**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**





**Form 10-K**




**x**
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
                EXCHANGE ACT OF 1934****For
                the fiscal year ended DECEMBER 31, 2006****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 0-24230**


**FIBERSTARS, INC.**


(Exact
      name of registrant as specified in its charter)




**Delaware**
            **94-3021850**(State
                or other jurisdiction of
            (I.R.S.
                Employerincorporation
                or organization)
            Identification
                No.)






**32000
      Aurora Road, Solon, OH 44139**


(Address
      of principal executive offices) (Zip Code)


Registrant’s
      telephone number, including area code: **(440) 715-1300**


Securities
      registered under section 12(b) of the Exchange Act: **None**


Securities
      registered under Section 12(g) of the Exchange Act:


Title
      of
      Each Class


**Common
      Stock, $0.0001 par value**


**Series A
      Participating**


**Preferred
      Stock**


**Purchase
      Rights**







Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.  Yes o  No x




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.  Yes o  No x




Indicate
      by check mark whether the registrant (1) has filed all reports required 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




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the
      best of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any
      amendments to this Form 10-K. x




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
      (Check one):




Large
      accelerated filer o            Accelerated
      filer x            Non-accelerated
      filer. o




Indicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Act)  Yes o  No x




The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates of the registrant was approximately $84,971,000 as of
      June 30, 2006 (based upon the last trading price of the Common Stock of
      registrant on the Nasdaq National Market as of that date). Shares of common
      stock held as of June 30, 2006 by each director and executive officer of
      the registrant, as well as shares held by each holder of more than 10% of the
      common stock known to the registrant, have been excluded for purposes of the
      foregoing calculation. This calculation does not reflect a determination that
      any person is an affiliate of the registrant for any other purpose.




As
      of
      March 1, 2007, there were 11,404,856 shares of the registrant’s Common
      Stock outstanding.




**DOCUMENTS
      INCORPORATED BY REFERENCE**




Items
      10
      (as to directors and Section 16 (a) Beneficial Ownership Reporting
      Compliance), 11, 12 (as to Beneficial Ownership), 13 and 14 of Part III of
      this Report on Form 10-K incorporates information by reference from
      registrant’s definitive Proxy Statement to be filed with the Securities and
      Exchange Commission in connection with the solicitation of proxies for
      registrant’s 2007 Annual Meeting of Shareholders to be held June 14,
      2007.







**FORWARD-LOOKING
      STATEMENTS**




*When
      used in this Report, the words “expects,” “anticipates,” “estimates,” “plans,”
“intends” and similar expressions are intended to identify forward-looking
      statements. These statements include, but are not limited to, statements as
      to
      our competitive position, future operating results, net sales growth, expected
      operating expenses and capital expenditures, gross product margin improvement,
      sources of revenues, anticipated credits from government contracts, product
      development and enhancements, liquidity and cash reserves, our reliance upon
      a
      limited number of customers, our accounting policies, the effect of recent
      accounting announcements, the development and marketing of new products,
      relationships with customers and distributors, relationships with, dependence
      upon and the ability to obtain components from suppliers, as well as our remarks
      concerning our ability to compete in the fiber optic lighting market, the
      evolution and future size of the fiber optic lighting market, seasonal
      fluctuations, plans for and expected benefits of outsourcing and offshore
      manufacturing, trends in the price and performance of fiber optic lighting
      products, the benefits and performance of our lighting products, the adequacy
      of
      our current facilities, our strategy with regard to protecting our proprietary
      technology, our ability to retain qualified employees; and the risks set forth
      below under Item 1A, “Risk Factors.” These forward-looking statements speak only
      as of the date hereof. We expressly disclaim any obligation or undertaking
      to
      release publicly any updates or revisions to any forward-looking statements
      contained herein to reflect any change in our expectations with regard thereto
      or any change in events, conditions or circumstances on which any such statement
      is based.*




Fiberstars®,
      BritePak®, OptiCoreTM, Lightly Expressed®, Jazz LightTM, FX LightTM, FX Spa LightTM,
      EFO ICETM, EnergyFocusTM, and Fiberstars EFO® are our registered trademarks.
      We also refer to trademarks of other corporations and organizations in this
      document.




All
      references to “Fiberstars,” “we,” “us,” “our” or “the Company” means
      Fiberstars, Inc. and its subsidiaries, except where it is made clear that
      the term means only the parent company.




**PART I**




**Item
      1. Business**




**Overview**




Fiberstars
      designs, develops, manufactures and markets fiber optic lighting systems for
      wide-ranging uses in both the general commercial and the pool and spa lighting
      markets. Our EFO lighting system, first introduced in 2004, offers greater
      energy savings, heat dissipation, and maintenance cost benefits over
      conventional lighting for multiple applications. Accordingly, we believe our
      EFO
      lighting system will become a leading technology in accent lighting and numerous
      niche lighting markets.




We
      currently operate in two principal markets, Commercial Lighting and Pool and
      Spa
      Lighting, with several product lines:




l
            *Commercial
                Lighting.*Within
                this market we sell both EFO lighting systems and traditional fiber
                optic
                lighting systems used in commercial
                applications.




l
            *Energy
                Efficient Accent Lighting.*We
                market our EFO lighting systems primarily as an energy efficient
                alternative to MR-16 halogen lamps used for accent lighting in retail
                and
                commercial building settings. We also target niche lighting markets
                such
                as general illumination on naval ships, adjustable spot lights used
                on
                loading docks and display and freezer case
                lighting.




l
            *Specialty
                Decorative and Special Effects Lighting.*We
                market our traditional small diameter fiber optic systems in specialty
                and
                special effects lighting applications including case lighting, decorative
                and neon alternative applications and
                signage.




l
            *LED
                Lighting Systems.*We
                market a line of LED lighting products for the decorative and general
                lighting markets.




l
            *Pool
                and Spa Lighting.*We
                market both our traditional fiber optic lighting products, developed
                prior
                to the introduction of EFO fiber optic systems, and other energy
                efficient
                non-fiber optic systems for underwater lighting applications. Our
                underwater lighting systems are installed in pools and spas built
                by pool
                builders throughout the United States and Canada. We also market
                pool EFO
                LED feature lighting systems and a line of pool control systems.




Our
      fiber
      optic lighting systems combine three components—an illuminator, fiber and
      fixtures—that are used in configurations designed for specific applications. The
      electrically powered illuminator encases the lamp and serves to generate and
      efficiently focus light to the fiber. Currently our illuminators use HID or
      halogen lamps. In 2006 we adapted the technology to work with LEDs, introducing
      a line of EFO water feature product and a berth light for US Navy ships. Our
      proprietary large diameter fiber cables used in our EFO fiber optic systems
      connect to the illuminator and are designed to emit light either at the end
      of
      the fiber as a point of light, or along the length of the fiber, similar in
      effect to neon lighting. We currently market our EFO fiber optic systems with
      two, six or eight fiber cables connected to the illuminator.




Our
      EFO
      fiber optic lighting system consists of a central source of illumination
      connected to multiple end-points via fiber cables. The electrically powered
      illuminator lamp encases our patented collectors that have our proprietary
      nanotechnology coating layers enabling the efficient capture of over 90% of
      the
      light from the lamp. Our large diameter fiber cables, manufactured through
      a
      proprietary continuous extrusion process, connect to the illuminator and
      efficiently deliver 95% of the light from the illuminator to the fiber while
      virtually eliminating infrared and ultraviolet light that negatively affect
      perishable goods and works of art. Our proprietary couplers attach the
      end-points of our fiber cables to the fixtures, enhancing compatibility with
      new
      fixtures. The efficiency benefits provided by these components coupled with
      our
      proprietary fiber optic extrusion manufacturing process distinguish our EFO
      fiber optic systems from other fiber optic lighting systems and traditional
      lighting technologies for numerous lighting applications. As a result of these
      developments, we believe we are the first to market energy efficient fiber
      optic
      lighting systems for specific applications such as accent lighting used in
      retail and commercial settings.




1




The
      increasingly stringent regulatory environment, high energy prices, retail and
      commercial demand for accent lighting and recent innovations in our fiber optic
      technology for lighting systems position our products to address a meaningful
      segment of the general lighting market.




**Industry
      Overview**




The
      worldwide market for electric lamps, lighting fixtures and ballasts was
      approximately $79 billion in 2001 and expected to grow to $100 billion by 2006,
      representing 5% annual growth, according to a 2003 report by The Freedonia
      Group, Inc., a market research firm. We estimate that our current
      addressable market for EFO technology is currently greater than $5 billion.
      This
      addressable market includes halogen accent lighting, freezer case lighting
      in
      supermarkets, dock lighting and display case lighting. The limitations of the
      lighting products commonly used for these applications, combined with rising
      energy costs and increasingly stringent energy regulations, present a compelling
      opportunity for alternative lighting solutions in these niche
      markets.




*Impact
      of Energy Regulation in the Lighting Industry*




In
      the
      United States, electricity consumption is projected to increase from 3.5 billion
      kilowatt hours in 2003 to 5.2 billion kilowatt hours in 2025, according to
      the
      United States Department of Energy’s International Energy Outlook. According to
      the report, electricity consumption in the commercial sector is the fastest
      growing segment at 2.5% annually through 2025. The Department of Energy in
      a
      2005 report estimated that lighting in the United States accounts for
      approximately 27% of total electricity consumed by commercial end-users. The
      electric power industry faces the challenge of satisfying increasing demand
      while being constrained by the limited supply of fossil fuels as well as
      infrastructure limitations affecting generation, transmission and distribution,
      all of which may result in higher electricity prices.




These
      challenges have resulted in a variety of new government regulations and
      initiatives intended to curtail energy consumption. This growing global concern
      with energy utilization together with energy conservation regulation has
      encouraged the development and implementation of more energy efficient lighting
      solutions. Some of the key regulations and initiatives affecting the lighting
      industry include:




·
              *ASHRAE-IESNA
                  Standard 90.1.*In
                  July 2004, the Department of Energy adopted the 1999 version of
                  ASHRAE-IESNA Standard 90.1, requiring all commercial and government
                  buildings to reduce lighting power density as measured by watts
                  per square
                  foot. For example, this standard generally mandated a reduction
                  in power
                  density to 1.9 watts per square foot for both new construction
                  and
                  renovations requiring building permits for retail buildings in
                  the United
                  States. This standard was lowered for retail buildings to 1.9 watts
                  per
                  square foot from the approximately 3.3 watts per square foot under
                  the
                  1989 version adopted for retail buildings in some
                  states.
  ·
              *The
                  Energy Policy Act of 2005.*This
                  recently enacted federal legislation provides tax incentives to
                  commercial
                  and residential electricity consumers for making energy efficiency
                  improvements well beyond present standards in their buildings and
                  homes.
                  The incentives are in place for a two year period beginning
                  January 1, 2006.
  ·
              *State
                  Legislation.*Certain
                  states, such as California, have adopted standards that exceed
                  the
                  ASHRAE-IESNA 90.1 minimum requirements. California’s updated Title 24,
                  which took effect in October 2005, requires residential and
                  non-residential buildings to use energy efficient lighting that
                  meets
                  minimum lumens per watt.
  ·
              *LEED—U.S.
                  Green Building Council’s Leadership in Energy & Environmental
                  Design.*LEED
                  is a self-assessing system designed for energy efficiency rating
                  of new
                  and existing commercial, institutional and high-rise residential
                  buildings. LEED evaluates the environmental performance of the
                  entire
                  building over its life cycle, providing a definitive standard for
                  what
                  constitutes a “green” building. To receive LEED certification, the
                  building must meet, among other things, ASHRAE- IESNA Standard
                  90.1
                  lighting requirements. For each reduction of 10% beyond the 90.1
                  requirements, the project receives an additional point toward achieving
                  LEED certification. In certain localities, a building must receive
                  a LEED
                  certificate in order to receive a building
                  permit.


Recent
      legislation has limited energy consumption available for lighting, which
      conflicts with the desire of the user to maintain or even increase
      effective  lighting.
      For example, retailers value effective accent lighting as a critical element
      in
      showcasing merchandise and promoting sales, but are constrained by
      the  current
      regulatory environment. Accent lighting is also essential in commercial and
      other buildings, including office buildings, schools, hospitals and
      casinos,  which
      use
      lighting as a design element in hallways, entryways, conference rooms and to
      display artwork. To maintain or obtain effective, high quality
      lighting, these
      retailers and other commercial users need a lighting solution that meets
      increasingly stringent regulatory requirements.




2




*Overview
      of Lighting Technologies*




Multiple
      lighting technologies have evolved to address a variety of lighting
      requirements. Each of these technologies has characteristics and limitations
      that affect its utility in a given application.




*Incandescent.* Due
      to
      its simplicity of use and low initial cost, the incandescent bulb is the
      dominant light source used in residential lighting in the United States. The
      basic technology for incandescent bulbs was created in the 19th century and
      further developed in the mid 20th century with the introduction of the Tungsten
      filament and gas fill. The MR-16 halogen lamp, one type of an incandescent
      lamp,
      has commonly been used in accent lighting. Incandescent bulbs including MR-16s
      have the following general characteristics:




·
            Produce
                a high quality bright, white light;




·
              Emit
                  significant heat, infrared and ultraviolet radiation that can damage
                  perishable goods and increases room temperature adding to
                  coolingcosts; and
  ·
              Require
                  significant electricity and frequent replacement due to short
                  life.
  *Fluorescent.* The
        fluorescent lamp is an energy efficient alternative to incandescent lamps
        commonly used in general illumination. The fluorescent lamp was initially
        developed in the 1930s using mercury atoms in a low pressure discharge. The
        compact fluorescent lamp, developed in the 1980s, produces notably higher
        lumens
        per watt than an incandescent lamp. Fluorescent lamps have the following
        general
        characteristics:
  ·
              Offer
                  high energy efficiency with modern fluorescent lamps reaching efficiencies
                  of about 80 lumens per watt;
  ·
              Produce
                  a non-directional beam of light not ideal for accent
                  lighting;
  ·
              Emit
                  light with unfavorable color
                  characteristics;
  ·
              Contain
                  mercury, which leads to disposal issues;
                  and
  ·
              Exhibit
                  lower light output and a shorter life in a cold
                  environment.
  *Solid
        State Lighting.* Invented
        in 1962, LEDs are only now beginning to show promise as a light source. For
        example, LEDs are increasingly replacing incandescent lamps in traffic signals
        and as brake and high mount stop lights for new cars. As the technology develops
        further, some industry professionals predict that performance
        characteristics of LEDs will equal or potentially exceed those of
        fluorescent lamps. Current LEDs have the following general
        characteristics:
  ·
              Offer
                  energy efficiency comparable to halogen
                  sources;
  ·
              Demonstrate
                  long life cycles; and
  ·
              Emit
                  low luminosity.
  *High-Intensity
        Discharge.* ** The
        newest white light source, the metal halide HID lamp, was invented in 1966
        and
        is used extensively in outdoor applications, automotive headlamps and general
        lighting sources in large indoor buildings such as warehouses. Metal halide
        HID
        lamps with efficiencies exceeding incandescent and fluorescent lamps in lumens
        per watt are available commercially. Newer versions of HID lamps are being
        used
        as interior spotlights for commercial applications. Metal halide HID lamps
        have
        the following general characteristics:
  ·
              Emit
                  high quality white light;
  ·
              Offer
                  energy efficiency;
  ·
              Provide
                  cost effectiveness in larger light packages, but are too expensive
                  when
                  packaged in a smaller light source partly due to theirexpensive ballasts; and
  ·
              Radiate
                  significant heat.
  *Emergence
        of Fiber Optic Lighting*
  Given
      the
      limitations of traditional lighting technologies and the opportunity to develop
      an alternative lighting solution for particular applications, Fiberstars and
      other companies began to experiment in the 1980s with connecting optical fiber
      to MR-16 halogen lamps. The primary applications for early fiber optic
      technology had relatively low light output and short lamp life, and were limited
      to color illumination in swimming pools and commercial decorative markets.
      In
      the 1990s optical fiber was applied in combination with metal halide light
      sources. This led to longer lamp life and higher light outputs. Additional
      addressable markets were unattainable with the early fiber optic lighting
      technology primarily due to the inefficiency of the system, which in turn was
      a
      result of the size and geometry of the light source, inefficiency of the
      collection optics and the small diameter fiber optic cables.




In
      the
      past several years, a number of patented technological advancements in our
      fiber
      optic lighting systems have resulted in markedly better performance
      characteristics enabling potential for broader use in a number of additional
      lighting applications. We believe our EFO fiber optic lighting systems are
      economically and aesthetically appealing and well-suited for accent and other
      niche lighting applications.




3




**The
      Fiberstars Solution**




Our
      EFO
      fiber optic system offers energy efficiency, lower life cycle costs and
      addresses the limitations of traditional lighting systems in specific
      applications. Building upon significant recent breakthroughs in fiber optic
      lighting technology, the first commercial deployment of our EFO system to a
      major customer was in the first quarter of 2004. Our patented EFO technology
      addresses the limitations of current fiber optic lighting technology and meets
      government regulations for energy efficiency through a series of technological
      advances over the last 18 months, including:




· Improved
      light output equivalent to MR-16s while being up to 80% more energy
      efficient;




· Introduced
      a full spectrum lamp that closely simulates daylight color;




·      
      Improved our patented large core fiber extrusion process enabling high volume
      production and reducing manufacturing costs; and




·      
      Developed application-specific fixtures to meet a broad variety of customers’
needs, including light bars which replicate fluorescent tubes.




We
      believe the intensity and efficiency of our EFO system improves upon the
      lighting advantages of traditional fiber optic lighting by enhancing customers’
lighting capabilities. EFO’s accent lighting capabilities allow a retailer to
      focus the attention of shoppers to the areas and products that they want to
      highlight. Physically separating the heat source from the fixture provides
      a
      non-heat radiating lighting solution that lowers cooling costs associated with
      lighting and reduces food spoilage and melting. The benefits of our EFO system
      have attracted new customers and have led to test application of our product
      at
      select locations.




*Key
      Features of Our EFO FiberOptic System*




*Illuminator.* Most
      of
      our commercial illuminators today deploy our specially designed metal halide
      HID
      lamps due to the capacity of these lamps to provide long life and maximum
      brightness. Our EFO technology can efficiently distribute the light from higher
      wattage metal halide lamps to lower light levels. We may, however, in the future
      use other efficient lighting sources as they become commercially
      viable.




*Fiber
      Cables.* Our
      patented large core fiber has outstanding clarity and consistency with low
      attenuation for fiber optic lighting applications. By combining our compound
      parabolic collector, or CPC, technology and our large core fiber, our system
      delivers light ranging from 30 to 60 lumens per watt, compared to approximately
      eight to 15 lumens per watt for a system using traditional MR-16 halogen
      lamps.




*Fixtures.* We
      produce a broad assortment of adjustable fixtures that allow the customer to
      easily adjust the direction and beam spread of the light for optimal light
      concentration.




*Key
      Benefits of Our EFO System*




*Energy
      Efficiency.* Our
      EFO
      system can provide our customers with accent lighting that also satisfies
      government and other regulatory regulations for energy efficient lighting.
      EFO
      technology enables customers to comply with ASHRAE-IESNA Standard 90.1 and
      Title
      24, qualify for the tax incentives available under the Energy Policy Act of
      2005
      and secure LEED certification without sacrificing intensity and light quality.
      The following table highlights the electrical savings of one 70 watt EFO accent
      light compared to competing lighting technologies:




**Light Source**
            
            
            
            **Number**
              **equivalent**
              **in 70 Watt**
              **EFO**
            
            **Total Watts**
            
            **Estimated Energy**
              **Savings
                %**70W
                EFO accent light
            
            
            1
            
            
            
            70W
            
            
            
            —26W
                Compact fluorescent down light
            
            
            4
            
            
            
            104W
            
            
            
            33
            %50W
                MR-16 halogen accent light
            
            
            8
            
            
            
            400W
            
            
            
            83
            %60W
                Incandescent down light
            
            
            7
            
            
            
            420W
            
            
            
            83
            %3W
                Luxeon3 LED accent light
            
            
            60
            
            
            
            180W
            
            
            
            61
            %25W
                Ceramic metal halide accent light
            
            
            5
            
            
            
            125W
            
            
            
            44
            %








4




The
      EFO
      technology delivers up to 80% energy savings over halogen or other incandescent
      lighting systems commonly used in similar applications. For example, Cinemark
      reduced its energy consumption from 5,140 watts to 1,120 watts by installing
      our
      EFO system.




*Color.* Today
      our
      EFO system is available in warm white and daylight colors. The warm white lamps
      have a color temperature that is suitable for interior spaces. The daylight
      color temperature matches the color temperature of the light entering spaces
      through windows. Because we control the design of the lamp, reflector and output
      fixture we can tune the system to deliver a balanced, full spectrum white
      light.




*Elimination
      of Virtually all Heat Radiation.* Our
      EFO
      system is designed to prevent the infrared and ultraviolet radiation emitted
      from the lamp from being funneled through the fiber. As a result, the light
      output emits virtually no infrared or ultraviolet light, which produce heat
      when
      absorbed by the target, and the only heat generated is from light output itself,
      which is negligible. In contrast, halogen lamps produce approximately nine
      watts
      of heat energy for every one watt of light.




*Cost
      Savings.* Our
      EFO
      system is able to significantly reduce maintenance and replacement costs that
      are normally attributed to traditional lighting systems. Our EFO systems contain
      lamps with a long life cycle and need fewer lamps to light a given area. For
      example, a customer would have to replace 20-40 MR-16 halogen lamps for every
      one EFO lamp annually based on average retail usage. In addition, because the
      EFO lamp is physically separated from the light fixture, when used in
      applications such as freezer cases, the quality of light and life of the EFO
      lamp is not affected by the freezing temperature. The EFO lamp does not radiate
      heat in the freezer and the freezer does not need to be emptied to change the
      lamp as is the case with fluorescent lamps.




*Traditional
      Fiber Optic Lighting*




We
      also
      sell a line of traditional fiber optic products that do not use our EFO
      technology. These products use an illuminator with HID or halogen light sources
      and a traditional imaging optical method that focuses the light from the source
      into bundles of stranded fiber. The system is used largely in decorative and
      display case lighting applications, where color changing and small points of
      light are key features.




In
      addition, we sell a line of fiber optic pool lighting products designed to
      add
      color and decorative lighting to water features for residential pools. We
      also  sell
      a
      variety of feature lighting systems that change color and includes an option
      to
      synchronize the color changes of multiple water features. The water
      feature lights
      are sold in kits that may be used to light waterfalls, one or more linear water
      streams, deck lights and landscape lights.




**Our
      Strategy**




Our
      objective is to become the leading provider of energy efficient lighting
      systems. To achieve this objective, we intend to pursue the following
      strategies:




· *Capitalize
      on the growing need for low cost, energy efficient lighting systems.* We
      intend
      to devote significant resources to our product development efforts to maximize
      the energy efficiency and quality of our lighting systems while reducing costs
      and enabling our customers to meet more stringent government regulations. In
      addition, we plan to continue to hire personnel with technological expertise
      in
      the lighting industry, develop new proprietary technologies and integrate new
      and potentially more efficient lighting sources into our lighting
      systems.




· *Focus
      on market niches where the benefits of our technology are most
      compelling.* We
      intend
      to establish showcase installations to demonstrate the benefits of our EFO
      technology and build broader awareness among our target customer base. For
      example, we believe the benefits of our EFO technology will appeal to retailers
      and supermarket operators, who share similar needs for highly efficient,
      flexible accent lighting solutions. To reach our target markets, we also intend
      to continue to build a direct sales force of experienced lighting
      salespeople.




· *Develop
      and expand strategic relationships.* To
      build
      awareness of our EFO technology, we intend to market our systems to leading
      architects, lighting designers, contractors and other entities that recommend
      or
      install lighting systems, as well as to fixture manufacturers and other
      participants in the general lighting market. For example, we have an agreement
      with Gensler Architecture, Design & Planning LLC or Gensler, a leading
      architecture, design and planning firm, under which Gensler provides consulting
      services and helps enhance our visibility and image within the design and
      construction communities. In addition, we plan to construct a Fiberstars
      Lighting Academy in Solon, Ohio, where lighting specialists, designers and
      installers will attend courses on EFO lighting technology and installation.
      We
      believe these marketing efforts will help further adoption of our technology
      in
      the general lighting market.




· *Further
      develop and enhance pool lighting products.* We
      intend
      to develop new products that are complementary to traditional pool lights
      currently sold by pool equipment suppliers. To maximize the sales of these
      new
      products, we plan to leverage our well-established presence in the pool and
      spa
      lighting market.




**Our
      Products**




We
      market
      a wide variety of fiber optic lighting systems in two general markets:
      (1) commercial lighting and (2) pool and spa lighting. Within the
      commercial lighting market we sell EFO systems in energy efficient accent
      lighting and specialty decorative and special effects lighting. All of our
      fiber
      optic lighting systems are comprised of illuminators, fiber cables and fixtures.
      Other customized components for non-EFO systems include under water lenses,
      color changing electric pool lights, landscape lighting fixtures and a line
      of
      lighted water features including waterfalls and laminar flow water
      fountains.




5




*EFO
      Fiber Optic System*




Our
      EFO
      fiber optic system is a new technology capable of replacing halogen and compact
      fluorescent lamps in retail and commercial lighting settings while using only
      a
      fraction of the energy. This lighting system effectively distributes energy
      efficient light in a user-friendly manner. The EFO system is based upon a
      lighting system made up of several components: a highly efficient light source,
      proprietary CPC optics, proprietary FiberJacks coupling technology and our
      large
      core fiber.




The
      primary light source for our EFO system is a unique metal halide HID lamp
      specifically developed in cooperation with, and is produced on our equipment
      exclusively for us by, Advanced Lighting Technologies, Inc. and its
      subsidiaries (“ADLT”) to maximize efficiency, output and life span. This source
      produces light with an efficiency of up to 90 lumens per watt, five times the
      efficiency of the light source used in MR-16 halogen lamps. We believe our
      metal
      halide HID lamp is the most energy efficient source of high quality light
      currently available and more closely matches the daylight color spectrum than
      any other lamp available for fiber optic applications. Furthermore, our standard
      metal halide HID lamp has a current life span of up to 14,000 hours, which
      is up
      to five times the typical life of MR-16 halogen lamps. We also use alternative
      light sources such as LEDs in certain applications, and in the future we
      anticipate utilizing these light sources in more of our products as they become
      more energy efficient.




We
      surround our light source with a CPC and employ additional coupling optics.
      We
      hold ten United States patents and one corresponding patent in Australia, and
      two pending patent applications in the United States and 9 pending corresponding
      foreign patent applications, for the CPC and those coupling optics. These
      collectors capture more than 90% of the light generated by our light source.
      Traditional imaging collectors are only about one half as efficient at
      delivering light to their outputs. Our collectors have multiple coating layers
      each smaller than 100 nanometers, which acting together form a reflective
      surface. These nanotechnology coatings were designed to act in conjunction
      with
      the other components in our EFO system. The coatings are applied using a unique
      low-pressure chemical vapor deposition process. Together with the patented
      shape
      of our collector, this non-imaging optical system delivers 93% reflectivity
      in
      the visible region. Furthermore, this optical system does not reflect infrared
      and ultraviolet radiation, minimizing the amount of infrared and ultraviolet
      light that leaves the collector.




Glass
      rods collect the light output from our collector, piping it outside the housing.
      These rods act as thermal barriers and when coated, also become filters. These
      filters block virtually all remaining infrared and ultraviolet radiation that
      comes from the light source directly or which is reflected by the collectors.
      The purity of the glass rods and the filters’ anti-reflective coatings allow for
      a transmission of up to 95% of the light output from the collector. These rods
      are the point of connection to the fiber optic cable. We house the lamp, solid
      state power supply, collector and rods in a single package referred to as the
      illuminator.




Unlike
      most fiber optic lighting systems, which use bundles of thin strands of fiber,
      our fiber is produced as a flexible large core polymer light pipe of varying
      diameters from three millimeters to 20 millimeters, depending on the customer’s
      application requirements. Our large core fiber is manufactured using a new
      acrylic plastic composition and proprietary processing method that produces
      a
      fiber that can withstand the heat and light conditions associated with EFO
      applications. This manufacturing process enables us to significantly reduce
      the
      cost of producing a continuous extruded large core fiber. We believe our large
      core fiber is approximately twice as efficient as a comparable stranded fiber
      cable.




Our
      EFO
      system consists of an illuminator, pre-cut lengths of our large core fiber
      with
      the FiberJacks couplers at either end, and application-specific fixtures. The
      FiberJacks couplers allow one end of the fiber to snap into the illuminator,
      similar to the way a telephone line connects to a phone jack, and the other
      end
      into the application-specific fixtures. FiberJacks, a proprietary plug-and-play
      coupling system, has significantly changed the installation of fiber optic
      lighting systems by eliminating the need for on-site fiber preparation, often
      an
      extremely precise process requiring highly skilled technicians. On-site
      preparation could result in errors in the alignment of the fibers, which in
      turn
      result in loss of light and variability of illumination at the fixture. With
      FiberJacks, all centering and alignment happens automatically, eliminating
      these
      types of losses and variability, and because all of our large core fibers are
      cut and finished with the FiberJacks couplers at the factory, the on-site
      installer need only unpack the fiber and snap it into the illuminator and the
      fixture.




*Application
      Specific Fixtures*




Our
      EFO
      system can be adapted to any number of lighting applications, including those
      currently using traditional lighting systems. The primary concerns to commercial
      end-users include quality of light, such as color, luminosity and directional
      lighting, and compliance with energy regulation. Our EFO system allows these
      customers greater flexibility in meeting their lighting needs within these
      regulatory constraints while maintaining the desired effect. The key variable
      in
      each of these applications is the fixture. We have developed FiberJacks
      compatible application-specific fixtures that allow the EFO system to be used,
      for example, in supermarkets, commercial retail space, freezer cases, in-case
      lighting, casinos and commercial accent lighting where traditional lighting
      technology was not, or is no longer, capable of meeting the customer’s needs. In
      addition, our EFO system can provide greater energy efficiency than traditional
      lighting systems with the advantages of directional lighting and focusable
      beams
      that traditional lighting systems typically sacrifice to comply with energy
      regulation. Many of our output fixtures include optics that allow consistent
      repetitive beam adjustment in both angle and beam spread. In addition, most
      of
      our fixtures are clean, simple and small in appearance, and include a wide
      range
      of trim and finishes.




6




These
      fixtures leverage the strengths of fiber optics to deliver well-defined beams,
      in an attractive package, at a low cost.




**Traditional
      Fiber Optic Products and Other Products**




*Commercial
      Lighting*




The
      primary illuminator in this product line is currently the 405 illuminator
      series, which uses a metal halide HID light source. Other Fiberstars
      illuminators use a halogen lamp. This light source may be sold  with
      a
      color wheel that causes the light output to rotate through a variety of colors
      for decorative applications, or as a white light system for down lighting or
      star ceiling
      applications. When used in down lighting or star ceiling applications, the
      illuminator is coupled with a variety of bundled fiber diameters and lengths
      that are encased in a plastic cladding. We sell a variety of down light and
      accent light fixtures for this product line. When used in neon-like decorative
      applications, the illuminator is coupled with a variety of diameters and lengths
      of BritePak®, a woven stranded fiber cable encased in a clear plastic
      cladding.




*Pool
      and Spa Lighting Products*




Our
      pool
      lighting products are designed to add color and decorative lighting to water
      features for residential pools at night. The 6000 series illuminator is
      the primary
      fiber optic product line sold into the swimming pool market and also uses an
      HID-based illuminator with a traditional imaging optical system. The illuminator
      is used with bundles of stranded fiber that transfer the light from the
      illuminator under the pool decking and into the pool where the end points are
      encased in a lens fixture. The illuminator is equipped with a color wheel that
      changes the color of the light output.




We
      sell a
      variety of feature lighting systems that also change color. These are sold
      with
      the 2000 illuminator series, which includes an option for synchronizing the
      color changes of multiple water features and with outdoor spas. The water
      feature lights are sold in kits that may be used to light waterfalls, one or
      more linear water streams, deck lights and landscape lights.




In
      addition, we sell the Jazz Light, a pool light that changes color. This light
      fits into the wall of the pool and uses an HID lamp with a color wheel
      to provide
      pool color changes. We also sell portable spa lights that add decorative color
      to portable spas.




*Other
      Products*




In
      our
      European operations we have developed a line of LED products for the decorative
      and accent lighting market. We plan to introduce these into the retail and
      specification markets in the U.S. in 2007. We also sell in Europe a small line
      of incandescent light sources. These products are sold into the decorative
      lighting market.  7


**Addressable
        Markets and Applications**
  The
        following table identifies our current addressable markets and potential
        applications that have deployed or beta tested our products:
  **Market
                  for EFO**
              
              **Potential
                  Applications**Supermarkets
              
              Accent
                  lighting for specialty product display sections such as seafood,
                  meat,
                  wine, freezer cases, and any other specialty accent
                  lightingSpecialty
                  Retail
              
              Down
                  lighting and accent lighting applied to display items such as clothing
                  racks and display windowsShips
              
              Replacement
                  of fluorescent bulbs for general illumination and specialty lighting
                  applicationsCommercial
                  Buildings
              
              Accent
                  and down lighting used in entry ways, conference rooms, foyers,
                  and art
                  displaysDock
                  Lighting
              
              Replacement
                  of existing hazardous and breakable dock lights used on loading
                  docksRestaurants
              
              Down
                  lighting and accent lightingHospitals
              
              Down
                  lighting for lobby, waiting room, gift shop and floral
                  casesSigns
              
              Direct
                  view end-point stranded fiberMuseum
                  Lighting
              
              Used
                  for high quality white light without damaging infrared or ultraviolet
                  radiationPools
              
              High
                  efficiency water feature and other specialty pool
                  applications
    8
    **Market
                  for Specialty**
                **Decorative
                  and Special**
                **Effect**
              
              **Potential
                  Applications**Retail
                  Case Lighting
              
              Used
                  in glass display cases for a low-heat emission and high quality
                  bright
                  white lightMuseum
                  Lighting
              
              Used
                  for high quality white light without damaging infrared or ultraviolet
                  radiationDecorative
              
              Kiosk
                  accent lighting, wall wash accent, color light for added attention,
                  direct
                  view side-emitting stripes, cove lighting, star fields, glass edge
                  lightingNeon
                  Replacement
              
              Stripes
                  of light going around the façade, Interior decorative
                  lightingSignage
              
              Back
                  light and halo letters, side emitting outline or enhancing graphics.
                  Direct view end point with special effects color changing or
                  animationFurniture
              
              Encased
                  in furniture such as cabinetsCasinos
              
              Special
                  effect single color or white light only, accent down lighting on
                  game
                  tables, conference rooms, same as commercial buildings.Hotels
              
              Hall
                  way lighting, hotel spas, saunas, workout rooms, conference rooms,
                  display
                  casesPool
                  and Spa
              
              Safe
                  and efficient lighting solution that enables users to change color
                  options
                  in pools and spas.
   **Sales,
        Marketing and Distribution**
  Our
        products are sold through a combination of a direct sales force paid on base
        plus commission, independent sales representatives and distributors into
        geographic markets throughout the world. We also are building an internal
        sales
        force for the sale of our EFO systems. We have been successful in hiring
        experienced salespeople from industry leading firms such as General Electric
        in
        order to facilitate our sales efforts. As of December 31, 2006, we had 50
        sales and sales support people throughout the United States and Europe. We
        believe the presence of salespeople with experience at industry-leading firms
        provides additional credibility to our marketing of our products, particularly
        our EFO systems, into markets historically dominated by a few large companies.
        In order to maximize our sales opportunities, we have developed different
        sales
        and marketing strategies to address various target markets of our
        products.
  *Commercial
        Lighting*
  *EFO
        Sales and Marketing*
  Our
        strategy is to sell our EFO system to several large accounts. We then plan
        to
        leverage these successes into additional installations with these and new
        customers. We identify key accounts through marketing efforts combining
        advertising, articles in trade publication and presentations at industry
        conferences and trade shows. The salespeople first facilitate the testing
        of the
        EFO system with a customer and then work with the customer for initial and
        follow-on sales. The typical test sequence is as follows: demonstrations
        to key
        executives within the store chain; small tests of prototype installations
        in one
        store department; larger tests in multiple departments; and finally, sales
        to
        store locations within chain regions. For example, a grocery store installation
        can include a variety of departments including seafood, deli, bakery, meat,
        wine
        and produce. These departments often display their higher margin products
        around
        the store’s perimeter. In many cases the store chain derives most of its profit
        from these sections of the store and is willing to spend more on highlighting
        their merchandise. Early multi-store sales have come from national supermarket
        chains and other retailers. We have installed products in over 60 stores
        at
        several grocery store chains. Our sales successes have come as a result of
        our ability to demonstrate a reduction in energy costs, help the chain meet
        energy regulations and provide attractive lighting of the chain’s
        merchandise.
   9
  
  To
        increase adoption of our EFO technology, we also intend to market our systems
        to
        leading architects, lighting designers, contractors and other entities that
        recommend or install lighting systems. For example, we have agreements with
        Gensler, a leading architecture, design and planning firm, under which they
        assist in designing our EFO system in the markets in which they do business.
        Gensler also provides strategic advice to help us enhance our visibility and
        image within the design and construction community as a manufacturer of
        preferred technology.
  In
        addition, some utility companies have embraced our technology as an energy
        efficient alternative to traditional lighting systems and have begun to promote
        EFO to their customers.
  We
        also
        sell our EFO systems through lighting representatives who target specific
        lighting projects in local markets. These representatives will specify EFO
        systems as the lighting for projects where EFO’s efficiency and lighting
        intensity are important. The sales representative firms are used in the United
        States, Canada, Europe and other international markets. We have more than
        62
        independent lighting representative organizations throughout the United States
        for our commercial lighting products, including EFO and traditional lighting
        products. These organizations are paid on a commission basis. Approximately
        13
        of these representatives account for a large majority of our commercial lighting
        product sales. We sell our products in Europe through two subsidiaries, Crescent
        Lighting Ltd. in the United Kingdom and Lichtberatung Mann (LBM) in Germany.
        These two companies manage our sales operations in Europe, Russia and the
        Middle
        East, which, as in the United States, include sales through sub-distributors
        and
        sales representatives. In other international markets we sell through regional
        lighting representatives.
  We
        regularly attend industry conferences at which we give presentations on our
        products. These conferences include Lightfair, Food Marketing Institute and
        other United States trade shows targeted at our customers, as well as lighting
        industry trade shows in Europe, Australia, Japan, India and China. We have
        had
        articles on our products written in LD+A, Architectural Lighting, Architectural
        Record, Display and Design Ideas and Visual Merchandising and Store Design.
        We
        participate in studies conducted by independent third parties, including
        universities and other educational institutions, designed to evaluate the
        benefits of our lighting systems. We also regularly give presentations to
        lighting designers on the benefits of EFO systems. In addition to selling
        into
        national grocery store and retail chains directly, our sales strategy for
        EFO is
        to convince lighting designers of EFO’s energy saving and accent lighting
        benefits. Lighting designers work with architects on larger building projects
        to
        ensure that attractive and up-to-date lighting products are used.
  *Traditional
        Commercial Lighting Products*
  Similar
        to our sales efforts for EFO systems, we sell our traditional fiber optic
        commercial lighting products through independent sales representatives. In
        addition, as with our EFO systems, we sell our traditional commercial lighting
        products in Europe, Russia and the Middle East through our subsidiaries.
        We also
        sell our traditional commercial lighting products internationally in most
        industrialized countries through distributors, including ADLT in Australia,
        Magic Lite in Canada, Verslite Hitech Lighting in India, Lighting Limited
        in
        China and Mitsubishi and Koto in Japan.
  *Government
        Sales*
  *U.S.
        Navy*
  In
        March
        2006 we entered into an agreement with U.S. Defense Department’s Defense
        Advanced Research Projects Administration or DARPA, to install our lighting
        systems on several U.S. Navy ships as part of a sea test. The test is designed
        to determine if these products can be used in future Navy installations.
        The
        test installations are scheduled to be completed in the first half of 2007,
        with
        the sea tests running for approximately 9 months thereafter. A total of
        $1,979,000 in revenue was recognized under this program in 2006. There was
        no
        such revenue recognized in prior years.
  *Pool
        and Spa Products*
  Our
        sales
        and marketing strategy for our pool and spa lighting products differs from
        our
        strategy for our commercial lighting products. Specifically, although the
        end-user for our pool and spa products is primarily the residential market,
        we
        primarily focus on sales to pool builders and pool product distributors by
        utilizing regional sales representative organizations that specialize in
        such
        sales. Accordingly, our marketing efforts for swimming pool products depend
        in
        large part upon swimming pool builders recommending our products to their
        customers and adapting their swimming pool designs to include our lighting
        systems. Each representative organization typically has the exclusive right
        to
        sell our products within its territory, receiving commissions on territory
        sales. In addition to using regional sales representatives, we also market
        our
        products to regional and national distributors in the swimming pool market.
        These distributors stock our products to fill orders received from swimming
        pool
        builders. Some of these distributors also engage in limited marketing activities
        in support of our products. We also market to certain large national pool
        builders under which they may purchase systems directly from us and offer
        our
        products with their swimming pools. To a lesser extent, we enter into incentive
        arrangements to encourage pool builders to purchase our products. We provide
        pool builders and independent sales representatives with marketing tools,
        including promotional videos, showroom displays and demonstration systems.
        We
        also use trade advertising and direct mail in addition to an ongoing program
        of
        sales presentations to pool builders and distributors.
   10
  SCP
        Pool
        Corporation, or SCP, the largest pool distributor in the United States and
        our
        largest pool customer, accounted for approximately 10%, 11% and 11% of our
        net
        sales in 2004, 2005 and 2006, respectively. We expect to maintain our business
        relationship with SCP; however, a cessation or substantial decrease in the
        volume of purchases by this customer could reduce availability of our products
        to end users and have a material adverse effect on our net sales and results
        of
        operations. At December 31, 2006, SCP accounted for 6% of accounts
        receivable and at December 31, 2005, they accounted for 8% of accounts
        receivable.
  Sales
        of
        our swimming pool products follow a seasonal pattern. This typically results
        in
        higher sales in the second and fourth quarters as pool distributors stock
        shelves for the spring and summer seasons. First quarter pool sales tend
        to be
        the lowest for a given year. Consistent with industry practice, we provide
        extended terms to distributors for shipments in the fourth quarter of a given
        year whereby they receive products in November and December for which
        they pay in equal installments from March through June of the
        following year. We sell the majority of our swimming pool lighting systems
        within the United States, Canada and Australia. Our pool lighting sales in
        Europe were not material in 2004, 2005 and 2006.
  **Backlog**
  We
        typically ship standard products within a few days after receipt of an order
        and
        custom products within 30 to 60 days of order receipt. Generally, there is
        not a significant backlog of orders, except at year-end. Our backlog at the
        end
        of 2006 was $1,143,000 compared to $1,144,000 at the end of 2005. We anticipate
        that all of our backlog as of December 31, 2006 will be filled in
        2007.
  **Competition**
  Our
        products compete with conventional electric lighting systems and with a variety
        of lighting products, including conventional light sources such as incandescent
        light bulbs as well as metal halide lamps, LEDs, compact fluorescent lamps
        and
        decorative neon lighting. Our EFO systems compete with conventional electrical
        lighting systems, other fiber optic lighting systems, and alternative energy
        efficient lighting products such as compact fluorescent lighting. Our
        traditional commercial lighting products compete with other lighting products
        primarily in the areas of down lighting, accent lighting and signage lighting.
        Our pool and spa lighting products compete with other sources of pool and
        spa
        lighting in the areas of in-pool lighting, including colored and color changing
        underwater lighting, and pool and spa accent lighting. Principal competitive
        factors include price, performance, ease of installation and maintenance
        requirements.
  Our
        EFO
        systems compete with conventional electrical lighting technologies and with
        other sources of accent and down lighting such as ceramic metal halide, halogen
        and incandescent bulbs. Our EFO systems compete with traditional electrical
        lighting systems and other fiber optics systems in markets where energy
        efficiency, ease of installation and lower maintenance costs are principal
        competitive factors. Our EFO systems also compete with manufacturers of lamps
        and fixtures who may sell their products to end-users as a system or as
        individual components.
  We
        expect
        that our ability to compete effectively with conventional lighting technologies,
        other fiber optic lighting products and new lighting technologies that may
        emerge will depend substantially upon achieving greater performance and reducing
        the cost of our EFO systems. Principal competitors in the EFO market include
        large lamp manufacturers and lighting fixture companies whose financial
        resources substantially exceed ours. These conventional lighting companies
        may
        introduce new or improved products that may reduce or eliminate some of the
        competitive advantages of our products. We anticipate the primary competition
        to
        our EFO systems will come from new technologies which offer increased energy
        efficiency, lower maintenance costs and/or lower heat radiation. In certain
        applications we compete with LED systems produced by large lighting companies,
        such as Phillips and General Electric.
  In
        traditional commercial lighting, we compete primarily with local and regional
        neon lighting manufacturers that, in many cases, are more established in
        their
        local markets than we are. In traditional commercial lighting, fiber optic
        lighting products are offered by a number of smaller companies, some of which
        compete aggressively on price. Some of these competitors offer products with
        performance characteristics similar to our products. Additionally, some
        conventional lighting companies now manufacture or license fiber optic lighting
        systems that compete with our products. Schott, a German glass fiber company,
        markets fiber optic systems in the United States. Many companies compete
        with us
        in Asia, including Philips, Mitsubishi, Bridgestone and Toray. Mitsubishi
        also
        sells our BritePak fiber cables in Japan. In addition, we compete with Toray
        in
        the stranded small diameter optical fiber in the special effects lighting
        market.
  In
        the
        pool and spa market, we face competition from suppliers and distributors
        who
        bundle lighting and non-lighting products and sell these packages to pool
        builders and installers. In addition, we face competition directly from
        manufacturers who produce their own lighting systems and components. For
        example, in the pool market, competitive products are offered by Pentair’s
        American Products Division, a major manufacturer of pool equipment and supplies,
        as well as Super Vision International. In the spa business, spa manufacturers
        install LED lighting systems during the manufacturing process. We intend
        to
        develop new fiber optic lighting products that are complementary to traditional
        pool lights currently sold by pool equipment suppliers. To maximize the sales
        of
        these new products, we plan to leverage our well-established presence in
        the
        pool and spa lighting market.
   11
  
  While
        we
        cannot predict the impact of competition on our business, we believe that
        an
        increase in the rate of our market expansion may be accompanied by increased
        competition. Increased competition could result in price reductions, reduced
        profit margins and loss of market share, developments which could adversely
        affect our operating results. There can be no assurance that we will be able
        to
        continue to compete successfully against current and future
        competitors.
  **Manufacturing
        and Suppliers**
  We
        produce our lighting systems through a combination of internal and outsourced
        manufacturing and assembly. Our internal lighting system manufacturing consists
        primarily of fiber processing, final assembly, testing and quality control.
        We
        use independent contractors to manufacture some components and sub-assemblies
        and have worked with a number of our vendors to design custom components
        to meet
        our specific needs. We manage inventories of domestically produced component
        parts on a just-in-time basis when practicable. Our quality assurance program
        provides for testing of all sub-assemblies at key stages in the assembly
        process
        as well as testing of finished products.
  In
        2004,
        we initiated a program to manufacture more of our products offshore, primarily
        in India and Mexico. As this process continues, we expect that more high
        volume
        products will be sourced offshore where labor and component cost savings
        may be
        achieved. Under a Production Share Agreement initiated in 2003 and renewed
        in
        August 2006, we conduct contract assembly in Mexico through North American
        Production Sharing Inc. and Industrias Unidas de BC, SA de CV, or North
        American. Under this agreement North American provides administrative and
        manufacturing services, including labor services and the use of manufacturing
        facilities in Mexico for the manufacture and assembly of certain of our fiber
        optic systems and related equipment and components. Also in 2004, we began
        obtaining assembled products from ECDS, located in Cochain, India. These
        products are received on a purchase order basis, primarily by ocean shipment
        and
        in some cases by air freight.
  We
        manufacture our large core fiber products in our Solon, Ohio
        facility, using
        either an extrusion process or a cast process.
  Under
        a
        supply agreement, which was last renewed in January 2000, Mitsubishi is the
        sole supplier of our small diameter stranded fiber. In sales volume, our
        products that incorporate small diameter stranded fiber have historically
        been
        the single largest fiber product that we sell and represent significant sales
        volume. We expect to maintain our relationship with Mitsubishi for the supply
        of
        small diameter fiber.
  ADLT
        and
        Fiberstars have had a strategic relationship since 1997 when ADLT acquired
        a
        substantial equity interest in Fiberstars, which was sold in 2004. Over the
        years ADLT and Fiberstars have maintained a collaborative relationship based
        on
        ADLT’s position as a leading supplier of metal halide light sources and
        Fiberstars need for “state of the art” light source technology. As a result, we
        rely on ADLT for our metal halide lamps, reflectors and power supplies. To
        further this relationship, in September 2005 and April 2006 we entered into
        several new agreements with ADLT regarding mutual development collaboration
        for
        the continued improvement in our lamp technology and for support of our coating
        technologies. These agreements also provide for the purchase of certain coating
        equipment, the provision to us of certain other services, the continued supply
        to us of products manufactured by ADLT, and a cross-license of certain
        intellectual property.
  We
        also
        rely on other sole source suppliers for other lamps, reflectors, remote control
        devices and power supplies. Although we cannot predict the effect that the
        loss
        of one or more of such suppliers would have on our results of operations,
        such
        loss could result in delays in the shipment of products and additional expenses
        associated with redesigning products and could have a material adverse effect
        on
        our operating results.
  **Research
        and Development**
  We
        believe that growth in fiber optic lighting will be driven by improvements
        in
        technology to provide increased light output at lower costs. Accordingly,
        we
        commit much of our research and development resources to those challenges.
        We
        have a research and development team located in Ohio primarily focused on
        developing or improving new and current EFO systems. In addition, we currently
        have engineers based in California and in India focused on further developing
        our pool and spa products.
  We
        purchased the base technology underlying our EFO system in 2000 with the
        acquisition of Unison Fiber Optic Lighting Systems LLC. Subsequent to this
        acquisition, we have been aided in our development of this technology, as
        well
        as the development of our traditional fiber optics products, by government
        awards and contracts. We have commercial rights to all of the technology
        we
        develop as part of these various government research and development contracts.
        A summary of work under these contracts is as follows:
  ·  In
        2003,
        we successfully completed a three-year $2.0 million research and development
        project to develop a continuous extrusion process for large core plastic
        optical
        fiber funded under a grant from the National Institute of Standards and
        Technology, or NIST, of the United States Department of Commerce.
  ·  In
        February 2003 DARPA, through the Army Aviation and Missile Command, or
        AMCOM, awarded to us and our partners a research and development contract
        for
        the development of next-generation light sources, optics, luminaire and
        integrated illuminated technologies for its high efficiency distributed
        lighting, or HEDLight, project. This contract provided for total payments
        of up
        to $7.8 million, including payments for subcontractors, over three years
        based
        on the achievement of milestones in the development of fiber optic illuminators
        and fixtures for installation on ships and aircraft. We received total gross
        funding of $7.8 million under this contract through December 31, 2005.
   12
  
  ·  In April 2003, we announced, together with APL Engineered Materials, a
        subsidiary of ADLT, the award of a $2.7 million research and development
        contract from DARPA for the development of a new arc discharge light source,
        a
        project to be led by APL Engineered Materials. Of this amount, we received
        from
        ADLT in 2006, $300,000 based on our achievement of certain milestones related
        to
        our contribution to this project. We anticipate that this new light source
        will
        exceed the performance of our existing EFO light source in efficiency,
        brightness and color rendering.
  ·   In
        June 2004, we announced an additional $1.0 million in funding from DARPA,
        dependent on the achievement of certain milestones, to develop
        an LED version of the HEDLight system. We achieved these milestones and earned
        the full $1.0 million by the end of 2005.
  ·  Also in
        June 2004, we announced two Small Business Innovative Research, or SBIR,
        awards from the Department of Energy. One is to work on an instant-on version
        of
        EFO, and the other is to develop a fast cure for the fiber production process,
        which would lower cost and improve throughput on the fiber production line.
        These awards were for an initial $100,000 for the first feasibility phase,
        and
        in September 2005 we received approval for an additional funding of
        $750,000 over two years for each project for the completion phase.
  ·   In
        addition, in October 2005, further SBIR awards from the Department of
        Defense under DARPA totaling $200,000 were obtained to further explore
        improvements to lamp coatings and design and to further research materials
        and
        processing techniques for the Company’s Continuously Extruded Large Core Fiber
        processing method. In December 2006 we received approval for an additional
        funding of $750,000 over two years for each project for the completion
        phase.
  ·  Net of
        payments to subcontractors, we received from DARPA and DoE aggregate cash
        payments of $2.5 million, in 2006, $2.3 million in 2005 and $2.5 million
        in 2004
        for R&D work.
  On
        September 19, 2005, we entered into agreements with ADLT regarding
        development assistance to be provided to us by ADLT and by us to ADLT. Under
        these agreements, ADLT will provide us with consulting, research and development
        services, including the development of lamps to be used in our current and
        future EFO systems for projects. So far, this assistance has only been required
        in the first quarter of 2006. In addition to our agreement with ADLT, we
        further
        augmented our internal research and development efforts by collaborating
        with
        other component suppliers, independent consultants and third parties. We
        depend
        substantially on these parties to undertake research and development efforts
        necessary to achieve improvements that would not otherwise be possible given
        the
        multiple and diverse technologies that must be integrated into our products
        and
        our limited engineering, personnel and financial resources. These third parties
        have no material contractual commitments to participate in these efforts,
        and
        there can be no assurance that they will continue to do so.
  Research
        and development expense for the years ended December 31, 2006, 2005 and
        2004 were $2.3 million, $2.2 million and $1.2 million, respectively, net
        of
        credits for research and development from the government.
  In
        March
        2006 we entered into a DARPA agreement with the Navy in which we will supply
        our
        lighting on three Navy ships for a sea test. Milestone deliveries under this
        agreement have been booked as revenue as the milestones have been delivered.
        In
        2006 we recognized $1,979,000 in revenue for deliveries made. Following
        successful completion of the sea test currently anticipated in late 2007
        or
        early 2008, the Navy would have the ability to purchase more products from
        us.
  **Intellectual
        Property**
  We
        believe that the success of our business depends primarily on our technical
        innovations, marketing abilities and responsiveness to customer requirements,
        rather than on patents, trade secrets, trademarks, copyrights and other
        intellectual property rights. Nevertheless, we have a policy of seeking to
        protect our intellectual property through patents, license agreements, trademark
        registrations, confidential disclosure agreements and trade secrets. As of
        March
        6, 2007, our intellectual property portfolio consisted of 49 issued United
        States and foreign patents, various pending United States  patent
        applications and various pending Patent Cooperation Treaty, or PCT, patent
        applications filed with the World Intellectual Property Organization that
        serve
        as the basis of national patent filings in countries of interest. A total
        of 43
        applications are pending. Our issued patents expire at various times between
        August 2008 and April 2023. Generally, the term of patent protection
        is 20 years from the earliest effective filing date of the patent
        application. There can be no assurance, however, that our issued patents
        are
        valid or that any patents applied for will be issued. There can be no assurance
        that our competitors or customers will not copy aspects of our fiber optic
        lighting systems or obtain information that we regard as proprietary. There
        also
        can be no assurance that others will not independently develop products similar
        to ours. The laws of some foreign countries in which we sell or may sell
        our
        products do not protect proprietary rights to products to the same extent
        as do
        the laws of the United States.
   13
  
  We
        are
        aware that a large number of patents and pending patent applications exist
        in
        the field of fiber optic technology. We are also aware that 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, we have in the past received communications
        from
        third parties asserting rights in our patents or that our technology infringes
        intellectual property 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. There
        can be no assurance that third parties will not assert claims that our products
        infringe third party patents or other intellectual property rights or that,
        in
        case of a dispute, licenses to such technology will be available, if at all,
        on
        reasonable terms. In addition, we may need to take legal action to enforce
        our
        intellectual property rights in the future. In the event of litigation to
        determine the validity of any third-party claims or claims by us against
        third-parties, such litigation, whether or not determined in our favor, could
        result in significant expense to us and divert the efforts of our technical
        and
        management personnel from productive tasks. Also, in the event of an adverse
        ruling in such litigation, we might be required to expend significant resources
        to develop non-infringing technology or to obtain licenses to the infringing
        technology, which licenses may not be available on acceptable terms. In the
        event of a successful claim against us and our failure to develop or license
        a
        substitute technology, our operating results could be adversely
        affected.
  **Employees**
  As
        of
        December 31, 2006, we had 125 full time employees, of whom 50 were involved
        in sales, marketing and customer service, 19 in research and product
        development, 40 in assembly and quality assurance, and 16 in finance and
        administration. From time to time, we employ part-time personnel in various
        capacities, primarily assembly and clerical support. In addition, we have
        35
        contract employees in Mexico. We have never experienced a work stoppage.
        No
        employees are subject to any collective bargaining agreement, and we believe
        our
        employee relations to be good.
  We
        believe that our future success will depend to a large extent on the continued
        contributions of certain employees, many of whom would be difficult to replace,
        and on our 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 our operations or otherwise harm our business or results
        of
        operations.
  **Available
        Information**
  Our
        Web
        site is *http://www.fiberstars.com* .
        We make
        available free of charge, on or through our Web site, our annual, quarterly
        and
        current reports, and any amendments to those reports, as soon as reasonably
        practicable after electronically filing such reports with the SEC. Information
        contained on our Web site is not part of this Report.
  **Item
        1A. Risk Factors**
  **We
        have recently changed the focus of our business and may be unsuccessful or
        experience difficulties in implementing this change. If this occurs, we may
        not
        be able to achieve operating profitability.**
  In
        connection with the reorganization and restructuring of Fiberstars, we intend
        to
        shift the primary focus of our business from our pool and spa products to
        products using our EFO technology. While we intend to continue designing
        and
        manufacturing pool and spa products, we plan to allocate significant resources
        to the development, marketing and distribution of our EFO system in the accent
        lighting market. We have a limited operating history in this market, and
        our
        shift in focus may affect our ability to accurately forecast sales, establish
        adequate reserves, estimate amounts of warranty and returns and other similar
        expenses. Our ability to achieve and maintain profitability depends on our
        ability to successfully implement our new business strategy.
  **Our
        operating results are subject to fluctuations caused by many factors that
        could
        result in decreased revenue and a decline in the price of our common
        stock.**
  Our
        quarterly operating results can vary significantly depending upon a number
        of
        factors including:
  ·  the
        lighting market’s acceptance of, and demand for, our products;
  ·  the
        level and seasonality of orders and the delivery of new products;
  ·  the
        continued availability of our current manufacturing channels and raw material
        suppliers;
  ·  the
        continued availability of our distributors or the availability of replacement
        distribution channels;
  ·  fluctuations in our sales volumes and mix of low and high margin
        products;
  ·  product
        development and marketing expenditures, which are made well in advance of
        potential resulting revenue;
  ·  increased expenses in research and development if we are not able to meet
        certain milestones in our Defense Advanced Research Project Agency, or DARPA,
        contracts;
  ·  the
        seasonality of the construction industry, which results in a substantial
        portion
        of our historical quarterly sales in the last month of each of the second
        and
        fourth quarters of the year;
   14
  
  ·  a
        significant portion of our expenses are relatively fixed, and if sales fall
        below our expectations, we will not be able to make any significant adjustment
        in our operating expenses; and
  ·  the
        impact of natural disasters, terrorist acts and other unforeseeable catastrophic
        events.
  Although
        we attempt to control our expense levels, these levels are based, in part,
        on
        anticipated revenue. Therefore, we may not be able to control spending in
        a
        timely manner to compensate for any unexpected revenue shortfall.
  You
        should not rely on period-to-period comparisons of our operating results
        as an
        indication of future performance. The results
        may be below the expectations of market analysts or investors, which would
        likely cause our share price to decline.
  **Our
        future success is highly dependent on the successful adoption of EFO systems
        by
        the lighting market, which is traditionally slow in adopting new
        technologies.**
  EFO
        is a
        relatively new and unproven type of lighting that may not achieve acceptance
        by
        lighting designers or other consumers of lighting products. Our potential
        retail
        customers are widespread and independent, and their decisions are influenced
        by
        a variety of factors which are often unique to each customer. These customers
        have multiple choices in lighting designs and products, including incandescent
        and fluorescent technologies, and may be averse to adopting new technology
        or
        incurring the costs of utilizing new technologies. In addition, these
        alternative lighting products are manufactured by large, established companies
        with significantly greater resources than us for developing energy efficient
        lighting. As a result, even if potential customers choose to adopt new lighting
        technologies, our products still may not be utilized. Even if some customers
        utilize our products on a limited basis, there is no guarantee that they
        will
        expand their use of or continue to utilize our products.
  One
        of
        our significant markets is large-scale new construction, including retail
        and
        grocery stores. Effective lighting by these customers is a critical element
        in
        showcasing merchandise and promoting sales. As a result, these customers
        are
        reluctant to change current lighting products for fear of losing sales. In
        order
        to penetrate these markets, we must persuade this customer base that the
        adoption of our EFO systems will not negatively impact their business. This
        process is slow, time-consuming and expensive. If our EFO system is not adopted
        by this customer base, we may not generate sufficient revenue to offset the
        cost
        of bringing our EFO technology into these target markets.
  Finally,
        successful penetration in certain markets or geographic regions does not
        guarantee that we will be able to achieve successful penetration into the
        accent
        lighting market or that our acceptance will be geographically
        widespread.
  **Our
        color spectrum lamp is untested by the retail market and may not be accepted
        without technological changes, if at all.**
  Our
        EFO
        system offers a new full spectrum lamp for use in retail stores. If
        our
        new full color spectrum lamp is not as effective as we anticipate or does
        not
        meet the
        specific needs of this target customer base, we may need to expend additional
        resources to make technological changes to the spectrum. If our new full
        color
        spectrum is not accepted or if we are unable to make the changes necessary
        for
        customer acceptance, this could negatively impact sales of our EFO
        system.
  **We
        plan on allocating a significant amount of resources to the research and
        development of our EFO lighting technology. If our EFO lighting system is
        not
        accepted in our target market, we may not recoup these
        expenses.**
  We
        plan
        on devoting a substantial portion of our research and development resources
        to
        developing new products using our EFO lighting technology and marketing it
        in
        our target markets. Because our EFO lighting system is a relatively new product,
        we do not know if we will be successful in penetrating our target markets.
        As a
        result, we may not generate a sufficient amount of revenue from the sales
        of our
        EFO lighting systems to offset the costs necessary to bring our EFO lighting
        systems to market. Our gross margins and operating results will suffer if
        our
        EFO lighting systems are not accepted in our target markets.
  **Our
        large core fiber manufacturing is centralized in a single facility, which
        may
        affect our ability to sufficiently meet product demand in a cost effective
        or
        timely manner.**
  We
        manufacture our large core fiber through a unique proprietary process and
        currently have one machine that manufactures this fiber, located at the facility
        we lease in Solon, Ohio. This large core fiber is used in a majority of our
        EFO
        systems. As a result, we are subject to manufacturing delays due to facility
        shutdown, power loss or labor difficulties. If our facility were to experience
        temporary shutdown, or be unable to function at predicted capacity, we may
        be
        unable to meet our demand in a cost efficient manner, if at all. Furthermore,
        our ability to modify our production output for custom orders is limited
        by our
        having one machine at a single facility. In addition, our alternative method
        is
        not cost effective. In 2005 and 2006 we entered into agreements with ADLT
        to
        purchase two coating machines and the supply of certain coatings which will
        be
        operated and maintained by a third party. If this machine is not operated
        or
        maintained properly we may experience delays in our manufacturing
        process.
   15
  
  **Two
        Fiberstars coating machines are operated by a third party. If the third party
        does not operate and/or maintain the machines properly, we may experience
        manufacturing delays.**
  In
        2005
        and 2006 we entered into agreements with ADLT to purchase two coating machines
        and the supply of certain coatings which will be operated and maintained
        by a
        third party. If this machine is not operated or maintained properly we may
        experience delays in our manufacturing process.
  **If
        electricity costs decline or regulatory requirements for energy efficient
        lighting are repealed, demand for our products may
        decline.**
  The
        principal advantage of our EFO technology over competing lighting technologies
        is energy efficiency. Factors compelling our target customers to utilize
        more
        energy efficient lighting technologies include increasing energy costs and
        federal and state
        government regulations requiring lower wattage per square foot such as
        ASHRAE-IESNA Standard 90.1, which limits electricity consumption for lighting per square foot to 1.9 watts for both new construction
        and renovations requiring building permits for retail buildings in the United
        States. If the need for increasingly energy efficient lighting technologies
        by
        our target customer base declines, the attractiveness of our technology would
        also decline.
  **We
        depend on a limited number of suppliers from whom we do not have guarantees
        of
        adequate supplies, thus 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 our small diameter stranded fiber, which is used
        extensively in our fiber pool and spa lighting products, and to a lesser
        extent,
        in our EFO systems. We also rely on a third party to operate and maintain
        Fiberstars arctube machines to produce EFO lamps. The loss of Mitsubishi
        as a
        supplier or ADLT as a third party operator could result in delays in the
        shipment of products, additional expense associated with redesigning products,
        impaired margins, reduced production volumes, strained customer relations
        and
        loss of business or could otherwise harm our results
        of operations.
  **We
        depend on ADLT for a number of components used in our products as well as
        future
        development of new components and also rely on ADLT to operate and maintain
        our
        coating machine and provide certain related services.**
  ADLT
        supplies us with certain components used in our products. While ADLT has
        been
        financially viable, there can be no assurances that this will continue. In
        addition, ADLT can terminate for convenience its obligations to supply us
        with
        components and related services for the coating machine purchased from them
        upon
        nine months notice to us. As a result, we have identified alternative suppliers
        for these components, but there could be an interruption of supply and increased
        costs if a transition to a new supplier were required. We could lose current
        or
        prospective customers as a result of supply interruptions. Increased costs
        and
        delays would negatively impact our gross margins and results of
        operations.
  **We
        have experienced negative cash flow from operations and may continue to do
        so in
        the future. We may need to raise additional capital in the future, but our
        ability to do so may be limited.**
  While
        we
        have historically been able to fund cash needs from operations, bank lines
        of
        credit or from capital markets transactions, due to competitive, economic
        or
        other factors there can be no assurance that we will continue to be able
        to do
        so. If our capital resources are insufficient to satisfy our liquidity
        requirements and overall business objectives we may seek to sell additional equity
        securities or obtain debt financing. Adverse business conditions due to a
        weak
        economic environment or a weak market for our products
        have led to and may lead to continued negative cash flow from operations,
        which
        may require us to raise additional financing, including equity financing.
        Any
        equity financing may be dilutive to shareholders, and debt financing, if
        available, will increase expenses and may involve restrictive covenants.
        We may
        be required to raise additional capital at times and in amounts which are
        uncertain, especially under the current capital market conditions. Under
        these
        circumstances, if we are unable to acquire additional capital
        or are required to raise it on terms that are less satisfactory than desired,
        it
        may harm our financial condition, which could require us to curtail our
        operations significantly, sell significant assets, seek arrangements with
        strategic partners or other parties that may require us to relinquish
        significant rights to products, technologies or markets, or explore other
        strategic alternatives including a merger or sale of our company.
  **We
        sell products into a marketplace where our competitors often have lower initial
        product pricing. If we are unable to** **provide
        customers with long term cost savings, we may not be able to successfully
        penetrate our target markets, which could** **harm
        our revenue and gross profits.**
  Customers
        in our target markets currently use conventional lighting technologies,
        including incandescent, halogen and fluorescent lighting. The initial cost
        of
        using these traditional lighting technologies is relatively low. Historically,
        we have not been able to price our EFO lighting system to compete with these
        traditional lighting products. As a result, in order to gain market share,
        our
        EFO lighting system must provide our target customers with longer life cycles.
        This is achieved through reduced maintenance costs,
        reduced energy costs and providing customers with the desired lighting effect
        without resulting in damage to or loss of goods. If  we
        are
        not able to persuade potential customers of the long-term cost savings in
        using
        our EFO lighting system, we may not be able to successfully compete in our target markets. Our financial results will suffer
        if
        we are not able to penetrate these target markets and gain
        market share. Additionally, MR-16 halogen lamp pricing is declining, and
        in
        order to remain competitive and broaden our market targets
        to include compact fluorescent lamps and other lamp types, we believe we
        must
        continue to reduce EFO costs and pricing.
   16
  
  **We
        operate in markets that are intensely and increasingly competitive. To be
        successful, we must provide energy saving solutions that offer compelling
        competitive advantages over conventional lighting
        technologies.**
  Competition
        is increasing in the commercial decorative and accent lighting and pool lighting
        markets, as well as in the energy efficient lighting markets. A number of companies
        offer directly competitive products, including color halogen lighting for
        swimming pools and incandescent and fluorescent lighting
        for commercial decorative and accent lighting. For example, General Electric
        recently announced it has developed a more energy-efficient incandescent
        lamp.
        We also compete with LED products in water lighting and in neon and other
        lighted signs. In addition, many of our competitors in the pool and spa market
        bundle their lighting products with other pool and spa related products,
        which
        many customers find to be an attractive alternative. Our competitors include
        large and well-established companies such as General Electric, Sylvania,
        Philips, Schott, 3M, Bridgestone, Pentair, Mitsubishi and
        OSRAM/Siemens.
  Many
        of
        our competitors have substantially greater financial, technical and marketing
        resources than we do. We may not be able to adequately respond to technological
        developments or fluctuations in competitive pricing. 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. To stay competitive we must continue to allocate
        our resources to research and development, which could negatively impact
        our
        gross margins. If we are unable to provide more efficient lighting technology
        than our competitors, our operating results will be adversely
        affected.
  **We
        rely on intellectual property and other proprietary information that may
        not be
        protected and that may be expensive to protect.**
  We
        currently hold 49 patents in the United States, and three corresponding patents
        in Japan and one corresponding patent in Australia. We also have 43 patents
        pending in the United States. 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 key 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 some of our competitors hold and
        have
        applied for patents related to fiber optic and non-fiber optic lighting.
        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. For example, in 2005 we were involved in patent litigation
        with Pentair with respect to our FX Pool Light product, which was subsequently
        settled. Litigation to determine the validity of any third-party claims or
        claims by us against such third party, 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. In addition,
        we do not know whether our competitors will in the future apply for and obtain
        patents that will prevent, limit or interfere with our ability to make, use,
        sell or import our products. Although we may seek to resolve any potential
        future claims or actions, we may not be able to do so on reasonable terms,
        or at
        all. If, following a successful third-party action for infringement, we cannot
        obtain a license or redesign our products, we may have to stop manufacturing
        and
        marketing our products and our business would suffer as a result.
  **Sales
        of our EFO systems depend on acceptance by multiple decision makers, resulting
        in lengthy sales cycles. As a result, the flow of EFO revenue is not
        predictable.**
  One
        of
        our significant markets is large-scale new construction and the length of
        our
        sales cycle in this market can be anywhere from nine months to as long as
        three
        years. Decisions about lighting products utilized in large-scale new
        construction are made
        at
        multiple levels by our current and potential customers, including merchandising
        and purchasing personnel, the chief financial  officer
        and the chief executive officer. These decisions are influenced by a number
        of
        factors including cost, reliability of the product and
        reliability of its source. In addition, some of these customers function
        autonomously and decisions with respect to construction, including lighting,
        are
        made by each store, even if part of a large chain. As a result, with respect
        to
        such customers, we often must meet with all the decision makers at each store
        where we want to install our EFO systems. Furthermore, such decisions are
        made significantly
        in advance of the utilization of the actual product. As a result, if we are
        unable to access the multiple decision makers or convince
        them to adopt our products and utilize them on a widespread basis, we may
        be
        unable to successfully penetrate these markets. We may also be required to
        invest significant time and resources into marketing to these customers before
        we are able to determine if we will be able to sell such customers our
        products.
  **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.**
  Our
        future success will depend to a large extent on the continued contributions
        of
        certain employees, such as our current chief executive officer, chief financial
        officer and chief technical officer. These and other key employees would
        be
        difficult to replace. Our future success will also depend on our ability
        to
        attract and retain qualified technical, sales, marketing and management
        personnel, for whom competition is intense. The loss of or failure to attract,
        hire and retain any such persons could delay product development cycles,
        disrupt
        our operations or otherwise harm our business or results of operations. In
        addition, we plan to build a new internal sales force, which may not generate
        the anticipated net sales and may incur unanticipated expenses.
   17
  
  **We
        are becoming increasingly dependent on foreign sources of supply for many
        of our
        components and in some cases complete assemblies, which due to distance or
        political events, may result in untimely deliveries.**
  In
        order
        to control costs, we are continually seeking offshore supply of components
        and
        assemblies. We currently import supplies from, or have products assembled
        in,
        Mexico, India, China, Taiwan, Japan and some European countries. This results
        in
        longer lead times for deliveries, which can mean less responsiveness to sudden
        changes in market demand for the products involved. Some of the countries
        where
        components are sourced may be less stable politically than the United States
        or
        may be subject to natural disasters or diseases, and this could lead to an
        interruption in the delivery of key components. Delays in the delivery of
        key components
        could result in delays in product shipments, additional expenses associated
        with
        locating alternative component sources or  redesigning
        products, impaired margins, reduced production volumes, strained customer
        relations and loss of customers, any of which could
        harm our results of operations. Furthermore, we bear the risk of theft or
        damage
        to our products with certain of our offshore partners, particularly with
        regard
        to our assembly facilities in Mexico.
  **If
        we fail to maintain an effective system of internal controls, we may not
        be able
        to accurately report our financial results or prevent fraud. As a result,
        current and potential shareholders could lose confidence in our financial
        reporting, which could harm our business and the trading price of our common
        stock.**
  Effective
        internal controls are necessary for us to provide reliable financial reports
        and
        effectively prevent fraud. We have in the past discovered, and may in the
        future
        discover, areas of our internal controls that need improvement. Section 404
        of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our
        internal controls over financial reporting and have our independent registered
        public accounting firm annually attest to our evaluation, as well as issue
        their
        own opinion on our internal control over financial reporting, which is required
        by us for the first time in connection with this Annual Report on
        Form 10-K. We have prepared for compliance with Section 404 by
        strengthening, assessing and testing our system of internal controls to provide
        the basis for our report. However, the continuous process of strengthening
        our
        internal controls and complying with Section 404 is expensive and time
        consuming, and requires significant management attention. We cannot be certain
        that these measures will ensure that we will maintain adequate control over
        our
        financial processes and reporting. If we or our independent registered public
        accounting firm discover a material weakness, the disclosure of that fact,
        even
        if quickly remedied, could reduce the market’s confidence in our financial
        statements and harm our stock price. In addition, future non-compliance with
        Section 404 could subject us to a variety of administrative sanctions,
        including the suspension or delisting of our common stock from The NASDAQ
        National Market and the inability of registered broker-dealers to make a
        market
        in our common stock, which would further reduce our stock price. Estimates
        of
        our annual costs, independent of additional audit fees, required to comply
        with
        Section 404 after 2006 on an on-going basis are $300,000 or higher. While
        we expect these costs to increase our operating expenses significantly, we
        cannot predict or estimate the amount of future additional costs we may incur
        or
        the timing of such costs.
  **Our
        components are difficult to manufacture and procure in large quantities and
        supply may be limited in the short term.**
  EFO
        system includes components that are difficult to manufacture and procure
        in
        large quantities in the short term. These components include lamps and optical and electronic components. Furthermore,
        if
        these components are in limited supply, our suppliers may allocate their
        supply
        to larger customers. If an increase in demand outpaces the projected expansion
        of our manufacturing capabilities, or if larger quantities are needed in
        a
        shorter time frame than anticipated, we may not be able to meet customers’
requirements and our ability to market our EFO system may be adversely affected.
        Our inability to meet customers’ requirements may also negatively affect our
        ability to gain market share and acceptance among lighting designers and
        other
        repeat customers of lighting products.
  **We
        have historically relied on government funding for our research and
        development.**
  Historically,
        approximately 54% of our EFO research and development efforts have been
        supported directly by government funding. In 2006, approximately 35% of our
        EFO
        research and development funding came from government sources and is contracted
        for short periods, usually one to two years. If government funding were to
        continue to be reduced or eliminated, there is no guarantee we would be able
        to
        continue to fund our research and development efforts in EFO technology and
        products at their current levels, if at all. If we are unable to support
        our EFO
        research and development efforts, there is no guarantee we would be able
        to
        develop enhancements to our current products or develop new
        products.
  **Changes
        to financial accounting standards may affect our results of operations and
        cause
        us to change our business practices.**
  We
        prepare our financial statements to conform with generally accepted accounting
        principles, or GAAP, in the United States. These accounting principles are
        subject to interpretation by the American Institute of Certified Public
        Accountants, the Securities and Exchange Commission and various bodies formed
        to
        interpret and create appropriate accounting policies. A change in those policies
        can have a significant effect on our reported results and may affect our
        reporting of transactions completed before a change
        is
        announced. Changes to those rules or the questioning of current practices
        may adversely affect our reported financial results or the
        way we conduct our business. For example, accounting policies affecting many
        aspects of our business, including rules relating to
        employee stock option grants, have recently been revised or are under review.
        The Financial Accounting Standards Board and other agencies
        have finalized changes to GAAP required us, starting in our first quarter
        of
        2006, to record a charge to earnings for employee stock option grants and
        other
        equity incentives. We may have significant and ongoing accounting charges
        resulting from option grant and other equity incentive expensing that could
        reduce our overall net income. In addition, because we historically have used
        equity-related compensation as a component of our total employee compensation
        program, the accounting change could make the use of
        equity-related compensation less attractive to us and therefore make it more
        difficult to attract and retain employees.
   18
  
  **We
        currently rely on lighting representatives for a significant portion of our
        decorative and special effects lighting systems sales and terms and conditions
        of sales are subject to change with very little notice.**
  Most
        of
        our decorative and special effects lighting systems are sold through lighting
        representatives, and we do not have long-term contracts with our distributors.
        If these distributors significantly change their terms with us or change
        their
        historical pattern of ordering products from us, there could be a significant
        adverse impact on our net sales and operating results.
  **Our
        sales are dependent upon new construction levels and are subject to seasonal
        and
        general economic trends.**
  Construction
        levels are affected by general economic conditions, real estate market, interest
        rates and the weather. Sales of commercial lighting products depend significantly upon the level of new building
        construction and renovation. 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. 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 and the third quarters 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.
  **If
        we are not able to timely and successfully develop, manufacture, market and
        sell
        our new products, our operating results will decline.**
  We
        expect
        to introduce new products each year in the pool and spa lighting market and
        the
        commercial lighting market. We depend on various components and raw materials
        for use in the manufacturing of our products from sole and foreign suppliers.
        We
        may not be able to successfully manage price fluctuations due to market demand
        or shortages. Significant increases in the costs or sustained
        interruptions in our receipt of adequate amounts, of necessary components
        and
        raw materials could harm our margins, result in
        manufacturing halts, harm our reputation and relationship with our customers
        and
        negatively impact our results of operations. In addition, we could have
        difficulties manufacturing these new products as a result of our inexperience
        with them or the costs could be higher
        than expected and delivery of these products may cause us to incur additional
        unexpected research and development expenses. Furthermore, in order to competitively price our products and achieve broader
        market acceptance, we may need to redesign our manufacturing
        process to produce our products in higher volume and at a reduced cost.
        Furthermore, any delays in the introduction of these
        new products could result in lost sales, loss of customer confidence and
        loss of
        market share. 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
        rely on the largest pool distributor in the United States for a significant
        portion of our pool and spa lighting products sales.**
  We
        sell a
        significant portion of our pool and spa lighting products through SCP. SCP
        accounted for approximately 10%, 11% and 11% of our net sales in 2004, 2005
        and
        2006, respectively. If SCP ceases to purchase or substantially decreases
        its
        volume of purchases, this could significantly reduce the availability of
        our
        products to end users, which could negatively impact our net sales and operating
        results. Furthermore, because SCP is the largest distributor in the United
        States, we may not be able to increase sales to our other distributors
        sufficiently to offset the loss resulting from SCP’s reduction or cessation in
        sales.
  **The
        loss of a key sales representative could have a negative impact on our net
        sales
        and operating results.**
  We
        rely
        on key sales representatives and outside sales agents for a significant portion
        of our sales. These sales representatives and outside sales agents have unique
        relationships with our customers and would be difficult to replace. The loss
        of
        a key sales representative or outside sales agent could interfere with our
        ability to maintain customer relationships and result in declines in our
        net
        sales and operating results. In addition, these sales representatives and
        sales
        agents carry multiple products lines, including those of our competitors.
        Generally, a sales representative or sales agent will primarily sell products
        from one well-established company and supplement these sales with products
        from
        smaller companies, such as Fiberstars. As a result, if we lost a key sales
        representative or sales agent, we may have difficulty replacing the sales
        representative or sales agent, if at all, which could negatively impact our
        net
        sales.
   19
  
  **We
        use plants in Mexico and India to manufacture and assemble many of our pool
        and
        spa products. The supply of these** **finished
        goods may be impacted by local political or social conditions as well as
        the
        financial strength of the companies with** **which
        we do business.**
  As
        we
        attempt to reduce manufacturing expenses, we are becoming increasingly dependent
        upon offshore companies for the manufacturing and final assembly of many
        of our
        pool and spa products. To do so, we must advance certain raw materials,
        inventory and production costs to these off-shore manufacturers. The supply
        of
        finished goods from these companies, and the raw materials, inventory and
        funds
        that we advance to them may be at risk depending upon the varying degrees
        of
        stability of the local political, economic and social environments in which
        they
        operate, and the financial strength of the manufacturing companies
        themselves.
  **Because
        we depend on a limited number of significant customers for our net sales,
        the
        loss of a significant customer, reduction in order size or the effects of
        volume
        discounts granted to significant customers from time to time could harm our
        operating results.**
  Our
        business is currently dependent on a limited number of significant customers,
        and we anticipate that we will continue to rely on a limited number of
        customers. For example, in 2006, SCP, our largest pool and spa customer,
        accounted for approximately 11%
        of
        our net sales. We expect these customers to continue to represent a significant
        portion of our net sales in the future. The loss of  any
        of
        these significant customers would harm our net sales and operating results.
        Customer purchase deferrals, cancellations, reduced order
        volumes or non-renewals from any particular customer could cause our quarterly
        operating results to fluctuate or decline and harm our business. In addition,
        volume discounts granted to significant customers from time to time could
        lead
        to reduced profit margins, and negatively impact our operating
        results.
  **Our
        components and products could have defects or design or compatibility issues,
        any of which could be costly to correct and** **could
        result in the rejection of our products and damage to our reputation, as
        well as
        lost sales, diverted development resources and increased warranty reserves
        and
        manufacturing costs.**
  In
        the
        past, we have experienced design defects and product failure. For example,
        in
        our EFO systems, we experienced defects related to the power supply in the
        illuminator. In our pool and spa products, we experienced defects with our
        circuit sequencing
        color wheel. We cannot guarantee that we will not experience defects or
        compatibility issues in components or products in the
        future. Errors or defects in our products may arise in the future, and, if
        significant or perceived to be significant, could result in rejection of
        our
        products, product returns or recalls, damage to our reputation, lost revenue,
        diverted development resources and increased customer service and support
        costs
        and warranty claims. Errors or defects in our products could also result
        in
        product liability claims. We estimate warranty and other returns and accrue
        reserves for such costs at the time of sale. Any estimates, reserves or accruals
        may be insufficient to cover sharp increases in product returns, and such
        returns may harm our operating results. In addition,
        customers may require design changes in our products in order to suit their
        needs. Losses, delays or damage to our reputation due to
        design or defect issues would likely harm our business, financial condition
        and
        results of operations.
  **If
        we are unable to predict market demand for our products and focus our
        inventories and development efforts to meet market demand, we could lose
        sales
        opportunities and experience a decline in sales.**
  In
        order
        to arrange for the manufacture of sufficient quantities of products and avoid
        excess inventory we need to accurately predict market demand for each of
        our
        products. Significant unanticipated fluctuations in demand could cause problems
        in our operations. We may not be able to accurately predict market demand
        in
        order to properly allocate our manufacturing and distribution resources among
        our products, especially with respect to the manufacturing of our large core
        fiber, as we use one machine to manufacture this fiber. As a result, we may
        experience declines in sales and lose, or fail to gain, market share.
        Conversely, if we overbuild inventories we run the risk of having inventory
        write-offs due to obsolescence.
  **We
        depend on collaboration with third parties, who are not subject to material
        contractual commitments, to augment our research and development
        efforts.**
  Our
        research and development efforts include collaboration with third parties.
        Many
        of these third parties are not bound by any
        material contractual commitment leaving them free to end their collaborative
        efforts at will. Loss of these collaborative efforts could adversely affect
        our
        research and development efforts and could have a negative effect on our
        competitive position in the market. In addition, arrangements for joint
        development efforts may require us to make royalty payments on sales of
        resultant products
        or enter into licensing agreements for the technology developed, which could
        increase our costs and negatively impact our results
        of operations.
   20
  
  **The
        demand for new construction is affected by general economic
        conditions.**
  The
        United States and international economies are cyclical and therefore difficult
        to predict. A sustained economic recovery is uncertain. In particular, recent
        increases in the cost of oil, increases in energy costs, terrorist acts and
        similar events, continued turmoil
        in the Middle East or war in general could contribute to a slowdown of the
        market demand for products that require significant initial
        capital expenditures, including new residential and commercial buildings.
        In
        addition, increases in interest rates may increase financing costs to customers,
        which in turn may decrease building rates and associated demand for our
        products. If the economic recovery slows down as a result of the recent
        economic, political and social turmoil, or if there are further terrorist
        attacks in the United States or elsewhere, we may experience decreases in
        the
        demand for our products, which may harm our operating results.
  **We
        are subject to global economic or political conditions, which may disrupt
        the
        general economy, reducing demand for our products.**
  We
        have
        significant international activities and customers, and plan to continue
        these
        efforts, which subject us to additional business risks, including logistical
        complexity, political instability and the general economic conditions in
        those
        markets. Sales outside the United States accounted for approximately 33%
        of our
        net sales in 2004, 33% of our net sales in 2005 and 29% of our net sales
        in
        2006. Because the market for our products tends to be highly dependent upon
        general economic conditions, a decline in general economic conditions would
        likely harm our operating results.
  Risks
        we
        face in conducting business internationally include:
  ·  multiple, conflicting and changing laws and regulations, export and import
        restrictions, employment laws, regulatory requirements and other government
        approvals, permits and licenses;
  ·  difficulties and costs in staffing and managing foreign operations such as
        our
        offices in Germany and the United Kingdom;
  ·  difficulties and costs in recruiting and retaining individuals skilled in
        international business operations;
  ·  increased costs associated with maintaining international marketing
        efforts;
  ·  potentially adverse tax consequences; political and economic instability, including wars, acts of terrorism, political
        unrest, boycotts, curtailments of trade and other business restrictions;
        and
  ·  currency
        fluctuations.
  In
        addition, in the Asia/Pacific region generally, we face risks associated
        with a
        recurrence of SARS, spreading of Asian bird flu, tensions between countries
        in that region, such as political tensions between China and Taiwan, the
        ongoing
        discussions with North Korea regarding its nuclear
        weapons program, potentially reduced protection for intellectual property
        rights, government-fixed foreign exchange rates, relatively
        uncertain legal products and developing telecommunications infrastructures.
        In
        addition, some countries in this region, such as
        China, have adopted laws, regulations and policies which impose additional
        restrictions on the ability of foreign companies to conduct business in that
        country or otherwise place them at a competitive disadvantage in relation
        to
        domestic companies.
  **Item
        2. Property**
  Our
        principal executive offices and commercial lighting manufacturing and assembly
        facilities are located in a 79,000 square foot facility in Solon, Ohio, under
        a
        lease agreement expiring in 2011. 10,000 square feet of this space is subleased
        to another tenant through June 2008. We have other local sales offices in
        the
        United States in Pleasanton, California and New York and in Europe sales
        and
        operations offices in the United Kingdom in Thatcham, under lease. We also
        own a
        local office in Berching, Germany. We also have a contract manufacturing
        facility near Tijuana, Mexico. We believe that our current facilities are
        adequate to support our current and anticipated near-term operations and
        that we
        can obtain additional space we may need in the future at commercially reasonable
        terms.
  **Item
        3. Legal Proceedings**
  On
        March
        6, 2006, Ohms Electric, Inc. filed a complaint against Fiberstars, Inc. with
        the
        30th Judicial Circuit Court in the State of Michigan. The complaint requests
        unspecified damages as a result of the Company’s product not working properly at
        Neighborhood Cinema in Lansing, Michigan. The suit was resolved in December
        2006.
  We
        may
        also from time to time become involved in legal proceedings in the ordinary
        course of business.
  There
        were no matters submitted to a vote of security holders during the quarter
        ended
        December 31, 2006.
  **Executive
        Officers of the Registrant**
  Our
        executive officers and their ages as of December 31, 2006, are as
        follows:
   21
  
  **Name**
              
              
              
              
              **Age**
              
              
              **Position**John
                  Davenport
              
              
              61
              
              
              Chief
                  Executive Officer and DirectorRoger
                  Buelow
              
              
              34
              
              
              Vice
                  President, Engineering and Chief Technology OfficerRobert
                  A. Connors
              
              
              58
              
              
              Vice
                  President, Finance and Chief Financial OfficerTed
                  des Enfants.
              
              
              35
              
              
              Vice
                  President and General Manager, Fiberstars EFOBarry
                  R. Greenwald
              
              
              60
              
              
              President
                  and General Manager, Pool DivisionEric
                  Hilliard
              
              
              39
              
              
              Chief
                  Operational Officer
   *Mr. Davenport* was
        appointed our Chief Executive Officer and a director in July 2005.
        Mr. Davenport joined us in November 1999 as Vice President, Chief
        Technology Officer and was appointed Chief Operating Officer in July 2003.
        Prior to joining Fiberstars, Mr. Davenport served as President of Unison
        Fiber Optic Lighting Systems, LLC, or Unison, from 1998 to 1999.
        Mr. Davenport began his career at GE Lighting in 1972 as a research
        physicist and thereafter served 25 years in various capacities including
        GE
        Lighting’s research and development manager and as development manager for high
        performance LED projects. He is a recognized expert in light sources, lighting
        systems and lighting applications, with special emphasis in low wattage
        discharge lamps, electronic ballast technology and distributed lighting systems
        using fiber optics.
  *Mr. Buelow* ** was
        appointed our Chief Technology Officer in July 2005. Mr. Buelow has
        also served as our Vice President, Engineering since February 2003. Prior
        to joining Fiberstars in 1999, he served as Director of Engineering for Unison
        from 1998 to 1999. Prior to that he served four years as an engineer at GE
        Lighting working on several fiber optic lighting projects. Mr. Buelow is a
        Certified Quality Engineer with ten patents.
  *Mr. Connors* joined
        the Company in July 1998 as Vice President, Finance, and Chief Financial
        Officer. From 1984 to 1998, Mr. Connors held a variety of positions for
        Micro Focus Group Plc, a software company with 1997 revenues of
        $165 million, including Chief Financial Officer and Chief Operating
        Officer. Prior to working for Micro Focus Group Plc, he held senior finance
        positions with Eagle Computer and W. R. Grace.
  *Mr. des
        Enfants* joined
        the Company in January 2005 as Vice President and General Manager,
        Fiberstars EFO. From 1994 to 2003, Mr. des Enfants held a variety of
        positions with the GE Lighting, most recently as District Sales Manager in
        the
        eastern region. From 1998 to 2001, he was National Account Manager with GE
        Lighting and from 1994 to 1998 held various Sales and Sales Manager positions
        at
        GE Lighting.
  *Mr. Greenwald* joined
        the Company in October 1989 as General Manager, Pool Division. He became
        Vice President in September 1993, Senior Vice President in
        February 1997 and President of the Pool Division in July 2005.
 Prior to joining the Company, Mr. Greenwald served as National Sales
        Manager at Aquamatic, a swimming pool accessory company, from August 1987
        to October 1989. From May 1982 to August 1987, Mr. Greenwald
        served as National Sales Manager at Jandy Inc., a swimming pool equipment
        company.
  *Mr.
        Hilliard* joined
        the Company in November 2006 as Chief Operational Officer. ** He
        is an
        operations and management professional with more that 12 years of experience
        in
        manufacturing operations. Prior to joining the Company, Mr. Hilliard was
        a
        Business Manager of Saint Gobain, flight structures business from 2002 to
        2006.
        Additionally he served 7 years with the Goodrich Aerospace Company in operations
        as well as internationally with HJ Heinz Company *.*
   22
  
  **PART II**
  **Item
        5. Market for the Registrant’s Common Equity, Related Stockholder Matters and
        Issuer Purchases of Equity Securities**
  Our
        common stock trades on the Nasdaq National Market under the symbol FBST.
        The
        following table sets forth the high and low sales prices for our common stock,
        from its consolidated transaction reporting system.
  **High**
              
              **Low**First
                  quarter 2005
              
              10.12
              
              7.28Second
                  quarter 2005
              
              12.50
              
              8.28Third
                  quarter 2005
              
              15.50
              
              9.75Fourth
                  quarter 2005
              
              10.80
              
              8.00First
                  quarter 2006
              
              9.33
              
              7.61Second
                  quarter 2006
              
              9.09
              
              6.91Third
                  quarter 2006
              
              8.85
              
              6.75Fourth
                  quarter 2006
              
              7.95
              
              5.42
   There
        were approximately 300 holders of record of our common stock as of
        March 14, 2007, and we estimate that at that date there were approximately
        800 additional beneficial owners.
  We
        have
        not declared or paid any cash dividends and do not anticipate paying cash
        dividends in the foreseeable future.
  **Securities
        Authorized for Issuance Under Equity Compensation Plans**
  The
        following table sets forth certain information regarding our equity compensation
        plans as of December 31, 2006:
  **Plan category**
              
              
              
              **Number of securities**
                **to be issued upon**
                **exercise of**
                **outstanding options,**
                **warrants and rights**
                **(a)**
              
              **Weighted-average**
                **exercise price of**
                **outstanding options,**
                **warrants and rights**
                **(b)**
              
              **Number of securities**
                **remaining available for**
                **future issuance under**
                **equity compensation plans**
                **(excluding securities**
                **reflected in column (a))**
                **(c)**Equity
                  compensation plans approved by security holders
              
              
              1,293,000
              
              
              
              $
              7.00
              
              
              
              245,000
              (1)(2)Equity
                  compensation plans not approved by security holders
              
              
              8,000
              
              
              
              $
              4.50
              
              
              
              —Total
              
              
              1,301,000
              (3)
              
              
              $
              6.98
              
              
              
              245,000
   (1)  Includes the number of shares reserved for issuance under our 2004 Stock
        Incentive Plan.
  (2)  Includes 55,000 shares available for sale pursuant to our 1994 Employee Stock
        Purchase Plan. Shares of common stock will be purchased at a price equal
        to 85%
        of the fair market value per share of common stock on either the first day
        preceding the offering period or the last date of the offering period, whichever
        is less.
  (3)  Includes 8,000 warrants held by employees or directors.
  **Item
        6. Selected Financial Data**
  The
        Selected Operations and Balance Sheet Data set forth below have been derived
        from our Consolidated Financial Statements. It should be read in conjunction
        with the information appearing under the heading “Management’s Discussion and
        Analysis of Financial Condition and Results of Operations” included in
        Item 7 of this Report and the Consolidated Financial Statements and related
        notes found in Item 15 of this Report.
   23
  **SELECTED
        CONSOLIDATED FINANCIAL DATA**
  **(IN
        THOUSANDS, EXCEPT PER SHARE DATA)**
  **YEARSENDEDDECEMBER31,**
                
                **2006**
                
                **2005**
                
                **2004**
                
                **2003**
                
                **2002**OPERATING
                    SUMMARYNet
                    sales
                
                $
                27,036
                
                $
                28,337
                
                $
                29,731
                
                $
                27,238
                
                $
                30,960Gross
                    profit
                
                
                7,785
                
                
                10,626
                
                
                11,511
                
                
                10,341
                
                
                11,474As
                    a percent of net sales
                
                
                28.8
                %
                
                37.5
                %
                
                38.7
                %
                
                38.0
                %
                
                37.1
                %Research
                    and development expenses
                
                
                2,341
                
                
                2,190
                
                
                1,188
                
                
                1,279
                
                
                2,290As
                    a percent of net sales
                
                
                8.7
                %
                
                7.7
                %
                
                4.0
                %
                
                4.7
                %
                
                7.4
                %Sales
                    and marketing expenses
                
                
                9,774
                
                
                9,595
                
                
                8,595
                
                
                7,188
                
                
                7,907As
                    a percent of net sales
                
                
                36.2
                %
                
                33.9
                %
                
                28.9
                %
                
                26.4
                %
                
                25.5
                %General
                    and administrative expenses
                
                
                4,956
                
                
                3,135
                
                
                2,459
                
                
                2,435
                
                
                2,709As
                    a percent of net sales
                
                
                18.3
                %
                
                11.1
                %
                
                8.3
                %
                
                8.9
                %
                
                8.8
                %Restructure
                    expense
                
                
                734
                
                
                3,120
                
                
                —
                
                
                —
                
                
                —As
                    a percent of net sales
                
                
                2.7
                %
                
                11.0
                %
                
                —
                %
                
                —
                %
                
                —
                %Loss
                    before tax
                
                
                (9,537
                )
                
                (7,314
                )
                
                (762
                )
                
                (594
                )
                
                (1,441
                )As
                    a percent of net sales
                
                
                (35.3
                )%
                
                (25.8
                )%
                
                (2.6
                )%
                
                (2.2
                )%
                
                (4.7
                )%Net
                    loss
                
                
                (9,650
                )
                
                (7,423
                )
                
                (704
                )
                
                (608
                )
                
                (3,519
                )As
                    a percent of net sales
                
                
                (35.7
                )%
                
                (26.2
                )%
                
                (2.4
                )%
                
                (2.2
                )%
                
                (11.4
                )%Net
                    loss per shareBasic
                
                $
                (0.85
                )
                $
                (0.90
                )
                $
                (0.10
                )
                $
                (0.10
                )
                $
                (0.70
                )Diluted
                
                $
                (0.85
                )
                $
                (0.90
                )
                $
                (0.10
                )
                $
                (0.10
                )
                $
                (0.70
                )Shares
                    used in per share calculation:Basic
                
                
                11,385
                
                
                8,223
                
                
                7,269
                
                
                5,993
                
                
                5,028Diluted
                
                
                11,385
                
                
                8,223
                
                
                7,269
                
                
                5,993
                
                
                5,028FINANCIAL
                    POSITION SUMMARYTotal
                    assets
                
                $
                40,592
                
                $
                46,209
                
                $
                27,018
                
                $
                24,119
                
                $
                20,101Cash,
                    cash equivalents and short-term investments
                
                
                15,968
                
                
                23,578
                
                
                3,609
                
                
                4,254
                
                
                231Working
                    capital
                
                
                22,410
                
                
                31,530
                
                
                14,541
                
                
                12,449
                
                
                7,417Credit
                    line borrowings
                
                
                1,124
                
                
                47
                
                
                ----
                
                
                -----
                
                
                -----Current
                    portion of long-term borrowings
                
                
                778
                
                
                342
                
                
                38
                
                
                30
                
                
                593Long-term
                    borrowings
                
                
                1,862
                
                
                1,089
                
                
                484
                
                
                521
                
                
                449Shareholders’
                    equity
                
                
                30,880
                
                
                38,184
                
                
                21,202
                
                
                18,950
                
                
                14,240Common
                    shares outstanding
                
                
                11,394
                
                
                11,270
                
                
                7,351
                
                
                6,317
                
                
                4,667
 24
 **Item
        7. Management’s Discussion and Analysis of Financial Condition and Results of
        Operations**
  *The
        following discussion of our financial condition and results of operations
        should
        be read together with the consolidated financial statements and the related
        notes incorporated by reference in this Annual Report on Form 10-K or
        referred to herein. This discussion contains, in addition to historical
        information, forward- looking statements that involve risks and uncertainties.
        Our actual results could differ materially from the results discussed in
        the
        forward-looking statements. Factors that could cause or contribute to these
        differences include, but are not limited to, those discussed below as well
        as
        those discussed under “Risk Factors,” “Special Note Regarding Forward-Looking
        Statements” and elsewhere in this Report. We disclaim any obligation to update
        information contained in any forward-looking statement.*
  **Overview**
  Fiberstars
        designs, develops, manufactures and markets fiber optic lighting systems
        for
        wide-ranging uses in both the general commercial and the pool and spa lighting
        markets. Our EFO system introduced in 2004, offers greater energy savings,
        heat
        dissipation and maintenance cost benefits over conventional lighting for
        multiple applications. Accordingly, we believe our EFO system will become
        a
        leading technology in accent lighting and numerous niche lighting
        markets.
  *Net
        Sales*
  In
        2006,
        2005 and 2004, products generated net sales of $27.0 million, $28.3 million,
        and
        $29.7 million. Of these net sales, in 2006, 2005 and 2004, sales of our EFO
        systems generated net sales of $4.0 million, $1.5 million and $0.6 million,
        respectively, and sales of our traditional commercial lighting systems generated
        net sales of $9.6 million, $12.0 million and $12.2 million, respectively.
        In
        addition, in 2006, 2005 and 2004, we generated net sales of $13.4 million,
        $14.8
        million and $16.9 million from sales of our pool and spa lighting
        products.
  We
        sell
        our general commercial lighting systems through direct sales personnel and
        independent lighting representatives. Specifically, we target large accounts
        and
        regional lighting representatives who in turn target specific lighting projects
        in local markets. We also intend to work with architects, lighting designers,
        contractors, utilities and other entities that recommend or install lighting
        systems to build awareness for our EFO systems. For example, we have an
        agreement with Gensler, an architecture, design and planning firm, under
        which
        Gensler assists us in designing our EFO systems in the markets in which they
        do
        business. We sell our traditional commercial lighting products through our
        national account sales personnel as well as independent lighting
        representatives. We also sell both our EFO and traditional commercial lighting
        products in Europe, Russia and the Middle East through our two subsidiaries
        who
        manage our sales operations in those regions. For our pool and spa lighting
        products, we utilize regional sales representatives that specialize in selling
        swimming pool systems to pool builders and pool product
        distributors.
  Our
        target markets and end customers for our commercial lighting products include
        national supermarket chains, specialty retail stores, restaurants and hotels
        and
        other commercial entities seeking down lighting and accent lighting solutions.
        The target customers for our pool and spa lighting markets are pool builders
        and
        pool product distributors who in turn sell our products into the residential
        market.
  We
        sell
        the majority of our commercial lighting systems and pool lighting products
        in
        the United States, Canada and Australia. Sales in the United States accounted
        for approximately 69% of our net sales in 2006, 67% in 2005 and 67% in
        2004.
  *Cost
        of Sales*
  Cost
        of
        sales consists primarily of costs associated with the manufacture of our
        products, including personnel and occupancy costs associated with manufacturing
        support and quality assurance.
  *Research
        and Development*
  Research
        and development expense consists primarily of salaries, bonuses and benefits
        for
        engineering personnel, depreciation of equipment, costs of third party
        subcontractors and consultants and costs associated with various projects,
        including testing, developing prototypes and URL related expenses. Funds
        received under government contracts are recorded as a credit to research
        and
        development expense.
  *Sales
        and Marketing*
  Sales
        and
        marketing expense consists primarily of salaries, bonuses, benefits and related
        costs for sales and marketing personnel, sales commissions, and costs associated
        with trade shows, literature and participation at industry
        conferences.
  *General
        and Administrative*
  General
        and administrative expense consists primarily of salaries, bonuses, insurance,
        bank charges, benefits and related costs for finance and administrative
        personnel and for outside service expenses, including legal, accounting and
        investor relations. In 2006, general and administrative expenses included
        costs
        of compliance with Section 404 of the Sarbanes Oxley Act of 2002 relating
        to
        evaluation of, and reporting of, internal financial controls. These expenses
        were approximately $0.5 million for 2006 in external consulting.
   25
  
  *Restructuring*
  In
        June 2005 we announced a restructuring which called for moving our
        headquarters and base of operations from Fremont, California to Solon, Ohio.
        We
        indicated at that time that the cost of the restructure would be approximately
        $3,500,000 and would result in approximately $2,000,000 in savings.  A
        liability of $1,220,000 was accrued at December 31, 2005.  In 2006, we paid
        $1,954,000 and expensed an additional $734,000.  There is no accrued
        liability for restructuring at December 31, 2006.
  *Seasonality*
  Sales
        of
        our products follow a seasonal pattern which typically results in higher
        sales
        in the second and fourth quarters as pool distributors stock shelves for
        the
        spring and summer seasons. First quarter sales for our products tend be lower
        in
        any given year. Consistent with industry practice, we provide extended terms
        to
        distributors for shipments in the fourth quarter of a given year whereby
        they
        receive products in November and December for which they pay in equal
        installments from April through June of the following
        year.
  **Critical
        Accounting Policies and Estimates**
  The
        preparation of financial statements requires that we make estimates and
        assumptions that affect the reported amounts of assets and liabilities, the
        disclosure of contingencies and the reported amounts of revenue and expenses
        in
        the financial statements. Material differences may result in the amount and
        timing of revenue and expenses if different judgments or different estimates
        were utilized. Critical accounting policies, judgments and estimates which
        we
        believe have the most significant impact on our financial statements are
        set
        forth below:
  · Revenue
        recognition;
  · Allowances for doubtful accounts, returns and discounts;
  · Valuation of inventories; and
  · Accounting for income taxes.
  · Stock-Based
        Compensation
  *Revenue
        Recognition*
  The
        Company recognizes revenue when all of the following occur: (1) we have
        received a purchase order from the customer or completed of a sales agreement
        with the customer; (2) shipment of the product has occurred or services
        have been provided; and (3) the sales price is fixed or determinable and
        collectibility is reasonably assured. Revenue from product sales is generally
        recognized upon shipment, and allowances are provided for estimated returns,
        discounts and warranties. Such allowances are adjusted periodically to reflect
        actual and anticipated returns, discounts and warranty expenses. Revenue
        from
        product sales that include an installation or other service obligation on
        the
        part of the Company are recognized upon the shipment of the product and
        completion of the Company’s installation or service obligation. Revenue on sales
        that include services such as design, integration and installation is generally
        recognized using the percentage-of-completion method. Under the
        percentage-of-completion method, revenue recognized reflects the portion
        of the
        anticipated contract revenue that has been earned, equal to the ratio of
        labor
        costs expended to date to anticipated final labor costs, based on current
        estimates of labor costs to complete the project. Our products are generally
        subject to warranties, and we provide for the estimated future costs of repair,
        replacement or customer accommodation in costs of sales. Fees for research
        and
        development services are determined on a cost-plus basis and are recognized
        as
        revenue when ownership of the completed work-product passes to the
        customer.
  We
        recognize shipments to pool lighting distributors as revenue upon shipment.
        Estimated sales returns are recorded upon recognition of revenues from
        distributors having rights of return, including exchange rights for unsold
        products. Historically, returns have been minimal. Shipments made to commercial
        lighting representatives and distributors are also recognized as revenue
        upon
        shipment because in these instances the representative or distributor is
        acting
        as a pass-through agent to a specific lighting project for which we have
        an
        existing contract or purchase order.
  Revenue
        recognition in each period is dependent on our application of these accounting
        policies. Our application of percentage-of-completion accounting is subject
        to
        our estimates of labor costs to complete each project. In the event that
        actual
        results differ from these estimates or we adjust these estimates in future
        periods, our operating results for a particular period could be materially
        affected.
  *Allowances
        for Doubtful Accounts, Returns and Discounts*
  We
        establish allowances for doubtful accounts, returns and discounts for
        specifically identified doubtful accounts, returns and discounts based on
        credit
        profiles of our customers, current economic trends, contractual terms and
        conditions and historical payment, return and discount experience. For each
        year
        ended December 31, the allowance for doubtful accounts, returns and
        discounts was $0.9 million for 2006, $1.4 million for 2005 and $1.2 million
        for
        2004. The amount charged to allowances for doubtful accounts and discounts
        was
        $0.8 million in 2006, $1.2 in 2005 and $0.9 million in 2004. The amount charged
        to expenses for doubtful accounts was $151,000 in 2006, $76,000 in 2005 and
        $47,000 in 2004. In the event that actual returns, discounts and bad debts
        differ from these estimates or we adjust these estimates in future periods,
        our
        operating results and financial position could be materially
        affected.
   26
  
  *Valuation
        of Inventories*
  We
        state
        inventories at the lower of standard cost (which approximates actual cost
        determined using the first-in-first-out method) or market. We establish
        provisions for excess and obsolete inventories after evaluation of historical
        sales, current economic trends, forecasted sales, product lifecycles and
        current
        inventory levels. During 2006, 2005 and 2004 we charged $868,000, $196,000
        and
        $116,000 to cost of sales for excess and obsolete inventories. Adjustments
        to
        our estimates, such as forecasted sales and expected product lifecycles,
        could
        harm our operating results and financial position.
  *Accounting
        for Income Taxes*
  As
        part
        of the process of preparing our consolidated financial statements, we are
        required to estimate our income tax liability in each of the jurisdictions
        in
        which we do business. This process involves estimating our actual current
        tax
        expense together with assessing temporary differences resulting from differing
        treatment of items, such as deferred revenues, for tax and accounting purposes.
        These differences result in deferred tax assets and liabilities, which are
        included in our consolidated balance sheet. We must then assess the likelihood
        that these deferred tax assets will be recovered from future taxable income
        and,
        to the extent we believe that recovery is not more likely than not or is
        unknown, we must establish a valuation allowance.
  Significant
        management judgment is required in determining our provision for income taxes,
        our deferred tax assets and liabilities and any valuation allowance recorded
        against our deferred tax assets. At December 31, 2006, we have recorded a
        full valuation allowance against our deferred tax assets in the United States
        and Germany, due to uncertainties related to our ability to utilize our deferred
        tax assets, primarily consisting of certain net operating losses carried
        forward. The valuation allowance is based on our estimates of taxable income
        by
        jurisdiction and the period over which our deferred tax assets will be
        recoverable.
  *Stock-Based
          Compensation*
 
 We
          measure all employee stock-based awards as an expense based on the grant-date
          fair value of these awards. Effective January 1, 2006, we began to recognize
          expense for all stock-based awards granted on or after that date and for
          all
          previous unvested awards using the modified prospective method. The fair
          value
          of options is estimated using the Black-Scholes option pricing model. Weighted
          average assumption used in the model include the expected life of the options,
          volatility, and risk-free interest rates.
  **Results
        of Operations**
  *Net
        Sales*
  Our
        net
        sales decreased 5% to $27,036,000 in 2006 compared to $28,337,000 in 2005
        and
        $29,731,000 in 2004. The 2006 decrease was a result of lower sales of pool
        products of 9% or $1,390,000 and traditional lighting products of 20% or
        $2,386,000 which was partially offset by increased sales of EFO products
        of 162%
        or $2,473,000. This decrease in pool lighting sales was primarily due to
        a
        $2,868,000 decrease in sales from our in-ground and Jazz lighting products
        partially offset by sales of $1,478,000 of new control and LED products.
        The
        decrease in traditional commercial lighting sales was due to lower sales
        in the
        U.S. and Germany. We expect net sales to increase in 2007 due to an anticipated
        increase in demand for Fiberstars EFO systems in commercial lighting markets
        and
        partially offset by an expected continued decline in demand of our traditional
        fiber optic products and pool products. The market for our products is highly
        dependent upon general economic conditions.
  Our
        net
        sales decreased 5% to $28,337,000 in 2005 compared to $29,731,000 in 2004.
        The
        2005 decrease was a result of lower sales of pool products of 13% or $2,134,000
        which was partially offset by increased sales of commercial lighting products
        of
        5% or $698,000. This decrease in pool lighting sales was primarily due to
        a
        $2,414,000 decrease in sales from our spa lighting products. The increase
        in
        commercial lighting sales was due to $945,000 in increased sales of EFO products
        partially offset by a decline in traditional fiber optic sales from our core
        legacy commercial lighting products of $247,000.
  International
        sales accounted for approximately 31% of net sales in 2006 as compared to
        33% of
        net sales in 2005 and 2004.
  *Gross
        Profit*
  We
        had
        gross profit of $7,785,000 in 2006, a decrease of 27% compared to $10,626,000
        in
        2005. Gross profit as a percent of sales decreased to 29% in 2006 compared
        to
        38% in 2005. This decrease was primarily due to lower gross profit margins
        from
        commercial lighting sales (16 percentage points) combined with a smaller
        decrease in pool lighting margins (2 percentage points). Commercial lighting
        gross profit margins declined due to increased sales from EFO products which
        are
        selling at a lower margin than traditional fiber optic products. We expect
        gross
        profit margins to improve due to improved gross profit margins on EFO sales
        in
        2007. Gross profit margins are also dependent upon general economic
        conditions.
  Gross
        profit of $10,626,000 in 2005 decreased 8% compared to $11,511,000 in 2004.
        Gross profit as a percent of sales decreased to 38% in 2005 compared to 39%
        in
        2004. This decrease was primarily due to lower gross profit margins from
        commercial lighting sales (5 percentage points) combined with a smaller decrease
        in pool lighting margins (2 percentage points). Commercial lighting gross
        profit
        margins declined due to increased sales from EFO products which are selling
        at a
        lower margin than traditional fiber optic products.
   27
  
  *Operating
        Expenses*
  Research
        and development expenses were $2,341,000, a 7% increase from research and
        development expenses of $2,190,000 in 2005. Although we increased spending
        in
        research and development expense on personnel and project costs related to
        government contract work and on improvements for existing products, this
        spending continued to be offset by expense credits for funds received in
        2006
        under certain Department of Energy, or DOE, contracts and under Defense Advanced
        Research Projects Agency, or DARPA, research and development contracts awarded
        in February and April of 2004, and SBIR awards. The gross research and
        development spending along with credits from government contracts is shown
        in
        the following table:
  **Year ended December 31,****2006**
              
              **2005**
              
              **2004****(in thousands)**Gross
                  expenses for research and development
              
              $
              3,556
              
              $
              4,485
              
              $
              3,670Deduct:
                  credits from DARPA & DOE contracts
              
              (1,215
              )
              (2,295
              )
              (2,482
              )Net
                  research and development expense
              
              $
              2,341
              
              $
              2,190
              
              $
              1,188
   Funds
        received from DOE and DARPA for milestones achieved during the fiscal year
        are
        recorded as a credit to research and development expense. Net of payments
        to
        subcontractors, this amounted to $1,215,000 in 2006 compared to $2,295,000
        in
        2005. This decrease in DOE and DARPA credits was a result of lower DARPA
        credits
        in the year as a result the completion of the AMCOM contract and associated
        credits in 2005. These lower credits were partially offset by an increase
        in
        credits from DOE. Gross expenses for research and development decreased by
        $929,000, due to the re-allocation of some R&D staff to building milestone
        deliverables under the Navy ship install contract and their associated costs
        being included in cost of sales in 2006 whereas there were no such re-classed
        expenses in 2005. Research and development expenses were 8.7% of sales in
        2006
        compared to 7.7% of sales in 2005. We expect research and development expenses
        to remain approximately flat in 2007 due to a comparable level of anticipated
        DARPA and DOE credits as those incurred in 2006.
  Research
        and development expenses were $2,190,000 in 2005, an 84% increase from research
        and development expenses of $1,188,000 in 2004. Although we increased spending
        in research and development expense on personnel and project costs related
        to
        government contract work and on improvements for existing products, this
        spending was offset by the increase in expense credits for funds received
        in
        2004 under certain DOE contracts and under DARPA research and development
        contracts awarded in February and April of 2003. Funds received from
        DOE and DARPA for milestones achieved during the fiscal year are recorded
        as a
        credit to research and development expense. Net of payments to subcontractors,
        this amounted to $2,482,000 in 2004. Research and development expenses were
        8.0%
        of sales in 2005 compared to 4.0% of sales in 2004.
  Sales
        and
        marketing expenses were $9,774,000 in 2006, a 2% increase compared to the
        $9,595,000 in sales and marketing expenses for 2005. This increase was due
        in
        part to an increase of $734,000 in EFO sales and marketing offset by lower
        commissions ($443,000) and lower Pool sales and marketing ($120,000) in
        2006.  Sales and marketing expenses were 36% of sales in 2006 and 34% of
        sales in 2005. The Company expects sales and marketing expenses to increase
        in
        absolute dollars in 2007 compared to 2006.
  Sales
        and
        marketing expenses were $9,595,000 in 2005, a 12% increase compared to the
        $8,595,000 in sales and marketing expenses for 2004. This
        increase was due in part to an increase of $730,000 in 2005 largely from
        higher
        pool and spa sales and marketing as a result of settling the Pentair lawsuit
        and
        additional selling costs with SCP. The balance of the increase is due to
        higher
        spending on EFO sales and marketing in the United States and Europe. Sales
        and marketing expenses were 34% of sales in 2004 and 29% of sales in
        2004.
  General
        and administrative expenses were $4,956,000 in 2006, a $1,821,000 increase
        as
        compared to $3,135,000 in 2005. General and administrative expenses were
        18% of
        sales in 2006 and 11% of sales in 2005 and 8% of sales in 2004. The
        increase was primarily due to higher costs associated with complying with
        the
        Sarbanes Oxley Act of 2002, option expenses associated with implementing
        FAS
        123r, accounting fees, investor relations costs and legal fees. We became
        an
        accelerated filer with the SEC due to our market capitalization as of
        June 30, 2006. As a result we were required to comply with Section 404
        of the Sarbanes-Oxley Act of 2002 beginning with our fiscal year ending
        December 31, 2006. Our outside costs to comply with Section 404 were
        approximately $500,000, independent of additional audit fees. The Company
        expects general and administrative expenses to decrease in 2007 due to lower
        Section 404 costs.
  General
        and administrative expenses were $3,135,000 in 2005, a $676,000 increase
        as
        compared to $2,459,000 in 2004. General and administrative expenses were
        11% of
        sales in 2005 and 8% of sales in 2004.
  In
        June 2005 we announced a restructuring which called for moving our
        headquarters and base of operations from Fremont, California to Solon, Ohio.
        We
        indicated at that time that the cost of the restructure would be approximately
        $3,500,000 and would result in approximately $2,000,000 in savings. In 2005
        we
        spent approximately $3,100,000 on restructuring expenses. Additional
        restructuring costs were necessary in 2006 beyond what was originally estimated
        in order to further consolidate distribution operations into our Mexican
        production site. In 2006 we spent approximately $700,000 on restructuring
        expenses. Restructuring was nearly complete as of year end 2006 and we continue
        to expect to realize between $1,500,000 and $2,000,000 in cost savings on
        an
        annual basis. These savings are being offset by expense increases as a result
        of
        building capacity and increasing expenses for development, sales and marketing
        of new products, primarily EFO, and also new lighting products.
   28
  
  *Other
        Income and Expenses*
  We
        had
        interest income of $760,000 and interest expense of $277,000 in 2006. Interest
        income consists of interest earned on deposits and marketable securities
        in
        2006, most of which was earned after receiving funds from the follow-on stock
        offering closed in November 2005. Interest expense is for bank interest on
        equipment loans and on a building loan in Germany for our corporate offices
        there. Our interest expense, was $39,000 in 2005 as compared to $17,000 in
        2004.
  We
        have
        certain long-term leases. Payments due under these leases are disclosed below
        in
        Item 7 and in the Consolidated Financial Statements and related Notes included
        elsewhere in this Report.
  *Income
        Taxes*
  We
        have a
        full valuation allowance against our deferred tax assets in the United States
        and Germany. There was no operating statement tax expense or benefit for
        our
        German operations in 2006 as any expected benefit was offset by an increase
        in
        our valuation allowance. We had a tax expense of $75,000 in the U.S. resulting
        from a tax liability associated with the tax treatment for goodwill. In addition
        we had a $38,000 tax expense shown for 2006 is a result of tax expense for
        our
        United Kingdom operations which experienced a profit in 2006.
  *Net
        Income (Loss)*
  Due
        to
        the decrease in sales in 2006 combined with a decrease in gross profit as
        a
        result of the lower sales and gross profit margins, the amount of loss before
        income taxes was $9,537,000, an increase from the loss before taxes of
        $7,314,000 in 2005. After including taxes from international operations and
        the United States tax expense relating to goodwill, the loss was $9,650,000,
        an
        increase in the loss over the $7,423,000 loss in 2005. This compares to a
        2004
        loss of $704,000.
  **Liquidity
        and Capital Resources**
  *Cash
        and Cash Equivalents*
  At
        December 31, 2006, our cash and cash equivalents were $3,705,000 as
        compared to $5,554,000 at December 31, 2005. We had $1,862,000 in long-term
        borrowings and $1,902,000 in short-term borrowings as of December 31, 2006
        and $1,089,000 in long-term borrowings and $389,000 in short-term borrowings as
        of December 31, 2005. We also had $12,263,000 in short-term securities at
        December 31, 2006 and $18,024,000 in short-term securities at
        December 31, 2005.
  *Operating
        Activities*
  Net
        cash
        used by operating activities primarily consists of net loss adjusted by non-cash
        items, including depreciation, amortization, stock-based compensation, and
        the
        effect of changes in working capital. Cash decreased during 2006 by a net
        loss
        of $9,650,000 compared to net losses of $7,423,000 and $704,000
        for 2005 and
        2004, respectively. After adjustments for depreciation and amortization and
        non-cash stock-based compensation charge, net cash used by operating activities
        was $7,335,000 in 2006 as compared to net cash used by operating activities
        of
        $5,933,000 for 2005.
  There
        were several changes in working capital in 2006. Cash decreased by $2,457,000
        due to a reduction in accruals largely due to paying off restructuring expenses
        accrued in 2005 and increased by $1,510,000 and $558,000 due to increases
        in
        accounts payables and a reduction in prepaids, respectively.
  After
        adjustments for all non-cash items, including cash used for working capital,
        net
        cash used in operating activities was $7,184,000 in 2006 compared to $3,472,000
        used in operating activities in 2005 and $2,469,000 used in operating activities
        in 2004.
  *Cash
        Provided by Investing Activities*
  There
        was
        a net contribution of cash of $2,058,000 in investing activities largely
        from
        the sales of short-term investments $5,761,000 partially offset by the
        acquisition of fixed assets $3,703,000. This compares to a net utilization
        of
        cash of $19,921,000 in investing activities in 2005 primarily due to the
        investments made in short-term securities and the acquisition of fixed assets.
        This compares to $724,000 spent on fixed asset acquisitions in 2004.
  *Cash
        Provided by Financing Activities*
  There
        was
        a net contribution to cash from financing activities of $2,908,000 in 2006
        compared to net contributions of $25,749,000 and $2,511,000 in 2005 and 2004,
        respectively. This net contribution was primarily due to our receipt of
        $2,686,000 in proceeds from bank borrowings net of repayments of $491,000,
        of
        which $1,609,000 of the proceeds was used was to finance the purchase of
        manufacturing equipment.
   29
  
  As
        a
        result of the cash used in operating activities and the cash provided by
        financing and investing activities, there was a net decrease in cash in 2006
        of
        $1,849,000 that resulted in an ending cash balance of $3,705,000. This compares
        to a net increase in cash of $1,945,000 in 2005 resulting in an ending cash
        balance of $5,554,000 for 2005.
  We
        have a
        bank line of credit agreement with Silicon Valley Bank effective August 15,
        2005. It was further amended September 25, 2006 and extended through August
        15,
        2007. This credit facility is for $5,000,000 and is secured by our assets
        and
        intellectual property. At December 31, 2006 the interest rate was 8.75%.
        The
        interest rate was 7.75% at December 31, 2005. The rate is the same for both
        the term-loan and line of credit in both years. It has a minimum tangible
        net worth covenant which we must meet going forward. On December 31, 2005
        this agreement was amended and restated to include an additional $3,000,000
        term-loan line of credit for equipment purchases. This agreement calls for
        repayment of principle in equal amounts over 4 years from the date of purchase
        of the equipment and has an interest rate of prime plus 0.5% if the quick
        ratio
        is greater than 1.5, and prime plus 1.5% if the quick ratio is at or below
        1.5.
        Borrowings under the Silicon Valley Agreement are collateralized by our assets
        and intellectual property. Specific borrowings under the revolver are tied
        to
        accounts receivable and inventory balances, and we are required to comply
        with
        certain covenants with respect to effective net worth and financial ratios,
        which we met as of December 31, 2006. The Company had borrowings of $1.0
        million under the revolving line of credit at December 31, 2006, and no
        borrowings at December 31, 2005. We had total borrowings of $2,261,000 under
        the
        term-loan portion of the agreement as of December 31, 2006, and had
        $1,092,000 in borrowings under this portion as of December 31, 2005. We pay
        an unused line fee of 0.25% against any unused daily balance during the
        year.
  Through
        our U.K. subsidiary, we maintain a bank overdraft facility of $490,000 (in
        UK
        pounds sterling, based on the exchange rate at December 31, 2006) under an
        agreement with Lloyds Bank Plc. There were no borrowings against this facility
        as of December 31, 2006 and 2005, respectively. The facility is renewed
        annually on January 1.  The interest rate was 7.25% at December 31,
        2006 and 6.75% at December 31, 2005.
  Through
        our German subsidiary, we maintain a credit facility under an agreement with
        Sparkasse Neumarkt Bank. This credit facility is in place to finance our
        building of new offices in Berching, Germany which is owned and occupied
        by our
        German subsidiary. As of December 31, 2006, we had borrowings of $379,000
        (in Euros, based on the exchange rate at December 31, 2006) against this
        credit facility, all of which comes due between 2007 and 2008. At December
        31, 2005, the Company had borrowings of $331,000 (in Euros based on
        the exchange rate at December 31, 2005). The interest rate was 5.35% at
        December 31, 2006 and 2005. In addition, our German subsidiary has a
        revolving line of credit for $198,000 (in Euros, based on the exchange rate
        at
        December 31, 2006) with Sparkasse Neumarkt Bank. As of December 31,
        2006, there were borrowings of $124,000 against this facility and borrowings
        of
        $47,000 against this facility at December 31, 2005. The revolving facility
        is renewed annually on January 1. Interest rates on this line of credit
        were 9.75% at December 31, 2006 and 8.75% at December 31, 2005.
  On
        November 8, 2005 the Company closed a follow-on offering, selling 2,500,000
        new shares of Common Stock at a price of $8.25. The purchase price of the
        Common
        Stock was set at $8.25 per share on November 2, 2005, which was
        approximately a 5% discount on the closing price on that day. On
        November 11, 2005 the Company announced that the underwriters had exercised
        their option to sell an additional 452,497 shares of Common Stock for $8.25
        as
        part of the offering. The gross amount raised was $24.4 million from the
        selling
        of 2,952,497 new shares, before costs and expenses. The net amount received
        by
        the company after deducting 6% in underwriter’s fees and legal, accounting and
        other costs was $22.2 million.
  We
        believe that our existing cash balances, funds received from the financing
        described above and funds available to us through our bank lines of credit
        together with funds that we anticipate generating from our operations, will
        be
        sufficient to finance our currently anticipated working capital requirements
        and
        capital expenditure requirements for at least the next 12 to 18 months. However,
        a sudden increase in product demand requiring a significant increase in
        manufacturing capability, or unforeseen adverse competitive, economic or
        other
        factors may impact our cash position, and thereby affect operations. From
        time
        to time we may be required to raise additional funds through public or private
        financing, strategic relationships or other arrangements. There can be no
        assurance that such funding, if needed, will be available on terms acceptable
        to
        us, or at all. Furthermore, any additional equity financing may be dilutive
        to
        shareholders, and debt financing, if available, may involve restrictive
        covenants. Strategic arrangements, if necessary to raise additional funds,
        may
        require that we relinquish rights to certain of our technologies or products.
        Failure to generate sufficient revenues or to raise capital when needed could
        have an adverse impact on our business, operating results and financial
        condition, as well as our ability to achieve intended business
        objectives.
   30
  **Contractual
        Obligations**
  The
        following summarizes our contractual obligations as of December 31, 2006,
        consisting of current and future payments for borrowings by our German
        subsidiary, borrowings under an equipment term loan in the United States
        and
        minimum lease payments under operating leases and the effect these obligations
        are expected to have on our liquidity and cash flow in future
        periods.
  **Borrowings**
                **By German**
                **Subsidiary**
              
              **Borrowings**
                **Under**
                **Equipment**
                **Term Loan**
              
              **Non-**
                **Cancelable**
                **Operating**
                **Leases**2007
              
              
              $
              47
              
              
              
              $
              731
              
              
              
              $
              9802008
              
              
              332
              
              
              
              676
              
              
              
              7882009
              
              
              
              
              
              
              676
              
              
              
              7722010
              
              
              —
              
              
              
              178
              
              
              
              730Thereafter
              
              
              —
              
              
              
              —
              
              
              
              222$
              379
              
              
              
              $
              2,261
              
              
              
              $
              3,492
  The
        Company also has $1,000,000 for credit line borrowings in the United States
        and $124,000 for Germany recorded as a current liability at December 31,
        2006.
  **Off-Balance
        Sheet Arrangements**
  We
        had no
        off-balance sheet arrangements as of December 31, 2006 or
        2005.
  **Recently
        Issued Accounting Pronouncements**
  In
        December 2004, the FASB issued SFAS No. 123 (revised 2004) or SFAS
        123R, “Share-Based Payments.” SFAS 123R requires all entities
        to recognize compensation expense in an amount equal to the fair value of
        share-based payments, such as stock options granted
        to employees. The Company has applied SFAS 123R using the modified prospective
        method. Under this method, the Company is
        required to record compensation expense (as previous awards continue to vest)
        for the unvested portion of previously granted awards that remain outstanding
        at
        the date of adoption. The Company could have elected to adopt SFAS 123R by
        restating previously issued financial statements, basing the amounts on the
        expense previously calculated and reported in the pro forma disclosures that
        had
        been required by SFAS 123. SFAS 123R was first effective for the Company
        for its
        year ending December 31, 2006. In March 2005, the SEC released Staff
        Accounting Bulletin No. 107, “Share-Based Payment” (“SAB 107”), which
        provides interpretive guidance related to the interaction between SFAS
        123(R) and certain SEC rules and regulations. It also provides the SEC
        staff’s views regarding valuation of share based payment arrangements. The
        application of SFAS 123R with SAB 107 had the effect of increasing stock-based
        compensation expense and reducing earnings by $1,118,000 in 2006 or 10 cents
        per
        share. The fair value of compensation expense has been calculated using the
        Black-Scholes pricing model. The amount of total unearned compensation at
        December 31, 2006  is $1,959,000. The remaining weighted average life is
        approximately 2 years.
  In
        July,
        2006, the FASB issued FASB interpretation No. 48, “Accounting for Uncertainty in
        Income Taxes” (“FIN48”), an interpretation of FASB statement No. 109,
“Accounting for Income Taxes”, regarding accounting for income tax uncertainties
        effective for fiscal years beginning after December 15, 2006. FIN 48 will
        apply
        to all tax positions related to income taxes subject to SFAS 109 on Accounting
        for Income Taxes. The adoption of the provisions of FIN 48 did not
        have a material impact on our financial position.
  In
        September 2006, the Securities and Exchange Commission published Staff
        Accounting Bulletin (“SAB”) No. 108 (Topic 1N), Considering the Effects of Prior
        Year Misstatements when Quantifying Misstatements in Current Year Financial
        Statements. SAB No. 108 requires registrants to quantify misstatements using
        both the balance sheet and income statement approaches, with adjustment required
        if either method results in a material error. The provisions of SAB No. 108
        are
        effective for annual financial statements for the fiscal year ending after
        November 15, 2006. We have incorporated SAB No. 108 in our financial statements
        as included in this Annual Report on Form 10-K, and it has had no material
        effect upon initial adoption.
  In
        September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
        Statement defines fair value, establishes a framework for measuring fair
        value,
        and expands disclosures about fair value measurements. This statement applies
        under other accounting pronouncements that require or permit fair value
        measurements, the FASB having previously concluded in those accounting
        pronouncements that fair value is the relevant measurement attribute.
        Accordingly, this statement does not require any new fair value measurements.
        We
        will adopt this standard January 1, 2008. We do not expect it to have a material
        impact on our financial position or results of operations.
   31
  
  **Item
        7A. Qualitative and Quantitative Disclosures About Market
        Risk**
  At
        December 31, 2006, we had $1,045,000 in cash held in foreign currencies
        based on the exchange rates at December 31, 2006. It is our practice to
        maintain cash balances in local currencies subject to periodic conversions
        prior
        to transfer to repay inter-company debts.
  Through
        our German subsidiary, we maintain a credit facility under an agreement with
        Sparkasse Neumarkt Bank. At December 31, 2006, we had total borrowings of
        $379,000 against this facility which comes due between 2007 and 2008 and
        is
        secured by real property owned by our German subsidiary. In addition, our
        German
        subsidiary has a revolving line of credit for $198,000 (in Euros, based on
        the
        exchange rate at December 31, 2006) with Sparkasse Neumarkt Bank. There
        were $124,000 and $47,000 in borrowings against this facility at
        December 31, 2006 and 2005, respectively. If funds from the credit facility
        are used to repay inter-company debts there is an exchange rate conversion
        risk.
  **Item
        8. Consolidated Financial Statements and Supplementary
        Data.**
  Our
        consolidated financial statements and related notes required by this item
        are
        listed and set forth in this report at Item 15 beginning at page F-1. The
        accompanying notes are an integral part of our consolidated financial
        statements.
  **Supplementary
        Financial Information**
  The
        following table sets forth our selected unaudited financial information for
        the
        eight quarters in the period ended December 31, 2006. This information has
        been prepared on the same basis as the audited financial statements and,
        in the
        opinion of management, contains all adjustments necessary for a fair
        presentation thereof.
  **QUARTERLY
        FINANCIAL DATA**
 **(IN
        THOUSANDS, EXCEPT PER SHARE DATA)**
  **2006 QUARTERS ENDED**
              
              
              
              **DEC. 31**
              
              **SEP. 30**
              
              
              **JUN. 30**
              
              
              
              **MAR. 31**Net
                  sales
              
              $
              7,191
              
              
              6,808
              
              
              $
              7,709
              
              
              
              5,327Gross
                  profit
              
              1,819
              
              2,036
              
              
              2,328
              
              
              1,602As
                  a percent of net sales
              
              25.3
              %
              29.9
              %
              
              30.2
              %
              
              30.0
              %Net
                  income (loss)
              
              (2
                  ,784
              )
              (2,125
              )
              
              (2,299)
              
              
              (2,441
              )As
                  a percent of net sales
              
              (38.7
              )%
              (31.2
              )%
              
              (29.8
              )%
              
              (45.8
              )%Net
                  income (loss) per share:Basic
              
              $
              (0.24
              )
              
              (0.19
              )
              
              
              (0.20
              )
              
              
              (0.22
              )Diluted
              
              $
              (0.24
              )
              
              (0.19
              )
              
              
              (0.20
              )
              
              
              (0.22
              )
   **2005 QUARTERS ENDED**
              
              
              
              **DEC. 31**
              
              
              **SEP. 30**
              
              **JUN. 30**
              
              
              **MAR. 31**Net
                  sales
              
              
              $
              6,234
              
              
              $
              7,638
              
              
              $
              7,645
              
              
              
              $
              6,820Gross
                  profit
              
              
              2,203
              
              
              2,958
              
              
              2,922
              
              
              
              2,543As
                  a percent of net sales
              
              
              35.3
              %
              
              38.7
              %
              
              38.2
              %
              
              
              37.3
              %Net
                  income (loss)
              
              
              (3,535
              )
              
              (2,074
              )
              
              (763)
              
              
              
              (1,051
              )As
                  a percent of net sales
              
              
              (56.7
              )%
              
              (27.2
              )%
              
              (10.0)
              %
              
              
              (15.4
              )%Net
                  income (loss) per share:Basic
              
              
              $
              (0.37
              )
              
              $
              (0.25
              )
              
              $
              (0.10
              )
              
              
              $
              (0.14
              )Diluted
              
              
              $
              (0.37
              )
              
              $
              (0.25
              )
              
              $
              (0.10
              )
              
              
              $
              (0.14
              )
 
  **Item
        9. Changes In and Disagreements With Accountants on Accounting and Financial
        Disclosure**
  None.
  **Item
        9A. Controls and Procedures**
  **Evaluation
        of disclosure controls and procedures**
  We
        maintain “disclosure controls and procedures,” as such term is defined in
        Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
“Exchange Act”), that are designed to ensure that information required to be
        disclosed by us in reports that we file or submit under the Exchange Act
        is
        recorded, processed, summarized, and reported within the time periods specified
        in Securities and Exchange Commission rules and forms, and that such
        information is accumulated and communicated to our management, including our
        principal executive officer and principal financial officer, as
        appropriate, to allow timely decisions regarding required disclosure. In
        designing and evaluating our disclosure controls and procedures, management
        recognized that disclosure controls and procedures, no matter how well conceived
        and operated, can provide only reasonable, not absolute, assurance that the
        objectives of the disclosure controls and procedures are met. Our disclosure
        controls and procedures have been designed to meet, and management believes
        that
        they meet, reasonable assurance standards, subject to the deficiencies and
        weaknesses identified and discussed under the sub-heading “Changes in Internal
        Controls” below. Additionally, in designing disclosure controls and
        procedures, our management necessarily was required to apply its judgment
        in
        evaluating the cost-benefit relationship of possible disclosure controls
        and
        procedures. The design of any disclosure controls and procedures also is
        based
        in part upon certain assumptions about the likelihood of future events, and
        there can be no assurance that any design will succeed in achieving its stated
        goals under all potential future conditions.
   32
  Based
        on
        their evaluation as of the end of the period covered by this Annual Report
        on
        Form 10-K, our principal
        executive officer and principal financial officer have
        concluded that, subject to the limitations noted above our disclosure controls
        and procedures were effective to ensure that material information relating
        to
        us, including our consolidated subsidiaries, is made known to them by others
        within those entities, particularly during the period in which this Annual
        Report on Form 10-K was being prepared.
  **Management’s
        Report on Internal Controls Over Financial Reporting**
  The
        management of Fiberstars, Inc., is responsible for establishing and maintaining
        adequate internal control over financial reporting, as such term is defined
        in
        Exchange Act Rules 13a-15(f). Under the supervision and with the participation
        of management, including our principal executive officer and principal financial
        officer, we conducted an evaluation of the effectiveness of internal control
        over financial reporting based upon criteria set forth by the Committee of
        Sponsoring Organizations of the Treadway Commission in Internal Control -
        Integrated Framework (COSO framework).
  An
        effective internal control system, no matter how well designed, has inherent
        limitations, including the possibility of human error and circumvention or
        overriding of controls and therefore can provide only reasonable assurance
        with
        respect to reliable financial reporting. Furthermore, effectiveness of an
        internal control system in future periods can not be guaranteed because the
        design of any system of internal controls is based in part upon assumptions
        about the likelihood of future events. There can be no assurance that any
        control design will succeed in achieving its stated goals under all potential
        future conditions. Over time certain controls may become inadequate because
        of
        changes in business conditions, or the degree of compliance with policies
        and
        procedures may deteriorate. As such, misstatements due to error or fraud
        may
        occur and not be detected.
  Based
        on
        our evaluation under the COSO framework, management concluded that internal
        control over financial reporting was effective as of December 31, 2006.
        Management’s assessment of the effectiveness of internal control over financial
        reporting as of December 31, 2006 has been audited by Grant Thornton LLP,
        an independent registered public accounting firm, as stated in their report
        which is included herein.
  **Changes
        in internal controls.**
  There
        was
        no change in our internal control over financial reporting (as defined in
        Rule 13a-15(f) under the Exchange Act) that occurred during our last fiscal
        quarter that has materially affected, or is reasonably likely to materially
        affect, our internal control over financial reporting.
   33
  
  **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
   Board
        of
        Directors and Shareholders
 Fiberstars,
        Inc.
  We
        have
        audited management’s assessment, included in the accompanying Management’s
        Report on Internal Control Over Financial Reporting, that Fiberstars, Inc.
        (a
        Delaware Corporation) and subsidiaries ("the Company") maintained effective
        internal control over financial reporting as of December 31, 2006, based
        on
        criteria established in Internal Control—Integrated Framework issued by the
        Committee of Sponsoring Organizations of the Treadway Commission (COSO).
        The
        Company’s management is responsible for maintaining effective internal control
        over financial reporting and for its assessment of the effectiveness of internal
        control over financial reporting. Our responsibility is to express an opinion
        on
        management’s assessment and an opinion on the effectiveness of the company’s
        internal control over financial reporting based on our audit.
  We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether effective
        internal control over financial reporting was maintained in all material
        respects. Our audit included obtaining an understanding of internal control
        over
        financial reporting, evaluating management’s assessment, testing and evaluating
        the design and operating effectiveness of internal control, and performing
        such
        other procedures as we considered necessary in the circumstances. We believe
        that our audit provides a reasonable basis for our opinions.
  A
        company’s internal control over financial reporting is a process designed to
        provide reasonable assurance regarding the reliability of financial reporting
        and the preparation of financial statements for external purposes in accordance
        with generally accepted accounting principles. A company’s internal control over
        financial reporting includes those policies and procedures that (1) pertain
        to
        the maintenance of records that, in reasonable detail, accurately and fairly
        reflect the transactions and dispositions of the assets of the company; (2)
        provide reasonable assurance that transactions are recorded as necessary
        to
        permit preparation of financial statements in accordance with generally accepted
        accounting principles, and that receipts and expenditures of the company
        are
        being made only in accordance with authorizations of management and directors
        of
        the company; and (3) provide reasonable assurance regarding prevention or
        timely
        detection of unauthorized acquisition, use, or disposition of the company’s
        assets that could have a material effect on the financial
        statements.
  Because
        of its inherent limitations, internal control over financial reporting may
        not
        prevent or detect misstatements. Also, projections of any evaluation of
        effectiveness to future periods are subject to the risk that controls may
        become
        inadequate because of changes in conditions, or that the degree of compliance
        with the policies or procedures may deteriorate.
  In
        our
        opinion, management’s assessment that Fiberstars, Inc. maintained effective
        internal control over financial reporting as of December 31, 2006, is fairly
        stated, in all material respects, based on criteria established in Internal
        Control—Integrated Framework issued by the Committee of Sponsoring Organizations
        of the Treadway Commission (COSO). ** Also
        in
        our opinion, the Company maintained, in all material respects, effective
        internal control over financial reporting as of December 31, 2006, based
        on
        criteria established in Internal Control—Integrated Framework issued by the
        Committee of Sponsoring Organizations of the Treadway Commission
        (COSO).
  We
        also
        have audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the consolidated balance sheets of the Company
        and its subsidiaries as of December 31, 2006 and 2005, and the related
        consolidated statements of operations, comprehensive income (loss),
        shareholders’ equity, and cash flows for each of the three years in the period
        ended December 31, 2006 and our report dated March 15, 2007 expressed an
        unqualified opinion on those financial statements.
   **/s/
        GRANT THORNTON LLP**
  Cleveland,
        Ohio
 March
        15,
        2007
  
   34
  
  **Item
        9B. Other Information**
  Not
        applicable.
   35
  **PART III**
  **Item
        10. Directors and Executive Officers of the Registrant**
  The
        information required by this Item regarding directors and nominees is
        incorporated herein by reference to the information under the caption “PROPOSAL
        NO. 1: ELECTION OF DIRECTORS” in our definitive Proxy Statement to be filed with
        the SEC in connection with the solicitation of proxies for  our 2007 Annual
        Meeting of Shareholders to be held on June 14, 2007 (the “Proxy
        Statement”). Information on our executive officers may be found in
        Part I.
  Item 405
        of Regulation S-K calls for disclosure of any known late filings or failure
        by an insider to file a report required by Section 16 of the
        Securities Exchange Act of 1934, as amended. This disclosure is contained
        in the
        section entitled “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
        COMPLIANCE” in the Proxy Statement and is incorporated herein by
        reference.
  We
        have a
        separately designated standing Audit Committee established in accordance
        with
        Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as
        amended. The members of the Audit Committee are Ronald Casentini (Chairperson),
        Michael Kasper and John B. Stuppin. All of such members meet the independence
        standards established by The NASDAQ Stock Market for serving on an audit
        committee. SEC regulations require that we disclose whether a director
        qualifying as an “audit committee financial expert” serves on our Audit
        Committee. Our Board of Directors has determined that both Mr. Casentini
        and Mr. Stuppin qualify as an “audit committee financial expert” within the
        meaning of such regulations.
  Our
        Board
        of Directors adopted a Code of Ethics and Business Conduct for all of its
        directors, officers and employees on February 25, 2004. To request a copy
        of the Code of Ethics and Business Conduct, please send a written request
        to our
        Secretary at Fiberstars Inc., 32000 Aurora Road, Solon, OH 44139. It is also
        available from our corporate website http://www.fiberstars.com.
  **Item
        11. Executive Compensation**
  The
        information regarding executive compensation required by Item 11 is incorporated
        herein by reference from the information in the Proxy Statement under the
        captions “EXECUTIVE COMPENSATION AND OTHER MATTERS,” “PROPOSAL NO. 1:
        ELECTION OF DIRECTORS—Director Compensation” and “PROPOSAL NO. 1: ELECTION
        OF DIRECTORS—Compensation Committee Interlocks and Insider
        Participation.”
  **Item
        12. Security Ownership of Certain Beneficial Owners and Management and Related
        Stockholder Matters**
  The
        information regarding security ownership of certain beneficial owners and
        management required by Item 12 is incorporated herein by reference from the
        information in the Proxy Statement under the caption “SECURITY OWNERSHIP OF
        PRINCIPAL SHAREHOLDERS AND MANAGEMENT.”
  The
        information regarding Securities to be issued under our Compensation Plans
        can
        be found under Item 5 of this Report on Form 10-K.
  **Item
        13. Certain Relationships and Related Transactions and Director
        Independence**
  The
        information regarding certain relationships and related transactions required
        by
        Item 13 is incorporated herein by reference to the information in the Proxy
        Statement under the caption “CERTAIN TRANSACTIONS” and “DIRECTOR
        INDEPENDENCE.”
  **Item
        14. Principal Accountant Fees and Services**
  The
        information regarding principal accountant fees and services and the
        pre-approval policies and procedures required by Item 14 is incorporated
        by
        reference from the information contained in the Proxy Statement under the
        caption “RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC
        ACCOUNTANTS—Principal Accountant Fees and Services” and “RATIFICATION OF
        APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS—Pre-Approval Policies
        and Procedures.”
   36
  **PART IV**
  **Item
        15. Exhibits and Financial Statement Schedule**
  (a)  
        (1) Financial Statements
   **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
   To
        the
        Board of Directors and Shareholders of
 Fiberstars, Inc.
  We
        have
        audited the accompanying consolidated balance sheets of Fiberstars, Inc.
        (a
        Delaware corporation) and subsidiaries (the Company) as of December 31, 2006
        and
        2005, and the related consolidated statements of operations, comprehensive
        income (loss), shareholders’ equity, and cash flows for each of the three years
        in the period ended December 31, 2006. These financial statements are the
        responsibility of the Company’s management. Our responsibility is to express an
        opinion on these financial statements based on our audits.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
  In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of Fiberstars, Inc. and
        subsidiaries as of December 31, 2006 and 2005 and the results of their
        operations and cash flows for each of the three years in the period ended
        December 31, 2006, in conformity with accounting principles generally accepted
        in the United States of America.
  Our
        audits were conducted for the purpose of forming an opinion on the basic
        financial statements taken as a whole. The financial statement schedule listed
        in Item 15(a)(2) of this Form 10-K is presented for purposes of
        additional analysis and is not a required part of the basic financial
        statements. This schedule has been subjected to the auditing procedures applied
        in the audit of the basic financial statements and, in our opinion, is fairly
        stated in all material respects in relation to the basic financial statements
        taken as a whole.
  As
        discussed in Note 2 to the consolidated financial statements, effective January
        1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment,” as
        revised.
  We
        also
        have audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the effectiveness of Fiberstars, Inc.’s
        internal control over financial reporting as of December 31, 2006, based
        on
        criteria established in Internal Control-Integrated Framework issued by the
        Committee of Sponsoring Organizations of the Treadway Commission (COSO) and
        our
        report dated March 15, 2007 expressed an unqualified opinion
        thereon.
   **/s/
        GRANT THORNTON LLP**
  Cleveland,
        Ohio
 March 15,
        2007
  
  
   F-1
  **FIBERSTARS, INC.**
 **CONSOLIDATED
        BALANCE SHEETS, December 31,**
 ***(amounts
        in thousands except share and per share amounts)***
  **2006**
              
              **2005****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              3,705
              
              $
              5,554Short-term
                  investments
              
              
              12,263
              
              
              18,024Accounts
                  receivable, net of allowances for doubtful accounts of $355 in
                  2006 and
                  $260 in 2005
              
              
              6,185
              
              
              6,287Inventories,
                  net
              
              
              7,708
              
              
              7,722Prepaids
                  and other current assets
              
              
              324
              
              
              879Total
                  current assets
              
              
              30,185
              
              
              38,466Fixed
                  assets, net
              
              
              5,978
              
              
              3,422Goodwill,
                  net
              
              
              4,247
              
              
              4,135Other
                  assets
              
              
              182
              
              
              186Total
                  assets
              
              $
              40,592
              
              $
              46,209**LIABILITIES**Current
                  liabilities:Accounts
                  payable
              
              $
              4,202
              
              $
              2,623Accruals
                  and other current liabilities
              
              
              1,671
              
              
              3,924Credit
                  line borrowings
              
              
              1,124
              
              
              47Current
                  portion of long-term bank borrowings
              
              
              778
              
              
              342Total
                  current liabilities
              
              
              7,775
              
              
              6,936Deferred
                  tax liabilities
              
              
              75
              
              
              -----Long-term
                  bank borrowings
              
              
              1,862
              
              
              1,089Total
                  liabilities
              
              
              9,712
              
              
              8,025Commitments
                  and contingencies (Note 8).**SHAREHOLDERS’
                  EQUITY***Preferred
                  stock, par value $0.0001 per share:*Authorized:
                  2,000,000 shares in 2006 and 2005Issued
                  and outstanding: no shares in 2006 and 2005*Common
                  stock, par value $0.0001 per share:*Authorized:
                  30,000,000 shares in 2006 and 2005Issued
                  and outstanding: 11,394,400 shares in 2006 and 11,270,000 shares
                  in
                  2005
              
              
              1
              
              
              1Additional
                  paid-in capital
              
              
              53,841
              
              
              52,452Unearned
                  stock-based compensation
              
              
              -----
              
              
              (397
              )Accumulated
                  other comprehensive income
              
              
              601
              
              
              41Accumulated
                  deficit
              
              
              (23,563
              )
              
              (13,913
              )Total
                  shareholders’ equity
              
              
              30,880
              
              
              38,184Total
                  liabilities and shareholders’ equity
              
              $
              40,592
              
              $
              46,209
    F-2
  **FIBERSTARS, INC.**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 **For
        the years ended December 31,**
 ***(amounts
        in thousands except per share amounts)***
   **2006**
              
              
              **2005**
              
              
              **2004**Net
                  sales
              
              $
              27,036
              
              $
              28,337
              
              $
              29,731Cost
                  of sales
              
              
              19,251
              
              
              17,711
              
              
              18,220Gross
                  profit
              
              
              7,785
              
              
              10,626
              
              
              11,511Operating
                  expenses:Gross
                  research and development
              
              
              3,556
              
              
              4,485
              
              
              3,670Deduct
                  credits from government contracts
              
              
              (1,215
              )
              
              (2,295
              )
              
              (2,482
              )Net
                  research and development expense
              
              
              2,341
              
              
              2,190
              
              
              1,188Sales
                  and marketing
              
              
              9,774
              
              
              9,595
              
              
              8,595General
                  and administrative
              
              
              4,956
              
              
              3,135
              
              
              2,459Restructuring
                  expenses.
              
              
              734
              
              
              3,120
              
              
              —Total
                  operating expenses
              
              
              17,805
              
              
              18,040
              
              
              12,242Loss
                  from operations
              
              
              (10,020
              )
              
              (7,414
              )
              
              (731
              )Other
                  income (expense):Other
                  income (expense)
              
              
              -----
              
              
              1
              
              
              (14
              )Interest
                  Income
              
              
              760
              
              
              138
              
              
              -----
 Interest
                  expense
              
              
              (277
              )
              
              (39
              )
              
              (17
              )
 Net
                  loss before income taxes
              
              
              (9,537
              )
              
              (7,314
              )
              
              (762
              )Income
                  tax benefit (provision)
              
              
              (113
              )
              
              (109
              )
              
              58Net
                  loss
              
              $
              (9,650
              )
              $
              (7,423
              )
              $
              (704
              )Net
                  loss per share—basic and diluted
              
              $
              (0.85
              )
              $
              (0.90
              )
              $
              (0.10
              )Shares
                  used in per share calculation—basic and diluted
              
              
              11,385
              
              
              8,223
              
              
              7,269
   The
        accompanying notes are an integral part of these financial
        statements.
   F-3
  **FIBERSTARS, INC.**
  **CONSOLIDATED
        STATEMENTS OF COMPREHENSIVE INCOME (LOSS)**
  **For
        the years ended December 31,**
  ***(amounts
        in thousands)***
   **2006**
              
              
              **2005**
              
              
              **2004**Net
                  loss
              
              $
              (9,650
              )
              $
              (7,423
              )
              $
              (704
              )Other
                  comprehensive income:Foreign
                  currency translation adjustments
              
              
              507
              
              
              (636
              )
              
              233Net
                  unrealized gain on securities
              
              
              53
              
              
              16
              
              
              —Comprehensive
                  loss
              
              $
              (9,090
              )
              $
              (8,043
              )
              $
              (471
              )
   The
        accompanying notes are an integral part of these financial
        statements.
   F-4
  **FIBERSTARS, INC.**
  **CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS’ EQUITY**
  **For
        the years ended December 31, 2006, 2005 and 2004**
  ***(amounts
        in thousands)***
 
 **Notes**
                
                **Accumulated**
                
                **Retained****Additional**
                
                **Unearned**
                
                **Receivable**
                
                **Other**
                
                **Earnings****CommonStock**
                
                **Paid-In**
                
                **Stock-Based**
                
                **From**
                
                **Comprehensive**
                
                **(Accumulated****Shares**
                
                **Amount**
                
                **Capital**
                
                **Compensation**
                
                **Shareholder**
                
                **Income**
                
                **Deficit)**
                
                **Total**Balances,
                    December 31, 2003
                
                
                6,317
                
                $
                1
                
                $
                24,531
                
                $
                —
                
                $
                (224
                )
                $
                428
                
                $
                (5,786
                )
                $
                18,950Exercise
                    of common stock warrants
                
                
                553
                
                
                
                
                
                121
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                121Issuance
                    of common stock
                  under
                    employee stock purchase plan
                
                
                4
                
                
                
                
                
                31
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                31Exercise
                    of common stock options
                
                
                477
                
                
                
                
                
                2,201
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,201Non-employee
                    stock-based compensation
                
                
                
                
                
                
                
                
                123
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                123Unearned
                    stock-based compensation
                
                
                
                
                
                
                
                
                513
                
                
                (513
                )
                
                
                
                
                
                
                
                
                
                
                -----Amortization
                    of unearned stock-based compensation
                
                
                
                
                
                
                
                
                
                
                
                23
                
                
                
                
                
                
                
                
                
                
                
                23Note
                    receivable from shareholder
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                224
                
                
                
                
                
                
                
                
                224Foreign
                    currency translation adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                233
                
                
                
                
                
                233Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (704
                )
                
                (704
                )Balances,
                    December 31, 2004
                
                
                7,351
                
                $
                1
                
                $
                27,520
                
                $
                (490
                )
                $
                —
                
                $
                661
                
                $
                (6,490
                )
                $
                21,202Issuance
                    of common stock S-3 Filing
                
                
                2,952
                
                
                
                
                
                22,174
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                22,174Exercise
                    of common stock warrants
                
                
                587
                
                
                
                
                
                408
                
                
                
                
                
                (62
                )
                
                
                
                
                
                
                
                346Issuance
                    of common stock
                  under
                    employee stock purchase plan
                
                
                4
                
                
                
                
                
                31
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                31Exercise
                    of common stock options
                
                
                376
                
                
                
                
                
                2,131
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,131Unearned
                    stock-based compensation
                
                
                
                
                
                
                
                
                53
                
                
                (53
                )
                
                
                
                
                
                
                
                
                
                
                —Amortization
                    of unearned stock-based compensation
                
                
                
                
                
                
                
                
                197
                
                
                146
                
                
                
                
                
                
                
                
                
                
                
                343Net
                    unrealized gain on securities
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                16
                
                
                
                
                
                16Foreign
                    currency translation adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (636
                )
                
                
                
                
                (636
                )Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (7,423
                )
                
                (7,423
                )Balances,
                    December 31, 2005
                
                
                11,270
                
                $
                1
                
                $
                52,514
                
                $
                (397
                )
                $
                (62
                )
                $
                41
                
                $
                (13,913
                )
                $
                38,184Reclassification
                    of unearned stock-based
                  compensation
                    upon FAS 123R adoption
                
                
                
                
                
                
                
                
                (397
                )
                
                397
                
                
                
                
                
                
                
                
                
                
                
                -----Additional
                    Costs from 2005 S-3 Filing
                
                
                
                
                
                
                
                
                (45
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                (45
                )Exercise
                    of common stock warrants
                
                
                14
                
                
                
                
                
                62
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                62Exercise
                    of common stock options
                
                
                106
                
                
                
                
                
                563
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                563Issuance
                    of common stock
                  under
                    employee stock purchase plan
                
                
                4
                
                
                
                
                
                26
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                26Note
                    Receivable from shareholder
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                62
                
                
                
                
                
                
                
                
                62Stock-based
                    compensation for options vested
                
                
                
                
                
                
                
                
                1,118
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,118Net
                    unrealized gain on securities
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                53
                
                
                
                
                
                53Foreign
                    currency translation adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                507
                
                
                
                
                
                507Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (9,650
                )
                
                (9,650
                )Balances,
                    December 31, 2006
                
                
                11,394
                
                $
                1
                
                $
                53,841
                
                $
                -----
                
                $
                -----
                
                $
                601
                
                $
                (23,563
                )
                $
                30,880
 
  The
        accompanying notes are an integral part of these financial
        statements.
   F-5
  **FIBERSTARS, INC.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **For
        the years ended December 31,**
 ***(amounts
        in thousands)***
  **2006**
              
              **2005**
              
              **2004****Cash
                  flows from operating activities:**Net
                  loss
              
              $
              (9,650
              )
              $
              (7,423
              )
              $
              (704
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              1,197
              
              
              1,145
              
              
              989Provision
                  for doubtful accounts receivable
              
              
              151
              
              
              76
              
              
              (84
              )Stock-based
                  compensation
              
              
              1,118
              
              
              345
              
              
              146Unrealized
                  income from marketable securities
              
              
              (53
              )
              
              (16
              )
              
              —Deferred
                  Taxes
              
              
              63
              
              
              —
              
              
              —Changes
                  in assets and liabilities:Accounts
                  receivable, trade
              
              
              127
              
              
              722
              
              
              (1,448
              )Inventories
              
              
              351
              
              
              363
              
              
              (1,673
              )Prepaid
                  and other current assets
              
              
              558
              
              
              (313
              )
              
              (208
              )Other
                  assets
              
              
              (99
              )
              
              56
              
              
              70Accounts
                  payable
              
              
              1,510
              
              
              (257
              )
              
              694Accruals
                  and other current liabilities
              
              
              (2,457
              )
              
              1,830
              
              
              (251
              )Total
                  adjustments
              
              
              2,466
              
              
              3,951
              
              
              (1,765
              )Net
                  cash provided by (used in) operating activities
              
              
              (7,184
              )
              
              (3,472
              )
              
              (2,469
              )**Cash
                  flows from investing activities:**Purchase
                  of short-term investments
              
              
              (108,834
              )
              
              (45,768
              )
              
              —Sale
                  of short-term investments
              
              
              114,595
              
              
              27,767
              
              
              —Acquisition
                  of fixed assets
              
              
              (3,703
              )
              
              (1,920
              )
              
              (724
              )Net
                  cash provided (used in) investing activities
              
              
              2,058
              
              
              (19,921
              )
              
              (724
              )**Cash
                  flows from financing activities:**Proceeds
                  from issuances of common stock
              
              
              651
              
              
              24,680
              
              
              2,354Repayment
                  of loan made to shareholder
              
              
              62
              
              
              —
              
              
              224
 Proceeds
                  from credit line borrowings
              
              
              1,077
              
              
              -----
              
              
              -----Proceeds
                  from long-term borrowings
              
              
              1,609
              
              
              1,069
              
              
              -----Payments
                  of long-term borrowings
              
              
              (491
              )
              
              -----
              
              
              (67
              )
 Net
                  cash provided by financing activities
              
              
              2,908
              
              
              25,749
              
              
              2,511
 ***Effect
                  of exchange rate changes on cash***
              
              
              369
              
              
              (411
              )
              
              37**Net
                  increase (decrease) in cash and cash equivalents**
              
              
              (1,849
              )
              
              1,945
              
              
              (645
              )**Cash
                  and cash equivalents, beginning of year**
              
              
              5,554
              
              
              3,609
              
              
              4,254**Cash
                  and cash equivalents, end of year**
              
              $
              3,705
              
              $
              5,554
              
              $
              3,609**Supplemental
                  information:**Interest
                  paid
              
              $
              248
              
              $
              39
              
              $
              17**Non-cash
                  investing activities**
 Fully
                  depreciated assets disposed of
              
              $
              79
              
              $
              1,083
              
              $
              —
   The
        accompanying notes are an integral part of these financial
        statements
  F-6
 **FIBERSTARS,
          INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **December 31,
          2006 and 2005**
  **1.  
        Nature of Operations:**
  Fiberstars, Inc.
        (the “Company”) develops and assembles lighting products using fiber optic
        technology for commercial lighting and swimming pool and spa lighting
        applications. The Company markets its products for worldwide distribution
        primarily through independent sales representatives, distributors and swimming
        pool builders.
  **2.  
        Summary of Significant Accounting Policies:**
  **Basis
        of Presentation:**
  The
        consolidated financial statements include the accounts of Fiberstars, Inc.
        and its subsidiaries. All significant inter-company balances and transactions
        have been eliminated.
  **Use
        of Estimates:**
  The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the reported amount of assets and
        liabilities and disclosure of contingent assets and liabilities at the date
        of
        the financial statements and the reported amounts of revenues and expenses
        during the reported period. Estimates include, but are not limited to, the
        establishment of reserves for accounts receivable, sales returns, inventory
        obsolescence and warranty claims; the useful lives for property, equipment,
        and
        intangible assets, and stock-based compensation. Actual results could differ
        from those estimates.
  **Cash
        Equivalents:**
  The
        Company considers all highly liquid investments purchased with an original
        maturity of three months or less to be cash equivalents.
  **Short-Term
        Investments:**
  The
        Company’s short-term investments are classified as available-for-sale, which are
        stated at estimated fair value. The Company has determined its short-term
        investments are available to support current operations and, accordingly,
        has
        classified such short-term investments as current assets without regard for
        contractual maturities. These short-term investments are invested through
        a
        major financial institution. The unrealized gains or losses on these short-term
        investments are included in accumulated other comprehensive income as a separate
        component of shareholders’ equity until realized.
  Short-term
        investments at December 31, 2006 were as follows ( *in
        thousands)* :
  **Cost**
              
              **Net**
                **unrealized gain**
              
              **Estimated**
                **Fair Value**Money
                  Market Fund
              
              $
              18
              
              
              $
              —
              
              
              
              $
              18Agency
                  Securities
              
              3,642
              
              
              46
              
              
              
              3,688Agency
                  Discount Notes
              
              6,468
              
              
              23
              
              
              
              6,491Munincipal
                  Bonds Taxable (Variable)
              
              2,066
              
              
              --
              
              
              
              2,066Total
              
              $
              12,194
              
              
              $
              69
              
              
              
              $
              12,263
   The
        short-term investments maturing in 2007 total $10.1 million. The remaining
        short-term investments have scheduled maturity dates from July 2024 through
        December 2036.
  The
        change in net unrealized holding gains on securities available for sale in
        the
        amount of $53,000 has been charged to other comprehensive income for the
        year
        ended December 31, 2006. The cost of securities sold is based on the
        specific identification method.
  Proceeds
        from the sale of available securities during 2006 were $108.8 million. Gross
        gains of $562,000 were realized on the sales of available for sale securities
        during 2006.
  F-7
  **FIBERSTARS,
          INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December 31,
          2006 and 2005**
  **Fair
        Value of Financial Instruments:**
  Carrying
        amounts of certain of the Company’s financial instruments including cash and
        cash equivalents, short-term investments, accounts receivable and accounts
        payable approximate fair value due to their short maturities. Based on borrowing
        rates currently available to the Company for loans with similar terms, the
        carrying value of long-term debt obligations also approximates fair
        value.
  **Revenue
        Recognition:**
  The
        Company recognizes revenue when all of the following occur: (1) receipt of
        a purchase order from the customer or completion of a sales agreement with
        the
        customer; (2) shipment of the product has occurred or services have been
        provided; and (3) the sales price is fixed or determinable and
        collectibility is reasonably assured. Revenue from product sales is generally
        recognized upon shipment, and allowances are provided for estimated returns,
        discounts and warranties. Such allowances are adjusted periodically to reflect
        actual and anticipated returns, discounts and warranty expenses. Revenue
        from
        product sales that include an installation or other service obligation on
        the
        part of the Company are recognized upon the shipment of the product and the
        completion of the Companys’ installation or service obligation. Revenue on sales
        that include services such as design, integration and installation is generally
        recognized using the percentage-of-completion method. Under the
        percentage-of-completion method, revenue recognized reflects the portion
        of the
        anticipated contract revenue that has been earned, equal to the ratio of
        labor
        costs expended to date to anticipated final labor costs, based on current
        estimates of labor costs to complete the project. The Company’s products are
        generally subject to warranties, and the Company provides for the estimated
        future costs of repair, replacement or customer accommodation in costs of
        sales.
        Fees for research and development services are determined on a cost-plus
        basis
        and are recognized as revenue when performed.
  The
        Company recognizes shipments to pool lighting distributors as revenue upon
        shipment. Estimated sales returns are recorded upon recognition of revenues
        from
        distributors having rights of return, including exchange rights for unsold
        products. Shipments made to commercial lighting representatives and distributors
        are also recognized as revenue upon shipment because in these instances the
        representative or distributor is acting as a pass-through agent to a specific
        lighting project for which the Company has an existing contract or purchase
        order.
  **Inventories:**
  The
        Company states inventories at the lower of standard cost (which approximates
        actual cost determined using the first-in-first-out method) or market. The
        Company establishes provisions for excess and obsolete inventories after
        evaluation of historical sales, current economic trends, forecasted sales,
        product lifecycles and current inventory levels. Charges to cost of sales
        for
        excess and obsolete inventories amounted to $868,000, $196,000 and $116,000
        in
        2006, 2005 and 2004, respectively.
  **Accounts
        Receivable:**
  The
        Company’s customers are currently concentrated in the United States and Europe.
        In the normal course of business, the Company extends unsecured credit to
        its
        customers related to the sale of its products. Typical credit terms require
        payment within 30 days from the date of delivery or service. The Company
        evaluates and monitors the creditworthiness of each customer on a case-by-case
        basis. The Company provides allowances for sales returns and doubtful accounts
        based on its continuing evaluation of its customers’ ongoing requirements and
        credit risk. The Company writes-off accounts receivable when they become
        uncollectible, and payments subsequently received on such receivables are
        credited to the allowance for doubtful accounts. The Company does not require
        collateral from its customers.
  **Income
        Taxes:**
  As
        part
        of the process of preparing its consolidated financial statements, the Company
        estimates its income tax liability in each of the jurisdictions in which
        it does
        business. This process involves estimating the Company’s actual current tax
        expense together with assessing temporary differences resulting from differing
        treatment of items, such as deferred revenues, for tax and accounting purposes.
        These differences result in deferred tax assets and liabilities, which are
        included in the consolidated balance sheet. The Company then assesses the
        likelihood that these deferred tax assets will be recovered from future taxable
        income and, to the extent the Company believes that recovery is not more
        likely
        than not, or is unknown, the Company establishes a valuation
        allowance.
  Significant
        management judgment is required in determining the provision for income taxes,
        the deferred tax assets and liabilities and any valuation allowance recorded
        against such deferred tax assets. At December 31, 2006, the Company’s
        deferred tax assets primarily consist mainly of certain net operating losses
        carried forward. The Company has recorded a valuation allowance of $9,680,000
        against these deferred tax assets, due to uncertainties related to its ability
        to utilize those deferred tax assets. The valuation allowance is based on
        estimates of taxable income by jurisdiction and the periods over which its
        deferred tax assets could be recoverable.
   F-8
 **FIBERSTARS,
        INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December 31,
        2006 and 2005**
 
  **Long-lived
        Assets:**
  Goodwill
        represents the excess of acquisition cost over the fair value of tangible
        and
        identified intangible net assets of the businesses acquired. Goodwill is
        not
        amortized, but is subjected to an annual impairment test. Intangible assets
        from
        acquisitions are stated at cost and are amortized on a straight-line basis
        over
        the estimated life of the assets acquired, but in no case for a period longer
        than 10 years. Fixed assets are stated at cost and are depreciated using
        the straight-line method over the estimated useful lives of the related assets
        (two to five years). Leasehold improvements are amortized on a straight-line
        basis over their estimated useful lives or the lease term, whichever is shorter,
        generally 3 to 7 years. When events or changes in circumstances indicate
        that assets may be impaired, an evaluation is performed comparing the estimated
        future undiscounted cash flows associated with the asset to the asset’s carrying
        amount to determine if a write-down to market value or discounted cash flow
        is
        required.
  **Certain
        Risks and Concentrations:**
  The
        Company invests its excess cash in deposits and high-grade short-term securities
        with a major financial institution that is insured by the Federal Deposit
        Insurance Corporation (“FDIC”) up to $100,000 and the Securities Investor
        Protection Corporation (“SIPC”) up to $500,000 of primary net equity protection
        including $100,000 for claims for cash. At times the cash balances exceed
        the
        amounts insured by the FDIC. Currently the Company has approximately $12
        million
        in short term securities invested with Bear Stearns Securities Corporation,
        under the management of Seneca Capital. The Company has not experienced any
        losses in such accounts and believes it is not exposed to significant risk
        of
        loss.
  The
        Company sells its products primarily to commercial lighting distributors
        and
        residential pool distributors and pool installation contractors in North
        America, Europe and the Far East. The Company performs ongoing credit
        evaluations of its customers and generally does not require collateral. Although
        the Company maintains allowances for potential credit losses that it believes
        to
        be adequate, a payment default on a significant sale could materially and
        adversely affect its operating results and financial condition. At
        December 31, 2006 and 2005, one customer accounted for 6% and 8% of
        accounts receivable, respectively. One customer accounted for 11%, 11% and
        10%
        of net sales in 2006, 2005 and 2004, respectively.
  The
        Company currently buys all of its small diameter stranded fiber, the main
        component of most of its products, from one supplier. There is a limited
        number
        of fiber suppliers, and even if an alternative supplier were obtained, a
        change
        in suppliers could cause delays in manufacturing and a possible loss of sales
        which would adversely affect operating results.
  The
        Company also relies on sole source suppliers for certain lamps, reflectors,
        remote control devices and power supplies. Although the Company cannot predict
        the affect that the loss of one or more of such suppliers would have on the
        Company, such loss could result in delays in the shipment of products and
        additional expenses associated with redesigning products and could have a
        material adverse affect on the Company’s operating results.
  The
        Company is dependent upon offshore companies for the manufacturing and final
        assembly of many of its pool and spa products. The Company advances certain
        raw
        materials, inventory, and production costs to these off-shore manufacturers.
        The
        supply of finished goods from these companies, and the raw materials, inventory
        and funds that it advances to them may be at risk depending upon the varying
        degrees of instability of these local political, economic, and social
        environments in which they operate, and the financial strength of the companies
        themselves.
  **Research
        and Development:**
  In
        February 2003, Defense
        Advanced Research Projects Agency, or DARPA, awarded
        the Company and its partners a research and development contract for the
        development of next generation light sources, optics, luminaire and integrated
        illuminated technologies for its High Efficiency Distributed Lighting (HEDLight)
        project. The DARPA contract calls for gross payments of $7,824,000 to the
        Company over three years based on achievement of various research and
        development milestones. On April 10, 2003 the Company announced that it and
        APL Engineered Materials, a subsidiary of Advanced Lighting Technologies
        Inc.
        (ADLT), were awarded a further $2.7 million research and development contract
        from DARPA to develop a new arc discharge light source. The contracts provided
        the Company $1,966,000 and $2,502,000 in research and development credits
        for
        the fiscal years ended December 31 2005 and 2004 respectively, net of
        subcontractor fees. The milestones are for work performed in developing fiber
        optic illuminators and fixtures for installation on ships and aircraft. Funds
        for each year are subject to annual congressional budget approval.
  During
        2005, the Company received a total of $1.5 million in awards from the Department
        of Energy under its Small Business Innovation Research “SBIR” program to improve
        its energy saving lighting technology, EFO. In addition, further SBIR awards
        from the Department of Defense under DARPA totaling $200,000 were obtained
        to
        further explore improvements to lamp coatings and design and to further research
        materials and processing techniques for the Company’s Continuously Extruded
        Large Core Fiber processing method.
   F-9
 **FIBERSTARS,
        INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December 31,
        2006 and 2005**
 
  In
        March
        2006 the Company entered into a DARPA agreement in which the Company supplied
        its’ lighting on three United States Navy ships for sea testing. Milestone
        deliveries under this agreement have been booked as revenue as the milestones
        have been delivered. In 2006, the Company recognized $1,979,000 in revenue
        for
        deliveries made.
  **Earnings
        Per Share:**
  Basic
        earnings (loss) per share is computed by dividing income (loss) available
        to
        common shareholders by the weighted average number of common shares outstanding
        for the period. Diluted earnings (loss) per share is computed 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.
  A
        reconciliation of the numerator and denominator of basic and diluted earnings
        (loss) per share is provided as follows *(in
        thousands, except per share amounts)* :
  **Years Ended December 31,****2006**
              
              **2005**
              
              **2004**Numerator—Basic
                  and Diluted loss per shareNet
                  loss
              
              $
              (9,650
              )
              $
              (7,423
              )
              $
              (704
              )Denominator—Basic
                  and Diluted loss per shareWeighted
                  average shares outstanding
              
              11,385
              
              8,223
              
              7,269Basic
                  and diluted loss per share
              
              $
              (0.85
              )
              $
              (0.90
              )
              $
              (0.10
              )
   The
        shares outstanding used for calculating basic and diluted earnings (loss)
        per
        share for a portion of the year 2005 included 156,375 shares of common stock
        and
        114,375 shares of common stock in 2004 issuable for no cash consideration
        upon
        exercise of certain exchange provisions of warrants held by ADLT and two
        of its
        former employees. There were no warrants outstanding for ADLT during
        2006.
  Options
        and warrants to purchase 1,690,430 shares, 1,485,678 shares and 2,167,903
        shares
        of common stock were outstanding at December 31, 2006, 2005 and 2004,
        respectively, but were not included in the calculations of diluted earnings
        (loss) per share because the Company had a loss for these years and their
        inclusion would be anti-dilutive.
  **Stock-Based
        Compensation:**
  In
        December 2004, the FASB issued FAS No. 123R, Share-Based Payment (“FAS No.
        123R”). FAS No. 123R is a revision of FAS
        No.
        123, Accounting for Stock-Based Compensation (“FAS No. 123”), and supersedes
        Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
        Employees (“APB No. 25”), and its related implementation guidance. On January 1,
        2006, the Company adopted the provisions of FAS No. 123R using the modified
        prospective method. FAS No. 123R focuses primarily on accounting for
        transactions in which an entity obtains employee services in share-based
        payment
        transactions. The Statement requires entities to recognize compensation expense
        for awards of equity instruments to employees based on grant-date fair value
        of
        those awards (with limited exceptions). FAS No. 123R also requires the benefits
        of tax deductions in excess of recognized compensation expense to be reported
        as
        a financing cash flow, rather than as an operating cash flow as prescribed
        under
        the prior accounting rules. This requirement reduces net operating cash flows
        and increases net financing cash flows in periods after adoption. Total cash
        flow remains unchanged from what would have been reported under prior accounting
        rules. For the year ended December 31, 2006, the Company recorded compensation
        expense of $1,118,000, or 10 cents per share. At December 31, 2005, the Company
        had unamortized compensation expenses of $397,000. This amount is now part
        of
        our total unearned compensation of $1,959,000 remaining at December 31,
        2006. The remaining weighted average life is approximately 2
        years. These costs will be charged to expense, amortized on a straight line
        method, in future periods in accordance with our FAS 123R
        accounting.
  The
        expense for 2006 includes both the cost of awards granted in 2006 and those
        unvested at the beginning of 2006. Both the expense and future unearned
        compensation have been estimated using the Black-Scholes option pricing model.
        Estimates utilized in the calculation include the expected life option,
        risk-free interest rate, and volatility and are further
        comparatively detailed below. The volatility estimates are calculated using
        historical pricing experience.
  As
        of
        December 31, 2006, the Company has two stock-based employee compensation
        plans, which are described more fully in Note 9. Prior to December 31,
        2006, the Company accounted for those plans under the recognition and
        measurement principles of APB Opinion No. 25, *Accounting
        for Stock Issued to Employees,* and
        related Interpretations. Under these principles, employee stock options are
        valued at the excess of the fair value of the underlying common stock over
        the
        exercise price of the options on the grant date.
  The
        Company accounts for equity instruments issued to non-employees in accordance
        with the provisions of FAS 123R. Under these principles, the equity instruments
        are valued at the fair value which is computed based on stock price on the
        date
        of grant or other measurement date, exercise price, estimated life, stock
        volatility and the risk free rate of interest.
   F-10
 **FIBERSTARS,
        INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December 31,
        2006 and 2005**
 
  The
        following table illustrates the effect on net income and earnings (loss)
        per
        share if the Company had prior to 2006 applied the fair value recognition
        provisions of FASB Statement No. 123, *Accounting
        for Stock-Based Compensation,* to
        stock-based employee compensation.
  *(in
        thousands, except per share amounts):*
  **2005**
              
              **2004**Net
                  Loss—as reported
              
              $
              (7,423
              )
              $
              (704
              )Add:
                  Stock-based employee compensation expense included in reported
                  net loss,
                  net of related tax effects
              
              20
              
              12Deduct:
                  Total stock-based employee compensation expense determined under
                  fair
                  value based method for all awards, net of related tax
                  effects
              
              (530
              )
              (420
              )Net
                  Loss—Pro forma
              
              $
              (7,933
              )
              $
              (1,112
              )Basic
                  and Diluted Loss Per Share—As reported
              
              $
              (0.90
              )
              $
              (0.10
              )Basic
                  and Diluted Loss Per Share—Pro forma
              
              $
              (0.96
              )
              $
              (0.15
              )
   The
        fair
        value of each option grant and stock purchase plan grant combined is estimated
        on the date of grant using the Black-Scholes option pricing model with the
        following weighted-average assumptions used for grants in 2006, 2005 and
        2004:
  **2006**
              
              **2005**
              
              **2004**Fair
                  value of options issued
              
              $
              3.52
              
              $
              5.14
              
              $
              3.77Exercise
                  price
              
              $
              7.09
              
              $
              10.65
              
              $
              7.50Expected
                  life of option
              
              4.0
                  years
              
              5.02
                  years
              
              4.88
                  yearsRisk-free
                  interest rate
              
              4.91
              %
              3.58
              %
              3.00
              %Expected
                  volatility
              
              59
              %
              49
              %
              48
              %
   **Foreign
        Currency Translation:**
  The
        Company’s international subsidiaries use their local currencies as their
        functional currencies. 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 accumulated comprehensive
        income within the statement of shareholders’ equity. Foreign currency
        transaction gains and losses are included as a component of interest income
        and
        other. Gains and losses from foreign currency translation are included as
        a
        separate component of comprehensive income (expense) within the consolidated
        statement of comprehensive income (loss).
  **Advertising
        Expenses:**
  The
        Company expenses the costs of advertising, which consists of costs for the
        placement of advertisements in various media as incurred. Advertising expenses
        were $415,000, $192,000 and $206,000 for the years ended December 31, 2006,
        2005 and 2004, respectively.
  **Product
        warranties:**
  The
        Company warrants finished goods against defects in material and workmanship
        under normal use and service for periods of one to three years for illuminators
        and fiber. Settlement costs consist of actual amounts expensed for warranty
        services, which are largely a result of third party service calls, and costs
        of
        replacement products. A liability for the estimated future costs under product
        warranties is maintained based on estimated future warranty expense for products
        outstanding under warranty *(in
        thousands)* :
  **Year ended**
                **December 31,****2006**
              
              **2005**Balance
                  at the beginning of the year
              
              $
              393
              
              $
              430Accruals
                  for warranties issued
              
              219
              
              656Settlements
                  made during the year (in cash or in kind)
              
              (382
              )
              (693
              )Balance
                  at the end of the year
              
              $
              230
              
              $
              393
    F-11
  **FIBERSTARS,
          INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December 31,
          2006 and 2005**
  **Reclassifications:**
  Certain
        prior year information has been reclassified to conform to current year
        presentation.
  **Recent
        Pronouncements:**
  In
        July,
        2006, the FASB issued FASB interpretation No. 48, “Accounting for Uncertainty in
        Income Taxes” (“FIN 48”), an interpretation of FASB statement No. 109,
“Accounting for Income Taxes”, regarding accounting for income tax uncertainties
        effective for fiscal years beginning after December 15, 2006. FIN 48 will
        apply
        to all tax positions related to income taxes subject to SFAS 109 on Accounting
        for Income Taxes. The impact of adopting the positions of the interpretation
        is
        not anticipated to have a material impact on our overall financial
        position.
  In
        September 2006, the Securities and Exchange Commission published Staff
        Accounting Bulletin (“SAB”) No. 108 (Topic 1N), Considering the Effects of Prior
        Year Misstatements when Quantifying Misstatements in Current Year Financial
        Statements. SAB No. 108 requires registrants to quantify misstatements using
        both the balance sheet and income statement approaches, with adjustment required
        if either method results in a material error. The provisions of SAB No. 108
        are
        effective for annual financial statements for the fiscal year ending after
        November 15, 2006. We have incorporated SAB No. 108 in our financial statements
        as included in this Annual Report on Form 10-K, and it has had no material
        effect upon initial adoption.
  In
        September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
        Statement defines fair value, establishes a framework for measuring fair
        value,
        and expands disclosures about fair value measurements. This statement applies
        under other accounting pronouncements that require or permit fair value
        measurements, the FASB having previously concluded in those accounting
        pronouncements that fair value is the relevant measurement attribute.
        Accordingly, this statement does not require any new fair value measurements.
        We
        will adopt this standard January 1, 2008. We do not expect it to have a material
        impact on our financial position or results of operations.
  **3.
        Inventories** *(in
        thousands)* **:**
  **December 31,****2006**
              
              **2005**Raw
                  materials
              
              $
              6,354
              
              $
              6,431Inventory
                  reserve
              
              
              (899
              )
              
              (859
              )Finished
                  goods
              
              
              2,253
              
              
              2,280$
              7,708
              
              $
              7,852
   **4.
        Fixed Assets** *(in
        thousands)* **:**
  **December 31,****2006**
              
              **2005**Equipment
                  (useful life 5 years)
              
              $
              8,411
              
              $
              5,648Tooling
                  (useful life 2 - 5 years)
              
              
              2,657
              
              
              1,998Furniture
                  and fixtures (useful life 5 years)
              
              
              202
              
              
              193Computer
                  software (useful life 3 years)
              
              
              395
              
              
              368Leasehold
                  improvements (the shorter of useful life or lease life)
              
              
              1,475
              
              
              83913,140
              
              
              9,046Less
                  accumulated depreciation and amortization
              
              
              (7,162
              )
              
              (5,624
              )$
              5,978
              
              $
              3,422
    F-12
 **FIBERSTARS,
        INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December 31,
        2006 and 2005**
 
  Fixed
        assets are stated at cost and are depreciated using the straight-line method
        over the estimated useful lives of the related assets (two to five years).
        Leasehold improvements are amortized on a straight-line basis over their
        estimated useful lives or the lease term, whichever is shorter, generally
        3 to
        7 years.
  **5.
        Goodwill and Intangibles**
  In
        accordance with SFAS 142, goodwill is subject to an annual impairment test.
        The Company performs the test in the fourth quarter of every year. The tests
        showed no impairment of the Company’s goodwill asset.
  The
        changes in the carrying amounts of goodwill and intangibles for the years
        ended
        December 31, 2006 and 2005 were as follows *(in
        thousands)* :
  **Goodwill**
              
              
              **Intangibles****Net**
                **Carrying**
                **Amount**
              
              
              **Gross**
                **Carrying**
                **Amount**
              
              
              **Accumulated**
                **Amortization**
              
              
              **Net**
                **Carrying**
                **Amount**Balance
                  as of January 1, 2005
              
              $
              4,279
              
              $
              770
              
              $
              (620
              )
              $
              150Amortization
                  expense
              
              
              —
              
              
              —
              
              
              (150
              )
              
              (150
              )Foreign
                  currency translation
              
              
              (144
              )
              
              —
              
              
              —
              
              
              —Balance
                  as of December 31, 2005
              
              
              4,135
              
              
              770
              
              
              (770
              )
              
              ---Foreign
                  currency translation
              
              
              112
              
              
              —
              
              
              —
              
              
              —Balance
                  as of December 31, 2006
              
              $
              4,247
              
              $
              770
              
              $
              (770
              )
              $
              —
   Intangibles
        at December 31, 2006 and 2005 include developed and core technology and
        patents with a gross carrying amount of $399,000 and $371,000. These Intangibles
        became fully amortized in 2005.
  **6.
        Accruals and Other Current Liabilities**  *(in
        thousands):*
  **December 31,****2006**
              
              **2005**Sales
                  commissions and incentives
              
              $
              445
              
              $
              1,089Accrued
                  warranty expense
              
              
              230
              
              
              393Accrued
                  legal and accounting fees
              
              
              29
              
              
              155Accrued
                  employee benefits
              
              
              418
              
              
              304Accrued
                  payables—related parties
              
              
              81
              
              
              15Accrued
                  rent
              
              
              57
              
              
              871Accrued
                  DARPA payables
              
              
              --
              
              
              314Accrued
                  Severance
              
              
              --
              
              
              455Accrued
                  taxes
              
              
              45
              
              
              153
 Others
              
              
              366
              
              
              175
 $
              1,671
              
              $
              3,924
   **7.
        Bank Borrowings:**
  The
        Company has a bank line of credit agreement with Silicon Valley Bank dated
        August 15, 2005. It was further amended September 25, 2006 and extended
        through August 15, 2007. This credit facility is for $5,000,000 and is secured
        by the Companys’ assets and intellectual property. At December 31, 2006, the
        interest rate was 8.75%.  The interest rate was 7.75% at December 31, 2005.
        The rate is the same for both the term-loan and line of credit in both
        years. It has a minimum tangible net worth covenant which the Company must
        meet going forward. On December 31, 2005 this agreement was amended and
        restated to include an additional $3,000,000 term-loan line of credit for
        equipment purchases. This agreement calls for repayment of principle in equal
        amounts over 4 years from the date of purchase of the equipment and has an
        interest rate of prime plus 0.5% if the quick ratio is greater than 1.5,
        and
        prime plus 1.5% if the quick ratio is at or below 1.5. Borrowings under the
        Silicon Valley Agreement are collateralized by the Companys’ assets and
        intellectual property. Specific borrowings under the revolver are tied to
        accounts receivable balances, and the Company’s required to comply with certain
        covenants with respect to effective net worth and financial ratios, which
        the
        Company met as of December 31, 2006. The Company had borrowings of
        $1,000,000 under the revolving line of credit at December 31, 2006, and no
        borrowings at December 31, 2005. The Company had total borrowings of $2,261,000
        under the term-loan portion of the agreement as of December 31, 2006, and
        had $1,092,000 in borrowings under this portion as of December 31, 2005.
        The Company pays an unused line fee of 0.25% against any unused daily balance
        during the year.
   F-13
 **FIBERSTARS,
        INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December 31,
        2006 and 2005**
 
  The
        $1,000,000 revolving line of credit is a current liability. Future maturities
        of
        obligations under the term-loan portion are as follows: 2007; $731,000, 2008;
        $676,000, 2009; $676,000, and 2010 $178,000.
  Through
        the Companiys’ U.K. subsidiary, it maintains a bank overdraft facility of
        $490,000 (in UK pounds sterling, based on the exchange rate at December 31,
        2006) under an agreement with Lloyds Bank Plc. There were no borrowings against
        this facility as of December 31, 2006 and 2005, respectively. The facility
        is renewed annually on January 1.  The facility interest rate
        was 7.25% at December 31, 2006 and 6.75% at December 31, 2005.
  Through
        the Companys’ German subsidiary, it maintains a credit facility under an
        agreement with Sparkasse Neumarkt Bank. This credit facility is in place
        to
        finance our building of new offices in Berching, Germany which is owned and
        occupied by the Companys’ German subsidiary. As of December 31, 2006, the
        Company had borrowings of $379,000 (in Euros, based on the exchange rate
        at
        December 31, 2006) against this credit facility, all of which comes due
        between 2007 and 2008. At December 31, 2005, the Company had borrowings of
        $331,000 (in Euros based on the exchange rate at December 31, 2005). The
        interest rate was 5.35% at December 31, 2006 and 2005.  In addition, the
        Companys’ German subsidiary has a revolving line of credit for $198,000 (in
        Euros, based on the exchange rate at December 31, 2006) with Sparkasse
        Neumarkt Bank. As of December 31, 2006, there were borrowings of $124,000
        against this facility and borrowings of $47,000 against this facility at
        December 31, 2005. The revolving facility is renewed annually on
        January 1. Interest rates on this line of credit were 9.75% at December 31,
        2006 and 8.75% at December 31, 2005.  The $124,000 revolving line of credit
        is a current liability. Future maturities of remaining borrowings are $47,000
        in
        2007 and $332,000 in 2008.
  **8.
        Commitments and Contingencies:**
  The
        Company occupies manufacturing and office facilities under non-cancelable
        operating leases expiring through 2011 under which it is responsible for
        related
        maintenance, taxes, and insurance. Minimum lease commitments under the leases
        are as follows *(in
        thousands):*
  **Year ending December 31,**
              
              
              **Gross
                  lease**
                **commitments**
              
              
              **Sublease**
                **Payments**
              
              
              **Minimum lease**
                **commitments**2007
              
              $
              994
              
              $
              (14
              )
              $
              980
 2008
              
              
              795
              
              
              (7
              )
              
              7882009
              
              
              772
              
              
              -----
              
              
              7722010
              
              
              730
              
              
              -----
              
              
              7302011
              
              
              222
              
              
              -----
              
              
              222
 Total
                  minimum lease payments
              
              $
              3,492
   These
        leases included certain escalation clauses and thus rent expense was recorded
        on
        a straight-line basis. Consolidated net rent expense approximated $828,000,
        $1,026,000 and $839,000 for the years ended December 31, 2006, 2005 and
        2004, respectively. Beginning in 2006, a portion of our Solon facility has
        been
        subleased. For 2006, gross rent of $895,000 has been reduced by $67,000 of
        sublease rentals.
  At
        December 31, 2006, a letter of credit in the amount of $290,000 was held by
        the Company on behalf of Sparkasse Neumarkt Bank. The letter of credit would
        be
        drawn against the Company’s line of credit facility with Silicon Valley Bank in
        the event of a default by the Company’s German subsidiary, LBM, on its
        outstanding loan with Sparkasse Neumarkt Bank.
  **9.
        Shareholders’ Equity:**
  **Common
        Stock:**
  The
        Company had shareholder notes receivable of $62,000 for warrants exercised
        in
        2005 and paid for in 2006.
  **Warrants:**
  There
        have been no warrants issued by the Company in 2006, 2005, and 2004. Warrants
        were issued in 2000 as part of acquisitions, and in 2002 and 2003 as part
        of
        stock based financings. There have been no warrants issued to employees,
        directors or consultants for compensation purposes. The activity relating
        to
        previously issued warrants is as follows:
 F-14
 **FIBERSTARS,
          INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December 31,
          2006 and 2005**
  **Warrants**
                **Outstanding**
                **Shares**
              
              
              
              **Warrants**
                **Outstanding**
                **Exercise Price**
              
              
              **Warrants**
                **Exercisable**
              
              
              **Amount****(in thousands)**Balance,
                  December 31, 2003
              
              
              1,601,899
              
              
              $
              0.01 - $6.00
              
              
              392,648
              
              
              $
              4,248Warrants
                  vested.
              
              
              —
              
              
              $
              0.01 - $5.563
              
              
              779,251
              
              
              
              —Warrants
                  exercised
              
              
              (553,312
              )
              
              $
              0.01 - $5.563
              
              
              (553,312
              )
              
              
              (1,532
              )Warrants
                  cancelled
              
              
              (32,585
              )
              
              $5.563
              
              
              (32,585
              )
              
              
              (181
              )Balance,
                  December 31, 2004
              
              
              1,016,002
              
              
              $
              0.01 - $5.563
              
              
              586,002
              
              
              $
              2,535Warrants
                  vested.
              
              
              —
              
              
              $
              0.01 - $5.563
              
              
              427,269
              
              
              
              —Warrants
                  exercised
              
              
              (587,374
              )
              
              $
              0.01 - $5.563
              
              
              (587,374
              )
              
              
              (625
              )Warrants
                  cancelled
              
              
              (17,877
              )
              
              $5.563
              
              
              (15,146
              )
              
              
              (73
              )Balance,
                  December 31, 2005
              
              
              410,751
              
              
              $
              4.30 - $4.50
              
              
              410,751
              
              
              $
              1,837Warrants
                  exercised
              
              
              (13,800
              )
              
              $
              4.50
              
              
              (13,800
              )
              
              
              
              (62
              )Balance,
                  December 31, 2006
              
              
              396,951
              
              
              $
              4.30 - $4.50
              
              
              396,951
              
              
              $
              
              1,775
     **1988
        Stock Option Plan:**
  Upon
        adoption of the 1994 Stock Option Plan (see below), the Company’s Board of
        Directors determined to make no further grants under the 1988 Stock Option
        Plan
        (the 1988 Plan). Upon cancellation or expiration of any options granted under
        the 1988 Plan, the related reserved shares of common stock became available
        instead for options granted under the 1994 Stock Option Plan, and, after
        May 19, 2004, under our 2004 Stock Incentive Plan.
  **1994
        Directors’ Stock Option Plan:**
  At
        December 31, 2004, a total of 400,000 shares of common stock had been
        reserved for issuance under the 1994 Directors’ Stock Option Plan. The plan
        provided for the granting of nonstatutory stock options to non-employee
        directors of the Company. This plan was terminated on May 19,
        2004.
  **1994
        Stock Option Plan:**
  At
        December 31, 2004, an aggregate of 1,550,000 shares of the Company’s common
        stock had been reserved for issuance and issued under the 1994 Stock Option
        Plan
        to employees, officers, and consultants at prices not lower than the fair
        market
        value of the common stock of the Company on the date of grant in the case
        of
        incentive stock options, and not lower than 85% of the fair market value
        on the
        date of grant in the case of non-statutory stock options. Options granted
        may be
        either incentive stock options or nonstatutory stock options. The plan
        administrator (the Board of Directors or a committee of the Board) determines
        the terms of options granted under the plan including the number of shares
        subject to the option, exercise price, term and exercisability. This plan
        was
        terminated on May 19, 2004.
  **2004
        Stock Incentive Plan**
  A
        total
        of 1,000,000 shares of common stock had been reserved for issuance under
        the
        2004 Employee Stock Purchase Plan. On May 19, 2004, the shareholders
        approved the 2004 Stock Incentive Plan (the “2004 Plan”). The stated purpose of
        the 2004 Plan is to promote the long-term success of the Company and the
        creation of stockholder value by (a) encouraging employees, outside
        directors and consultants to focus on critical long-range objectives,
        (b) encouraging the attraction and retention of employees, outside
        directors and consultants with exceptional qualifications and (c) linking
        employees, outside directors and consultants directly to stockholder interests
        through increased stock ownership. The 2004 Plan seeks to achieve this purpose
        by providing for awards in the form of restricted shares, stock units, options
        (which may constitute incentive stock options or nonstatutory stock options)
        or
        stock appreciation rights. An aggregate of 500,000 shares of the Company’s
        common stock was reserved for issuance under the 2004 Plan on May 19, 2004.
        On June 15, 2006, the shareholders reserved an additional 500,000 shares
        of the
        Company’s common stock for issuance under the 2004 Plan.
  F-15
 **FIBERSTARS,
          INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December 31,
          2006 and 2005**
  Option
        activity under all plans comprised:
  **Options**
                **Available**
                **For Grant**
              
              **Number of Shares**
                **Outstanding**
              
              **Weighted**
                **Average Exercise**
                **Price Per Share****(in thousands)**
              
              **(in thousands)**Balance,
                  December 31, 2003
              
              
              55
              
              
              
              1,387
              
              
              
              $
              4.18Granted
              
              
              (273
              )
              
              
              273
              
              
              
              $
              7.20Cancelled
              
              
              29
              
              
              
              (29
              )
              
              
              $
              5.11Exercised
              
              
              —
              
              
              
              (477
              )
              
              
              $
              4.62Additional
                  shares reserved
              
              
              500
              
              
              
              —
              
              
              
              —Balance,
                  December 31, 2004
              
              
              311
              
              
              
              1,154
              
              
              
              $
              5.56Granted
              
              
              (376
              )
              
              
              376
              
              
              
              $
              9.88Cancelled
              
              
              79
              
              
              
              (79
              )
              
              
              $
              5.50Exercised
              
              
              —
              
              
              
              (376
              )
              
              
              $
              8.95Balance,
                  December 31, 2005
              
              
              14
              
              
              
              1,075
              
              
              
              $
              6.48Granted
              
              
              (330
              )
              
              
              330
              
              
              
              $
              7.12Cancelled
              
              
              6
              
              
              
              (6
              )
              
              
              $
              5.52Exercised
              
              
              —
              
              
              
              (106
              )
              
              
              $
              5.36Additional
                  shares reserved
              
              
              500
              
              
              
              —
              
              
              
              —Balance,
                  December 31, 2006
              
              
              190
              
              
              
              1,293
              
              
              
              $
              7.00
   At
        December 31, 2006, 755,762 options to purchase shares of common
        stock were exercisable at a weighted average fair value of
        $3.07.
  At
        December 31, 2006, total outstanding
        shares were 1,293,479 with a weighted average fair value of
        $3.33.
  **OPTIONS OUTSTANDING**
              
              **OPTIONS CURRENTLY**
                **EXERCISABLE****Range of**
                **Exercise Prices**
              
              **Number**
                **of Shares**
                **Outstanding**
              
              **Weighted**
                **Average**
                **Remaining**
                **Contractual**
                **Life**
              
              **Weighted**
                **Average**
                **Exercise Price**
              
              **Number**
                **Exercisable**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price****(in thousands)**
              
              **(in years)**
              
              
              
              **(in thousands)**$2.95
                  - $4.80
              
              
              312
              
              
              
              2.0
              
              
              
              $
              3.90
              
              
              
              294
              
              
              
              $
              3.90$5.25
                  - $7.19
              
              
              295
              
              
              
              4.8
              
              
              
              $
              6.53
              
              
              
              130
              
              
              
              $
              6.30$7.23
                  - $9.50
              
              
              410
              
              
              
              5.8
              
              
              
              $
              7.62
              
              
              
              197
              
              
              
              $
              7.73$9.60
                  - 12.00
              
              
              276
              
              
              
              4.4
              
              
              
              $
              10.09
              
              
              
              135
              
              
              
              $
              10.471,293
              
              
              
              
              
              
              
              
              
              
              
              756
   **1994
        Employee Stock Purchase Plan:**
  A
        total
        of 150,000 shares of common stock had been reserved for issuance under the
        1994
        Employee Stock Purchase Plan. The plan permits eligible employees to purchase
        common stock through payroll deductions at a price equal to the lower of
        85% of
        the fair market value of the Company’s common stock at the beginning or end of
        the offering period. Employees may end their participation at any time during
        the offering period, and participation ends automatically on termination
        of
        employment with the Company. On June 15, 2006, the shareholders reserved
        an
        additional 50,000 shares of the Company’s common stock for issuance under the
        1994 Employee Stock Purchase Plan. At December 31, 2006, 2005 and 2004,
        94,614 shares, 90,306 shares and 86,382 shares had been issued under this
        plan.
        Stock-based compensation expense has been recorded as part of the Company’s
        stock-based compensation.
  **Shareholder
        Rights Plan**
  On
        September 12, 2001, the Board of Directors of Fiberstars, Inc.
        declared a dividend distribution of one “Right” for each outstanding share of
        common stock of the Company to shareholders of record at the close of business
        on September 26, 2002. One Right will also attach to each share of common
        stock issued by the Company subsequent to such date and prior to the
        distribution date defined below. With certain exceptions, each Right, when
        exercisable, entitles the registered holder to purchase from the Company
        one
        one-thousandth of a share of a new series of preferred stock, designated
        as
        Series A Participating Preferred Stock, at a price of $30.00 per one
        one-thousandth of a share, subject to adjustment. The Rights were distributed
        as
        a non-taxable dividend and expire ten years from the date of the Rights Plan.
        In
        general, the Rights will become exercisable and trade independently from
        the
        common stock on a distribution date that will occur on the earlier of
        (i) the public announcement of the acquisition by a person or group of 15%
        or more of the common stock or (ii) ten days after commencement of a tender
        or exchange offer for the common stock that would result in the acquisition
        of
        15% or more of the common stock. Upon the occurrence of certain other events
        related to changes in ownership of the common stock, each holder of a Right
        would be entitled to purchase shares of common stock, or an acquiring
        corporation’s common stock, having a market value of twice the exercise price.
        Under certain conditions, the Rights may be redeemed at $0.001 per Right
        by the
        Board of Directors. On November 27, 2006 the Company reincorporated in the
        State of Delaware and the Rights became Rights to purchase Series A
        Participating Preferred Stock of the reincorporated Company. The description
        and
        terms of the Rights are set forth in a Rights Agreement dated as of October
        25,
        2006 between the Company and Mellon Investor Services LLC, as rights agent.
   F-16
 **FIBERSTARS,
        INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December 31,
        2006 and 2005**
 
  **Follow-On
        2005 Stock Offering**
  On
        November 8, 2005 the Company closed a follow-on offering, selling 2,500,000
        new shares of Common Stock at a price of $8.25. The purchase price of the
        Common
        Stock was set at $8.25 per share on November 2, 2005, which was
        approximately a 5% discount on the closing price on that day. On
        November 11, 2005 the Company announced that the underwriters had exercised
        their option to sell an additional 452,497 shares of Common Stock for $8.25
        as
        part of the offering. The gross amount raised was $24.4 million from the
        selling
        of 2,952,497 new shares, before costs and expenses. The net amount received
        by
        the company after deducting 6% in underwriter’s fees and legal, accounting and
        other costs was $22.2 million.
  **10.
        Income Taxes:**
  The
        components of the benefit from (provision for) income taxes are as follows *(in thousands)* :
  **Years
                    Ended December31,****2006**
                
                **2005**
                
                **2004**Current:Federal
                
                $
                —
                
                $
                —
                
                $
                —Foreign
                
                
                (50
                )
                
                (107
                )
                
                58State
                
                
                
                
                
                (2
                )
                
                —(50
                )
                
                (109
                )
                
                58Deferred:Federal
                
                
                (74
                )
                
                —
                
                
                —Foreign
                
                
                12
                
                
                —
                
                
                —State
                
                
                (1
                )
                
                —
                
                
                —(63
                )
                
                —
                
                
                —Benefit
                    from (provision for) income taxes
                
                $
                (113
                )
                $
                (109
                )
                $
                58
   The
        following table shows the geographic components of pretax income (loss) between
        United States and foreign subsidiaries *(in
        thousands)* :
  **December31,****2006**
              
              **2005**
              
              **2004**United
                  States
              
              $
              (9,510
              )
              $
              (7,714
              )
              $
              (813
              )Foreign
                  subsidiaries
              
              
              (27
              )
              
              400
              
              
              51$
              (9,537
              )
              $
              (7,314
              )
              $
              (762
              )
  
   The
        principal items accounting for the difference between income taxes computed
        at
        the United States statutory rate and the benefit from (provision for) income
        taxes reflected in the statements of operations are as follows:
  **December31,****2006**
              
              **2005**
              
              **2004**United
                  States statutory rate
              
              
              34.0
              %
              
              34.0
              %
              
              34.0
              %State
                  Taxes (net of federal tax benefit)
              
              
              2.0
              %
              
              5.5
              %
              
              5.5
              %Valuation
                  allowance
              
              
              (39.0
              )%
              
              (46.5)%
              
              
              (28.3)%Other
              
              
              1.8
              %
              
              5.5
              %
              
              (3.6)%(1.2
              )%
              
              (1.5)%
              
              
              7.6
              %
  
    F-17
 **FIBERSTARS,
        INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December 31,
        2006 and 2005**
 The
          tax
          effects of temporary differences that give rise to significant portions
          of the
          deferred tax assets are as follows *(inthousands)* :
  **December31,****2006**
                
                **2005**
                
                **2004**Allowance
                    for doubtful accounts
                
                $
                113
                
                $
                99
                
                $
                84Accrued
                    expenses and other reserves
                
                
                1,097
                
                
                1,681
                
                
                1,227Tax
                    credits, Deferred R&D and other
                
                
                154
                
                
                352
                
                
                339Net
                    operating loss
                
                
                8,328
                
                
                4,617
                
                
                1,699Valuation
                    allowance
                
                
                (9,680
                )
                
                (6,749
                )
                
                (3,349
                )Net
                    deferred tax asset
                
                $
                12
                
                $
                —
                
                $
                —Deferred
                    tax liabilitiesassociatedwith
                    indefinite-lived
                    intangibles
                
                
                (75
                )
                
                —
                
                
                —Net
                    total deferred taxes
                
                $
                (63
                )
                $
                —
                
                $
                —
 The
        Company has a full valuation allowance against its United States and German
        deferred tax assets. The net deferred tax asset of $12,000 is for the Company’s
        United Kingdom subsidiary which was profitable in 2006. The $58,000 tax
        benefit shown for 2004 is a result of deferred tax for the German operations
        which experienced a loss in 2004 after being profitable in prior years. No
        tax
        benefit has been recorded for the 2006 German operations loss.
  The
        deferred tax provision for 2006 resulted from tax
        amortization of intangible assets with indefinite lives for book
        purposes. During 2006, cumulative tax-amortization exceeded book
        amortization that had been previously recorded resulting in the requirement
        to record a deferred tax liability of $75,000 at December 31,
        2006.
  As
        of
        December 31, 2006, the Company has a net operating loss carry-forward of
        approximately $22.6 million and $21.5 million for federal and state
        and local income tax purposes, respectively. If not utilized, these
        carry-forwards will begin to expire in 2020 for federal and 2008 for state
        purposes.
  **11.
        Segments and Geographic Information:**
  The
        Company has two primary product lines: the pool and spa lighting product
        line
        and the commercial lighting product line, each of which markets and sells
        fiber
        optic lighting products. 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)* :
  **Years Ended December 31,****2006**
              
              **2005**
              
              **2004**United
                  States Domestic
              
              $
              18,776
              
              $
              19,123
              
              $
              19,974Other
                  Countries
              
              8,260
              
              9,214
              
              9,757$
              27,036
              
              $
              28,337
              
              $
              29,731
   A
        summary
        of geographic long-lived assets (fixed assets and goodwill) is as follows *(in thousands)* :
  **December 31,****2006**
              
              **2005**United
                  States Domestic
              
              $
              8,406
              
              $
              5,975Germany
              
              1,674
              
              1,506Other
                  Countries
              
              145
              
              76$
              10,225
              
              $
              7,557  F-18
 **FIBERSTARS,
          INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**
 **December 31,
          2006 and 2005**
 
  A
        summary
        of sales by product line is as follows *(in
        thousands)* :
  **Years Ended December 31,****2006**
              
              **2005**
              
              **2004**Pool
                  and Spa Lighting
              
              $
              13,364
              
              $
              14,744
              
              $
              16,888Commercial
                  Lighting
              
              13,672
              
              13,593
              
              12,843$
              27,036
              
              $
              28,337
              
              $
              29,731
   **12.
        Employee Retirement Plan:**
  The
        Company maintains a 401(k) profit sharing plan for its employees who meet
        certain qualifications. The Plan allows eligible employees to defer up to
        15% of
        their earnings, not to exceed the statutory amount per year on a pretax basis
        through contributions to the Plan. The Plan provides for employer contributions
        at the discretion of the Board of Directors; however, no such contributions
        were
        made in 2006, 2005 or 2004.
  **13.
        Reorganization**
  In
        June 2005, the Company announced its plans to close its Fremont office and
        consolidate most of its operations in Solon, Ohio, where the Company already
        had
        a local sales office and a manufacturing facility. The relocation resulted
        in a
        restructuring charge of approximately $3.5 million for severance payments,
        redundancy, lease and inventory write-offs. The Company recognized a $3,120,000
        restructuring charge in the year ended December 31, 2005. During 2006, the
        Company charged to operations $734,000 for costs associated with the
        reorganization.
  The
          following table details the activity of the Company’s accrued liabilities for
          restructuring:
  December
                      31, 2005 Accrued liability
                  
                  $
                  1,220Payments
                      for restructuring
                  
                  
                  1,954Additional
                      restructuring expense
                  
                  
                  734December
                      31, 2006 Accrued liability
                  
                  $
                  -
 **14.
        Related Party Transactions**
  The
        Company entered into a consulting agreement with Jeffrey H. Brite, a member
        of
        its Board of Directors, effective date of November 1, 2004. As a consultant
        under this agreement, Mr. Brite is to assist Fiberstars, Inc.’s President and
        Vice President of Sales in identifying, contacting and making introductions
        to
        key building project personnel in a position to facilitate the purchase of
        Fiberstars, Inc. products. In return, Fiberstars, Inc. is to compensate Mr.
        Brite with the award of an option for the acquisition of up to 40,000 shares
        of
        its common stock at a per share exercise price of $7.23 and with annual
        aggregate cash payments of $50,000 to be paid in quarterly installments during
        each of the years 2005, 2006 and 2007.
  Gensler
        Architecture, Design & Planning, P.C., a New York Professional Corporation
        (“Gensler”) provides contract services to the Company in the areas of fixture
        design and marketing targeted at expanding the market for the Company’s EFO®
products. Mr. Jeffrey H. Brite, an employee of Gensler, is a member of the
        Company's Board of Directors. The Company entered into a three year consulting
        agreement with Gensler, effective December 15, 2004. Gensler has agreed to
        assist Fiberstars’ marketing group with matters of structure, procedure and
        practices as they relate to the design, real estate and procurement communities,
        and to advise Fiberstars on strategies to enhance its visibility and image
        within the design and construction community as a manufacturer of preferred
        technology. In return, Fiberstars has agreed to compensate Gensler with a
        one-time cash payment of $60,750 for services delivered in advance of the
        completion of the negotiation of the Consulting Agreement, $50,000 annual
        cash
        payments to be paid in quarterly installments of $12,500 in arrears for each
        of
        the calendar years 2005, 2006 and 2007, and a one-time option award to acquire
        up to 75,000 shares of Fiberstars’ common stock at a per share exercise price of
        $6.57 which has been expensed in 2006 under FAS 123R. For the fiscal years
        ended
        December 31, 2006, 2005 and 2004, the Company paid Gensler $50,000, $50,000
        and
        $60,750 ,respectively, for services performed.
  On
        July
        1, 2005, David Ruckert, the Company’s CEO resigned as CEO and served as
        President and Director through September 30, 2005 after which he served as
        director.  Mr. Ruckert signed a severance agreement with the Company which
        was effective July 1, 2005, and which resulted in a payment of $332,076 upon
        his
        departure as an employee, October 1, 2005.
  F-19
 
 **Item
        15 (continued)**
  (a)  (continued)
  (2)  Financial Statement Schedules
  The
        following Financial Statement Schedule of Fiberstars, Inc. is filed as part
        of this Form 10-K included in Item 15(c) below:
  Schedule II—Valuation
        and Qualifying Accounts.
  All
        other
        schedules are omitted either because they are not applicable or the required
        information is shown in the financial statements or the notes
        thereto.
  (3)  
          Exhibits
  See
        Item 15 (b) below.
  Each
        management contract or compensatory plan or arrangement required to be filed
        has
        been identified.
  (c) 
        Exhibits
 **Exhibit****Number**
                  
                  **Description
                      of Documents**2.1
                  
                  Agreement
                      and Plan of Merger between Fiberstars, Inc., a California corporation,
                      and
                      Fiberstars, Inc., a Delaware corporation (incorporated by reference
                      to
                      Appendix C to the Registrant’s Definitive Proxy Statement on Schedule 14A
                      filed on May 1, 2006).3.1
                  
                  Certificate
                      of Incorporation of the Registrant (incorporated by reference
                      to Appendix
                      A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed May
                      1, 2006).3(i).2
                  
                  Certificate
                      of Designation of Series A Participating Preferred Stock of
                      the Registrant
                      (incorporated by reference to Appendix B to the Registrant’s Definitive
                      Proxy Statement shown on Schedule 14A filed May 1,
                      2006).3.2
                  
                  Bylaws
                      of the Registrant, (incorporated by reference to Appendix C
                      to the
                      Registrant’s Current Report on Form 8-K filed November 27,
                      2006).4.1
                  
                  Form
                      of Common Stock Certificate (incorporated by reference to Exhibit
                      4.1 to
                      the Registrant’s Current Report on Form 8-K filed November 27,
                      2006).4.2
                  
                  Rights
                      Agreement dated as of October 25, 2006 between the Registrant
                      and Mellon
                      Investor Services, as rights agent (incorporated by reference
                      to Exhibit
                      4.2 to the Registrant’s Current Report on Form 8-K filed November 27,
                      2006).4.3
                  
                  Form
                      of Warrant for the purchase of shares of Common Stock (incorporated
                      by
                      reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K
                      filed November 27, 2006)).10.1†
                  
                  Form
                      of Indemnification Agreement for directors and officers of
                      the Registrant
                      (incorporated by reference to Exhibit 10.1 to the Registrant’s
                      Registration Statement on Form SB-2 (Commission File No.
                      33-79116-LA)).10.2†
                  
                  1994
                      Employee Stock Purchase Plan, amended as of December 7, 2000,
                      (incorporated by reference to Exhibit 99.3 to the Registrant’s
                      Registration Statement on Form S-8 (Commission File No. 333-52042)
                      filed
                      on December 18, 2000).10.3
                  
                  Registration
                      Rights Agreement dated as of June 27, 1990, between the Registrant
                      and
                      certain holders of the Registrant’s capital stock, as amended by Amendment
                      No. 1 dated as of February 6, 1991 and Amendment No. 2 dated
                      as of April
                      30, 1994 (incorporated by reference to Exhibit 10.10 to the
                      Registrant’s
                      Registration Statement on Form SB-2 (Commission File No.
                      33-79116-LA)).10.4
                  
                  Amendment
                      No. 3 to Registration Rights Agreement to include Warrant shares
                      as
                      Registerable Securities (incorporated by reference to Exhibit
                      1.2 to the
                      Registrant’s Registration Statement on Form SB-2 (Commission File No.
                      33-79116-LA)).
  
 10.5
                  
                  Form
                      of Agreement between the Registrant and independent sales representatives
                      (incorporated by reference to Exhibit 10.20 to the Registrant’s
                      Registration Statement on Form SB-2 (Commission File No.
                      33-79116-LA)).10.6
                  
                  Stock
                      Purchase Agreement dated March 21, 1995, among the Registrant,
                      Mitsubishi
                      International Corporation and Mitsubishi Corporation (incorporated
                      by
                      reference to Exhibit 10.20 to the Registrant’s Annual Report on Form
                      10-KSB for the year ended December 31, 1994).10.7*
                  
                  Three
                      (3)Year Supply Agreement dated November 30, 2000, between the
                      Registrant
                      and Mitsubishi International Corporation (incorporated by reference
                      to
                      Exhibit 10.30 to the Registrant’s Annual Report on Form 10-K for the year
                      ended December 31, 2000).10.8
                  
                  Common
                      Stock and Warrant Purchase Agreement, dated March 29, 2002,
                      by and among
                      the Registrant and the investors named therein (incorporated
                      by reference
                      to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
                      quarter ended March 31, 2002).10.9
                  
                  Securities
                      Purchase Agreement dated June 17, 2003, by and among the Registrant
                      and
                      the investors named therein (incorporated by reference to Exhibit
                      99.2 to
                      the Registrant’s Current Report on Form 8-K filed on June 19,
                      2003).10.10
                  
                  Form
                      of Warrant by and between the Registrants and each of the investors
                      party
                      to the Securities Purchase Agreement dated June 17, 2003 (incorporated
                      by
                      reference to Exhibit 99.3 to the Registrant’s Current Report on Form 8-K
                      filed on June 19, 2003).10.11†
                  
                  Form
                      of Indemnification Agreement for officers of the Registrant
                      (incorporated
                      by reference to exhibit 10.42 to the Registrant’s Annual Report on Form
                      10-K for the year ended December 31, 2003).10.12
                  
                  Form
                      of Indemnification Agreement for directors of the Registrant
                      (incorporated
                      by reference to Exhibit 10.44 to the Registrant’s Annual Report on Form
                      10-K for the year ended December 31, 2003).10.13
                  
                  Production
                      Share Agreement dated October 9, 2003, by and among the Registrant,
                      North
                      American Production Sharing, Inc. and Industrias Unidas de
                      B.C., S.A. de
                      C.V (incorporated by reference to exhibit 10.45 to the Registrant’s Annual
                      Report on Form 10-K for the year ended December 31,
                      2003).10.14
                  
                  Consulting
                      Agreement effective as of November 1, 2004, between the Registrant
                      and
                      Gensler Architecture, Design& Planning, P.C. (Incorporated by
                      reference to exhibit 10.28 to the Registrant’s Annual Report on Form 10-K
                      for the year ended December 31, 2005)10.15†
                  
                  Consulting
                      Agreement effective as of November 1, 2004, between the Registrant
                      and
                      Jeffrey H. Brite. (Incorporated by reference to exhibit 10.29
                      to the
                      Registrant’s Annual Report on Form 10-K for the year ended December 31,
                      2005)10.16
                  
                  Loan
                      and Security Agreement between Silicon Valley Bank and the
                      Registrant,
                      dated August 15, 2005 (incorporated by reference from Exhibit
                      10.1 to the
                      Registrant’s Current Report on Form 8-K filed August 18,
                      2005).10.17†
                  
                  Employment
                      Agreement between the Registrant and John N. Davenport, dated
                      July 1, 2005
                      (incorporated by reference from Exhibit 10.2 to the Registrant’s Quarterly
                      Report on Form 10-Q (File No. 000-24230) filed on November
                      14,
                      2005).10.18†
                  
                  Severance
                      Agreement between the Registrant and David N. Ruckert, dated
                      September 16,
                      2005 (incorporated by reference from Exhibit 10.3 to the Registrant’s
                      Quarterly Report on Form 10-Q (File No. 000-24230) filed on
                      November 14,
                      2005).10.19
                  
                  Fiberstars
                      Development Agreement between the Registrant and Advanced Lighting
                      Technologies, Inc. dated September 19, 2005 (incorporated by
                      reference
                      from Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q (File
                      No. 000-24230) filed on November 14, 2005).10.20
                  
                  ADLT
                      Development Agreement between the Registrant and Advanced Lighting
                      Technologies, Inc. dated September 19, 2005 (incorporated by
                      reference
                      from Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q (File
                      No. 000-24230) filed on November 14,
                      2005).
  10.21
                    
                    Equipment
                        Purchase and Supply Agreement between the Registrant and
                        Deposition
                        Services, Inc. dated September 19, 2005 (incorporated by
                        reference from
                        Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q (File No.
                        000-24230) filed on November 14, 2005).10.22
                    
                    Cross
                        License Agreement between the Registrant and Advanced Lighting
                        Technologies, Inc. dated September 19, 2005 (incorporated
                        by reference
                        from Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q (File
                        No. 000-24230) filed on November 14, 2005).10.23
                    
                    Master
                        Services Agreement between the Registrant and Advanced Lighting
                        Technologies, Inc. dated September 19, 2005 (incorporated
                        by reference
                        from Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-Q (File
                        No. 000-24230) filed on November 14, 2005).10.24
                    
                    First
                        Amendment to Production Share Agreement, effective as of
                        August 17, 2005,
                        by and among the Registrant, North American Production Sharing,
                        Inc. and
                        Industrias Unidas de B.C., S.A. de C.V. (incorporated by
                        reference from
                        Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed October
                        25, 2005).10.25
                    
                    Sublease
                        between Venture Lighting International, Inc. and the Registrant
                        dated as
                        of November 11, 2005 (incorporated by reference from Exhibit
                        10.1 to the
                        Registrant’s Current Report on Form 8-K (File No. 000-24230) filed on
                        November 17, 2005).10.26
                    
                    Amended
                        and Restated Loan and Security Agreement (together with Schedule
                        to
                        Amended and Restated Loan and Security Agreement and Compliance
                        Certificate) between Fiberstars, Inc. and Silicon Valley
                        Bank dated
                        December 30, 2005 (incorporated by reference from Exhibit
                        10.1 to the
                        Registrant’s Current Report on Form 8-K (File No. 000-24230) filed on
                        January 6, 2006).10.27†
                    
                    Consulting
                        Agreement by and between Registrant and David N. Ruckert
                        dated as of
                        February 3, 2006 (incorporated by reference from Exhibit
                        10.1 to the
                        Registrant’s Quarterly Report on Form 10-Q (File No. 000-24230) filed
                        on
                        May 15, 2006).10.28*
                    
                    Equipment
                        and Supply Agreement entered into May 25, 2006 between Fiberstars,
                        Inc.
                        and Deposition Sciences, Inc.(incorporated by reference from
                        Exhibit 10.1
                        to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-24230)
                        filed on August 11, 2006).10.29
                    
                    Modification
                        to sublease between Fiberstars, Inc. and Keystone Ruby, LLC.(incorporated
                        by reference from Exhibit 10.2 to the Registrant’s Quarterly Report on
                        Form 10-Q (File No. 000-24230) filed on August 11,
                        2006).10.30
                    
                    Amendment
                        No. 1 To Amended And Restated Loan And Security Agreement
                        between
                        Fiberstars, Inc and Silicon Valley Bank dated September 25,
                        200610.31†
                    
                    Form
                        of Indemnification Agreement for directors and officers of
                        the
                        Registrant.10.32†
                    
                    Amendment
                        to Consulting Agreement by and between Registrant and David
                        N. Ruckert
                        dated as of February 3, 2006.21.1
                    
                    Significant
                        subsidiaries of the Registrant.23.1
                    
                    Consent
                        of Independent Registered Public Accounting Firm.31.1
                    
                    Rule
                        13a-14(a)Certification by Chief Executive Officer.31.2
                    
                    Rule
                        13a-14(a)Certification by Chief Financial Officer.32.1**
                    
                    Statement
                        of Chief Executive Officer under 18 United States Code
                        §1350.32.2**
                    
                    Statement
                        of Chief Financial Officer under 18 United States Code
                        §1350.
 
 *
              Confidential
                  treatment has been granted with respect to certain portions of
                  this
                  agreement.
  **
              In
                  accordance with item 601(b)(32)(ii) of Regulation S-K and SEC Release
                  Nos. 33-8338 and 34-47986, Final Rule: Management’s Reports on Internal
                  Control Over Financial Report and Certification of Disclosure in
                  Exchange
                  Act Periodic Reports, the certifications furnished in Exhibits 32.1
                  and 32.2 hereto are deemed to accompany this form 10-K and will
                  not be
                  deemed “filed” for purposes of Section 18 of the Exchange Act. Such
                  certifications will not be deemed incorporated by reference into
                  any
                  filing under the Securities Act or the Exchange Act, except to
                  the extent
                  that the Registrant specifically incorporates it by
                  reference.
  †
              Indicates
                  management contracts or compensatory plan or
                  arrangement.
  (d)  Financial Statement Schedules
  
   
  **SCHEDULE
        II**
  **FIBERSTARS, INC.**
  **SCHEDULE
        OF VALUATION AND QUALIFYING ACCOUNTS**
  **Description**
              
              
              
              **Balance at**
                **Beginning of**
                **Year**
              
              **Charges**
                **To Revenue**
              
              **Charges**
                **To Expenses**
              
              **Deductions**
              
              **Balance at**
                **End of Year****(Amounts in thousands)**Year
                  Ended December 31, 2006Allowance
                  for doubtful accounts and returns
              
              
              $
              448
              
              
              
              $
              —
              
              
              
              $
              220
              
              
              
              $
              68
              
              
              
              $
              600Valuation
                  allowance for deferred tax assets
              
              
              6,749
              
              
              
              —
              
              
              
              2,931
              
              
              
              —
              
              
              
              9,680Year
                  Ended December 31, 2005Allowance
                  for doubtful accounts and returns
              
              
              381
              
              
              
              —
              
              
              
              106
              
              
              
              39
              
              
              
              448Valuation
                  allowance for deferred tax Assets
              
              
              3,349
              
              
              
              —
              
              
              
              3,400
              
              
              
              —
              
              
              
              6,749Year
                  Ended December 31, 2004Allowance
                  for doubtful accounts and returns
              
              
              465
              
              
              
              —
              
              
              
              47
              
              
              
              131
              
              
              
              381Valuation
                  allowance for deferred tax Assets
              
              
              2,596
              
              
              
              —
              
              
              
              753
              
              
              
              —
              
              
              
              3,349
     
   
  **SIGNATURES**
  Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange
        Act of 1934, the Registrant has duly caused this Report to be signed on its
        behalf by the undersigned, thereto duly authorized.
  
 FIBERSTARS,INC.Date:
                    March16, 2007
                By:
                /s/
                    JOHN M. DAVENPORTJohn
                    M. Davenport*Chief
                    Executive Officer**(Principal
                    Executive Officer)*
  In
        accordance with the Securities Exchange Act of 1934, this Report has been
        signed
        by the following persons in the capacities and on the dates
        indicated.
  **Signature**
                
                **Title**
                
                **Date**/s/
                    JOHN M. DAVENPORT
                
                Chief
                    Executive Officer and Director
                
                March
                    16, 2007John
                    M. Davenport
                
                *(Principal
                    Executive Officer)*/s/
                    ROBERT A. CONNORS
                
                Chief
                    Financial Officer
                
                March
                      16, 2007Robert
                    A. Connors
                
                *(Principal
                    Financial and Accounting Officer)*/s/
                    JOHN B. STUPPIN
                
                Director
                
                March
                      16, 2007John
                    B. Stuppin/s/
                    RONALD CASENTINI
                
                Director
                
                March
                      16, 2007Ronald
                    Casentini/s/
                    MICHAEL KASPER
                
                Director
                
                March
                      16, 2007Michael
                    Kasper/s/
                    PAUL VON PAUMGARTTEN
                
                Director
                
                March
                      16, 2007Paul
                    Von Paumgartten/s/
                    PHILIP WOLFSON
                
                Director
                
                March
                      16, 2007Philip
                    Wolfson/s/
                    DAVID N. RUCKERT
                
                Director
                
                March
                      16, 2007David
                    N. Ruckert
    
  **Exhibit****Number**
                
                **Description
                    of Documents**2.1
                
                Agreement
                    and Plan of Merger between Fiberstars, Inc., a California corporation,
                    and
                    Fiberstars, Inc., a Delaware corporation (incorporated by reference
                    to
                    Appendix C to the Registrant’s Definitive Proxy Statement on Schedule 14A
                    filed on May 1, 2006).3.1
                
                Certificate
                    of Incorporation of the Registrant (incorporated by reference
                    to Appendix
                    A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed May
                    1, 2006).3(i).2
                
                Certificate
                    of Designation of Series A Participating Preferred Stock of the
                    Registrant
                    (incorporated by reference to Appendix B to the Registrant’s Definitive
                    Proxy Statement shown on Schedule 14A filed May 1,
                    2006).3.2
                
                Bylaws
                    of the Registrant, (incorporated by reference to Appendix C to
                    the
                    Registrant’s Current Report on Form 8-K filed November 27,
                    2006).4.1
                
                Form
                    of Common Stock Certificate (incorporated by reference to Exhibit
                    4.1 to
                    the Registrant’s Current Report on Form 8-K filed November 27,
                    2006).4.2
                
                Rights
                    Agreement dated as of October 25, 2006 between the Registrant
                    and Mellon
                    Investor Services, as rights agent (incorporated by reference
                    to Exhibit
                    4.2 to the Registrant’s Current Report on Form 8-K filed November 27,
                    2006).4.3
                
                Form
                    of Warrant for the purchase of shares of Common Stock (incorporated
                    by
                    reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K
                    filed November 27, 2006)).10.1†
                
                Form
                    of Indemnification Agreement for directors and officers of the
                    Registrant
                    (incorporated by reference to Exhibit 10.1 to the Registrant’s
                    Registration Statement on Form SB-2 (Commission File No.
                    33-79116-LA)).10.2†
                
                1994
                    Employee Stock Purchase Plan, amended as of December 7, 2000,
                    (incorporated by reference to Exhibit 99.3 to the Registrant’s
                    Registration Statement on Form S-8 (Commission File No. 333-52042)
                    filed
                    on December 18, 2000).10.3
                
                Registration
                    Rights Agreement dated as of June 27, 1990, between the Registrant
                    and
                    certain holders of the Registrant’s capital stock, as amended by Amendment
                    No. 1 dated as of February 6, 1991 and Amendment No. 2 dated
                    as of April
                    30, 1994 (incorporated by reference to Exhibit 10.10 to the Registrant’s
                    Registration Statement on Form SB-2 (Commission File No.
                    33-79116-LA)).10.4
                
                Amendment
                    No. 3 to Registration Rights Agreement to include Warrant shares
                    as
                    Registerable Securities (incorporated by reference to Exhibit
                    1.2 to the
                    Registrant’s Registration Statement on Form SB-2 (Commission File No.
                    33-79116-LA)).
 10.5
                
                Form
                    of Agreement between the Registrant and independent sales representatives
                    (incorporated by reference to Exhibit 10.20 to the Registrant’s
                    Registration Statement on Form SB-2 (Commission File No.
                    33-79116-LA)).10.6
                
                Stock
                    Purchase Agreement dated March 21, 1995, among the Registrant,
                    Mitsubishi
                    International Corporation and Mitsubishi Corporation (incorporated
                    by
                    reference to Exhibit 10.20 to the Registrant’s Annual Report on Form
                    10-KSB for the year ended December 31, 1994).10.7*
                
                Three
                    (3)Year Supply Agreement dated November 30, 2000, between the
                    Registrant
                    and Mitsubishi International Corporation (incorporated by reference
                    to
                    Exhibit 10.30 to the Registrant’s Annual Report on Form 10-K for the year
                    ended December 31, 2000).10.8
                
                Common
                    Stock and Warrant Purchase Agreement, dated March 29, 2002, by
                    and among
                    the Registrant and the investors named therein (incorporated
                    by reference
                    to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
                    quarter ended March 31, 2002).10.9
                
                Securities
                    Purchase Agreement dated June 17, 2003, by and among the Registrant
                    and
                    the investors named therein (incorporated by reference to Exhibit
                    99.2 to
                    the Registrant’s Current Report on Form 8-K filed on June 19,
                    2003).
  
 10.10
                
                Form
                    of Warrant by and between the Registrants and each of the investors
                    party
                    to the Securities Purchase Agreement dated June 17, 2003 (incorporated
                    by
                    reference to Exhibit 99.3 to the Registrant’s Current Report on Form 8-K
                    filed on June 19, 2003).10.11†
                
                Form
                    of Indemnification Agreement for officers of the Registrant (incorporated
                    by reference to exhibit 10.42 to the Registrant’s Annual Report on Form
                    10-K for the year ended December 31, 2003).10.12
                
                Form
                    of Indemnification Agreement for directors of the Registrant
                    (incorporated
                    by reference to Exhibit 10.44 to the Registrant’s Annual Report on Form
                    10-K for the year ended December 31, 2003).10.13
                
                Production
                    Share Agreement dated October 9, 2003, by and among the Registrant,
                    North
                    American Production Sharing, Inc. and Industrias Unidas de B.C.,
                    S.A. de
                    C.V (incorporated by reference to exhibit 10.45 to the Registrant’s Annual
                    Report on Form 10-K for the year ended December 31,
                    2003).10.14
                
                Consulting
                    Agreement effective as of November 1, 2004, between the Registrant
                    and
                    Gensler Architecture, Design& Planning, P.C. (Incorporated by
                    reference to exhibit 10.28 to the Registrant’s Annual Report on Form 10-K
                    for the year ended December 31, 2005)10.15†
                
                Consulting
                    Agreement effective as of November 1, 2004, between the Registrant
                    and
                    Jeffrey H. Brite. (Incorporated by reference to exhibit 10.29
                    to the
                    Registrant’s Annual Report on Form 10-K for the year ended December 31,
                    2005)10.16
                
                Loan
                    and Security Agreement between Silicon Valley Bank and the Registrant,
                    dated August 15, 2005 (incorporated by reference from Exhibit
                    10.1 to the
                    Registrant’s Current Report on Form 8-K filed August 18,
                    2005).10.17†
                
                Employment
                    Agreement between the Registrant and John N. Davenport, dated
                    July 1, 2005
                    (incorporated by reference from Exhibit 10.2 to the Registrant’s Quarterly
                    Report on Form 10-Q (File No. 000-24230) filed on November 14,
                    2005).10.18†
                
                Severance
                    Agreement between the Registrant and David N. Ruckert, dated
                    September 16,
                    2005 (incorporated by reference from Exhibit 10.3 to the Registrant’s
                    Quarterly Report on Form 10-Q (File No. 000-24230) filed on November
                    14,
                    2005).10.19
                
                Fiberstars
                    Development Agreement between the Registrant and Advanced Lighting
                    Technologies, Inc. dated September 19, 2005 (incorporated by
                    reference
                    from Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q (File
                    No. 000-24230) filed on November 14, 2005).10.20
                
                ADLT
                    Development Agreement between the Registrant and Advanced Lighting
                    Technologies, Inc. dated September 19, 2005 (incorporated by
                    reference
                    from Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q (File
                    No. 000-24230) filed on November 14,
                    2005).
 10.21
                
                Equipment
                    Purchase and Supply Agreement between the Registrant and Deposition
                    Services, Inc. dated September 19, 2005 (incorporated by reference
                    from
                    Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q (File No.
                    000-24230) filed on November 14, 2005).10.22
                
                Cross
                    License Agreement between the Registrant and Advanced Lighting
                    Technologies, Inc. dated September 19, 2005 (incorporated by
                    reference
                    from Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q (File
                    No. 000-24230) filed on November 14, 2005).10.23
                
                Master
                    Services Agreement between the Registrant and Advanced Lighting
                    Technologies, Inc. dated September 19, 2005 (incorporated by
                    reference
                    from Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-Q (File
                    No. 000-24230) filed on November 14, 2005).10.24
                
                First
                    Amendment to Production Share Agreement, effective as of August
                    17, 2005,
                    by and among the Registrant, North American Production Sharing,
                    Inc. and
                    Industrias Unidas de B.C., S.A. de C.V. (incorporated by reference
                    from
                    Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed October
                    25, 2005).10.25
                
                Sublease
                    between Venture Lighting International, Inc. and the Registrant
                    dated as
                    of November 11, 2005 (incorporated by reference from Exhibit
                    10.1 to the
                    Registrant’s Current Report on Form 8-K (File No. 000-24230) filed on
                    November 17, 2005).
  
  10.26
              
              Amended
                  and Restated Loan and Security Agreement (together with Schedule
                  to
                  Amended and Restated Loan and Security Agreement and Compliance
                  Certificate) between Fiberstars, Inc. and Silicon Valley Bank dated
                  December 30, 2005 (incorporated by reference from Exhibit 10.1
                  to the
                  Registrant’s Current Report on Form 8-K (File No. 000-24230) filed on
                  January 6, 2006).10.27†
              
              Consulting
                  Agreement by and between Registrant and David N. Ruckert dated
                  as of
                  February 3, 2006 (incorporated by reference from Exhibit 10.1 to
                  the
                  Registrant’s Quarterly Report on Form 10-Q (File No. 000-24230) filed on
                  May 15, 2006).10.28*
              
              Equipment
                  and Supply Agreement entered into May 25, 2006 between Fiberstars,
                  Inc.
                  and Deposition Sciences, Inc.(incorporated by reference from Exhibit
                  10.1
                  to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-24230)
                  filed on August 11, 2006).10.29
              
              Modification
                  to sublease between Fiberstars, Inc. and Keystone Ruby, LLC.(incorporated
                  by reference from Exhibit 10.2 to the Registrant’s Quarterly Report on
                  Form 10-Q (File No. 000-24230) filed on August 11,
                  2006).10.30
              
              Amendment
                  No. 1 To Amended And Restated Loan And Security Agreement between
                  Fiberstars, Inc and Silicon Valley Bank dated September 25, 200610.31†
              
              Form
                  of Indemnification Agreement for directors and officers of the
                  Registrant.10.32†
              
              Amendment
                  to Consulting Agreement by and between Registrant and David N.
                  Ruckert
                  dated as of February 3, 2006.21.1
              
              Significant
                  subsidiaries of the Registrant.23.1
              
              Consent
                  of Independent Registered Public Accounting Firm.31.1
              
              Rule
                  13a-14(a)Certification by Chief Executive Officer.31.2
              
              Rule
                  13a-14(a)Certification by Chief Financial Officer.32.1**
              
              Statement
                  of Chief Executive Officer under 18 United States Code
                  §1350.32.2**
              
              Statement
                  of Chief Financial Officer under 18 United States Code
                  §1350.
   *
              Confidential
                  treatment has been granted with respect to certain portions of
                  this
                  agreement.
  **
              In
                  accordance with item 601(b)(32)(ii) of Regulation S-K and SEC Release
                  Nos. 33-8338 and 34-47986, Final Rule: Management’s Reports on Internal
                  Control Over Financial Report and Certification of Disclosure in
                  Exchange
                  Act Periodic Reports, the certifications furnished in Exhibits 32.1
                  and 32.2 hereto are deemed to accompany this form 10-K and will
                  not be
                  deemed “filed” for purposes of Section 18 of the Exchange Act. Such
                  certifications will not be deemed incorporated by reference into
                  any
                  filing under the Securities Act or the Exchange Act, except to
                  the extent
                  that the Registrant specifically incorporates it by
                  reference.
  †
              Indicates
                  management contracts or compensatory plan or
                  arrangement.
  (d)  Financial Statement Schedules