In the past, companies that have experienced volatilityresults or outcomes to differ materially from those expressed in the market prices of their stock have been the object of securities class action litigation. If we were the object of securities class action litigation, it could result in substantial costs and a diversion of management’s attention and resources.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus containsany forward-looking statements that involve risks and uncertainties. Many of these statements appear, in particular, in the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Forward-looking statements include, but are not limited to, statements about:

• our expectations regarding our cash flows, future operations, net sales growth, capital and other expenditures;
  
• growth in our operations and adequacy of capital resources;
  
• our liquidity and strategy;
  
• our strategy with regard to dividends;
  
• expected realization of the value of deferred tax assets;
  
• our accounting policies and the effect of recent accounting pronouncements;
  
• development and marketing of future products and expected shipment dated;
  
• product development and enhancements;
  
• our intellectual property;
  
• our competitive position and the benefits and performance of our lighting products;
  
• future growth of fiber optic lighting and trends in the price and performance of fiber optic lighting products;
  
• our relationships with customer, distributors, suppliers and our ability to obtain components;
  
• our relationship and future technologies expected to result from our relationship with Advanced Lighting Technologies, Inc.;
  
• adequacy of our facilities;
  
• plans for and expected benefits of outsourcing manufacturing;
  
• our ability to retain qualified employees; and
  
• seasonal fluctuations.
  

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     You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding thatmay cause our actual future results, mayperformance, or achievements to be materially different from anythe future results, performance, or achievements expressed or implied by any forward-looking statements.  We qualify all of our forward-lookingThese statements by these cautionary statements.

PROCEEDS FROM THE OFFERING

     We will not receive any proceeds from the sale of the shares by the selling shareholders. However, we will receive the exercise price if a selling shareholder exercises its warrant. We cannotmay be certain as to when and if this warrant will be exercised and as to the amount of the proceeds we will actually receive from the exercise because of the net issuance exercise provisions of the warrant. All proceeds from the sale of the shares will be for the account of the selling shareholders, as described below. See “Principal and Selling Shareholders” and “Plan of Distribution.”

MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

     Our common stock trades on the Nasdaq National Market tier of the Nasdaq Stock Marketfound under the symbol “FBST.” The following table sets forth the high and low sale prices for our common stock, as reported on the Nasdaq National Market for the periods indicated. These reported prices reflect interdealer prices without adjustments for retail markups, markdowns or commissions.

     There were approximately 225 holders of record of our common stock as of April 30, 2004, and the Company estimates that at that date there were approximately 800 additional beneficial owners.

     The Company has not declared or paid any cash dividends and does not anticipate paying cash dividends in the foreseeable future.

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SELECTED CONSOLIDATED FINANCIAL DATA

     The following selected consolidated statement of operations data for the fiscal years ended December 31, 2003, 2002 and 2001 and the selected consolidated balance sheet data as of December 31, 2003 and 2002 have been derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The selected consolidated statements of operations data for the three-month periods ended March 31, 2004 and 2003 and the selected consolidated balance sheet data as of March 31, 2004 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statements of operations data for the fiscal years ended December 31, 2000 and 1999 and the selected consolidated balance sheet data as of December 31, 2001, 2000 and 1999 are derived from our audited consolidated financial statements not included in this prospectus. The selected consolidated balance sheet data as of March 31, 2003 is derived from our unaudited financial statements not included in this prospectus. 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” and the consolidated financial statements and related notes included elsewhere“Business” in our 2011 Annual Report on Form 10-K, as well as in this prospectus.

SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

     In accordance with SFAS 142 we ceased amortizing goodwill as of December 31, 2001. Refer to note 5 of the notes to consolidated financial statements for the year ended December 31, 2003. There are no other major changes affecting comparability of the years.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

     The following discussion and analysis of our financial condition andprospectus generally.  Actual events or results of operations should be read in conjunction with “Selected Consolidated Financial Data” and the consolidated financial statements and related notes on pages F-1 through F-35 of this prospectus. Our actual results couldmay differ materially from those anticipateddiscussed in these forward-looking statements as a result of a number ofvarious factors, including, those discussed inwithout limitation, the risks outlined under “Risk Factors” and elsewherematters described in this prospectus. See “Special Note Regarding Forward-Looking Statements.”

Resultsprospectus generally.  In light of Operations

Three Months Ended March 31, 2004these risks and 2003

Net Sales

     Net sales increased 2% to $6,008,000 foruncertainties, there can be no assurance that the three months ended March 31, 2004, as compared to $5,879,000 for the three months ended March 31, 2003. This increase resulted primarily from a 6% increaseforward-looking statements contained in pool and spa lighting sales partially offset by a 2% decreasethis prospectus will in commercial lighting sales. The increase in pool and spa lighting sales was largely due to increased sales of fiber optic lighting systems and Jazz light systems for swimming pools partially offset by decreased sales of spa products. The decrease in sales of spa products primarily reflects increased competition in the spa market. The 2% reduction in commercial lighting sales primarily reflects soft demand in the United States themed-entertainment and light bars market, which was partially offset by an increase in commercial lighting sales in Europe as comparedfact occur.  In addition to the same period a year ago. Due to anticipated improvements in the pool and spa lighting market and increased sales of EFO TM systems in commercial lighting markets, we believe our net sales will increase in 2004.

Gross Profit

     Gross profit was $2,101,000 for the three months ended March 31, 2004, a 3% increase in the dollar amount when compared to $2,046,000 for the three months ended March 31, 2003. The gross profit margin percentage of 35% for the three months ended March 31, 2004 was equal to the gross profit margin achieved in the same period in 2003. During the first quarter of 2004 an increase in the pool and spa gross profit margin was offset by a decrease in the gross profit margin for the commercial lighting markets. The increase in the dollar amount of gross profit was due to the increase in sales. If net sales remain flat or increase, we believe overall gross profit will increase in 2004, as we expect our cost of sales to decrease as we increase our offshore manufacturing in Mexico and India.

Operating Expenses

     Research and development expenses were $270,000 for the three months ended March 31, 2004, an increase of $70,000 compared to the three months ended March 31, 2003. This increase was primarily due to increased research and development efforts on commercial lighting projects during the first quarter of 2004 compared to the same period of 2003. During the first quarter of 2004, we accrued $587,000 in net credits for fundsinformation expressly required to be received fromincluded in this prospectus, we provide such further material information, if any, as may be necessary to make the Defense Advanced Research Projects Agency, or DARPA, under a contract awarded to usrequired statements, in February 2003. This compares to $342,000 in net credits accrued in connection with the DARPA contract and an additional $106,000 under an award from the National Institute of Science, or NIST, during the first quarter of 2003. We expect research and development expenses to increase in 2004 as we plan to increase our development of commercial lighting products, primarily EFO, along with additional DARPA work.

     Sales and marketing expenses increased by 13% to $1,977,000 for the three months ended March 31, 2004 as compared to $1,748,000 for the same period in 2003. This increase was due in part to our decision in October 2003 to no longer use internal sales representatives for our pool and spa products. This change resulted in a $72,000 increase in commissions paid to outside sales representatives partially offset by head-count reductions in our pool and spa group, with associated reductions in travel expenses, arising from our decision to use an outside sales representatives. In addition, we incurred a $90,000 as a result of an increased headcount and travel associated with the increased head-count in our commercial lighting group and increased travel expenses arising from increased attention paid to our national customers and prospects, and an $80,000 increase in European sales and marketing costs due to changes in exchange rates. We expect sales and marketing expenses to increase for 2004 as we anticipate increasing our sales and marketing efforts for our new products.

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     General and administrative expense decreased 6% to $624,000 for the three months ended March 31, 2004 from $664,000 for the three months ended March 31, 2003. This decrease was primarily due to a reduction in personnel costs and lower accounting fees, including the head-count reduction in our pool and spa group. We expect general and administrative expenses to be relatively flat for 2004.

Net Loss

     We recorded a net loss of $764,000 for the three months ended March 31, 2004 as compared to a net loss of $622,000 for the three months ended March 31, 2003. The increase in net loss largely reflects an increase in operating expenses compared to the corresponding period of 2003.

Years Ended December 31, 2003, 2002 and 2001

Net Sales

     Net sales increased 7% to $30,960,000 in 2002 as compared to 2001. The increase was a result of an increase in the sales of pool products of 25% or $3,631,000 offset by a decline in sales of commercial lighting products of 12% or $1,724,000. The rise in pool lighting sales was largely due to increases from sales of the new Jazz, in-ground pool lighting product and spa products of $3,966,000 partially offset by a decline in other products of $305,000. The decrease in commercial lighting sales was due to a decline in U.S. domestic lighting sales of 24% or $1,801,000 partially offset by an increase in international sales of $175,000. Of the decrease in U.S. domestic lighting sales, $1,227,000 of the decline was due to a drop in resort and casino business, largely as an after-effect of the September 11, 2001 tragedy.

     International sales accounted for approximately 28% of net sales in 2003 as compared to 26% of net sales in 2002 and 27% in 2001. The relative increase in international sales from 2002 to 2003 was due to growth in European sales compared to a decline in domestic sales. The increase in International sales was a result of higher sales from our German operation. The relative decrease in international sales from 2001 to 2002 was a result of the increase in domestic pool lighting sales in 2002.

Gross Profit

     Gross profit of $10,341,000 in 2003 declined by 10% compared to gross profit of $11,474,000 achieved in 2002. However, gross profit as a percent of sales increased to 38% in 2003 compared to 37% in 2002. This increase was primarily due to a reduction in direct product costs in the second half of the year as a result of moving some of our manufacturing to offshore locations. We continue to take measures intended to improve margins in future periods by redesigning products for cost reductions and by balancing production between U.S. and offshore locations. We expect gross profit margin to improve slightly in 2004 dependent upon general economic conditions.

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     Gross profit of $11,474,000 in 2002 remained essentially flat with gross profit of $11,447,000 achieved in 2001. However, gross profit margin decreased to 37% in 2002 compared to 39% in 2001 primarily due to higher freight costs in 2002, up $632,000 or 2%, along with lower than normal gross margins on the new Jazz product, contributing $425,000 or 1% off prior year pool margins, partially offset by higher International margins, up 1%.

Operating Expenses

     Research and development expenses were $1,279,000 in 2003, a 44% decrease from research and development expenses in 2002 of $2,290,000. The decrease was largely due to the increase in expense credits in 2003 under the Defense Advanced Research Projects Agency, or DARPA, contracts awarded to us in February and April of 2003. Funds to be received from the 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 $1,463,000 in 2003. In addition, we had additional research and development credits from National Institute of Standards and Technology, or NIST, of $583,000 in 2003, a decrease of $291,000 over NIST credits realized in 2002. The NIST project was completed in 2003 and as a result we will not realize further credits from this award in future years. The additional decrease in research and development expense in 2003 came as a result of lower personnel and project costs in non-government funded projects due to reductions in personnel. Research and development expenses were 5% of sales in 2003 compared to 7% of sales in 2002. We expect research and development expenses to increase in 2004.

     Research and development expenses were $2,290,000 in 2002, a 17% decrease from research and development expenses in 2001 of $2,764,000. The decrease was largely due to the increase in expense credits in 2002 of $331,000 as compared to 2001 from the NIST award. Total NIST payments of $874,000 were credited against research and development expenses in 2002. The additional decrease in research and development expense in 2002 came as a result of lower personnel and project costs. Research and development expenses were 7% of sales in 2002 compared to 10% of sales in 2001.

     Sales and marketing expenses were $7,188,000 in 2003, a 9% decrease as compared to the $7,907,000 in sales and marketing expenses for 2002. The decrease in sales and marketing expenses was due in part to lower commissions expenses of $239,000 from the discontinuance of the Waterpik agency agreement in the middle of 2002. These savings were combined with decreases in personnel and travel expenses in both pool and spa lighting and commercial lighting due to headcount reductions. Sales and marketing expenses were 26% of sales in both 2003 and 2002. We expect sales and marketing expenses to increase in 2004.

     Sales and marketing expenses were $7,907,000 in 2002, a 5% decrease as compared to the $8,371,000 in sales and marketing expenses for 2001. The decrease in sales and marketing expenses was due to lower commissions expenses of $662,000 from the mid-year discontinuance of the Waterpik agency agreement. These savings were partially offset by increases in personnel and travel expenses related to hiring sales representatives to replace the Waterpik agents. Sales and marketing expenses were 26% of sales in 2002, compared to 29% of sales in 2001.

     General and administrative expenses were $2,435,000 in 2003, a 10% decrease as compared to $2,709,000 in 2002. The decrease in general and administrative expenses was largely due to a decrease in personnel expense due to headcount reductions, reduced bad debt expense, investor relations and computer costs in 2003 of $190,000. General and administrative expenses were 9% of sales in 2003 and 2002 and 12% of sales in 2001. We expect general and administrative expenses to increase slightly in 2004.

     General and administrative expenses were $2,709,000 in 2002, a 25% decrease as compared to $3,627,000 in 2001. The decrease in general and administrative expenses was largely due to a decrease of $444,000 in amortization of goodwill due to a change in accounting method. Prior to 2002, goodwill was amortized over the life of the acquired assets, whereas in 2002 goodwill was no longer amortized but became subject to an annual impairment test according to Financial Accounting Standards Board, or FASB, 142. The balance of the decrease in general and administrative expense in 2002 was due to lower personnel, legal and other general and administrative expenses of $474,000.

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Other Income and Expenses

     Interest expense, which consists of expense for bank interest, was $119,000 in 2003 as compared to $66,000 in 2002. The increase in interest expense was a result of more borrowings against our bank line of credit in 2003 as compared to 2002. The higher borrowings were used to fund operations. Net interest expense in 2002 decreased compared to net interest expense of $122,000 in 2001 due to a decrease in interest rates in 2002.

     Total interest and other income includes interest income and other non-operating income. This was $80,000 in 2003, compared to $41,000 in 2002 and in 2001. Income from our joint venture is recognized under the equity method. This was $6,000 in 2003 compared to $16,000 in 2002 and $15,000 in 2001.

     We have certain long-term leases. Payments due under these leases are disclosed in note 8 of the consolidated financial statements included elsewhere in this prospectus.

Income Taxes

     We have a full valuation allowance against our deferred tax assets. There is no operating statement tax expense or benefit for U.S. operations in 2003 since the benefit expected is offset by an increase in the valuation allowance. We took a non-cash charge of $2,405,000 to record an initial valuation allowance against our deferred tax asset in the third fiscal quarter of 2002, in accordance with FASB 109. After an offset for tax benefits taken in 2002, the net tax provision including the charge was $2,078,000. The income tax benefit (provision) rate was (2)% in 2003 as compared to (144)% in 2002 and 37% in 2001.

Net Income

     Due to the decrease in expenses in 2003, the amount of loss before income taxes decreased by $847,000 compared to 2002. After including taxes from international operations the loss was $608,000, an improvement of $2,911,000 over 2002. Because of the valuation allowance for deferred tax taken in 2002, the net loss increased to $3,519,000 in 2002 compared to a loss of $2,128,000 in 2001.

Liquidity and Capital Resources

Cash and Cash Equivalents

     At March 31, 2004, our cash and cash equivalents were $1,648,000 as compared to $4,254,000 at December 31, 2003, a net cash decrease of $2,606,000 during the first quarter of 2004. This compares to a net cash decrease of $43,000 for the same period in 2003, and an ending cash balance of $188,000 as of March 31, 2003.

     We had no bank borrowings against our U.S. line of credit at March 31, 2004 and at December 31, 2003.

     At December 31, 2003, our cash and cash equivalents were $4,254,000 as compared to $231,000 at December 31, 2002. We had no bank borrowings against our U.S. line of credit at December 31, 2003 compared to $522,000 and an overdraft of $691,000 at the end of fiscal 2002.

Cash Used in Operating Activities

     Cash decreased from operations during the first quarter of 2004 principally by a net loss of $764,000 an increase in accounts receivable of $2,161,000, an increase in prepaid expenses of $400,000, an increase in inventories of $193,000 and a decrease in accrued liabilities of $663,000. Our accounts receivable increased due to higher DARPA receivables and higher pool and spa accounts receivable, a result of our early buy program that allows customers to receive products in the fourth quarter of the calendar year, but pay for these products in the second quarter of the following calendar year. These uses of cash from operations were partially offset by depreciation and amortization of $233,000 and increases in accounts payable of $150,000. After these and other adjustments our total net cash used in operating activities in the first quarter of 2004 was $3,759,000 compared to $2,740,000 used in operating activities in the first quarter of 2003.

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     Cash was decreased during 2003 by a net loss of $608,000 compared to a net loss of $3,519,000 during 2002. After adjusting for depreciation and amortization, and prepaids and other current assets there was a contribution of cash of $572,000 in 2003 as compared to a use of cash of $2,099,000 for 2002; additional cash was utilized in 2003 to fund a decrease in accounts receivable of $238,000, while further cash was contributed by an increase in accounts payable of $167,000 and a decrease in inventories of $398,000. After including cash used for working capital, there was a total of $705,000 in cash provided by operating activities in 2003 compared to $1,872,000 in cash used for operating activities in 2002.

Cash Used in Investing Activities

     Investing activities used cash of $163,000 in the first quarter of 2004, compared to a use of cash of $29,000 for the same period of 2003. During both periods, cash was used for the acquisition of fixed assets.

     There was a net utilization of cash of $717,000 in investing activities in 2003 primarily due to the acquisition of fixed assets compared to $793,000 spent on acquiring fixed assets in 2002.

Cash Provided by Financing Activities

     Financing activities contributed $1,312,000 to cash during the first quarter of 2004. This contribution was due primarily to the net proceeds from the exercise of employee stock options. For the same period in 2003, financing activities, primarily bank borrowings, contributed $2,616,000 to cash. During both periods, we received cash contributions from the repayment of shareholder loans of $224,000 in 2004 and $75,000 in 2003.

     There was a net contribution of $3,447,000 in cash in 2003 from financing activities. This net contribution was primarily due to the proceeds from the sale of our common stock and warrants in a private placement which closed in two stages in June 2003 and August of 2003, as discussed below, with aggregate net proceeds of $3,812,000, net of fees and expenses. This was offset by the repayment of bank borrowings of $607,000 and a bank overdraft of $691,000.

     As a result of the cash provided by operating and financing activities and the cash used in investing activities, there was a net increase in cash in 2003 of $4,023,000 that resulted in an ending cash balance of $4,254,000. This compares to a net increase in cash of $99,000 in 2002 resulting in an ending cash balance of $231,000 for 2002.

     We have a $5,000,000 Loan and Security Agreement (Accounts Receivable and Inventory), dated December 7, 2001, with Comerica Bank bearing interest equal to prime plus 0.25% per annum computed daily or a fixed rate term option of LIBOR plus 3%. Borrowings under this Loan and Security Agreement are collateralized by our assets and intellectual property. Specific borrowings are tied to accounts receivable and inventory balances, and we must comply with certain covenants with respect to effective net worth and financial ratios. We had no borrowings against this facility as of March 31, 2004 and had no borrowings as of December 31, 2003. As of April 2, 2004, Comerica Bank agreed to amend the Loan and Security Agreement to eliminate the profitability covenant.

     We also have a $461,000 (in UK pounds sterling, based on the exchange rate at March 31, 2004) bank overdraft agreement with Lloyds Bank Plc through our UK subsidiary. There were no borrowings against this facility as of March 31, 2004 and December 31, 2003.

     As of March 31, 2004, we had a total borrowing of $458,000 (in Euros, based on the exchange rate as of March 31, 2004) against a note payable secured by real property owned by our German subsidiary. As of December 31, 2003, we had $475,000 (in Euros, based on the exchange rate as of March 31, 2004) borrowed against this note. Additionally, we have a revolving credit line facility of $259,000 (in Euros, based on the exchange rate at March 31, 2004) with Sparkasse Neumarkt Bank. As of March 31, 2004, we had total borrowings of $132,000 against this facility. There were no borrowings against this facility as of December 31, 2003.

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     Future payments for borrowings by our German subsidiary and minimum lease payments under operating leases, as of December 31, 2003, were as follows (in thousands):

     As part of the acquisition of Lightly Expressed in 2000, we granted the Lightly Expressed shareholders warrants to purchase 100,000 shares of our common stock that may be exercised in three years if certain operating profitsoffered and sold from salestime to time by the Selling Shareholders.  We will receive no proceeds from the sale of the products acquired are met. There were 50,000 warrants exercisable as of December 31, 2003.

On June 17, 2003,August 11, 2011, we entered into a securities purchase agreement to sell up to 1,350,233 sharesLetter of common stock and warrants to purchase 405,069 shares of common stock for an aggregate purchase price of $4,388,250 in a two-stage private placement. The first stage of the private placement, involving the sale of 923,078 shares of common stock and warrants to purchase 276,922 shares of common stock, closed on June 17, 2003Credit Agreement (“LOC”) with Fiberstars receiving net proceeds of $2,769,000, net of fees and expenses. The second stage of the private placement, involving the sale of 427,155 shares of common stock and warrants to purchase 128,147 shares of common stock, closed on August 18, 2003 with Fiberstars receiving net proceeds of $1,043,000, net of fees and expenses. As required by Nasdaq Marketplace Rules, the issuance and sale of the shares and warrants in the second stage were subject to shareholder approval because the price was less than the greater of book or market value per share and amounted to 20% or more ofMark J. Plush, our common stock. The shareholders approved the issuance and sale of the shares and warrants in the second stage at a special meeting of shareholders held on August 12, 2003. For both stages, the purchase price of the common stock was $3.25 per share, which was a 12.5% discount on the 10-day average price as of June 1, 2003. The warrants have an initial exercise price of $4.50 per share and a life of 5 years. The warrants were valued at $641,000 and $297,000 for the first and second stages, respectively, based on a Black-Scholes calculation as of the June 17, 2003 and August 18, 2003 closing dates and under EITF 00-19 were included at those values in long term liabilities at the time of each closing. The balance of the net proceeds was accounted for as additional paidin capital. Under EITF 00-19, we marked-to-market the value of the warrants at the end of each accounting period until the registration statement for the shares and warrants was declared effective by the SEC on September 24, 2003. Once the registration statement for the shares and warrants was declared effective, the warrant value on the effective date was reclassified to equity as additional paid in capital. As a result of the change in value of the warrants issued in the first stage from the closing date to the end of the second quarter on June 30, 2003, we realized a benefit of $8,000 that was included in other income in our condensed consolidated statement of operations in the second quarter of 2003. As a result of the change in value of the first stage warrants from June 30, 2003 and the second stage warrants from the second closing date to September 30, 2003, we realized a benefit of $15,000 that was included in other income in our condensed consolidated statement of operations in the third quarter of 2003. We are subject to certain indemnity provisions included in the stock purchase agreement entered into as part of the financing. In December 2003, we also issued warrants to purchase 81,104 shares of common stock to the firm Merriman Curhan and Ford & Co., formerly known as RTX Securities Corporation, as compensation as placement agent for the private placement. These warrants have the same terms as the warrants issued in the private placement.

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     We believe that existing cash balances and funds available through our bank lines of credit together with funds that we anticipate generating from operations, will be sufficient to finance our currently anticipated working capital requirements and capital expenditure requirements for at least the next twelve months. However, unforeseen adverse competitive, economic or other factors may damage 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.

Critical Accounting Policies

     The preparation of financial statements requires us to 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. See note 2 of notes to consolidated financial statements which contains a discussion of our significant accounting policies. 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.

Revenue Recognition

     We recognize revenue upon: (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 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 performed.

     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, there have been minimal returns. 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.

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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 $1,096,000 for 2003, $1,034,000 for 2002 and $1,334,000 for 2001. The amount charged to revenue for returns and discounts was $141,000 in 2003, $956,000 in 2002 and $1,487,000 in 2001. The amount charged to expenses for doubtful accounts was $2,000 in 2003, $78,000 in 2002 and $274,000 in 2001. 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.

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 2003, $128,000 was charged 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 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 March 31, 2004, we have recorded a full valuation allowance against our deferred tax assets, 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.

Recent Accounting Pronouncements

     In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. This Statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2004, except for mandatory redeemable financial instruments of nonpublic entities. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. The adoption of SFAS No. 150 did not have an impact on our financial position, results of operations or cash flows.

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    In January 2003, the FASB issued FASB Interpretation No. 46, or FIN 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of FIN 46 did not have a material impact on our financial position or results of operations or cash flows.

Supplementary Financial Information

     The following table sets forth selected unaudited financial information for Fiberstars for the nine quarters in the period ended March 31, 2004. This information has been prepared on the same basis as the audited and unaudited consolidated 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)

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* Note: Included in these results is a $2,405,000 charge for a valuation allowance for deferred taxes taken in the quarter ended September 30, 2002.

     In accordance with SFAS 142 we ceased amortizing goodwill as of December 31, 2001. Refer to note 5 of the notes to consolidated financial statements.

Qualitative or Quantitative Disclosures About Market Risk

     As of March 31, 2004, we had $311,000 in cash held in foreign currencies based on the exchange rates at March 31, 2004. The balances for cash held overseas in foreign currencies are subject to exchange rate risk. We have a policy of maintaining cash balances in local currencies unless an amount of cash is occasionally transferred in order to repay intercompany debts. A change in the foreign currency rate would result in a revaluing of the cash for the overseas entity that would be included in cash in the Consolidated Balance Sheets.

     As of March 31, 2004, we had a total borrowing of $458,000 (in Euros, based on the exchange rate at March 31, 2004) against a note payable secured by real property owned by our German subsidiary. As of December 31, 2003, we had $475,000 (in Euros, based on the exchange rate at December 31, 2004) borrowed against this note. We also have a revolving credit line facility of $259,000 (in Euros, based on the exchange rate at March 31, 2004) with Sparkasse Neumarkt Bank. As of March 31, 2004, we had $132,000 borrowed against this facility. We had no borrowings against this facility as of December 31, 2003.

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BUSINESS

Overview

     Fiberstars, incorporated in California in 1985, develops and markets fiber optic lighting systems that are used in a variety of commercial and residential applications. We were one of the pioneers in the use of fiber optic technology in lighting. By continuing to improve the price and performance of our products and by expanding our marketing efforts, we believe Fiberstars has become the world’s leading supplier in this market.

     Our products often have advantages over conventional lighting in areas of efficiency, safety, maintenance and beauty, and thus can be used in place of conventional lighting in a number of applications. By delivering special lighting effects, which conventional lighting often cannot match, fiber optic lighting systems are especially attractive for a wide range of decorative applications such as the lighting of swimming pools and spas, signage, “neon” type decoration, landscaping and other areas of use within the commercial and residential markets. Technology developed by Fiberstars can be used for commercial and industrial downlights and can save up to 80% of the energy consumed by conventional electric lighting. This technology is also used in a new, non-fiber optic Fiberstars electric light for swimming pools which offers many benefits compared to other electric pool lights.

     We design, develop and manufacture our lighting systems and market and distribute our products worldwide, primarily through independent sales representatives, distributors and swimming pool builders.

Products

     Our fiber optic lighting systems combine three types of products—illuminators, fiber, and fixtures—in configurations designed to meet the needs of specific markets. The electrically powered illuminators generate and focus light into the ends of optical fiber. Fiber tubing products connect to the illuminators and are designed to emit light either at the end of the fiber optics as a spot source of light, or along the length of the fiber optics, similar in effect to neon lighting. The systems can also include fixtures and other accessories designed for specific applications.

Illuminators

     We manufacture a number of different illuminators for use in different applications. Most commercial illuminators utilize metal halide high intensity discharge, or H.I.D., lamps to provide long life and maximum brightness. Some include patented optical systems which have been designed by Fiberstars to enhance performance. Our lower cost illuminators use quartz halogen lamps, some of which are custom manufactured to our specifications

     New products introduced in 2003 include the Fiberstars FX Light and Fiberstars Spa Lights for the swimming pool market and Fiberstars EFO Fiberjacks for commercial lighting markets. The EFO system is based on Fiberstars’ patented CPC non-imaging optical system for efficiency in fiber optic light delivery. The FX Light and FX Spa Light products complete our line in the market for in-pool electric lighting systems.

Fiber Tubing

     Fiberstars EFO also takes advantage of a patented, proprietary large core fiber optic product called OptiCore, which has outstanding clarity with low attenuation for fiber optic lighting applications. The combination of CPC optics and OptiCore fibers yields system light output efficiency ranging from 30 to 60 lumens-per-watt, depending on the configuration of the system, compared to approximately 12-15 lumens-per-watt for systems using traditional incandescent and halogen lamps. We manufacture OptiCore™ in our Solon, Ohio facility.

     We also market small diameter stranded fiber products, such as our patented BritePak fiber tubing that can maintain reasonably consistent brightness for side-lit fiber and runs up to 100 feet in length. For end-lit applications, a wide variety of fiber stock keeping units, or SKUs, are available to enable one illuminator to illuminate several spotlights, which are typically placed within twenty feet of the illuminator. We purchase stranded fiber from Mitsubishi and cable and/or encase it in a polyvinyl chloride, or PVC, tube at our Fremont, California facility.

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     All of our fiber tubing products are manufactured in various lengths and diameters to meet the requirements of each particular market and application. We carry small amounts of finished goods inventory except during certain times of the year prior to heavy seasonal sales.

Fixtures and Accessories

     We design and manufacture certain fixtures and accessories within product lines. Other fixtures and accessories are supplied by third parties. Our commercial lighting division produces a broad assortment of ceiling and landscape fixtures from which lighting designers may choose.

     As part of our acquisition of Lightly Expressed, Ltd, or Lightly Expressed, in May 2000, we acquired a line of high-end display case fixtures and a process for the manufacture of lightbars. In 2003, we sourced an additional lightbar design under original equipment manufacturer, or OEM, contracts from a manufacturer in Canada to offer a complete product line to customers. We believe that fiber optics are ideal for case lighting because all of the light is directed within a 60-degree angle, which highlights merchandise well and does not generate heat like traditional incandescent lighting.

     In 2004, we intend to sell lighted water feature systems through our pool and spa division. These systems include lighted waterfalls, lighted laminar flows, lighted flowerpots and lighted globes that provide accent lighting for outdoor swimming pools and spas.

Applications and End-Users

     Our fiber optic lighting products are manufactured to the specifications of architects, professional lighting designers, swimming pool builders or end-users. Our products have been installed for commercial lighting applications in fast food restaurants such as Burger King and McDonald’s; retail stores such as Footlocker, Starbucks, Albertson’s, Giant Food and Toys R Us; hotels such as the MGM Grand, Caesar’s Palace, the Venetian and the Stratosphere Tower in Las Vegas; and entertainment facilities such as theme parks operated by the Walt Disney Company and Universal Studios. Fiberstars commercial lighting systems also have been used in a number of specialty applications, including theatrical productions, bridges, theater aisles and ceilings, and have been used by the Monterey Bay Aquarium, HBO Studios, AMC theaters, Chevron, New York’s Trump Tower, New York Life, Tiffany, Nordstrom’s, Gertrude Hawk Chocolates, Marathon Coach, Sonic, Macy’s, JR Dunn Jewelers, Burdine’s, Chuck E. Cheese, Hobb’s Fountains, Wings, Cheescake Factory and Carnival Cruise Lines.

     Our primary products for swimming pool and spa lighting are designed to provide underwater lighting for newly constructed pools. In addition, we market products for spa lighting, pool perimeter lighting, patios, decks and landscape lighting. Our underwater lighting systems are installed in pools and spas built by major national pool builders and builder groups, as well as numerous regional and local pool builders throughout the United States, Canada, Europe and Australia.

Sales, Marketing and Distribution

Commercial Lighting Products

     In the commercial lighting market, our marketing efforts are directed at creating specifications for our systems in plans developed by architects, professional lighting designers and building owners. We reach these professionals through our own national account sales personnel as well as approximately 66 independent lighting representative organizations throughout the United States, approximately 20 of which account for a substantial majority of our commercial lighting product sales. The independent lighting representatives assist in the specification process, directing orders to electrical equipment distributors, who, in turn, purchase products from Fiberstars. Domestic distributors of commercial lighting products typically do not engage in marketing efforts or stock any inventory of our products. Our arrangements with our independent lighting representatives do not prohibit the handling of conventional lighting products, including products that may be competitive with ours, although these representatives typically do not handle competing fiber optic lighting products.

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     Our products are sold in Europe through two subsidiaries, Crescent Lighting Ltd. in the United Kingdom and Lichtberatung Mann (LBM) in Germany. Together, these two companies oversee the sales operations in Europe, Russia and the Middle East which, as in the U.S., include sales through sub-distributors and sales representatives.

     Outside of Europe, Russia and the Middle East, our commercial lighting products are sold internationally in more than 29 countries by approximately 23 distributors, including Mitsubishi, ADLT Australia and Koto, in Japan.

Pool and Spa Products

     Our underwater lighting products are sold primarily for installation in new swimming pools and spas. Accordingly, our marketing efforts for swimming pool and spa products depend on swimming pool builders to recommend our products to their customers and to adapt their swimming pool designs to include our lighting systems. We utilize regional sales representative organizations that specialize in selling swimming pool products to pool builders and pool product distributors. Each representative organization typically has the exclusive right to sell our products within its territory, receiving commissions on sales in its territory. In September 2002, we discontinued our agreement to sell through the organization of the Laars/Jandy Division of Waterpik Technologies Inc., or Waterpik. Prior to the cessation of this relationship, Waterpik received a commission on sales in its territory.

     Regional and national distributors in the swimming pool market stock our products to fill orders received from swimming pool builders. Some of these distributors engage in limited marketing activities for our products.

     We enter into incentive arrangements to encourage pool builders to purchase our products. We have entered into agreements with certain large national pool builders under which the builders may purchase Fiberstars systems directly from us and offer our products with their swimming pools. 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.

South Central Pools, or SCP, the largest pool distributor in the U.S. and our largest pool customer, accounted for approximately 11% of our net sales in 2003, 9% in 2002 and 8% in 2001, and 9% and 10% for the three months ended March 31, 2004 and 22003, 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 endusers and, in turn, have a material adverse effect on our net sales and results of operations. SCP accounted for 14% and 13% of accounts receivable at December 31, 2003 and 2002, respectively, and 10% and 22% at March 31, 2004 and 2003, respectively.

     We sell our spa products directly to spa manufacturers on an OEM basis throughout the U.S. and Canada, and through distributors in other locations.

     Sales of our swimming pool and spa 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. The first quarter pool sales tend to be the lowest of any quarter for the year. In conformity with industry practice, extended terms are given to distributors for shipments in the fourth quarter of the year whereby they receive products in November and December for which they pay in equal installments from March through June of the following year.

     The majority of sales of our swimming pool lighting systems to date have been made in the U.S., Canada and Australia. However, we also sell through several distribution agreements in Europe. Pool lighting sales in Europe were not material in 2003, 2002 or 2001.

Geographic Areas and Product Lines

     We sell our products worldwide and have two product lines: pool and spa lighting and commercial lighting. Information on the geographic split of revenues and revenues by product line may be found in Note 11 to our consolidated financial statements.

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Backlog

     We normally 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 December 31, 2003 was $1,261,000 compared to $859,000 at December 31, 2002. We anticipate that all of the backlog will be filled within the current year.

Competition

     Our products compete with a wide variety of lighting products, including conventional electric lighting in various forms, light emitting diode, or LEDs, and decorative neon lighting. We also experience competition from other companies offering products containing fiber optic technology. Principal competitive factors include price, performance (including brightness, reliability and other factors), aesthetic appeal (including light color), market presence, installation, power consumption and maintenance requirements.

     We believe that our products compete favorably against conventional lighting in such areas as aesthetic appeal, ease of installation, maintenance and power consumption. The unique characteristics of fiber optic lighting, such as no heat or electricity at the light fixture, ability to change colors and remote lamp replacement, enable our products to be used in some situations where conventional lighting is not practical. However, the initial purchase price of our products is typically higher than conventional lighting, and our products are often less bright than conventional alternatives. We believe these deficiencies are being addressed in whole or in part by our CPC technology products including EFO. In the case of neon lighting, certain popular neon colors, such as bright red, cannot be achieved as effectively with our products.

     We are engaged in ongoing efforts to develop and improve our products, adapt our products for new applications and design and engineer new products. We expect that our ability to compete effectively with conventional lighting technologies, other fiber optic lighting products and new lighting technologies that may be introduced, will depend substantially upon achieving greater light output and reducing the cost of our systems. In January 2003, we introduced a new, lower-priced illuminator based on our patented CPC optical technology. This technology improves performance by more efficiently capturing available lamp-light from highly efficient metal halide lamps. This product is an outgrowth of advanced technology acquired as part of our acquisition of Unison, which is described in “Research and Product Development.”

     Providers of conventional lighting systems include large lamp manufacturers and lighting fixture companies that have substantially greater resources than we have. These conventional lighting companies may introduce new and improved products that may reduce or eliminate some of the competitive advantages of our products. In commercial lighting, also compete primarily with local and regional neon lighting manufacturers and craftspeople that, in many cases, are better established in their local markets than we are.

     We also face direct competition from other fiber optic lighting products and pool lighting products. Competitive products are offered in the pool market by Pentair, Inc.’s American Products Division, a major manufacturer of pool equipment and supplies, as well as Super Vision International. In commercial lighting, fiber optic lighting products are offered by an increasing number of smaller companies, some of which compete aggressively on price. Some of these competitors offer products with performance characteristics similar to those of our products. Certain large companies in the conventional lighting industry, manufacture or license fiber optic lighting systems that compete with our products. For example, Schott, a German glass fiber company, markets fiber optic lighting systems in the U.S. Many companies compete with us in Asia, including Mitsubishi, Bridgestone and Toray. Mitsubishi sells Fiberstars’ BritePak fiber tubing in Japan.

     We cannot predict the impact of competition on our business. We believe that an increase in the rate of market expansion may be accompanied by an increase in competition. Increased competition could result in price reductions, reduced profit margins and loss of market share, which would 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.

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Assembly, Testing and Quality Assurance

     Our illuminator manufacturing consists primarily of 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. Inventories of domestically produced component parts are managed 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 2003, we continued our program to manufacture more of our products in offshore locations, mainly 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. In October 2003, we entered into a Production Share Agreement with North American Production Sharing, Inc. and Industrias Unidas de B.C., S.A. de C.V., or North American. Under this agreement North American will provide administrative and manufacturing services, including labor services and the use of manufacturing facilities in Mexico, for the manufacturing and assembly of certain of our fiber optic systems and related equipment and components.

     Under a supply agreement, which was renewed in January 2001, Mitsubishi is the sole supplier of our small diameter stranded fiber, which is our largest selling fiber product. Since the acquisition of Unison Fiber Optic Systems, LLC, or Unison, we have been manufacturing large core fiber. We expect to maintain our relationship with Mitsubishi. Mitsubishi owns approximately 2.0% of our outstanding common stock and distributes certain of our products in Japan. We also rely on sole source suppliers for certain lamps, reflectors, remote control devices and power supplies. Although we cannot predict the effect that the loss of one or more of these suppliers would have on us, any 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 Product 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 are committing much of our research and development resources to those challenges. Optical technology we developed following the Unison acquisition has resulted in illuminator products for both the pool and spa and the commercial lighting division. We believe these new technology products are state-of-the-art in fiber optic lighting. In 2002, we completed the redesign of our high-end commercial illuminator, improving efficiency. The product shipped for the first time in January 2003, and the improved version shipped January 2004. Despite our ongoing development efforts, there can be no assurance that we will be able to achieve future improvements in brightness and cost, or that competitors will not develop lighting technologies that are brighter, less expensive or otherwise superior to ours.

     In 2000, we received a federal grant from the NIST for up to $2,000,000 in funding over three years for research and development of solid core fiber for lighting purposes. This contract provided us with $520,000 in funding for the eleven-month period ended September 2001, $914,000 for the one-year period ended September 2002 and $566,000 for the one-year period ended September 2003.

     In February 2003, the Defense Advanced Research Projects Agency, or DARPA, through the Army Aviation and Missile Command, or AMCOM, awarded 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. Under this contract, we will receive $6,818,000 over three years based on achieving various research and development milestones. The milestones relate to the development of fiber optic illuminators and fixtures for installation on ships and aircraft. Upon achieving these milestones, we will receive $2,115,000, $2,599,000 and $2,104,000 for the calendar years ended December 31, 2003, 2004 and 2005, respectively. We received funds for the first year and we have congressional approval for the second year. Funds for 2005 are subject to budget approval.

     On April 10, 2003, we announced that we and APL Engineered Materials, a subsidiary of ADLT, were awarded an additional $2,700,000 research and development contract from DARPA to develop a new arc discharge light source. We will receive $300,000 of this amount for our portion of this research over a three year period. We have received funds for the first year. APL Engineered Materials is leading the light source project. We expect that the new high performance light source will provide improvements in efficacy and brightness and color rendering over the present Fiberstars EFO source. We received and aggregate of $1,463,000, net of payments to subcontractors, for DARPA contracts in 2003.

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     We augment our internal research and development efforts by involving certain of our component suppliers, independent consultants and other third parties in the process of seeking improvements in our products and technology. 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 in 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.

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 31, 2004, our intellectual property portfolio consisted of 40 issued U.S. patents, various pending U.S. 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. Our issued patents expire at various times between August 2008 and October 2022. 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 those we sell. The laws of some foreign countries in which we sell or may sell our products do not protect our proprietary rights in our products to the same extent as do the laws of the United States.

     We are aware that a large number of patents and pending patent applications exist in the field of fiber optic technology. We also are aware that some 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 its 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, any 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 any 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 March 31, 2004, we had 121 full time employees, of whom 41 were involved in sales, marketing and customer service, 22 in research and product development, 45 in assembly and quality assurance, and 13 in finance and administration. From time to time we also employ part-time personnel in various capacities, primarily assembly and clerical support. We have never experienced a work stoppage, no employees are subject to any collective bargaining agreement, and we consider our employee relations to be good.

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     We believe that our future success will depend to a large extent on the continued contributions of key 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 of these persons could delay product development cycles, disrupt our operations or otherwise harm our business or results of operations.

Facilities

     Our principal executive offices and manufacturing and assembly facilities are located in a 60,000 square foot facility in Fremont, California, under a lease agreement expiring in 2006. We lease local offices in the United States in Solon, Ohio and in Thatcham, the United Kingdom. We also own a facility for our local office in Berching, Germany. Each local office is used for sales support, manufacturing, engineering and administrative operations. 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.

Legal Proceedings

     We are not currently a party to any material legal proceedings.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

     (a)     Previous independent accountants.

          (i)     On September 29, 2003, we dismissed PricewaterhouseCoopers LLP as our independent accountants. The change in independent accountants was approved by our Audit and Finance Committee.

          (ii)     The reports of PricewaterhouseCoopers LLP on our financial statements for the past two fiscal years contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle.

          (iii)     In connection with our audits for the two most recent fiscal years, there have been no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused PricewaterhouseCoopers LLP to make reference thereto in connection with their report on the financial statements for such years.

          (iv)     During the two most recent fiscal years, and through September 29, 2003, there have been no reportable events as that term is defined in Item 304(a)(1)(v) of Regulation S-K.

          (v)     We provided PricewaterhouseCoopers LLP with a copy of the above statements and requested that PricewaterhouseCoopers LLP furnish it with a letter addressed to the SEC stating whether or not it agrees with such statements. A copy of such letter, dated September 30, 2003, is filed as Exhibit 16 to our Current Report on Form 8-K filed October 2, 2003.

     (b)     New independent accountants.

     On September 29, 2003, we appointed Grant Thornton LLP as our new independent accountants. The appointment was approved by our Audit and Finance Committee. During the two most recent fiscal years and through September 29, 2003, we have not consulted with Grant Thornton LLP regarding either:

          (i)     the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on our financial statements, and neither a written report was provided to us nor oral advice was provided that Grant Thornton LLP concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue; or

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          (ii)     any matter that was either the subject of a disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of Regulation S-K, or a reportable event, as that term is defined in Item 304(a)(1)(v) of Regulation S-K.

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MANAGEMENT

Executive Officers and Directors

     The following table sets forth certain information regarding our executive officers and directors, and their ages as of April 30, 2004:

     Mr. Ruckert joined Fiberstars in November 1987 as President, Chief Operating Officer and a director. He has served as our Chief Executive Officer since October 1988 and served as our Secretary from February 1990 to February 1994. From June 1985 to October 1987, he was Executive Vice President of Greybridge, a toy company he co-founded that was later acquired by Worlds of Wonder in 1987. Prior to that time, he was Executive Vice President of Atari from October 1982 to June 1984 and was a Manager/Vice President of Bristol-Myers Company in New York from October 1966 to October 1982.

     Mr. Davenport joined Fiberstars 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 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 global 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. Greenwald joined Fiberstars in October 1989 as General Manager, Pool Division. He became Vice President in September 1993 and Senior Vice President in February 1997. Prior to joining Fiberstars, 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. Keplinger joined Fiberstars in August 1988 as Manager of Operations. He became Vice President in 1991 and Senior Vice President in February 1997. From June 1986 to August 1988, Mr. Keplinger was a sales representative at Leemah Electronics, an electronics manufacturing company. From February 1983 to June 1986, Mr. Keplinger was a sales manager with California Magnetics Corp, a custom transformer manufacturing company.

     Mr. Connors joined Fiberstars in July 1998 as Vice President, Finance, and Chief Financial Officer. From 1984 to 1998, Mr. Connors held a variety of positions, including Chief Financial Officer, and Chief Operating Officer, for Micro Focus Group Plc, a software company. Prior to Micro Focus Group Plc, Mr. Connors held senior finance positions with Eagle Computer and W. R. Grace.

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     Mr. Buelow was appointed our Vice President, Engineering in 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 General ElectricSecretary, in the Lighting division workingamount of $250,000.  The LOC bears interest at the rate of 12.5% on several fiber optic lighting projects. Mr. Buelow holds BSthe face amount and MS degrees in Applied Mathematics and Systems Engineering from Case Western Reserve University, Cleveland, Ohio andhas a term of 24 months.  It is collateralized by a Certified Quality Engineer with five utility patents.

     Mr. des Enfants joined Fiberstars in January 2004 as Vice President and General Manager, Fiberstars EFO. From 1994 to 2003, Mr. des Enfants held a variety of positionscash deposit 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 Lightinginsurance company that had issued our contract performance bonds and from 1994 to 1998 held various sales and sales manager positions at GE Lighting.

     Mr. Stuppin was elected Chairmanby 32% of the Board in May 1995 and has served as a director since 1993. Since September 1987, Mr. Stuppin has served in various executive capacities with Neurobiological Technologies, Inc.unpledged shares of capital stock of Crescent Lighting, Ltd., or NTI, a biomedical development company he co-founded, and he currently serves as a director of NTI. Mr. Stuppin also has been an investment banker and a venture capitalist, with over 25 years of experience in the founding and management of companies active in emerging technologies.

     Mr. Brite joined our board in July 2003. From January 2002 to the present he has served as Director of Product Development for Gensler, a leading global design, planning and strategic consulting firm. From 1996 to 2002, prior to joining Gensler, Mr. Brite was partner and Chief Executive Officer of NeoRay, a lighting company which was sold to Cooper Lighting. Prior to joining NeoRay, Mr. Brite founded a lighting distribution business and a real estate firm.

     Mr. Hellman became a director of Fiberstars in September 1997. Since May 1995, Mr. Hellman has been Chairman of the Board of Directors and Chief Executive Officer of Advanced Lighting Technologies, Inc., or ADLT. From 1983 until May 1995, Mr. Hellman founded a total of seventeen affiliated companies that specialize in the production and distribution of metal halide lighting systems, all of which were eventually acquired by ADLT. From 1968 until 1983, Mr. Hellman served in various capacities at General Electric Company, or GE, including Manager of Strategy Analysis for the GE Lighting Business Group, Manager of Engineering for the Photographic Lamp Department, and Manager of Metal Halide Product Engineering.

     Mr. Krishnan joined our Board in April 2003. He has served as Chief Operating Officer of ADLT since February 2003. From 1998 to 2003, he served as Vice President of Indian Operations of ADLT. From 1992 to 1998, Mr. Krishnan was Vice President of South Asian Operations for Lighting Resources International, Inc., a lighting services company located in Ohio. From 1988 to 1995 he was with K&M International, Inc, in the machine parts and lamp division, serving most recently as Vice President. From 1981 to 1988, Mr. Krishnan was an engineering manager at Hindustan Machine Tools in India.

     Mr. Traversi joined our Board in October 2002. He is currently a Managing Director of 2020 Growth Partners, LLC, a strategic advisory services firm. From 2000 to 2002, Mr. Traversi was co-founder and Chief Executive Officer of PRE Solutions, Inc., which founded and built an electronic processor of prepaid telecom products. From 1997 to 1999, he was President of Sirrom Capital Corporation, a financial services and investment firm. From 1989 to 1996, Mr. Traversi was a General Partner and Managing Director at Montgomery Securities (now Banc of America Securities, LLC).

     Dr. Wolfson joined our board in January 1986. Since 1998, Dr. Wolfson has served as Chief Executive Officer of Phytos, Inc., an herbal medicine development company. He has been Assistant Clinical Professor at the University of California School of Medicine in San Francisco since 1986 and has maintained a private practice in psychiatric medicine since 1982. Dr. Wolfson also served as a director and a consultant to NTI from 1989 to 1992.

Director Compensation

     Each non-employee director receives $1,000 per Board of Directors meeting attended to cover out-of-pocket expenses incurred in connection with attendance. During the fiscal year ended December 31, 2003, Messrs. Eliot, Feuer, Garet, Hellman, Stuppin, Wolfson, Traversi, Krishnan and Brite received aggregate payments of $5,650, $1,850, $2,800, $3,800, $5,650, $4,700, $5,650, $2,850 and $1,900 respectively, for their services as directors.

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