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.

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:

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.

“ 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

(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;

(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;

(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.

“ 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.

“ 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.

“ 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;

(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.

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.

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.

(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.

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.

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.

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.

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 Bo