Equipment Supply Contract

3.5                                  DSI Technology .  “DSI Technology” shall mean all tangible and intangible know-how, trade secrets, inventions (patented and unpatented), data, and other information relating to the design, fabrication, assembly, and operation of the MACHINE and the processes employed on the MACHINE by DSI to apply the Coating on CPCs.

3.6                                  Equipment .  The various items of component equipment supplied by third party vendors which DSI has incorporated into the MACHINE and which may hereafter be added to or incorporated into the MACHINE will be collectively referred to as the “EQUIPMENT.”  The term MACHINE will be inclusive of all EQUIPMENT.

3.7                               Machine .  “MACHINE” shall mean DSI’s LPCVD Machine 104 that DSI is presently using to apply Coatings for FIBERSTARS, as more particularly described in Exhibit C, and purchased from DSI by FIBERSTARS pursuant to this Agreement.

3.8                                  Technical Documentation .  Engineering drawings, technical manuals and other technical documents describing the operation and maintenance of the MACHINE, sufficient for reasonably trained and qualified FIBERSTARS’ personnel to properly and effectively operate and maintain the MACHINE without the assistance of DSI, will be collectively referred to as the “TECHNICAL DOCUMENTATION.”

3.9                                  Technical Training .  Training on the use of the MACHINE to apply Coatings on CPCs will be referred to as the “TECHNICAL TRAINING.”

3.10                            Technical Services .  Technical guidance available to FIBERSTARS from DSI during the installation, trial operations and testing of the MACHINE at a FIBERSTARS facility, as well as other engineering services, will be collectively referred to as the “TECHNICAL SERVICES.”

4.                                       PURCHASE AND SALE OF THE MACHINE

4.1                                  Machine .  DSI hereby agrees to sell, and, subject to inspection and acceptance as provided in Section 5.1, FIBERSTARS hereby agrees to purchase the MACHINE, subject to the terms and conditions of this Agreement.  The MACHINE is being sold in an “as is” condition, without any warranty, express or implied, except as provided in Paragraph 7.2.

(a)   Technical Documentation .  At the time the MACHINE is delivered to FIBERSTARS’ facility, and FIBERSTARS has paid DSI the license fee if required by Paragraph 9.3, below, FIBERSTARS may order the TECHNICAL DOCUMENTATION from DSI, and DSI will provide it, at DSI’s then prevailing hourly rates and reimbursable expense policies, with the total price thereof not to exceed *** ($***) Dollars.  FIBERSTARS shall treat the TECHNICAL DOCUMENTATION as “DSI Confidential Information”, as such term is defined in Paragraph 10, and shall restrict its disclosure to third parties in the manner required by Paragraph 10.

*** CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE COMMISSION.

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The TECHNICAL DOCUMENTATION shall set forth information regarding the DSI PROCESS.  The TECHNICAL DOCUMENTATION shall be prepared in the English language and shall refer to the English measurement system normally used by DSI.  The following number of sets shall be provided:

(i)                   drawings and diagrams, as applicable – two sets.

(ii)                textual documentation, as applicable – two sets.

(iii)             One electronic copy of the TECHNICAL DOCUMENTATION, prepared using MicroSoft Word and other mutually agreeable and commercially available software.

DSI shall deliver to Licensee the TECHNICAL DOCUMENTATION at least fifteen (15) days prior to delivery of MACHINE 104 under this Agreement.  Licensee shall inspect the TECHNICAL DOCUMENTATION for completeness within fifty (50) days after the date of its receipt, and promptly will advise DSI if Licensee discovers that it is not complete.  Notwithstanding the foregoing, if errors, in the Technical Documentation are discovered, DSI promptly will correct them, and DSI also will provide up to *** hours of TECHNICAL SERVICES via telephone, without charge and designed to overcome any such inaccuracy so that the period during which Licensee’s use of the Machine is adversely affected by any such inaccuracy is a short as possible.  If Licensee requests that DSI provide on-site TECHNICAL SERVICES to make the machine operational, DSI will provide such TECHNICAL SERVICES at its standard hourly rates, plus actual, reasonable travel and living expenses.  DSI will discount the first $*** of such Technical Services by ***%.

(b)                                  Technical Training .  At the time the MACHINE is delivered to a FIBERSTARS’ facility, and FIBERSTARS has paid DSI the applicable license fee if required by Paragraph 9.3, below, DSI will provide, without additional charge, up to sixty (60) hours of TECHNICAL TRAINING to FIBERSTARS’ personnel.  FIBERSTARS may also retain the services of DSI at DSI’s then prevailing hourly rates and reimbursable expense policies to provide, and DSI will provide, additional TECHNICAL TRAINING to FIBERSTARS’ personnel.

(c)                                   Technical Services .  At the time the MACHINE is delivered to FIBERSTARS’ facility, and FIBERSTARS has paid DSI the license fee if required by Paragraph 9.3, below, FIBERSTARS may retain the services of DSI, at DSI’s then prevailing hourly rates and reimbursable expense policies, to provide TECHNICAL SERVICES to FIBERSTARS.

4.2                                  Site Preparation .  The proper and timely construction of the installation site for the MACHINE at FIBERSTARS’ facility and the process support services (infrastructure for water, power, etc.) shall be the responsibility of FIBERSTARS and shall conform to the written site and infrastructure requirements provided by DSI.  Within thirty (30) days following its receipt of Fiberstars’ written request, DSI will deliver to FIBERSTARS, in writing, the site and infrastructure requirements.  In the event FIBERSTARS retains the services of DSI to provide TECHNICAL SERVICES to install the MACHINE at FIBERSTARS’ facility, DSI shall review FIBERSTARS’ installation site to ensure full compliance with such requirements prior to the installation.

*** CONFIDENTIAL MATERIAL REDACTED AND SEPARATELY FILED WITH THE COMMISSION.

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4.3                                  Modification of Terms .  No addition to or modification of the terms and conditions of the purchase and sale of the MACHINE, whether contained in a purchase order or otherwise, shall be binding upon either party unless specifically agreed to by both parties, in writing.

4.4                                  Purchase Price .  The purchase price for the MACHINE and a schedule of payments of the purchase price are set forth in Exhibit D.

4.5                                  Form of Payment .  All payments to be made by FIBERSTARS to DSI for the purchase of the MACHINE shall be made by wire transfer in U.S. Dollars through DSI’s bank, as described in written instructions provided by DSI.

4.6                                  Sale of the Machine by FIBERSTARS .  During the first ten (10) years following the date of this Agreement, (the “Restricted Sale Period”) if FIBERSTARS receives a bonafide third party offer to purchase the MACHINE from a DSI Competitor (as defined in the License), FIBERSTARS shall have the right to sell the MACHINE, and to transfer or sublicense the License to such third party only upon compliance with the following:

(i)                                      FIBERSTARS will provide a written notice of the proposed transaction to DSI, including identifying the proposed purchaser and the agreed price;

(ii)                                   The proposed sale must provide for the delivery of the MACHINE to such third party on a date not less than ten (10) months from the date a copy of such offer is delivered to DSI;

(iii)                                DSI will provide a written notice to FIBERSTARS, either exercising or rejecting this right of first refusal, not less than 45 days after the notice of the foregoing third party purchase offer is delivered to DSI; and

(iv)                               If DSI exercises this right of first refusal, DSI shall purchase the MACHINE from FIBERSTARS, at a price equal to the lesser of (A) the price offered by such third party and (B) the sum of the net book value of the MACHINE and the License, as reflected in FIBERSTARs’ accounting records, determined and payable as of the date of the proposed sale.

After the Restricted Sale Period has expired, FIBERSTARS may sell the MACHINE and transfer the License, without restriction.

5                                           BAILMENT OF THE MACHINE

5.1                                  Bailment .

(a)                                   Not less than thirty days prior to consummation of the Offering (see Section 9.1 below), Fiberstars will inspect the Machine and its operation to assure that the Machine is in good working order, including observing a Coating run.  Within five (5) business days following such inspection, Fiberstars will notify DSI of the results of such inspection and, if

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Fiberstars determines that the Machine is in good working order, Fiberstars will accept the Machine in writing.  If Fiberstars determines that the Machine is not in good working order (consistent with the performance of the Machine during 90 days immediately preceding the inspection), DSI shall have thirty days to repair the Machine and, upon its receipt of written notice from DSI that the Machine is in good working order and ready for re-inspection, Fiberstars shall have fifteen (15) days to re-inspect the Machine.  If the inspection reveals that the Machine is still not in good working order, Fiberstars may terminate this Agreement and the License Agreement without further liability.

(b)                                  On and after the sale date of the MACHINE to FIBERSTARS, DSI agrees to take possession of the MACHINE at its Santa Rosa facility and use the MACHINE for the purpose of applying Coatings on CPCs and other agreed substrata, if any, for the Term of this Agreement, or until the bailment is terminated by FIBERSTARS, whichever first occurs.    Title to the MACHINE shall remain vested in FIBERSTARS during the period of this bailment.  FIBERSTARS shall have the right to inspect the MACHINE during DSI’s normal business hours upon delivery of reasonable prior notice.  DSI shall not acquire by this Agreement any right, title or interest, legal or equitable, in the MACHINE except for what is granted under the terms of this Agreement.

5.2                                  Operational Costs .  During the period of bailment, DSI shall maintain the Machine in good working order, and DSI shall pay all costs associated with the ownership, use, maintenance and repair of the MACHINE, including but not limited the replacement of parts, components and EQUIPMENT as required.  FIBERSTARS shall procure and maintain insurance to insure the MACHINE at its purchase price for loss or damage occasioned by fire, theft, negligence or vandalism while the MACHINE is in possession of DSI.  DSI shall, at its cost, maintain the MACHINE in good condition and in accordance with DSI’s standard practices and shall deliver the MACHINE to FIBERSTARS at FIBERSTARS’ expense at the termination of the bailment in such condition, normal wear and tear excepted.

5.3                                  Other Uses of the MACHINE by DSI

(a)                                   DSI shall have the right, at no cost (except as provided in Paragraph 5.3(a)(i) below), to use the MACHINE for its own account and for the account of DSI’s other customers (the “DSI Use”) for periods of time determined in accordance with the provisions of this Paragraph 5.3.  A total of twenty-two (22) shifts during each calendar month (or a prorata portion thereof for a partial month), on the basis of a two (2) shift per day, five (5) day per week schedule, shall be available on the MACHINE to manufacture Coated CPCs for FIBERSTARS (the “FIBERSTARS Use”), with one (1) shift defined as an eight (8) hour DSI work day.  The remaining balance of shifts in each calendar month shall be available for DSI Use, inclusive of additional shifts of MACHINE operation beyond two (2) shifts per day, five (5) days per week as may be initiated by DSI in its sole discretion, and shifts allocated to FIBERSTARS Use but reallocated to DSI Use pursuant to Subparagraphs 5.3(a)(i) and (a)(ii).

(i)                                      If in any calendar month during the first sixty (60) months of the Term the manufacture of Coated CPCs pursuant to accepted Purchase Orders can be

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completed in less than twenty-two (22) shifts, the remaining number of shifts shall be available for DSI Use.  If in any calendar month during 2006, the FIBERSTARS Use exceeds twenty-two (22) shifts, the number of shifts of FIBERSTARS Use in excess of twenty-two (22) shifts shall be carried over to the following calendar month and made available for DSI Use.  In consideration of the allocation to DSI Use of any such unused shifts, DSI shall pay to FIBERSTARS Five Thousand Dollars ($5,000) per month for the first twelve (12) months of the Term.

(ii)                                   DSI may commence the DSI Use of the MACHINE at any time that all pending, approved Purchase Orders for Coated CPCs have been completed, or at any time after the MACHINE has been idle for eight (8) or more consecutive hours during the course of DSI’s normal day and normal swing shift operations for reasons caused by FIBERSTARS; provided, however, notwithstanding the commencement of DSI Use in any month, DSI shall take such steps as may be necessary to assure that not less than twenty-two (22) shifts remain available for the fulfillment of Purchase Orders from Fiberstars for delivery of Coated CPCs during each of the succeeding months.  FIBERSTARS may further delay DSI’s use of the MACHINE up to two additional shifts by agreeing to pay DSI five hundred dollars ($500) per shift.  Otherwise, DSI and FIBERSTARS shall negotiate in good faith the dates of commencement and termination of the DSI Use of the MACHINE in light of FIBERSTARS’ delivery schedule(s) and the understanding that seven (7) calendar days will be required to re-establish the process of applying Coatings on the MACHINE.

(b)                                  Subject to compliance with the provisions of Paragraph 5.3(a), above, DSI may not use the MACHINE for more than two hundred sixty-four (264) shifts (based upon a manufacturing operation of two (2) shifts per day, five (5) working days per week) measured on an annual basis and without the right to carry over to the succeeding year any unused shifts. Any additional shifts of MACHINE operation initiated by DSI shall be allocated to DSI Use.  DSI shall maintain a usage log for the MACHINE, and these logs will be available for FIBERSTARS’ review during regular business hours.  In the event DSI’s customer for whose benefit the MACHINE is to be used is a classified government entity or agency or the identity of such customer is protected under a written Nondisclosure Agreement, FIBERSTARS agrees that any information of a classified or protected nature shall be deleted from the log prior to disclosure and/or transfer to FIBERSTARS.

5.4                                  Damage to the MACHINE .  FIBERSTARS shall maintain insurance covering loss or destruction or damage to the MACHINE.  DSI shall use the proceeds of such insurance if delivered to DSI by FIBERSTARS to repair, renovate or replace the MACHINE, as directed by FIBERSTARS.  Any deficiency in the amount of insurance proceeds to accomplish any such action shall be paid by FIBERSTARS.  Notwithstanding the foregoing, if the Machine is damaged or destroyed in whole or in part as a result of the negligence or intentional misconduct of DSI, its employees, invitees, agents or contractors, DSI shall be liable to Fiberstars in an amount equal to the cost of repairing or replacing such damage or destruction.

5.5                                  Termination of Bailment .  At the time that the MACHINE is no longer required to manufacture the Coating, and FIBERSTARS has no other need for the MACHINE,

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DSI shall have the following rights to purchase the MACHINE: (i) a right of first refusal to purchase the MACHINE at the price set forth in a bona fide, arms length purchase offer from a third party, which offer must provide for the delivery of the MACHINE to such third party on a date not less than ten (10) months from the date a copy of such offer is delivered to DSI; or (ii) in the absence of any such third party offer, the right to purchase the MACHINE at its then depreciated book value as reflected in FIBERSTARS’ accounting records.  In connection with the foregoing right of first refusal, DSI will provide a written notice to FIBERSTARS, either exercising or rejecting such right of first refusal, not less than 45 days after the notice of the foregoing third party purchase offer is delivered to DSI.  If neither a third party offer is delivered to DSI nor a written notice of DSI’s exercise of its purchase option is delivered to FIBERSTARS within thirty (30) days after the last of FIBERSTARS’ purchase order has been filled, DSI shall ship the MACHINE, at FIBERSTARS’ cost, to a location designated by FIBERSTARS, and shall provide the TECHNICAL TRAINING and, to the extent purchased by FIBERSTARS, the TECHNICAL DOCUMENTATION and the TECHNICAL SERVICES.

6.                                        PURCHASE OF COATINGS

6.1                                  Purchase and Sale .  Pursuant to the terms and conditions of this Agreement, DSI agrees to provide, and FIBERSTARS agrees to purchase, the materials and labor to apply Coatings on CPCs to produce Coated CPCs that are ordered by FIBERSTARS during the Term of this Agreement.  The unit prices for the first five (5) years of the Term are set forth in Exhibit E Other Coated   products that may be required by FIBERSTARS during the Term may be added by an amendment to this Agreement.  All unit prices shall be exclusive of taxes, duties, tariffs, freight charges, and in transit insurance, the payment of which shall be the responsibility of FIBERSTARS.

6.2                                  Unit Prices .  The range of anticipated annual volumes and corresponding unit prices for minimum quantity orders of *** (***) or more Coated CPCs are set forth in Exhibit E.  The unit price for a Coating after the five (5) year anniversary of this Agreement shall be negotiated and agreed to by the parties.   The parties further agree to negotiate in good faith the unit price for a Coating for annual quantities below *** (***) or greater than *** (***), and for order quantities less than *** (***) Coated CPCs; provided that no minimum annual quantity shall apply during the period ending December 31, 2006.

6.3                                  Purchase Orders .  FIBERSTARS shall initiate each order for Coated CPCs by the delivery to DSI of a written purchase order (the “Purchase Order”), setting forth the quantity to be ordered, the applicable unit price, and requested delivery date(s).  Acceptable delivery dates are a function of order quantities and shall be by mutual agreement, negotiated in good faith; provided, however, that each Purchase Order must be received by DSI at least thirty (30) days prior to the earliest of the requested delivery dates.  DSI shall commence delivery of the Coated CPCs within thirty (30) days after its acceptance of each Purchase Order, and will complete and deliver Coated CPCs in the volumes and at the times agreed to by the parties.

6.4                                  A