10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549

Form 10-Q

(Mark one)

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934

     For the quarterly period ended   March 31,  2001

OR

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          0-24564

FIBERSTARS, INC.
(Exact name of registrant as specified in its charter)

California	94-3021850
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
44259 Nobel Drive, Fremont, CA	94538
(Address of principal executive offices)	(Zip Code)
(Registrant’s telephone number, including area code):  (510) 490-0719

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 x  No o

The number of outstanding shares of the registrants’ Common Stock, $0.0001 par value, as of March 31, 2001 was 4,301,902.

FIBERSTARS, INC.

TABLE OF CONTENTS

Part I  -  FINANCIAL INFORMATION

Item 1	Financial Statements:
	a.     Consolidated Balance Sheets         March 31, 2001 and December 31, 2000
	b.     Consolidated Statements of Operations Three months          ended March 31, 2001 and 2000
	c.     Consolidated Statements of Comprehensive Operations         Three months ended March 31, 2001 and 2000
	d.     Consolidated Statements of Cash Flows         Three months ended March 31, 2001 and 2000
	e.     Notes to Consolidated Financial Statements
Item 2	Management’s Discussion and Analysis of Results of Operations and Financial Condition
Item 3	Quantitative and Qualitative Disclosures About Market Risk
Part II  -  OTHER INFORMATION
Item 1	Legal Procedings
Item 6	Exhibits and Reports on Form 8-K
	Signatures
EXHIBITS
	Exhibits Index

PART I.    FINANCIAL INFORMATION

FIBERSTARS, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)

	March 31,	December 31,
	2001	2000
	(unaudited)
ASSETS
Current assets:
Cash and cas.h equivalents	$360	$1,230
Accounts receivable trade, net	8,819	7,329
Notes and other accounts receivables	104	125
Inventories, net	6,204	5,672
Prepaids and other current assets	351	411
Deferred income taxes	2,107	1,412
Total current assets	17,945	16,179
Fixed assets, net	2,795	2,888
Goodwill, net	4,942	5,150
Other assets	311	245
Deferred income taxes	235	157
Total assets	$26,228	$24,619
LIABILITIES
Current Liabilities:
Accounts payable	$2,847	$3,513
Accrued expenses	1,847	2,056
Line of credit	3,186	-
Current portion of long-term debt	8	8
Total current liabilities	7,888	5,577
Long-term debt, less current portion	522	482
Total liabilities	8,410	6,059
SHAREHOLDERS' EQUITY
Common stock	1	1
Value of warrants outstanding	2,722	2,722
Additional paid-in capital	15,800	15,721
Note receivable from shareholder	(75)	(75)
Cumulative translation adjustments	(382)	(278)
Retained earnings (accumulated deficit)	(248)	469
Total shareholders' equity	17,818	18,560
Total liabilities and shareholders' equity	$26,228	$24,619

The accompanying notes are an integral part of these financial statements

FIBERSTARS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands except per share amounts)
(unaudited)

	Three Months Ended March 31,
	2001	2000
Net sales	$6,876	$8,782
Cost of sales	4,267	5,090
Gross profit	2,609	3,692
Operating expenses:
Research and development	651	426
Sales and marketing	2,199	2,209
General and administrative	890	694
Write-off in-process technology acquired	-	938
Total operating expenses	3,740	4,267
Loss from operations	(1,131)	(575)
Other income (expense):
Equity in joint venture's income	9	-
Interest income (expense), net	(40)	(15)
Loss before income taxes	(1,162)	(590)
Benefit from income taxes	445	212
Net loss	$(717)	$(378)
Net loss per share - basic	$(0.15)	$(0.09)
Shares used in per share calculation - basic	4,687	4,308
Net loss per share - diluted	$(0.15)	$(0.09)
Shares used in per share calculation - diluted	4,687	4,308

The accompanying notes are an integral part of these financial statements

FIBERSTARS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(amounts in thousands)
(unaudited)

	Three Months Ended March 31,
	2001	2000
Net loss	$(717)	$(378)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments	(169)	(105)
Income tax benefit	65	38
Comprehensive loss	$(821)	$(445)

The accompanying notes are an integral part of these financial statements

FIBERSTARS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)

(unaudited)

	Three Months Ended  March 31,
	2001	2000
Cash flows from operating activities:
Net loss	$(717)	$(378)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	373	323
Write-off in-process technology acquired	-	938
Provision for doubtful accounts receivable	20	37
Equity in joint venture	(9)	-
Deferred income taxes	(785)	(319)
Changes in assets & liabilities:
Accounts receivable	(1,578)	(3,332)
Notes and other receivable	14	68
Inventories	(571)	(901)
Prepaid expenses and other current assets	57	64
Other assets	(54)	(126)
Accounts payable	(634)	644
Accrued expenses	(126)	40
Total adjustments	(3,293)	(2,564)
Net cash used in operating activities	(4,010)	(2,942)
Cash flows from investing activities:
Repayment of loan made to officers	7	40
Acquisition of fixed assets	(168)	(140)
Net cash used in investing activities	(161)	(100)
Cash flows from financing activities:
Cash proceeds from sale of common stock	78	160
Repayment of long-term debt	-	(17)
Proceeds from issuance of long-term debt	73	-
Proceeds from line of credit	3,186	1,500
Net cash provided by financing activities	3,337	1,643
Effect of exchange rate changes on cash	(36)	(18)
Net decrease in cash and cash equivalents	(870)	(1,417)
Cash and cash equivalents, beginning of period	1,230	1,904
Cash and cash equivalents, end of period	$360	$487
Non-cash investing activities:
Fair value of assets acquired		$2,550
Warrants for capital stock issued		$(2,550)

The accompanying notes are an integral part of these financial statements

FIBERSTARS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(Unaudited)

1.  Summary of Significant Accounting Policies

Interim Financial Statements (unaudited)

Although unaudited, the interim financial statements in this report reflect all adjustments, consisting of normal recurring accruals, which are, in the opinion of management, necessary for a fair statement of financial position, results of operations and cash flows for the interim periods covered and of the financial condition of Fiberstars, Inc. (“the Company”) at the interim balance sheet dates.  The results of operations for the interim periods presented are not necessarily indicative of the results expected for the entire year.

Year-end Balance Sheet

The year-end balance sheet information was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles.  These financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2000, contained in the Company’s 2000 Annual Report on Form 10-K.

Foreign Currency Translation:

The Company's international subsidiaries use their local currency as their functional currency. For those subsidiaries, assets and liabilities are translated at exchange rates in effect at the balance sheet date and income and expense accounts at average exchange rates during the year. Resulting translation adjustments are recorded directly to a separate component of shareholders' equity.

Earnings Per Share

The Company presents its earnings per share (“EPS”) in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, which requires the presentation of basic and diluted EPS. Basic EPS is computed by dividing income available to shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of incremental shares upon exercise of stock options and warrants.

In accordance with the disclosure requirements of SFAS No. 128, a reconciliation of the numerator and denominator of basic and diluted EPS is provided as follows (in thousands, except per share amounts):

	Three months ended March 31,
	2001	2000
Numerator - Basic and Diluted EPS
Net loss	$(717)	$(378)
Denominator - Basic EPS
Weighted average shares outstanding	4,687	4,308
Basic loss per share	$(0.15)	$(0.09)
Denominator - Diluted EPS
Denominator - Basic EPS	4,687	4,308
Effect of dilutive securities:
Stock options and warrants
	4,687	4,308
Diluted loss per share	$(0.15)	$(0.09)

At March 31, 2001, options and warrants to purchase 1,662,849 shares were outstanding, but were not included in the quarter’s calculation of diluted EPS because their inclusion would have been antidilutive.  Options to purchase 10,000 shares of common stock were outstanding at March 31, 2000, but were not included in the calculation of diluted EPS because their inclusion would have been antidilutive.

2.  Inventories

Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out cost method) or market and consist of the following (in thousands):

	March 31,  2001	December 31,   2000
	(unaudited)
Raw materials	$3,816	$3,764
Finished goods	2,388	1,909
	$6,204	$5,672

3.  Line of Credit and Long-term Debt:

The Company has a $5.0 million secured line of credit for working capital purposes with Wells Fargo Bank.  As of March 31, 2001, the Company had used $3,186,000 of its available line.  On March 23, 2001 the Company executed new line of credit documents which provided for securing the line with the Company’s inventory and accounts receivable.  This was the only significant change to the line of credit.  Additionally, the term loan commitment for equipment purchases, which the Company had never used, was discontinued.  The line of credit is renewable on an annual basis, with the next renewal in August 2001.

The Company also has a $404,000 bank overdraft agreement with Lloyds Bank Plc through its UK subsidiary.  There were no net borrowings against the overdraft agreement as of March 31, 2001.  In addition, at the end of the first quarter, the Company had a total borrowing of $530,000 against a credit facility which totals $653,000 held by its German subsidiary.  This borrowing is largely held in order to finance the offices owned by the Company in Berching, Germany.

4.  Comprehensive Income

The Company has adopted the provisions of SFAS No. 130, “Reporting Comprehensive Income,” effective January 1, 1998.  SFAS No. 130 requires the disclosure of comprehensive income and its components in a full set of general purpose financial statements.  Comprehensive income is defined as net income plus net sales, expenses, gains and losses that, under generally accepted accounting principles, are excluded from net income.  A separate statement of comprehensive operations has been presented with this report.

5. Segments and Geographic Sales

The Company operates in a single industry segment that manufactures, markets and sells fiber optic lighting products.  The Company has two primary product lines:  the pool and spa lighting product line and the commercial lighting product line.  The Company markets its products for worldwide distribution primarily through independent sales representatives, distributors and swimming pool builders in North America, Europe and the Far East.

A summary of geographic sales is as follows (in thousands):

	Three months ended March 31,
	2001	2000
	(unaudited)	(unaudited
U.S. Domestic	$4,854	$5,793
U.S. Export	521	1,152
European subsidiaries	1,501	1,838
	$6,876	$8,782

A summary of sales by product line is as follows (in thousands):

	Three months ended March 31,
	2001	2000
	(unaudited)	(unaudited)
Pool and Spa Lighting	$3,033	$4,580
Commercial Lighting	3,843	3,777
Other	-	425
	$6,876	$8,782

6.  Restructuring charge

Included in general and administrative expense in the first quarter of fiscal 2001 was a  restructuring charge.  This charge was for $118,000 and was for the planned reduction of the Company's workforce by 18 people, or 11%.

Item 2.  Management’s Discussion and Analysis of Results of Operations and Financial Condition

The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and related notes included elsewhere in this report and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.

When used in this discussion, the words "expects," "anticipates," "estimates," and similar expressions are intended to identify forward-looking statements.  These statements, which include statements as to the Company's future operating results, expected expenses and capital expenditure levels, expected cash flows, expected inventory levels, reductions in accounts receivable, expectations regarding market conditions, the adequacy of capital resources and growth in operations, are subject to risks and uncertainties that could cause actual results to differ materially from those projected.  These risks and uncertainties include, but are not limited to, those risks discussed below, as well as our ability to retain and obtain customer and distributor relationships, our ability to maintain relationships with strategic partners and Advanced Lighting Technology, Inc. (“ADLT”), our ability to manage expenses and inventory levels, our ability to reduce manufacturing overhead and general and administrative expenses as a percentage of sales, our ability to reduce  doubtful accounts receivable, our ability to increase cash balances in future quarters, the cost of accessing or acquiring technologies or intellectual property, the cost of enforcing or defending intellectual property, risks relating to developing and marketing new products, the ability of our lighting products to meet customer expectations, manufacturing difficulties, possible delays in the release of products, risks associated with the evolution and growth of the fiber optic lighting market, trends in price performance and adoption rates of fiber optic lighting products in Europe and the United States, our dependence on a limited number of suppliers for components and distributors for sales, our ability to obtain high-quality components at reasonable prices, the impact of limited energy resources on our manufacturing operations and business, the impact of technological advances and competitive products, and seasonal and other fluctuations in the construction industry;and the matters discussed in "Factors That May Affect Results."  These forward-looking statements speak only as of the date hereof.  The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

RESULTS OF OPERATIONS

Net sales decreased 22% to $6,876,000 for the quarter ended March 31, 2001 as compared to the same quarter a year ago.  The decrease was a result of a significant decrease in in-ground pool lighting sales along with a drop in international sales partially offset by growth in the U.S. commercial lighting sales. The significant sales decline in in-ground pool lighting was attributed to unseasonably cool and wet weather through parts of the country along with market uncertainty about the future strength of the economy.  The Company expects continued softness in the pool lighting market this year.

Gross profit decreased to $2,609,000 in the first quarter of fiscal 2001, a 29% decrease compared with the same period in the prior year.  The gross profit margin was 38% for the first quarter of fiscal 2001, a four percentage point decrease from the 42% gross margin achieved in the first quarter of fiscal 2000.  The decrease in gross margin was primarily a result of higher operations overhead costs as a percentage of net sales.

Research and development expenses were $651,000 in the first quarter of fiscal 2001, a 53% increase compared with the first quarter of fiscal 2000.  The increase is largely due to including certain expenses in research and development in fiscal 2001 which were previously included in cost of sales in fiscal 2000 as part of a development agreement. This development agreement was between the Company and ADLT and provided for the Company to do certain development work for ADLT for which the Company received consulting revenues.  $303,000 in expenses for engineers and materials spent on this project were included in cost of sales in the first quarter of fiscal 2000.  Since the expenses of these engineers in fiscal 2001 are not directly generating revenues, they are now included in research and development expenses.  The development agreement with ADLT was in place between October 1999 and December 2000.  Increases in research and development expenses for the first quarter of fiscal 2001 were offset by $143,000 of National Institute of Science and Technology funds to be received for work performed in the first quarter under a federal Advanced Technology Program award.  As a percentage of net sales, research and development expenses were 9% for the first quarter of fiscal 2001 versus 5% in the first quarter of fiscal 2000.

Sales and marketing expenses remained almost unchanged at $2,199,000 in the first quarter of fiscal 2001 as compared to $2,209,000 for the same period in fiscal 2000.  The decrease was primarily due to lower sales and marketing spending in the U.S. commercial lighting market.  Sales and marketing expenses were 32% of sales in the first quarter of fiscal 2001 compared to 25% for the same quarter in fiscal 2000.  The increase in sales and marketing expenses as a percentage of sales was due to a reduction in revenues not compensated by a corresponding decline in expenses.

General and administrative costs were $890,000 in the first quarter of fiscal 2001, an increase of 28% over costs in the first quarter of fiscal 2000.  This increase was largely due to taking a $118,000 restructuring charge for the planned reduction of the Company’s workforce by 18 people, or 11%.  Excluding the restructuring charge, general and administrative expenses would have increased 11% over the first quarter of fiscal 2000 largely due to higher amortization from acquisitions made in fiscal 2000.  General and administrative costs were 13% of net sales in the quarter ended March 31, 2001 versus 8% for the same quarter in fiscal 2000.

In the first quarter of fiscal 2000 there was an additional expense of $938,000 attributable to the write-off of in-process technology acquired as part of the acquisition of Unison Fiber Optic Lighting Systems, LLC (“Unison”).  There were no such charges in the first quarter of fiscal 2001.

Other income and expense includes income from joint ventures and interest income and expense. Net interest expense was $40,000 in the first quarter of fiscal 2001 compared to net interest expense of $15,000 for the same quarter in fiscal 2000.  The increase in interest expense was due primarily to a greater draw down on the Company’s line of credit in the first quarter of fiscal 2001 as compared to 2000, as a result of needing to fund increases in accounts receivable and inventory.

The Company recorded an increased net loss of $717,000 in the first quarter of fiscal 2001 as compared to a net loss of $378,000 in the first quarter of fiscal 2000, substantially as a result of the sales decrease, higher expenses and decrease in gross profit margin.  The net loss in the first quarter of fiscal 2000 included a $938,000 write-off of in-process technology.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2001, cash and cash equivalents were $360,000 as compared to $1,230,000 at December 31, 2000.  In addition, there was a utilization of the Company’s line of credit of $3,186,000 at the end of the quarter as compared to no outstanding utilization of the line of credit at the prior year end.

Cash was used during the first three months of fiscal 2001 by a net loss of $717,000 which compared to a loss of $378,000 from net income for the same period in fiscal 2000.  After adjusting for depreciation, amortization and the write-off of in-process technology acquired, $344,000 in cash was used for the three month period ended March 31, 2001 as compared to $883,000 for the same period in fiscal 2000.  After including cash used for working capital, there was a total of $4,010,000 in cash used for operating activities in fiscal 2001 compared to a use of $2,942,000 for operating activities in the first three months of fiscal 2000.  Cash in the first quarter of fiscal 2001 was used to increase inventory.  The inventory increase was for pool lighting products, for new products not yet released and for additional fiber.  Additionally, accounts receivable remained seasonably high as the Company carried balances for “early buy” customer purchases made in the fourth quarter of fiscal 2000 which are due to be paid in the second quarter of fiscal 2001.  The Company has also experienced an increase in accounts receivable which are beyond 90 days, and will be focusing on bringing these down in succeeding quarters.

There was a net contribution of $3,337,000 in cash in the first three months of fiscal 2001 from financing activities, primarily from the draw down under the Company’s bank line of credit.  In the same period in fiscal 2000, the Company used $1,500,000 from its bank line of credit.

As a result of the cash used in operating activities and the cash provided by financing activities, there was a net use of cash in the first three months of fiscal 2001 of $870,000 which resulted in an ending cash balance of $360,000.  This compares to a net utilization of $1,417,000 in cash for the same period in fiscal 2000, resulting in an ending cash balance of $487,000 for that period.

The Company has a $5.0 million secured line of credit for working capital purposes with Wells Fargo Bank.  As of March 31, 2001, the Company had used $3,186,000 of its available line.  On March 23, 2001 the Company executed new line of credit documents which provided for securing the line with the Company’s inventory and accounts receivable.  Additionally the term loan commitment for equipment purchases, which the Company had never used, was discontinued.  The line of credit is renewable on an annual basis, with the next renewal in August 2001.

The Company also has a $404,000 bank overdraft agreement with Lloyds Bank Plc through its UK subsidiary.  There were no net borrowings against the overdraft agreement as of March 31, 2001.  In addition, at the end of the first quarter, the Company had a total borrowing of $530,000 against a credit facility which totals $653,000 held by its German subsidiary.  This borrowing is largely held in order to finance the offices owned by the Company in Berching, Germany.

The Company believes that existing cash balances, together with the Company’s bank lines of credit and funds that may be generated from operations, will be sufficient to finance the Company’s currently anticipated working capital requirements and capital expenditure requirements for at least the next twelve months.

FACTORS THAT MAY AFFECT RESULTS

Our quarterly operating results are subject to fluctuations caused by many factors which could result in decreased revenues and a drop in the price of our common stock.

Our quarterly operating results can vary significantly depending upon a number of factors.  It is difficult to predict the lighting market’s acceptance of our products on a quarterly basis, and the level and timing of orders received can fluctuate substantially. Our sales volumes also fluctuate.  Historically we have shipped a substantial portion of our quarterly sales in the last month of each of the second and fourth quarters of the year.  Our product development and marketing expenditures may vary significantly from quarter to quarter and are made well in advance of potential resulting revenue.  Significant portions of our expenses are relatively fixed in advance based upon our forecasts of future sales. If sales fall below our expectations in any given quarter, we will not be able to make any significant adjustment in our operating expenses, and our operating results will be adversely affected.

Our sales are dependent upon new construction levels and are subject to seasonal trends. 

Sales of our pool and spa lighting products, which currently are available only with newly constructed pools and spas, depend substantially upon the level of new construction of pools. Sales of commercial lighting products also depend significantly upon the level of new building construction and renovation. Construction levels are affected by housing market trends, interest rates and the weather.  Because of the seasonality of construction, our sales of swimming pool and commercial lighting products, and thus our overall revenues and income, have tended to be significantly lower in the first quarter of each year. Various economic and other trends may alter these seasonal trends from year to year, and we cannot predict the extent to which these seasonal trends will continue. The U.S. economy has been softening at the end of fiscal 2000 and the beginning of fiscal 2001.  If this trend continues, as appears likely, we may experience difficulties collecting accounts receivable, sales and demand for our products may decrease and our operating results will probably suffer.

If we are not able to successfully develop, manufacture, market and sell our new products, our operating results will decline.

The Company plans to introduce several new products in the downlight, neon replacement, display case and pool markets this year.   We could have difficulties manufacturing these new products as a result of our inexperience with them.  Also, it is difficult to predict whether the market will accept these new products.  If any of these new products fails to meet expectations, our operating results will be adversely affected.

We operate in markets that are intensely and increasingly competitive.

Competition is increasing in a number of our markets. A number of companies offer directly competitive products, including fiber optic lighting products for downlighting, display case and water lighting, and neon and other lighted signs.  Our competitors include some very large and well-established companies such as Philips, Schott, 3M, Bridgestone, Mitsubishi and Osram/Siemens.  All of these companies have substantially greater financial, technical and marketing resources than we do.  We anticipate that any future growth in fiber optic lighting will be accompanied by continuing increases in competition, which could adversely affect our operating results if we cannot compete effectively.

We rely on intellectual property and other proprietary information that may not be protected and that may be expensive to protect.

The Company has twenty-five patents as of April 2001.  There can be no assurance, however, that our issued patents are valid or that any patents applied for will be issued.  We have a policy of seeking to protect our intellectual property through, among other things, the prosecution of patents with respect to certain of our technologies. There are many issued patents and pending patent applications in the field of fiber optic technology, and certain of our competitors hold and have applied for patents related to fiber optic lighting. Although, to date, we have not been involved in litigation challenging our intellectual property rights or asserting intellectual property rights of others, we have in the past received communications from third parties asserting rights in our patents or that our technology infringes intellectual property rights held by such third parties.  Based on information currently available to us, we do not believe that any such claims involving our technology or patents are meritorious.  However, we may be required to engage in litigation to protect our patent rights or to defend against the claims of others.  In the event of litigation to determine the validity of any third party claims or claims by us against such third party, such litigation, whether or not determined in our favor, could result in significant expense and divert the efforts of our technical and management personnel, regardless of the outcome of such litigation.

We rely on distributors for a significant portion of our sales and terms and conditions of sales are subject to change with very little notice.

Most of the Company’s products are sold through distributors and the Company does not have long-term contracts with its distributors.  Some of these distributors are quite large, particularly in the pool products market.  If these distributors significantly change their terms with the Company or change their historical pattern of ordering products from the Company, there could be a significant impact on the Company’s revenues and profits.

We depend on key employees in a competitive market for skilled personnel, and the loss of the services of any of our key employees could materially affect our business.

The Company’s future success will depend to a large extent on the continued contributions of certain employees, many of whom would be difficult to replace.  The future success of the Company also will depend on its ability to attract and retain qualified technical, sales, marketing and management personnel, for whom competition is intense.  The loss of or failure to attract and retain any such persons could delay product development cycles, disrupt the Company’s operations or otherwise harm the Company’s business or results of operations.

We depend on a limited number of suppliers from whom we do not have a guarantee to adequate supplies, increasing the risk that loss of  or problems with a single supplier could result in impaired margins, reduced production volumes, strained customer relations and loss of business.

Mitsubishi is the sole supplier of the Company’s fiber, other than the large core fiber the Company now manufactures following the Unison acquisition.  The Company also relies on sole source for certain lamps, reflectors, remote control devices and power supplies.  The loss of one or more of the Company’s suppliers could result in delays in the shipment of products, additional expense associate with redesigning products, impaired margins, reduced production volumes, strained customer relations, loss of business or otherwise harm the results of operations.

We may experience power blackouts and higher electricity prices as a result of California's current energy crisis, which could disrupt our operations and increase our expenses.

California is in the midst of an energy crisis that could disrupt our operations and increase our expenses.  We rely on the major Northern California public utility, Pacific Gas & Electric Company (“PG&E”) to supply electric power to our facilities in Northern California.  PG&E has recently filed for bankruptcy.  Due to problems associated with the de-regulation of the power industry in California and shortages in wholesale electricity supplies, customers of PG&E have been faced with increased electricity prices, power shortages and, in some cases, rolling blackouts.  If blackouts interrupt our power supply, we may be temporarily unable to continue operations at our facilities.  Any such interruption in our ability to continue operations at our facilities could delay our ability to develop, manufacture or market our products, which could damage our reputation and result in lost revenue, either of which could substantially harm our business and results of operations.

OTHER FACTORS

Our business is subject to additional risks that could materially and adversely affect our future business, including:

• manufacturing risks, including the risks of shortages in materials or components necessary to our manufacturing and assembly operations, and the risks of increases in the prices of raw materials and components;

• sales and distribution risks, such as risks of changes in product mix or distribution channels that result in lower margins;

• risks of the loss of a significant distributor or sales representative;

• risks of the loss of a significant customer or swimming pool builder;

• risks of the effects of volume discounts that we grant from time to time to our larger customers, including reduced profit margins;

• risks of product returns and exchanges: we cannot be assured that we will not experience component problems in the future that could require increased warranty reserves and manufacturing costs;

• risks associated with product development and introduction problems, such as increased research, development and marketing expenses associated with new product introductions; and

• risks associated with delays in the introduction of new products and technologies, including lost sales and loss of market share.

Item 3.      Quantitative and Qualitative Disclosures About Market Risk

At March 31, 2001, the Company had $287,000 in cash held in foreign currencies as translated at period end foreign currency exchange rates.  The balances for cash held overseas in foreign currencies is subject to exchange rate risk.   The Company has a policy of maintaining cash balances in local currencies unless an amount of cash is occasionally transferred in order to repay intercompany debts.

The following table summarizes the outstanding loans held by the Company’s German subsidiary.  The amounts outstanding and due in future years are translated at the rate of 2.22 DM to $1.00, which was in effect at March 31, 2001.  This debt held in overseas foreign currency is subject to exchange rate risk.

(in thousands)	Basecurrency	2001	2002	2003	2004	2005
Amounts outstanding	DM	$530	$530	$370	$370	$370
Amounts due	DM			$160

PART II  -  OTHER INFORMATION

Item 1.      Legal Procedings

On December 20, 2000, Oklahoma Lighting Sales, LLC (“OLS”) filed an action against Fiberstars, Inc. and Sonic Industries, Inc. (“Sonic”) in the District Court of Oklahoma County, Oklahoma, claiming breach of oral contract and tortious interference among other things, requesting unspecified damages in excess of $10,000.  OLS was the supplier of the Company’s products to Sonic from October 1997 to November 2000.  OLS was replaced as the supplier by Sonic in November 2000.  The new supplier is a company which Fiberstars was using as a warranty service provider for Sonic stores.  OLS claims Fiberstars’ use of this warranty service provider resulted in OLS losing the supplier assignment with Sonic.  Fiberstars and Sonic believe that Sonic was acting entirely within its right to hire a new distributor.

On April 9, 2001, a settlement agreement between OLS and the Company was signed by both parties, providing for the Company to receive assets with a book value of $400,000 from OLS and for the parties to release each other from all demands, claims and causes of action.

Item 6. Exhibits and Reports on Form 8-K

(a)	The following exhibits have been filed with this Report:
	Exhibit 10.1  - Extension – Loan Agreement between the Registrant and Wells Fargo Bank, National Association dated as of March 23, 2001.
	Exhibit 10.2  -  Extension - Revolving Line of Credit Note by the Registrant dated as of March 23, 2001, to Wells Fargo Bank, National Association
	Exhibit 10.3  -  Continuing Security Agreement, Rights to Payment and Inventory by the Registrant dated as of March 23, 2001, to Wells Fargo Bank.
(b)	The following report on Form 8-K was filed previously during the period covered by this report:
	Current Report on Form 8-K, filed on February 12, 2001, reporting under Item 5, the phasing out of certain officer positions

Items 2, 3, 4 and  5 are not applicable and have been omitted.

SIGNATURES

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.

		FIBERSTARS, INC.
Date: May 15, 2001	By:	/s/    Robert A.Connors
		Robert A.Connors
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

EXHIBIT INDEX

Exhibit
Number        Description of Documents

10.1	Extension – Loan Agreement between the Registrant and Wells Fargo Bank, National Association dated as of March 23, 2001.
10.2	Extension - Revolving Line of Credit Note by the Registrant dated as of March 23, 2001, to Wells Fargo Bank, National Association.
10.3	Continuing Security Agreement, Rights to Payment and Inventory by the Registrant dated as of March 23, 2001, to Wells Fargo Bank.

EX-10.1

	EXHIBIT 10.1
LOAN AGREEMENT	WELLS FARGO BANK

   This Loan Agreement (this “Agreement”) is entered into by and between Fiberstars, Inc. (“Borrower”) and WELLS FARGO BANK, NATIONAL ASSOCIATION (“Bank”) and sets forth the terms and conditions which govern all Borrower’s commercial credit accommodations form Bank, whether now existing or hereafter granted (each, a “Credit” and collectively, “Credits”), which terms and conditions are in addition to those set forth in any other contract, instrument or document (collectively with this Agreement, the “Loan Documents”) required by this Agreement or heretofore or at any time hereafter delivered to Bank in connection with any Credit.

   I.    REPRESENTATIONS AND WARRENTIES.  Borrower makes the following representations and warranties to Bank, which representations and warranties shall be true as of the date hereof and on the date of each extension of credit under each Credit with the same effect as through make on each such date:

     (a)Legal Status.  Borrower is a corporation, duly organized and existing and in good standing under the laws of the State of California, and is qualified or licensed to do business in all jurisdictions in which such qualification or licensing is required or in which the failure to be qualified or licensed could have a material adverse effect on Borrower.

(b)Authorization and Validity.  Each of the Loan Documents has been duly authorized, and upon its execution and delivery to Bank will constitute a legal valid and binding obligation of Borrower or the party which executes the same, enforceable in accordance with its respective terms.

(c)No Violation.  The execution, delivery and performance by Borrower of each of the Loan Documents do not violate any provision of law or regulation, or contravene any provision of Borrower’s Articles of Incorporation or By-Laws, or result in any breach of or default under any agreement, indenture or other instrument to which Borrower is a party or by which Borrower may be bound.

(d)No Litigation.  There are no pending, or to the best of Borrower’s knowledge threatened, actions, claims, investigations, suits or proceedings by or before any governmental authority, arbitrator, court or administrative agency which could have a material adverse effect on the financial condition or operation of Borrower except as disclosed by Borrower to Bank in writing prior to the date hereof.

     (e)Financial Statements.  The most recent annual financial statement of Borrower, and all interim financial statements delivered to Bank since the date of said financial statement, true copies of which have been delivered by Borrower to Bank prior to the date hereof, are complete and correct, present fairly the financial condition of Borrower and disclose all liabilities of Borrower, and have been prepared in accordance with generally accepted accounting principles.  Since the dates of such financial statements there has been no material adverse change in the financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a security interest in or otherwise encumbered any of its assets or properties except in favor of Bank or as otherwise permitted by Bank in writing.

     (f)Tax Returns.  Borrower has no knowledge of any pending assessments or adjustments of its income tax payable with respect to any year except as disclosed by Borrower to Bank in writing prior to the date hereof.

II.    ADDITIONAL TERMS.

   (a) Conditions Precedent.  The obligation of Bank to grant any Credit is subject to the condition that Bank shall have received all contracts, instruments and documents, duly executed where applicable, deemed necessary by Bank to evidence such Credit and all terms and conditions applicable thereto, all of which shall be in form and substance satisfactory to Bank.

   (b) Application of Payments.  Each payment made on each Credit shall be applied first, to any interest then due, second, to any fees and charges then due, and third, to the outstanding principal balance thereof.

III.    COVENANTS.  So long as any Credit remains available or any amounts under any Credit remain outstanding, Borrower shall, unless Bank otherwise consents in writing:

   (a)Insurance.  Maintain and keep in force, for each business in which Borrower is engaged, insurance of the types and in amounts customarily carried in similar lines of business, including but not limited to fire, extended coverage, public liability, flood, property damage and workers’ compensation, carried with companies an in amounts satisfactory to Bank, and deliver to Bank from time to time at Bank’s request schedules setting forth all insurance then in effect.

   (b)Compliance; Laws and Regulations.  Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of Borrower’s business; and comply with the provisions of all documents pursuant to which Borrower is organized and/or which govern Borrower’s continued existence and with the requirements of all laws, rules, regulations and orders of any governmental authority applicable to Borrower and/or its business, including without limitation, all state or federal environmental, hazardous waste, health and safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any operations and/or properties of Borrower.

   (c)  Other Indebtedness.  Not create, incur, assume or permit to exist any indebtedness or other liabilities, whether  secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, direct or contingent (including any contingent liability under any guaranty of the obligations of any person or entity), except (i) the liabilities of Borrower to Bank, (ii) trade debt incurred by Borrower in the normal course of its business, and (iii) any other liabilities of Borrower existing as of, and disclosed to Bank in writing prior to, the date hereof.

   (d)Merger; Consolidation; Transfer of Assets.  Not merge into or consolidate with any other entity; nor make any substantial change in the nature of Borrower’s business as conducted as of the date hereof; nor acquire all or substantially all of the assets of any other person or entity; nor sell, lease, transfer or otherwise dispose of all or substantial or material portion of Borrower’s assets except in the ordinary course of its business.

   (e)Pledge of Assets.  Not mortgage, pledge, grant or permit to exist a security interest in, or lien upon, all or any portion of Borrower’s assets now owned or hereafter acquired, except in favor of Bank and except any of the foregoing existing as of, and disclosed to Bank in writing prior to, the date hereof.

   (f)Financial Statements.  Provide to Bank all of the following, in form and detail satisfactory to Bank, together with such current financial and other information as Bank from time to time may reasonably request:

(i)  As soon as available, but in no event later than 120 days after and as of the end of each fiscal year, an audited financial statement of Borrower, prepared by an independent certified public accountant acceptable to Bank, to include a balance sheet, income statement and statement of cash flow, together with all supporting schedules and footnotes.

(ii)  As soon as available, but in no event later than 45 days after and as of the end of each fiscal quarter, a financial statement of Borrower, prepared by independent certified public accountant and certified as correct by an officer of Borrower authorized to borrow under the most current Corporate Borrowing Resolution delivered by Borrower to Bank, to include a balance sheet and income statement, together with all supporting schedules and footnotes.

   (g)      Financial Condition.  Maintain Borrower’s financial condition as follows using generally accepted accounting principles consistently applied and used consistently with prior practices, except to the extent modified by the following definitions:

(i) Total Liabilities divided by Tangible Net Worth not at any time grater than 0.75 to 1.0, with “Total Liabilities” defined as the aggregate of current liabilities and non-current liabilities less subordinated debt, and with “Tangible Net Worth” defined as the aggregate of total stockholders’ equity plus subordinated debt less any intangible assets.

(ii)Quick Ratio not at any time less than 1.25 to 1.0, with “Quick Ratio” defined as the aggregate of unrestricted cash, unrestricted marketable securities and receivables convertible into cash divided by total current liabilities.

(iii)Net income after taxes not less than $1.00 on annual basis, determined as of each fiscal year end, and pre-tax profit not less than $1.00 on a year-to-date basis, determined as of the end of each fiscal quarter of each year, and as of the end of their fiscal quarter of each year.

(iv)EBITDA Coverage Ratio is not less than 1.50 to 1.0 as of each fiscal year end, with “EBITDA” defined as net profit before tax plus interest expense (net of capitalized interest expense), depreciation expense and amortization expense, and with “EBITDA Coverage Ratio” defined as EBITDA divided by the aggregate of interest expense plus the prior period current maturity of long-term debt and the prior period current maturity of subordinated debt.

   IV.   DEFAULT; REMEDIES.

     (a)  Events of Default.  The occurrence of any of the following shall constitute an “Event of Default” under this Agreement:

(i)The failure to pay any principal, interest, fees or other charges when due under any of the Loan Documents.

(ii)Any representation or warranty hereunder or under any other Loan Document shall prove to be incorrect, false or misleading in any material respect when made.

(iii)Any violation or breach of any term or condition of this Agreement or any other of the Loan Documents.

             (iv)       Any default in the payment or performance of any obligation, or any defined event of default, under any provisions of any contract, instrument or document pursuant to which Borrower or any guarantor hereunder has Incurred debt or any other liability of any kind to any person or entity, including Bank.

(v)The filing of a petition by or against Borrower or any guarantor hereunder any provisions of the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time, or under any similar or other law relating to bankruptcy, insolvency, reorganization or other relief for debtors; the appointment of a receiver, trustee, custodian or liquidator of or for any part o the assets or property of Borrower or any such guarantor; Borrower or any such guarantor becomes insolvent, makes a general assignment for the benefit of creditors or is generally not paying its debts as they become due; or any attachment or like levy on any property of Borrower or any such guarantor.

(vi)Any material adverse change, as determined solely by Bank, in the financial condition of Borrower.

(vii)The death or incapacity of any individual guarantor hereunder; or the dissolution or liquidation of Borrower or of any guarantor hereunder which is a corporation, partnership or other type of entity.

(viii)Any change in ownership during the term hereof of an aggregate of 25% or more of the common stock of Borrower.

    (b)Remedies.  Upon the occurrence of any Event of Default: (i) the entire balance of principal, interest, fees and charges on each Credit shall, at Bank’s option, become immediately due and payable in full without presentment, demand, protest or notice of dishonor, all of which are expressly waived by Borrower; (ii) the obligation, if any, of Bank to extend any further credit to Borrower under any of the Loan Documents shall immediately cease and terminate; and (iii) Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including without limitation the right to resort to any security for any Credit.  All rights, powers and remedies of Bank shall be cumulative.

   V.   MISCELLANEOUS.

   (a) No Waiver.  No delay, failure or discontinuance of Bank in exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy.  Any waiver, permit, consent or approval of any kind by Bank of any breach of or default under any of the Loan Documents, or any such waiver of any provisions or conditions hereof, must be in writing and shall be effective only to the extent set forth in writing.

   (b)Notices.  All notices, requests and demands required under this Agreement must be in writing, addressed to the applicable party at its address specified below or to such other address as any party may designate by written notice to each other party, and shall be deemed given or made as follows: (i) if personally delivered, upon delivery; (ii) if sent by mail, upon the earlier of the date of receipt or 3 days after deposit in the U.S. mail, first class and postage prepaid; and (iii) if sent by telecopy, upon receipt.

   (c.)Costs, Expenses and Attorneys’ Fees.  Borrower shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys’ fees (to include outside counsel fees and all allocated costs of Bank’s in-house counsel), expended or incurred by Bank in connection with (I) the negotiation and preparation of this Agreement and the other Loan Documents, and Bank’s continued administrative of each Credit, (iii) the enforcement of Bank’s rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents, and (iii) the prosecution or defense of any action in any way related to any of the Loan Documents, including without limitation, any action of declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Borrower or any other person or entity.

   (d)Successors; Assignment.  This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Borrower may not assign or transfer its interests or rights hereunder without Bank’s prior written consent.  Bank reserves the  right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Bank’s rights and benefits under each of the Loan Documents.  In connection therewith, Bank may disclose all documents and information which Bank now has or may hereafter acquire relating to any Credit, Borrower or its business, any guarantor or any Credit or the business of any such guarantor, or any collateral for any Credit.

   (e)Controlling Agreement; Amendment.  In the even of any direct conflict between any provision of this Agreement and any provision of any other Loan Document, the terms of this Agreement shall control.  This Agreement may be amended or modified only in writing signed by Bank and Borrower.

   (f)No Third Party Beneficiaries.  This Agreement is made and entered into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any other Loan Document to which it is not a party.

   (g) Serverability of Provisions.  If any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or any remaining provisions of this Agreement.

   (h)Governing Law.  This Agreement shall be governed by and construed in accordance with the laws of the State of California.

   (i)Cancellation of Prior Loan Agreements.  The Agreement cancels and supersedes all prior loan agreements between Borrower and Bank relating to any Credit.

   VI.   ARBITRATION

   (a)Arbitration.  The parties hereto agree, upon demand by any party, to submit to binding arbitration all claims, disputes and controversies between or among them (and their respective employees, officers, directors, attorneys, and other agents), whether in tort, contract or otherwise arising out of or relating to in any way (i) the loan and related Loan Documents which are the subject of this Agreement and its negotiation, execution, collateralization, administration, repayment, modification, extension, substitution, formation, inducement, enforcement,  default or termination; or (ii) requests for additional credit.

   (b)Governing Rules.  Any arbitration proceeding will (i) proceed in a location in California selected by the American Arbitration Association (“AAA”); (ii) be governed by the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the documents between the parties; and (iii) be conducted by the AAA, or such other administrator as the parties shall mutually agree upon, in accordance with the AAA’s commercial dispute resolution procedures, unless the claim or counterclaim is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and costs in which case the arbitration shall be conducted in accordance with the AAA’s optional procedures for large, complex commercial disputes (the commercial dispute resolution procedures or the optional procedures for large, complex commercial disputes to be referred to , as applicable, as the “Rules”).  If there is any inconsistency between the terms hereof and the Rules, the terms and procedures set forth herein shall control.  Any party who fails or refuses to submit to arbitration following a demand by any other party shall bear all costs and be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. §91 or any similar applicable state law.

   (c.)No Waiver; Provisional Remedies, Self-Help and Foreclosure.  The arbitration requirement does not limit the right of any party to (i) foreclose against real or personal property collateral; (ii) exercise self-help remedies relating to collateral or proceeds of collateral such as setoff or repossession; or (iii) obtain provisional or ancillary remedies such as replevin, injunctive relief, attachment or the appointment of a receiver, before during or after the pendency of any arbitration proceeding.  This exclusion does not constitute a waiver of the right or obligation of any party to submit any dispute to arbitration or reference hereunder, including those arising from the exercise of the actions detailed in sections (i), (ii), and (iii) of this paragraph.

   (d)Arbitrator Qualifications and Powers; Awards.  Any arbitration proceeding in which the amount in controversy is $5,000,000.00 or less will be decided by a single arbitrator selected according to the Rules, and who shall not render an award of grater than $5,000,000.00.  Any dispute in which the amount in controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations.  The arbitrator will be a neutral attorney licensed in the State of California or a neutral retired judge of the state of federal judiciary of California, in either case with a minimum of ten years experience in the substantive law applicable to the subject matter of the dispute to be arbitrated.  The arbitrator will determine whether or not an issue is arbitratable and will give effect to the statues of limitation in determining any claim.  In any arbitration proceeding the arbitrator will decide (by documents only or with a hearing at the arbitrator’s discretion) any pre-hearing motions which are similar to motions to dismiss for failure to state a claim or motions for summary adjudication.  The arbitrator shall resolve all disputes in accordance with e substantive law of California and may grant any remedy or relief that a court of such state could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award.  The arbitrator shall also have the power to award recovery of all costs and fees, to impose sanctions and to take such other action as the arbitrator deems necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of Civil Procedure or other applicable law.  Judgement upon the award rendered by the arbitrator may be entered in any court having jurisdiction.  The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief.

(e)Discovery:  In any arbitration proceeding discover will be permitted accordance with the Rules.  All Discovery shall be expressly limited to matters directly relevant to the dispute being arbitrated and must be competed no later than 20 days before the hearing date and within 180 days of the filing of the dispute with the AAA.  Any requests for an extension of the discovery periods, or any discovery disputes, will be subject to final determination by the arbitrator upon a showing that the request for discover is essential for the party’s presentation and that no alternative means for obtaining information is available.

   (f)Class Proceedings and Consolidations.  The resolution of any dispute arising pursuant to the terms of this Agreement shall be determined by a separate arbitration proceeding and such dispute shall not be consolidated with other disputees or include in any class proceedings.

   (g)Payment of Arbitration Costs And Fees.  The arbitrator shall award all costs and expenses of the arbitration proceeding.

    (h)Real Property Collateral; Judicial Reference.  Notwithstanding anything herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, b any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (iii) all parties to the arbitration waive any rights or benefits that might accrue them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interest securing such indebtedness and obligations, shall remain fully valid and enforceable.  If any Dispute is not submitted to arbitration, the Dispute shall be referred to a referee in accordance with California Cod of Civil Procedure Section 638 et seq., and this general reference agreement is intended to be specifically enforceable in accordance with said Section 638.  A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA’s selection procedures.  Judgement upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645.

    (i)Miscellaneous.  To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the dispute with the AAA.  No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business, by applicable law or regulation, or to the extent necessary to exercise any judicial review rights set forth herein.  If more than one agreement for arbitration by or between the parties potentially applies to a dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the dispute shall control.  This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties.

IN WITNESS WHEREOF, Borrower and Bank have executed this Agreement as of March 23, 2001.

Fiberstars, Inc.

By:  /s/ Robert A. Connors

Title: Chief Financial Officer

Address:44259 Nobel Drive

Fremont, CA  94538

WELLS FARGO BANK,
NATIONAL ASSOCIATION

By:  /s/ Laura Zaragoza

Title: Wells Fargo Assistant Vice President

Address:121 Park Center Plaza 3^rd Flr

San Jose, CA  95113

EX-10.2

	EXHIBIT 10.2
WELLS FARGO BANK	REVOLVING LINE OF CREDIT NOTE
$5,000,000.00	San Jose, California
	March 23, 2001

   FOR VALUE RECEIVED, the undersigned Fiberstars, Inc.  (“Borrower”) promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION (“Bank”) at its office at Santa Clara Valley RCBO, 121 Park Center Plaza 3^rd Flr, San Jose, CA 95113, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of $5,000,000.00, or such much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement as set forth herein.

DEFINITIONS:

   As used herein, the following terms shall have the meanings set forth after each, and any other term defined in this Note shall have the meaning set forth at the place defined:

            (a)          “Business Day” means any day except a Saturday, Sunday, or any other day on which commercial banks in California are authorized or required by law to close.

            (b)          “Fixed Rate Term” means a period commencing on a Business Day and continuing for 1, 2 or 3 months, as designated by Borrower, during which all or a portion of the outstanding principal balance of this Note bears interest determined in relation to LIBOR; provided however, that no Fixed Rate Term may be selected for a principal amount less than $100,000.00; and provided further, that no Fixed Rate Term shall extend beyond the scheduled maturity date hereof.  If any Fixed Rate Term would end on a day which is not a Business Day, then such Fixed Rated Term shall be extended to the next succeeding Business Day.

(c)“LIBOR” means the rate per annum (rounded upward, if necessary, to the nearest whole 1/8 of 1%) determined by dividing Base LIBOR by a percentage equal to 100% less any LIBOR Reserve Percentage.

                           (i)“Base LIBOR” means the rate per annum for United States dollar deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the understanding that such rate is quoted by Bank for the purpose of calculating effective rates of interest for loans making reference thereto, on the fist day of a Fixed Rate Term for delivery of funds on said date for a period of time approximately equal to the number of days in such Fixed Rate Term and in an amount approximately equal to the principal amount to  which such Fixed Rate Term applies.  Borrower understands and agrees that Bank may base its quotation of the Inter-Bank Marked Offered Rate upon such offers or other market indicators of the Inter-Bank Market as Bank in its discretion deems appropriate including, but not limited to, the rate offered for U.S. dollar deposits on the London Inter-Bank Market.

                           (ii) “LIBOR Reserve Percentage” means the reserve percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor) for “Eurocurrency Liabilities” (as defined in Regulation D of the Federal Reserve Board, as amended), adjusted by Bank for expected changes in such reserve percentage during the applicable Fixed Rated Term.

             (d)        “Prime Rate” means at any time the rate of interest most recently announced within Bank at its principal office as its Prime Rate, with the understanding that the Prime Rate is one of Bank’s base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as Bank may designate.

INTEREST:

             (a)         Interest.  The outstanding principal balance of this Note shall bear interest (computed on the basis of a 360-day year, actual days elapsed) either (I) at a fluctuating rate per annum equal to the Prime Rate in effect from time to time, or (ii) at a fixed rate per annum determined by Bank to be 1.75000% above LIBOR in effect on the first day of the applicable Fixed Rate Term.  When interest is determined in relation to the Prime Rate, each change in the rate of interest hereunder shall become effective on the date each Prime Rate change is announced within Bank.  With respect to each LIBOR selection hereunder, Bank is hereby authorized to note the date, principal amount, interest rate and Fixed Rate Term applicable thereto and any payments make thereon on Bank’s books and records (either manually or by electronic entry) and/or on any schedule attached to this Note, which notations shall be prima facie evidence of the accuracy of the information noted.

             (b)        Selection of Interest Rate Options.   At any time any portion of this Note bears interest determined in relation to LIBOR, it may be continued by Borrower at the end of the Fixed Rate Term applicable thereto so that all or a portion thereof bears interest determined in relation to the Prime Rate or to LIBOR for a new Fixed Rate Term designated by Borrower.  At any time any portion of the Note bears interest determined in relation to the Prime Rate, Borrower may convert all or a portion thereof so that it bears interest determined in relation to LIBOR for a Fixed Rate Term designated by Borrower.  At such time as Borrower requests an advance hereunder or wishes to select a LIBOR option for all or a portion for the outstanding principal balance hereof, and at the end of each Fixed Rate Term, Borrower shall give Bank notice specifying: (i) the interest rate option selected by Borrower; (ii) the principal amount subject thereto; and (iii) for each LIBOR selection, the length of the applicable Fixed Rate Term.  Any such notice may be given by telephone (or such other electronic method as Bank may permit) so long as, with respect to each LIBOR selection, (A) if requested by Bank, Borrower provides to Bank written confirmation thereof not later than three (3) Business Days after such notice is give, and (B) such notice is given to Bank prior to 10:00 a.m. on the first day of the Fixed Rate Term, or at a later time during any Business Day if Bank, at it’s sole option but without obligation to do so, accepts Borrower’s notice and quotes a fixed rate to Borrower.  If Borrower does not immediately accept a fixed rate when quoted by Bank, the quoted rate shall expire and any subsequent LIBOR request form Borrower shall be subject to a redetermination by Bank of the applicable fixed rate.  If no specific designation of interest is made at the time any advance is requested hereunder or at the end of any Fixed Rate Term, Borrower shall be deemed to have made a Prime Rate interest selection for such advance or the principal amount to which Fixed Rate Term applied.

             (c)         Taxes and Regulatory Costs.   Borrower shall pay to Bank immediately upon demand, in addition to any other amounts due or to become due hereunder, any and all (i) withholdings, interest equalization taxes, stamp taxes or other taxes (except income and franchise taxes) imposed by any domestic or foreign governmental authority and related in any manner or LIBOR, and (ii) future, supplemental, emergency or other changes in the LIBOR Reserve Percentage, assessment rates imposed by the Federal Deposit Insurance Corporation, or similar requirements or costs imposed by any domestic or foreign governmental authority or resulting form compliance by Bank with any request or directive (whether or not having the fore of law) from any central bank or other governmental authority and related in any manner to LIBOR to the extent they are not included in the calculation of LIBOR.  In determining which of the foregoing are attributable to any LIBOR option available to Borrower hereunder, any reasonable allocation make by Bank among its operations shall be conclusive and binding upon Borrower.

             (d)        Payment of Interest.  Interest accrued on this Note shall be payable on the 28th day of each month, commencing March 28, 2001.

             (e)         Default Interest.  From and after the maturity date of this Note, or such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-year, actual days elapsed) equal to 4% above the rate of interest from time to time applicable to this Note.

             (f)         Commitment Fee.  Prior to the initial extension of credit under this Note, Borrower shall pay to Bank a non-refundable commitment fee of $2,500.00.

             (g)        Collection of Payments.  Borrower authorizes Bank to collect all interest and fees due hereunder by charging Borrower’s deposit account number 4496-813031 with Bank, or any other deposit account maintained by any Borrower with Bank, for the full amount thereof.  Should there be insufficient funds in any such deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower.

SIGHT COMMERICAL AND STANDBY LETTER OF CREDIT SUBFEATURE:

             (a)         Letter of Credit Subfeature.  As a subfeature under this Note, Bank agrees from time to time during the term hereof to issue standby letters of credit for the account of Borrower to finance guarantee lease payments for their German facility and/or sight commercial letters of credit for the account of Borrower to finance Borrower’s inventory purchases (each, a “Letter of Credit” and collectively, “Letters of Credit”); provided however, that the form and substance of each Letter of Credit shall be subject to approval by Bank, in it’s sole discretion; and provided further, that the aggregate undrawn amount of all outstanding Letters of Credit shall not at any time exceed $400,000.00.  Each standby Letter of Credit shall be issued for a term not to exceed 365 days, and each commercial Letter of Credit shall be issued for a term not to exceed 180 days, as designated by Borrower; provided however, that no standby Letter of Credit shall have an expiration date subsequent to the maturity date of this Note, and no commercial Letter of Credit shall have an expiration date more than 90 days beyond the maturity date of this Note.  The undrawn amount of all Letters of Credit shall be reserved under this Note and shall not be available for borrowings hereunder.  Each Letter of Credit shall be subject to the additional terms and conditions of the Letter of Credit Agreement and related documents, if any, required by Bank in connection with the issuance thereof.  Each draft paid by Bank under a Letter of Credit shall be deemed an advance under this Note and shall be repaid by Borrower in accordance with the terms and conditions of this Note; provided however, that if advances hereunder are not available, for any reason, at the time any draft is paid by Bank, then Borrower shall immediately pay to Bank the full amount of such draft, together with interest thereon form the date such amount is paid by Bank to the date such amount is full repaid by Borrower, at the rate of interest applicable to advances hereunder.  In such event Borrower agrees that Bank, in its sole discretion, may debit any deposit account maintained by Borrower with Bank for the amount of any such draft.

             (b)        Letter of Credit Fees.  Borrower shall pay to Bank fees upon the issuance of each letter of Credit, upon the payment or negotiation of each draft under any letter of Credit and upon the occurrence of any other activity with respect to any Letter of Credit (including without limitation, the transfer, amendment or cancellation of any Letter of Credit) determined in accordance with Bank'’ standard fees and charges then in effect for such activity.

CLEAN ACCEPTANCE SUBFEATURE:

             (a)         Acceptance Subfeature.  As a subfeature under this Note, Bank agrees from time to time during the term hereof to create banker’s acceptances (each, an “Acceptance” and collectively, “Acceptances”) for the account of Borrower by accepting drafts drawn on Bank by Borrower for the purpose of financing Borrower’s importation of goods into the United States; provided however, that the form and substance of each Acceptance shall be subject to approval by Bank, in its sole discretion; and provided further, that the aggregate amount of all outstanding Acceptances shall not at any time exceed $400,000.00.  Each Acceptance shall be in the minimum amount of $5,000.00.  Each Acceptance shall be subject to the additional terms and conditions of an Acceptance Agreement in form and substance satisfactory to Bank.  Each Acceptance shall be created for a term not to exceed the lesser of 365 days, as designated by Borrower, or such period of time as may be necessary to comply with the terms of the Acceptance Agreement; provided however, that no Acceptance shall mature more than 90 days beyond the maturity date of this Note.  The outstanding amount of all Acceptances shall be reserved under this Note and shall not be available for borrowings hereunder.  The amount of each Acceptance which matures shall be deemed an advance under this Note and shall be repaid by Borrower in accordance with the terms and conditions of this Note; provided however, that if advances hereunder are not available, for any reason, at the time any Acceptance matures, then Borrower shall immediately pay to Bank the full amount of such matured Acceptance, together with interest thereon from the date such Acceptance matures to the date such amount is fully repaid by Borrower, at the rate of interest applicable to advances hereunder.  In such event Borrower agrees that Bank, in its sole discretion, may debit any deposit account maintained by Borrower with Bank for the amount of any Acceptance.  All Acceptances created hereunder shall be discounted with Bank.

             (b)        Acceptance Fees.  For each Acceptance created hereunder, Borrower shall pay to Bank on the date such Acceptance is created an acceptance fee determined in accordance with Bank’s standard fees and charges then in effect for the creation of Acceptances.

BORROWING AND REPAYMENT:

             (a)         Use of Proceeds.  Advances under this Note shall be available solely to finance working capital requirements.

             (b)        Borrowing and Repayment.  Borrower may form time to time during the term of this Note borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions of this Note and of any document executed in connection with, or at any time as a supplement to, this Note; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount stated above; and provided further, that Borrower shall maintain a zero balance on advances under this Note for a period of at least 30 consecutive days during each fiscal year.  All payments credited to principal shall be applied first, to the outstanding principal balance of this Note which bears interest determined in relation to the Prime Rate, if any, and second, to the outstanding principal balance of this Note which bears interest determined in relation to LIBOR, with such payments applied to the oldest Fixed Rate Term first.  The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of any principal payments made hereon by or for any Borrower, which balance may be endorsed hereon from time to time by the holder.  The outstanding principal balance of this Note shall be due and payable in full on August 15, 2001; except with respect to any draft paid by Bank under a commercial Letter of Credit and any Acceptance which matures subsequent to said date, the full amount of which shall be due and payable by Borrower immediately upon payment by Bank or at such maturity as applicable.

             (c)         Advances.  Advances hereunder, to the total amount of the principal sum available hereunder, may be made by the holder at the oral or written request of (i) David N. Ruckert or Roland Dennis or Bob Connors, any on acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (ii) any person, with respect to advances deposited to the credit of any deposit account of any Borrower, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of each Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account.  The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by any Borrower.

PREPAYMENT:

             (a)         Prime Rate.  Borrower may prepay principal on any portion of this Note which bears interest determined in relation to the Prime Rate at any time, in any amount and without penalty.

             (b)        LIBOR.  Borrower may prepay principal on any portion of this Note which bears interest determined in relation to LIBOR at any time and in the minimum amount of $100,000.00; provided however, that if the outstanding principal balance of such portion of this Note is less than said amount, the minimum prepayment amount shall be the entire outstanding principal balance thereof.  In consideration of Bank providing this prepayment option to Borrower, or if any such portion of this Note shall become due and payable at any time prior to the last day of the Fixed Rate Term applicable thereto by acceleration or otherwise, Borrower shall pay to Bank immediately upon demand a fee which is the sum of the discounted monthly differences for each month from the month of prepayment through the month in which Fixed Rate Term matures, calculated as follows for each such month:

(i)Determine the amount of interest which would have accrued each month on the amount prepaid at the interest rate applicable to such amount had it remained outstanding until the last day of the Fixed Rate Term applicable thereto.

(ii)Subtract from the amount determined in (i) above the amount of interest which would have accrued from the same month on the amount repaid for the remaining term of such Fixed Rate Term at LIBOR in effect on the date of prepayment for new loans made for such term and in a principal amount equal to the amount prepaid.

(iii)If the result obtained in (ii) for any month is greater than zero, discount that difference by LIBOR used in (ii) above.

Each Borrower acknowledges that prepayment of such amount may result in Bank incurring additional costs, expenses and/or liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities.  Each Borrower, therefore, agrees to pay the above-described prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment cots, expenses and/or liabilities of Bank.  If Borrower fails to pay any prepayment fee when due, the amount of such prepayment fee shall thereafter bear interest until paid at a prate per annum 2.000% above Prime Rate in effect from time to time (computed on the basis of a 360-day year, actual days elapsed).  Each change in the rate of interest on any such past due prepayment fee shall become effective on the date each Prime Rate change is announced within Bank.

COLLATERAL:

   As security for the payment and performance of all obligations of Borrower under this Note, Borrower grants to Bank security interests of first priority (except as agreed otherwise by Bank in writing) in the following property of Borrower, now owned or at any time hereafter acquired: all accounts receivable, other rights to payment and general intangibles; all inventory, together with security interests in all other personal property of Borrower not or at any time hereafter pledged to Bank as collateral for any other commercial credit  accommodation granted by Bank to Borrower.  All of the foregoing shall be evidenced by and subject to the terms of such security agreements, financing statements and other documents as Bank shall reasonably require, all in form and substance satisfactory to Bank.  Borrower shall reimburse Bank immediately upon demand for all costs and expenses incurred by Bank in connection with any of the foregoing security, including without limitation, filing fees and allocated costs of collateral audits.

EVENTS OF DEFAULT:

   Any default in the payment or performance of any obligation under this Note, or any defined event of default under any loan agreement now or at any time hereafter in effect between Borrower and Bank (whether executed prior to, concurrently with or at any time after this Note), shall constitute an “Event of Default” under this Note.

MISCELLANEOUS:

             (a)         Remedies.  Upon the occurrence of any Even of Default, the holder of this Note, at the holder’s option, may declare all sums of principal, interest, fees and charges outstanding hereunder to be immediately due and payable without presentment, demand, notice of nonperformance, notice of protest, protest or notice of dishonor, all of which are expressly waived by each Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate.  Each Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys’ fees (to include outside counsel fees and all allocated costs of the holder’s in-house counsel), expended or incurred by the holder in connection with the enforcement of the holder’s rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity.

             (b)        Obligations Joint and Several.  Should more than one person or entity sign this Note as Borrower, the obligations of each such Borrower shall be joint and serveral.

             (c)         Governing Law.  This Note shall be governed by and construed in accordance with the laws of the State of California.

             IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above.

Fiberstars, Inc.

By:  /s/ Robert A. Connors

Title: Chief Financial Officer

EX-10.3

	EXHIBIT 10.3
	CONTINUING SECURITY AGREEMENT
WELLS FARGO BANK	RIGHTS TO PAYMENT AND INVENTORY

1.GRANT OF SECURTY INTEREST.  For valuable consideration, the undersigned Fiberstars, Inc., or any of them (“Debtor”), hereby grants and transfers to WELLS FARGO BANK, NATIONAL ASSOCIATION (“Bank”) a security interest in all accounts, deposit accounts, chattel paper, instrument, documents and general intangibles (collectively called “Rights to Payment”), now existing or at any time hereafter, and prior to the termination hereof, arising (whether they arise from the sale, lease or other disposition of inventor or from performance of contracts for service, manufacture, construction, repair or otherwise or from any other source whatsoever), including all securities, guaranties, warranties, indemnity agreements, insurance policies and other agreements pertaining to the same or the property described therein, and in all goods returned by or repossessed from Debtor’s customers, together with a security interest in all inventory, goods held for sale or lease or to be furnished under contracts for service, goods so leased or furnished, raw materials, component parts, work in process or materials used or consumed in Debtor’s business and all warehouse receipts, bills of lading and other documents evidencing goods owned or acquired by Debtor, and all goods covered thereby, now or at any time hereafter, and prior to the termination hereof, owned or acquired by Debtor, wherever located, and all products thereof (collectively called “Inventory”), whether in the possession of Debtor, warehousemen, bailees or any other person, or in process of delivery and whether located at Debtor’s places of business of elsewhere (with all Rights to Payment and Inventory referred to herein collectively as the “Collateral”), together with whatever is receivable or received when any of the Collateral or proceeds thereof are sold, leased, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, including without limitation, all Rights to Payment, including returned premiums, with respect to involuntary, including with limitation, all Rights to Payment, including returned premiums, with respect to any insurance relating to any of the foregoing, and all Rights to Payment with respect to any cause of action affecting or relating to any of the foregoing (hereinafter called “Proceeds”).

2.OBLIGATIONS SECURED.  The obligations secured hereby are the payment and performance of: (a) all present and future Indebtedness of Debtor to Bank; (b) all obligations of Debtor and rights of Bank under this Agreement; and (c) all present and future obligations of Debtor to Bank of other kinds.  The word “Indebtedness” is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Debtor, or any of them, hereto fore, now or hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether Debtor may be liable individually or jointly, or whether recovery upon such Indebtedness may be or hereafter becomes unenforceable.

3.TERMINATION.  This Agreement will terminate upon the performance of all obligations of Debtor o Bank, including without limitation, the payment of all Indebtedness of Debtor to Bank, and the termination of all commitments of Bank to extend credit to Debtor, existing at the time Bank receives written notice from Debtor of the termination of this Agreement.

4.OBLIGATIONS OF BANK.  Bank has no obligation to make any loans hereunder.  Any money received by Bank in respect of the Collateral may be deposited, at Bank’s option, into a non-interest bearing account over which Debtor shall have no control, and the same shall, for all purposes, be deemed Collateral hereunder.

5.REPRESENTATIONS AND WARRANTIES.  Debtor represents and warrants to Bank that:  (a) Debtor is the owner and has possession or control of the Collateral and Proceeds; (b) Debtor has the right to grant a security interest in the Collateral and Proceeds; (c) all Collateral and Proceeds are genuine, free from liens, adverse claims, setoffs, default, prepayment, defenses and conditions precedent of any kind or character, except the lien created hereby or as otherwise agreed to by Bank, or heretofore disclosed by Debtor to Bank, in writing; (d) all settlements contained herein and, where applicable, in the Collateral are true and complete in all material respects; (e) no financing statement covering any of the Collateral or Proceeds, and naming any public office; (f) all persons appearing to be obligated on Rights to Payment and Proceeds have authority and capacity to contract and are bound as they appear to be; (g) all property subject to chattel paper has be properly registered and filed in compliance with law and to perfect the interest of Debtor in such property; and (h) all Rights to Payment and Proceeds comply with all applicable laws concerning form, content and manner of preparation and execution, including where applicable Federal Reserve Regulation Z and any State consumer credit laws.

6.CONVENANTS OF DEBTOR.

             (a)         Debtor Agrees in general: (i) to pay Indebtedness secured hereby when due; (ii) to Indemnify Bank against all losses, claims, demands, liabilities, and expenses of every kind caused by property subject hereto; (iii) to pay all costs and expenses, including reasonable attorneys’ fees, incurred by Bank in the perfection and preservation of the Collateral or Bank’s interest therein and/or the realization, enforcement and exercise of Bank’s rights, powers and remedies hereunder; (iv) to permit Bank to exercise it’s power; (v) to execute and deliver such documents as Bank deems necessary to create, perfect and continue the security interests contemplated hereby; and (vi) not to change its chief place of business (or personal residence, if applicable) or the place where Debtor keeps any of the Collateral or Debtor’s records concerning the Collateral and Proceeds without first giving Bank written notice of the address to which Debtor is moving same.

             (b)Debtor agrees with regard to the Collateral and Proceeds, unless Bank agrees otherwise in writing: (i) to insure Inventory and, where applicable, Rights to Payment with Bank as loss payee, in form, substance and amounts, under agreements, against risks and liabilities, and with insurance companies satisfactory to Bank; (ii) not to use any Inventory for any unlawful purpose or in anyway that would void any insurance required to be carried in connection therewith; (iii) not to remove Inventory from Debtor’s premises, except for deliveries to buyers in the ordinary course of Debtor’s business and except Inventory which consists of mobile goods as defined in the California Uniform Commercial Code, in which case Debtor agrees not to remove or permit the removal of the Inventory from its state of domicile for a period in excess of 30 calendar days; (iv) not to permit any security interest in or lien on the Collateral or Proceeds, including without limitation, liens arising from the storage of Inventory, except in favor of Bank; (v) not to sell, hypothecate or otherwise dispose of, nor permit the transfer by operation of law of, any of the Collateral or Proceeds or any interest therein, except sales of Inventory to buyers in the ordinary course of Debtor’s business; (vi) to furnish reports to Bank of all acquisitions, returns, sales and other dispositions of the Inventory in such form and detail and at such times as Bank may require; (vii) to permit Bank to inspect the Collateral at any time ; (viii) to keep, in accordance with generally accepted accounting principles, complete and accurate records regarding all Collateral and Proceeds, and to permit Bank to inspect the same and make copies thereof at any reasonable time; (ix) if requested by Bank, to receive and use reasonable diligence to collect Rights to Payment and Proceeds, in trust and as the property of Bank and to immediately endorse an appropriate and deliver such Rights to Payment and Proceeds to Bank daily in the exact form in which they are received together with a collection report in form satisfactory to Bank; (x) not to commingle Rights to Payment , Proceeds or collections thereunder with other property; (xi) to give only normal allowances and credits and to advise Bank thereof immediately in writing if they affect any Rights to Payment or Proceeds in any material respect; (xii) on demand, to deliver to Bank returned property resulting from, or payment equal to, such allowances or credits on any Rights to Payment or Proceeds or to execute such documents and do such other things as Bank may reasonably request for the purpose of perfecting, preserving and enforcing its security interest in such returned property; (xiii) from time to time, when requested by Bank, to prepare and deliver a schedule of all Collateral and Proceeds subject to this Agreement and to assign in writing and deliver to Bank all accounts, contracts, leases and other chattel paper, instruments, documents and other evidences thereof; (xiv) in the event Bank elects to receive payments of Rights to Payment or Proceeds hereunder, to pay all expenses incurred by Bank in connection therewith, including expenses of accounting, correspondence, collection efforts, reporting to account or contract debtors, filing, recording, record keeping and expenses incidental thereto; and (xv) to provide any service and do any other acts which may be necessary to maintain, preserve and protect all Collateral and, as appropriate and applicable, to keep all Collateral in good and saleable condition in accordance with the standards and practices adhered to generally by users and manufacturers of like property, and to keep all Collateral and Proceeds free and clear of all defenses, rights of offset and counterclaims.

7.POWERS OF BANK.  Debtor appoints Bank its true attorney-in-fact to perform any of the following powers, which are coupled with an interest, are irrevocable until termination of this Agreement and may be exercised from time to time by Bank’s officers and employees, or any of them, whether or not Debtor is in default: (a) to perform any obligation of Debtor hereunder in Debtor’s name or otherwise; (b) to give notice to account debtors or others of Bank’s rights in the Collateral and Proceeds, to enforce the same and make extension agreements with respect thereto; (c) to release persons liable on Proceeds and to give receipts and acquittances and compromise disputes in connection therewith; (d) to release security; (e) to resort to security in any order; (f) to prepare, execute, file, record or deliver notes, assignments, schedules, designation statements, financing statements continuation statements, termination statements, statements of assignment, applications of registration or like papers to perfect, preserve or release Bank’s interest in the Collateral and Proceeds; (g) to receive, open and real mail address to Debtor; (h) to take cash, instruments for the payment of money and other property to which Bank is entitled; (I) to verify facts concerning  the Collateral and Proceeds by inquiry of obligors thereon, or otherwise, in its own name or a fictitious name; (j)  to endorse, collect, deliver and receive payment under instruments for the payment of money constituting or relating to Proceeds; (k) to prepare, adjust, execute, deliver and receive payment under insurance claims, and to collect and receive payment of and endorse any instrument in payment of loss or returned premiums or any other insurance refund or return, and to apply such amounts received by Bank, at Bank’s sole option, toward repayment of the Indebtedness or replacement of the Collateral; (l) to exercise all rights, powers and remedies which Debtor would have, but for this agreement, with respect to all Collateral and Proceeds subject hereto; (m) to enter onto Debtor’s premises in inspecting the Collateral; (n) to make withdrawals from and to close deposit accounts or other accounts with any financial institution, wherever located, into which Proceeds may have deposited, and to apply funds so withdrawn to payment of the Indebtedness; (o) to preserve or release the interest evidenced by chattel paper to which Bank is entitled hereunder and to endorse and deliver evidences of title incidental thereto; and (p) to do all acts and things and execute all documents in the name of Debtor or otherwise, deemed by Bank as necessary, proper and convenient in connection with the preservation, perfection or enforcement of its rights hereunder.

8.PAYMENT OF PREMIUMS, TAXES, CHARGES, LIENS AND ASSESSMENTS.  Debtor agrees to pay prior to delinquency, all insurance premiums, taxes, charges, liens and assessments against the Collateral and Proceeds, and upon the failure of Debtor to do so, Bank at its option may pay any of them and shall be the sole judge of the legality or validity thereof and the amount necessary to discharge the same.  Any such payments made by Bank shall be obligations of Debtor to Bank, due and payable immediately upon demand, together with interest at a rate determined in accordance with the provisions of Section 15 herein, and shall be secured by the Collateral and Proceeds, subject to all terms and conditions of this Agreement.

9.EVENTS OF DEFAULT.  The occurrence of any of the following shall constitute an “Event of Default” under this Agreement: (a) any default in the payment or performance of any obligation, or any defined event of default, under (i) any contract or instrument evidencing any Indebtedness, or (ii) any other agreement between any Debtor and Bank, including without limitation any loan agreement, relating to or executed in connection with any Indebtedness; (b) any representation or warranty made by any Debtor herein shall prove to be incorrect in any material respect when made; (c) any Debtor shall fail to observe or perform any obligation or agreement contained herein; (d) any attachment or like levy on any property of any Debtor; and (e) Bank, in good faith, believes any or all of the Collateral and/or Proceeds to be in danger of misuse, dissipation, commingling, loss, theft, damage or destruction, or otherwise in jeopardy or unsatisfactory in character or value.

10.REMEDIES.  Upon the occurrence of any Event of Default, Bank shall have the right to declare immediately due and payable all or any Indebtedness secured hereby and to terminate any commitments to make loans or otherwise extend credit to Debtor.  Bank shall have all other rights, powers, privileges and remedies granted to a secured party upon default under the California Uniform Commercial Code or otherwise provided by law, including without limitation, the right to contact all persons obligated to Debtor on any Collateral or Proceeds and to instruct such persons to deliver all Collateral and/or Proceeds directly to Bank.   All rights, powers, privileges and remedies of Bank shall be cumulative.  No delay, failure or discontinuance of Bank in exercising any right, power, privilege or remedy hereunder shall affect or operate as a waiver of such right, power, privilege or remedy; nor shall any single or partial exercise of any such right, power, privilege or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power, privilege or remedy.  Any waiver, permit, consent or approval of any kind by Bank of any default hereunder, or any such waiver of any provisions or conditions hereof, must be in writing and shall be effective only to the extent set forth in writing.  It is agreed that public or private sales, for cash or on credit, to a wholesaler or retailer or investor, or user of property of the types subject to this Agreement, or public auction, are all commercially reasonable since differences in the sales prices generally realized in the different kinds of sales are ordinarily offset by the differences in the costs and credit risks of such sales.  While an Event Default exists: (a) Debtor will deliver to Bank from time to time, as requested by Bank, current lists of all Collateral and Proceeds; (b) Debtor will not dispose of any of the Collateral or Proceeds except on terms approve by Bank; (c) at Bank’s request, Debtor will assemble and deliver all Collateral and Proceeds, and books and records pertaining thereto, to Bank at a reasonably convenient place designated by Bank; and (d) Bank may, without notice to Debtor, enter onto Debtor’s premises and take possession of the Collateral.  With respect to any sale by Bank of any Collateral subject to this Agreement, Debtor hereby expressly grants to Bank the right to sell such Collateral using any or all of Debtor’s trademarks, trade names, trade name rights and/or proprietary labeles or marks.

11.DISPOSITION OF COLLATERAL AND PROCEEDS.   Upon the transfer of all or any part of the Indebtedness, Bank may transfer all or any part of the Collateral or Proceeds and shall be fully discharged thereafter from all liability and responsibility with respect to any of the foregoing so transferred, and the transferee shall be vested with all rights and powers of Bank hereunder with respect to any of the foregoing so transferred; but with respect to any Collateral or Proceeds not so transferred Bank shall retain all rights, powers, privileges and remedies herein given.  Any proceeds of any disposition of any of the Collateral or Proceeds, or any part thereof, may be applied by Bank to the payment of expenses incurred by Bank in connection with the foregoing, including reasonable attorney’s fees, and the balance of such proceeds may be applied by Bank toward the payment of the Indebtedness in such order of application as Bank may from time to time elect.

12.STATUTE OF LIMITATIONS.  Until all Indebtedness shall have been paid in full and all commitments by Bank to extend credit to Debtor have been terminated, the power of sale and all other rights, powers, privileges and remedies granted to Bank hereunder shall continue to exist and may be exercised by Bank at any time and from time to time irrespective of the fact that the Indebtedness or any part thereof may have become barred by any statute of limitations, or that the personal liability of Debtor may have ceased, unless such liability shall have ceased due tot the payment in full of all Indebtedness secured hereunder.

13.MISCELLANEOUS.  (a) The obligations of Debtor are joint and several; (b) Debtor hereby waives any right (I) to require Bank to make any presentment or demand, or give any notice of nonpayment or nonperformance, protest, notice of protest or notice of dishonor hereunder, (ii) to direct the application of payments or security for Indebtedness of Debtor or indebtedness of customers of Debtor, or (iii) to require proceedings against others or to require exhaustion of security; and (c) Debtor hereby consents to extensions, for bearances or alterations of the terms of Indebtedness, the release or substitution of security, and the release of any guarantors; provided however, that in each instance, Bank believes in good faith that the action in question is commercially reasonable in that it does not unreasonably increase the risk of nonpayment of the Indebtedness to which the action applies.  Until all Indebtedness shall have been paid in full, no Debtor shall have any right of subrogation or contribution, and each Debtor hereby waives any benefit of or right to participate in any of the Collateral or Proceeds or any other security now or hereafter held by Bank.

14.NOTICES.   All notices, requests and demands required under this Agreement must be in writing, addressed to Bank at the address specified in any other loan documents entered into between Debtor and Bank and to Debtor at the address of its chief executive office (or personal residence, if applicable) specified below or to such other address as any party may designate by written notice to each other party, and shall be deemed to have been given or made as follows: (a) if personally delivered, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or 3 days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt.

15.COSTS, EXPENSES AND ATTORNEYS’ FEES.  Debtor shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys’ fees (to include outside counsel feels and all allocated costs of Bank’s in-house counsel), expended or incurred by Bank in exercising any right, power, privilege or remedy conferred by this Agreement or in the enforcement thereof, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Debtor or in any way affecting any of the Collateral or Bank’s ability to exercise any of its rights or remedies with respect thereto.  All of the foregoing shall be paid by Debtor with interest from the date of demand until paid in full at a rate per annum equal to the greater of ten percent (10%) or Bank’s Prime Rate in effect from time to time.

16.SUCCESSORS; ASSIGNS; AMENDMENT.  This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties, and may be amended or modifies only in writing signed by Bank and Debtor.

17.OBLIGATIONS OF MARRIED PERSONS.  Any married person who signs this Agreement as Debtor hereby expressly agrees that recourse may be had against his or her separate property for all his or her Indebtedness to Bank secured by the Collateral and Proceeds under this Agreement.

18.SEVERABILITY OF PROVISIONS.  If any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision of such provision or any remaining provisions of this Agreement.

19.GOVERNING LAW.  This Agreement shall be governed by and construed in accordance with the law of the State of California.

    Debtor warrants that its chief executive office (or personal residence, if applicable) is located at the following address:  44259 NOBEL DRIVE, FREMONT, CA  94538
    Debtor warrants that the Collateral (except goods in transit) is located or domiciled at the following additional address:
NONE

    IN WITNESS WHEREOF, this Agreement has been duly executed as of March 23, 2001.

Fiberstars, Inc.

By:/s/ Robert A. Connors

Title:Chief Financial Officer