10QSB

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-QSB

ý        Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: September 30, 2005

o        Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition period from                  to                     

Commission file number: 1-12966

ClearStory Systems, Inc.

(Exact name of small business issuer as specified in its charter)

Delaware	06-1302773
(State of incorporation)	(IRS employer identification number)

One Research Drive, Suite 200B

Westborough, MA 01581

(Address of principal executive offices)

Issuer’s telephone number, including area code: (508) 870-4000

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ý  No  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes  o  No ý

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:

Title of Each Class	Outstanding November 14, 2005
Common Stock, par value $.10	5,992,287

Transitional Small Business Disclosure Format (check one)

Yes  o  No ý

ClearStory Systems, Inc.

INDEX

PART I	FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of September 30, 2005 (Unaudited) and March 31, 2005		3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended September 30, 2005 and 2004 (Unaudited)		4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2005 and 2004 (Unaudited)		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis or Plan of Operation		10
Item 3. Controls and Procedures		22
PART II	OTHER INFORMATION
Item 6. Exhibits		23
Signature		23

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ClearStory Systems, Inc.

CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands)

	September 30,			March 31,
	2005			2005
ASSETS
Current assets:
Cash and cash equivalents	$	222		$	849
Accounts receivable, net	904			917
Prepaid expenses and other current assets	413			439
Total current assets	1,539			2,205
Property and equipment, net	1,236			1,439
Capitalized software, net	1,707			1,852
Goodwill	1,223			1,223
Other assets	595			186
	$	6,300		$	6,905
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	2,330		$	2,665
Advances against accounts receivable sold with recourse	753			606
Revolving credit facility	1,350			—
Deferred revenue	2,069			2,527
Capital leases, current portion	145			115
Total current liabilities	6,647			5,913
Long term liabilities:
Deferred rent	490			494
Capital leases, net of current portion	57			112
Total long term liabilities	547			606
Commitments and contingencies
Stockholders’ equity:
Series B Convertible Preferred Stock	1			1
Series C Convertible Preferred Stock	40			37
8% Convertible Preferred Stock	1			1
Common Stock	599			599
Additional paid-in capital	57,174			56,139
Accumulated deficit	(58,709		)	(56,391		)
Total stockholders’ equity (deficit)	(894		)	386
	$	6,300		$	6,905

The accompanying notes are an integral part of these consolidated financial statements.

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ClearStory Systems, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended September 30,						Six Months Ended September 30,
	2005			2004			2005			2004
Revenue:
Product	$	538		$	945		$	1,106		$	2,170
Services	1,315			1,632			2,882			3,390
	1,853			2,577			3,988			5,560
Cost of revenues:
Product	112			63			161			126
Services	698			936			1,466			1,763
	810			999			1,627			1,889
Gross profit	1,043			1,578			2,361			3,671
Operating expenses:
Sales and marketing	596			717			1,314			1,458
Product development	826			591			1,627			1,203
General and administrative	640			837			1,205			1,451
	2,062			2,145			4,146			4,112
Operating loss	(1,019		)	(567		)	(1,785		)	(441		)
Interest expense, net	(105		)	(28		)	(150		)	(54		)
Net loss	$	(1,124	)	$	(595	)	$	(1,935	)	$	(495	)
Net loss per share - basic and diluted	$	(0.22	)	$	(0.12	)	$	(0.39	)	$	(0.13	)
Weighted average common shares outstanding - basic and diluted	5,992			5,992			5,992			5,992

The accompanying notes are an integral part of these consolidated financial statements.

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ClearStory Systems, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended
	September 30,
	2005			2004
Cash flows from operating activities:
Net loss	$	(1,935	)	$	(495	)
Reconciliation of net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	439			247
Deferred rent	(4		)	185
Changes in assets and liabilities:
Accounts receivable	13			464
Prepaid expenses and other current assets	26			(81		)
Other assets	(20		)	20
Accounts payable and accrued expenses	(338		)	687
Deferred revenue	(458		)	(130		)
Net cash provided by (used in) operating activities	(2,277		)	897
Cash flows from investing activities:
Capitalized software	—			(766		)
Capital expenditures	(32		)	(488		)
Net cash used in investing activities	(32		)	(1,254		)
Cash flows from financing activities:
Net advances (repayments) from sale of receivables	147			(345		)
Proceeds from Revolving Credit Facility	1,350			—
Proceeds from issuance of Note	750			—
Repayment of Note	(750		)	—
Proceeds from sale and leaseback of equipment	—			240
Payments on capital leases	(65		)	(45		)
Proceeds from issuance of Series C Preferred	250			450
Net cash provided by financing activities	1,682			300
Net decrease in cash	(627		)	(57		)
Cash, beginning of period	849			751
Cash, end of period	$	222		$	694
Supplemental Disclosure of Cash Flow Information:
Series C Preferred Stock issued in settlement of dividends	$	340		$	281
Equipment purchased under capital leases	40			—
Cash interest paid	125			54

The accompanying notes are an integral part of these consolidated financial statements.

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ClearStory Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Nature of Business and Basis of Presentation

ClearStory Systems, Inc. (the “Company” or “ClearStory”) is a leading provider of integrated enterprise content management (“ECM”) solutions.  ClearStory’s proven technology provides a solid foundation for managing the full spectrum of enterprise content, from documents to e-mail, and graphics to video.  By bringing digital assets and business content with a unified Web services platform, ClearStory readily enables content use in e-commerce, customer service, marketing content management and regulatory compliance applications.

The consolidated financial statements included in this report have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting.  In addition, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations relating to interim condensed financial statements.  However, the Company believes that the disclosures contained herein are adequate to make the information presented not misleading.  The financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-KSB for the fiscal year ended March 31, 2005.  The results for the three and six months ended September 30, 2005 may not be indicative of the results that may be expected for the year ending March 31, 2006 or for any other future period.

In the opinion of the management of the Company, the accompanying unaudited financial statements reflect all adjustments that are necessary to present fairly the financial position of the Company as of September 30, 2005 and the results of operations for the three and six months ended September 30, 2005 and 2004 and cash flows for the six months ended September 30, 2005 and 2004.

Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123(R)”), which is a revision of SFAS No. 123, Accounting for Stock-based Compensation (“SFAS No. 123”). SFAS No. 123(R) supersedes Accounting Principle Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach to accounting for share-based payments in SFAS No. 123(R) is similar to the approach described in SFAS No. 123.  However, SFAS No. 123(R) requires all share–based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values.  Pro forma disclosure of the fair value of share-based payments is no longer an alternative to financial statement recognition.  SFAS No. 123(R) is effective for small business issuers at the beginning of the first fiscal year beginning after December 15, 2005, or effective April 1, 2006 for the Company.

The Company expects the adoption of SFAS No. 123(R) to have a material effect on its financial statements, in the form of additional compensation expense, on a quarterly and annual basis.  It is not possible to precisely determine the expense impact of adoption since a portion of the ultimate expense that is recorded will likely relate to awards that have not yet been granted, but are likely to be granted prior to our April 1, 2006 adoption date.  The expense associated with these future awards can only be determined based on factors such as the price for the Company’s common stock, volatility of the Company’s stock price and risk free interest rates as measured at the grant date.  However, the pro forma disclosures related to SFAS No. 123 included in the Company’s historic financial statements are relevant data points for gauging the potential level of expense that might be recorded in future periods.

Earnings (Loss) Per Common Share

Basic and diluted net earnings (loss) per share are presented in conformity with SFAS No. 128, Earnings Per Share (“SFAS No. 128”), for all periods presented. In accordance with SFAS No. 128, basic net earnings (loss)

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per common share was determined by dividing net earnings (loss) applicable to common stockholders by the weighted average common shares outstanding during the period. Basic and diluted net earnings (loss) per share are the same because all outstanding common stock equivalents have been excluded as they are anti-dilutive.

Reconciliation of the Company’s net loss to net loss attributable to common shareholders is as follows:

	Three Months Ended September 30,						Six Months Ended September 30,
	2005			2004			2005			2004
Net loss - as reported	$	(1,124	)	$	(595	)	(1,935		)	(495		)
Preferred stock dividends	(194		)	(151		)	(383		)	(296		)
Net loss attributable to common shareholders	$	(1,318	)	$	(746	)	$	(2,318	)	$	(791	)

For the three and six months ended September 30, 2005 and 2004, approximately 20.4 million and 17.1 million shares, respectively, from stock options, warrants and convertible securities were excluded due to their anti-dilutive effect. 

Stock-Based Compensation

The Company has elected to follow APB No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its employee stock options.  Under APB No. 25, when the exercise price of employee stock options is equal to or greater than the market price of the underlying stock on the date of grant no compensation expense is recorded.  The Company discloses information relating to the fair value of stock-based compensation awards in accordance with SFAS No. 123. 

The Company computed the pro forma disclosures required under SFAS No. 123 for all stock options granted to employees and directors of the Company as of September 30, 2005 and 2004, using the Black-Scholes option pricing model prescribed by SFAS No. 123.

The effect of applying SFAS No. 123 would be as follows:

	Three Months Ended September 30,						Six Months Ended September 30,
	2005			2004			2005			2004
	(In thousands, except per share data)
Net loss attributable to common shareholders:
As reported	$	(1,318	)	$	(746	)	$	(2,318	)	$	(791	)
Pro forma - SFAS 123	$	(1,412	)	$	(877	)	$	(2,506	)	$	(1,053	)
Basic and diluted net loss per share:
As reported	$	(0.22	)	$	(0.12	)	$	(0.39	)	$	(0.13	)
Pro forma - SFAS 123	$	(0.24	)	$	(0.15	)	$	(0.42	)	$	(0.18	)

Advances against Receivables Sold with Recourse

On November 2, 2004, the Company entered into a factoring agreement (“Factoring Agreement”) with Benefactor Funding Corporation (“Benefactor”), which replaced its existing financing agreement with another financing company.  Pursuant to the Factoring Agreement, the Company will sell certain accounts receivable to Benefactor at a purchase price, for each accepted account, equal to (i) 98.75% of the face amount of the applicable account receivable less (ii) Benefactor’s fees and the amount of any trade or cash discounts, credits or allowances, set-offs or any other applicable reductions or adjustments. The Company has also granted Benefactor a security interest in all of the Company’s assets to secure the payment and performance of all obligations under the Factoring Agreement.

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10% Convertible Promissory Note

On June 16, 2005, the Company, issued a 10% Convertible Promissory Note (the “Note”) to SCP Private Equity Partners II, L.P. (“SCP”). The Note was issued in the amount of $750,000, and was payable on demand at any time. Pursuant to the terms of the Note, the Note was convertible upon demand into up to 386,678 shares of the Company’s Series C Convertible Preferred Stock, par value $.01 per share (“Series C Preferred”) or other equity securities of the Company. The Note could be pre-paid by the Company at any time without penalty.  On September 8, 2005, the Company utilized borrowings from its Revolving Credit Facility to repay the Note. 

Revolving Credit Facility

On August 25, 2005, the Company entered into a Loan and Security Agreement (“Revolver’) with Silicon Valley Bank (“SVB”) which provides for the Company to borrow up to $1,500,000 for general corporate purposes for the next two years at the prime interest rate plus 0.5%, payable monthly.  The Company granted SVB a second security interest in all of the Company’s assets to secure the payment and performance of all obligations under the Revolver. The Revolver also contains certain financial covenants and was guaranteed by SCP.  In consideration for the guarantee by SCP, the Company issued a warrant to SCP to purchase 232,007 shares of Series C Preferred at $1.9396 per share. The term of the warrant expires on August 25, 2015.  The Company has valued the warrant at $408,000 utilizing the Black-Scholes option pricing model.  The Company will amortize this cost along with $41,000 of legal and other fees incurred over the term of the Revolver.  On September 8, 2005, the Company utilized borrowings under the Revolver to repay its Note with SCP. 

Based upon the results for the six months ended September 30, 2005 and its current outlook for the remainder of the year, the Company was and will continue to be in violation of its financial covenants set forth in the Revolver.  While SVB has indicated that it would consider amending the financial covenants to levels consistent with the Company’s expectations for the remaining term of the Revolver, there can be no assurance that SVB will agree to amend these financial covenants or that the Company will be successful in complying with these covenants.  If the Company is unsuccessful in amending these financial covenants, or is unable to comply with these covenants, SVB could declare the loan in default and require the Company, or SCP under its guarantee, to repay all outstanding amounts under the Revolver in full.

Series C Convertible Preferred Stock

On January 28, 2005, the Company entered into a Series C Convertible Preferred Stock Purchase Agreement with SCP and CSSMK, LLC (“CSSMK”), whereby the Company sold 257,785 shares of Series C Preferred at $1.9396 per share to SCP for the sum of $500,000 and sold an additional 51,557 shares of Series C Preferred to CSSMK at $1.9396 per share for the sum of $100,000.  Pursuant to the agreement, SCP, or at the discretion of SCP, CIP Capital LP (“CIP”), agreed to purchase a minimum of 77,336 additional shares of Series C Preferred at $1.9396 per share for the sum of $150,000, on or before April 15, 2005 (the “Second Closing”).  In addition, SCP could, at its sole discretion, expand the number of shares to be purchased at the Second Closing to a maximum of 128,893 shares of Series C Preferred for $250,000.  SCP elected to purchase 128,893 shares of Series C Preferred for $250,000 on April 15, 2005.

For the six months ended September 30, 2005, the Company issued a total of 42,021 shares of Series C Preferred in settlement of dividends of $82,000 on its Series B Convertible Preferred Stock (“Series B Preferred”).  The Company also issued 154,261 shares of Series C Preferred in settlement of dividends of $299,000 on its Series C Preferred Stock.  The Company has recorded an additional $50,000 in accrued dividends associated with its Series B Preferred and Series C Preferred at September 30, 2005.

Liquidity

As of September 30, 2005, the Company had a cash balance of $222,000, the ability to sell certain accounts receivable for additional funds of approximately $250,000 pursuant to its Factoring Agreement and $150,000 of available funds under its Revolver.  Based upon the Company’s current operating outlook for the remainder of the current fiscal year, the Company needs additional financial resources to meet its short term liquidity requirements.  The Company is currently in discussions with its major shareholders and SVB regarding the need to either increase

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the borrowing capacity under the Revolver, or raise capital from other sources.  The increase in the Company’s borrowing capacity under the Revolver is subject to a number of risks and uncertainties and to various contingencies, including the agreement of SCP to guarantee the Company’s obligations under the expanded Revolver.  The Company can make no assurances it will be successful in its efforts to expand its borrowing capacity under its Revolver, or to raise capital from other sources.

The Company will need additional financing, beyond that which is contemplated above, to further supplement its liquidity needs, especially for intra-quarter liquidity requirements that depend on the timing and amount of monthly cash receipts that are anticipated by its current operating outlook. Additional financing could take the form of equity or debt offerings, spin-offs, joint ventures or other collaborative relationships that may require the Company to issue shares or share revenue.  Since its acquisition of WebWare in September 2003, the Company has incurred operating losses and negative cash flows which have historically been funded through the issuance of additional capital from its major stockholders. Based upon its latest operating outlook, the Company expects to incur losses for the remainder of the fiscal year due in part to significant investments in its direct sales and marketing efforts, the establishment of new sales distribution channels and the development and release of its products.  There can be no assurances that the Company will be able to achieve revenue levels or sufficiently reduce expenses to allow the Company to become profitable without detrimentally affecting its long-term revenues or market position.  Additionally, the Company already has a working capital deficit of $5,108,000 as of September 30, 2005, compared to a working capital deficit of $3,708,000 as of March 31, 2005, which increases the need for the Company to successfully execute and deliver on its current business plan.  The Company expects its working capital deficit to increase, as the Company anticipates incurring operating losses for the remaining quarters of fiscal 2006. In the event that the Company’s plans or assumptions change or prove to be inaccurate (due to revenue shortfalls, unanticipated expenses, difficulties, delays or otherwise), the Company may have insufficient funds to support its operations. Over the past several years, the Company has been successful in raising additional funds from its major shareholders, and these funds have allowed the Company to continue to make certain strategic investments.  However, the Company’s ability to garner continued financial support from these, or other investors, should the need arise, cannot be assured.

Geographic Information

The Company operates as a single reportable segment as a developer and distributor of software solutions for the ECM market.

Revenue was derived from customers in the following geographic areas:

	Three Months Ended September 30,				Six Months Ended September 30,
	2005		2004		2005		2004
North America	$	1,691	$	2,274	$	3,562	$	4,980
Europe	100		195		264		387
Other	62		108		162		193
	$	1,853	$	2,577	$	3,988	$	5,560

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Item 2.Management’s Discussion and Analysis or Plan of Operations

The following discussion of results of operations for the three months (“Second Quarter of Fiscal 2006”) and the six months (“First Half of Fiscal 2006”) ended September 30, 2005 and the three months (“Second Quarter of Fiscal 2005”) and the six months (“First Half of Fiscal 2005”) ended September 30, 2004 and the discussion of the Company’s financial condition at September 30, 2005 should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this Form 10-QSB and the audited financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-KSB for the year ended March 31, 2005, which has been filed with the Securities and Exchange Commission (the “SEC”).  The following discussion contains forward-looking statements that reflect our business, plans, estimates and beliefs.  Our results could differ materially from those discussed in the forward-looking statements.

We were founded to capture and preserve high volumes of mission critical business information.  Our product offering includes web-based presentment capabilities for documents such as bank statements, 401(k) statements, customer and vendor statements, explanation of benefits (“EOB”) statements, and transaction confirmation documents.  We have expanded our product offerings to include e-mail archiving and notification capabilities as well as the ability to capture, store and deliver high value digital assets such as video, voice on demand, graphics and presentations subsequent to our acquisition of certain assets and liabilities of WebWare Corp. on September 5, 2003.  These offerings provide our customers with the ability to improve internal communication, enhance productivity and increase customer satisfaction and communication.  With the March 2005 release of Radiant Enterprise Media Server (“Radiant EMS”), our next generation software platform, coupled with our ActiveMedia product offerings, we have substantially expanded our digital archive and rich media asset management capabilities and support business efforts such as video and voice on demand, and brand and channel management.

We distribute our products through a combination of our direct sales force and through our Alliance Partners.  Revenue is net of discounts and allowances given to our Alliance Partners.  We also market and license our products on an international basis through our Alliance Partners.  We have reseller relationships with Unisys, and Xerox Global Services, and original equipment manufacturer (“OEM”) agreements with Agfa Corporation, Ascent Media Group, Inc., and Sunguard Shareholder Systems, Inc. In addition, on March 30, 2005, we signed an agreement with IBM, representing a new distribution opportunity for our recently released platform, Radiant EMS. We consider the development of a successful Alliance Partner program as a key element for our future growth. In Fiscal 2005, we derived approximately 46% of our total revenues from our Alliance Partners.  Sales to new end-users generally include a software license, professional services, and maintenance contracts.  Additionally, our Radiant EMS and Active Media products are also offered under a hosting contract pursuant to which we are an application service provider (“ASP”).  ASP sales typically include monthly recurring revenues that are recognized as earned.

Significant Accounting Policies

Financial Reporting Release No. 60, which was recently issued by the SEC, requires all registrants to discuss critical accounting policies or methods used in the preparation of the financial statements. The notes to the consolidated financial statements included in our Annual Report on Form 10-KSB for the year ended March 31, 2005 includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements, the most significant of which are revenue recognition, capitalization of software, and income taxes.

Further, we have made a number of estimates and assumptions that affect reported amounts of assets, liabilities, revenues and expenses, and actual results may differ from those estimates. The areas that require the greatest degree of management judgment are the assessment of the recoverability of long-lived assets, primarily goodwill and capitalized software costs.  Capitalized software costs, which consist primarily of payroll and related expenses, are capitalized once technological feasibility, which is defined as completion of beta testing, is established.  It is then amortized when the product is released over an estimated useful life of three to five years.

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We believe that full consideration has been given to all relevant and material circumstances to which we may be subject, and the financial statements accurately reflect our best estimate of the results of operations, financial position and cash flows for the periods presented.

RESULTS OF OPERATIONS

Second Quarter of Fiscal 2006 Compared to Second Quarter of Fiscal 2005:

Revenues

The following tables compare total revenues for the periods indicated (in thousands):

	Three Months Ended September 30,
	2005		2004		% Change
Product revenues	$	538	$	945	-43	%
Professional services	153		323		-53	%
Maintenance and hosting contract revenues	1,162		1,309		-11	%
Total revenues	$	1,853	$	2,577	-28	%

Revenues for the Second Quarter of Fiscal 2006 decreased by $724,000, or 28%, to $1,853,000 as compared to revenues of $2,577,000 for the Second Quarter of Fiscal 2005.  Product revenues decreased by $407,000, or 43%, to $538,000 in the Second Quarter of Fiscal 2006 as compared to $945,000 in the Second Quarter of Fiscal 2005.  The decrease in product revenues was primarily attributable to lower product revenue associated with Radiant BDS. Professional service revenues decreased by $170,000, or 53%, to $153,000 in the Second Quarter of Fiscal 2006 as compared to $323,000 in the Second Quarter of Fiscal 2005. The decrease in professional service revenues was due to the decline in product revenues which have historically resulted in the initiation of service engagements.  Maintenance and hosting revenues decreased by $147,000, or 11%, to $1,162,000 in the Second Quarter of Fiscal 2006 as compared to $1,309,000 in the Second Quarter of Fiscal 2005. The decrease in maintenance and hosting revenues was due primarily to a decline in hosting revenues as a large hosting customer moved its application in-house.

Gross Profit

Gross profit for the Second Quarter of Fiscal 2006 decreased by $535,000, or 34%, to $1,043,000 as compared to gross profit of $1,578,000 for the Second Quarter of Fiscal 2005.  The decrease in gross profit is related to the decrease in product and service revenue as discussed above.  Gross margin percentage decreased to 56% for the Second Quarter of Fiscal 2006 from 61% for the Second Quarter of Fiscal 2005. The decrease in the gross margin percentage was primarily the result of lower product revenue, which has higher gross profit margins, and lower professional service margins due to lower productivity from fewer service engagements.

Sales and Marketing

Sales and marketing expenses for the Second Quarter of Fiscal 2006 decreased by $121,000, or 17%, to $596,000, as compared to $717,000 for the Second Quarter of Fiscal 2005. The decrease is primarily due to lower commissions earned due to the decline in revenues and in marketing costs from those incurred in the Second Quarter of Fiscal 2005 associated with the re-branding of our suite of products along with our company name change to ClearStory.

Sales and marketing expenses expressed as a percentage of sales increased to 32% in the Second Quarter of Fiscal 2006 compared to 28% in the Second Quarter of Fiscal 2005, primarily due to a decrease in revenues.

Product Development

Product development expenses, net of capitalized software, for the Second Quarter of Fiscal 2006 increased by $235,000, or 40%, to $826,000 as compared to $591,000 for the Second Quarter of Fiscal 2005.  We capitalized

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$391,000 of product development costs associated with the development of our next generation platform, Radiant EMS, in the Second Quarter of Fiscal 2005 with no capitalization occurring in the Second Quarter of Fiscal 2006. Radiant EMS achieved technological feasibility in the fourth quarter of Fiscal 2004 and was released in March 2005. Excluding the impact of the software capitalization, total product development expenses for the Second Quarter of Fiscal 2006 would have decreased by $156,000, or 16%, to $826,000 as compared to $982,000 for the Second Quarter of Fiscal 2005.  The decrease in product development costs is attributable to reduced costs associated with Radiant BDS and a reduction in external development costs associated with the development of Radiant EMS.

Product development expenses, excluding the impact of the software capitalization, expressed as a percentage of revenues was 45% in the Second Quarter of Fiscal 2006, compared to 38% in the Second Quarter of Fiscal 2005.

General and Administrative

General and administrative expenses for the Second Quarter of Fiscal 2006 decreased by $197,000, or 24%, to $640,000 as compared to $837,000 for the Second Quarter of Fiscal 2005.  General and administrative expenses decreased primarily as a result of reduced facility costs as we moved into a new corporate facility on March 1, 2004, but continued to be obligated on our prior facility through September 2004.

General and administrative expense, expressed as a percentage of revenues, was 35% for the Second Quarter of Fiscal 2006, compared to 32% in the Second Quarter of Fiscal 2005.

Interest Expense, net

Interest expense, net for the Second Quarter of Fiscal 2006 increased by $77,000 to $105,000 as compared to $28,000 for the Second Quarter of Fiscal 2005.  The increase in interest expense, net was primarily due to our issuance of the Note and our entering into the Revolver.

Provision for Taxes

No provision for or benefit from federal, state or foreign income taxes was recorded for the Second Quarter of Fiscal 2006 or for the Second Quarter of Fiscal 2005 because we incurred net operating losses and fully reserved our deferred tax assets as their future realization could not be determined. 

First Half of Fiscal 2006 Compared to First Half of Fiscal 2005:

Revenues

	Six Months Ended September 30,
	2005		2004		% Change
Product revenues	$	1,106	$	2,170	-49	%
Professional services	395		751		-47	%
Maintenance and hosting contract revenues	2,487		2,639		-6	%
Total revenues	$	3,988	$	5,560	-28	%

Revenues for the First Half of Fiscal 2006 decreased by $1,572,000, or 28%, to $3,988,000 as compared to revenues of $5,560,000 for the First Half of Fiscal 2005.  Product revenues decreased by $1,064,000, or 49%, to $1,106,000 in the First Half of Fiscal 2006 as compared to $2,170,000 in the First Half of Fiscal 2005.  The decrease in product revenues was primarily attributable to lower product revenue associated with Radiant BDS and with longer sales cycles and delays in purchase decisions associated with our Radiant EMS product. Professional service revenues decreased by $356,000, or 47%, to $395,000 in the First Half of Fiscal 2006 as compared to $751,000 in the First Half of Fiscal 2005. The decrease in professional services revenues was due to the decline in product revenues which have historically resulted in the initiation of service engagements.  Maintenance and hosting revenues decreased by $152,000, or 6%, to $2,487,000 in the First Half of Fiscal 2006 as compared to $2,639,000 in the First Half of Fiscal 2005. The decrease in maintenance and hosting revenues was due primarily to a decline in hosting revenues as a large hosting customer moved its application in-house.

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Gross Profit

Gross profit for the First Half of Fiscal 2006 decreased by $1,310,000, or 36%, to $2,361,000 as compared to gross profit of $3,671,000 for the First Half of Fiscal 2005.  The decrease in gross profit is related to the decrease in product and service revenue as previously discussed.  Gross margin percentage decreased to 59% for the First Half of Fiscal 2006 from 66% for the First Half of Fiscal 2005. The decrease in the gross margin percentage was primarily the result of lower product revenue, which has higher gross profit margins, and lower service margins due to lower productivity from fewer service engagements.

Sales and Marketing

Sales and marketing expenses for the First Half of Fiscal 2006 decreased by $144,000, or 10%, to $1,314,000, as compared to $1,458,000 for the First Half of Fiscal 2005. The decrease is primarily due to lower commissions earned due to the decline in revenues and a decrease in marketing costs incurred in the Second Quarter of Fiscal 2005 associated with the re-branding of our suite of products, along with our company name change to ClearStory.

Sales and marketing expenses expressed as a percentage of sales increased to 33% in the First Half of Fiscal 2006 compared to 26% in the First Half of Fiscal 2005, primarily due to the decrease in revenues.

Product Development

Product development expenses, net of capitalized software, for the First Half of Fiscal 2006 increased by $424,000, or 35%, to $1,627,000 as compared to $1,203,000 for the First Half of Fiscal 2005.  We capitalized $766,000 of product development costs associated with the development of our next generation platform, Radiant EMS, in the First Half of Fiscal 2005 with no capitalization occurring in the First Half of Fiscal 2006. Radiant EMS achieved technological feasibility in the fourth quarter of Fiscal 2004 and was released in March 2005. Excluding the impact of the software capitalization, total product development expenses for the First Half of Fiscal 2006 would have decreased by $342,000, or 17%, to $1,627,000 as compared to $1,969,000 for the First Half of Fiscal 2005.  The decrease in product development costs is attributable to reduced costs associated with Radiant BDS and a reduction in external development costs associated with the development of Radiant EMS.

Product development expenses, excluding the impact of the software capitalization, expressed as a percentage of revenues was 41% in the First Half of Fiscal 2006, compared to 35% in the First Half of Fiscal 2005.

General and Administrative

General and administrative expenses for the First Half of Fiscal 2006 decreased by $246,000, or 17%, to $1,205,000 as compared to $1,451,000 for the First Half of Fiscal 2005.  General and administrative expenses decreased primarily as a result of reduced facility costs as we moved into a new corporate facility on March 1, 2004 but continued to be obligated on our prior facility through September 2004.

General and administrative expense, expressed as a percentage of revenues, was 30% for the First Half of Fiscal 2006, compared to 26% in the First Half of Fiscal 2005.

Interest Expense, net

Interest expense, net for the First Half of Fiscal 2006 increased by $96,000 to $150,000 as compared to $54,000 for the First Half of Fiscal 2005.  The increase in interest expense, net was primarily due to our issuance of the Note and our entering into the Revolver.

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Provision for Taxes

No provision for or benefit from federal, state or foreign income taxes was recorded for the First Half of Fiscal 2006 or for the First Half of Fiscal 2005 because we incurred net operating losses and fully reserved our deferred tax assets as their future realization could not be determined. 

Liquidity and Capital Resources

As of September 30, 2005, we had a cash balance of $222,000, the ability to sell certain accounts receivable for additional funds of approximately $250,000 pursuant to our Factoring Agreement and $150,000 of available funds under our Revolver.  Based upon our current operating outlook for the remainder of the current fiscal year, we need additional financial resources to meet our short term liquidity requirements.  We are currently in discussions with our major shareholders and SVB regarding the need to either increase our borrowing capacity under the Revolver, or raise capital from other sources.  The increase in the borrowing capacity under the Revolver is subject to a number of risks and uncertainties and to various contingencies, including the agreement of SCP to guarantee our obligations under the expanded Revolver.  We can make no assurances it will be successful in our efforts to expand our borrowing capacity under our Revolver, or to raise capital from other sources.

We will need additional financing, beyond that which is contemplated above, to further supplement our liquidity needs, especially for intra-quarter liquidity requirements that depend on the timing and amount of monthly cash receipts that are anticipated by our current operating outlook. Additional financing could take the form of equity or debt offerings, spin-offs, joint ventures or other collaborative relationships that may require us to issue shares or share revenue.  Since our acquisition of WebWare in September 2003, we have incurred operating losses and negative cash flows which have historically been funded through the issuance of additional capital from our major stockholders. Based upon our latest operating outlook, we expect to incur losses for the remainder of the fiscal year due in part to significant investments in our direct sales and marketing efforts, the establishment of new sales distribution channels and the development and release of our products.  There can be no assurances that we will be able to achieve revenue levels or sufficiently reduce expenses to allow us to become profitable without detrimentally affecting our long-term revenues or market position.  Additionally, we already have a working capital deficit of $5,108,000 as of September 30, 2005, compared to a working capital deficit of $3,708,000 as of March 31, 2005, which increases the need for us to successfully execute and deliver on our current business plan.  We expect our working capital deficit to increase, as we anticipate incurring operating losses for the remaining quarters of fiscal 2006. In the event that our plans or assumptions change or prove to be inaccurate (due to revenue shortfalls, unanticipated expenses, difficulties, delays or otherwise), we may have insufficient funds to support our operations. Over the past several years, we have been successful in raising additional funds from our major shareholders, and these funds have allowed us to continue to make certain strategic investments.  However, our ability to garner continued financial support from these, or other investors, should the need arise, cannot be assured.

Our cash flows are summarized below for the periods indicated: (in thousands)

	Six Months Ended
	September 30,
	2005			2004
Cash provided by (used in):
Operating activities	$	(2,277	)	$	897
Investing activities	(32		)	(1,254		)
Financing activities	1,682			300
Net decrease in cash	(627		)	(57		)
Cash, beginning of period	849			751
Cash, end of period	$	222		$	694

Net cash used in operating activities was $2,277,000 in the First Half of Fiscal 2006 compared to net cash provided by operating activities of $897,000 in the prior comparable period.  The decrease in cash from operations is primarily due to our higher net loss for the First Half of Fiscal 2006, a decrease in accounts payable and accrued expenses due to the timing of payments and a decrease in deferred revenue.  For the Second Quarter of Fiscal 2006, the day’s sales outstanding (“DSO”) was 44 compared to a DSO of 74 for the Second Quarter of Fiscal 2005.

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Net cash used in investing activities was $32,000 in the First Half of Fiscal 2006 compared to $1,254,000 in the prior comparable period.  For the First Half of 2005, we utilized funds of $766,000 for capitalized software development costs and $4881,000 of funds for capital expenditures for the completion of our hosted data center, other equipment relating to the relocation of corporate facilities and computer equipment and software associated with our product development activities.

Net cash provided by financing activities was $1,682,000 in the First Half of Fiscal 2006 compared to net cash provided by financing activities of $300,000 in the prior comparable period.  Cash provided by financing activities in the First Half of Fiscal 2006 was a result of the proceeds from the issuance of $250,000 of Series C Preferred, the proceeds of $1,350,000 under our new Revolver and $147,000 of advances against account receivables under our Factoring Agreement.  Cash provided by financing activities in the First Half of Fiscal 2005 was a result of the proceeds from the issuance of $450,000 of Series C Preferred, the proceeds of $240,000 under a sale and leaseback transaction, partially offset by a decline in advances against accounts receivable under our Factoring Agreement.

Quarterly Results

Quarterly revenues and results of operations may fluctuate as the result of a variety of factors, including the lengthy sales cycle for our products, the proportion of revenues attributable to software license fees versus services, the amount of revenue generated by alliances with other companies distributing our products, demand for our products and services, the size and timing of individual license transactions, the introduction of new products and product enhancements by us or our competitors, changes in customer budgets and capital expenditures, competitive conditions in the industry and general economic conditions.  Additionally, the sale of our products generally involves a significant commitment of capital by our customers and may be delayed due to time-consuming authorization procedures within an organization.  Other factors affecting our operating results include our ability to design and introduce on a timely basis new products which compete effectively on the basis of price and performance, product obsolescence, technological changes, competition and competitive pressures on price, the ability to hire and retain qualified personnel and general economic conditions affecting the investment by potential customers in technology based investments.  There is no assurance that we can maintain or increase our sales volume going forward or that we will be able to achieve a profit in the marketing of our products.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have not been disclosed.

“Forward-Looking” Statements Under The Private Securities Litigation Reform Act

This Quarterly Report on Form 10-QSB contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  These statements appear in a number of places in this Quarterly Report and include all statements that are not statements of historical fact regarding the intent, belief or expectations of the Company and its management.  These statements are based upon a number of assumptions and estimates, which are subject to significant uncertainties, many of which are beyond our control.  Words such as “may,” “would,” “could,” “will,” “expect,” “anticipate,” “believe,” “intend,” “plan” and “estimate” are meant to identify such forward-looking statements.  Such forward-looking statements are not guarantees and actual results may differ materially from those expressed or implied by such forward-looking statements.  Factors that could cause actual results to differ materially include, but are not limited to, our ability to achieve or maintain growth or profitability, our ability to execute our business strategy successfully, our ability to obtain financing and to pay off our existing liabilities and to fund our working capital needs, our relationship with our existing lenders, our relationship with our customers and suppliers, increased competition, possible system failures and rapid changes in technology and other factors discussed in this Quarterly Report on Form 10-QSB and in our other filings with the SEC.

Business Risks

An investment in our common stock involves a high degree of risk.  Current and potential investors should carefully consider the following risks, and consult with their legal, tax and financial advisors when considering an investment in the Company.

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We Need Additional Financing To Fund Our Operations.

We are actively exploring alternative sources of capital, which could result in additional financing arrangements. The opinion of our independent auditors on our audited financial statements for the year ended March 31, 2005 is subject to a “going concern” qualification and states that our accumulated deficit resulting from recurring losses from operations and a working capital deficiency raises substantial doubt about our ability to continue as a going concern.    If we are unable to obtain additional financing or attain profitability within the next three to six months, we may be unable to continue operating as an independent entity.  There is no assurance that we will be successful. Further, additional financing could take the form of equity or debt offerings, spin-offs, joint ventures or other collaborative relationships that may require us to issue shares or share revenue.  Any such financing strategies would likely impose operating restrictions on us and be dilutive to holders of our common stock, and may not be available on attractive terms or at all.  Further, any additional financing we enter into would be subject to approval by SCP.

We Have A History Of Losses And Our Ability To Be Profitable Depends On A Number Of Factors That We May Be Unable To Control.

We have incurred substantial operating losses since our inception, which has resulted in an accumulated deficit of $58,709,000, as of September 30, 2005. For the years ended March 31, 2005 and March 31, 2004, we incurred net losses of $1,242,000 and $2,324,000, respectively, and we incurred additional net losses of $1,935,000 for the six months ended September 30, 2005.  We expect this working capital deficit to further increase as we anticipate incurring additional losses for the remainder of fiscal 2006. Since our acquisition of certain assets and liabilities of WebWare on September 3, 2003, we have experienced operating losses as we focused our efforts on integration and market enhancement initiatives and the development of our next generation platform, Radiant EMS.  There can be no assurance that revenues will continue to increase from current levels to allow us to become profitable or that any expense reduction actions we may take will allow us to become profitable, or not affect our future revenues or market position. 

Our quarterly sales and operating results have varied significantly, and may vary in the future, as a result of several factors such as:

•Size and timing of software license orders

•Adoption of recently introduced products

•Sales mix of installed versus hosted license revenues

•License revenues as a percentage of our revenues

•Completion of backlog orders

•Successful implementation of a direct sales model

•Acceptance and sign off of service contracts

•Maintenance contract renewal rates

•Seasonality

•Customer budgetary constraints and timelines

•Availability of embedded third party products or tool sets

•Availability of Alliance Partner products

•Financial condition of Alliance Partners

•Variations of Alliance Partner strategies

•Competitive pricing

•Changes in product distribution channels

•Execution of a direct sales strategy

•Variations in expense levels

•General technology trends

•Change of business strategy

•General economic conditions

•Changes in accounting pronouncements

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A significant amount of our license and service revenues are derived from a limited number of customers.  Such orders are typically placed within the specific financial quarter when revenue is recognized, and we expect this trend to continue.  The placement of such orders is typically at the end of a fiscal quarter requiring shipment.  The sales cycle is typically lengthy for a new licensed customer and shorter for an existing customer.  Revenue recognition for service contracts requires the acceptance and sign off from a customer.  The amount of licensed product and service backlogs at the end of a quarter is typically immaterial.  We experience variations in product demand due to customer budgetary constraints that may be imposed within a fiscal year.  Additionally, we may experience changes in product demand due to changes in budgetary timelines.  As a consequence, we experience difficulty in forecasting license and service revenues, particularly at the beginning of the fiscal quarter.

License revenue gross margins are substantially higher than other revenue sources.  The percentage of license revenues to the overall revenues in a fiscal period may materially affect the overall gross margins and profitability for any period.  Variations in expense levels compared to other periods may result in changes in operating income within a fiscal period.

Execution Of Our Business Plan Will Require The Successful Implementation Of Our Direct Sales Strategy.

Historically, we have significantly relied on the indirect sales channel for sales leads and product revenues.  We have invested, and expect to continue to invest, in the development and growth of a direct sales channel.  To the extent that we are not successful in such efforts, future revenue growth and operating margins may be adversely affected.

Because We Have Experienced Losses We May Need Additional Working Capital To Implement Our Business Plan.

We experienced losses from operations of $1,242,000 and $2,324,000 for the fiscal years ended March 31, 2005 and 2004, respectively, and we incurred additional net losses of $1,935,000 for the six months ended September 30, 2005. These losses were funded partially through additional equity offerings and most recently debt offerings.  Based upon our current operating outlook for the remainder of the current fiscal year, we need additional financial resources to meet our short term liquidity requirements.  We are currently in discussions with our major shareholders and SVB regarding the need to either increase our borrowing capacity under the Revolver, or raise capital from other sources.  The increase in our borrowing capacity under our Revolver is subject to a number of risks and uncertainties and to various contingencies, including the agreement of SCP to guarantee our obligations under the expanded Revolver.  We can make no assurances that we will be successful in our efforts to expand our borrowing capacity under our Revolver, or to raise capital from other sources.

We will need additional financing, beyond that which is contemplated above, to further supplement our liquidity needs, especially for intra-quarter liquidity requirements that depend on the timing and amount of monthly cash receipts that are anticipated by our current operating outlook.  Additional financing could take the form of equity or debt offerings, spin-offs, joint ventures or other collaborative relationships that may require us to issue shares or share revenue.  As of September 30, 2005, we had a working capital deficit of $5,108,000 compared to a working capital deficit of $3,708,000 as of March 31, 2005.

If additional funds are raised by issuance of equity securities, dilution to our stockholders will result.  There can be no assurances, however, that we will be successful in obtaining funds from any equity sources.  If additional funds are not available, we may be forced to eliminate or curtail certain of our projects, sell assets, take additional steps to conserve cash and modify the execution of our business plan. These actions may adversely affect our results of operations.

Our Inability To Raise Additional Capital On Acceptable Terms In The Future May Limit Our Growth.

If our capital resources become insufficient to meet future requirements, we will have to raise additional funds to continue the operations, development and commercialization of our technologies. Our inability to raise capital would seriously harm our business and development efforts. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operations. These funds may not be available on favorable terms, or at all. If adequate funds are not available on attractive terms, we may have to restrict our operations significantly or obtain funds by entering into

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agreements on unattractive terms. Further, to the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in dilution to our stockholders.

Our Existing Common Stock Shareholders Face Substantial Dilution Upon the Conversion of Our Outstanding Series B Convertible Preferred Stock and Series C Convertible Preferred Stock.

Our stock is traded on the Over the Counter Bulletin Board (OTCBB) under the symbol “CSYS”.  As of September 30, 2005, we have 5,992,287 common shares outstanding.  As of September 30, 2005, the Company’s Series B Convertible Preferred Stock is convertible into 8,634,080 shares of common stock while the Company’s Series C Convertible Preferred Stock is convertible into approximately 7,982,200 shares of common stock.

The Members Of Our Board Of Directors Own A Significant Percentage Of Our Common Stock And Can Influence Matters Requiring The Vote Of Shareholders.

As of September 30, 2005, our directors and officers, assuming the conversion of all outstanding preferred stock into common stock, owned approximately 17.8 million shares of common stock, representing approximately 79% of the outstanding common stock.  Based on their ownership, our directors and officers have the ability to influence matters requiring a stockholder vote, including the election of directors, the amendment of charter documents, the merger or dissolution of the Company and the sale of all or substantially all of its assets.  Their voting power also may discourage or prevent any proposed takeover.

Our Preferred Stockholders Have Senior Rights In The Event Of Our Liquidation, Dissolution Or Winding-Up.

Our preferred stockholders have senior rights in the event of our liquidation, dissolution or winding-up, including our sale to a third party.  In the event that any liquidation, dissolution or winding-up occurs, our common stockholders would not be entitled to any proceeds of such liquidation, dissolution or winding-up until the liquidation preference of our preferred stockholders is fully satisfied.  As a result, we can provide no assurances that our common stockholders will receive any proceeds in the event of our liquidation, dissolution or winding-up to the extent that the liquidation preference of our preferred stockholders is not fully satisfied.  As of September 30, 2005, the aggregate liquidation preference for all series of preferred stock, excluding the conversion of the outstanding Series C Preferred warrant issued in connection with the guarantee by SCP of our Revolver, was approximately $19.8 million.

The Potential Issuance Of Additional Shares Of Preferred Stock May Negatively Affect The Market Price Of Our Common Stock And Shareholder Rights.

 Our certificate of incorporation empowers the board of directors with the right to determine the designations, rights, preferences and privileges of the holders of one or more series of preferred stock.  The board of directors can issue, without stockholder approval, preferred stock with voting, dividend, conversion, liquidation or other rights, which could adversely affect the voting power and equity interest of common stockholders. 

Because Our Common Stock Has Historically Had Limited Trading Volumes, Our Shareholders May Experience Liquidity Issues.

The average daily trading volume for the three-month trading period ended September 30, 2005 on the OTC bulletin board was approximately 3,000 shares of common stock.  This may impair the ability of our shareholders to achieve liquidity within certain periods of trading. 

Our Former Independent Public Accountants, Goldstein & Morris PC, Resigned Effective October 20, 2004.

On October 20, 2004, Goldstein & Morris PC (“Goldstein & Morris”) informed us that they were resigning as our independent registered public accounting firm.  Prior to October 20, 2004, Goldstein & Morris had not previously advised management or our audit committee of its intention to resign its engagement as our independent registered public accounting firm.  The resignation was not sought or recommended by our audit committee.

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 Following this resignation, the Company’s audit committee engaged a new independent public accounting firm.

On May 25, 2005, the Public Company Accounting Oversight Board took action against Goldstein & Morris by revoking its registration and barring its managing partner, Edward B. Morris, from associating with a registered accounting firm for violating the auditor independence rules of the Sarbanes-Oxley Act with respect to two public companies unrelated to the Company.

SEC rules require the Company to present historical audited financial statements in various SEC filings, such as registration statements, along with Goldstein & Morris’s consent to the inclusion of their audit report in those filings. Despite our best efforts, we have not been able to obtain the consent of Goldstein & Morris to the inclusion of their audit report in the Company’s current filing and, most likely, future filings. The SEC has previously provided relief to allow companies to file reports without the requirement to file a consent of its former independent registered public accounting firm in certain circumstances, but purchasers of securities sold under the registration statements, which were not filed with the consent of former independent registered public accounting firm’s audit report, would not be able to sue the former independent registered public accounting firm pursuant to Section 11(a)(4) of the Securities Act, and therefore, the purchasers’ right of recovery under that section may be limited as a result of the Company’s inability to obtain Goldstein & Morris’s consent.

Our business and our results of operations may be adversely impacted by Goldstein & Morris’s resignation in that:

•We have and expect to continue to incur substantial additional legal and accounting fees relating to disclosure and other regulatory compliance matters associated with the resignation of Goldstein & Morris; and

•Our management has already spent, and is expected to continue to spend, considerable time and effort on matters related to the resignation of Goldstein & Morris.

Our Business Greatly Depends On Indirect Sales.

We depend upon introductions to potential customers by companies with which we maintain strategic alliances for a significant percentage of our sales.  Although we have written agreements with our Alliance Partners and other value added resellers, the agreements do not require customer introductions nor do they provide for minimum required purchases of our products. If any of the companies with which we maintain strategic alliances decide not to refer potential customers to us, our sales may be reduced and operating losses increased.  In addition, there is no assurance that we will be able to maintain our strategic alliances on current terms.  If our Alliance Partners’ strategy, product offerings or financial condition change, or if there are material changes in their sales force or customer support, or if their hardware or software products are unavailable, our revenues may be affected.

We Are Dependent On Licensed Technology.

We depend on certain software products that are licensed from third parties, which are embedded and used in our products.  We believe that there are replacement alternatives for such third party products; however, the interruption of the availability of such products may have an adverse impact on the delivery of our products.  Additionally, we expect our third party vendors to maintain and continually improve their products.  To the extent that such products became obsolete or inoperable with other industry standard applications, we may experience an adverse effect on revenues, operating results and a decrease in customer satisfaction.

We Changed The Name Of The Company And Initiated A New Product Branding.

At the Annual Stockholder Meeting held on October 28, 2004, our stockholders approved a proposal to change the name of the Company to ClearStory Systems, Inc. from INSCI Corp.  We believe that the name change better reflects our current positioning within the ECM market. The name change has required and may continue to require increased expense for legal matters, as well as promotional, marketing and communication materials. We have also initiated an effort to establish a common brand for our products within the ECM market with a new naming convention for certain of our products. To the extent that the name change and product branding cause

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confusion within our target market or client base, we may experience a decrease in revenues and/or an increase in overall expenses.

We Are Offering Our Customers A Hosted Solution.

We host certain of our applications in our hosted data center. The success of the hosted application business model has not been clearly demonstrated, and market acceptance of the hosted center is not ensured.  To the extent that we experience technological problems or challenges, certain of our customers may seek a market alternative, which may limit market adoption of the hosted model.

Our Products And Services Are Dependent On Internet Acceptance, Accessibility, Infrastructure And Security.

We have developed and realized revenues from our Internet-based products and related services.  The Internet is a recent product delivery platform, and as such, is characterized by rapid technology changes, evolving standards and adoption rates.  Future revenues and services are dependent upon the acceptance of the Internet as a recognized method of conducting business.

The accessibility of the Internet has expanded over the last several years.  Technology enhancements and improvements have accelerated the availability of Internet access.  To the extent that continued developments in communications, communication standards, availability and accessibility do not continue to expand, the rate of adoption may decline.  Additionally, the expansion of the Internet as a commercial communications platform typically requires continued capital investment and infrastructure support.  To the extent that capital investment declines or funding for Internet-based programs is reduced, the accessibility and necessary supporting infrastructure may reduce the adoption and performance of the Internet.

If there is an increase in the use of the Internet, or no increase in bandwidth, the infrastructure may not be able to effectively support demand and result in a degradation of commercial acceptance.  Reduced response times may also affect the acceptance of the Internet.

Rapid Technology Changes In Our Industry May Adversely Affect Our Business.

Our business is subject to technological advances and possible product obsolescence.  The market for our products is characterized by rapidly changing technology, intense competition, technological complexity and evolving industry standards.  We must ensure that our products are compatible with those products offered by third-party vendors, including server platforms for our software and various storage devices and platforms.  We have no contracts with third-party vendors; therefore, there is no assurance that we will be able to make our software products compatible with new products that are introduced by others.

We Have Recently Released The Next Generation Of Our Product.

We recently announced the release of our next generation software platform, Radiant EMS, based upon a pure J2EE architecture.  We have also embraced a Web services technology model for the user interfaces and application program interface.  There can be no assurance that such technologies will not be replaced by more contemporary offerings in the marketplace.

The market acceptance of the architecture and related applications cannot be ensured. To the extent that we experience certain product issues or that acceptance is limited, we may incur increased expense to maintain additional product lines and may not realize anticipated savings with the technology model. The performance and market adoption of this platform may alter future product development strategies, which may result in delays to subsequent product introductions. In addition, customers may delay upgrading and migrating to new products. As a result of the above, we may experience reduced revenues and increased expenses in future periods.

Quality Assurance And Product Stability.

We have invested to establish a quality assurance function to limit certain errors, omissions and support incidents. While we believe that we have implemented industry standards and procedures to minimize issues, there

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can be no assurance that released versions of the product will not contain certain issues, the consequence of which cannot be fully determined.

We Depend On Proprietary Technology, Which Is Not Protected By Patents.

Our business depends on proprietary software technology for which we have no patent protection.  Although we require our employees and others to whom we disclose proprietary information to sign non-disclosure agreements, this protection may not be sufficient.  Our business will be adversely affected if anyone improperly uses or discloses our proprietary software or other proprietary information.

We do not hold any patents and rely on copyright and trade secret laws, non-disclosure agreements and contractual provisions to protect our proprietary technology.  These methods afford only limited protection.  Despite the precautions we take, unauthorized parties may attempt to copy or otherwise obtain and use our proprietary technologies, ideas, know-how and other proprietary information without authorization or may independently develop technologies similar or superior to our technologies. Policing unauthorized use of our products may be difficult and costly.  Also, the laws of some foreign countries may not protect our proprietary rights to the same extent as the laws of the United States.  Therefore, we are unable to predict whether our means of protecting our proprietary rights will be adequate.

We believe that our technologies have been developed independent of others.  Nevertheless, third parties may assert infringement claims against us and our technologies may be determined to infringe on the intellectual property rights of others.  We could become liable for damages, or be required to modify our technologies or obtain a license if our technologies are determined to infringe upon the intellectual property rights of others.  We may not be able to modify our technologies or obtain a license in a timely manner, if required, or have the financial or other resources necessary to defend an infringement action.  We would be materially adversely affected if we fail to do any of the foregoing.

Because Of The High Cost, We Lack Product Liability Insurance.

We develop, market, install and service enterprise content management and digital asset management systems.  Failure of our products may result in a claim against us.  Because of the high cost of product liability insurance, we do not maintain insurance to protect against claims associated with the use of our products.  Any claim against us may result in costs to us in defending litigation.  Further, any claim may require management’s time and the use of certain of our resources.

We Depend Upon Certain Key Employees To Develop Our Products.

We do not have the financial resources to compete with larger more established companies to attract and retain certain key technological employees.  The loss of current technological employees or our inability to recruit and retain employees with certain key technology skills could have an adverse effect on product development and our business.

Because Of Certain Provisions In Our By-Laws, Change In Control May Be Difficult.

Our by-laws and the Delaware General Corporation Law contain provisions that may make a change in control of the Company more difficult or delay attempts by others to obtain control of us, even when this may be in the interests of stockholders.  The Delaware General Corporation Law also imposes conditions on certain business combinations with “interested stockholders”, as defined by Delaware law.  Under certain agreements with key personnel, we also have provided the acceleration of vesting of stock options in the event of a change of control and severance payments in the event that the employment of such personnel is terminated without cause following a change in control.  Additionally, we have provided that if a change of control occurs, certain directors will receive immediate vesting of stock options granted under our 1992 and 2004 Directors Option Plans.

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Item 3.Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Exchange Act Rule 15(d)-15(e). Based upon that evaluation, we believe that our disclosure controls and procedures are effective in enabling us to record, process, summarize and report information required to be disclosed in our periodic SEC filings within the required time periods.  Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the periodic reports filed with the SEC is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

During the period covered by this report, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART IIOTHER INFORMATION

Item 6.Exhibits

(a)Exhibits

10.1Loan and Security Agreement, dated as of August 25, 2005, by and between ClearStory Systems, Inc. and Silicon Valley Bank.*

10.2Unconditional Guaranty, dated as of August 25, 2005, made by SCP Private Equity Partners II, L.P. in favor of ClearStory Systems, Inc.*

10.3Series C Convertible Preferred Stock Purchase Warrant, dated as of August 25, 2005, issued by ClearStory Systems, Inc. to SCP Private Equity Partners II, L.P.*

31.1    Certificate pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2Certificate pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1Certificate pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

32.2Certificate pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

*Filed herewith.

**Furnished herewith.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

		ClearStory Systems, Inc.
Dated:	November 14,2005	By: /s/ HENRY F. NELSON
		Henry F. Nelson, President and Chief Executive Officer
Dated:	November 14,2005	By: /s/ STEPHEN A. READ
		Stephen A. Read, Vice President and Chief Financial Officer

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EX-10.1

Exhibit 10.1

LOAN AND SECURITY AGREEMENT

This LOAN AND SECURITY AGREEMENT (this “Agreement”) dated as of August 25, 2005, between SILICON VALLEY BANK, a California chartered bank, with its principal place of business at 3003 Tasman Drive, Santa Clara, California 95054 and with a loan production office located at One Newton Executive Park, Suite 200, 2221 Washington Street, Newton, Massachusetts 02462 (“Bank”) and CLEARSTORY SYSTEMS, INC., a Delaware corporation (“Borrower”), provides the terms on which Bank shall extend credit to Borrower and Borrower shall repay Bank. The parties agree as follows:

1ACCOUNTING AND OTHER TERMS

Accounting terms not defined in this Agreement shall be construed following GAAP.  Except as otherwise specified, calculations and determinations must be made following GAAP.  The term “financial statements” includes the notes and schedules attached thereto.  The terms “including” and “includes” always mean “including (or includes) without limitation,” in this or any Loan Document.  Capitalized terms in this Agreement shall have the meanings set forth in Article 13.  All other terms contained in this Agreement, unless otherwise indicated, shall have the meaning provided by the Code, to the extent such terms are defined therein.

2LOAN AND TERMS OF PAYMENT

2.1Promise to Pay.  Borrower hereby unconditionally promises to pay Bank the unpaid principal amount of all Credit Extensions and interest on the unpaid principal amount of the Credit Extensions as and when due in accordance with this Agreement.

2.1.1Revolving Advances.

(a)Revolving Line Availability.  Bank shall make Advances not exceeding the following (“Revolving Line Availability”): (i) the Revolving Line, minus (ii) the aggregate outstanding balance of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit), plus an amount equal to any Letter of Credit Reserves, minus (iii) the FX Reserve, and minus (iv) the aggregate outstanding Advances hereunder.  Amounts borrowed under this Section may be repaid and reborrowed during the term of this Agreement.

(b)Borrowing Procedure.  To obtain an Advance, Borrower must notify Bank (which notice shall be irrevocable) by facsimile or telephone by 3:00 p.m. Eastern time on the Business Day the Advance is to be made.  If such notification is by telephone, Borrower must promptly confirm the notification by delivering to Bank a completed Payment/Advance Form.  Bank shall credit Advances to Borrower’s deposit account.  Bank may make Advances under this Agreement based on instructions from a Responsible Officer or his or her designee or without instructions if the Advances are necessary to meet Obligations which have become due.  Bank may rely on any telephone notice given by a person whom Bank reasonably believes is a Responsible Officer or designee. Borrower shall indemnify Bank for any loss Bank suffers due to such reliance.

(c)Interest Rate.   The principal amounts outstanding under the Revolving Line shall accrue interest at a per annum rate equal to the aggregate of the Prime Rate and one half of one percent (0.5%), which interest shall be payable monthly.

(d)Termination; Repayment.  The Revolving Line terminates on the Maturity Date, when the principal amount of all Advances, the unpaid interest thereon, and all other Obligations relating to the Revolving Line shall be immediately due and payable.

2.1.2Letters of Credit Sublimit.

(a)Bank shall issue or have issued Letters of Credit for Borrower’s account not exceeding Revolving Line Availability.  The face amount of outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve) may not exceed Revolving Line Availability.  Borrower’s Letter of Credit reimbursement obligation shall be secured by cash on terms acceptable to Bank on and after (i) the Maturity Date, or (ii) the termination of the Revolving Line by Borrower, or (iii) the occurrence of an Event of Default hereunder.  All Letters of Credit shall be in form and substance acceptable to Bank in its sole discretion, and

shall be subject to the terms and conditions of Bank’s standard Application and Letter of Credit Agreement (“Letter of Credit Application”).  Borrower agrees to execute any further documentation in connection with the Letters of Credit as Bank may reasonably request.

(b)The obligation of Borrower to immediately reimburse Bank for drawings made under Letters of Credit shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement and such Letters of Credit, and the Letter of Credit Application.  Borrower shall indemnify, defend, protect, and hold Bank harmless from any loss, cost, expense or liability, including, without limitation, reasonable attorneys’ fees, arising out of or in connection with any Letters of Credit, other than losses, costs, expenses or liabilities arising out of or relating to Bank’s gross negligence or willful misconduct.

(c)Borrower may request that Bank issue a Letter of Credit payable in a currency other than United States Dollars.  If a demand for payment is made under any such Letter of Credit, Bank shall treat such demand as an Advance to Borrower of the equivalent of the amount thereof (plus fees and charges in connection therewith such as wire, cable, SWIFT or similar charges) in United States currency at the then prevailing rate of exchange in San Francisco, California, for sales of that other currency for transfer to the country of which it is the currency.

(d)Upon the issuance of any Letter of Credit payable in a currency other than United States Dollars, Bank shall create a reserve under the Revolving Line for protection against fluctuations in currency exchange rates, in an amount equal to ten percent (10%) of the face amount of such Letter of Credit (the “Letter of Credit Reserve”).  The amount of the Letter of Credit Reserve may be amended by Bank from time to time to account for fluctuations in the exchange rate.  The availability of funds under the Revolving Line shall be reduced by the amount of the Letter of Credit Reserve for as long as such Letter of Credit remains outstanding.

2.1.3Foreign Exchange Sublimit. Borrower may enter into foreign exchange forward contracts with Bank under which Borrower commits to purchase from or sell to Bank a set amount of foreign currency more than one (1) Business Day after the contract date (the “FX Forward Contract”). Bank shall subtract 10% of each outstanding FX Forward Contract (the “FX Reserve”) from the foreign exchange sublimit, which sublimit is a maximum of Revolving Line Availability.  The total FX Forward Contracts at any one time may not exceed ten (10) times the amount of the FX Reserve.  Bank may terminate the FX Forward Contracts if an Event of Default occurs.The Obligations of Borrower relating to this Section may not exceed Revolving Line Availability.

2.1.4Cash Management Services Sublimit.  Borrower may request and utilize the Bank’s cash management services (the “Cash Management Services”), which may include merchant services, direct deposit of payroll, business credit card, and check cashing services identified in the various cash management services agreements related to such Cash Management Services.  The maximum amount of Obligations relating to Cash Management Services shall not exceed Revolving Line Availability (the “Cash Management Services Sublimit”).  The aggregate amounts utilized under the Cash Management Services Sublimit shall at all times reduce the amount otherwise available for Credit Extensions under the Revolving Line.  Any amounts Bank pays on behalf of Borrower or any amounts that are not paid by Borrower to Bank for any Cash Management Services will be treated as Advances under the Revolving Line and will accrue interest at the interest rate applicable to Advances.

2.1.5Undisbursed Credit Extensions.  Bank’s obligation to lend the undisbursed portion of the Obligations shall terminate if, in Bank’s sole discretion, there has been a Material Adverse Change, or there has been any material adverse deviation by Borrower from the most recent business plan of Borrower presented to and accepted by Bank prior to the execution of this Agreement.

2.2Interest Rate.

(a)Default Rate. After an Event of Default, Obligations shall bear interest at five percent (4.0%) above the rate effective immediately before the Event of Default. 

(b)Adjustment to Interest Rate. The applicable interest rate hereunder shall increase or decrease when the Prime Rate changes.

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(c)360-Day Year.  Interest is computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed.

(d)Debit of Accounts.  Bank may debit any of Borrower’s deposit or operating accounts, including Account Number XXXXXXXXXX, for principal and interest payments when due, or any other amounts Borrower owes Bank, when due. Bank shall promptly notify Borrower after it debits Borrower’s accounts.  These debits shall not constitute a set off.

(e)Payments.  Interest is payable monthly on the first calendar day of each month.  Payments received after 12:00 noon Eastern time are considered received at the opening of business on the next Business Day.  When a payment is due on a day that is not a Business Day, the payment is due the next Business Day and additional fees or interest, as applicable, shall continue to accrue.

(f)Prepayment.  Borrower has the option, at any time upon thirty (30) days’ prior written notice to Bank, to terminate this Agreement by paying to Bank, in cash, the Obligations in full, without premium or penalty. If Borrower has sent a notice of termination pursuant to the provisions of this Section, then Bank’s obligations to extend credit hereunder shall terminate and Borrower shall be obligated to repay the Obligations in full, without premium or penalty, on the date set forth as the date of termination of this Agreement in such notice (unless due earlier pursuant to this Agreement). 

2.3Fees.  Borrower shall pay to Bank:

(a)Commitment Fee.  A fully earned, non-refundable commitment fee of $15,000.00 due and payable on the Closing Date; and

(b)Unused Revolving Line Facility Fee.  In addition to the foregoing, as compensation for Bank’s maintenance of sufficient funds available for such purpose, Bank shall have earned a fee (the “Unused Revolving Line Facility Fee”), which fee shall be paid quarterly, in arrears, on a calendar year basis, in an amount equal to one quarter of one percent (0.25%) per annum of the average unused portion of the Revolving Line, as reasonably determined by Bank. Borrower shall not be entitled to any credit, rebate or repayment of any Unused Revolving Line Facility Fee previously earned by Bank pursuant to this Section notwithstanding any termination of the within Agreement, or suspension or termination of Bank’s obligation to make loans and advances hereunder; and

(c)Bank Expenses.  All Bank Expenses (including reasonable attorneys’ fees and expenses) incurred through and after the Closing Date, when due.

3CONDITIONS OF LOANS

3.1Conditions Precedent to Initial Credit Extension.  Bank’s obligation to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, such documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate, including, without limitation, the following:

(a)this Agreement;

(b)a certificate of the Secretary of Borrower with respect to articles, bylaws, incumbency and resolutions authorizing the execution and delivery of this Agreement, the Loan Documents, and all transactions related thereto;

(c)Perfection Certificate by Borrower;

(d)a legal opinion of Borrower’s and Guarantor’s counsel (authority and enforceability);

(e)Guaranty by the Guarantor;

(f)Subordination Agreement from Guarantor;

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(g)consent of Senior Lender;

(h)landlord’s waiver;

(i)Securities Account Control Agreement;

(j)insurance certificate;

(k)payment of the fees and Bank Expenses;

(l)Certificate of Foreign Qualification (if applicable);

(m)Certificate of Good Standing/Legal Existence; and

(n)such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate.

3.2Conditions Precedent to all Credit Extensions.  Bank’s obligations to make each Credit Extension, including the initial Credit Extension, is subject to the following:

(a)timely receipt of any Payment/Advance Form; and

(b)the representations and warranties in Article 5 shall be true in all material respects on the date of the Payment/Advance Form and on the effective date of each Credit Extension and no Event of Default shall 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 in Article 5 remain true in all material respects; provided, however, that those representations and warranties expressly referring to another date shall be true, in all material respects, only as of such date.

4CREATION OF SECURITY INTEREST

4.1Grant of Security Interest.  Borrower hereby grants Bank, to secure the payment and performance in full of all of the Obligations and the performance of each of Borrower’s duties under the Loan Documents, a continuing security interest in, and pledges and assigns to Bank, the Collateral, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof.  Subject to Section 5.2, Borrower warrants and represents that the security interest granted herein shall be a first priority security interest in the Collateral.

Except as noted on the Perfection Certificate, Borrower is not a party to, nor is bound by, any material license (other than over the counter software that is commercially available to the public) or other material agreement with respect to which Borrower is the licensee that prohibits or otherwise restricts Borrower from granting a security interest in Borrower’s interest in such license or agreement or any other property.  Borrower shall provide written notice to Bank within ten (10) days of entering or becoming bound by, any such license or agreement which is reasonably likely to have a material impact on Borrower’s business or financial condition.  Borrower shall take such steps as Bank reasonably requests to obtain the consent of, authorization by or waiver by, any person whose consent or waiver is necessary for all such licenses or contract rights to be deemed “Collateral” and for Bank to have a security interest in it that might otherwise be restricted or prohibited by law or by the terms of any such license or agreement, whether now existing or entered into in the future.

If Borrower shall, at any time, become aware that it has acquired a material commercial tort claim, Borrower shall promptly notify Bank in a writing signed by Borrower which provides a brief summary of the details thereof and grant to Bank in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance reasonably satisfactory to Bank.

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4.2Termination by Borrower.

Borrower may terminate this Agreement by sending written notice to Bank and paying in full all Obligations.  If this Agreement is terminated, Bank’s lien and security interest in the Collateral shall continue until Borrower fully satisfies the Obligations.

4.3Authorization to File Financing Statements.  Borrower hereby authorizes Bank to file UCC financing statements, without notice to Borrower, with all appropriate jurisdictions in order to perfect or protect Bank’s interest or rights hereunder, including a notice that any disposition of the Collateral, by either Borrower or any other Person, shall be deemed to violate the rights of Bank under the Code.

5REPRESENTATIONS AND WARRANTIES

Borrower represents and warrants to Bank as follows:

5.1Due Organization and Authorization.  Borrower, and each Subsidiary, is duly existing and in good standing in its state of formation and qualified and licensed to do business in, and in good standing in, any state in which the conduct of its business or its ownership of property requires that it be qualified except where the failure to do so could not reasonably be expected to cause a Material Adverse Change.  In connection with this Agreement, Borrower delivered to Bank a perfection certificate signed by Borrower (the “Perfection Certificate”).  Borrower represents and warrants to Bank that: (a) Borrower’s exact legal name is that indicated on the Perfection Certificate and on the signature page hereof; and (b) Borrower is an organization of the type, and is organized in the jurisdiction, set forth in the Perfection Certificate; and (c) the Perfection Certificate accurately sets forth Borrower’s organizational identification number or accurately states that Borrower has none; and (d) the Perfection Certificate accurately sets forth Borrower’s place of business, or, if more than one, its chief executive office as well as Borrower’s mailing address if different, and (e) all other information set forth on the Perfection Certificate pertaining to Borrower is accurate and complete.  If Borrower does not now have an organizational identification number, but later obtains one, Borrower shall forthwith notify Bank of such organizational identification number.

The execution, delivery and performance of the Loan Documents have been duly authorized, and do not conflict with Borrower’s organizational documents, nor shall they constitute an event of default under any material agreement by which Borrower is bound.  Borrower is not in default under any agreement to which or by which it is bound in which the default could reasonably be expected to cause a Material Adverse Change.

5.2Collateral.  Borrower has good title to the Collateral, free of Liens except Permitted Liens.  Borrower has no deposit account, other than the deposit accounts with Bank and deposit accounts described in the Perfection Certificate. The Accounts are bona fide, existing obligations, and the service or property has been performed or delivered to the account debtor or its agent for immediate shipment to and unconditional acceptance by the account debtor. The Collateral is not in the possession of any third party bailee (such as a warehouse).  Except as hereafter disclosed to Bank in writing by Borrower, none of the components of the Collateral shall be maintained at locations other than as provided in the Perfection Certificate.  In the event that Borrower, after the date hereof, intends to store or otherwise deliver any portion of the Collateral to a bailee, then Borrower will first receive the written consent of Bank and such bailee must acknowledge in writing that the bailee is holding such Collateral for the benefit of Bank. All Inventory is in all material respects of good and marketable quality, free from material defects.

5.3Litigation.  Except as shown in the Perfection Certificate, there are no actions or proceedings pending or, to the knowledge of Borrower’s Responsible Officers or legal counsel, threatened by or against Borrower or any Subsidiary in which an adverse decision would reasonably be expected to cause a Material Adverse Change.

5.4No Material Deterioration in Financial Statements.  All consolidated financial statements for Borrower and any Subsidiary delivered to Bank fairly present in all material respects Borrower’s consolidated financial condition and Borrower’s consolidated results of operations as of and for the periods set forth therein.  There has not been any material deterioration in Borrower’s consolidated financial condition since the date of the most recent financial statements submitted to Bank.

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5.5Solvency.  The fair salable value of Borrower’s assets (including goodwill minus disposition costs) exceeds the fair value of its liabilities; Borrower is not left with unreasonably small capital after the transactions in this Agreement; and Borrower is able to pay its debts (including trade debts) as they mature.

5.6Regulatory Compliance.  Borrower is not an “investment company” or a company “controlled” by an “investment company” under the Investment Company Act of 1940.  Borrower is not engaged as one of its important activities in extending credit for margin stock (under Regulations X, T and U of the Federal Reserve Board of Governors).  Borrower has complied in all material respects with the Federal Fair Labor Standards Act.  Borrower has not violated any laws, ordinances or rules, the violation of which could reasonably be expected to cause a Material Adverse Change.  To Borrower’s knowledge, none of Borrower’s or any Subsidiary’s properties or assets has been used by Borrower or any Subsidiary or by previous Persons, in disposing, producing, storing, treating, or transporting any hazardous substance other than legally, except where failure to do so would not reasonably be expected to cause a Material Adverse Change. Borrower and each Subsidiary has timely filed all required material 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.  Borrower and each Subsidiary has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all government authorities that are necessary to continue its business as currently conducted except where the failure to obtain or make such consents, declarations, notices or filings would not reasonably be expected to cause a Material Adverse Change.

5.7Subsidiaries; Investments.  Borrower does not own any stock, partnership interest or other equity securities except for Permitted Investments.

5.8Full Disclosure.  No written representation, warranty or other statement of Borrower in any certificate or written statement given to Bank taken together with all such written certificates and written statements given to Bank contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements not misleading (it being recognized by Bank that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not viewed as facts and that actual results during the period or periods covered by such projections and forecasts may differ from the projected or forecasted results).

6AFFIRMATIVE COVENANTS

Borrower shall do all of the following:

6.1Government Compliance.  Borrower shall maintain its, and all Subsidiaries’, legal existence and good standing in their respective jurisdictions of formation and maintain qualification in each jurisdiction in which the failure to so qualify would reasonably be expected to have a material adverse effect on Borrower’s business or operations.  Borrower shall comply, and have each Subsidiary comply, with all laws, ordinances and regulations to which it is subject, noncompliance with which could have a material adverse effect on Borrower’s business or operations or would reasonably be expected to cause a Material Adverse Change.

6.2Financial Statements, Reports, Certificates.

(a)Borrower shall deliver to Bank: (i) as soon as available, but no later than thirty (30) days after the last day of each month, a company prepared consolidated balance sheet and income statement covering Borrower’s consolidated operations during the period certified by a Responsible Officer and in a form acceptable to Bank, together with aged listings of accounts receivable (by invoice date); (ii) as soon as available, but no later than one hundred twenty (120) days after the last day of Borrower’s fiscal year, audited consolidated financial statements of Borrower prepared under GAAP, consistently applied, together with an unqualified opinion on the financial statements from an independent certified public accounting firm reasonably acceptable to Bank; (iii) as soon as available, but no later than thirty (30) days after approval of same by Borrower’s Board of Directors, Borrower’s annual balance sheet and income statement projections; (iv) within five (5) days of filing, Borrower shall provide Bank copies of, or electronic notice of links to, all statements, reports and notices made available to Borrower’s security holders or to any holders of Subordinated Debt and all reports on Form 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission; (v) a prompt report of any legal actions pending or threatened against

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Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of One Hundred Thousand Dollars ($100,000.00) or more; and (vi) other financial information reasonably requested by Bank.

(b)Within thirty (30) days after the last day of each quarter, Borrower shall deliver to Bank, a Compliance Certificate signed by a Responsible Officer in the form of Exhibit C.

6.3Inventory; Returns.  Borrower shall keep all Inventory in good and marketable condition, free from material defects. Borrower must promptly notify Bank of all returns, recoveries, disputes and claims that involve more than Fifty Thousand Dollars ($50,000.00).

6.4Taxes.  Borrower shall make, and cause each Subsidiary to make, timely payment of all material federal, state, and local taxes or assessments (other than taxes and assessments which Borrower is contesting in good faith, with adequate reserves maintained in accordance with GAAP) and will deliver to Bank, on demand, appropriate certificates attesting to such payments.

6.5Insurance.  Borrower shall keep its business and the Collateral insured for risks and in amounts, and as Bank may reasonably request.  Insurance policies shall be in a form, with companies, and in amounts that are satisfactory to Bank in its reasonable discretion. All property policies shall have a lender’s loss payable endorsement showing Bank as an additional loss payee and all liability policies shall show Bank as an additional insured and all policies shall provide that the insurer must give Bank at least twenty (20) days notice before canceling its policy.  At Bank’s request, Borrower shall deliver certified copies of policies and evidence of all premium payments. Proceeds payable under any policy shall, at Bank’s option, be payable to Bank on account of the Obligations. Notwithstanding the foregoing, so long as no Event of Default has occurred and is continuing, Borrower shall have the option of applying the proceeds of any casualty policy up to $200,000.00, in the aggregate, toward the replacement or repair of destroyed or damaged property; provided that (i) any such replaced or repaired property (a) shall be of equal or like value as the replaced or repaired Collateral and (b) shall be deemed Collateral in which Bank has been granted a first priority security interest and (ii) after the occurrence and during the continuation of an Event of Default all proceeds payable under such casualty policy shall, at the option of Bank, be payable to Bank on account of the Obligations.  If Borrower fails to obtain insurance as required under Section 6.5 or to pay any amount or furnish any required proof of payment to third persons and Bank, Bank may make all or part of such payment or obtain such insurance policies required in Section 6.5, and take any action under the policies Bank reasonably deems prudent.

6.6Accounts.

(a)In order to permit Bank to monitor Borrower’s financial performance and condition, Borrower shall maintain Borrower’s primary depository, operating and securities accounts with Bank or SVB Securities, and a majority of Borrower’s cash or securities in excess of that amount used for Borrower’s operations shall be maintained at Bank or SVB Securities.

(b)Borrower shall identify to Bank, in writing, any bank or securities account opened by Borrower with any institution other than Bank.  In addition, for each such domestic account that Borrower at any time opens or maintains, Borrower shall, at Bank’s request and option, pursuant to an agreement in form and substance acceptable to Bank, cause the depository bank or securities intermediary to agree that such account is the collateral of Bank, and enter into a “control agreement” pursuant to the terms hereunder. Notwithstanding the foregoing, provided that no Event of Default has occurred or is continuing, Borrower may maintain up to a maximum of $100,000.00, in the aggregate at any time, at institutions other than Bank without entering into a control agreement. The provisions of the previous sentence shall not apply to deposit accounts exclusively used for payroll, payroll taxes and other employee wage and benefit payments to or for the benefit of Borrower’s employees.

6.7Financial Covenants.

(a)Borrower Net Revenue. Borrower shall maintain at all times, to be tested as of the last day of each quarter for the prior six (6) month period, minimum aggregate net revenue of at least: (i) $4,100,000.00 for the six (6) month period ending September 30, 2005, (ii) $X,XXX,000.00 for the six (6) month period ending December 31, 2005, (iii) $X,XXX,000.00 for the six (6) month period ending March 31, 2006, and (iv) the greater of (A) $X,XXX,000.00, or (B) 80% of the projections set forth in the plan approved by Borrower’s Board or

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Directors, for the six (6) month period ending June 30, 2006, and for the six (6) month period ending as of the last day of each quarter thereafter.  

(b)Guarantor Liquidity.  Beginning with the quarter ending September 30, 2005, the Guarantor shall maintain, at all times to be tested as of the last day of each quarter, Unencumbered Capital, in an amount equal to or greater than three (3) times the aggregate outstanding Obligations; provided, however, that if, at any time, Unencumbered Capital is less than three (3) times the aggregate outstanding Obligations, Guarantor shall, as soon as possible but in no event later than thirty (30) days thereafter, either (i) deposit and maintain with Bank, at all times thereafter, cash in such amounts as Bank determines will secure the full amount of the outstanding Obligations, or (ii) provide Bank with an irrevocable letter of credit, on terms and conditions reasonably acceptable to Bank in its sole discretion, from a financial institution reasonably acceptable to Bank in its sole discretion, and in such amount as Bank determines will secure the full amount of the outstanding Obligations.   

6.8Further Assurances.  Borrower shall execute any further instruments and take further action as Bank reasonably requests to perfect or continue Bank’s security interest in the Collateral or to effect the purposes of this Agreement.

7NEGATIVE COVENANTS

Borrower shall not do any of the following without Bank’s prior written consent which shall not be unreasonably withheld:

7.1Dispositions.  Convey, sell, lease, transfer, assign or otherwise dispose of (collectively a “Transfer”), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, including the Intellectual Property, except for Transfers of (a) Inventory in the ordinary course of business; (b) non-exclusive licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries in the ordinary course of business; or (c) worn-out or obsolete Equipment.  Borrower shall not enter into an agreement with any Person other than Bank which restricts the subsequent granting of a security interest in the Intellectual Property.

7.2Changes in Business, Ownership, Management or Business Locations.  Engage in or permit any of its Subsidiaries to engage in any business other than the businesses currently engaged in by Borrower or reasonably related thereto, or have a material change in its ownership such that greater than fifty percent (50%) of Borrower’s voting stock as of the Closing Date is transferred (other than by the sale of Borrower’s equity securities in a public offering or to venture capital investors so long as Borrower identifies to Bank the venture capital investors prior to the closing of the investment), or management.  Borrower shall not, without prior written notice to Bank: (a) relocate its chief executive office, or (b) change its jurisdiction of organization, or (c) change its organizational structure or type, or (d) change its legal name, or (e) change any organizational number (if any) assigned by its jurisdiction of organization.

7.3Mergers or Acquisitions.  Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with any other Person, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person, except where (a) such transactions do not in the aggregate exceed $500,000.00 (including the assumption of any indebtedness), (b) no Event of Default has occurred and is continuing or would exist after giving effect to the transactions, and (c) Borrower is the surviving legal entity. A Subsidiary may merge or consolidate into another Subsidiary or into Borrower.

7.4Indebtedness.  Create, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so, other than Permitted Indebtedness.

7.5Encumbrance.  Create, incur, or allow any Lien on any of its property, including the Intellectual Property, or assign or convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries to do so, except for Permitted Liens, or permit any Collateral not to be subject to the first priority security interest granted herein.  The Collateral may also be subject to Permitted Liens.

7.6Distributions; Investments.  (a) Directly or indirectly acquire or own any Person, or make any Investment in any Person, other than Permitted Investments, or permit any of its Subsidiaries to do so; or (b) pay any dividends or make any distribution or payment or redeem, retire or purchase any capital stock, except for

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repurchases of stock from former employees or directors of Borrower under the terms of applicable repurchase agreements in an aggregate amount not to exceed $50,000.00 in the aggregate in any fiscal year, provided that no Event of Default has occurred, is continuing or would exist after giving effect to the repurchases.

7.7Transactions with Affiliates.  Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower, except for transactions that are in the ordinary course of Borrower’s business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm’s length transaction with a non-affiliated Person.

7.8Subordinated Debt.  Make or permit any payment on any Subordinated Debt, except under the terms of the Subordinated Debt, or amend any provision in any document relating to the Subordinated Debt

7.9Compliance.  (a) Become an “investment company” or a company controlled by an “investment company”, under the Investment Company Act of 1940 or undertake as one of its important activities extending credit to purchase or carry margin stock, or use the proceeds of any Credit Extension for that purpose; (b) fail to meet the minimum funding requirements of ERISA, or permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; or (c) fail to comply in any material respect with the Federal Fair Labor Standards Act or violate any other law or regulation, if the violation would reasonably be expected to cause a Material Adverse Change, or permit any of its Subsidiaries to do so.

8EVENTS OF DEFAULT

Any one of the following shall constitute an event of default hereunder (an “Event of Default”):

8.1Payment Default.  Borrower fails to pay any of the Obligations within three (3) days after their due date. During such three (3) day period the failure to cure the default shall not constitute an Event of Default (but no Credit Extension shall be made during such cure period).

8.2Covenant Default.  (a)  Borrower fails or neglects to perform any obligation in Section 6.2, 6.6, 6.7, or 6.8 or violates any covenant in Article 7;  or (b)  Borrower fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant or agreement contained in this Agreement, any of the Loan Documents, or in any present or future agreement between Borrower and Bank and as to any default under such other material term, provision, condition, covenant or agreement that can be cured, has failed to cure the default within ten (10) days after the occurrence thereof; provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by Borrower be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default (provided that no Credit Extensions shall be made during such cure period).  Grace periods provided under this Section shall not apply, among other things, to financial covenants or any other covenants that are required to be satisfied, completed or tested by a date certain.

8.3Material Adverse Change.  A Material Adverse Change occurs.

8.4Attachment.  (a) Any material portion of Borrower’s assets is attached, seized, levied on, or comes into possession of a trustee or receiver and the attachment, seizure or levy is not removed in ten (10) days; (b) the service of process upon Borrower seeking to attach, by trustee or similar process, any funds of Borrower on deposit with Bank, or any entity under control of Bank (including a subsidiary); (c) Borrower is enjoined, restrained, or prevented by court order from conducting a material part of its business; (d) a judgment or other claim becomes a Lien on a material portion of Borrower’s assets; or (e) a notice of lien, levy, or assessment is filed against any of Borrower’s assets by any government agency and not paid within ten (10) days after Borrower receives notice.  These are not Events of Default if stayed or if a bond is posted pending contest by Borrower (but no Credit Extensions shall be made during the cure period).

8.5Insolvency.  (a) Borrower is unable to pay its debts (including trade debts) as they become due or otherwise becomes insolvent; (b) Borrower begins an Insolvency Proceeding; or (c) an Insolvency Proceeding is

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begun against Borrower and not dismissed or stayed within thirty (30) days (but no Credit Extensions shall be made before any Insolvency Proceeding is dismissed).

8.6Other Agreements.  If there is a default in any agreement to which Borrower is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of One Hundred Thousand Dollars ($100,000.00) or that would result in a Material Adverse Change.

8.7Judgments.  If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least One Hundred Thousand Dollars ($100,000.00) shall be rendered against Borrower and shall remain unsatisfied and unstayed for a period of ten (10) days (provided that no Credit Extensions will be made prior to the satisfaction or stay of such judgment).

8.8Misrepresentations.  If Borrower or any Person acting for Borrower makes any material misrepresentation or material misstatement now or later in any warranty or representation in this Agreement or in any writing delivered to Bank or to induce Bank to enter this Agreement or any Loan Document.

8.9Subordinated Debt. A default or breach occurs under any agreement between Borrower and any creditor of Borrower that signed a subordination agreement with Bank, or any creditor that has signed a subordination agreement with Bank breaches any terms of the subordination agreement.

8.10Guaranty.  (a) Any guaranty of any Obligations terminates or ceases for any reason to be in full force; or (b) any Guarantor does not perform any obligation or covenant under any guaranty of the Obligations; or (c) any material misrepresentation or material misstatement exists now or later in any warranty or representation in any guaranty of the Obligations or in any certificate delivered to Bank in connection with the guaranty; or (d) any circumstance described in Articles 7 or 8 occurs to any Guarantor, or (e) the liquidation, winding up, termination of existence, or insolvency of any Guarantor.

9BANK’S RIGHTS AND REMEDIES

9.1Rights and Remedies.  When an Event of Default occurs and continues, Bank may, without notice or demand, do any or all of the following:

(a)Declare all Obligations immediately due and payable (but if an Event of Default described in Section 8.5 occurs all Obligations are immediately due and payable without any action by Bank);

(b)Stop advancing money or extending credit for Borrower’s benefit under this Agreement or under any other agreement between Borrower and Bank;

(c)Demand that Borrower: (i) deposit cash with Bank in an amount equal to the aggregate amount of any Letters of Credit remaining undrawn, as collateral security for the repayment of any future drawings under such Letters of Credit, and Borrower shall forthwith deposit and pay such amounts, and (ii) pay in advance all Letter of Credit fees scheduled to be paid or payable over the remaining term of any Letters of Credit;

(d)Settle or adjust disputes and claims directly with account debtors for amounts, on terms and in any order that Bank considers advisable and notify any Person owing Borrower money of Bank’s security interest in such funds and verify and/or collect the amounts owed by such account debtors.  After the occurrence of an Event of Default, any amounts received by Borrower shall be held in trust by Borrower for Bank, and, if requested by Bank, Borrower shall immediately deliver such receipts to Bank in the form received from the account debtor, with proper endorsements for deposit; 

(e)Make any payments and do any acts it considers necessary or reasonable to protect its security interest in the Collateral.  Borrower shall assemble the Collateral if Bank requests and make it available as Bank designates.  Bank may enter premises where the Collateral is located, take and maintain possession of any part of the Collateral, and pay, purchase, contest, or compromise any Lien which appears to be prior or superior to its

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security interest and pay all expenses incurred. Borrower grants Bank a license to enter and occupy any of its premises, without charge, to exercise any of Bank’s rights or remedies;

(f)Apply to the Obligations any (i) balances and deposits of Borrower it holds, or (ii) any amount held by Bank owing to or for the credit or the account of Borrower;

(g)Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell the Collateral. Bank is hereby granted a non-exclusive, royalty-free license or other right to use, without charge, Borrower’s labels, Patents, Copyrights, Mask Works, rights of use of any name, trade secrets, trade names, Trademarks, service marks, and advertising matter, or any similar property as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank’s exercise of its rights under this Section, Borrower’s rights under all licenses and all franchise agreements inure to Bank’s benefit;

(h)Deliver a notice of exclusive control, any entitlement order, or other directions or instructions pursuant to any control agreement or similar agreements providing control of any Collateral; and

(i)Exercise all rights and remedies and dispose of the Collateral according to the Code.

9.2Power of Attorney.  Borrower hereby irrevocably appoints Bank as its lawful attorney-in-fact, to be effective upon the occurrence and during the continuance of an Event of Default, to:  (a) endorse Borrower’s name on any checks or other forms of payment or security; (b) sign Borrower’s name on any invoice or bill of lading for any Account or drafts against account debtors; (c) settle and adjust disputes and claims about the Accounts directly with account debtors, for amounts and on terms Bank determines reasonable; (d) make, settle, and adjust all claims under Borrower’s insurance policies; and (e) transfer the Collateral into the name of Bank or a third party as the Code permits.  Borrower hereby appoints Bank as its lawful attorney-in-fact to sign Borrower’s name on any documents necessary to perfect or continue the perfection of any security interest regardless of whether an Event of Default has occurred until all Obligations have been satisfied in full and Bank is under no further obligation to make Credit Extensions hereunder.  Bank’s foregoing appointment as Borrower’s attorney in fact, and all of Bank’s rights and powers, coupled with an interest, are irrevocable until all Obligations have been fully repaid and performed and Bank’s obligation to provide Credit Extensions terminates.

9.3Bank Expenses.  Any amounts paid by Bank as provided herein shall constitute Bank Expenses and are immediately due and payable, and shall bear interest at the then applicable rate hereunder and be secured by the Collateral.  No payments by Bank shall be deemed an agreement to make similar payments in the future or Bank’s waiver of any Event of Default.

9.4Bank’s Liability for Collateral.  So long as Bank complies with reasonable banking practices regarding the safekeeping of Collateral and Section 9-207 of the Code, Bank shall not be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c) any diminution in the value of the Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or other Person.  Borrower bears all risk of loss, damage or destruction of the Collateral.

9.5Remedies Cumulative.  Bank’s rights and remedies under this Agreement, the Loan Documents, and all other agreements are cumulative.  Bank has all rights and remedies provided under the Code, by law, or in equity. Bank’s exercise of one right or remedy is not an election, and Bank’s waiver of any Event of Default is not a continuing waiver. Bank’s delay is not a waiver, election, or acquiescence. No waiver hereunder shall be effective unless signed by Bank and then is only effective for the specific instance and purpose for which it was given.

9.6Demand Waiver.  Borrower waives demand, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees held by Bank on which Borrower is liable.

10NOTICES

All notices or demands by any party to this Agreement or any related agreement must be in writing and be personally delivered or sent by an overnight delivery service, by certified mail, postage prepaid, return receipt

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requested, or by facsimile at the addresses listed below.  Either Bank or Borrower may change its notice address by giving the other party written notice.

If to Borrower:	CLEARSTORY SYSTEMS, INC.
	One Research Drive, Suite 200B
	Westborough, Massachusetts 01581
	Attn: Mr. Stephen Read
	FAX: (508) 366-0431
If to Bank:	Silicon Valley Bank
	One Newton Executive Park, Suite 200
	2221 Washington Street
	Newton, Massachusetts 02462
	Attn: Ms. Irina Case
	Fax: (617) 969-5973
with a copy to:	Riemer & Braunstein LLP
	Three Center Plaza
	Boston, Massachusetts 02108
	Attn: David A. Ephraim, Esquire
	FAX: (617) 880-3456

11CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER

Massachusetts law governs the Loan Documents without regard to principles of conflicts of law.  Borrower and Bank each submit to the exclusive jurisdiction of the State and Federal courts in Massachusetts.  NOTWITHSTANDING THE FOREGOING, BANK SHALL HAVE THE RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION WHICH BANK DEEMS NECESSARY OR APPROPRIATE IN ORDER TO REALIZE ON THE COLLATERAL OR TO OTHERWISE ENFORCE BANK’S RIGHTS AGAINST BORROWER OR ITS PROPERTY.

BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT.  EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.

12GENERAL PROVISIONS

12.1Successors and Assigns.  This Agreement binds and is for the benefit of the successors and permitted assigns of each party.  Borrower may not assign this Agreement or any rights or Obligations under it without Bank’s prior written consent which may be granted or withheld in Bank’s discretion.  Bank has the right, without the consent of or notice to Borrower, to sell, transfer, assign, negotiate, or grant participation in all or any part of, or any interest in, Bank’s obligations, rights and benefits under this Agreement, the Loan Documents or any related agreement.

12.2Indemnification.  Borrower hereby indemnifies, defends and holds Bank and its directors, officers, employees and agents harmless against:  (a) all obligations, demands, claims, and liabilities asserted by any other party or Person in connection with the transactions contemplated by the Loan Documents; and (b) all losses or Bank Expenses incurred, or paid by Bank from, arising from transactions between Bank and Borrower (including reasonable attorneys’ fees and expenses), except for losses caused by Bank’s gross negligence or willful misconduct.

12.3Right of Set Off.   Borrower hereby grants to Bank, a lien, security interest and right of set off as security for all Obligations to Bank, whether now existing or hereafter arising upon and against all deposits, credits,

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collateral and property, now or hereafter in the possession, custody, safekeeping or control of Bank or any entity under the control of Bank (including a Bank subsidiary) or in transit to any of them.  At any time after the occurrence and during the continuance of an Event of Default, without demand or notice, Bank may set off the same or any part thereof and apply the same to any liability or obligation of Borrower even though unmatured and regardless of the adequacy of any other collateral securing the Obligations.  ANY AND ALL RIGHTS TO REQUIRE BANK TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF BORROWER ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.

12.4Time of Essence.  Time is of the essence for the performance of all Obligations in this Agreement.

12.5Severability of Provision.  Each provision of this Agreement is severable from every other provision in determining the enforceability of any provision.

12.6Amendments in Writing; Integration.  All amendments to this Agreement must be in writing signed by both Bank and Borrower.  This Agreement and the Loan Documents represent the entire agreement about this subject matter, and supersede prior negotiations or agreements.  All prior agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of this Agreement and the Loan Documents merge into this Agreement and the Loan Documents.

12.7Counterparts.  This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, are an original, and all taken together, constitute one Agreement.

12.8Survival.  All covenants, representations and warranties made in this Agreement continue in full force until this Agreement has terminated pursuant to its terms, and all Obligations have been satisfied..  The obligation of Borrower in Section 12.2 to indemnify Bank shall survive until the statute of limitations with respect to such claim or cause of action shall have run.

12.9Confidentiality.  In handling any confidential information, Bank shall 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 business with Borrower; (b) to prospective transferees or purchasers of any interest in the Credit Extensions (provided, however, Bank shall use commercially reasonable efforts in obtaining such prospective transferee’s or purchaser’s agreement to the terms of this provision); (c) as required by law, regulation, subpoena, or other order, (d) as required in connection with Bank’s examination or audit; and (e) as Bank considers appropriate in exercising remedies under this Agreement.  Confidential information does not include information that either: (i) 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 (ii) is disclosed to Bank by a third party, if Bank does not know that the third party is prohibited from disclosing the information.

13DEFINITIONS

13.1Definitions.  In this Agreement:

“Accounts” are all existing and later arising accounts, contract rights, and other obligations owed Borrower in connection with its sale or lease of goods (including licensing software and other technology) or provision of services, all credit insurance, guaranties, other security and all merchandise returned or reclaimed by Borrower and Borrower’s Books relating to any of the foregoing, as such definition may be amended from time to time according to the Code.

“Advance” or “Advances” is a loan advance (or advances) under the Revolving Line.

“Affiliate” is a Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person’s senior executive officers, directors, partners and, for any Person that is a limited liability company, that Person’s managers and members.

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 “Bank Expenses” are all audit fees and expenses and reasonable costs or expenses (including reasonable attorneys’ fees and expenses) for preparing, negotiating, defending and enforcing the Loan Documents (including appeals or Insolvency Proceedings).

“Borrower’s Books” are all Borrower’s books and records including ledgers, records regarding Borrower’s assets or liabilities, the Collateral, business operations or financial condition and all computer programs or storage or any equipment containing the information.

“Business Day” is any day that is not a Saturday, Sunday or a day on which Bank is closed.

“Callable Capital” is the remaining amount of capital, excluding capital attributable to Defaulting Partners, which Guarantor would be able to obtain from the General Partner and the Limited Partners, without condition, upon proper issuance of capital call notices in accordance with the Partnership Agreement.

“Cash Management Services” is defined in Section 2.1.4.

“Cash Management Services Sublimit” is defined in Section 2.1.4.

“Closing Date” is the date of this Agreement.

“Code” is the Uniform Commercial Code as adopted in Massachusetts, as amended and as may be amended and in effect from time to time.

 “Collateral” is any and all properties, rights and assets of Borrower granted by Borrower to Bank or arising under the Code, now, or in the future, in which Borrower obtains an interest, or the power to transfer rights, in the property described on Exhibit A.

 “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 any guarantee or other support arrangement.

“Copyrights” are all copyright rights, applications or registrations and like protections in each work or authorship or derivative work, whether published or not (whether or not it is a trade secret) now or later existing, created, acquired or held.

“Credit Extension” is each Advance, Letter of Credit, FX Forward Contract, or any other extension of credit by Bank for Borrower’s benefit.

“Defaulting Partner” is the General Partner or any Limited Partner who has previously failed to comply with any portion of a capital call made by the Guarantor or the General Partner (for any fund under General Partner’s management) unless: (i) such failure has been cured, or (ii) the Guarantor has substituted the Defaulting Partner with another partner, in accordance with the Partnership Agreement, who is in compliance with all of the terms of the Partnership Agreement.

“Equipment” is all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest.

“ERISA” is the Employee Retirement Income Security Act of 1974, and its regulations.

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“Event of Default” is defined in Article 8.

“FX Forward Contract” is defined in Section 2.1.3.

“FX Reserve” is defined in Section 2.1.3.

“GAAP” is generally accepted accounting principles in the United States.

“General Partner” means the general partner of the Guarantor.

“Guarantor” is any present or future guarantor of the Obligations, including, without limitation, SCP Private Equity Partners II, L.P.

“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, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease obligations and (d) Contingent Obligations.

“Insolvency Proceeding” is any proceeding 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”is any Copyrights, Copyright rights, Copyright applications, Copyright registrations and like protections in each work of authorship and derivative work, whether published or unpublished, now owned or later acquired; any Patents, Trademarks, service marks and applications therefor; any trade secret rights, including any rights to unpatented inventions, now owned or hereafter acquired.

“Inventory” is present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or later owned by or in the custody or possession, actual or constructive, of Borrower, including inventory temporarily out of its custody or possession or in transit and including returns on any accounts or other proceeds (including insurance proceeds) from the sale or disposition of any of the foregoing and any documents of title.

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

“Letter of Credit” means a letter of credit or similar undertaking issued by Bank pursuant to Section 2.1.2.

“Letter of Credit Application” is defined in Section 2.1.2.

“Letter of Credit Reserve” is defined in Section 2.1.2.

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

“Limited Partners” means the limited partners set forth in the Partnership Agreement, as the same may be amended from time to time.

“Loan Documents” are, collectively, this Agreement, any guaranties executed by any Guarantor, and any other present or future agreement between Borrower and/or for the benefit of Bank in connection with this Agreement, all as amended, extended or restated.

“Mask Works” are all mask works or similar rights available for the protection of semiconductor chips, now owned or later acquired.

“Material Adverse Change”is: (a) a material impairment in the perfection or priority of Bank’s security interest in the Collateral or in the value of such Collateral; (b) a material adverse change in the business, operations,

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or financial condition of Borrower; (c) a material impairment of the prospect of repayment of any portion of the Obligations; or (d) the determination by Bank, based upon information available to it and in its reasonable judgment, that there is a substantial likelihood that Borrower or Guarantor shall fail to comply with one or more of the financial covenants in Article 6 during the next succeeding financial reporting period.

“Maturity Date”is August 23, 2007.

“Obligations” are all liabilities, obligations, covenants, agreements, debts, principal, interest, Bank Expenses and other amounts Borrower owes Bank now or later, including letters of credit, cash management services, and foreign exchange contracts, if any, and including interest accruing after Insolvency Proceedings begin and debts, liabilities, or obligations of Borrower assigned to Bank.

“Partnership Agreement” is that certain Limited Partnership Agreement dated as of June 15, 2000, as amended, by and among the Limited Partners and the General Partner.

 “Patents” are patents, patent applications and like protections, including improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same.

“Payment/Advance Form”is in the form of Exhibit B.

“Perfection Certificate”is defined in Section 5.1.

“Permitted Indebtedness” is:

(a)Borrower’s indebtedness to Bank under this Agreement or the Loan Documents;

(b)Indebtedness existing on the Closing Date and shown on the Perfection Certificate;

(c)Subordinated Debt;

(d)Indebtedness secured by Permitted Liens;

(e)Other Indebtedness not otherwise permitted by Section 7.4 not exceeding $250,000.00 in the aggregate outstanding at any time; and

(f)Extensions, refinancings, modifications, amendments and restatements of any items of Permitted Indebtedness (a) through (e) above, provided that the principal amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms upon Borrower or its Subsidiary, as the case may be.

“Permitted Investments” are:

(a)Investments shown on the Perfection Certificate and existing on the Closing Date; and

(b) (i)  marketable direct obligations issued or unconditionally guaranteed by the United States or its agency or any state maturing within 1 year from its acquisition, (ii) commercial paper maturing no more than 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 1 year after issue, and (iv) any other investments administered through Bank.

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“Permitted Liens” are:

(a)Liens existing on the Closing Date and shown on the Perfection Certificate or 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)Leases or subleases and non-exclusive licenses or sublicenses granted in the ordinary course of Borrower’s business, if the leases, subleases, licenses and sublicenses permit granting Bank a security interest;

(d)Liens of materialmen, mechanics, warehousemen, carriers or other similar Liens accruing after the date hereof and in the ordinary course of Borrower’s business or by operation of law or regulation and securing obligations not yet due;

(e)Liens to secure payment of workers’ compensation, employment insurance, or social security obligations of Borrower;

(f)Liens incurred in the extension, renewal or refinancing of the indebtedness secured by Liens described in (a) through (e), 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 may not increase; and

(e)Liens in favor of other financial institutions arising in connection with Borrower’s deposit accounts held at such institutions, provided that Bank has a perfected security interest in the amounts held in such deposit accounts.

“Person” is any individual, sole proprietorship, partnership, limited liability company, joint venture, company, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency.

“Portfolio Company Obligations” are the aggregate amount of Guarantor’s obligations from time to time under guarantees issued by Guarantor with respect to the obligations of its portfolio companies (whether or not demand for payment has been made thereunder).

“Prime Rate” is Bank’s most recently announced “prime rate,” even if it is not Bank’s lowest rate.

“Responsible Officer” is each of the Chief Executive Officer, President, Chief Financial Officer and Controller of Borrower.

“Revolving Line” is an Advance or Advances of up to $1,500,000.00.

“Revolving Line Availability” is defined in Section 2.1.1(a).

“Senior Lender” is Benefactor Funding Corp.

“Subordinated Debt” is debt incurred by Borrower subordinated to Borrower’s debt to Bank (pursuant to a subordination agreement entered into between Bank, Borrower and the subordinated creditor), on terms reasonably acceptable to Bank.

“Subsidiary” is any Person, or 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.

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“Trademarks”are trademark and service mark rights, registered or not, applications to register and registrations and like protections, and the entire goodwill of the business of Borrower connected with the trademarks.

“Unencumbered Capital” is Callable Capital minus the aggregate amount of outstanding Portfolio Company Obligations.

“Unused Revolving Line Facility Fee” is defined in Section 2.3(b).

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as a sealed instrument under the laws of the Commonwealth of Massachusetts as of the date first above written.

BORROWER:
CLEARSTORY SYSTEMS, INC.
By:	/S/ Stephen A. Read
Name:			Stephen A. Read
Title:		VP, CFO
BANK:
SILICON VALLEY BANK
By:	/S/ Irina Case
Name:			Irina Case
Title:		SVP

S-1

EXHIBIT A

The Collateral consists of all right, title and interest of Borrower in and to the following:

All goods, equipment, inventory, contract rights or rights to payment of money, license agreements, franchise agreements, general intangibles (including payment intangibles), accounts (including health-care receivables), documents, instruments (including any promissory notes), chattel paper (whether tangible or electronic), cash, deposit accounts, fixtures, letters of credit rights (whether or not the letter of credit is evidenced by a writing), commercial tort claims, securities, and all other investment property supporting obligations, and financial assets, whether now owned or hereafter acquired, wherever located; and

All Borrower’s Books relating to the foregoing and any and all claims, rights and interests in any of the above and all substitutions for, additions, attachments, accessories, accessions and improvements to and replacements, products, proceeds and insurance proceeds of any or all of the foregoing.

The Collateral does not include: any copyright rights, copyright applications, copyright registrations mask works, and like protections in each work of authorship and derivative work, whether published or unpublished, now owned or later acquired; any patents, trademarks, service marks and applications therefor; any trade secret rights, including any rights to unpatented inventions, now owned or hereafter acquired.  Notwithstanding the foregoing, the Collateral shall include all accounts, license and royalty fees and other revenues, proceeds, or income arising out of or relating to any of the foregoing.

A-2

EXHIBIT B

Loan Payment/Advance Request Form

DEADLINE FOR SAME DAY PROCESSING IS 3:00 E.S.T.

Fax To: (617) 969-5965 Date:

LOAN PAYMENT:
CLEARSTORY SYSTEMS, INC.
From Account #		To Account #
	(Deposit Account #)		(Loan Account #)
Principal $		and/or Interest $
Authorized Signature:		Phone Number:

LOAN ADVANCE:

Complete Outgoing Wire Request section below if all or a portion of the funds from this loan advance are for an outgoing wire.

From Account #		To Account #
	(Loan Account #)		(Deposit Account #)
Amount of Advance $

All Borrower’s representation and warranties in the Loan and Security Agreement are true, correct and complete in all material respects on the date of the telephone transfer request for an advance, but those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date:

Authorized Signature: Phone Number:

OUTGOING WIRE REQUEST
Complete only if all or a portion of funds from the loan advance above are to be wired.
Deadline for same day processing is 3:00 pm, E.S.T.
Beneficiary Name:	Amount of Wire:
Beneficiary Bank:	Account Number:
City and State:
Beneficiary Bank Transit (ABA) #:	Beneficiary Bank Code (Swift, Sort, Chip, etc.):
		(For International Wire Only)
Intermediary Bank:	Transit (ABA) #:
For Further Credit to:
Special Instruction:

By signing below, I (we) acknowledge and agree that my (our) funds transfer request shall be processed in accordance with and subject to the terms and conditions set forth in the agreements(s) covering funds transfer service(s), which agreements(s) were previously received and executed by me (us).

Authorized Signature:	2nd Signature (If Required):
Print Name/Title:	Print Name/Title:
Telephone #	Telephone #

B-1

EXHIBIT C

COMPLIANCE CERTIFICATE

TO:SILICON VALLEY BANK

FROM:CLEARSTORY SYSTEMS, INC.

The undersigned authorized officer of CLEARSTORY SYSTEMS, INC. certifies that under the terms and conditions of the Loan and Security Agreement 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) there are no Events of Default, and all representations and warranties in the Agreement are true and correct in all material respects on this date; provided however, that those representations and warranties expressly referring to another date shall be true and correct in all material respects only as of such date.  Attached are the required documents supporting the certification.  The Officer certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) consistently applied from one period to the next except as explained in an accompanying letter or footnotes.  The Officer 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 under “Complies” column.

Reporting Covenant	Required	Complies
Interim financial statements for Borrower with A/R Agings (by invoice date)	Monthly within 30 days	YesNo
Annual financial statements (CPA Audited) for  Borrower	FYE within 120 days	YesNo
Annual Balance Sheet and Income Statement	Within 30 days of Board approval	YesNo
10 Q, 10 K and 8-K	Within 5 days after filing with SEC	YesNo
Compliance Certificate	Quarterly within 30 days	YesNo

Financial Covenant	Required	Actual	Complies
Maintain at all times (tested quarterly):
Minimum net revenue (Borrower)	*	:1.0	YesNo
Minimum Callable Capital (Guarantor)	3x outstanding Obligations	:1.0	YesNo

*as set forth in Section 6.7(a) of the Loan and Security Agreement

	BANK USE ONLY
Comments Regarding Exceptions: See Attached.	Received by:
Sincerely,		AUTHORIZED SIGNER
	Date:
SIGNATURE
	Verified:
TITLE			AUTHORIZED SIGNER
DATE	Compliance Status:			Yes	No

C-1

EX-10.2

Exhibit 10.2

UNCONDITIONAL GUARANTY

For and in consideration of certain loans by SILICON VALLEY BANK, a California-chartered bank, with its principal place of business at 3003 Tasman Drive, Santa Clara, California 95054 and with a loan production office located at One Newton Executive Park, Suite 200, 2221 Washington Street, Newton, Massachusetts 02462 (“Bank”) to CLEARSTORY SYSTEMS, INC., a Delaware corporation (hereinafter, the “Borrower”), which loans were made pursuant to a certain Loan and Security Agreement between Borrower and Bank dated August 25, 2005, as may be amended from time to time (hereinafter, the “Agreement”), the undersigned guarantor SCP PRIVATE EQUITY PARTNERS II, L.P., a Delaware limited partnership (“Guarantor”), hereby unconditionally and irrevocably guarantees the prompt and complete payment of all amounts that Borrower owes to Bank under the Agreement and performance by Borrower of Borrower’s Obligations under the Agreement, as may be amended from time to time, in strict accordance with its terms.  All terms used herein but not defined shall have the meaning ascribed to such term in the Agreement.

1.If Borrower does not perform its Obligations under the Agreement and an Event of Default shall have occurred and is continuing, Guarantor will, within twenty-one (21) days of receipt of demand from Bank, immediately pay all amounts due (including, without limitation, all principal, interest,  and fees) and satisfy all Borrower’s Obligations under the Agreement.

2.These obligations are independent of Borrower’s Obligations and separate actions may be brought against Guarantor (whether action is brought against Borrower or whether Borrower is joined in the action).  Guarantor  waives benefit of any statute of limitations affecting its liability.  Guarantor’s liability is not contingent on the genuineness or enforceability of the Agreement.

3.Bank may, without notice to Guarantor and without affecting Guarantor’s obligations under this Guaranty:  (a) renew, extend, or otherwise change the terms of the Agreement; (b) take security for the payment of this Guaranty or the Agreement; (c) exchange, enforce, waive and release any security; and (d) apply the security and direct its sale  as Bank, in its discretion, chooses. Notwithstanding the foregoing, any amendment in writing which (i) increases the maximum amount of principal that may be borrowed by the Borrower thereunder or (ii) shortens the maturity date thereof, may not be made without the Guarantor’s consent, which shall not be unreasonably withheld.

4.As long as the Credit Extensions remain outstanding and the Agreement has not been terminated, Guarantor waives to the extent not prohibited by law:

(a)Any right to require Bank to: (i) proceed against Borrower or any other person; (ii) proceed against or exhaust any security; or (iii) pursue any other remedy.  Bank may exercise or not exercise any right or remedy it has against Borrower or any security it holds (including the right to foreclose by judicial or non-judicial sale) without affecting Guarantor’s liability.

(b)Any defenses from disability or other defense of Borrower or from the cessation of Borrowers liabilities.

(c)Any setoff, defense or counterclaim against Bank (other than the defense of payment or performance).

(d)Any defense from the absence, impairment or loss of any right of reimbursement or subrogation or any other rights against Borrower.  Until the Credit Extensions have been paid and Bank’ s obligation to make Credit Extensions has terminated, Guarantor shall not exercise any right of subrogation or reimbursement against Borrower in respect to any payment by Guarantor hereunder.

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(e)Any right to enforce any remedy that Bank has against Borrower.

(f)Any rights  to participate in any security held by Bank.

(g)Any demands for performance or notices of nonperformance. Guarantor is responsible for being and keeping itself informed of Borrower’s financial condition.  Unless Guarantor requests particular information, Bank has no duty to provide information to Guarantor.

5.Guarantor acknowledges that, to the extent Guarantor has or may have rights of subrogation or reimbursement against Borrower for claims arising out of this Guaranty, those rights may be impaired or destroyed if Bank elects to proceed against any real property security of Borrower by non-judicial foreclosure.  That impairment or destruction could, under certain judicial cases and based on equitable principles of estoppel, give rise to a defense by Guarantor against its obligations under this Guaranty.  Guarantor waives that defense (to the extent not prohibited by law) and any others arising from Bank’s election to pursue non-judicial foreclosure.

6.If Borrower becomes insolvent or is adjudicated bankrupt or files a petition for reorganization or similar relief under the United States Bankruptcy Code, or if a petition is filed against Borrower and/or any Obligation under the Agreement is terminated or rejected,  or any Obligation of Borrower is modified or if Borrower ‘s Obligations are avoided Guarantor’s liability will not be affected and its liability will continue.  If Bank must  return any payment because of the insolvency, bankruptcy or reorganization of Borrower, Guarantor or any other guarantor, this Guaranty will remain effective or be reinstated.

7.So long as Credit Extensions remain outstanding and Bank’s obligation to make Credit Extensions has not been terminated, Guarantor subordinates any indebtedness of Borrower it holds to Bank; and during the continuance of any Event of Default, Guarantor will collect, enforce and receive payments as Bank’s trustee and will pay Bank those payments without reducing or affecting its liability under this Guaranty (provided that notwithstanding any Event of Default, Guarantor may retain such payments for its own account to the extent permitted under the Agreement).

8.Guarantor will pay Bank’s reasonable attorneys’ fees and other costs and expenses incurred enforcing this Guaranty. This Guaranty may not be waived, revoked or amended without Bank’s prior  written consent.  If any provision of this Guaranty is unenforceable, all other provisions remain effective.  This Guaranty represents the entire agreement among the parties about this guaranty.  No prior dealings, no usage of trade, and no parol or extrinsic evidence may supplement or vary this Guaranty.  Bank may assign this Guaranty.  This Guaranty benefits Bank, its successors and assigns.  This Guaranty is in addition to any other guaranties Bank obtains.

9.Guarantor represents and warrants that, as of the date hereof, (i) it has taken all action necessary to  authorize execute, deliver and perform this Guaranty; (ii) execution, delivery and performance of this Guaranty do not conflict with any organizational documents or agreements to which it is a party; and (iii) this Guaranty is a valid and binding obligation, enforceable against Guarantor according to its terms.

10.Guarantor will do all of the following:

(a)Maintain its legal existence, remain in good standing in its state of organization, and continue to qualify in each jurisdiction in which the failure to qualify could have a material adverse effect on the financial condition, operations or business.  Maintain all licenses, approvals, and agreements, the loss of which could have a material adverse effect on its financial condition, operations or business.

(b)Comply with all statutes and regulations if non-compliance could adversely affect its financial condition, operations or business.

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(c)Execute other instruments and take action Bank reasonably requests to effect the purposes of this Agreement.

(d)Beginning with the quarter ending September 30, 2005, the Guarantor shall maintain, at all times to be tested as of the last day of each quarter, Unencumbered Capital, in an amount equal to or greater than three (3) times the aggregate outstanding Obligations; provided, however, that if, at any time, Unencumbered Capital is less than three (3) times the aggregate outstanding Obligations, Guarantor shall, as soon as possible but in no event later than thirty (30) days thereafter, either (i) deposit and maintain with Bank, at all times thereafter, cash in such amounts as Bank determines will secure the full amount of the outstanding Obligations, or (ii) provide Bank with an irrevocable letter of credit, on terms and conditions reasonably acceptable to Bank in its sole discretion, from a financial institution reasonably acceptable to Bank in its sole discretion, and in such amount as Bank determines will secure the full amount of the outstanding Obligations.

(e)Guarantor shall deliver to Bank: (i) as soon as available, but no later than sixty (60) days after the last day of each quarter (except for the quarter ending December 31st), a company prepared consolidated balance sheet and income statement covering Guarantor’s consolidated operations during the period certified by a Responsible Officer and in a form acceptable to Bank; and (ii) as soon as available, but no later than one hundred twenty (120) days after the last day of Guarantor’s fiscal year, audited consolidated financial statements of Guarantor prepared under GAAP, consistently applied, together with an unqualified opinion on the financial statements from an independent certified public accounting firm reasonably acceptable to Bank.

(f)Within sixty (60) days after the last day of each quarter, Guarantor shall deliver to Bank a Compliance Certificate signed by a Responsible Officer in the form of Exhibit A.

11.Guarantor hereby grants to Bank, a lien, security interest and right of setoff as security for all Obligations to Bank, whether now existing or hereafter arising upon and against all deposits, credits, collateral and property, now or hereafter in the possession, custody, safekeeping or control of Bank or any entity under the control of Bank (including a Bank subsidiary) or in transit to any of them.  At any time after the occurrence and during the continuance of an Event of Default, without demand or notice, Bank may set off the same or any part thereof and apply the same to any liability or obligation of Guarantor arising hereunder even though unmatured and regardless of the adequacy of any other collateral securing the loan.  ANY AND ALL RIGHTS TO REQUIRE BANK TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE LOAN, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF THE GUARANTOR, ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.

12.Massachusetts law governs this Guaranty without regard to principles of conflicts of law.  Guarantor and Bank each submit to the exclusive jurisdiction of the State and Federal courts in Massachusetts; provided, however, that if for any reason Bank cannot avail itself of such courts in the Commonwealth of Massachusetts, Guarantor accepts jurisdiction of the courts and venue in Santa Clara County, California.  GUARANTOR AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT.  EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.

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13.Definitions. In this Guaranty:

“Callable Capital” is the remaining amount of capital, excluding capital attributable to Defaulting Partners, which Guarantor would be able to obtain from the General Partner and the Limited Partners, without condition, upon proper issuance of capital call notices in accordance with the Partnership Agreement.

“Defaulting Partner” is the General Partner or any Limited Partner who has previously failed to comply with any portion of a capital call made by the Guarantor or the General Partner (for any fund under General Partner’s management) unless: (i) such failure has been cured, or (ii) the Guarantor has substituted the Defaulting Partner with another partner, in accordance with the Partnership Agreement, who is in compliance with all of the terms of the Partnership Agreement.

“General Partner” means the general partner of the Guarantor.

“Limited Partners” means the limited partners set forth in the Partnership Agreement, as the same may be amended from time to time.

“Obligations” has the meaning set forth in the Agreement.

“Partnership Agreement” is that certain Limited Partnership Agreement dated as of June 15, 2000, as amended, by and among the Limited Partners and the General Partner.

“Portfolio Company Obligations” are the aggregate amount of Guarantor’s obligations from time to time under guarantees issued by Guarantor  with respect to the obligations of its portfolio companies (whether or not demand for payment has been made thereunder).

“Responsible Officer” is Dennis Ferry, CFO.

“Unencumbered Capital” is Callable Capital minus the aggregate amount of outstanding Portfolio Company Obligations.

[The remainder of this page is intentionally left blank]

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IN WITNESS WHEREOF, the undersigned Guarantor has executed this Guaranty as an instrument under seal under the laws of the Commonwealth of Massachusetts, as of this 25 day of August, 2005.

Date	August 25,2005	SCP PRIVATE EQUITY PARTNERS II, L.P.
		By: SCP Private Equity II General Partner, L.P.,
			its general partner
			By: SCP Private Equity II, LLC,
				its manager
				By:	/S/ Thomas G. Rebar
				Name:		Thomas G. Rebar
				Title:		G Manager

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EXHIBIT A

COMPLIANCE CERTIFICATE

TO:         SILICON VALLEY BANK

FROM:   SCP PRIVATE EQUITY PARTNERS II, L.P.

The undersigned authorized officer of SCP PRIVATE EQUITY PARTNERS II, L.P. certifies that under the terms and conditions of the Guaranty executed by the Guarantor (the “Guaranty”), (i) Guarantor is in complete compliance for the period ending                             with all required covenants except as noted below and (ii) there are no Events of Default, and all representations and warranties in the Guaranty are true and correct in all material respects on this date; provided however, that those representations and warranties expressly referring to another date shall be true and correct in all material respects only as of such date.  Attached are the required documents supporting the certification.  The Officer certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) consistently applied from one period to the next except as explained in an accompanying letter or footnotes.  The Officer acknowledges that no borrowings may be requested at any time or date of determination that Guarantor is not in compliance with any of the terms of the Guaranty, and that compliance is determined not just at the date this certificate is delivered.

Please indicate compliance status by circling Yes/No under “Complies” column.

Reporting Covenant	Required	Complies
Interim financial statements for Guarantor	Quarterly within 60 days*	Yes   No
Annual financial statements (CPA Audited) for Guarantor	FYE within 120 days	Yes   No
Compliance Certificate	Quarterly within 60 days	Yes   No

*except for the quarter-ending 12/31

Financial Covenant	Required	Actual	Complies
Maintain at all times (tested quarterly):
Minimum Unencumbered Capital	3x outstanding Obligations	:1.0	Yes   No

	BANK USE ONLY
Comments Regarding Exceptions: See Attached.	Received by:
Sincerely,		AUTHORIZED SIGNER
	Date:
SIGNATURE
	Verified:
TITLE			AUTHORIZED SIGNER
DATE	Compliance Status:			Yes	No

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EX-10.3

Exhibit 10.3

THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS IT HAS BEEN REGISTERED UNDER THAT ACT OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE.

Right to Purchase

232,007 Shares

of Series C Convertible Preferred

Stock of ClearStory Systems, Inc.

August 25, 2005

No. C-1

CLEARSTORY SYSTEMS, INC.

SERIES C CONVERTIBLE PREFERRED STOCK PURCHASE WARRANT

ClearStory Systems, Inc., a Delaware corporation (the “Company”), hereby certifies that, for value received, SCP Private Equity Partners II, L.P. (the “Holder”), or its successors or registered assigns, is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time before 5:00 p.m., Boston time, on the Expiration Date (as hereinafter defined), 232,007 fully paid and nonassessable shares of Series C Convertible Preferred Stock, par value $0.01 per share (the “Series C Preferred Stock”), of the Company, at a purchase price per share of $1.9396 (the “Purchase Price”).  The number of such shares of Series C Preferred Stock and the Purchase Price are subject to adjustment as provided in this Warrant. 

1.             Certain Definitions.  As used herein the following terms have the following respective meanings:

(a)           The term “Change of Control” means (i)  any reorganization, consolidation, merger or similar transaction or series of related transactions (each, a “combination transaction”) in which the Company is a constituent corporation or is a party if, as a result of such combination transaction, the voting securities of the Company that are outstanding immediately prior to the consummation of such combination transaction (other than any such securities that are held by an Acquiring Stockholder (as defined below)) do not represent, or are not converted into, securities of the surviving corporation of such combination transaction (or such surviving corporation’s parent corporation if the surviving corporation is owned by the parent corporation) that, immediately after the consummation of such combination transaction, together possess at least a majority of the total voting power of all securities of such surviving corporation (or its parent corporation, if applicable) that are outstanding immediately after the consummation of such combination transaction; or (ii) a sale of all or substantially all of the assets of the Company.  For purposes of this definition, an “Acquiring Stockholder” means a stockholder or stockholders of the Company that (A) merges or combines with the Company in

such combination transaction or (B) owns or controls a majority of another corporation that merges or combines with the Company in such combination transaction.

(b)           The term “Expiration Date” means (i) August 25, 2015 or (ii) immediately prior to the consummation of a Change of Control.

2.             Exercise of Warrant.

(a)           This Warrant may be exercised in full or in part at any time or from time to time until the Expiration Date by the holder hereof by surrender of this Warrant and the exercise notice annexed hereto (duly executed) by such holder, to the Company at its principal office, accompanied by payment, in cash or by check payable to the order of the Company in the amount obtained by multiplying (a) the number of shares of Series C Preferred Stock designated by the holder in the notice of exercise by (b) the Purchase Price then in effect (or by net exercise in accordance with the provisions of Section 3 below).  On any partial exercise, the Company at its expense will forthwith issue and deliver to or upon the order of the holder hereof a new Warrant or Warrants of like tenor, in the name of the holder hereof or as such holder (upon payment by such holder of any applicable transfer taxes and subject to applicable securities laws) may request, providing in the aggregate on the face or faces thereof for the number of shares of Series C Preferred Stock for which such Warrant or Warrants may still be exercised.

(b)           Automatic Exercise Prior to Expiration.  If not earlier exercised, this Warrant shall be deemed to have been exercised on a net basis pursuant to Section 3(a) below immediately prior to the expiration hereof, and upon such deemed exercise, and without any further act or deed of the Holder or any other person or entity, the Company shall issue to the Holder the number of fully paid and non-assessable shares of Series C Preferred Stock to which such Holder would be entitled hereunder.

3.             Net Exercise. 

(a)           In lieu of exercising this Warrant pursuant to Section 2, the Holder may elect to receive, without the payment by the Holder of any additional consideration, shares of Series C Preferred Stock equal to the value of this Warrant or any portion hereof by the surrender of this Warrant or such portion to the Company, with the exercise notice annexed hereto duly executed (and by indicating thereon that the Holder is exercising this Warrant pursuant to the net exercise provisions of this Section 3), at the office of the Company.  Thereupon, the Company shall issue to the Holder such number of fully paid and nonassessable shares of Series C Preferred Stock as is computed using the following formula:

X = Y (A-B)

   A

Where   X =the number of shares to be issued to the Holder pursuant to this Section 3.

Y =the number of shares covered by this Warrant in respect of which the net issue election is made pursuant to this Section 3.

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A =the Fair Market Value (as hereinafter defined) of one share of Series C Preferred Stock, as at the time the net issue election is made pursuant to this Section 3.

B =the Purchase Price in effect under this Warrant at the time the net issue election is made pursuant to this Section 3.

The Board shall promptly respond in writing to an inquiry by the Holder as to the Fair Market Value of one share of Series C Preferred Stock.

(b)           The “Fair Market Value” of a share of Series C Preferred Stock as of a particular date (the “Determination Date”) shall mean the fair market value of such share as determined in good faith by the Board of Directors upon review of all relevant factors; provided, however, that, if the Determination Date is the date of a liquidation, dissolution or winding up of the Company (including a Change of Control), then the “Fair Market Value” of a share of Series C Preferred Stock shall mean the aggregate of all amounts paid, payable (or otherwise distributed or distributable) to the holders of the Series C Preferred Stock pursuant to the Company’s Certificate of Incorporation, as amended to date (the “Charter”) upon such liquidation, dissolution or winding up (assuming, for this purpose, that: (i) this Warrant was exercised immediately prior to, and the underlying shares of Series C Preferred Stock issued thereon were issued and outstanding as of, such liquidation, dissolution or winding up; and (ii) the exercise price payable in respect of such deemed exercise of this Warrant is included in the assets available for distribution to the holders of the Company’s capital stock under the Charter in connection with such liquidation, dissolution or winding up).

4.             Delivery of Stock Certificates, etc., on Exercise.  As soon as practicable after the exercise of this Warrant, and in any event within 10 business days thereafter, the Company at its expense (including the payment by it of any applicable issue or stamp taxes) will cause to be issued in the name of and delivered to the holder hereof, or as such holder (upon payment by such holder of any applicable transfer taxes and subject to applicable securities laws) may direct, a certificate or certificates for the number of fully paid and nonassessable shares of Series C Preferred Stock to which such holder shall be entitled on such exercise, in such denominations as may be requested by such holder, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then current Fair Market Value (as determined in Section 3(b) above) of one full share of Series C Preferred Stock, together with any other stock or other securities and property (including cash, where applicable) to which such holder is entitled upon such exercise pursuant to Section 2 or 3 hereof, or otherwise.

5.             Covenants as to Series C Preferred Stock and Common Stock.  The Company covenants and agrees that all shares of Series C Preferred Stock which may be issued upon the exercise of this Warrant, and all shares of Common Stock, $.10 par value per share (the “Common Stock”), of the Company, which may be issued upon the conversion of the Series C Preferred Stock, will, upon issuance, be validly issued, fully paid and non-assessable and free

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from all taxes, liens and charges with respect to the issue thereof.  Without limiting the generality of the foregoing, the Company covenants that it will from time to time take all such actions as may be required to assure that the stated or par value per share of Series C Preferred Stock is at all times equal to or less than the then effective Purchase Price per share of Series C Preferred Stock issuable upon exercise of this Warrant.  The Company further covenants and agrees that the Company will at all times have authorized and reserved, free from preemptive rights, a sufficient number of shares of its Series C Preferred Stock to provide for the exercise of this Warrant and shares of Common Stock to provide for the conversion of the Series C Preferred Stock. If and so long as the Series C Preferred Stock issuable upon the exercise of this Warrant or the Common Stock issuable upon conversion of the Series C Preferred Stock is listed on any national securities exchange, the Company will, if permitted by the rules of such exchange, list and keep listed on such exchange, upon official notice of issuance, all such shares of capital stock that are so listed.

6.             No Stockholder Rights .  This Warrant shall not entitle the holder hereof to any voting rights or other rights as a stockholder of the Company.

7.             Restrictions on Transfer; Registration Rights.   The holder of this Warrant by acceptance hereof agrees that the transfer of this Warrant, the shares of Series C Preferred Stock issuable upon the exercise of all or any portion of this Warrant and the shares of Common Stock issuable upon conversion of such shares of Series C Preferred Stock are subject to the provisions of the Charter, including, without limitation, the rights, privileges and preferences of the Series C Preferred Stock set forth in the Certificate of Designation for the Series C Preferred Stock contained in the Charter. This Warrant, and the shares of Series C Preferred Stock issuable upon exercise of all or any portion of this Warrant and the shares of Common Stock issuable upon conversion of such shares of Series C Preferred Stock shall be entitled to all rights and benefits accorded thereto in the Charter, and the applicable provisions of the Charter are hereby incorporated herein by reference.  Without limiting the generality of the foregoing, the shares of Series C Preferred Stock issuable upon exercise of this Warrant (and, as applicable, any securities issuable upon conversion of such shares), shall be entitled to the same registration rights applicable to the “Registrable Securities” in that certain Amended and Restated Registration Rights Agreement, dated as of September 2, 2003, by and among the Company, the Holder, Selway Partners, LLC, Selway Management, Inc. and CIP Capital L.P.

8.             Transfer of Warrant.  Subject to applicable securities laws, this Warrant and all rights hereunder are transferable, in whole or in part, at the agency or office of the Company referred to in Section 2, by the holder hereof in person or by duly authorized attorney, upon surrender of this Warrant properly endorsed.  Subject to applicable securities laws, each taker and holder of this Warrant, by taking or holding the same, consents and agrees that this Warrant, when endorsed, in blank, shall be deemed negotiable, and, when so endorsed the holder hereof may be treated by the Company and all other persons dealing with this Warrant as the absolute owner hereof for any purposes and as the person entitled to exercise the rights represented by this Warrant, or to the transfer hereof on the books of the Company, any notice to the contrary

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notwithstanding; but until each transfer on such books, the Company may treat the registered holder hereof as the owner hereof for all purposes.

9.Adjustment of Number of Shares; Purchase Price; Nature of Securities Issuable Upon Exercise of Warrants..

(a)           Purchase Price; Adjustment of Number of Shares.  The Purchase Price set forth above and the number of shares purchasable hereunder shall be subject to adjustment from time to time as hereinafter provided.

(i)            Reclassification, etc.  If the Company, at any time while this Warrant, or any portion thereof, remains outstanding and unexpired, shall, by the reclassification or exchange of securities or otherwise, change any of the securities as to which purchase rights under this Warrant exist into the same or a different number of securities of any other class or classes, this Warrant shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities that were subject to the purchase rights under this Warrant immediately prior to such reclassification, exchange, or other change and the Purchase Price therefor shall be appropriately adjusted, all subject to further adjustment as provided in this Section 9.

(ii)           Stock Splits, Stock Dividends and Reverse Stock Splits.  In case at any time the Company shall split or subdivide the outstanding shares of Series C Preferred Stock into a greater number of shares, or shall declare and pay any stock dividend with respect to its outstanding stock that has the effect of increasing the number of outstanding shares of Series C Preferred Stock, the Purchase Price in effect immediately prior to such subdivision or stock dividend shall be proportionately reduced and the number of shares of Series C Preferred Stock purchasable pursuant to this Warrant immediately prior to such subdivision or stock dividend shall be proportionately increased, and conversely, in case at any time the Company shall combine its outstanding shares of Series C Preferred Stock into a smaller number of shares, the Purchase Price in effect immediately prior to such combination shall be proportionately increased and the number of shares of Series C Preferred Stock purchasable upon the exercise of this Warrant immediately prior to such combination shall be proportionately reduced.

(iii)          Adjustments for Dividends in Stock or Other Securities of Property.  If while this Warrant, or any portion hereof, remains outstanding and unexpired the holders of shares of Series C Preferred Stock shall have received, or, on or after the record date fixed for the determination of eligible stockholders, shall have become entitled to receive, without payment therefor, other or additional stock or other securities or property (other than cash) of the Company by way of dividend, then and in each case, this Warrant shall represent the right to acquire, in addition to the number of shares of the security receivable upon exercise of this Warrant, and without payment of any additional consideration therefor, the amount of such other or additional stock or other securities or property of the Company that such holder would hold on the date of such exercise had it been the holder of record of the security receivable upon exercise of this Warrant on the date hereof and had thereafter, during the period from the date

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hereof to and including the date of such exercise, retained such shares and/or all other additional stock available by it as aforesaid during such period, giving effect to all adjustments called for during such period by the provisions of this Section 9.

(b)           Timing of Purchase Price Adjustment.  No adjustment of the Purchase Price shall be made unless such adjustment would require an increase or decrease of at least $0.0001 in such price; provided that any adjustments which by reason of this Section 9(b) are not required to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment(s) so carried forward, shall require an increase or decrease of at least $0.0001 in the Purchase Price then in effect hereunder.

10.           Certificate of Adjustment. Whenever the Purchase Price (or the number of shares of Series C Preferred Stock issuable on the exercise of this Warrant) is adjusted, as herein provided, the Company shall promptly deliver to the Holder a certificate of the Company’s chief financial officer setting forth the Purchase Price (and the number of shares of Series C Preferred Stock issuable on the exercise of this Warrant) after such adjustment and setting forth a brief statement of the facts requiring such adjustment.

11.           Notices of Record Date, Etc.  In the event of:

(a)           any taking by the Company of a record of the holders of the Series C Preferred Stock or Common Stock for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase, sell or otherwise acquire or dispose of any shares of stock of any class or any other securities or property, or to receive any other right;

(b)           any reclassification of the capital stock of the Company, capital reorganization of the Company, or Change of Control; or

(c)           any voluntary or involuntary dissolution, liquidation or winding up of the Company;

then in each such event the Company will provide or cause to be provided to the Holder a written notice thereof.  Such notice shall be provided at least ten (10) calendar days prior to the date specified in such notice on which any such action is to be taken.

12.           Exchange of Warrant.  This Warrant is exchangeable upon the surrender hereof by the holders hereof at the office or agency of the Company designated in Section 2 hereof, for new Warrants of like tenor representing in the aggregate the rights to subscribe for and purchase the number of shares which may be subscribed for and purchased hereunder, each of such new Warrants to represent the right to subscribe for and purchase such number of shares as shall be designated by said holder or holders hereof at the time of such surrender.

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13.           Lost, Stolen, Mutilated or Destroyed Warrant.  If this Warrant is lost, stolen, mutilated or destroyed, the Company may, on such terms as to indemnity or otherwise as it may in its reasonable discretion impose (which shall, in the case of a mutilated Warrant, include the surrender thereof), issue a new Warrant of like denomination and tenor as the Warrant so lost, stolen, mutilated or destroyed.  Any such new Warrant shall constitute a contractual obligation of the Company, whether or not the allegedly lost, stolen, mutilated or destroyed Warrant shall be at any time enforceable by anyone.

14.           Notice Prior to Public Offering.  The Company shall give each Holder at least thirty (30) days prior written notice of the effectiveness of any registration statement filed with the Securities and Exchange Commission under the 1933 Act covering any shares of capital stock of the Company.

15.           No Impairment.  The Company will not, by amendment of its Charter or through any reclassification, capital reorganization, consolidation, merger, sale or conveyance of assets, dissolution, liquidation, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance of performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder.

16.           Miscellaneous.  This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought.  This Warrant shall be governed by and construed in accordance with the General Corporation Law of the State of Delaware as to matters within the scope thereof, and as to all other matters shall be governed by and construed in accordance with the internal laws of the Commonwealth of Massachusetts as applied to agreements entered into among Massachusetts residents to be performed entirely within the Commonwealth of Massachusetts, without regard to principles of conflicts of law.  The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof.  This Warrant is being executed as an instrument under seal.  The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision.

[Remainder of Page Intentionally Left Blank]

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IN WITNESS WHEREOF, the undersigned have executed this Series C Convertible Preferred Stock Purchase Warrant as a sealed instrument as of the day and year first above written.

Dated:  August 25, 2005	CLEARSTORY SYSTEMS, INC.
	By:	/S/ Henry F. Nelson
	Name:		Henry F. Nelson
	Title:		President, CEO

ACCEPTED AND AGREED TO BY:
By:
SCP PRIVATE EQUITY PARTNERS II, L.P
	General Partner
By:	/S/ Thomas G. Rebar
	Name:	Thomas G. Rebar
	Title:

8

NOTICE OF EXERCISE

(To be signed only on exercise of Warrant)

TO:         CLEARSTORY SYSTEMS, INC.

The undersigned hereby irrevocably elects to [check applicable subsection]:

(a)	Purchase                       shares of Series C Preferred Stock of ClearStory Systems, Inc. pursuant to the terms of Section 2 of the attached Warrant.  Payment of the Purchase Price per share required under Section 2 of such Warrant accompanies this notice.
OR
(b)	Exercise the attached Warrant for [all of the shares] [               of the shares] [cross out inapplicable phrase] purchasable under the Warrant pursuant to the net exercise provisions of Section 3 of such Warrant.

Dated:
	(Signature must conform to name of holder as specified on the face of the Warrant)
	(Address)

FORM OF ASSIGNMENT

(To be signed only on transfer of Warrant)

For value received, the undersigned hereby sells, assigns, and transfers unto                                                the right represented by the within Warrant to purchase                      shares of Series C Convertible Preferred Stock of ClearStory Systems, Inc. to which the within Warrant relates, and appoints                                         as its Attorney to transfer such right on the books of ClearStory Systems, Inc. with full power of substitution in the premises.

Dated:
	(Signature must conform to name of holder as specified on the face of the Warrant)
Signed in the presence of:

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

THE SARBANES-OXLEY ACT OF 2002

I, Henry F. Nelson, certify that:

1.I have reviewed this quarterly report on Form 10-QSB of ClearStory Systems, Inc.;

2.Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.The small business issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

c)Disclosed in this quarterly report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an quarterly report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5.The small business issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Dated: November 14,2005

/S/ HENRY F. NELSON

Henry F. Nelson

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

THE SARBANES-OXLEY ACT OF 2002

I, Stephen A. Read, certify that:

1.I have reviewed this quarterly report on Form 10-QSB of ClearStory Systems, Inc.;

2.Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.The small business issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

c)Disclosed in this quarterly report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an quarterly report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5.The small business issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Dated: November 14,2005

/S/ Stephen A. Read

Stephen A. Read

Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-QSB of ClearStory Systems, Inc. (the  “Company”) for the quarterly period ended September 30, 2005 (the “Report”), Henry F. Nelson, President and Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.    & #160;          the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 14,2005

  /S/ HENRY F. NELSON

  Henry F. Nelson

  President and Chief Executive Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-QSB of ClearStory Systems, Inc. (the  “Company”) for the quarterly period ended September 30, 2005 (the “Report”), Stephen A. Read, Vice President and Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  November 14,2005

  /S/ STEPHEN A. READ

  Stephen A. Read

  Vice President and Chief Financial Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.