924168--3/31/2006--FIBERSTARS_INC

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{customer, product, revenue}

{product, market, service}

{condition, economic, financial}

{product, candidate, development}

{personnel, key, retain}

{product, liability, claim}

{control, financial, internal}

{cost, operation, labor}

{gas, price, oil}

{regulation, change, law}

{property, intellectual, protect}

{acquisition, growth, future}

{stock, price, operating}

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. 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 future success is highly dependent on the successful adoption of EFO systems by the lighting market, which is traditionally slow in adopting new technologies. Our daylight color spectrum lamp is untested by the retail market and may not be accepted without technological changes, if at all. 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. Our 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. If electricity costs decline or regulatory requirements for energy efficient lighting are repealed, demand for our products may decline.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. 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. 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. We may be unable to attract and retain qualified accounting personnel and we may be unable to maintain adequate disclosure controls and procedures in the future. 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. 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. We rely on intellectual property and other proprietary information that may not be protected and that may be expensive to protect. 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. 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. 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. 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. Our components are difficult to manufacture and procure in large quantities and supply may be limited in the short term. We have historically relied on government funding for our research and development. Changes to financial accounting standards may affect our results of operations and cause us to change our business practices. 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. Recent changes to our senior management could negatively effect our operations and relationships with customers, suppliers and employees. Our sales are dependent upon new construction levels and are subject to seasonal and general economic trends. If we are not able to timely and successfully develop, manufacture, market and sell our new products, our operating results will decline. We rely on the largest pool distributor in the United States for a significant portion of our pool and spa lighting products sales. The loss of a key sales representative could have a negative impact on our net sales and operating results. 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. 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 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. 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. We depend on collaboration with third parties, who are not subject to material contractual commitments, to augment our research and development efforts. The demand for new construction is affected by general economic conditions. The impact of recent hurricanes may continue to have a significant negative effect on our business, financial condition and results of operations. We are subject to global economic or political conditions, which may disrupt the general economy, reducing demand for our products.

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924168--3/31/2006--FIBERSTARS_INC_/CA/