Document:

EXHIBIT 10.1

                           LOAN AND SECURITY AGREEMENT

        THIS LOAN AND SECURITY AGREEMENT (together with any schedule, annex, or
exhibit attached hereto, as the same may be amended, restated, or otherwise
modified, this "Agreement") is entered into on August 15, 2005 (the "Effective
Date") between SILICON VALLEY BANK ("Bank"), whose address is 3003 Tasman Drive,
Santa Clara, California 95054, and FIBERSTARS, INC., a California corporation
("Borrower"), whose chief executive office is 44259 Nobel Drive, Fremont,
California 94538 ("Borrower's Address"). (Definitions of capitalized terms used
in this Agreement are set forth in Section 8 below.)

1.      ADVANCES.

        1.1     Advances. Subject to the conditions in Section 1.1 of the
Schedule and to deduction of Reserves, Bank will make advances (collectively,
the "Advances") to Borrower up to the amounts shown on the Schedule.

        1.2     Interest. All Obligations shall bear interest at the rate shown
on the Schedule, except where expressly set forth to the contrary in this
Agreement. Interest shall be payable monthly, in arrears, on the last day of the
month. Interest shall be charged to a deposit account with Bank designated by
Borrower, or if no funds are available in any such deposit account, as a Credit
Extension under this Agreement.

        1.3     Overadvances. If at any time or for any reason the total of all
outstanding Credit Extensions and all other monetary Obligations exceeds the
Credit Limit, Borrower shall immediately pay the amount of the excess to Bank
(the "Overadvance"), without notice or demand. Without limiting Borrower's
obligation to repay to Bank the amount of any Overadvance, Borrower agrees to
pay Bank interest on the outstanding amount of any Overadvance, on demand, at
the Default Rate.

        1.4     Fees. Borrower shall pay Bank the fees shown on the Schedule,
which are in addition to all interest and other sums payable to Bank and is not
refundable.

        1.5     Credit Extension Requests. To obtain a Credit Extension,
Borrower shall make a request to Bank by facsimile or telephone. Credit
Extension requests received after 12:00 Noon Pacific time will not be considered
by Bank until the next Business Day. Bank may rely on any telephone request for
a Credit Extension given by a person whom Bank reasonably believes is an
authorized representative of Borrower, and Borrower will indemnify Bank for any
loss Bank suffers as a result of that reliance.

        1.6     Letters of Credit. At the request of Borrower, Bank may, in its
good faith business judgment, issue or arrange for the issuance of letters of
credit for the account of Borrower, in each case in form and substance
satisfactory to Bank in its sole discretion (collectively, "Letters of Credit").
The aggregate face amount of all Letters of Credit from time to time outstanding
shall not exceed the amount shown on the Schedule (the "Letter of Credit
Sublimit"), and shall be reserved against Loans which would otherwise be
available hereunder, and in the event at any time there are insufficient Loans
available to Borrower for such reserve, Borrower shall deposit and maintain with
Bank cash collateral in an amount at all times equal to such deficiency, which
shall be held as Collateral for all purposes of this Agreement.

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Borrower shall pay all bank charges (including charges of Bank) for the issuance
of Letters of Credit, together with such additional fee as Bank's letter of
credit department shall charge in connection with the issuance of the Letters of
Credit. Any payment by Bank under or in connection with a Letter of Credit shall
constitute a Loan hereunder on the date such payment is made. Each Letter of
Credit shall have an expiry date no later than thirty days prior to the Maturity
Date. Borrower hereby agrees to indemnify and hold Bank harmless from any loss,
cost, expense, or liability, including payments made by Bank, expenses, and
reasonable attorneys' fees incurred by Bank arising out of or in connection with
any Letters of Credit. Borrower agrees to be bound by the regulations and
interpretations of the issuer of any Letters of Credit guarantied by Bank and
opened for Borrower's account or by Bank's interpretations of any Letter of
Credit issued by Bank for Borrower's account, and Borrower understands and
agrees that Bank shall not be liable for any error, negligence, or mistake,
whether of omission or commission, in following Borrower's instructions or those
contained in the Letters of Credit or any modifications, amendments, or
supplements thereto. Borrower understands that Letters of Credit may require
Bank to indemnify the issuing bank for certain costs or liabilities arising out
of claims by Borrower against such issuing bank. Borrower hereby agrees to
indemnify and hold Bank harmless with respect to any loss, cost, expense, or
liability incurred by Bank under any Letter of Credit as a result of Bank's
indemnification of any such issuing bank. The provisions of this Loan Agreement,
as it pertains to Letters of Credit, and any other Loan Documents relating to
Letters of Credit are cumulative.

2.      SECURITY INTEREST. To secure the payment and performance of all of the
Obligations when due, Borrower hereby grants to Bank a security interest in all
of the following (collectively, the "Collateral"): all right, title and interest
of Borrower in and to all of the following, whether now owned or hereafter
arising or acquired and wherever located: all Accounts; all Inventory; all
Equipment; all Deposit Accounts; all General Intangibles (including without
limitation all Intellectual Property); all Investment Property; all Other
Property; and any and all claims, rights and interests in any of the above, and
all guaranties and security for any of the above, and all substitutions and
replacements for, additions, accessions, attachments, accessories, and
improvements to, and proceeds (including proceeds of any insurance policies,
proceeds of proceeds and claims against third parties) of, any and all of the
above, and all Borrower's books relating to any and all of the above.

3.      REPRESENTATIONS, WARRANTIES AND COVENANTS OF BORROWER.
        In order to induce Bank to enter into this Agreement and to make Credit
Extensions, and except to the extent set forth in the Representations, Borrower
represents and warrants to Bank as follows, and Borrower covenants that the
following representations will continue to be true at all times, and that
Borrower will at all times comply with all of the following covenants,
throughout the term of this Agreement and until all Obligations have been paid
and performed in full:

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        3.1     Corporate Existence and Authority. Borrower is and will continue
to be, duly organized, validly existing and in good standing under the laws of
the State of California. Borrower is and will continue to be qualified and
licensed to do business in California, and all jurisdictions in which any
failure to do so would result in a Material Adverse Change. The execution,
delivery and performance by Borrower of this Agreement, and all other documents
contemplated hereby (a) have been duly and validly authorized, (b) are
enforceable against Borrower in accordance with their terms (except as
enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to creditors'
rights generally), (c) do not violate Borrower's Certificate of Incorporation,
or Borrower's by-laws, or any law or any material agreement or instrument which
is binding upon Borrower or its property, and (d) do not constitute grounds for
acceleration of any material indebtedness or obligation under any agreement or
instrument which is binding upon Borrower or its property.

        3.2     Name; Trade Names and Styles. The name of Borrower set forth in
the heading to this Agreement, or such other name of which it has notified Bank
in accordance with this Section 3.2, is its correct name. Listed in the
Representations are all prior names of Borrower and all of Borrower's present
and prior trade names. Borrower shall give Bank thirty (30) days prior written
notice before changing its name or doing business under any other name. Borrower
has complied, and will in the future comply, in all material respects, with all
laws relating to the conduct of business under a fictitious business name,
except where the failure to so comply would not reasonably be expected to result
in a Material Adverse Change.

        3.3     Place of Business; Location of Collateral. The address set forth
in the heading to this Agreement as Borrower's address (or such other address of
which Borrower has given Bank notice pursuant to this Section 3.3) is Borrower's
chief executive office. In addition, Borrower has places of business and
Collateral is located only at the locations set forth in the Representations (or
such other locations of which Borrower has given or will give Bank notice
pursuant to this Section 3.3). Borrower will give Bank at least thirty (30) days
prior written notice before opening any additional place of business, changing
its chief executive office or state of incorporation, or moving any of the
Collateral to a location other than Borrower's Address or one of the locations
set forth in the Representations, except that Borrower may maintain sales
offices in the ordinary course of business at which not more than a total of
$50,000 fair market value of Equipment is located.

        3.4     Title to Collateral; Perfection; Permitted Liens.

                (a)     Borrower is now, and will at all times in the future be,
the sole owner of all the Collateral, except for items of Equipment which are
leased or licensed to Borrower. The Collateral now is and will remain free and
clear of any and all liens, charges, security interests, encumbrances and
adverse claims, except for Permitted Liens. Bank now has, and will continue to
have, a first-priority perfected and enforceable security interest in all of the
Collateral, subject only to the Permitted Liens, and Borrower will at all times
defend Bank and the Collateral against all claims of others.

                (b)     Borrower has set forth in the Representations all of
Borrower's deposit accounts, securities accounts, and commodity accounts
(collectively, "Collateral Accounts"). Borrower will give Bank five (5) Business
Days advance written notice before establishing any new Collateral Account with
a bank or financial institution other than Bank and will cause the entity where
any such new Collateral Account is maintained to execute and deliver to Bank a
control agreement to perfect Bank's security interest in the Collateral Account
and otherwise satisfactory to Bank in its good faith business judgment. Nothing
herein limits any requirements which may be set forth in the Schedule as to
where Collateral Accounts will be maintained.

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                (c)     In the event that Borrower shall at any time after the
date hereof have any commercial tort claims against others, which it is
asserting, and in which the potential recovery exceeds $100,000, Borrower shall
promptly notify Bank thereof in writing and provide Bank with such information
regarding the same as Bank shall request (unless providing such information
would waive the Borrower's attorney-client privilege). Such notification to Bank
shall constitute a grant of a security interest in the commercial tort claim and
all proceeds thereof to Bank, and Borrower shall execute and deliver all such
documents and take all such actions as Bank shall request in connection
therewith.

                (d)     None of the Collateral now is or will be affixed to any
real property in such a manner, or with such intent, as to become a fixture.
Borrower is not and will not become a lessee under any real property lease
pursuant to which the lessor may obtain any rights in any of the Collateral and
no such lease now prohibits, restrains, impairs or will prohibit, restrain or
impair Borrower's right to remove any Collateral from the leased premises.
Whenever any Collateral is located upon premises in which any third party has an
interest, Borrower shall, whenever requested by Bank, use its best efforts to
cause such third party to execute and deliver to Bank, in form acceptable to
Bank, such waivers and subordinations as Bank shall specify in its good faith
business judgment. In the event that such waivers and subordinations are not
obtained, Bank may, in its discretion, establish appropriate reserves against
the Borrowing Base. Borrower will keep in full force and effect, and will comply
with all material terms of, any lease of real property where any of the
Collateral now or in the future may be located.

        3.5     Maintenance of Collateral. Borrower will maintain the Collateral
in good working condition (ordinary wear and tear excepted), and Borrower will
not use the Collateral for any unlawful purpose. Borrower will promptly advise
Bank in writing of any material loss or damage to the Collateral.

        3.6     Books and Records. Borrower has maintained and will maintain at
Borrower's Address books and records sufficient to prepare financial statements
in accordance with GAAP.

        3.7     Financial Condition, Statements and Reports. All financial
statements of Borrower and it consolidated Subsidiaries now or in the future
delivered to Bank have been, and will be, prepared in conformity with GAAP and
now and in the future will fairly present the results of operations and
financial condition of Borrower and its consolidated Subsidiaries, in accordance
with GAAP, at the times and for the periods therein stated. Between the last
date covered by any such statement provided to Bank and the date hereof, there
has been no Material Adverse Change.

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        3.8     Tax Returns and Payments; Pension Contributions. Borrower has
timely filed, and will timely file, all required tax returns and reports, and
Borrower has timely paid, and will timely pay, all foreign, federal, state and
local taxes, assessments, deposits and contributions now or in the future owed
by Borrower. Notwithstanding the foregoing, Borrower may defer payment of any
contested taxes, provided that Borrower (a) in good faith contests Borrower's
obligation to pay the taxes by appropriate proceedings promptly and diligently
instituted and conducted, (b) notifies Bank in writing of the commencement of,
and any material development in, the proceedings, and (c) posts bonds or takes
any other steps required to keep the contested taxes from becoming a lien upon
any of the Collateral. Borrower is unaware of any claims or adjustments proposed
for any of Borrower's prior tax years which could result in additional taxes
becoming due and payable by Borrower. Borrower has paid, and shall continue to
pay all amounts necessary to fund all present and future pension, profit sharing
and deferred compensation plans in accordance with their terms, and Borrower has
not and will not withdraw from participation in, permit partial or complete
termination of, or permit the occurrence of any other event with respect to, any
such plan which could reasonably be expected to result in any liability of
Borrower, including any liability to the Pension Benefit Guaranty Corporation or
its successors or any other governmental agency.

        3.9     Compliance with Law. Borrower has, to the best of its knowledge,
complied, and will comply, in all material respects, with all provisions of all
foreign, federal, state and local laws and regulations applicable to Borrower,
including, but not limited to, those relating to Borrower's ownership of real or
personal property, the conduct and licensing of Borrower's business, and all
environmental matters.

        3.10    Litigation. There is no claim, suit, litigation, proceeding or
investigation pending or (to the best of Borrower's knowledge) threatened
against Borrower in any court or before any governmental agency which could
reasonably be expected to result, either separately or in the aggregate, in any
Material Adverse Change. Borrower will promptly inform Bank in writing of any
claim, proceeding, litigation or investigation in the future threatened in
writing or instituted against Borrower involving any single claim that can
reasonably be expected to result in liability in excess of $50,000, or $100,000
in the aggregate.

        3.11    Use of Proceeds. The Credit Extensions shall be used solely for
working capital and other general business requirements of Borrower. Borrower is
not purchasing or carrying any "margin stock" (as defined in Regulation U of the
Board of Governors of the Federal Reserve System) and no part of the proceeds of
any Credit Extension will be used to purchase or carry any "margin stock" or to
extend credit to others for the purpose of purchasing or carrying any "margin
stock," in either case in violation of Regulation U.

4.      ACCOUNTS.

        4.1     Representations Relating to Accounts. Borrower represents and
warrants to Bank as follows: Each Account with respect to which Advances are
requested by Borrower shall, on the date each Advance is requested and made, (a)
represent an undisputed bona fide existing unconditional obligation of the
Account Debtor created by the sale, delivery, and acceptance of goods or the
rendition of services, or the non-exclusive licensing of Intellectual Property,
in the ordinary course of Borrower's business, and (b) meet the Minimum
Eligibility Requirements set forth in Section 8 below.

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        4.2     Representations Relating to Documents and Legal Compliance.
Borrower represents and warrants to Bank as follows: All statements made and all
unpaid balances appearing in all invoices, instruments and other documents
evidencing the Accounts are and shall be true and correct and all such invoices,
instruments and other documents and all of Borrower's books and records are and
shall be genuine and in all respects what they purport to be. All sales and
other transactions underlying or giving rise to each Account shall comply in all
material respects with all applicable laws and governmental rules and
regulations. To the best of Borrower's knowledge, all signatures and
endorsements on all documents, instruments, and agreements relating to all
Accounts are and shall be genuine, and all such documents, instruments and
agreements are and shall be legally enforceable in accordance with their terms
except to the extent that the enforceability thereof may be limited by
applicable bankruptcy, insolvency, moratorium and other similar laws affecting
creditors' rights generally and by equitable principles (regardless of whether
enforcement is sought in equity or at law).

        4.3     Schedules and Documents relating to Accounts. Borrower shall
deliver to Bank transaction reports and schedules of collections, as provided in
the Schedule, on Bank's standard forms; provided, however, that Borrower's
failure to execute and deliver the same shall not affect or limit Bank's
security interest and other rights in all of Borrower's Accounts, nor shall
Bank's failure to advance or lend against a specific Account affect or limit
Bank's security interest and other rights therein. If requested by Bank,
Borrower shall furnish Bank with copies (or, at Bank's request, originals) of
all contracts, orders, invoices, and other similar documents, and all shipping
instructions, delivery receipts, bills of lading, and other evidence of
delivery, for any goods the sale or disposition of which gave rise to such
Accounts, and Borrower warrants the genuineness of all of the foregoing.
Borrower shall also furnish to Bank an aged accounts receivable trial balance as
provided in the Schedule. In addition, Borrower shall deliver to Bank, on its
request, the originals of all instruments, chattel paper, security agreements,
guarantees and other documents and property evidencing or securing any Accounts,
in the same form as received, with all necessary endorsements, and copies of all
credit memos.

        4.4     Collection of Accounts. Borrower shall have the right to collect
all Accounts, unless and until a Default or an Event of Default has occurred and
is continuing. Whether or not an Event of Default has occurred and is
continuing, Borrower shall hold all payments on, and proceeds of, Accounts in
trust for Bank, and Borrower shall immediately deliver all such payments and
proceeds to Bank in their original form, duly endorsed, to be applied to the
Obligations in such order as Bank shall determine. So long as Obligations are
outstanding, Borrower shall deposit all proceeds of Collateral into a lockbox
account, or such other "blocked account" as Bank may specify, pursuant to a
blocked account agreement in such form as Bank may specify in its good faith
business judgment.

        4.5     Remittance of Proceeds. All proceeds arising from the
disposition of any Collateral shall be delivered, in kind, by Borrower to Bank
in the original form in which received by Borrower not later than the following
Business Day after receipt by Borrower, to be applied to the Obligations in such
order as Bank shall determine; provided that, if no Default or Event of Default
has occurred and is continuing, Borrower shall not be obligated to remit to Bank
the proceeds of the sale of property the Transfer of which is permitted by
Section 5.5(c) hereof. Borrower agrees that it will not commingle proceeds of
Collateral with any of Borrower's other funds or property, but will hold such
proceeds separate and apart from such other funds and property and in an express
trust for Bank. Nothing in this Section limits the restrictions on disposition
of Collateral set forth elsewhere in this Agreement.

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        4.6     Disputes. Borrower shall notify Bank promptly of all disputes or
claims relating to Accounts. Borrower shall not forgive (completely or
partially), compromise or settle any Account for less than payment in full, or
agree to do any of the foregoing, except that Borrower may do so, provided that:
(a) Borrower does so in good faith, in a commercially reasonable manner, in the
ordinary course of business, and in arm's length transactions, which are
reported to Bank on the regular reports provided to Bank; (b) no Default or
Event of Default has occurred and is continuing; and (c) taking into account all
such discounts, settlements and forgiveness, the total outstanding Credit
Extensions will not exceed the Credit Limit.

        4.7     Returns. Provided no Event of Default has occurred and is
continuing, if any Account Debtor returns any Inventory to Borrower, Borrower
shall promptly determine the reason for such return and, unless such return is
disputed by Borrower or unless such return is immediately replaced by Borrower,
promptly issue a credit memorandum to the Account Debtor in the appropriate
amount. In the event any attempted return occurs after the occurrence and during
the continuance of any Event of Default, Borrower shall hold the returned
Inventory in trust for Bank, and immediately notify Bank of the return of the
Inventory.

        4.8     Verification. Bank may, from time to time, verify directly with
the respective Account Debtors the validity, amount and other matters relating
to the Accounts, by means of mail, telephone or otherwise, either in the name of
Borrower or Bank or such other name as Bank may choose.

        4.9     No Liability. Bank shall not be responsible or liable for any
shortage or discrepancy in, damage to, or loss or destruction of, any goods, the
sale or other disposition of which gives rise to an Account, or for any error,
act, omission, or delay of any kind occurring in the settlement, failure to
settle, collection or failure to collect any Account, or for settling any
Account in good faith for less than the full amount thereof, nor shall Bank be
deemed to be responsible for any of Borrower's obligations under any contract or
agreement giving rise to an Account. Nothing herein shall, however, relieve Bank
from liability for its own gross negligence or willful misconduct.

5.      ADDITIONAL DUTIES OF BORROWER.

        5.1     Financial and Other Covenants. Borrower shall at all times
comply with the financial and other covenants set forth in the Schedule.

        5.2     Insurance. Borrower shall, at all times insure all of the
tangible personal property Collateral and carry such other business insurance,
with insurers reasonably acceptable to Bank, in such form and amounts as Bank
may reasonably require and that are customary and in accordance with standard
practices for Borrower's industry and locations, and Borrower shall provide
evidence of such insurance to Bank. All casualty insurance policies shall name
Bank as loss payee and shall contain a lenders loss payee endorsement in form
reasonably acceptable to Bank. All policies of liability insurance shall name
Bank as an additional insured. Upon receipt of the proceeds of any such
insurance, Bank shall apply such proceeds in reduction of the Obligations as
Bank shall determine in its good faith business judgment, except that, provided
no Default or Event of Default has occurred and is continuing, Bank shall
release to Borrower casualty insurance proceeds totaling less than $100,000,
which shall be utilized by Borrower for the replacement of the property with
respect to which the insurance proceeds were paid. Bank may require reasonable
assurance that the insurance proceeds so released will be so used. If Borrower
fails to provide or pay for any insurance, Bank may, but is not obligated to,
obtain the same at Borrower's expense. Borrower shall promptly deliver to Bank
copies of all material reports made to insurance companies.

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        5.3     Reports. Borrower, at its expense, shall provide Bank with the
written reports set forth in the Schedule, and such other written reports with
respect to Borrower (including budgets, sales projections, operating plans and
other financial documentation), as Bank shall from time to time reasonably
specify in its good faith business judgment.

        5.4     Access to Collateral, Books and Records. At reasonable times,
and on one (1) Business Day's notice, Bank, or its agents, shall have the right
to inspect the Collateral and the right to audit and copy Borrower's books and
records. After the initial inspection and audit, such inspections and audits
shall occur at least three times per year so long as Advances are outstanding,
otherwise only prior to the first Advance. Bank shall take reasonable steps to
keep confidential all information obtained in any such inspection or audit, but
Bank shall have the right to disclose any such information to its auditors,
regulatory agencies, and attorneys, and pursuant to any subpoena or other legal
process. The foregoing inspections and audits shall be at Borrower's expense and
the charge therefor shall be $750 per person per day (or such higher amount as
shall represent Bank's then current standard charge for the same), plus
reasonable out-of-pocket expenses; provided that so long as no Event of Default
has occurred and is continuing and Borrower requests Credit Extensions
regularly. Borrower shall not be required to pay such expenses more than three
times per fiscal year. Audits following termination of the Streamline Option
shall be at Borrower's expense. In the event Borrower and Bank schedule an
inspection or audit more than ten (10) days in advance, and Borrower seeks to
reschedule the inspection or audit with less than ten (10) days written notice
to Bank, then (without limiting any of Bank's rights or remedies), Borrower
shall pay Bank a cancellation fee of $1,000 plus any out-of-pocket expenses
incurred by Bank, to compensate Bank for the anticipated costs and expenses of
the cancellation.

        5.5     Negative Covenants. Except as may be permitted in the Schedule,
Borrower shall not, and shall not permit any Subsidiary to, without Bank's prior
written consent (which shall be a matter of its good faith business judgment),
do any of the following:

                (a)     merge or consolidate with another corporation or entity
(except that a Subsidiary may merge or consolidate with or into another
Subsidiary or Borrower); or acquire all or substantially all of the capital
stock or property of a Person other than a Subsidiary;

                (b)     enter into any material transaction with any Affiliate
of Borrower except for (i) transactions that are in the ordinary course of
Borrower's business, upon fair and reasonable terms (when viewed in the context
of any series of transactions of which it may be a part, if applicable); and
(ii) transactions permitted under Sections 5.5(f) or (i);

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                (c)     convey, sell, lease, transfer or otherwise dispose of
(collectively "Transfer") all or any part of its business or property, except
for:

                        (i)     sales of Inventory in the ordinary course of
business;

                        (ii)    dispositions of obsolete, damaged or worn-out
Equipment in the ordinary course of business; and

                        (iii)   non-exclusive licensing of Intellectual Property
in the ordinary course of business;

                (d)     without prior written notice to Bank, store any
Inventory or other Collateral with any warehouseman or other third party not
specified in the Representations or otherwise consented to in writing by Bank;

                (e)     sell any Inventory on a sale-or-return, guaranteed sale,
consignment, or other contingent basis;

                (f)     make any loans of any money or other assets except for
Permitted Investments;

                (g)     incur any Indebtedness, other than Permitted
Indebtedness;

                (h)     guarantee or otherwise become liable with respect to the
obligations of another party or entity other than Permitted Indebtedness;

                (i)     pay or declare any dividends on stock or redeem, retire,
purchase or otherwise acquire, directly or indirectly, any of Borrower's stock
except for Permitted Distributions;

                (j)     permit, vote in favor of, or enter into any agreement
that would result in, a Change of Control;

                (k)     engage, directly or indirectly, in any material line of
business other than those lines of business conducted by Borrower and its
Subsidiaries on the date hereof and any businesses reasonably related,
complementary or incidental thereto or reasonable extensions thereof; or

                (l)     with respect to Borrower only, dissolve or elect to
dissolve, or, without prior written notice to Bank pursuant to Section 3.3,
change its state of incorporation.

        5.6     Litigation Cooperation. Should any third-party suit or
proceeding be instituted by or against Bank with respect to any Collateral or
relating to Borrower, Borrower shall, without expense to Bank, make available
Borrower and its officers, employees and agents and Borrower's books and
records, to the extent that Bank may deem them reasonably necessary in order to
prosecute or defend any such suit or proceeding.

        5.7     Further Assurances. Borrower agrees, at its expense, on request
by Bank, to execute all documents and take all actions, as Bank, may, in its
good faith business judgment, deem necessary or useful in order to perfect and
maintain Bank's perfected first-priority security interest in the Collateral
(subject to Permitted Liens), and in order to fully consummate the transactions
contemplated by this Agreement.

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6.      TERM.

        6.1     Maturity Date. This Agreement shall continue in effect until the
later to occur of payment in full of the Obligations or the Maturity Date
subject to Section 6.3 below.

        6.2     Early Termination. This Agreement may be terminated prior to the
Maturity Date as follows: (a) by Borrower, effective three (3) Business Days
after written notice of termination is given to Bank; or (b) by Bank at any time
after the occurrence and during the continuance of an Event of Default, without
notice, effective immediately. If this Agreement is terminated by Borrower or by
Bank under this Section 6.2, Borrower shall pay to Bank a termination fee in an
amount equal to one percent (1.0%) of the Maximum Credit Limit, provided that no
termination fee shall be charged if the credit facility hereunder is replaced
with a new facility from another division of Bank. The termination fee shall be
due and payable on the effective date of termination and thereafter shall bear
interest at a rate equal to the highest rate applicable to any of the
Obligations.

        6.3     Payment of Obligations. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay and perform in full all
Obligations, whether evidenced by installment notes or otherwise, and whether or
not all or any part of such Obligations are otherwise then due and payable.
Notwithstanding any termination of this Agreement, all of Bank's security
interests in all of the Collateral and all of the terms and provisions of this
Agreement shall continue in full force and effect until all Obligations have
been paid and performed in full; provided that Bank may, in its sole discretion,
refuse to make any further Credit Extensions after termination. No termination
shall in any way affect or impair any right or remedy of Bank, nor shall any
such termination relieve Borrower of any Obligation to Bank, until all of the
Obligations have been paid and performed in full. Upon payment and performance
in full of all the Obligations and termination of this Agreement, Bank shall
promptly terminate its financing statements with respect to the Borrower and
deliver to Borrower such other documents as may be required to fully terminate
Bank's security interests.

7.      EVENTS OF DEFAULT AND REMEDIES.

        7.1     Events of Default. The occurrence of any of the following events
shall constitute an "Event of Default" under this Agreement, and Borrower shall
give Bank immediate written notice thereof:

                (a)     any warranty, representation, statement, report or
certificate made or delivered to Bank by Borrower or any of Borrower's officers,
employees or agents, now or in the future, shall be untrue or misleading in any
material respect when made or deemed to be made;

                (b)     Borrower shall fail to pay (i) when due, any Credit
Extension or any interest thereon or (ii) within three (3) days after when due,
any other monetary Obligation, including any Overadvance;

                (c)     Borrower shall fail to comply with any of the financial
covenants set forth in the Schedule, or shall fail to perform any other
non-monetary Obligation which by its nature cannot be cured, or shall fail to
permit Bank to conduct an inspection or audit as specified in Section 5.4
hereof;

                                      -12-
<PAGE>

                (d)     Borrower shall fail to perform any other non-monetary
Obligation, which failure is not cured within three (3) days after the date
performance was to be rendered;

                (e)     any levy, assessment, attachment, seizure, lien or
encumbrance (other than a Permitted Lien) is made on a material part of the
Collateral which is not cured within ten (10) Business Days after the occurrence
of the same;

                (f)     any event of default occurs under any Indebtedness in
excess of $50,000 secured by a Permitted Lien, which is not cured within any
applicable cure period or waived in writing by the holder of the Permitted Lien;

                (g)     any event of default in other agreement between Borrower
and a third party that gives the third party the right to accelerate any
Indebtedness exceeding $50,000;

                (h)     dissolution, termination of existence or insolvency of
Borrower; or appointment of a receiver, trustee or custodian, for all or any
part of the property of, assignment for the benefit of creditors by, or the
commencement of any proceeding by Borrower under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of Indebtedness, dissolution or
liquidation law or statute of any jurisdiction, now or in the future in effect;

                (i)     the commencement of any proceeding against Borrower
under any reorganization, bankruptcy, insolvency, arrangement, readjustment of
Indebtedness, dissolution or liquidation law or statute of any jurisdiction, now
or in the future in effect, which is not cured by the dismissal or stay thereof
within thirty (30) days after the date commenced;

                (j)     Borrower makes any payment on account of any
indebtedness or obligation which has been subordinated to the Obligations other
than as permitted in the applicable subordination agreement, or if any Person
who has subordinated such indebtedness or obligations terminates or in any way
limits his subordination agreement;

                (k)     there shall be a Change in Control;

                (l)     Borrower shall generally not pay its debts as they
become due, or Borrower shall conceal, remove or transfer any part of its
property, with intent to hinder, delay or defraud its creditors, or make or
suffer any transfer of any of its property which may be fraudulent under any
bankruptcy, fraudulent conveyance or similar law; or

                (m)     a Material Adverse Change shall occur. Bank may cease
making any Credit Extensions hereunder during any of the above cure periods and
thereafter if an Event of Default has occurred and is continuing.

                                      -13-
<PAGE>

        7.2     Remedies. Upon the occurrence and during the continuance of any
Event of Default, Bank, at its option, and without notice or demand of any kind
(all of which are hereby expressly waived by Borrower), may do any one or more
of the following: (a) cease making Credit Extensions or otherwise extending
credit to Borrower under this Agreement or any other Loan Document; (b)
accelerate and declare all or any part of the Obligations to be immediately due,
payable, and performable, notwithstanding any deferred or installment payments
allowed by any instrument evidencing or relating to any Obligation; (c) take
possession of any or all of the Collateral wherever it may be found, and for
that purpose Borrower hereby authorizes Bank without judicial process to enter
onto any of Borrower's premises without interference to search for, take
possession of, keep, store, or remove any of the Collateral, and remain on the
premises or cause a custodian to remain on the premises in exclusive control
thereof, without charge for so long as Bank deems it necessary, in its good
faith business judgment, in order to complete the enforcement of its rights
under this Agreement or any other agreement; provided, however, that should Bank
seek to take possession of any of the Collateral by court process, Borrower
hereby irrevocably waives: (i) any bond and any surety or security relating
thereto required by any statute, court rule or otherwise as an incident to such
possession; (ii) any demand for possession prior to the commencement of any suit
or action to recover possession thereof; and (iii) any requirement that Bank
retain possession of, and not dispose of, any such Collateral until after trial
or final judgment; (d) require Borrower to assemble any or all of the Collateral
and make it available to Bank at places designated by Bank which are reasonably
convenient to Bank and Borrower, and to remove the Collateral to such locations
as Bank may deem advisable; (e) complete the processing, manufacturing or repair
of any Collateral prior to a disposition thereof and, for such purpose and for
the purpose of removal, Bank shall have the right to use Borrower's premises,
vehicles, hoists, lifts, cranes, and other Equipment and all other property
without charge; (f) sell, lease or otherwise dispose of any of the Collateral,
in its condition at the time Bank obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private sales,
in lots or in bulk, for cash, exchange or other property, or on credit, and to
adjourn any such sale from time to time without notice other than oral
announcement at the time scheduled for sale. Bank shall have the right to
conduct such disposition on Borrower's premises without charge, for such time or
times as Bank deems reasonable, or on Bank's premises, or elsewhere and the
Collateral need not be located at the place of disposition. Bank may directly or
through any affiliated company purchase or lease any Collateral at any such
public disposition, and if permissible under applicable law, at any private
disposition. Any sale or other disposition of Collateral shall not relieve
Borrower of any liability Borrower may have if any Collateral is defective as to
title or physical condition or otherwise at the time of sale; (g) demand payment
of, and collect any Accounts and General Intangibles comprising Collateral and,
in connection therewith, Borrower irrevocably authorizes Bank to endorse or sign
Borrower's name on all collections, receipts, instruments and other documents,
to take possession of and open mail addressed to Borrower and remove therefrom
payments made with respect to any item of the Collateral or proceeds thereof,
and, in Bank's good faith business judgment, to grant extensions of time to pay,
compromise claims and settle Accounts and the like for less than face value; (h)
offset against any sums in any of Borrower's general, special or other deposit
accounts with Bank against any or all of the Obligations; and (i) demand and
receive possession of any of Borrower's federal and state income tax returns and
the books and records utilized in the preparation thereof or referring thereto.
All reasonable attorneys' fees, expenses, costs, liabilities and obligations
incurred by Bank with respect to the foregoing shall be added to and become part
of the Obligations, shall be due on demand, and shall bear interest at a rate
equal to the highest interest rate applicable to any of the Obligations. Without
limiting any of Bank's rights and remedies, from and after the occurrence and
during the continuance of any Event of Default, the interest rate applicable to
the Obligations shall be increased by an additional five percent (5%) per annum
(the "Default Rate").

                                      -14-
<PAGE>

        7.3     Standards for Determining Commercial Reasonableness. Borrower
and Bank agree that a sale or other disposition (collectively, "Sale") of any
Collateral which complies with the following standards will conclusively be
deemed to be commercially reasonable: (a) notice of the sale is given to
Borrower at least ten days prior to the sale, and, in the case of a public sale,
notice of the sale is published at least five days before the sale in a
newspaper of general circulation in the county where the sale is to be
conducted; (b) notice of the sale describes the collateral in general,
non-specific terms; (c) the sale is conducted at a place designated by Bank,
with or without the Collateral being present; (d) the sale commences at any time
between 8:00 a.m. and 6:00 p.m; (e) payment of the purchase price in cash or by
cashier's check or wire transfer is required; and (f) with respect to any sale
of any of the Collateral, Bank may (but is not obligated to) direct any
prospective purchaser to ascertain directly from Borrower any and all
information concerning the same. Bank shall be free to employ other methods of
noticing and selling the Collateral, in its discretion, if they are commercially
reasonable.

        7.4     Power of Attorney. Upon the occurrence and during the
continuance of any Event of Default, without limiting Bank's other rights and
remedies, Borrower grants to Bank an irrevocable power of attorney coupled with
an interest, authorizing and permitting Bank (acting through any of its
employees, attorneys or agents) at any time, at its option, but without
obligation, with or without notice to Borrower, and at Borrower's expense, to do
any or all of the following, in Borrower's name or otherwise, but Bank agrees
that if it exercises any right hereunder, it will do so in good faith and in a
commercially reasonable manner: (a) execute on behalf of Borrower any documents
that Bank may, in its good faith business judgment, deem advisable in order to
perfect and maintain Bank's security interest in the Collateral, or in order to
exercise a right of Borrower or Bank, or in order to fully consummate all the
transactions contemplated under this Agreement, and all other Loan Documents;
(b) execute on behalf of Borrower, any invoices relating to any Account, any
draft against any Account Debtor and any notice to any Account Debtor, any proof
of claim in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's
or other lien, or assignment or satisfaction of mechanic's, materialman's or
other lien; (c) take control in any manner of any cash or non-cash items of
payment or proceeds of Collateral; endorse the name of Borrower upon any
instruments, or documents, evidence of payment or Collateral that may come into
Bank's possession; (d) endorse all checks and other forms of remittances
received by Bank; (e) pay, contest or settle any lien, charge, encumbrance,
security interest and adverse claim in or to any of the Collateral, or any
judgment based thereon, or otherwise take any action to terminate or discharge
the same; (f) grant extensions of time to pay, compromise claims and settle
Accounts and General Intangibles for less than face value and execute all
releases and other documents in connection therewith; (g) pay any sums required
on account of Borrower's taxes or to secure the release of any liens therefor,
or both; (h) settle and adjust, and give releases of, any insurance claim that
relates to any of the Collateral and obtain payment therefor; (i) instruct any
third party having custody or control of any books or records belonging to, or
relating to, Borrower to give Bank the same rights of access and other rights
with respect thereto as Bank has under this Agreement; and (j) take any action
or pay any sum required of Borrower pursuant to this Agreement and any other
Loan Documents. Any and all reasonable sums paid and any and all reasonable
costs, expenses, liabilities, obligations and attorneys' fees incurred by Bank
with respect to the foregoing shall be added to and become part of the
Obligations, shall be payable on demand, and shall bear interest at a rate equal
to the highest interest rate applicable to any of the Obligations. In no event
shall Bank's rights under the foregoing power of attorney or any of Bank's other
rights under this Agreement be deemed to indicate that Bank is in control of the
business, management or properties of Borrower.

                                      -15-
<PAGE>

        7.5     Application of Proceeds. All proceeds realized as the result of
any sale of the Collateral shall be applied by Bank, first, to the costs,
expenses, liabilities, obligations and attorneys' fees incurred by Bank in the
exercise of its rights under this Agreement, second, to the interest due upon
any of the Obligations, and third, to the principal of the Obligations, in such
order as Bank shall determine in its sole discretion. Any surplus shall be paid
to Borrower or other persons legally entitled thereto; Borrower shall remain
liable to Bank for any deficiency. If, Bank, in its good faith business
judgment, directly or indirectly enters into a deferred payment or other credit
transaction with any purchaser at any sale of Collateral, Bank shall have the
option, exercisable at any time, in its good faith business judgment, of either
reducing the Obligations by the principal amount of purchase price or deferring
the reduction of the Obligations until the actual receipt by Bank of the cash
therefor.

        7.6     Remedies Cumulative. In addition to the rights and remedies set
forth in this Agreement, Bank shall have all the other rights and remedies
accorded a secured party under the Code and under all other applicable laws, and
under any other instrument or agreement now or in the future entered into
between Bank and Borrower, and all of such rights and remedies are cumulative
and none is exclusive. Exercise or partial exercise by Bank of one or more of
its rights or remedies shall not be deemed an election, nor bar Bank from
subsequent exercise or partial exercise of any other rights or remedies. The
failure or delay of Bank to exercise any rights or remedies shall not operate as
a waiver thereof, but all rights and remedies shall continue in full force and
effect until all of the Obligations have been fully paid and performed.

8.      Definitions.  As used in this agreement, the following terms have the
following meanings:

        "Account Debtor" means the obligor on an Account.

        "Accounts" means all present and future "accounts" as defined in the
Code in effect on the date hereof with such additions to such term as may
hereafter be made, and includes without limitation all accounts receivable and
other sums owing to Borrower.

        "Advances" has the meaning set forth in Section 1.1 above.

        "Affiliate" means, with respect to any Person, any Person controlling,
controlled by or under common control with such Person.

        "Bank Expenses" are all audit/inspection fees and expenses and
reasonable costs and expenses (including reasonable attorneys' fees and
expenses) for preparing, negotiating, administering, defending and enforcing the
Loan Documents (including appeals or Insolvency Proceedings).

        "Borrowing Base" means the lesser of (a) $5,000,000 or (b) 75% of
Borrower's Eligible Accounts of which, from November 1, 2005 through April 30,
2005, no more than $2,000,000 will be advanced against Eligible 'Early Buy' Pool
and Spa Accounts and from May 1 until June 15, 2006, no more than $1,500,000
(the "Pool and Spa Sublimit").

                                      -16-
<PAGE>

        "Business Day" means a day on which Bank is open for business.

        "Change in Control" is a transaction in which any "person" or "group"
(within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act
of 1934, as amended (the "Act")) becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Act), directly or indirectly, of greater than 35% of the
shares of all classes of stock then outstanding of Borrower ordinarily entitled
to vote in the election of directors.

        "Code" means the Uniform Commercial Code as adopted and in effect in the
State of California from time to time.

        "Collateral" has the meaning set forth in Section 2 above.

        "Contingent Obligation" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (a) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (b) any obligations for undrawn letters of credit for the account of
that Person; and (c) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices, but "Contingent
Obligation" does not include endorsements in the ordinary course of business.
The amount of a Contingent Obligation is the stated or determined amount of the
primary obligation for which the Contingent Obligation is made or, if not
determinable, the maximum reasonably anticipated liability for it determined by
the Person in good faith; but the amount may not exceed the maximum of the
obligations under the guarantee or other support arrangement.

        "continuing" and "during the continuance of" when used with reference to
a Default or Event of Default means that the Default or Event of Default has
occurred and has not been either waived in writing by Bank or cured within any
applicable cure period.

        "Control Agreement" means, collectively, any control agreement entered
into among Borrower, Bank and the depositary bank, securities intermediary, or
commodity intermediary at which Borrower maintains a deposit account, securities
account, or a commodity account, pursuant to which Bank obtains control (within
the meaning of the applicable provision of the Code) over such deposit account,
securities account, or commodity account.

        "Credit Extension" is each Advance or any other extension of credit by
Bank for the Borrower's benefit.

        "Credit Limit" has the meaning set forth in the Schedule.

        "Current Liabilities" means the aggregate amount of Borrower's Total
Liabilities which mature within one (1) year.

                                      -17-
<PAGE>

        "Default" means any event which with notice or passage of time or both,
would constitute an Event of Default.

        "Default Rate" has the meaning set forth in Section 7.2 above.

        "Deposit Accounts" means all present and future "deposit accounts" as
defined in the Code in effect on the date hereof with such additions to such
term as may hereafter be made, and includes without limitation all general and
special bank accounts, demand accounts, checking accounts, savings accounts and
certificates of deposit.

        "Eligible Accounts" means Accounts arising in the ordinary course of
Borrower's business from the sale of goods, the rendition of services, or the
non-exclusive licensing of Intellectual Property to Account Debtors that are
U.S. Account Debtors, that meet all Borrower's representations and warranties in
Article 4 which Bank, in its good faith business judgment, shall deem eligible
for borrowing. Without limiting the fact that the determination of which
Accounts are eligible for borrowing is a matter of Bank's good faith business
judgment, the following (the "Minimum Eligibility Requirements") are the minimum
requirements for an Account to be an Eligible Account: (a) the Account must not
be outstanding for more than 90 days from its invoice date (the "Eligibility
Period"), (b) the Account must not represent progress billings, or be due under
a fulfillment or requirements contract with an. Account Debtor, (c) the Account
must not be subject to any contingencies (including Accounts arising from sales
on consignment, guaranteed sale or other terms pursuant to which payment by an
Account Debtor may be conditional), (d) the Account must not be owing from an
Account Debtor with whom Borrower has any dispute (whether or not relating to
the particular Account) (but, subject to Bank's satisfactory verification, only
the amount in dispute shall be excluded), (e) the Account must not be owing from
a Related Account Debtor of Borrower; (f) the Account must not be owing from an
Account Debtor which is subject to any insolvency or bankruptcy proceeding, or
whose financial condition is not acceptable to Bank, or which, fails or goes out
of a material portion of its business; (g) the Account must not be owing from
the United States or any department, agency or instrumentality thereof (unless
there has been compliance, to Bank's satisfaction, with the United States
Assignment of Claims Act); (h) the Account must not be owing from an Account
Debtor to whom Borrower is or may be liable for goods purchased from such
Account Debtor or otherwise (but, in such case, the Account will be deemed not
eligible only to the extent of any amounts owed by Borrower to such Account
Debtor); (g) the Account must not have selling terms greater than 90 days,
except for Eligible 'Early Buy' Pool and Spa Accounts (as defined below).
Accounts owing from one Account Debtor will not be deemed Eligible Accounts to
the extent they exceed 25% of the total Accounts outstanding. In addition, if
more than 50% of the Accounts owing from an Account Debtor are outstanding for a
period longer than their Eligibility Period (without regard to unapplied
credits) or are otherwise not eligible Accounts, then all Accounts owing from
that an Account Debtor will be deemed ineligible for borrowing. Bank may, from
time to time, in its good faith business judgment, revise the Minimum
Eligibility Requirements upon written notice to Borrower.

        "Eligible 'Early Buy' Pool and Spa Accounts" means all of Borrower's
pool and spa accounts which are due and payable 91 to 180 days from the invoice
date, provided however that such accounts do not include those not paid within
the earlier of (a) thirty (30) days from the invoice due date or (b) 180 days
from the invoice date.

                                      -18-
<PAGE>

        "Equipment" means all present and future "equipment" as defined in the
Code in effect on the date hereof with such additions to such term as may
hereafter be made, and includes without limitation all machinery, fixtures,
goods, vehicles (including motor vehicles and trailers), and any interest in any
of the foregoing.

        "Event of Default" means any of the events set forth in Section 7.1 of
this Agreement.

        "GAAP" means generally accepted accounting principles consistently
applied.

        "General Intangibles" means all present and future "general intangibles"
as defined in the Code in effect on the date hereof with such additions to such
term as may hereafter be made, and includes without limitation all Intellectual
Property, payment intangibles, royalties, contract rights, goodwill, franchise
agreements, purchase orders, customer lists, route lists, telephone numbers,
domain names, claims, income tax refunds, security and other deposits, options
to purchase or sell real or personal property, rights in all litigation
presently or hereafter pending (whether in contract, tort or otherwise),
insurance policies (including without limitation key man, property damage, and
business interruption insurance), payments of insurance and rights to payment of
any kind.

        "good faith business judgment" means honesty in fact and good faith (as
defined in Section 1201 of the Code) in the exercise of Bank's business
judgment.

         "including" means including (but not limited to).

        "Indebtedness" is (a) indebtedness for borrowed money or the deferred
price of property or services (such as reimbursement and other obligations for
surety bonds and letters of credit that are carried as liabilities on Borrower's
balance sheet) other than Contingent Obligations, (b) obligations evidenced by
notes, bonds, debentures or similar instruments, and (c) capital lease
obligations.

        "Insolvency Proceeding" are proceedings by or against any Person under
the United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.

        "Intellectual Property" means all present and future (a) copyrights,
copyright rights, copyright applications, copyright registrations and like
protections in each work of authorship and derivative work thereof, whether
published or unpublished, (b) trade secret rights, including all rights to
unpatented inventions and know how, and confidential information; (c) mask work
or similar rights available for the protection of semiconductor chips; (d)
patents, patent applications and like protections including without limitation
improvements, divisions, continuations, renewals, reissues, extensions and
continuations-in-part of the same; (e) trademarks, servicemarks, trade styles,
and trade names, whether or not any of the foregoing are registered, and all
applications to register and registrations of the same and like protections, and
the entire goodwill of the business of Borrower connected with and symbolized by
any such trademarks; (f) computer software and computer software products; (g)
designs and design rights; (h) technology; (i) all claims for damages by way of
past, present and future infringement of any of the rights included above; and
(j) all licenses or other rights to use any property or rights of a type
described above.

                                      -19-
<PAGE>

        "Inventory" means all present and future "inventory" as defined in the
Code in effect on the date hereof with such additions to such term as may
hereafter be made, and includes without limitation all merchandise, raw
materials, parts, supplies, packing and shipping materials, work in process and
finished products, including without limitation such inventory as is temporarily
out of Borrower's custody or possession or in transit and including any returned
goods and any documents of title representing any of the above.

        "Investment" is any beneficial ownership (including stock, partnership
interest or other securities) of any Person, or any loan, advance or capital
contribution to any Person.

        "Investment Property" means all present and future investment property,
securities, stocks, bonds, debentures, debt securities, partnership interests,
limited liability company interests, options, security entitlements, securities
accounts, commodity contracts, commodity accounts, and all financial assets held
in any securities account or otherwise, and all options and warrants to purchase
any of the foregoing, wherever located, and all other securities of every kind,
whether certificated or uncertificated.

        "Lien" is a mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.

        "Loan Documents" means, collectively, this Agreement, the
Representations, the Intellectual Property Security Agreement, and all other
present and future documents, instruments and agreements between Bank and
Borrower, relating to this Agreement, and all amendments and modifications
thereto and replacements therefor.

        "Material Adverse Change" means any of the following: (a) a material
adverse change in the business, operations, or financial or other condition of
the Borrower, (b) a material impairment of the prospect of repayment of any
portion of the Obligations, or (c) a material impairment of the priority of
Bank's security interests in the Collateral.

        "Maturity Date" has the meaning set forth in Section 4 of the Schedule.

        "Maximum Credit Limit" has the meaning set forth in the Schedule.

        "Minimum Eligibility Requirements" is defined in the defined term
"Eligible Domestic Accounts."

        "Obligations" means all present and future Credit Extensions, debts,
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Bank, whether evidenced by this Agreement or any other
Loan Document, or any note or other instrument or document, or otherwise,
whether arising from an extension of credit, opening of a letter of credit,
banker's acceptance, loan, guaranty, indemnification or otherwise, whether
direct or indirect (including, without limitation, those acquired by assignment
and any participation by Bank in Borrower's debts owing to others), absolute or
contingent, due or to become due, including, without limitation, all interest,
charges, expenses, fees, attorneys' fees, expert witness fees, audit/inspection
fees, collateral monitoring fees, closing fees, facility fees, minimum interest
charges and any other sums chargeable to Borrower under this Agreement or under
any other Loan Documents.

                                      -20-
<PAGE>

        "Operating Documents" shall mean, for any Person, such Person's
formation documents, as currently filed with the Secretary of State of such
Person's state of formation, and, (a) if such Person is a corporation, its
bylaws in current form, (b) if such Person is a limited liability company, its
limited liability company agreement (or similar agreement), each of the
foregoing with all current modifications and amendments thereto.

        "Other Property" means the following as defined in the Code in effect on
the date hereof with such additions to such term as may hereafter be made, and
all rights relating thereto: all present and future "commercial tort claims"
(including without limitation any commercial tort claims identified in the
Representations), "documents", "instruments", "promissory notes", "chattel
paper", "letters of credit", "letter-of-credit rights", "fixtures", "farm
products" and "money"; and all other goods and personal property of every kind,
tangible and intangible, whether or not governed by the Code.

        "Payment" means all checks, wire transfers and other items of payment
received by Bank (including proceeds of Accounts and payment of the Obligations
in full) for credit to Borrower's outstanding Credit Extensions or, if the
Streamline Option is in effect, to its deposit accounts with Bank.

        "Permitted Distributions" means:

                (a)     purchases of capital stock from former employees,
consultants and directors pursuant to repurchase agreements or other similar
agreements;

                (b)     distributions or dividends consisting solely of
Borrower's capital stock;

                (c)     purchases for value of any rights distributed in
connection with any stockholder rights plan; and

                (d)     any Subsidiary may pay dividends or make distributions
to Borrower or another Subsidiary.

        "Permitted Indebtedness" is:

                (a)     Borrower's Indebtedness to Bank under this Agreement or
any other Loan Document;

                (b)     any Indebtedness in excess of $50,000 in principal
amount existing on the date of this Agreement and shown on the Representations;

                (c)     capitalized leases and purchase money Indebtedness
secured by Permitted Liens not exceeding $100,000;

                                      -21-
<PAGE>

                (d)     refinanced Permitted Indebtedness, provided that the
amount of such Indebtedness is not increased except by an amount equal to a
reasonable premium or other reasonable amount paid in connection with such
refinancing and by an amount equal to any existing, but unutilized, commitment
thereunder;

                (e)     Indebtedness of Borrower to any Subsidiary to the extent
it is Subordinated Debt; Indebtedness of any Subsidiary to another Subsidiary;
and Indebtedness of any Subsidiary to Borrower to the extent permitted under
clause (g) of the definition of Permitted Investments; and

                (f)     Indebtedness under any performance, surety, statutory or
appeal bonds or similar obligations incurred in the ordinary course of business.

        "Permitted Investments" are:

                (a)     Investments existing on the date of this Agreement;

                (b)     (i) marketable direct obligations issued or
unconditionally guaranteed by the United States or its agencies or any State
maturing within one (1) year from its acquisition, (ii) commercial paper
maturing no more than one (1) year after its creation and having the highest
rating from either Standard & Poor's Corporation or Moody's Investors Service,
Inc., (iii) Bank's certificates of deposit issued maturing no more than two (2)
years after issue; (iv) repurchase agreements having maturities of not more than
90 days; (v) money market accounts maintained with mutual funds having assets in
excess of $1,000,000; (vi) tax exempt securities rated A or better by Moody's or
A+ or better by Standard & Poors; (vii) mutual funds having at least 95% of
their assets invested in the foregoing Investments, and (viii) other Investments
permitted by Borrower's investment policy that has been approved by its board of
directors (or a committee thereof) and Bank;

                (c)     Investments consisting of deposit and investment
accounts in the name of Borrower;

                (d)     Investments consisting of extensions of credit to
Borrower's or its Subsidiaries' customers in the nature of accounts receivable,
prepaid royalties or notes receivable arising from the sale or lease of goods,
provision of services or licensing activities of Borrower;

                (e)     Investments received in satisfaction or partial
satisfaction of obligations owed by financially troubled obligors;

                (f)     Investments acquired in exchange for any other
Investments in connection with or as a result of a bankruptcy, workout,
reorganization or recapitalization;

                (g)     Investments of Subsidiaries in or to Borrower;
Investments of Subsidiaries in or to other Subsidiaries; and

                (h)     Investments received in a transaction permitted under
Section 5.5(c).

                                      -22-
<PAGE>

        "Permitted Liens" means the following:

                (a)     (i) Liens existing on the Effective Date and shown on
the Representations and (ii) Liens arising under this Agreement or other Loan
Documents;

                (b)     Liens for taxes, fees, assessments or other government
 charges or levies, either not delinquent or being contested in good faith and
for which Borrower maintains adequate reserves on its Books, if they have no
priority over any of Bank's security interests;

                (c)     Liens (including with respect to capital leases) (i) on
property (including accessions, additions, parts, replacements, fixtures,
improvements and attachments thereto, and the proceeds thereof) acquired or held
by Borrower or its Subsidiaries incurred for financing such property (including
accessions, additions, parts, replacements, fixtures, improvements and
attachments thereto, and the proceeds thereof), or (ii) existing on property
(and accessions, additions, parts, replacements, fixtures, improvements and
attachments thereto, and the proceeds thereof) when acquired, if the Lien is
confined to such property (including accessions, additions, parts, replacements,
fixtures, improvements and attachments thereto, and the proceeds thereof) and
the Indebtedness is Permitted Indebtedness;

                (d)     Liens incurred in the extension, renewal or refinancing
of the indebtedness secured by Liens described in (a) through (c), but any
extension, renewal or replacement Lien must be limited to the property
encumbered by the existing Lien and the principal amount of the indebtedness it
secures may not increase;

                (e)     licenses or sublicenses granted in the ordinary course
of Borrower's business and any interest or title of a licensor or under any
license or sublicense, if the licenses and sublicenses permit granting Bank a
security interest;

                (f)     leases or subleases granted in the ordinary course of
Borrower's or any of its Subsidiaries' business, including in connection with
Borrower's leased premises or leased property;

                (g)     carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like Liens arising in the ordinary course of business which
are not overdue for a period of more than 30 days or which are being contested
in good faith and by appropriate proceeding if adequate reserves with respect
thereto are maintained on the books of the applicable Person;

                (h)     pledges or deposits in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
social security legislation;

                (i)     deposits to secure the performance of bids, trade
contracts (other than for borrowed money), contracts for the purchase of
property, leases, statutory obligations, surety and appeal bonds, performance
bonds and other obligations of a like nature, in each case, incurred in the
ordinary course of business and not representing an obligation for borrowed
money;

                (j)     easements, rights-of-way, restrictions and other similar
encumbrances affecting real property which do not materially detract from the
value of the property subject thereto or materially interfere with the ordinary
conduct of the business of the applicable Person;

                                      -23-
<PAGE>

                (k)     statutory, common law or contractual Liens of depository
institutions or institutions holding securities accounts (including rights of
set-off) provided they are subordinate to Bank's Liens pursuant to the terms of
a control agreement;

                (l)     Liens in favor of customs or revenue authorities arising
as a matter of law to secure payment of customs duties in connection with the
importation of goods; and

                (m)    Liens on insurance proceeds in favor of insurance
companies granted solely to secure financed insurance premiums.

        "Person" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.

        "Prime Rate" means the rate announced from time to time by Bank as its
"prime rate;" it is a base rate upon which other rates charged by Bank are
based, and it is not necessarily the best rate available at Bank.

        "Quick Assets" is, on any day, the Borrower's consolidated, unrestricted
cash, cash equivalents, net billed accounts receivable, and investments with
maturities less than 12 months determined according to GAAP.

        "Related Account Debtor" means, with respect to any Person, any
Affiliate, relative, partner, shareholder, director, officer, or employee of
such Person.

        "Representations" means the written Collateral Information Certificate
provided by Borrower to Bank.

        "Reserves" means, as of any date of determination, such amounts as Bank
may from time to time establish and revise in its good faith business judgment,
reducing the amount of Credit Extensions and other financial accommodations
which would otherwise be available to Borrower under the lending formula(s)
provided in the Schedule: (a) for accrued interest; (b) to reflect events,
conditions, contingencies or risks which, as determined by Bank in its good
faith business judgment, do or may adversely affect (i) the Collateral or any
other property which is security for the Obligations or its value (including
without limitation any increase in delinquencies of Accounts), (ii) the assets,
business or prospects of Borrower, or (iii) the security interests and other
rights of Bank in the Collateral (including the enforceability, perfection and
priority thereof); or (c) to reflect Bank's good faith belief that any
collateral report or financial information furnished by or on behalf of Borrower
to Bank is or may have been incomplete, inaccurate or misleading in any material
respect; or (d) in respect of any state of facts which Bank determines in good
faith constitutes a Default or an Event of Default.

        "Schedule" means that Schedule to Loan and Security Agreement attached
to this Agreement.

        "Streamline Option" has the meaning set forth in Section 6 of the
Schedule.

                                      -24-
<PAGE>

        "Subsidiary" is, for any Person, any other business entity of which more
than 50% of the voting stock or other equity interests is owned or controlled,
directly or indirectly, by the Person or one or more Affiliates of the Person.

        "Subordinated Debt" is debt incurred by Borrower subordinated to
Borrower's indebtedness owed to Bank and which is reflected in a written
agreement in a manner and form acceptable to Bank and approved by Bank in
writing.

        "Tangible Net Worth" shall mean, for Borrower, Subordinated Debt plus
the excess of total assets of Borrower minus Total Liabilities of Borrower,
determined in accordance with GAAP and on an unconsolidated basis, and there
shall be excluded from assets, without duplication: (a) notes, accounts
receivable and other obligations owing to Borrower from its officers or other
Affiliates, and (b) all assets which would be classified as intangible assets
under GAAP, including without limitation goodwill, licenses, patents,
trademarks, trade names, copyrights, capitalized software and organizational
costs, licenses and franchises.

        "Total Liabilities" are, on any day, obligations that should, under
GAAP, be classified as liabilities on Borrower's consolidated balance sheet,
including all Indebtedness and any current portion of Subordinated Debt allowed
to be paid, but excluding all other Subordinated Debt.

        "U.S. Account Debtor" means any Account Debtor that is incorporated or
organized under the laws of the United States of America, a state thereof, or
the District of Columbia.

        Other Terms. All accounting terms used in this Agreement, unless
otherwise indicated, shall have the meanings given to such terms in accordance
with GAAP, consistently applied. All other terms contained in this Agreement,
unless otherwise indicated, shall have the meanings provided by the Code, to the
extent such terms are defined therein.

9.      GENERAL PROVISIONS.

        9.1     Interest Computation; Float Charge. In computing interest on the
Obligations, all Payments received after 12:00 Noon Pacific time on any day
shall be deemed received on the next Business Day. In addition, whenever Credit
Extensions are outstanding, Bank shall be entitled to charge Borrower a "float"
charge in an amount equal to two (2) Business Days' interest, at the interest
rate applicable to the Credit Extensions, on all Payments received by Bank. The
float charge for each month shall be payable on the last day of the month. Bank
shall not, however, be required to credit Borrower's account for the amount of
any item of payment which is unsatisfactory to Bank in its good faith business
judgment, and Bank may charge Borrower's loan account for the amount of any item
of payment which is returned to Bank unpaid.

        9.2     Application of Payments. All payments with respect to the
Obligations may be applied, and in Bank's good faith business judgment reversed
and re-applied, to the Obligations, in such order and manner as Bank shall
determine in its good faith business judgment.

                                      -25-
<PAGE>

        9.3     Charges to Accounts. Bank may, in its discretion, require that
Borrower pay monetary Obligations in cash to Bank or charge any monetary
Obligations to Borrower's deposit accounts maintained with Bank, or, if no
amounts are available in such deposit accounts, charge them to Borrower's loan
account with Bank, in which event they will bear interest at the same rate
applicable to the Credit Extensions.

        9.4     Monthly Accountings. Bank shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower (except for reverses and reapplications of payments made and
corrections of errors discovered by Bank), unless Borrower notifies Bank in
writing to the contrary within sixty (60) days after such account is rendered,
describing the nature of any alleged errors or omissions.

        9.5     Notices. All notices to be given under this Agreement shall be
in writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, or certified mail return receipt
requested, addressed to Bank or Borrower at the addresses shown in the heading
to this Agreement, or at any other address designated in writing by one party to
the other party. Notices to Bank shall be directed to the Commercial Finance
Division, to the attention of the Division Manager or the Division Credit
Manager. All notices shall be deemed to have been given upon delivery in the
case of notices personally delivered, or at the expiration of one Business Day
following delivery to the private delivery service, or two Business Days
following the deposit thereof in the United States mail, with postage prepaid.

        9.6     Severability. Should any provision of this Agreement be held by
any court of competent jurisdiction to be void or unenforceable, such defect
shall not affect the remainder of this Agreement, which shall continue in full
force and effect.

        9.7     Integration. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between Borrower and Bank and supersede all
prior and contemporaneous negotiations and oral representations and agreements,
all of which are merged and integrated in this Agreement. There are no oral
understandings, representations or agreements between the parties which are not
set forth in this Agreement or in other written agreements signed by the parties
in connection herewith.

        9.8     Waivers; Indemnity. The failure of Bank at any time or times to
require Borrower to strictly comply with any of the provisions of this Agreement
or any other Loan Document shall not waive or diminish any right of Bank later
to demand and receive strict compliance therewith. Any waiver of any default
shall not waive or affect any other default, whether prior or subsequent, and
whether or not similar. None of the provisions of this Agreement or any other
Loan Document shall be deemed to have been waived by any act or knowledge of
Bank or its agents or employees, but only by a specific written waiver signed by
an authorized officer of Bank and delivered to Borrower. Borrower waives the
benefit of all statutes of limitations relating to any of the Obligations or
this Agreement or any other Loan Document, and Borrower waives demand, protest,
notice of protest and notice of default or dishonor, notice of payment and
nonpayment, release, compromise, settlement, extension or renewal of any
commercial paper, instrument, account, General Intangible, document or guaranty
at any time held by Bank on which Borrower is or may in any way be liable, and
notice of any action taken by Bank, unless expressly required by this Agreement.

                                      -26-
<PAGE>

Borrower hereby agrees to indemnify Bank and its affiliates, subsidiaries,
parent, directors, officers, employees, agents, and attorneys, and to hold them
harmless from and against any and all claims, debts, liabilities, demands,
obligations, actions, causes of action, penalties, costs and expenses (including
reasonable attorneys' fees), of every kind, which they may sustain or incur
based upon or arising out of any of the Obligations, or any relationship or
agreement between Bank and Borrower, or any other matter, relating to Borrower
or the Obligations; provided that this indemnity shall not extend to damages
proximately caused by the indemnitee's own gross negligence or willful
misconduct. Notwithstanding any provision in this Agreement to the contrary, the
indemnity agreement set forth in this Section shall survive any termination of
this Agreement and shall for all purposes continue in full force and effect.

        9.9     No Liability for Ordinary Negligence. Neither Bank, nor any of
its directors, officers, employees, agents, attorneys or any other Person
affiliated with or representing Bank shall be liable for any claims, demands,
losses or damages, of any kind whatsoever, made, claimed, incurred or suffered
by Borrower or any other party through the ordinary negligence of Bank, or any
of its directors, officers, employees, agents, attorneys or any other Person
affiliated with or representing Bank, but nothing herein shall relieve Bank from
liability for its own gross negligence or willful misconduct.

        9.10    Amendment. The terms and provisions of this Agreement may not be
waived or amended, except in a writing executed by Borrower and a duly
authorized officer of Bank.

        9.11    Time of Essence. Time is of the essence in the performance by
Borrower of each and every obligation under this Agreement.

        9.12    Attorneys' Fees and Costs. Borrower shall reimburse Bank for all
reasonable attorneys' fees and all filing, recording, search, title insurance,
appraisal, audit, inspection, and other reasonable costs incurred by Bank,
pursuant to, or in connection with, or relating to this Agreement (whether or
not a lawsuit is filed), including, but not limited to, any reasonable
attorneys' fees and costs Bank incurs in order to do the following: prepare and
negotiate this Agreement and all present and future documents relating to this
Agreement; obtain legal advice in connection with this Agreement or Borrower;
enforce, or seek to enforce, any of its rights; prosecute actions against, or
defend actions by, Account Debtors; commence, intervene in, or defend any action
or proceeding; initiate any complaint to be relieved of the automatic stay in
bankruptcy; file or prosecute any probate claim, bankruptcy claim, third-party
claim, or other claim; examine, audit, copy, and inspect any of the Collateral
or any of Borrower's books and records; protect, obtain possession of, lease,
dispose of, or otherwise enforce Bank's security interest in, the Collateral;
and otherwise represent Bank in any litigation relating to Borrower. In
satisfying Borrower's obligation hereunder to reimburse Bank for attorneys fees,
Borrower may, for convenience, issue checks directly to Bank's attorneys,
Bingham McCutchen LLP, but Borrower acknowledges and agrees that Bingham
McCutchen LLP is representing only Bank and not Borrower in connection with this
Agreement. If either Bank or Borrower files any lawsuit against the other
predicated on a breach of this Agreement, the prevailing party in such action
shall be entitled to recover its reasonable costs and attorneys' fees, including
(but not limited to) reasonable attorneys' fees and costs incurred in the
enforcement of, execution upon or defense of any order, decree, award or
judgment. All attorneys' fees and costs to which Bank may be entitled pursuant
to this Section shall immediately become part of the Obligations, shall be due
on demand and shall bear interest at a rate equal to the highest interest rate
applicable to any of the Obligations.

                                      -27-
<PAGE>

        9.13    Benefit of Agreement. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors, assigns,
heirs, beneficiaries and representatives of Borrower and Bank; provided,
however, that Borrower may not assign or transfer any of its rights under this
Agreement without the prior written consent of Bank, and any prohibited
assignment shall be void. No consent by Bank to any assignment shall release
Borrower from its liability for the Obligations.

        9.14    Limitation of Actions. Any claim or cause of action by Borrower
against Bank, its directors, officers, employees, agents, accountants or
attorneys, based upon, arising from, or relating to this Agreement, or any other
Loan Document, or any other transaction contemplated hereby or thereby or
relating hereto or thereto, or any other matter, cause or thing whatsoever,
occurred, done, omitted or suffered to be done by Bank, its directors, officers,
employees, agents, accountants or attorneys, shall be barred unless asserted by
Borrower by the commencement of an action or proceeding in a court of competent
jurisdiction by the filing of a complaint within one year after the first act,
occurrence or omission upon which such claim or cause of action, or any part
thereof, is based, and the service of a summons and complaint on an officer of
Bank, or on any other person authorized to accept service on behalf of Bank,
within thirty (30) days thereafter. Borrower agrees that such one-year period is
a reasonable and sufficient time for Borrower to investigate and act upon any
such claim or cause of action. The one-year period provided herein shall not be
waived, tolled, or extended except by the written consent of Bank in its sole
discretion. This provision shall survive any termination of this Agreement or
any other Loan Document.

        9.15    Paragraph Headings; Construction. Paragraph headings are only
used in this Agreement for convenience. Borrower and Bank acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe, limit,
define or interpret any term or provision of this Agreement. This Agreement has
been fully reviewed and negotiated between the parties and no uncertainty or
ambiguity in any term or provision of this Agreement shall be construed strictly
against Bank or Borrower under any rule of construction or otherwise.

        9.16    Governing Law; Jurisdiction; Venue. This Agreement and all acts
and transactions hereunder and all rights and obligations of Bank and Borrower
shall be governed by the laws of the State of California. As a material part of
the consideration to Bank to enter into this Agreement, Borrower (a) agrees that
all actions and proceedings relating directly or indirectly to this Agreement
shall, at Bank's option, be litigated in courts located within California, and
that the exclusive venue therefor shall be Santa Clara County; (b) consents to
the jurisdiction and venue of any such court and consents to service of process
in any such action or proceeding by personal delivery or any other method
permitted by law; and (c) waives any and all rights Borrower may have to object
to the jurisdiction of any such court, or to transfer or change the venue of any
such action or proceeding.

                                      -28-
<PAGE>

        9.17    Mutual Waiver of Jury Trial. BORROWER AND BANK EACH HEREBY WAIVE
THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT
OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN BANK AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF BANK OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH BANK OR BORROWER, IN ALL
OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.

        9.18    Confidentiality. In handling any confidential information of
Borrower, Bank will exercise the same degree of care that it exercises for its
own proprietary information, but disclosure of information may be made: (a) to
Bank's subsidiaries or affiliates in connection with their present or
prospective business relations with Borrower; (b) to prospective transferees or
purchasers of any interest in the Credit Extensions; (c) as required by law,
regulation, subpoena, or other order so long as Borrower is given notice thereof
if practicable (and Bank is permitted to provide such notice) and an opportunity
to seek a protective order, (d) as required in connection with Bank's
examination or inspection/audit; and (e) as Bank considers appropriate in
exercising remedies under this Agreement. Confidential information does not
include information that either: (x) is in the public domain or in Bank's
possession when disclosed to Bank, or becomes part of the public domain after
disclosure to Bank; or (y) is disclosed to Bank by a third party.

                            [Signature page follows.]

                                      -29-
<PAGE>

EXECUTION COPY

        IN WITNESS WHEREOF, the parties have duly authorized and caused this
Agreement to be executed as of the date first written above.

BORROWER:

FIBERSTARS, INC., a California corporation

By:
   --------------------------------------------------

Title:
      -----------------------------------------------

BANK:

SILICON VALLEY BANK

By:
   --------------------------------------------------

Title
     ------------------------------------------------

<PAGE>

                                   SCHEDULE TO
                           LOAN AND SECURITY AGREEMENT

BORROWER:   FIBERSTARS, INC.
ADDRESS:    44259 NOBEL DRIVE
            FREMONT, CA  94538

DATE:       AUGUST 15, 2005

This Schedule forms an integral part of the Loan and Security Agreement between
Silicon Valley Bank and Borrower of even date.

================================================================================

1.  CREDIT LIMIT
     (Section 1.1):                     An amount (the "Credit Limit") not to
                                        exceed the lesser of: (a) $5,000,000 at
                                        any one time outstanding (the "Maximum
                                        Credit Limit") or (b) amounts available
                                        under the Borrowing Base.

                                        Bank may, from time to time, modify the
                                        Borrowing Base in its good faith
                                        business judgment, upon notice to the
                                        Borrower, based on changes in collection
                                        experience with respect to Eligible
                                        Accounts or other issues or factors
                                        relating to the Eligible Accounts or
                                        other Collateral.

                                        Notwithstanding anything to the contrary
                                        herein, the aggregate amount of all
                                        outstanding Credit Extensions and
                                        amounts outstanding under the sublimits
                                        set forth below, shall not exceed the
                                        Maximum Credit Limit.

    CONDITIONS PRECEDENT
     (Section 1.1)
                                        Bank's obligation to make the initial
                                        Credit Extension is subject to the
                                        condition precedent that the following
                                        have been satisfied, all in form and
                                        substance satisfactory to Bank:

                                             (a)     Borrower shall have
                                        executed and delivered the Loan
                                        Documents;

                                             (b)     Borrower shall have
                                        delivered an executed one or more
                                        Control Agreements by and among
                                        Borrower, Bank, and the depositary bank,
                                        securities intermediary, or commodity
                                        intermediary at which Borrower maintains
                                        a Collateral Account for Bank to perfect
                                        its security interest in any such
                                        Collateral Account;

                                             (c)     Borrower  shall  have
                                        delivered the Operating Documents and a
                                        good standing certificate of Borrower
                                        from the State of California;

                                       -1-
<PAGE>

  SILICON VALLEY BANK                  SCHEDULE TO LOAN AND SECURITY AGREEMENT
--------------------------------------------------------------------------------

                                             (d)     Borrower shall have
                                        delivered the Corporate Borrowing
                                        Resolutions;

                                             (e)     Bank shall have  conducted
                                        an initial field inspection of
                                        Borrower's Accounts prior to the initial
                                        Advance;

                                             (f)     Borrower  shall have paid
                                        all costs and fees, including the Loan
                                        Fee and Bank Expenses, then due; and

                                             (g)     Borrower shall have
                                        delivered to Bank, in addition to the
                                        documents required herein, all
                                        documents, certificates, and other
                                        assurances that Bank or its counsel may
                                        reasonably request.

                                        Bank's obligation to make each Credit
                                        Extension, including the initial Credit
                                        Extension, is subject to the condition
                                        precedent that the following shall have
                                        been satisfied, all in form and
                                        substance satisfactory to Bank:

                                             (x)     timely receipt of a notice
                                        of borrowing pursuant to Section 1.6;

                                             (y)     unless otherwise waived by
                                        Bank, the Control Agreements shall be in
                                        full force and effect; and

                                             (z)     the representations and
                                        warranties in Section 3 must be true on
                                        the date of the notice of borrowing and
                                        on the date any Credit Extension is
                                        made, and no Default or Event of Default
                                        may have occurred and be continuing or
                                        result from the Credit Extension. Each
                                        Credit Extension is Borrower's
                                        representation and warranty on that date
                                        that the representations and warranties
                                        of Section 3 remain true.

    SUBLIMITS
     (Sections 1.1, 1.2 and 1.6):

CASH MANAGEMENT
---------------

       SERVICES AND RESERVES:           Borrower may use amounts not to exceed
       ---------------------            $500,000 minus the sum of (a) the FX
                                        Reserve and (b) amounts outstanding
                                        under the Letters of Credit, for Bank's
                                        Cash Management Services (as defined
                                        below), including, merchant services,
                                        business credit card, ACH and other
                                        services identified in the cash
                                        management services agreement related to
                                        such service (the "Cash Management
                                        Services"). Bank may, in its sole
                                        discretion, reserve against Credit
                                        Extensions which would otherwise be
                                        available hereunder such sums as Bank
                                        shall determine in its good faith
                                        business judgment in connection with the
                                        Cash Management Services, and Bank may
                                        charge to Borrower's loan account or
                                        deposit accounts with Bank, any amounts
                                        that may become due or owing to Bank in
                                        connection with the Cash Management
                                        Services. Borrower agrees to execute and
                                        deliver to Bank all standard form
                                        applications and agreements of Bank in
                                        connection with the Cash Management
                                        Services, and, without limiting any of
                                        the terms of such applications and
                                        agreements, Borrower will pay all
                                        standard fees and charges of Bank in
                                        connection with the Cash Management
                                        Services. The Cash Management Services
                                        shall terminate on the Maturity Date.

                                       -2-
<PAGE>

  SILICON VALLEY BANK                  SCHEDULE TO LOAN AND SECURITY AGREEMENT
--------------------------------------------------------------------------------

FOREIGN EXCHANGE
----------------

    Contract Sublimit:                  Borrower may enter into foreign exchange
    ------------------                  forward contracts with Bank, on its
                                        standard forms, under which Borrower
                                        commits to purchase from or sell to Bank
                                        a set amount of foreign currency more
                                        than one business day after the contract
                                        date (the "FX Forward Contracts"). Bank
                                        will subtract ten percent of each
                                        outstanding FX Forward Contract from the
                                        foreign exchange sublimit which is a
                                        maximum of $500,000 minus the sum of (a)
                                        all amounts utilized for Cash Management
                                        Services and (b) the face amount of all
                                        issued outstanding Letters of Credit
                                        (the "FX Reserve"). The aggregate amount
                                        of the FX Forward Contracts at any one
                                        time may not exceed ten (10) times the
                                        amount of the FX Reserve (which shall be
                                        in addition to other reserves). In the
                                        event at any time there are insufficient
                                        amounts available to Borrower for such
                                        FX Reserve, Borrower shall deposit and
                                        maintain with Bank cash collateral in an
                                        amount at all times equal to such
                                        deficiency, which shall be held as
                                        Collateral for all purposes of this
                                        Agreement. Bank may, in its discretion,
                                        terminate the FX Forward Contracts at
                                        any time that an Event of Default occurs
                                        and is continuing. Borrower shall
                                        execute all standard form applications
                                        and agreements of Bank in connection
                                        with the FX Forward Contracts, and
                                        without limiting any of the terms of
                                        such applications and agreements,
                                        Borrower shall pay all standard fees and
                                        charges of Bank in connection with the
                                        FX Forward Contracts.

       Letters of Credit                Pursuant to the terms set forth in
       -----------------                Section 1.6, the aggregate face Sublimit
        (Section 1.6)                   amount of all Letters of Credit from
                                        time to time issued and outstanding
                                        shall not exceed the maximum of $500,000
                                        minus the sum of (a) the FX Reserve and
                                        (b) Cash Management Services.

================================================================================

2.  INTEREST.

       INTEREST RATE
       (Section 1.2):                   A rate equal to the Prime Rate in effect
                                        from time to time plus one and
                                        three-quarter percent (1.75%) per annum,
                                        except that for Advances made under the
                                        Pool and Spa Sublimit such rate shall
                                        equal the Prime Rate plus two and
                                        one-quarter percent (2.25%) per annum.
                                        Interest shall be calculated on the
                                        basis of a 360-day year for the actual
                                        number of days elapsed. The interest
                                        rate applicable to the Obligations shall
                                        change on each date there is a change in
                                        the Prime Rate.

================================================================================

                                       -3-
<PAGE>

  SILICON VALLEY BANK                  SCHEDULE TO LOAN AND SECURITY AGREEMENT
--------------------------------------------------------------------------------

3.  FEES (Section 1.4):

       Loan Fee:                        $25,000 due and payable on the Effective
                                        Date. Bank acknowledges receipt of
                                        payment of $20,000 which has been
                                        credited to Borrower for amounts payable
                                        hereunder.

       Collateral Handling Fee:         $1,000 due and payable on the last day
                                        of each month, so long as there are
                                        Credit Extensions outstanding under the
                                        Credit Limit.

       Unused Line Fee:                 0.25% of the average unused daily
                                        balance of the Maximum Credit Limit due
                                        and payable on the last day of each
                                        month.

================================================================================

4.  MATURITY DATE
     (Section 6.1):                     August 14, 2006  (the "Maturity Date")

================================================================================

5.  FINANCIAL COVENANTS
     (Section 5.1):                     Borrower shall comply with each of the
                                        following covenants:

         MINIMUM TANGIBLE
         NET WORTH
         (Monthly):                     As of the last day of each month,
                                        Borrower shall maintain a Tangible Net
                                        Worth of not less than (a) $10,000,000
                                        from the Effective Date through December
                                        31, 2005 and (b) $8,500,000 thereafter,
                                        plus fifty percent (50%) of all
                                        consideration received after the
                                        Effective Date for equity securities of
                                        Borrower and Subordinated Debt and
                                        twenty-five percent (25%) of quarterly
                                        net income. Increases in the Minimum
                                        Tangible Net Worth covenant based on
                                        consideration received for (a) equity
                                        securities of Borrower and Subordinated
                                        Debt shall be effective as of the end of
                                        each month in which such consideration
                                        is received and (b) quarterly income
                                        shall be effective as of the end of each
                                        fiscal quarter, and shall continue
                                        effective thereafter.

================================================================================

6.  REPORTING.
     (Section 5.3):

                                        Borrower shall provide Bank with the
                                        following:

                                             1.   At each request for a Credit
                                        Extension, but not less than weekly,
                                        transaction reports and schedules of
                                        collections, on Bank's standard form.

                                             2.   Monthly accounts receivable
                                        agings, aged by invoice date, and
                                        accounts payable agings, aged by invoice
                                        date, inventory reports and outstanding
                                        or held check registers, if any, within
                                        thirty (30) days after the end of each
                                        month, together with a Borrowing Base
                                        Certificate in the form of Exhibit A
                                        attached hereto.

                                             3.   Monthly reconciliations of
                                        accounts receivable agings (aged by
                                        invoice date), transaction reports, and
                                        general ledger, within thirty (30) days
                                        after the end of each month.

                                             4.   Monthly unaudited  financial
                                        statements, as soon as available, and in
                                        any event within thirty (30) days after
                                        the end of each month.

                                       -4-
<PAGE>

  SILICON VALLEY BANK                  SCHEDULE TO LOAN AND SECURITY AGREEMENT
--------------------------------------------------------------------------------

                                             5.   A monthly Compliance
                                        Certificate substantially in the form of
                                        Exhibit B attached hereto, within thirty
                                        (30) days after the end of each month,
                                        in such form as Bank shall reasonably
                                        specify, signed by the Chief Financial
                                        Officer of Borrower, certifying that, as
                                        of the end of such month, Borrower was
                                        in full compliance with all of the terms
                                        and conditions of this Agreement, and
                                        setting forth calculations showing
                                        compliance with the financial covenants
                                        set forth in this Agreement and such
                                        other information as Bank shall
                                        reasonably request, including, without
                                        limitation, a statement that at the end
                                        of such month there were no held checks.

                                             6.    Annual operating budgets
                                        (including income statements, balance
                                        sheets and cash flow statements, by
                                        month) for the upcoming fiscal year of
                                        Borrower within thirty (30) days prior
                                        to the end of each fiscal year of
                                        Borrower, but for fiscal year 2006, no
                                        later than November 15, 2005.

                                             7.   Annual financial statements,
                                        as soon as available, and in any event
                                        within 120 days following the end of
                                        Borrower's fiscal year, audited by, and
                                        with an unqualified opinion of,
                                        independent certified public accountants
                                        acceptable to Bank.

    STREAMLINE OPTION                   Notwithstanding the foregoing, if, at
                                        any time Credit Extensions are zero or
                                        have been reduced to zero, then Borrower
                                        shall not be required to provide the
                                        items set forth in paragraphs 1 and 3 of
                                        this Section 6 (the "Streamline
                                        Option"). As long as the Streamline
                                        Option is in effect, Borrower must
                                        provide Bank thirty (30) days notice to
                                        request an Advance and after such notice
                                        is provided the Streamline Option will
                                        be terminated. An audit will then be
                                        required prior to the Advance.

                                       -5-
<PAGE>

  SILICON VALLEY BANK                  SCHEDULE TO LOAN AND SECURITY AGREEMENT
--------------------------------------------------------------------------------

================================================================================

7.  ADDITIONAL PROVISIONS

                                        (1)  Banking Relationship. Borrower
                                             shall at all times maintain with
                                             Bank or an affiliate of Bank, its
                                             primary deposit and investment
                                             accounts.

                                        (2)  Subordination of Inside Debt. All
                                             present and future indebtedness of
                                             Borrower to its officers, directors
                                             and shareholders ("Inside Debt")
                                             shall, at all times, be
                                             subordinated to the Obligations
                                             pursuant to a subordination
                                             agreement on Bank's standard form.
                                             Borrower represents and warrants
                                             that there is no Inside Debt
                                             presently outstanding, except as
                                             provided in the Representations.
                                             Prior to incurring any Inside Debt
                                             in the future, Borrower shall cause
                                             the person to whom such Inside Debt
                                             will be owed to execute and deliver
                                             to Bank a subordination agreement
                                             on Bank's standard form.

BORROWER:                                      BANK:

FIBERSTARS, INC.                               SILICON VALLEY BANK

By                                             By
    -------------------------                     --------------------------

Title                                          Title
     ------------------------                       ------------------------

                                       -6-
<PAGE>

                                    EXHIBIT A

                       FORM OF BORROWING BASE CERTIFICATE

<PAGE>

                                    EXHIBIT B

                         FORM OF COMPLIANCE CERTIFICATE

TO:    SILICON VALLEY BANK                                  Date:
       3003 Tasman Drive
       Santa Clara, CA 95054

FROM:  FIBERSTARS, INC.

         The undersigned Chief Financial Officer of FiberStars, Inc.
("Borrower") certifies that under the terms and conditions of the Loan and
Security Agreement dated August 15, 2005, between Borrower and Bank (the
"Agreement"), (i) Borrower is in complete compliance for the period ending
_______________ with all required covenants except as noted below and (ii) all
representations and warranties in the Agreement are true and correct in all
material respects on this date. In addition, the undersigned certifies that (x)
Borrower and each of its Subsidiaries has timely filed all required tax returns
and paid, or made adequate provision to pay, all material taxes, except those
being contested in good faith with adequate reserves under GAAP, (y) there are
no legal actions pending or threatened against Borrower or any of its
Subsidiaries which Borrower has not previously notified in writing to Bank, and
(z) as of the end of this compliance period, there were no held checks. Attached
are the required financial reports and calculation of financial covenants
supporting the certification. The undersigned acknowledges that no borrowings
may be requested at any time or date of determination that Borrower is not in
compliance with any of the terms of the Agreement, and that compliance is
determined not just at the date this certificate is delivered.

         PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES, NO, OR N/A UNDER
"COMPLIES" COLUMN.

<TABLE>
<CAPTION>
REPORTING COVENANT                                       REQUIRED                                  COMPLIES
------------------------------------------------------   ------------------------------------      ---------------------
<S>                                                      <C>                                       <C>
Transaction reports and schedules of collections         Weekly and with requests for Credit       Yes      No       N/A
                                                         Extensions*

Accounts receivable agings, aged by invoice date,        Monthly within 30 days of month end       Yes      No       N/A
accounts payable agings, aged by invoice date, and
outstanding or held check registers, if any + BB

Reconciliations of accounts receivable agings, aged by   Monthly within 30 days of month end*      Yes      No       N/A
invoice date, transaction reports, and general ledger

Perpetual inventory reports for Inventory valued on a    Monthly within 30 days of month end       Yes      No       N/A
first-in, first-out basis at the lower of cost or
market (in accordance with GAAP)

Monthly unaudited financial statements + CC              Monthly within 30 days of month end       Yes      No       N/A

Annual operating budgets (including income statements,   30 days prior to FYE                      Yes      No       N/A
balance sheets, and cash flow statements, each of the
foregoing, by month) for the upcoming fiscal year

Annual financial statements certified by, and with an    Annually, within 120 days after FYE       Yes      No       N/A
unqualified opinion of, independent CPA
</TABLE>

* not applicable during Streamline Option

<PAGE>

<TABLE>
<CAPTION>
FINANCIAL COVENANT                    REQUIRED                              ACTUAL       COMPLIES
----------------------------------    ----------------------------------    ---------    ---------------------
<S>                                   <C>                                   <C>          <C>
Tangible Net Worth (month end)

                                      From the Effective Date through       $________    Yes      No
                                      December 31, 2005: $10,000,000
                                      plus 50% of all consideration
                                      received after the Effective Date
                                      for equity securities and
                                      Subordinated Debt and 25% of
                                      quarterly net income

                                      From January 1, 2006 and              $________    Yes      No
                                      thereafter: $8,500,000 plus 50% of
                                      all consideration received after
                                      the Effective Date for equity
                                      securities and Subordinated Debt
                                      and 25% of quarterly net income

Outstanding Obligations under Loan    $0                                    $______      Yes      No       N/A
Agreement*
</TABLE>

Comments Regarding Exceptions: See Attached.
Sincerely,                                           BANK USE ONLY

FIBERSTARS, INC.                        Received by:
                                                    ----------------------------
By:                                                 AUTHORIZED SIGNER
     -------------------------------
                                        Date:
Name:                                        -----------------------------------
       -----------------------------
                                        Verified:
Title:  Chief Financial Officer                  -------------------------------
                                                     AUTHORIZED SIGNER

                                        Date:
                                             -----------------------------------

                                        Compliance Status:             Yes   NoEX-4.1

Exhibit 4.1

EXECUTION VERSION

NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN
A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS OR BLUE SKY LAWS.
NOTWITHSTANDING THE FOREGOING, THESE SECURITIES AND THE SECURITIES ISSUABLE UPON
CONVERSION OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT SECURED BY SUCH SECURITIES.

VERTICALNET, INC.

Senior Secured Convertible Promissory Note

due July 2, 2007

No. CN-05-     $     

Dated: August 16, 2005

For value received, VERTICALNET, INC., a Pennsylvania corporation (the “Maker”),
hereby promises to pay to the order of      (together with its successors,
representatives, and permitted assigns, the “Holder”), in accordance with the terms
hereinafter provided, the principal amount of      ($     ), together
with interest thereon. Concurrently with the issuance of this Note, the Maker is issuing separate
senior secured convertible promissory notes (the “Other Notes”) to separate purchasers (the
“Other Holders”) pursuant to the Purchase Agreement (as defined in Section 1.1 hereof).

All payments under or pursuant to this Note shall be made in United States Dollars in
immediately available funds to the Holder at the address of the Holder first set forth above or at
such other place as the Holder may designate from time to time in writing to the Maker or by wire
transfer of funds to the Holder’s account, instructions for which are attached hereto as
Exhibit A. The outstanding principal balance of this Note shall be due and payable on July
2, 2007 (the “Maturity Date”) or at such earlier time as provided herein.

ARTICLE I

Section 1.1 Purchase Agreement. This Note has been executed and delivered pursuant to
the Note and Warrant Purchase Agreement dated as of August 16, 2005 (the “Purchase Agreement”) by
and among the Maker and the purchasers listed therein. Capitalized terms used and not otherwise
defined herein shall have the meanings set forth for such terms in the Purchase Agreement. 

Section 1.2 Interest. Beginning on the issuance date of this Note (the “Issuance
Date”), the outstanding principal balance of this Note shall bear interest, in arrears, at a
rate per annum equal to nine percent (9%), payable monthly until the Maturity Date commencing
December 16, 2005 at the option of the Maker in cash or in shares of the Maker’s common stock, par
value $0.01 per share (the “Common Stock”), registered for resale, in accordance with terms
of Section 1.3 below. Interest shall be computed on the basis of a 360-day year of twelve (12)
30-day months and shall accrue commencing on the Issuance Date. Furthermore, upon the occurrence
of an Event of Default (as defined in Section 2.1 hereof), then to the extent permitted by law, the
Maker will pay interest to the Holder, payable on demand, on the outstanding principal balance of
the Note from the date of the Event of Default until such Event of Default is cured at the rate of
the lesser of fifteen percent (15%) and the maximum applicable legal rate per annum.

Section 1.3 Payment of Principal and Interest.

(a) Commencing one hundred twenty (120) days following the Issuance Date and continuing
thereafter on the first (1st) Business Day of each month until the Maturity Date (each,
a “Principal Payment Date”), the Maker shall pay an amount to the Holder equal to
1/20th of the original principal amount of this Note plus any accrued but unpaid
interest (the “Principal Installment Amount”); provided, however, if on any
Principal Payment Date, the outstanding principal amount of this Note plus any accrued but unpaid
interest is less than the Principal Installment Amount, then the Maker shall pay to the Holder such
lesser amount. The Maker may pay such Principal Installment Amount in cash, in shares of Common
Stock registered for resale or in any combination thereof. If the Maker elects to pay the
Principal Installment Amount in cash such amount shall be wired in immediately available funds on
the Principal Payment Date; provided, however, that if the Holder has delivered a
Conversion Notice to the Maker or delivers a Conversion Notice prior to the Principal Payment Date,
the principal amount of this Note to be so converted shall be applied against the next Principal
Installment Amount. The Maker shall provide irrevocable written notice to the Holder of the form
of payment of the Principal Installment Amount at least seven (7) Business Days prior to each
Principal Payment Date for which a Principal Installment Amount is made by the Maker. For purposes
of this Note, “Determination Date” shall mean the date that is ten (10) Business Days immediately
prior to a Principal Payment Date.

(b) If the Maker elects to pay the Principal Installment Amount in shares of Common Stock
registered for resale, the number of shares of Common Stock registered for resale to be issued to
the Holder shall be an amount equal to the Principal Installment Amount divided by (i) the Fixed
Conversion Price, if the average Closing Bid Price of the Common Stock for the twenty (20) Trading
Days immediately preceding the applicable Determination Date (the “Trailing Price”) is
equal to or exceeds one hundred fifteen percent (115%) of the Fixed Conversion Price, or (ii)
eighty-five percent (85%) of the average of the five lowest VWAPs (as defined in Section 1.3(c)
hereof) for the ten (10) Trading Days immediately preceding the applicable Determination Date, if
the Trailing Price of the Common Stock is less than one hundred fifteen percent (115%) of the Fixed
Conversion Price for the twenty (20) Trading Days immediately preceding the applicable
Determination Date; provided, however, that if the Holder has delivered a
Conversion Notice to the Maker or delivers a Conversion Notice prior to the Principal Payment Date,
the principal amount of this Note to be so converted shall be applied against the next Principal
Installment Amount. Notwithstanding the foregoing, the maximum amount of shares of Common Stock
that the Maker may issue to satisfy the payment of the Principal Installment Amount in any month
shall not exceed twenty percent (20%) of the Total Dollar Volume (as defined in this Section
1.3(b)), provided that if such amount of shares of Common Stock exceeds twenty percent (20%) of the
Total Dollar Volume, such excess amount shall be paid by the Maker in cash. Notwithstanding the
foregoing to the contrary, the Maker may elect to pay the Principal Installment Amount in shares of
Common Stock registered for resale on any Principal Payment Date only if (A) the registration
statement providing for the resale of the shares of Common Stock issuable upon conversion of this
Note is effective and has been effective, without lapse or suspension of any kind, for a period of
thirty (30) consecutive calendar days, (B) trading in the Common Stock shall not have been
suspended by the Securities and Exchange Commission or the Nasdaq SmallCap Market (or other
exchange or market on which the Common Stock is trading), (C) the Maker is in material compliance
with the terms and conditions of this Note and the other Transaction Documents, (D) the issuance of
shares of Common Stock on the Principal Payment Date does not violate the provisions of Section 3.4
hereof, (E) the number of authorized but unissued and otherwise unreserved shares of Common Stock
is sufficient for such issuance, (F) no Bankruptcy Event has occurred, (G) the Maker is not in
default with respect to any material obligation hereunder or under any other Transaction Document
and (H) no public announcement of a pending or proposed Change of Control transaction has occurred
that has not been consummated. For purposes hereof, “Total Dollar Volume” means, for any
date, the product of (1) the lesser of (x) the average of the daily VWAP for the twenty (20)
Trading Days immediately preceding the applicable Determination Date and (y) the Closing Bid Price
of the Common Stock on applicable Determination Date and (2) the sum of the trading volume for each
of the (20) Trading Days immediately preceding the applicable Determination Date.

(c) For purposes hereof, “VWAP” means, for any date, (i) the daily volume weighted
average price of the Common Stock for such date on the OTC Bulletin Board (or other exchange or
market on which the Common Stock is trading) as reported by Bloomberg Financial L.P. (based on a
Trading Day from 9:30 a.m. Eastern Time to 4:00 p.m. Eastern Time); (ii) if prices for the Common
Stock are then listed or quoted on the OTC Bulletin Board, the volume weighted average price of the
Common Stock for such date on the OTC Bulletin Board; (iii) if the Common Stock is not then listed
or quoted on the OTC Bulletin Board (or other exchange or market on which the Common Stock is
trading) and if prices for the Common Stock are then reported in the “Pink Sheets” published by the
Pink Sheets, LLC (or a similar organization or agency succeeding to its functions of reporting
prices), the most recent bid price per share of the Common Stock so reported; or (iv) in all other
cases, the fair market value of a share of Common Stock as determined by an independent appraiser
selected in good faith by the Holder and reasonably acceptable to the Maker.

Section 1.4 Security Agreement. The obligations of the Maker hereunder are secured by
a continuing security interest in all of the assets and properties of the Maker pursuant to the
terms of a security agreement dated as of August 16, 2005 by and among the Maker, on the one hand,
and the Holders and the Other Holders, on the other hand.

Section 1.5 Payment on Non-Business Days. Whenever any payment to be made shall be
due on a Saturday, Sunday or a public holiday under the laws of the State of New York, such payment
may be due on the next succeeding Business Day and such next succeeding day shall be included in
the calculation of the amount of accrued interest payable on such date.

Section 1.6 Transfer. This Note may be transferred or sold, subject to the provisions
of Section 4.8 of this Note, or pledged, hypothecated or otherwise granted as security by the
Holder.

Section 1.7 Replacement. Upon receipt of a duly executed, notarized and unsecured
written statement from the Holder with respect to the loss, theft or destruction of this Note (or
any replacement hereof), and without requiring an indemnity bond or other security, or, in the case
of a mutilation of this Note, upon surrender and cancellation of such Note, the Maker shall issue a
new Note, of like tenor and amount, in lieu of such lost, stolen, destroyed or mutilated Note.

ARTICLE II

EVENTS OF DEFAULT; REMEDIES

Section 2.1 Events of Default. The occurrence of any of the following events shall be
an “Event of Default” under this Note:

(a) the Maker shall fail to make the payment of any amount of principal outstanding or accrued
and unpaid interest on the date such payment is due hereunder; or

(b) [Intentionally Omitted]

(c) [Intentionally Omitted]

(d) the suspension from listing, without subsequent listing on any one of, or the failure of
the Common Stock to be listed on at least one of the OTC Bulletin Board, Nasdaq SmallCap Market,
Nasdaq National Market, American Stock Exchange or The New York Stock Exchange, Inc. for a period
of five (5) consecutive Trading Days; or

(e) the Maker’s notice to the Holder, including by way of public announcement, at any time, of
its inability to comply (including for any of the reasons described in Section 3.8(a) hereof) or
its intention not to comply with proper requests for conversion of this Note into shares of Common
Stock; or

(f) the Maker shall fail to (i) timely deliver the shares of Common Stock upon conversion of
the Note or any accrued and unpaid interest, or (ii) make the payment of any fees and/or liquidated
damages under this Note, the Purchase Agreement or the Registration Rights Agreement, which failure
is not remedied within three (3) Business Days after the incurrence thereof; or

(g) while the Registration Statement is required to be maintained effective pursuant to the
terms of the Registration Rights Agreement, the effectiveness of the Registration Statement lapses
for any reason (including, without limitation, the issuance of a stop order) or is unavailable to
the Holder for sale of the Registrable Securities (as defined in the Registration Rights Agreement)
in accordance with the terms of the Registration Rights Agreement, and such lapse or unavailability
continues for a period of ten (10) consecutive Trading Days, provided that the Maker has
not exercised its rights pursuant to Section 3(n) of the Registration Rights Agreement and the
cause of such lapse or unavailability is not due to factors primarily within the control of Holder;
or

(h) default shall be made in the performance or observance of (i) any material covenant,
condition or agreement contained in this Note (other than as set forth in clause (f) of this
Section 2.1) and such default is not fully cured within five (5) Business Days after the occurrence
thereof or (ii) any material covenant, condition or agreement contained in the Purchase Agreement,
the Other Notes, the Registration Rights Agreement or any other Transaction Document which is not
covered by any other provisions of this Section 2.1 and such default is not fully cured within five
(5) Business Days after the occurrence thereof; or

(i) any material representation or warranty made by the Maker herein or in the Purchase
Agreement, the Registration Rights Agreement, the Other Notes or any other Transaction Document
shall prove to have been false or incorrect or breached in a material respect on the date as of
which made; or

(j) the Maker shall (A) default in any payment of any amount or amounts of principal of or
interest on any Indebtedness (other than the Indebtedness hereunder) the aggregate principal amount
of which Indebtedness is in excess of $100,000 or (B) default in the observance or performance of
any other agreement or condition relating to any Indebtedness or contained in any instrument or
agreement evidencing, securing or relating thereto, or any other event shall occur or condition
exist, the effect of which default or other event or condition is to cause, or to permit the holder
or holders or beneficiary or beneficiaries of such Indebtedness to cause with the giving of notice
if required, such Indebtedness to become due prior to its stated maturity; or

(k) a Bankruptcy Event shall have occurred; or

(l) a proceeding or case shall be commenced in respect of the Maker, without its application
or consent, in any court of competent jurisdiction, seeking (i) the liquidation, reorganization,
moratorium, dissolution, winding up, or composition or readjustment of its debts, (ii) the
appointment of a trustee, receiver, custodian, liquidator or the like of it or of all or any
substantial part of its assets in connection with the liquidation or dissolution of the Maker or
(iii) similar relief in respect of it under any law providing for the relief of debtors, and such
proceeding or case described in clause (i), (ii) or (iii) shall continue undismissed, or unstayed
and in effect, for a period of sixty (60) days or any order for relief shall be entered in an
involuntary case under United States Bankruptcy Code (as now or hereafter in effect) or under the
comparable laws of any jurisdiction (foreign or domestic) against the Maker or action under the
laws of any jurisdiction (foreign or domestic) analogous to any of the foregoing shall be taken
with respect to the Maker and shall continue undismissed, or unstayed and in effect for a period of
sixty (60) days; or

(m) the failure of the Maker to instruct its transfer agent to remove any legends from shares
of Common Stock eligible to be sold under Rule 144 of the Securities Act and issue such unlegended
certificates to the Holder within three (3) Business Days of the Holder’s request so long as the
Holder has provided reasonable assurances to the Maker that such shares of Common Stock can be
resold pursuant to Rule 144; or

(n) the failure of the Maker to pay any amounts due to the Holder herein or in the Purchase
Agreement or the Registration Rights Agreement within three (3) Business Days of receipt of notice
to the Maker; or

(o) the occurrence of an Event of Default under the Other Notes.

Section 2.2 Remedies Upon An Event of Default. If an Event of Default shall have
occurred and shall be continuing, the Holder of this Note may at any time at its option, (a)
declare the entire unpaid principal balance of this Note, together with all interest accrued
hereon, due and payable, and thereupon, the same shall be accelerated and so due and payable,
without presentment, demand, protest, or notice, all of which are hereby expressly unconditionally
and irrevocably waived by the Maker; provided, however, that upon the occurrence of
an Event of Default described in (i) Sections 2.1 (k) or (l), the outstanding principal balance and
accrued interest hereunder shall be automatically due and payable and (ii) Sections 2.1 (a)-(j) and
2.1(m)-(o), demand the prepayment of this Note pursuant to Section 3.7 hereof, (b) subject to
Section 3.4 hereof, demand that the principal amount of this Note then outstanding shall be
converted into shares of Common Stock at a Conversion Price per share calculated pursuant to
Section 3.1 hereof assuming that the date that the Event of Default occurs is the Conversion Date
(as defined in Section 3.1(b) hereof) and demand that all accrued and unpaid interest under this
Note shall be converted into shares of Common Stock in accordance with Section 1.2 hereof, or (c)
exercise or otherwise enforce any one or more of the Holder’s rights, powers, privileges, remedies
and interests under this Note, the Purchase Agreement, the Registration Rights Agreement, other
Transaction Document or applicable law. No course of delay on the part of the Holder shall operate
as a waiver thereof or otherwise prejudice the right of the Holder. No remedy conferred hereby
shall be exclusive of any other remedy referred to herein or now or hereafter available at law, in
equity, by statute or otherwise.

ARTICLE III

CONVERSION; ANTIDILUTION; PREPAYMENT

Section 3.1 Conversion Option.

(a) At any time on or after the Issuance Date, this Note shall be convertible (in whole or in
part), at the option of the Holder (the “Conversion Option”), into such number of fully
paid and non-assessable shares of Common Stock (the “Conversion Rate”) as is determined by
dividing (x) that portion of the outstanding principal balance under this Note as of such date that
the Holder elects to convert by (y) the Conversion Price (as defined in Section 3.2(a) hereof) then
in effect on the date on which the Holder faxes a notice of conversion (the “Conversion
Notice”), duly executed, to the Maker (facsimile number (610) 240-9470, Attn.: Legal) (the
“Voluntary Conversion Date”), provided, however, that the Conversion Price
shall be subject to adjustment as described in Section 3.6 below. The Holder shall deliver this
Note to the Maker at the address designated in the Purchase Agreement at such time that this Note
is fully converted. With respect to partial conversions of this Note, the Maker shall keep written
records of the amount of this Note converted as of each Conversion Date.

(b) On the Mandatory Conversion Date (as defined below), the Maker may cause the outstanding
principal amount of this Note plus all accrued and unpaid interest to convert into a number of
fully paid and nonassessable shares of Common Stock equal to the quotient of (i) the outstanding
principal amount of this Note plus all accrued and unpaid interest outstanding on the Mandatory
Conversion Date divided by (ii) the Conversion Price in effect on the Mandatory Conversion Date by
providing ten (10) days prior written notice of such Mandatory Conversion Date. As used herein, a
"Mandatory Conversion Date” shall be a date that is six (6) months following the effective
date of the registration statement providing for the resale of the shares of Common Stock issuable
upon conversion of this Note (the “Registration Statement”) in which the VWAP of the Common
Stock is equal to or exceeds two hundred percent (200%) of the Fixed Conversion Price then in
effect for a period of twenty (20) consecutive Trading Days and the dollar trading volume of the
Common Stock for each Trading Day of such twenty (20) consecutive Trading Day period exceeds
$200,000; provided, that (A) the Registration Statement is effective and has been
effective, without lapse or suspension of any kind, for a period thirty (30) consecutive calendar
days immediately preceding the Mandatory Conversion Date, (B) trading in the Common Stock shall not
have been suspended by the Securities and Exchange Commission or The Nasdaq SmallCap Market (or
other exchange or market on which the Common Stock is trading), (C) the Maker is in material
compliance with the terms and conditions of this Note and the other Transaction Documents, and (D)
the issuance of shares of Common Stock on the Mandatory Conversion Date pursuant to such mandatory
conversion does not violate the provisions of Section 3.4 hereof. Notwithstanding the foregoing to
the contrary, the Mandatory Conversion Date shall be extended for as long as a Triggering Event (as
defined in Section 3.7(f) hereof) shall have occurred and be continuing. The Mandatory Conversion
Date, the Voluntary Conversion Date and any Principal Payment Date on which the Maker is permitted
and has elected to pay all or any portion of the Principal Installment Amount then due in Common
Stock, collectively are referred to in this Note as the “Conversion Date.”

(c) The term “Closing Bid Price” shall mean, on any particular date (i) the closing
bid price per share of the Common Stock on such date on The Nasdaq SmallCap Market or another
registered national stock exchange on which the Common Stock is then listed, or if there is no such
price on such date, then the closing bid price on such exchange or quotation system on the date
nearest preceding such date, or (ii) if the Common Stock is not listed then on The Nasdaq SmallCap
Market or any registered national stock exchange, the closing bid price for a share of Common Stock
in the over-the-counter market, as reported by the OTC Bulletin Board or in the National Quotation
Bureau Incorporated (or similar organization or agency succeeding to its functions of reporting
prices) at the close of business on such date, or if there is no such price on such date, then the
closing bid price for a share of Common Stock on the over-the-counter market on the date nearest
preceding such date or (iii) if the Common Stock is not then reported by the OTC Bulletin Board or
the National Quotation Bureau Incorporated (or similar organization or agency succeeding to its
functions of reporting prices), then the average of the “Pink Sheet” quotes for the relevant
conversion period, as determined in good faith by the Holder, or (iv) if the Common Stock is not
then publicly traded, the fair market value of a share of Common Stock as determined by the Holder
and reasonably acceptable to the Maker.

Section 3.2 Conversion Price.

(a) The term “Fixed Conversion Price” shall mean $0.70. The term “Conversion
Price” shall mean the Fixed Conversion Price, subject to adjustment under Section 3.6 hereof.

(b) Notwithstanding any of the foregoing to the contrary, if during any period (a
"Black-out Period”), a Holder is unable to trade any Common Stock issued or issuable upon
conversion of this Note immediately due to the postponement of filing or delay or suspension of
effectiveness of a registration statement or because the Maker has otherwise informed such Holder
that an existing prospectus cannot be used at that time in the sale or transfer of such Common
Stock (provided that such postponement, delay, suspension or fact that the prospectus cannot be
used is not due to factors solely within the control of the Holder of this Note or due to the Maker
exercising its rights under Section 3(n) of the Registration Rights Agreement), such Holder shall
have the option but not the obligation on any Conversion Date within ten (10) Trading Days
following the expiration of the Black-out Period of using the Conversion Price applicable on such
Conversion Date or any Conversion Price selected by such Holder that would have been applicable had
such Conversion Date been at any earlier time during the Black-out Period or within the ten (10)
Trading Days thereafter. In no event shall the Black-out Period have any effect on the Maturity
Date of this Note.

Section 3.3 Mechanics of Conversion. 

(a) Not later than three (3) Trading Days after any Conversion Date, the Maker or its
designated transfer agent, as applicable, shall issue and deliver to the Depository Trust Company
(“DTC”) account on the Holder’s behalf via the Deposit Withdrawal Agent Commission System
(“DWAC”) as specified in the Conversion Notice, registered in the name of the Holder or its
designee, for the number of shares of Common Stock to which the Holder shall be entitled. In the
alternative, not later than three (3) Trading Days after any Conversion Date, the Maker shall
deliver to the applicable Holder by express courier a certificate or certificates which shall be
free of restrictive legends and trading restrictions (other than those required by Section 5.1 of
the Purchase Agreement) representing the number of shares of Common Stock being acquired upon the
conversion of this Note (the “Delivery Date”). Notwithstanding the foregoing to the
contrary, the Maker or its transfer agent shall only be obligated to issue and deliver the shares
to the DTC on the Holder’s behalf via DWAC (or certificates free of restrictive legends) if such
conversion is in connection with a sale and the Holder has complied with the applicable prospectus
delivery requirements. If in the case of any Conversion Notice such certificate or certificates
are not delivered to or as directed by the applicable Holder by the Delivery Date, the Holder shall
be entitled by written notice to the Maker at any time on or before its receipt of such certificate
or certificates thereafter, to rescind such conversion, in which event the Maker shall immediately
return this Note if tendered for conversion, whereupon the Maker and the Holder shall each be
restored to their respective positions immediately prior to the delivery of such notice of
revocation, except that any amounts described in Sections 3.3(b) and (c) shall be payable through
the date notice of rescission is given to the Maker.

(b) The Maker understands that a delay in the delivery of the shares of Common Stock upon
conversion of this Note beyond the Delivery Date could result in economic loss to the Holder. If
the Maker fails to deliver to the Holder such shares via DWAC or a certificate or certificates
pursuant to this Section hereunder by the Delivery Date, the Maker shall pay to such Holder, in
cash, an amount per Trading Day for each Trading Day until such shares are delivered via DWAC or
certificates are delivered, together with interest on such amount at a rate of 10% per annum,
accruing until such amount and any accrued interest thereon is paid in full, equal to the greater
of (A) (i) 1% of the aggregate principal amount of the Notes requested to be converted for the
first five (5) Trading Days after the Delivery Date and (ii) 2% of the aggregate principal amount
of the Notes requested to be converted for each Trading Day thereafter and (B) $2,000 per day
(which amount shall be paid as liquidated damages and not as a penalty). Nothing herein shall
limit a Holder’s right to pursue actual damages for the Maker’s failure to deliver certificates
representing shares of Common Stock upon conversion within the period specified herein and such
Holder shall have the right to pursue all remedies available to it at law or in equity (including,
without limitation, a decree of specific performance and/or injunctive relief). Notwithstanding
anything to the contrary contained herein, the Holder shall be entitled to withdraw a Conversion
Notice, and upon such withdrawal the Maker shall only be obligated to pay the liquidated damages
accrued in accordance with this Section 3.3(b) through the date the Conversion Notice is withdrawn.

(c) In addition to any other rights available to the Holder, if the Maker fails to cause its
transfer agent to transmit to the Holder a certificate or certificates representing the shares of
Common Stock issuable upon conversion of this Note on or before the Delivery Date, and if after
such date the Holder is required by its broker to purchase (in an open market transaction or
otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the shares
of Common Stock issuable upon conversion of this Note which the Holder anticipated receiving upon
such exercise (a “Buy-In”), then the Maker shall (1) pay in cash to the Holder the amount
by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the
shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the number
of shares of Common Stock issuable upon conversion of this Note that the Maker was required to
deliver to the Holder in connection with the conversion at issue times (B) the price at which the
sell order giving rise to such purchase obligation was executed, and (2) at the option of the
Holder, either reinstate the portion of the Note and equivalent number of shares of Common Stock
for which such conversion was not honored or deliver to the Holder the number of shares of Common
Stock that would have been issued had the Maker timely complied with its conversion and delivery
obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase
price of $11,000 to cover a Buy-In with respect to an attempted conversion of shares of Common
Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause
(1) of the immediately preceding sentence the Maker shall be required to pay the Holder $1,000. The
Holder shall provide the Maker written notice indicating the amounts payable to the Holder in
respect of the Buy-In, together with applicable confirmations and other evidence reasonably
requested by the Maker. Nothing herein shall limit a Holder’s right to pursue any other remedies
available to it hereunder, at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief with respect to the Maker’s failure to timely deliver
certificates representing shares of Common Stock upon conversion of this Note as required pursuant
to the terms hereof.

Section 3.4 Ownership Cap and Certain Conversion Restrictions.

(a) Notwithstanding anything to the contrary set forth in Section 3 of this Note, at no time
may the Holder convert all or a portion of this Note if the number of shares of Common Stock to be
issued pursuant to such conversion would exceed, when aggregated with all other shares of Common
Stock owned by the Holder at such time, the number of shares of Common Stock which would result in
the Holder beneficially owning (as determined in accordance with Section 13(d) of the Exchange Act
and the rules thereunder) more than 4.9% of all of the Common Stock outstanding at such time;
provided, however, that upon the Holder providing the Maker with sixty-one (61)
days notice (pursuant to Section 4.1 hereof) (the “Waiver Notice”) that the Holder would
like to waive this Section 3.4(a) with regard to any or all shares of Common Stock issuable upon
conversion of this Note, this Section 3.4(a) will be of no force or effect with regard to all or a
portion of the Note referenced in the Waiver Notice; provided, further, that this
provision shall be of no further force or effect during the sixty-one (61) days immediately
preceding the Maturity Date.

(b) Notwithstanding anything to the contrary set forth in Section 3 of this Note, at no time
may the Holder convert all or a portion of this Note if the number of shares of Common Stock to be
issued pursuant to such conversion, when aggregated with all other shares of Common Stock owned by
the Holder at such time, would result in the Holder beneficially owning (as determined in
accordance with Section 13(d) of the Exchange Act and the rules thereunder) in excess of 9.9% of
the then issued and outstanding shares of Common Stock outstanding at such time; provided,
however, that upon the Holder providing the Maker with a Waiver Notice that the Holder
would like to waive Section 3.4(b) of this Note with regard to any or all shares of Common Stock
issuable upon conversion of this Note, this Section 3.4(b) shall be of no force or effect with
regard to all or a portion of the Note referenced in the Waiver Notice; provided,
further, that this provision shall be of no further force or effect during the sixty-one
(61) days immediately preceding the Maturity Date.

(c) Notwithstanding anything to the contrary set forth herein, the Maker shall not be
obligated to issue in excess of an aggregate of 9,468,758 shares of Common Stock upon conversion of
the Notes, which number of shares shall be subject to adjustment pursuant to Sections 3.6(a)(i)
through (iv) (such number of shares, the “Issuable Maximum”). The Issuable Maximum equals
19.99% of the number of shares of Common Stock outstanding immediately prior to the Issuance Date.
If on any Conversion Date (A) the Conversion Price then in effect is such that the aggregate number
of shares of Common Stock to be issued on such Conversion Date when added with the number of share
of Common Stock previously issued upon conversion of the Notes would equal or exceed the Issuable
Maximum, and (B) the Maker shall not have previously obtained the vote of stockholders (the
“Stockholder Approval”), if any, as may be required by the applicable rules and regulations
of the Nasdaq SmallCap Market (or any successor entity) applicable to approve the issuance of
shares of Common Stock in excess of the Issuable Maximum pursuant to the terms hereof, then the
Maker shall issue to the Holder so requesting such number of shares of Common Stock equal to the
Issuable Maximum minus the number of shares of Common Stock previously issued upon conversion of
the Notes and, with respect to the remainder of shares of Common Stock which would result in an
issuance of shares of Common Stock in excess of the Issuable Maximum (the “Excess Shares”),
the Maker shall use its best efforts to obtain the Stockholder Approval applicable to such issuance
as soon as is possible, but in any event not later than the next annual meeting of stockholders.
The Maker acknowledges that such request has been made by the Holder as of the Issuance Date. The
Maker and the Holder understand and agree that shares of Common Stock issued to and then held by
the Holder as a result of conversion of the Notes or as a result of exercise of the Warrants shall
not be entitled to cast votes on any resolution to obtain Stockholder Approval. The Maker agrees
that all of the officers and directors of the Maker that hold shares of Common Stock shall vote in
favor of the issuance of shares of Common Stock in excess of the Issuable Maximum. In the event
that Stockholder Approval is not obtained by the next annual meeting of stockholders, the Holder
shall have the right on a Conversion Date to have the Maker prepay in cash such portion of the
outstanding principal amount of this Note plus all accrued but unpaid interest that would have been
issued in shares of Common Stock upon conversion but for such number of shares being in excess of
the Issuable Maximum. In the event that the Holder exercises this prepayment right, the Holder
shall provide written notice to the Maker and the Maker shall pay in cash the prepayment price
within five (5) Business Days following receipt of such written request by the Holder.

	 	 	 
	Section 3.5

	 	Intentionally Omitted.
	
 
	 	 
	Section 3.6

	 	Adjustment of Conversion Price
	
 
	 	 

(a) The Conversion Price shall be subject to adjustment from time to time as follows:

(i) Adjustments for Stock Dividends and Splits. If the Maker, at any time while this
Note is outstanding, (i) pays a stock dividend on its Common Stock or otherwise makes a
distribution on any class of capital stock that is payable in shares of Common Stock, (ii)
subdivides outstanding shares of Common Stock into a larger number of shares, or (iii) combines
outstanding shares of Common Stock into a smaller number of shares, then in each such case the
Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding immediately before such event and of which the denominator shall
be the number of shares of Common Stock outstanding immediately after such event. Any adjustment
made pursuant to clause (i) of this Section 3.6(a)(i) shall become effective immediately
after the record date for the determination of stockholders entitled to receive such dividend or
distribution, and any adjustment pursuant to clause (ii) or (iii) of this Section 3.6(a)(i)
shall become effective immediately after the effective date of such subdivision or combination.

(ii) Pro Rata Distributions. If the Maker, at any time while this Note is
outstanding, distributes to holders of Common Stock (i) evidences of its indebtedness, (ii) any
security (other than a distribution of Common Stock covered by the preceding paragraph), (iii)
rights or warrants to subscribe for or purchase any security, or (iv) any other asset (in each
case, “Distributed Property”), then in each such case the Conversion Price in effect immediately
prior to the record date fixed for determination of stockholders entitled to receive such
distribution shall be adjusted (effective on such record date) to equal the product of such
Conversion Price times a fraction of which the denominator shall be the average of the Closing Bid
Prices for the five Trading Days immediately prior to (but not including) such record date and of
which the numerator shall be such average less the then fair market value of the Distributed
Property distributed in respect of one outstanding share of Common Stock, as determined by the
Maker’s independent certified public accountants that regularly examine the financial statements of
the Maker (an “Appraiser”). In such event, the Holder, after receipt of the determination by the
Appraiser, shall have the right to select an additional appraiser (which shall be a nationally
recognized accounting firm), in which case such fair market value shall be deemed to equal the
average of the values determined by each of the Appraiser and such appraiser. As an alternative to
the foregoing adjustment to the Conversion Price, at the request of the Holder delivered before the
90th day after such record date, the Maker will deliver to such Holder, within five Trading Days
after such request (or, if later, on the effective date of such distribution), the Distributed
Property that such Holder would have been entitled to receive in respect of the Underlying Shares
for which this Note could have been converted into immediately prior to such record date. If the
Holder elected to receive Distributed Property in accordance with the preceding sentence and such
Distributed Property is not delivered to the Holder pursuant to the preceding sentence, then upon
expiration of or any conversion of the Note that occurs after such record date, such Holder shall
remain entitled to receive, in addition to the Underlying Shares otherwise issuable upon such
conversion (if applicable), such Distributed Property.

(iii) Major Transactions. If, at any time while this Note is outstanding, the Maker
effects any Major Transaction, then upon any subsequent conversion of this Note, the Holder shall
have the right to receive, for each Underlying Share that would have been issuable upon such
conversion absent such Major Transaction, the same kind and amount of securities, cash or property
as it would have been entitled to receive upon the occurrence of such Major Transaction if it had
been, immediately prior to such Major Transaction, the holder of one share of Common Stock (the
“Alternate Consideration”). If holders of Common Stock are given any choice as to the
securities, cash or property to be received in a Major Transaction, then the Holder shall be given
the same choice as to the Alternate Consideration it receives upon any conversion of this Note
following such Major Transaction. In the event of a Major Transaction, the Maker or the successor
or purchasing Person, as the case may be, shall execute with the Holder a written agreement
providing that:

(x) this Note shall thereafter entitle the Holder to purchase the Alternate Consideration,

(y) in the case of any such successor or purchasing Person, upon such consolidation, merger,
statutory exchange, combination, sale or conveyance such successor or purchasing Person shall be
jointly and severally liable with the Maker for the performance of all of the Maker’s obligations
under this Note and the Purchase Agreement, and

(z) if registration or qualification is required under the Exchange Act or applicable state
law for the public resale by the Holder of shares of stock and other securities so issuable upon
conversion of this Note, such registration or qualification shall be completed prior to such
reclassification, change, consolidation, merger, statutory exchange, combination or sale.

If, in the case of any Major Transaction, the Alternate Consideration includes shares of
stock, other securities, other property or assets of a Person other than the Maker or any such
successor or purchasing Person, as the case may be, in such Major Transaction, then such written
agreement shall also be executed by such other Person and shall contain such additional provisions
to protect the interests of the Holder as the Board of Directors of the Maker shall reasonably
consider necessary by reason of the foregoing. At the Holder’s request, any successor to the
Maker or surviving Person in such Major Transaction shall issue to the Holder a new Note consistent
with the foregoing provisions and evidencing the Holder’s right to convert such Note into Alternate
Consideration. The terms of any agreement pursuant to which a Major Transaction is effected shall
include terms requiring any such successor or surviving Person to comply with the provisions of
this Section 3.6(a)(iii) and insuring that this Note (or any such replacement security)
will be similarly adjusted upon any subsequent transaction analogous to a Major Transaction. If any
Major Transaction constitutes or results in a Going Private Transaction, then at the request of the
Holder delivered before the 90th day after such Major Transaction, the Maker (or any such successor
or surviving entity) will purchase this Note from the Holder for a purchase price, payable in cash
within five Trading Days after such request (or, if later, on the effective date of the Major
Transaction), equal to the Black Scholes value of the then outstanding principal amount of this
Note on the date of such request.

(iv) Subsequent Equity Sales.

(x) If, at any time while this Note is outstanding, the Maker or any Subsidiary issues
additional shares of Common Stock or rights, warrants, options or other securities or debt
convertible, exercisable or exchangeable for shares of Common Stock or otherwise entitling any
Person to acquire shares of Common Stock (collectively, “Common Stock Equivalents”) at an effective
net price to the Maker per share of Common Stock (the “Effective Price”) less than the
Conversion Price (as adjusted hereunder to such date), then the Conversion Price shall be reduced
to equal the Effective Price. For purposes of this paragraph, in connection with any issuance of
any Common Stock Equivalents, (A) the maximum number of shares of Common Stock potentially issuable
at any time upon conversion, exercise or exchange of such Common Stock Equivalents (the “Deemed
Number”) shall be deemed to be outstanding upon issuance of such Common Stock Equivalents, (B)
the Effective Price applicable to such Common Stock shall equal the minimum dollar value of
consideration payable to the Maker to purchase such Common Stock Equivalents and to convert,
exercise or exchange them into Common Stock (net of any discounts, fees, commissions and other
expenses), divided by the Deemed Number, and (C) no further adjustment shall be made to the
Conversion Price upon the actual issuance of Common Stock upon conversion, exercise or exchange of
such Common Stock Equivalents. The Effective Price of Common Stock or Common Stock Equivalents
issued in any transaction in which more than one type of securities are issued shall give effect to
the allocation by the Maker of the aggregate amount paid for such securities among the different
securities issued in such transaction.

(y) If, at any time while this Note is outstanding, the Maker or any Subsidiary issues Common
Stock Equivalents with an Effective Price or a number of underlying shares that floats or resets or
otherwise varies or is subject to adjustment based (directly or indirectly) on market prices of the
Common Stock (a “Floating Price Security”), then for purposes of applying the preceding
paragraph in connection with any subsequent conversion, the Effective Price will be determined
separately on each Conversion Date and will be deemed to equal the lowest Effective Price at which
any holder of such Floating Price Security is entitled to acquire Common Stock on such Conversion
Date (regardless of whether any such holder actually acquires any shares on such date).

(z) Notwithstanding the foregoing, no adjustment will be made under this 3.6(a)(iv) in respect
of any issues described in subsection (c) below.

(b) Record Date. In case the Maker shall take record of the holders of its Common
Stock for the purpose of entitling them to subscribe for or purchase Common Stock or Convertible
Securities, then the date of the issue or sale of the shares of Common Stock shall be deemed to be
such record date.

(c) Certain Issues Excepted. Anything herein to the contrary notwithstanding, the
Maker shall not be required to make any adjustment to the Conversion Price in connection with (i)
securities issued (other than for cash) in connection with a merger, acquisition, or consolidation,
(ii) securities issued pursuant to a bona fide firm underwritten public offering with a nationally
recognized underwriter of the Maker’s securities in excess of $15,000,000, (iii) securities issued
pursuant to the conversion or exercise of convertible or excercisable securities issued or
outstanding on or prior to the date hereof or issued pursuant to the Purchase Agreement, (iv) the
shares of Common Stock issuable upon the exercise of Warrants, (v) securities issued in connection
with strategic license agreements or other partnering arrangements so long as such issuances are
not for the purpose of raising capital, (vi) Common Stock issued or options to purchase Common
Stock granted or issued pursuant to the Maker’s stock option plans and employee stock purchase
plans as they now exist, (vii) any warrants issued to the placement agent and its designees for the
transactions contemplated by the Purchase Agreement, and (viii) the payment of any accrued interest
in shares of Common Stock pursuant to this Note.

(d) No Impairment. The Maker shall not, by amendment of its Articles of Incorporation
or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder by the Maker, but will at all
times in good faith, assist in the carrying out of all the provisions of this Section 3.6 and in
the taking of all such action as may be necessary or appropriate in order to protect the conversion
rights of the Holder against impairment. In the event a Holder shall elect to convert any Notes as
provided herein, the Maker cannot refuse conversion based on any claim that such Holder or any one
associated or affiliated with such Holder has been engaged in any violation of law, violation of an
agreement to which such Holder is a party or for any reason whatsoever, unless, an injunction from
a court, or notice, restraining and or adjoining conversion of all or of said Notes shall have
issued and the Maker posts a surety bond for the benefit of such Holder in an amount equal to one
hundred thirty percent (130%) of the amount of the Notes the Holder has elected to convert, which
bond shall remain in effect until the completion of arbitration/litigation of the dispute and the
proceeds of which shall be payable to such Holder in the event it obtains judgment.

(e) Certificates as to Adjustments. Upon occurrence of each adjustment or
readjustment of the Conversion Price or number of shares of Common Stock issuable upon conversion
of this Note pursuant to this Section 3.6, the Maker at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and furnish to the Holder a
certificate setting forth such adjustment and readjustment, showing in detail the facts upon which
such adjustment or readjustment is based. The Maker shall, upon written request of the Holder, at
any time, furnish or cause to be furnished to the Holder a like certificate setting forth such
adjustments and readjustments, the applicable Conversion Price in effect at the time, and the
number of shares of Common Stock and the amount, if any, of other securities or property which at
the time would be received upon the conversion of this Note. Notwithstanding the foregoing, the
Maker shall not be obligated to deliver a certificate unless such certificate would reflect an
increase or decrease of at least one percent (1%) of such adjusted amount.

(f) Issue Taxes. The Maker shall pay any and all issue and other taxes, excluding
federal, state or local income taxes, that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion of this Note pursuant thereto; provided,
however, that the Maker shall not be obligated to pay any transfer taxes resulting from any
transfer requested by the Holder in connection with any such conversion.

(g) Fractional Shares. No fractional shares of Common Stock shall be issued upon
conversion of this Note. In lieu of any fractional shares to which the Holder would otherwise be
entitled, the Maker shall pay cash equal to the product of such fraction multiplied by the average
of the Closing Bid Prices of the Common Stock for the five (5) consecutive Trading Days immediately
preceding the Conversion Date.

(h) Reservation of Common Stock. The Maker shall at all times when this Note shall be
outstanding, reserve and keep available out of its authorized but unissued Common Stock, such
number of shares of Common Stock as shall from time to time be sufficient to effect the conversion
of this Note and all interest accrued thereon; provided that the number of shares of Common
Stock so reserved shall at no time be less than one hundred twenty percent (120%) of the number of
shares of Common Stock for which this Note and all interest accrued thereon are at any time
convertible. The Maker shall, from time to time in accordance with Pennsylvania corporate law,
increase the authorized number of shares of Common Stock if at any time the unissued number of
authorized shares shall not be sufficient to satisfy the Maker’s obligations under this Section
3.6(h).

(i) Regulatory Compliance. If any shares of Common Stock to be reserved for the
purpose of conversion of this Note or any interest accrued thereon require registration or listing
with or approval of any governmental authority, stock exchange or other regulatory body under any
federal or state law or regulation or otherwise before such shares may be validly issued or
delivered upon conversion, the Maker shall, at its sole cost and expense, in good faith and as
expeditiously as possible, endeavor to secure such registration, listing or approval, as the case
may be.

Section 3.7 Prepayment.

(a) Prepayment Upon an Event of Default. Notwithstanding anything to the contrary
contained herein, upon the occurrence of an Event of Default described in Sections 2.1(a)-(j) and
2.1(m)-(o) hereof, the Holder shall have the right, at such Holder’s option, to require the Maker
to prepay in cash all or a portion of this Note at a price equal to one hundred ten percent (110%)
of the aggregate outstanding principal amount of this Note plus all accrued and unpaid interest
applicable at the time of such request (the “Event of Default Prepayment Price”). Nothing
in this Section 3.7(a) shall limit the Holder’s rights under Section 2.2 hereof.

(b) Prepayment Option Upon Major Transaction. In addition to all other rights of the
Holder contained herein, simultaneous with the occurrence of a Major Transaction (as defined in
Section 3.7(e) hereof), the Holder shall have the right, at the Holder’s option, to require the
Maker to prepay all or a portion of the Holder’s Notes at a price equal to one hundred ten percent
(110%) of the aggregate outstanding principal amount of this Note plus all accrued and unpaid
interest (the “Major Transaction Prepayment Price”).

(c) Prepayment Option Upon Triggering Event. In addition to all other rights of the
Holder contained herein, after a Triggering Event (as defined below), the Holder shall have the
right, at the Holder’s option, to require the Maker to prepay all or a portion of this Note in cash
at a price equal to the sum of (i) the greater of (A) one hundred ten percent (110%) of the
aggregate outstanding principal amount of this Note plus all accrued and unpaid interest and (B) in
the event at such time the Holder is unable to obtain the benefit of its conversion rights through
the conversion of this Note and resale of the shares of Common Stock issuable upon conversion
hereof in accordance with the terms of this Note and the other Transaction Documents, the aggregate
outstanding principal amount of this Note plus all accrued but unpaid interest hereon, divided by
the Conversion Price on (x) the date the Prepayment Price (as defined below) is demanded or
otherwise due or (y) the date the Prepayment Price is paid in full, whichever is less, multiplied
by the VWAP on (x) the date the Prepayment Price is demanded or otherwise due, or (y) the date the
Prepayment Price is paid in full, whichever is greater, and (ii) all other amounts, costs, expenses
and liquidated damages due in respect of this Note and the other Transaction Documents (the
"Triggering Event Prepayment Price,” and, collectively with the “Major Transaction
Prepayment Price,” the “Prepayment Price”).

(d) Intentionally Omitted.

(e) "Major Transaction.” A “Major Transaction” shall be deemed to have
occurred at such time as any of the following events:

(i) the consolidation, merger or other business combination of the Maker with or into another
Person (as defined in Section 4.13 hereof) (other than (A) pursuant to a migratory merger effected
solely for the purpose of changing the jurisdiction of incorporation of the Maker or (B) a
consolidation, merger or other business combination in which holders of the Maker’s voting power
immediately prior to the transaction continue after the transaction to hold, directly or
indirectly, the voting power of the surviving entity or entities necessary to elect a majority of
the members of the board of directors (or their equivalent if other than a corporation) of such
entity or entities); or

(ii) the sale or transfer of more than fifty percent (50%) of the Maker’s assets (based on the
fair market value as determined in good faith by the Maker’s Board of Directors) other than
inventory in the ordinary course of business in one or a related series of transactions; or

(iii) closing of a purchase, tender or exchange offer made to the holders of more than fifty
percent (50%) of the outstanding shares of Common Stock in which more than fifty percent (50%) of
the outstanding shares of Common Stock were tendered and accepted.

(f) "Triggering Event.” A “Triggering Event” shall be deemed to have occurred
at such time as any of the following events:

(i) so long as any Notes are outstanding, the effectiveness of the Registration Statement,
after it becomes effective, (i) lapses for any reason (including, without limitation, the issuance
of a stop order) or (ii) is unavailable to the Holder for sale of the shares of Common Stock, and
such lapse or unavailability continues for a period of more than seven (7) consecutive Trading Days
or for 20 days in any 12 month period (which need not be consecutive), and the shares of Common
Stock into which the Holder’s Notes can be converted cannot be sold in the public securities market
pursuant to Rule 144, provided that the cause of such lapse or unavailability is not due to factors
primarily within the control of the Holder of the Notes; and provided further that a Triggering
Event shall not have occurred if and to the extent the Maker exercised its rights set forth in
Section 3(n) of the Registration Rights Agreement;

(ii) the suspension from listing, without subsequent listing on any one of, or the failure of
the Common Stock to be listed on at least one of the OTC Bulletin Board, Nasdaq SmallCap Market,
Nasdaq National Market, American Stock Exchange or The New York Stock Exchange, Inc. for a period
of more than seven (7) consecutive Trading Days or for 20 days in any 12 month period (which need
not be consecutive);

(iii) the Maker’s notice to any holder of the Notes, including by way of public announcement,
at any time, of its inability to comply (including for any of the reasons described in Section 3.8)
or its intention not to comply with proper requests for conversion of any Notes into shares of
Common Stock; or

(iv) the Maker’s failure to comply with a Conversion Notice tendered in accordance with the
provisions of this Note within ten (10) Business Days after the receipt by the Maker of the
Conversion Notice; or

(v) the Maker deregisters its shares of Common Stock and as a result such shares of Common
Stock are no longer publicly traded;

(vi) the Maker fails to make any cash payment required under the Transaction Documents and
such failure is not cured within five days after notice of such default is first given to the Maker
by a Holder;

(vii) the Maker consummates a “going private” transaction and as a result the Common Stock is
no longer registered under Sections 12(b) or 12(g) of the Exchange Act; or

(viii) the Maker defaults in the timely performance of any other obligation under the
Transaction Documents and such default continues uncured for a period of 20 days after the date on
which notice of such default is first given to the Maker by a Holder (it being understood that no
prior notice need be given in the case of a default that cannot reasonably be cured within 20
days).

(g) Intentionally Omitted.

(h) Mechanics of Prepayment at Option of Holder Upon Major Transaction. No sooner
than fifteen (15) days nor later than ten (10) days prior to the consummation of a Major
Transaction, but not prior to the public announcement of such Major Transaction, the Maker shall
deliver written notice thereof via facsimile and overnight courier (“Notice of Major
Transaction”) to the Holder of this Note. At any time after receipt of a Notice of Major
Transaction (or, in the event a Notice of Major Transaction is not delivered at least ten (10) days
prior to a Major Transaction, at any time within ten (10) days prior to a Major Transaction), any
holder of the Notes then outstanding may require the Maker to prepay, effective immediately prior
to the consummation of such Major Transaction, all of the holder’s Notes then outstanding by
delivering written notice thereof via facsimile and overnight courier (“Notice of Prepayment at
Option of Holder Upon Major Transaction”) to the Maker, which Notice of Prepayment at Option of
Holder Upon Major Transaction shall indicate (i) the number of Notes that such holder is electing
to prepay and (ii) the Major Transaction Prepayment Price, as calculated pursuant to Section 3.7(b)
above.

(i) Mechanics of Prepayment at Option of Holder Upon Triggering Event. Within one (1)
Business Day after the occurrence of a Triggering Event, the Maker shall deliver written notice
thereof via facsimile and overnight courier (“Notice of Triggering Event”) to each holder
of the Notes. At any time after the earlier of a holder’s receipt of a Notice of Triggering Event
and such holder becoming aware of a Triggering Event, any holder of this Note and the Other Notes
then outstanding may require the Maker to prepay all of the Notes on a pro rata basis by delivering
written notice thereof via facsimile and overnight courier (“Notice of Prepayment at Option of
Holder Upon Triggering Event”) to the Maker, which Notice of Prepayment at Option of Holder
Upon Triggering Event shall indicate (i) the amount of the Note that such holder is electing to
have prepaid and (ii) the applicable Triggering Event Prepayment Price, as calculated pursuant to
Section 3.7(c) above. A holder shall only be permitted to require the Maker to prepay the Note
pursuant to Section 3.7 hereof for the greater of a period of ten (10) days after receipt by such
holder of a Notice of Triggering Event or for so long as such Triggering Event is continuing.

(j) Intentionally Omitted.

(k) Payment of Prepayment Price. Upon the Maker’s receipt of a Notice(s) of
Prepayment at Option of Holder Upon Triggering Event or a Notice(s) of Prepayment at Option of
Holder Upon Major Transaction from any holder of the Notes, the Maker shall immediately notify each
holder of the Notes by facsimile of the Maker’s receipt of such Notice(s) of Prepayment at Option
of Holder Upon Triggering Event or Notice(s) of Prepayment at Option of Holder Upon Major
Transaction and each holder which has sent such a notice shall promptly submit to the Maker such
holder’s certificates representing the Notes which such holder has elected to have prepaid. The
Maker shall deliver the applicable Triggering Event Prepayment Price, in the case of a prepayment
pursuant to Section 3.7(i), to such holder within five (5) Business Days after the Maker’s receipt
of a Notice of Prepayment at Option of Holder Upon Triggering Event and, in the case of a
prepayment pursuant to Section 3.7(h), the Maker shall deliver the Major Transaction Prepayment
Price immediately prior to the consummation of the Major Transaction; provided that a holder’s
original Note shall have been so delivered to the Maker; provided further that if the Maker is
unable to prepay all of the Notes to be prepaid, the Maker shall prepay an amount from each holder
of the Notes being prepaid equal to such holder’s pro-rata amount (based on the number of Notes
held by such holder relative to the number of Notes outstanding) of all Notes being prepaid. If
the Maker shall fail to prepay all of the Notes submitted for prepayment (other than pursuant to a
dispute as to the arithmetic calculation of the Prepayment Price), in addition to any remedy such
holder of the Notes may have under this Note and the Purchase Agreement, the applicable Prepayment
Price payable in respect of such Notes not prepaid shall bear interest at the rate of two percent
(2%) per month (prorated for partial months) until paid in full. Until the Maker pays such unpaid
applicable Prepayment Price in full to a holder of the Notes submitted for prepayment, such holder
shall have the option (the “Void Optional Prepayment Option”) to, in lieu of prepayment,
require the Maker to promptly return to such holder(s) all of the Notes that were submitted for
prepayment by such holder(s) under this Section 3.7 and for which the applicable Prepayment Price
has not been paid, by sending written notice thereof to the Maker via facsimile (the “Void
Optional Prepayment Notice”). Upon the Maker’s receipt of such Void Optional Prepayment
Notice(s) and prior to payment of the full applicable Prepayment Price to such holder, (i) the
Notice(s) of Prepayment at Option of Holder Upon Triggering Event or the Notice(s) of Prepayment at
Option of Holder Upon Major Transaction, as the case may be, shall be null and void with respect to
those Notes submitted for prepayment and for which the applicable Prepayment Price has not been
paid, (ii) the Maker shall immediately return any Notes submitted to the Maker by each holder for
prepayment under this Section 3.7(k) and for which the applicable Prepayment Price has not been
paid and (iii) the Conversion Price of such returned Notes shall be adjusted to the lesser of (A)
the Conversion Price as in effect on the date on which the Void Optional Prepayment Notice(s) is
delivered to the Maker and (B) the lowest Closing Bid Price during the period beginning on the date
on which the Notice(s) of Prepayment of Option of Holder Upon Major Transaction or the Notice(s) of
Prepayment at Option of Holder Upon Triggering Event, as the case may be, is delivered to the Maker
and ending on the date on which the Void Optional Prepayment Notice(s) is delivered to the Maker;
provided that no adjustment shall be made if such adjustment would result in an increase of the
Conversion Price then in effect. A holder’s delivery of a Void Optional Prepayment Notice and
exercise of its rights following such notice shall not effect the Maker’s obligations to make any
payments which have accrued prior to the date of such notice. Payments provided for in this
Section 3.7 shall have priority to payments to other stockholders in connection with a Major
Transaction.

(l) Intentionally Omitted.

Section 3.8 Inability to Fully Convert.

(a) Holder’s Option if Maker Cannot Fully Convert. If, upon the Maker’s receipt of a
Conversion Notice, the Maker cannot issue shares of Common Stock registered for resale under the
Registration Statement for any reason, including, without limitation, because the Maker (w) does
not have a sufficient number of shares of Common Stock authorized and available, (x) is otherwise
prohibited by applicable law or by the rules or regulations of any stock exchange, interdealer
quotation system or other self-regulatory organization with jurisdiction over the Maker or any of
its securities from issuing all of the Common Stock which is to be issued to the Holder pursuant to
a Conversion Notice or (y) fails to have a sufficient number of shares of Common Stock registered
for resale under the Registration Statement, then the Maker shall issue as many shares of Common
Stock as it is able to issue in accordance with the Holder’s Conversion Notice and, with respect to
the unconverted portion of this Note, the Holder, solely at Holder’s option, can elect to:

(i) require the Maker to prepay that portion of this Note for which the Maker is unable to
issue Common Stock in accordance with the Holder’s Conversion Notice (the “Mandatory
Prepayment”) at a price per share equal to the Triggering Event Prepayment Price as of such
Conversion Date (the “Mandatory Prepayment Price”);

(ii) if the Maker’s inability to fully convert is pursuant to Section 3.8(a)(y) above, require
the Maker to issue restricted shares of Common Stock in accordance with such holder’s Conversion
Notice;

(iii) void its Conversion Notice and retain or have returned, as the case may be, this Note
that was to be converted pursuant to the Conversion Notice (provided that the Holder’s voiding its
Conversion Notice shall not effect the Maker’s obligations to make any payments which have accrued
prior to the date of such notice).

In the event a Holder shall elect to convert any portion of its Notes as provided herein, the Maker
cannot refuse conversion based on any claim that such Holder or any one associated or affiliated
with such Holder has been engaged in any violation of law, violation of an agreement to which such
Holder is a party or for any reason whatsoever, unless, an injunction from a court, on notice,
restraining and/or enjoining conversion of all or of said Notes shall have been issued and the
Maker posts a surety bond for the benefit of such Holder in an amount equal to 130% of the
outstanding principal amount of the Notes the Holder has elected to convert, which bond shall
remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of
which shall be payable to such Holder in the event it obtains judgment.

(b) Mechanics of Fulfilling Holder’s Election. The Maker shall immediately send via
facsimile to the Holder, upon receipt of a facsimile copy of a Conversion Notice from the Holder
which cannot be fully satisfied as described in Section 3.8(a) above, a notice of the Maker’s
inability to fully satisfy the Conversion Notice (the “Inability to Fully Convert Notice”).
Such Inability to Fully Convert Notice shall indicate (i) the reason why the Maker is unable to
fully satisfy such holder’s Conversion Notice, (ii) the amount of this Note which cannot be
converted and (iii) the applicable Mandatory Prepayment Price. The Holder shall notify the Maker
of its election pursuant to Section 3.8(a) above by delivering written notice via facsimile to the
Maker (“Notice in Response to Inability to Convert”).

(c) Payment of Prepayment Price. If the Holder shall elect to have its Notes prepaid
pursuant to Section 3.8(a)(i) above, the Maker shall pay the Mandatory Prepayment Price to the
Holder within thirty (30) days of the Maker’s receipt of the Holder’s Notice in Response to
Inability to Convert, provided that prior to the Maker’s receipt of the Holder’s Notice in
Response to Inability to Convert the Maker has not delivered a notice to the Holder stating, to the
satisfaction of the Holder, that the event or condition resulting in the Mandatory Prepayment has
been cured and all Conversion Shares issuable to the Holder can and will be delivered to the Holder
in accordance with the terms of this Note. If the Maker shall fail to pay the applicable Mandatory
Prepayment Price to the Holder on a timely basis as described in this Section 3.8(c) (other than
pursuant to a dispute as to the determination of the arithmetic calculation of the Prepayment
Price), in addition to any remedy the Holder may have under this Note and the Purchase Agreement,
such unpaid amount shall bear interest at the rate of two percent (2%) per month (prorated for
partial months) until paid in full. Until the full Mandatory Prepayment Price is paid in full to
the Holder, the Holder may (i) void the Mandatory Prepayment with respect to that portion of the
Note for which the full Mandatory Prepayment Price has not been paid, (ii) receive back such Note,
and (iii) require that the Conversion Price of such returned Note be adjusted to the lesser of (A)
the Conversion Price as in effect on the date on which the Holder voided the Mandatory Prepayment
and (B) the lowest Closing Bid Price during the period beginning on the Conversion Date and ending
on the date the Holder voided the Mandatory Prepayment.

(d) Pro-rata Conversion and Prepayment. In the event the Maker receives a Conversion
Notice from more than one holder of the Notes on the same day and the Maker can convert and prepay
some, but not all, of the Notes pursuant to this Section 3.8, the Maker shall convert and prepay
from each holder of the Notes electing to have its Notes converted and prepaid at such time an
amount equal to such holder’s pro-rata amount (based on the principal amount of the Notes held by
such holder relative to the principal amount of the Notes outstanding) of all the Notes being
converted and prepaid at such time.

Section 3.9 No Rights as Shareholder. Nothing contained in this Note shall be
construed as conferring upon the Holder, prior to the conversion of this Note, the right to vote or
to receive dividends or to consent or to receive notice as a shareholder in respect of any meeting
of shareholders for the election of directors of the Maker or of any other matter, or any other
rights as a shareholder of the Maker.

ARTICLE IV

MISCELLANEOUS

Section 4.1 Notices. Any notice, demand, request, waiver or other communication
required or permitted to be given hereunder shall be in writing and shall be effective (a) upon
hand delivery by telex (with correct answer back received), telecopy or facsimile at the address or
number designated in the Purchase Agreement (if delivered on a Business Day during normal business
hours where such notice is to be received), or the first Business Day following such delivery (if
delivered other than on a Business Day during normal business hours where such notice is to be
received) or (b) on the second Business Day following the date of mailing by express courier
service, fully prepaid, addressed to such address, or upon actual receipt of such mailing,
whichever shall first occur. The Maker will give written notice to the Holder at least twenty (20)
Trading Days prior to the date on which the Maker takes a record (x) with respect to any dividend
or distribution upon the Common Stock, (y) with respect to any pro rata subscription offer to
holders of Common Stock or (z) for determining rights to vote with respect to any Major
Transaction, dissolution, liquidation or winding-up and in no event shall such notice be provided
to such holder prior to such information being made known to the public. The Maker will also give
written notice to the Holder at least twenty (20) Trading Days prior to the date on which any Major
Transaction, dissolution, liquidation or winding-up will take place and in no event shall such
notice be provided to the Holder prior to such information being made known to the public. The
Maker shall promptly notify the Holder of this Note of any notices sent or received, or any actions
taken with respect to the Other Notes.

Section 4.2 Governing Law. This Note shall be governed by and construed in accordance
with the internal laws of the State of New York, without giving effect to any of the conflicts of
law principles which would result in the application of the substantive law of another
jurisdiction. This Note shall not be interpreted or construed with any presumption against the
party causing this Note to be drafted.

Section 4.3 Headings. Article and section headings in this Note are included herein
for purposes of convenience of reference only and shall not constitute a part of this Note for any
other purpose.

Section 4.4 Remedies, Characterizations, Other Obligations, Breaches and Injunctive
Relief. The remedies provided in this Note shall be cumulative and in addition to all other
remedies available under this Note, at law or in equity (including, without limitation, a decree of
specific performance and/or other injunctive relief), no remedy contained herein shall be deemed a
waiver of compliance with the provisions giving rise to such remedy and nothing herein shall limit
a holder’s right to pursue actual damages for any failure by the Maker to comply with the terms of
this Note. Amounts set forth or provided for herein with respect to payments, conversion and the
like (and the computation thereof) shall be the amounts to be received by the holder thereof and
shall not, except as expressly provided herein, be subject to any other obligation of the Maker (or
the performance thereof). The Maker acknowledges that a breach by it of its obligations hereunder
will cause irreparable and material harm to the Holder and that the remedy at law for any such
breach may be inadequate. Therefore the Maker agrees that, in the event of any such breach or
threatened breach, the Holder shall be entitled, in addition to all other available rights and
remedies, at law or in equity, to seek and obtain such equitable relief, including but not limited
to an injunction restraining any such breach or threatened breach, without the necessity of showing
economic loss and without any bond or other security being required.

Section 4.5 Enforcement Expenses. The Maker agrees to pay all costs and expenses of
enforcement of this Note, including, without limitation, reasonable attorneys’ fees and expenses.

Section 4.6 Binding Effect. The obligations of the Maker and the Holder set forth
herein shall be binding upon the successors and assigns of each such party, whether or not such
successors or assigns are permitted by the terms hereof.

Section 4.7 Amendments. This Note may not be modified or amended in any manner except
in writing executed by the Maker and the Holder.

Section 4.8 Compliance with Securities Laws. The Holder of this Note acknowledges
that this Note is being acquired solely for the Holder’s own account and not as a nominee for any
other party, and for investment, and that the Holder shall not offer, sell or otherwise dispose of
this Note. This Note and any Note issued in substitution or replacement therefor shall be stamped
or imprinted with a legend in substantially the following form:

“NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES
AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN
RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY,
MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN COMPLIANCE
WITH APPLICABLE STATE SECURITIES LAWS OR BLUE SKY LAWS.
NOTWITHSTANDING THE FOREGOING, THESE SECURITIES AND THE SECURITIES
ISSUABLE UPON CONVERSION OF THESE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT SECURED BY SUCH
SECURITIES.”

Section 4.9 Consent to Jurisdiction. Each of the Maker and the Holder (i) hereby
irrevocably submits to the exclusive jurisdiction of the United States District Court sitting in
the Southern District of New York and the courts of the State of New York located in New York
county for the purposes of any suit, action or proceeding arising out of or relating to this Note
and (ii) hereby waives, and agrees not to assert in any such suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of such court, that the suit, action or
proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding
is improper. Each of the Maker and the Holder consents to process being served in any such suit,
action or proceeding by mailing a copy thereof to such party at the address in effect for notices
to it under the Purchase Agreement and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing in this Section 4.9 shall affect or
limit any right to serve process in any other manner permitted by law. Each of the Maker and the
Holder hereby agree that the prevailing party in any suit, action or proceeding arising out of or
relating to this Note shall be entitled to reimbursement for reasonable legal fees from the
non-prevailing party.

Section 4.10 Parties in Interest. This Note shall be binding upon, inure to the
benefit of and be enforceable by the Maker, the Holder and their respective successors and
permitted assigns.

Section 4.11 Failure or Indulgence Not Waiver. No failure or delay on the part of the
Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such power, right or privilege preclude
other or further exercise thereof or of any other right, power or privilege.

Section 4.12 Maker Waivers. Except as otherwise specifically provided herein, the
Maker and all others that may become liable for all or any part of the obligations evidenced by
this Note, hereby waive presentment, demand, notice of nonpayment, protest and all other demands’
and notices in connection with the delivery, acceptance, performance and enforcement of this Note,
and do hereby consent to any number of renewals of extensions of the time or payment hereof and
agree that any such renewals or extensions may be made without notice to any such persons and
without affecting their liability herein and do further consent to the release of any person liable
hereon, all without affecting the liability of the other persons, firms or Maker liable for the
payment of this Note, AND DO HEREBY WAIVE TRIAL BY JURY.

(a) No delay or omission on the part of the Holder in exercising its rights under this Note,
or course of conduct relating hereto, shall operate as a waiver of such rights or any other right
of the Holder, nor shall any waiver by the Holder of any such right or rights on any one occasion
be deemed a waiver of the same right or rights on any future occasion.

(b) THE MAKER ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS NOTE IS A PART IS A COMMERCIAL
TRANSACTION, AND TO THE EXTENT ALLOWED BY APPLICABLE LAW, HEREBY WAIVES ITS RIGHT TO NOTICE AND
HEARING WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH THE HOLDER OR ITS SUCCESSORS OR ASSIGNS MAY
DESIRE TO USE.

Section 4.13 Definitions. For the purposes hereof, the following terms shall have the
following meanings:

“Bankruptcy Event” means any of the following events: (a) the Maker or any Subsidiary
commences a case or other proceeding under any bankruptcy, reorganization, arrangement, adjustment
of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction relating to the Maker or any Subsidiary thereof; (b) there is commenced against the
Maker or any Subsidiary any such case or proceeding that is not dismissed within 60 days after
commencement; (c) the Maker or any Subsidiary is adjudicated insolvent or bankrupt or any order of
relief or other order approving any such case or proceeding is entered; (d) the Maker or any
Subsidiary suffers any appointment of any custodian or the like for it or any substantial part of
its property that is not discharged or stayed within 60 days; (e) the Maker or any Subsidiary makes
a general assignment for the benefit of creditors; (f) the Maker or any Subsidiary fails to pay, or
states that it is unable to pay or is unable to pay, its debts generally as they become due; (g)
the Maker or any Subsidiary calls a meeting of its creditors with a view to arranging a
composition, adjustment or restructuring of its debts; or (h) the Maker or any Subsidiary, by any
act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of
the foregoing or takes any corporate or other action for the purpose of effecting any of the
foregoing. For purposes of this definition, Subsidiaries shall not include any subsidiary of the
Maker that is non-operating, non-revenue generating and is being liquidated or dissolved solely in
connection with the reorganization of the Maker’s organizational structure.

“Business Day” means any day except a Saturday, Sunday or any day which shall be a
legal holiday or a day on which banking institutions in the State of New York are authorized or
required by law or other government action to close.

“Change of Control” means the occurrence of any of the following in one or a series of
related transactions: (i) an acquisition after the date hereof by an individual or legal entity or
“group” (as described in Rule 13d-5(b)(1) under the Exchange Act) of more than one-half of the
voting rights or equity interests in the Maker; (ii) a replacement of more than one-half of the
members of the Maker’s board of directors; (iii) a merger or consolidation of the Maker or any
Subsidiary or a sale of more than one-half of the assets of the Maker in one or a series of related
transactions, unless following such transaction or series of transactions, the holders of the
Maker’s securities prior to the first such transaction continue to hold at least two-thirds of the
voting rights and equity interests in of the surviving entity or acquirer of such assets; (iv) a
recapitalization, reorganization or other transaction involving the Maker or any Subsidiary that
constitutes or results in a transfer of more than one-half of the voting rights or equity interests
in the Maker; (v) consummation of a “Rule 13e-3 transaction” as defined in Rule 13e-3 under the
Exchange Act with respect to the Maker, or (vi) the execution by the Maker or its controlling
shareholders of an agreement providing for or reasonably likely to result in any of the foregoing
events.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Going Private Transaction” means a “Rule 13e-3 transaction” as defined in Rule 13e-3
under the Exchange Act.

"Person” means an individual or a corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability company, joint stock company,
government (or an agency or political subdivision thereof) or other entity of any kind.

“Trading Day” means (a) a day on which the Common Stock is traded on The Nasdaq
SmallCap Market (or other exchange or market on which the Common Stock is trading), or (b) if the
Common Stock is not traded on The Nasdaq SmallCap Market (or other exchange or market on which the
Common Stock is trading), a day on which the Common Stock is quoted in the over-the-counter market
as reported by the National Quotation Bureau Incorporated (or any similar organization or agency
succeeding its functions of reporting prices); provided, however, that in the event
that the Common Stock is not listed or quoted as set forth in (a) or (b) hereof, then Trading Day
shall mean any day Business Day.

“Underlying Shares” means the shares of Common Stock issuable (a) upon conversion of
the Notes (as such term is defined in the Purchase Agreement) and (b) as payment of any principal
amount of the Notes or interest accrued and outstanding on the Notes.

[Signature Page Follows]

1

IN WITNESS WHEREOF, the Maker has caused this Senior Secured Convertible Promissory Note to be
duly executed on this 16th day of August 2005.

VERTICALNET, INC.

By: /s/ Gene S. Godick     

Name: Gene S. Godick

Title: Executive Vice President and Chief Financial Officer

2

EXHIBIT A

WIRE INSTRUCTIONS.

Payee:      

Bank:      

Address:      

     

Bank No.:      

Account No.:      

Account Name:      

3

FORM OF

NOTICE OF CONVERSION

(To be Executed by the Registered Holder in order to Convert the Note)

The undersigned hereby irrevocably elects to convert $      of the principal amount of
the above Note No.      into shares of Common Stock of Verticalnet, Inc. (the “Maker”)
according to the conditions hereof, as of the date written below.

Date of Conversion      

Applicable Conversion Price      

Number of shares of Common Stock beneficially owned or deemed beneficially owned by the Holder on
the Date of Conversion:      

Signature     

[Name]

Address:     

     

4

Schedule A

Noteholders

	 	 	 	 	 
	Name	 	Note Amount
	Iroquois Master Fund, Ltd.
	 	 	1,150,000.00	 
	Alpha Capital AG
	 	 	500,000.00	 
	JGB Capital L.P.
	 	 	300,000.00	 
	Harborview Master Fund LP
	 	 	400,000.00	 
	Portside Growth and Opportunity Fund
	 	 	250,000.00	 
	Smithfield Fiduciary LLC
	 	 	500,000.00	 
	Bristol Investment Fund, Ltd.
	 	 	500,000.00	 
	Nite Capital LP
	 	 	250,000.00	 
	Castle Creek Technology Partners LLC
	 	 	1,000,000.00	 
	DKR Soundshore Oasis Holding Fund Ltd.
	 	 	500,000.00	 
	CAMOFI Master LDC
	 	 	500,000.00	 
	Whalehaven Capital Fund Limited
	 	 	500,000.00	 
	Platinum Long term Growth I, LLC
	 	 	250,000.00	 

5

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