in
      excess
      of the
      maximum allowed by the applicable law as aforesaid, then any and all such excess
      shall be and the same is hereby waived by the holder, and any and all such
      excess paid shall be automatically credited against and in reduction of the
      principal due under this Note. If Lender shall reasonably determine that the
      Prime-based Rate (together with all other charges or payments related hereto
      that may be deemed interest) stipulated under this Note is or may be usurious
      or
      otherwise limited by law, the unpaid balance of this Note, with accrued interest
      at the highest rate then permitted to be charged by stipulation in writing
      between Lender and Borrower, at the option of Lender, shall immediately become
      due and payable.

     

    If
      an
      Event of Default, as set forth in the Loan Agreement, occurs the entire unpaid
      principal balance and all accrued interest shall at the sole option of Lender
      be
      immediately due and payable, together with (to the extent permitted under
      applicable law) the costs, attorneys’ and outside consultants’ fees, which, in
      either case, are reasonably incurred by Lender in collecting or enforcing
      payment, and the outstanding principal amount hereof shall bear interest at
      the
      Default Rate.

     

    Borrower
      hereby grants to Lender a security interest in Lender’s own indebtedness or
      liability to Borrower, if any, however evidenced, including a security interest
      in all of Borrower’s bank deposits, instruments, negotiable documents and
      chattel paper which at any time are in the possession or control of Lender,
      as
      further security for repayment of the Obligations; and the Borrower hereby
      grants to Lender all rights and privileges afforded a secured party under the
      Michigan Uniform Commercial Code.

     

    All
      payments other than scheduled payments paid hereunder shall, at the option
      of
      Lender, first be applied against any and all fees, costs and expenses (including
      expenses of collection), then against accrued interest, and the balance against
      principal. Acceptance by Lender of any payment in an amount less than the amount
      then due shall be deemed an acceptance on account only, and the failure to
      pay
      the entire amount then due shall be and continue to be an Event of
      Default.

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    Borrower
      hereby waives presentment for payment, demand, notice of non-payment (except
      such notice, if any, as required under the Loan Agreement) notice of protest
      and
      protest of this Note, diligence in collection or bringing suit. 

     

    This
      Note
      is secured by, and executed pursuant to, the Loan Agreement and the other Loan
      Documents therein described. Reference is hereby made to said Loan Agreement
      and
      Loan Documents for additional terms relating to the transaction giving rise
      to
      this instrument, the security given for this instrument and additional terms
      and
      conditions under which this instrument matures, accelerates or may be prepaid.
      Borrower’s obligations hereunder are cross-collateralized and cross-defaulted
      with all other indebtedness owing to Lender by Borrower. 

     

    DEFINITIONS

     

    As
      used
      in this Note, the following terms shall have the given meaning:

     

    “Applicable
      Margin” shall mean one percent (1%); provided, however, upon receipt by Lender
      of Borrower’s audited financial statements for the 2009 fiscal year, the
      Applicable Margin shall decrease to zero percent (0%) if and only if Borrower’s
      Adjusted EBITDA (as defined in the Loan Agreement) is equal to or greater than
      Five Million Dollars ($5,000,000).

     

    “Default
      Rate” shall mean an annual rate of interest equal to the lesser of (i) three
      percent (3.0%) per annum in excess of the Prime-based Rate or (ii) the highest
      rate of interest permitted by applicable law to be charged for unpaid monetary
      obligations.

     

    “Loan
      Agreement” shall mean that certain Loan Agreement dated September 25, 2008 by
      and between Borrower and Lender, as it may be amended, restated or replaced
      from
      time to time.

     

    “Prime-based
      Rate” shall mean a per annum rate of interest equal to the Prime Rate plus the
      Applicable Margin.

     

    “Prime
      Rate” shall mean the fluctuating rate of interest publicly announced by the
      Lender at its principal place of business from time to time as being its prime
      rate of interest thereafter in effect, with each change in the Prime Rate
      automatically and without notice changing the rate then in effect. The Prime
      Rate is not necessarily the lowest rate of interest which may be available
      from
      the Lender on fluctuating rate loans.

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    Signature
      Page to Promissory Note (Term Loan-Prime)

    dated
      September 25, 2008

    

    
      	 	
              BORROWER:

            
	 	 
	 	
              ADVANCED
                PHOTONIX, INC.

            
	
              Address:

            	 
	 	 
	
              2925
                Boardwalk

            	
              By:
                /s/ Richard D. Kurtz

            
	
              Ann
                Arbor, Michigan 48104

            	
               

            
	 	
              Its:
                CEO and President 

            

    

    

    
      	
              By:
                /s/ Robin F. Risser

            
	 
	
              Its:
                Chief Financial Officer

            

    

    
      
        
        

      

      
        4

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