Lighting Science (LSCG) 10-K/A 2007 FY Annual report (amended)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

FORM 10-K/A

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2007

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 0-20354

Lighting Science Group Corporation

(Exact name of Registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation)	23-2596710 (I.R.S. Employer Identification Number)
120 Hancock Lane
Westampton, NJ	08060
(Address of principal executive office)	(Zip Code)

Registrant’s telephone number, including area code: (214) 382-3630

Securities registered pursuant to Section 12(b) of the Exchange Act: None

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

Title of each Class:

COMMON STOCK, PAR VALUE

$0.001 PER SHARE

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso Noþ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yeso Noþ

     Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

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

     Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o Noo.

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

Large accelerated filero  Accelerated filero  Non-accelerated filero
(Do not check if a smaller reporting company) Smaller reporting companyþ 

     Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yeso Noþ

     The aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates, computed by reference to the closing sales price of such stock, as of June 29, 2007 was $26,808,000. (For purposes of determination of the aggregate market value, only directors, executive officers and 10% or greater stockholders have been deemed affiliates.)

     The number of shares outstanding of the registrant’s common stock, par value $0.001, as of March 24, 2008 was 22,069,810 shares. On January 25, 2008, we completed a one-for-twenty reverse stock split resulting in our total shares issued and outstanding and outstanding stock options and warrants decreasing in a one-to-twenty ratio.

EXPLANATORY NOTE

          Lighting Science Group Corporation is filing this Amendment No. 1 on Form 10-K/A (this “Amendment”) to amend our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed with the Securities and Exchange Commission on March 31, 2008 (the “Original Filing”). For the convenience of the reader, this Amendment sets forth the Original Filing in its entirety, as amended by this Amendment. However, this Amendment only amends Item 1 and Item 2 of Part I and Item 7 and Item 8 of Part II of the Original Filing. This Amendment is filed in response to comment letters we received from the staff of the Securities and Exchange Commission in connection with the staff’s review of the Original Filing. In addition, as required by Rule 12b-15 promulgated under the Securities Exchange Act of 1934, as amended, new certifications by our principal executive officer and principal financial officer are filed as exhibits to this Amendment.

          Other than certain information included in “Note 13 – Subsequent Events” to the consolidated financial statements included in Item 8 of this Amendment and the change of the address of our principal executive offices in Item 1, this Amendment does not reflect events occurring after the filing of the Original Filing and unless otherwise stated herein, the information contained in the Amendment is current only as of the time of the Original Filing. Except as described above, no other changes have been made to the Original Filing. Accordingly, the Amendment should be read in conjunction with our filings made with the Securities and Exchange Commission subsequent to the filing of the Original Filing.

TABLE OF CONTENTS

	Page
PART I
Item 1 and 2. Business and Properties		1
Item 1A. Risk Factors		4
Item 2. Properties (see Item 1. Business and Properties)		11
Item 3. Legal Proceedings		11
Item 4. Submission of Matters to a Vote of Security Holders		12
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		12
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 8. Financial Statements and Supplementary Data		20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		20
Item 9A. Controls and Procedures		20
Item 9B. Other Information		21
PART III
Item 10. Directors, Executive Officers and Corporate Governance		21
Item 11. Executive Compensation		24
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		29
Item 13. Certain Relationships and Related Transactions and Director Independence		31
Item 14. Principal Accountant Fees and Services		32
PART IV
Item 15. Exhibits and Financial Statement Schedules		32
SIGNATURES		33
Certification of Chief Executive Officer Pursuant to Section 302
Certification of Senior Vice President, Strategy and Finance Pursuant to Section 302
Certification Pursuant to 18 U.S.C. Section 1350
EX-24.1
EX-31.1
EX-31.2
EX-32.1

PART I

Items 1 and 2. Business and Properties.

          We design, manufacture and market intelligent, environmentally friendly light emitting diode (“LED”) lighting solutions for consumer and professional applications. Our patented and patent-pending designs in power management, thermal management, controls and micro-electronics are engineered to enhance lighting performance, reduce energy consumption, lower maintenance costs and eliminate the use of hazardous materials. From concepts to delivery, our value proposition is to deliver immediate cost savings and environmental benefits to the end-user. We are publicly-traded on the Over-the-Counter Bulletin Board, or the OTC Bulletin Board, as “LSCG.”

          We are one of the few LED lighting companies in the world with the design and engineering capabilities to offer a complete spectrum of digitally-controlled lighting solutions, from color-changing to white light. Our product range includes replacement lamps, lighting fixtures and highly customized lighting solutions for the gaming, architainment, retail, commercial & industrial, and public infrastructure markets.

          We are focused on optimizing our core engineering and design capabilities and intellectual property to develop key value propositions for these markets. We expect to deliver these solutions to our customers through alliances with channel partners, such as original equipment manufacturers (“OEMs”), lighting designers, electrical and lighting distributors and energy saving companies.

          We were incorporated in Delaware in 1988. On June 1, 2004, we acquired 100% of the outstanding common stock of Lighting Science, Inc., a corporation that developed and owned certain intellectual property related to the design, development and power management of lighting products utilizing LEDs as a source of light. On December 23, 2004, The Phoenix Group Corporation, our predecessor entity, announced its decision to change its name to Lighting Science Group Corporation by means of a merger with its wholly owned subsidiary, Lighting Science, Inc. We began conducting our operations under the name “Lighting Science Group Corporation” on January 1, 2005.

          LED Holdings, LLC, a Delaware limited liability company (“LED Holdings”), was formed on or about June 5, 2007 for the purpose of acquiring on June 14, 2007 100% of the operations and net assets of LED Effects, Inc. (“LED Effects”), a California-based company engaged in the business of designing, developing and manufacturing LED lighting applications.

          On October 4, 2007, we entered into an Exchange and Contribution Agreement (the “Exchange Agreement”) with LED Holdings. Pursuant to the Exchange Agreement, we acquired substantially all of the assets of LED Holdings including, among other things, $15,000,000 in cash and cash equivalents, 180 shares of common stock of LED Effects Japan KK, 200 shares of common stock of Kabushiki Kaisha LED Systems, leases, equipment, inventory, accounts receivable, contracts, permits, records, and intellectual property (collectively, the “Acquisition”). In exchange for these assets, we issued 2,000,000 shares of our newly designated Series B Preferred Stock, par value $.001 per share (“Series B Stock”) and 15,928,734 shares of our common stock to LED Holdings.

          We have accounted for the Acquisition as a reverse merger. Accordingly, for accounting and financial reporting purposes, Lighting Science Group was treated as the acquired company, and LED Holdings was treated as the acquiring company. Therefore, the historical financial statements presented in Item 8 of this Form 10-K for the period beginning on June 14, 2007 and ending on December 31, 2007 and the amounts used in management’s discussion and analysis included in Item 7 as they relate to this period are those of LED Holdings, and the change in reporting entity has been presented in accordance with FAS 154. Because LED Holdings had no operations prior to its acquisition of the net assets of LED Effects, the historical financial statements included in Item 8 of this Form 10-K for periods prior to June 14, 2007 are those of LED Effects. Therefore, the historical financial statements presented in Item 8 of this Form 10-K for the period beginning on June 14, 2007 and ending on December 31, 2007 includes the operations of LED Holdings from June 14, 2007 through October 4, 2007 and the consolidated operations of LED Holdings and Lighting Science Group from October 4, 2007 through December 31, 2007.

          Unless the context otherwise requires, all references in this Form 10-K to “Lighting Science Group,” “we,” “us,” “our,” or the “Company” refer to Lighting Science Group Corporation, together with LSGC, LLC, its wholly-

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owned subsidiary. Our principal executive offices are located at 120 Hancock Lane, Westampton, New Jersey 08060. Our telephone number at our principal executive offices is (609) 265-1401.

Recent Developments

          On January 25, 2008, we completed a one-for-twenty reverse stock split resulting in our total shares issued and outstanding and outstanding stock options and warrants decreasing in a one-to-twenty ratio.

Target Markets

          We are aggressively targeting what we believe will be high growth market segments that have become economically viable from a price/performance ratio but remain in the infancy stage of the technology adoption curve. For example, in the general illumination category, we believe we are the leading global provider of intelligent, environmentally responsible LED lighting solutions focused on replacing less energy efficient technologies.

          We are focused on optimizing our core capabilities and technologies to develop key value propositions for the gaming, architainment, commercial & industrial, retail and public infrastructure markets. Our primary target markets and supporting products in 2008 are as follows:

          Gaming— Comprised of casino gaming machine manufacturers. We provide engineering support and contract production services for dynamic color LED displays in gaming devices, toppers and signage.

          Architainment— Comprised of building exterior and interior spaces that are characterized with unique architectural elements to create ambience and a welcoming atmosphere. We will offer an extensive product portfolio to illuminate and enhance the architecture for exterior and interior applications. These solutions will be available in white and RGB for various applications, e.g. wall washing, cove lighting, flood lighting, integrated and display.

          Commercial & Industrial— Comprised of commercial & industrial workspaces such as offices, warehouses, manufacturing plants, healthcare and education locations. These settings require high performance white light solutions, which can be delivered via our new range of LED lamps designed to replace or seamlessly integrate into existing lighting systems. These retrofit lamps fit into existing sockets and reduce energy consumption by as much as 80% while providing equal lighting performance to traditional incandescent technology.

          Retail— Comprised of hospitality (hotels, lounges, resorts and other locations for entertainment) and store retailers (specialty stores, department stores, supermarkets, convenience stores, DIY stores). We provide economically viable LED solutions with OEMs and national accounts. The primary product lines sold in these industries are display lighting systems for retail applications and replacement lamp solutions for general illumination.

          Public Infrastructure— Comprised government entities that manage streets and highways, airports, ports, bridges, tunnels and other public spaces. In collaboration with leading OEMs, We are developing a broad range of solutions that will be sold through national OEM distribution networks. Primary products in this channel are targeted for street lighting applications.

Sales and Distribution Strategy

          Our sales and distribution strategy consists of both “pull” and “push” initiatives to penetrate the marketplace. We have dedicated salespeople who have and are continuing to develop relationships with lighting designers and architects within the lighting specification community. We also sell our products on our website, www.lsgc.com. We have developed an OEM sales organization targeting market segment leaders in both traditional lighting segments as well as new OEM opportunities created by the unique characteristics of solid state lighting (“SSL”). Additionally, we are targeting key national specialty retailers to seek to create greater awareness of our product solutions. Internationally, we have affiliates based in London and Tokyo, as well as agency representatives

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in Dubai and Hong Kong. We are continually looking for international partners to extend our global reach. In addition to our sales and marketing operations in Tokyo, we also own an interest in LED Systems. The other shareholders of LED Systems, which are three local companies, Ebara Densan, NTT and Nippon Comsys, provide a well established channel to the market segments that we are targeting in Asia.

          OEM Partnerships

          Our strategy is to enter into partnerships with market segment leaders that currently have limited in-house SSL design and engineering capabilities. This strategy should allow us to capitalize on the strengths of the segment leaders’ brand equity, sales and distribution networks, manufacturing resources, and market presence to rapidly penetrate existing and emerging markets. Concurrently, we believe the segment leader will benefit from our cutting edge technology to quickly bridge the gap and enter into SSL lighting. We are in the process of establishing agreements with multiple leading manufacturers as an ingredient brand. We also intend to remain OEM agnostic and to build our brand equity in our market strategy.

          Direct Sales Efforts in Emerging Markets

          Due to the unique characteristics of SSL, new applications of lighting are continually emerging and creating markets where no clear segment leader exists. In these emerging markets, we are creating new business models and entirely new value chains. By doing so, we are expanding our presence beyond traditional lighting applications. To service anticipated demand, we have identified and are targeting approximately 50 lighting representative agencies, 11 lamp/electrical distributors, and 109 energy savings and lighting management companies across North America to distribute our products.

Competition

          In the high performance lighting markets in which we sell our LED lighting products, and in the licensing markets in which we participate, our systems compete with lighting products utilizing traditional lighting technology provided by many vendors. In addition, we face competition from a smaller number of manufacturers, including manufacturers of traditional lighting equipment that have developed one or more solid-state lighting products. Some of our competitors, particularly those that offer traditional lighting products, are larger companies with greater resources to devote to research and development, manufacturing and marketing than we have.

          Additionally, to the extent that we seek to introduce products for use in general lighting applications, such as retrofit bulbs and lamps for standard fixtures, we expect to encounter competition from large, established companies in the general lighting industry such as General Electric, Matsushita, Osram Sylvania and Philips Lighting, each of which has, we believe, undertaken initiatives to develop LED technology. These companies have global marketing capabilities and substantially greater resources to devote to research and development and other aspects of the development, manufacture and marketing of solid-state lighting systems than we have. We also compete with domestic and international manufacturers of lighting components of various sizes and resources.

Properties

          We lease office and industrial space in the following locations to carry out our operations: New York City, New York (approximately $12,000 per month – lease expires in August 2013); Dallas, Texas (approximately $14,000 per month – lease expires in October 2012); Rancho Cordova, California (approximately $14,000 per month – lease expires in August 2012), and Satellite Beach, Florida (approximately $15,000 per month – lease expires in September 2012). We also lease office space in Tokyo, Japan on a month-to-month basis at a total rate of approximately $2,500 per month.

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Item 1A. Risk Factors.

Risks Related to Our Business

          Because we have a limited amount of revenues and a history of losses, we may be unable to continue operations unless we can generate sufficient operating income by completing the development of, and the successful marketing of, our products.

          Since we emerged from bankruptcy on September 26, 2003, we have sustained operating losses. For the years ended December 31, 2007 and December 31, 2006, we had revenues of $2,776,000 and $436,000, respectively, and as of December 31, 2007 and December 31, 2006, we had an accumulated deficit of approximately $33,112,000 and $21,562,000, respectively. We expect sales of our products to increase in 2008. Our ability to generate revenue is, however, dependent on receiving purchase commitments from customers as well as the timing of such purchase commitments that are received. Our ability to generate revenue is also dependent on our ability to preserve the customer relationships that were developed by LED Holdings and our ability to continue selling our products to this group of customers as well as to other potential customers in the markets served by these customer relationships. Further, our ability to generate revenue for the remainder of 2008 on certain of our products is partially dependent on the length of time required to obtain appropriate UL or other certifications required by potential customers.

          It is difficult to evaluate the likelihood that we will achieve or maintain profitability in the future.

          We have recently made the transition from a development stage company to one that is focusing on sales and growth in the lighting industry marketplace. Accordingly, we have not yet achieved sustained profitability on a quarterly or annual basis. As we concentrate on commercializing our products, our limited operating history makes an evaluation of our future prospects difficult. If we do not achieve sufficient growth in our revenues and achieve and sustain profitability in the future, we will be unable to continue operations.

          If we are unable to obtain outside sufficient capital when needed, our business and future prospects will or could be adversely affected and we could be forced to suspend or discontinue operations.

          Although we believe our current cash balances together with revenues received from the sale of our products will be sufficient to meet our operating needs during 2008, the actual amount of funds that we will need will be determined by several factors, many of which are beyond our control. These factors include the timing and volume of sales transactions, market acceptance of our products, the success of our research and development efforts (including any unanticipated delays), the costs and timing of obtaining new patent rights, regulatory changes, competition, technological developments in the market, evolving industry standards, the amount of working capital investments we are required to make, and the costs required for us to litigate and ultimately resolve the lawsuits with Philips Solid State Lighting Solutions, Inc., Koninklijke Philips Electronics N.V., and Philips Electronics North America Corporation.

          Potential sources of outside capital include entering strategic business relationships, bank borrowings, public or private sales of shares of our capital stock or debt or other similar arrangements. We do not have any committed sources of outside capital at this time. It is uncertain whether we will be able to obtain outside capital when we need it or on terms that would be acceptable. If we raise funds by selling additional shares of our common stock or securities convertible into our common stock, the ownership interest of our existing stockholders will be diluted. If we are unable to obtain sufficient outside capital when needed, our business and future prospects will be adversely affected and we could be forced to suspend or discontinue operations.

          If we are unable to integrate the assets of LED Holdings into our operations, our business and future prospects will or could be adversely affected.

          The integration of the recently acquired assets of LED Holdings including, among other things, leases, equipment, inventory, accounts receivable, contracts, permits, records, and intellectual property, may be difficult and may lead to adverse effects. The success of the integration will depend, in part, on our ability to realize the anticipated synergies, cost savings and growth opportunities from integrating the assets of LED Holdings with our

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business. Our success in realizing these benefits and the timing of this realization depend upon the successful integration of the assets of LED Holdings. The integration process may be a complex, costly and time-consuming process. The difficulties of combining the assets of the companies include, among others:

• consolidating research and development operations, where appropriate;

• coordinating sales, distribution and marketing functions;

• preserving the important research and development, manufacturing and supply, distribution, marketing, customer and other relationships of LED Holdings;

• minimizing the diversion of management’s attention from ongoing business concerns; and

• coordinating geographically separate organizations.

          We may not accomplish this integration smoothly or successfully. The diversion of the attention of management from its current operations to the integration effort and any difficulties encountered in combining operations could prevent us from realizing the full benefits anticipated to result from the acquisition of the assets of LED Holdings and adversely affect our other operations.

          If our Optimized Digital Lighting technology does not achieve market acceptance, prospects for our growth and profitability may be limited.

          Our future success depends on market acceptance of our LED and Optimized Digital Lighting (“ODL”) technology. Potential customers may be reluctant to adopt solid-state lighting as an alternative to traditional lighting technology because of its higher initial cost or perceived risks relating to its novelty, reliability, usefulness, light quality, and cost-effectiveness when compared to other lighting sources available in the market. If acceptance of solid-state lighting in general, and of our ODL lighting systems in particular, does not continue to grow within the high performance lighting markets that we serve, and in the markets that we intend to serve through future customers, then opportunities to increase our revenues and operate profitably may be limited.

          Our business strategy includes penetration of the general lighting market with our lighting products. Failure to obtain and incorporate into our products, on a timely basis, LEDs having satisfactory performance, quality and cost characteristics could delay our planned introduction of new products, or reduce the attractiveness to potential customers of our products in the general lighting market. In addition, the characteristics of our ODL technology that we believe are desired by customers in the high performance color lighting markets that we currently serve may not provide us with competitive advantages in the general lighting market. For example, end users in the general lighting market may not require the complex, dynamic lighting effects or sophisticated digital control that our systems provide. Similarly, if LED manufacturers are able to develop single LEDs that produce light of acceptable consistency and color, our color temperature control technologies may be of less importance in the general lighting market than in the high performance color lighting market.

          Because we rely upon Govi Rao, Ken Honeycutt, Kevin Furry, Frederic S. Maxik and other key personnel, a loss of any key personnel could prevent or significantly delay the achievement of our goals.

          Our success will depend to a large extent on the abilities and continued service of key personnel. The loss of Govi Rao, our chairman and chief executive officer, Ken Honeycutt, our president and chief operating officer, Kevin Furry, our chief technology officer, Frederic S. Maxik, our chief scientific officer, or other key personnel could prevent or significantly delay the achievement of our goals. We have employment agreements with each of Messrs. Rao, Honeycutt, Furry and Maxik. We maintain a key man life insurance policy with respect to Mr. Rao, Mr. Furry, Mr. Maxik and other key management staff as determined by the board of directors. If any of these persons were to leave us, it could delay implementation of our business plan and marketing efforts. If we continue to grow, we will need to add additional management and other personnel. Competition for qualified personnel in our industry is intense, and our success will depend on our ability to attract and retain highly skilled personnel. Our efforts to obtain or retain such personnel may not be successful.

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          If critical components and raw materials that we utilize in our products become unavailable, we may incur delays in shipment that could damage our business.

          We depend on our suppliers for certain standard electronic components as well as custom components critical to the manufacture of our solid-state lighting systems. For certain types of LEDs used in our lighting systems, we currently have a limited number of suppliers. We depend on our vendors to supply in a timely manner critical components in adequate quantities and consistent quality and at reasonable costs. Finding a suitable alternate supply of required components and obtaining them in needed quantities may be a time-consuming process and we may not be able to find an adequate alternative source of supply at an acceptable cost.

          Because we generally rely on purchase orders rather than long-term contracts with our suppliers, we cannot predict with certainty our ability to obtain components in adequate quantities and at acceptable prices in the longer term. If we are unable to obtain components in adequate quantities, we may incur delays in shipment or be unable to meet demand for our products, which could damage our reputation with customers and prospective customers.

          The principal raw materials used in the manufacture of our LED components and sensor assemblies are silicon wafers, gold wire, lead frames, and a variety of packages and substrates, including metal, printed circuit board, flex circuits, ceramic and plastic packages. All of these raw materials can be obtained from several suppliers. From time to time, particularly during periods of increased industry-wide demand, silicon wafers and other materials have been in short supply. Any significant interruption in the supply of these raw materials could have a material adverse effect upon us.

          If the companies to which we outsource the manufacture of our products fail to meet our requirements for quality, quantity and timeliness, our revenues and reputation in the marketplace could be harmed.

          We outsource a significant portion of the manufacture and assembly of our products. We currently depend on a small number of contract manufacturers to manufacture our products at plants in various locations throughout the world. These manufacturers supply a significant portion of the necessary raw materials (other than certain critical components such as LEDs, which we procure directly) and may provide the necessary facilities and labor to manufacture our products. We do not have long-term contracts with these manufacturers. If these companies were to terminate their arrangements with us or fail to provide the required capacity and quality on a timely basis, we would be unable to manufacture and ship our products until replacement manufacturing services could be obtained. To qualify a new contract manufacturer, familiarize it with our products, quality standards and other requirements, and commence volume production may be a costly and time-consuming process. Therefore, we may be unable to establish alternative manufacturing relationships on acceptable terms.  

          Our reliance on contract manufacturers involves certain risks, including the following:

• lack of direct control over production capacity and delivery schedules;

• lack of direct control over quality assurance, manufacturing yields and production costs; and

• risk of loss of inventory while in transit.

          Any interruption in our ability to effect the manufacture and distribution of our products could result in delays in shipment, lost sales, limited revenue growth and damage to our reputation in the market, all of which would adversely affect our business.

          If we are unable to increase production capacity for our products in a timely manner, we may incur delays in shipment and our revenues and reputation in the marketplace could be harmed. 

          An important part of our business strategy is the expansion of production capacity for our products. We plan to increase production capacity by adding new contract manufacturers and by expanding capacity with our existing contract manufacturers. Our ability to successfully increase production capacity will depend on a number of factors, including the following:

• identification and availability of appropriate and affordable contract manufacturers;

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• ability of our current contract manufacturers to allocate more existing capacity to us or their ability to add new capacity quickly;

• availability of critical components used in the manufacture of our products;

• establishment of adequate management information systems, financial controls and supply chain management and quality control procedures; and

• ability of our future contract manufacturers to implement our manufacturing processes.

          If we are unable to increase production capacity for our products in a timely manner while maintaining adequate quality, we may incur delays in shipment or be unable to meet increased demand for our products which could harm our revenues and damage our reputation and our relationships with customers and prospective customers.

          If we are not able to compete effectively against larger lighting manufacturers with greater resources, our prospects for future success will be jeopardized. 

          In the high performance lighting markets in which we sell our ODL and other LED lighting systems, and in the licensing markets in which we participate, our systems compete with lighting products utilizing traditional lighting technology provided by many vendors. In addition, we face competition from a number of manufacturers, including manufacturers of traditional lighting equipment that have developed one or more SSL products. Some of our competitors, particularly those that offer traditional lighting products, are larger companies with greater resources to devote to research and development, manufacturing and marketing than we have.

          Additionally, to the extent that we seek to introduce ODL products for use in general lighting applications, such as retrofit bulbs and lamps for standard fixtures, we expect to encounter competition from large, established companies in the general lighting industry such as General Electric, Matsushita, Osram Sylvania and Philips Lighting, each of which has, we believe, undertaken initiatives to develop LED technology. These companies have global marketing capabilities and substantially greater resources to devote to research and development and other aspects of the development, manufacture and marketing of solid-state lighting systems than we have. We will also be competing with domestic and international manufacturers of lighting components of various sizes and resources. We may be unable to compete successfully in such markets against these or future competitors.

          In each of our markets, we anticipate the possibility that LED manufacturers, including those that currently supply us with LEDs, may seek to compete with us by introducing more complete systems that do not infringe upon our patents.  

          Our competitors’ lighting technologies and products may be more readily accepted by customers than our products. Additionally, to the extent that competition in our markets intensifies, we may be required to reduce our prices in order to remain competitive. If we do not compete effectively, or if we reduce our prices without making commensurate reductions in our costs, our revenues and profitability, and our future prospects for success may be harmed.

          If we are unable to manage any future growth effectively, our profitability and liquidity could be adversely affected. 

          Our anticipated growth is expected to place significant strain on our limited research and development, sales and marketing, operational and administrative resources. To manage any future growth, we must continue to improve our operational and financial systems and expand, train and manage our employee base. For example, we may need to implement new management information systems, hire and train new sales representatives and expand our supply chain management and quality control operations. Additionally, we may need to make additions to our operations and administrative management teams. If we are unable to manage our growth effectively, we may be unable to operate profitability and we may not be able to effectively pursue our business plan.

          We are subject to legal, political and economic risks abroad. 

          We currently outsource the manufacture of certain of our products and parts and components to international facilities. To the extent that we continue to outsource to international locations, we are exposed to

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differing laws, regulations and business cultures than what we experience domestically that may adversely impact our business. We may also be exposed to economic and political instability and international unrest. Although we hope to enter into agreements with manufacturers, shippers and distributors that attempt to minimize these risks, such agreements may not be honored and we may not be able to adequately protect our interests.

          We intend to continue outsourcing the manufacture of our products and parts and components internationally for the foreseeable future. There are many barriers and risks to operating successfully in the international marketplace, including the following:

• intellectual property protection risks;

• foreign currency risks;

• dependence on foreign manufacturers, shippers and distributors;

• compliance with multiple, conflicting and changing governmental laws and regulations; and

• import and export restrictions and tariffs.

          If we are not able to successfully deliver our products and services to our anticipated markets in a timely and cost-effective manner, our revenue growth and profitability may be adversely affected.

          Our products could contain defects that could reduce sales or result in claims against us.

          Despite testing by us and our customers, defects could be found in the future in our existing or future products. This could result in, among other things, a delay in the recognition or loss of revenues, loss of market share or failure to achieve market acceptance. These defects may cause us to incur significant warranty, support and repair costs, divert the attention of our engineering personnel from our product development efforts and harm both our relationship with our customers and our reputation in the marketplace. The occurrence of these problems could result in the delay or loss of market acceptance of our products and would likely harm our business. Defects, integration issues or other performance problems in our products could also result in personal injury or financial or other damages to our customers for which they might seek legal recourse against us. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend.

          We are currently subject to litigation with Philips Solid State Lighting Solutions, Inc., the unfavorable outcome of which might have a material adverse effect on our financial condition, results of operations and cash flows.

          Philips Solid State Lighting Solutions, Inc. filed a civil lawsuit against us on February 19, 2008. The lawsuit seeks injunctive relief and unspecified compensatory and treble damages and attorneys’ fees for alleged infringement of five (5) related patents. Although we believe that this lawsuit is without merit and intend to dispute the claim, we cannot predict with any significant degree of certainty the outcome or resolution of this lawsuit or the timing for its resolution. In addition to the expense and burden that may be incurred in defending this litigation and any damages that we may suffer, our management’s efforts and attention may be diverted from the ordinary business operations in order to address the claim. If the final resolution of this litigation is unfavorable to us, our financial condition, results of operations and cash flows might be materially adversely affected.

Risks Related to Intellectual Property

          If we are unable to respond effectively as new lighting technologies and market trends emerge, our competitive position and our ability to generate revenues and profits may be harmed. 

          To be successful, we must keep pace with rapid changes in lighting technology, changing customer requirements, new product introductions by competitors and evolving industry standards, any of which could render our existing products obsolete if we fail to respond in a timely manner. For example, if new solid-state lighting devices are introduced that can be controlled by methods not covered by our proprietary technology, or if effective new sources of light other than solid-state devices are discovered, our current products and technology could become less competitive or obsolete. If others develop innovative proprietary lighting technology that is superior to ours, or if we fail to accurately anticipate technology and market trends and respond on a timely basis with our own

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innovations, our competitive position may be harmed and we may not achieve sufficient growth in our revenues to attain, or sustain, profitability.

          If we are unable to obtain and protect our intellectual property rights, our ability to commercialize our products could be substantially limited.

          We have filed forty-nine (49) patent applications. From these applications, eighteen (18) patents have been issued,  three (3) have been approved and are awaiting patent issuance, twenty-two (22) are currently pending approval, and six (6) are no longer active. Any patent applications filed by us, or by others under which we have rights, may not result in patents being issued in the United States or foreign countries. Because our patent position involves complex legal, scientific, and factual questions, the issuance, scope, validity and enforceability of our patents cannot be predicted with certainty. Competitors may develop products similar to our products that do not conflict with our patents. Others may challenge our patents and, as a result, our patents could be narrowed or invalidated. Our ODL technology may inadvertently infringe on patents or rights owned by others or licenses which might not be available to us.

          Litigation of intellectual property rights can be complex, costly, protracted and highly disruptive to our business operations by diverting the attention and energies of our management and key technical personnel, which could severely harm our business. Plaintiffs in intellectual property cases often seek injunctive relief. Any intellectual property litigation commenced against us could force us to take actions that could be harmful to our business. We may not be able to afford the legal costs associated with defending or enforcing any of our patents.

          In some cases, we may rely on trade secrets to protect our innovations. There can be no assurance that trade secrets will be established, that secrecy obligations will be honored or that others will not independently develop similar or superior technology. To the extent that consultants, key employees or other third parties apply technological information independently developed by them or by others to our projects, disputes might arise as to the proprietary rights to such information that may not be resolved in our favor.

Risks Related to Our Common Stock

          Because our stock price is volatile, it can be difficult for stockholders to predict the value of our shares at any given time.

          The price of our common stock has been and may continue to be volatile, which makes it difficult for stockholders to assess or predict the value of their shares. In the last two completed fiscal years, the price of our common stock has ranged from $3.00 to $13.00. A variety of factors may affect the market price of our common stock including, but not limited to:

• changes in expectations as to our future financial performance;

• announcements of technological innovations or new products by us or our competitors;

• announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;

• changes in laws and government regulations;

• developments concerning our proprietary rights;

• public perception relating to the commercial value or reliability of any of our lighting products;

• future sales of our common stock or issues of other equity securities convertible into or exercisable for the purchase of common stock; and

• general stock market conditions.  

          Trading in our common stock is sporadic and an established trading market may not be developed or sustained.

          Although our common stock is quoted in the OTC Bulletin Board, a regular trading market for the securities may not be sustained in the future. The OTC Bulletin Board is an inter-dealer, over-the-counter market that provides significantly less liquidity than the Nasdaq stock market. Quotes for stocks listed in the OTC Bulletin

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Board generally are not listed in the financial sections of newspapers and newspapers often devote very little coverage to stocks quoted solely in the OTC Bulletin Board. Accordingly, prices for and coverage of securities quoted solely in the OTC Bulletin Board may be difficult to obtain. In addition, stocks quoted solely in the OTC Bulletin Board tend to have a limited number of market makers and a larger spread between the bid and ask prices than those listed on the NYSE, AMEX or Nasdaq. All of these factors may cause holders of our common stock to be unable to resell their securities at any price. This limited trading also could decrease or eliminate our ability to raise additional funds through issuances of its securities.

          Our common stock is considered a “penny stock” and may be difficult to sell.

          SEC regulations generally define a “penny stock” to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock currently is less than $5.00 per share and, therefore, is designated as a “penny stock” according to SEC rules. This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of investors to sell their shares.

          Because we have never paid dividends on our common stock and have no plans to do so, the only return on your investment will come from any increase in the value of the common stock.

          Since beginning our current business, we have not paid cash dividends on the common stock and do not intend to pay cash dividends in the foreseeable future. Rather, we currently intend to retain future earnings, if any, to finance operations and expand our business. Therefore, any return on your investment would come only from an increase in the value of our common stock.

          One stockholder owns a significant portion of our outstanding capital stock and is able to influence our actions.

          LED Holdings beneficially owns 2,000,000 shares of our newly designated Series B Stock and 15,928,734 shares of our outstanding common stock, which represents approximately 70% of our fully-diluted capital stock and 80% of the voting power of all of our outstanding shares of capital stock as of March 24, 2008. Due to the significant amount of voting power held by LED Holdings, it has the ability to greatly influence the election of our board of directors and to approve or disapprove all other matters requiring the vote of stockholders.

          Because there is a potential for significant future dilution of our existing stockholders, their percentage ownership and control over company matters could be reduced.

          Currently, we are authorized to issue up to 495,000,000 shares of our common stock. As of  March 24, 2008, there were issued and outstanding 22,069,810 shares of our common stock and we may be obligated to issue up to 4,217,837 shares of our common stock to the holders of our outstanding 6% Convertible Preferred Stock, Series B Stock, warrants for the purchase of common stock, and stock options. We are also obligated to issue up to 250,000 shares of restricted common stock to Ken Honeycutt, our president and chief operating officer, pursuant to the terms of his Restricted Stock Award Agreement. The authorized but unissued shares of common stock may be issued by us in such transactions and at such times as our board of directors considers appropriate, whether in public or private offerings, as stock splits or dividends or in connection with mergers and acquisitions or otherwise. Any such issuance that is not made solely to all then-existing common stockholders proportionate to their interests (as in a stock dividend or stock split) will result in dilution to each stockholder by reducing his or her percentage ownership of the total outstanding shares.

          Anti-takeover provisions in our charter documents and under Delaware law could prevent or delay a change in control of our company. 

          Provisions of our certificate of incorporation and by-laws may discourage, delay or prevent a merger, acquisition or change of control that a stockholder may consider favorable. These provisions include the ability to

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issue “blank check” preferred stock. The existence of this provision could limit the price that investors might be willing to pay in the future for shares of our common stock.

          Provisions of Delaware law may also discourage, delay or prevent someone from acquiring or merging with us or obtaining control of us.

ITEM 2. Properties (see Items 1 and 2. Business and Properties).

ITEM 3. Legal Proceedings.

          On February 19, 2008, Philips Solid-State Lighting Solutions, Inc. (“Philips”) filed (but has not served) a civil lawsuit in the United States District Court for the District of Massachusetts against (i) us; (ii) LED Holdings; and (iii) LED Effects, Inc., an entity whose assets were acquired by LED Holdings (“LED Effects”) (Philips Solid-State Lighting Solutions, Inc. v. Lighting Science Group Corporation, et al.). The lawsuit alleges that the defendants have infringed five (5) related patents. The complaint does not name any product that is alleged to infringe and provides no specific facts in support of the claims of infringement. The lawsuit seeks injunctive relief and unspecified compensatory and treble damages and attorneys’ fees for the alleged patent infringement. The subject patents are owned in the name of Color Kinetics, Inc. (“CK”), which was acquired by Philips in August 2007.

     We are reviewing Philips’ allegations, but believe they are without merit and intend to dispute them in light of, among other things, the following:

• Since 1994, LED Effects has been developing and selling custom-designed, pulse-with-modulation (PWM) controlled, color-changing LED fixtures and components. As successor to the assets of LED Effects, we believe we are (and LED Effects has been since its inception) considered a leader in this fixture and component space, and we continue to develop and sell cutting-edge LED-based products today.

• Prior to Phillips’ acquisition of CK, a Philips affiliate conducted extensive due diligence relating to the intellectual property of LED Effects. The Philips affiliate subsequently (i) proposed and consummated a joint development agreement with LED Effects and (ii) proposed a minority investment in LED Effects.

• The Philips affiliate previously contracted with LED Effects to develop and manufacture products in accordance with the Philips affiliate’s specifications and using LED Effects’ proprietary technology. The Philips affiliate then used such products to compete successfully against CK before CK was subsequently acquired by Philips.

• Since the CK acquisition, Philips has continued to purchase and distribute linear products employing the technology of LED Effects, as indicated on Philips’ web site. (www.nam.lighting.philips.com/us/luminaires/products.php).

     We have also been informed that on March 17, 2008, Pegasus Partners IV, L.P. (“Pegasus”) filed a complaint against Koninklijke Philips Electronics N.V., Philips Electronics North America Corporation and Philips Solid-State Lighting Solutions, Inc. in state court in Dallas, Texas. According to Pegasus, the complaint alleges that the defendants defrauded Pegasus and breached fiduciary duties to Pegasus in connection with the parties’ evaluation of a potential acquisition of LED Effects. Among other things, the complaint asserts that defendants misled Pegasus by representing that defendants would be committed to and continue to direct business to LED Effects despite the fact that defendants were simultaneously negotiating to acquire LED Effects’ competitor, CK. We have been informed that the defendants have not yet responded to the complaint.

     On March 7, 2008, we filed a complaint in Sacramento, California Superior Court against Koninklijke Philips Electronics N.V., Philips Electronics North America Corporation and Philips Solid-State Lighting Solutions, Inc. as successor to Color Kinetics Inc. (collectively, “Philips Electronics”). (Lighting Science Group Corp. et al. v. Koninklijke Philips Electronics N.V., et al.) The complaint alleges breach of the covenant of good faith and fair dealing, breach of fiduciary duty, intentional interference with economic relationship, negligent interference with economic relationship, violation of Business & Professions Code § 17200, and misappropriation of trade secrets by Philips Electronics. The complaint requests injunctive and monetary relief. On March 27, 2008, we filed a motion

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for a preliminary injunction in our lawsuit against Philips Electronics, in the Superior Court of California, Sacramento County, seeking to restrain and enjoin Philips Electronics from (i) using or relying on any confidential or trade secret information obtained or derived from us in (a) bidding on any commercial lighting projects on which we are also bidding or (b) Philips Electronics’ prosecution of its action against us for alleged patent infringement of any of its patents; (ii) performing or completing work on any custom lighting projects that began as joint opportunities with us under the Joint Development Agreement, dated March 16, 2006, between us and Philips Electronics without offering us the right to participate therein; or (iii) failing to return to us any confidential or trade secret information or due diligence materials obtained from us. As set forth in the Motion, this filing was necessitated by, among other things: Philips Electronics’ tortious conduct in bidding directly against us on some of the same projects Philips Electronics had previously jointly pursued and jointly bid on with us and Philips Electronics’ unlawful exploitation in making such bids on our confidential and trade secret information previously shared with Philips Electronics on a confidential basis.

ITEM 4. Submission of Matters to a Vote of Security Holders.

          On December 7, 2007, the holders of shares of our capital stock representing a majority of our then outstanding voting power, by written consent in lieu of a special meeting, authorized an amendment to our Certificate of Incorporation, to effect a one-for-twenty reverse stock split. This stockholder written consent was executed by the holder of approximately 70% of the then outstanding shares of our common stock as of December 7, 2007 and became effective on the twenty-first day following the mailing of an information statement on Schedule 14C relating to such amendment.

PART II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

          Since July 14, 2005, our common stock has been quoted on the OTC Bulletin Board, which is a quotation service administered by the National Association of Securities Dealers (NASD). Our trading symbol on the OTC Bulletin Board is “LSCG.”

          The OTC Bulletin Board is a limited and sporadic trading market. The following table sets forth the range of high and low bid information for our common stock as reported on the OTC Bulletin Board for the last two fiscal years. The price information available reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

Common Stock	HIGH		LOW
2007
Fourth Quarter	$	10.60		4.40
Third Quarter		11.40		6.60
Second Quarter		10.40		5.00
First Quarter		8.40		5.80
2006
Fourth Quarter	$	9.00		3.40
Third Quarter		6.40		3.00
Second Quarter		9.60		4.40
First Quarter		13.00		5.80

          As of March 24, 2008, there were 22,069,810 shares of common stock outstanding and held of record by approximately 5,500 holders (inclusive of those brokerage firms, clearing houses, banks and other nominee holders, holding common stock for clients, with each such nominee being considered as one holder).

          The last reported sales price of our common stock on the OTC Bulletin Board on March 24, 2008 was $3.20 per share.

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          We have not paid cash dividends on our common stock and do not intend to pay cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to finance operations and expand our business and, therefore, do not expect to pay any dividends in the foreseeable future.

          On July 6, 2005, our board of directors adopted the 2005 Equity Based Compensation Plan (the “2005 Plan”) and a proposal to implement such plan was approved at the annual stockholders’ meeting in August 2005. A total of 250,000 shares of common stock were initially reserved for issuance pursuant to the 2005 Plan. In December 2006, an amendment to the 2005 Plan was approved at the annual stockholders meeting, whereby an additional 250,000 shares of common stock were reserved under the 2005 Plan. Prior to adoption of the 2005 Plan, we had no option or other equity based compensation plans.

          The following table sets forth information as of December 31, 2007 with respect to compensation plans under which shares of our common stock may be issued.

					Number of Securities
	Number of Securities to be		Weighted-Average		Remaining Available
	Issued Upon Exercise of		Exercise Price of		for Future Issuance
	Outstanding Options,		Outstanding Options,		Under Equity
Plan	Warrants and Rights		Warrants and Rights		Compensation Plans
Lighting Science Group Corporation 2005 Equity Based Incentive Compensation Plan (approved by security holders)		267,667	$	7.60		232,333

          During 2007, there were no equity securities issued pursuant to transactions exempt from the registration requirements under the Securities Act of 1933, as amended, that were not disclosed previously in Current Reports on Form 8-K or Quarterly Reports on Form 10-Q, except:

• On November 13, 2007, we issued 4,167 shares of common stock in a private placement to a holder of 6% Convertible Preferred Stock upon conversion of 7,813 shares of 6% Convertible Preferred Stock.

• On November 14, 2007, we issued 153,334 shares of common stock in a private placement to a holder of 6% Convertible Preferred Stock upon conversion of 287,500 shares of 6% Convertible Preferred Stock.

          During the first quarter of 2008, we also issued the following equity securities pursuant to transactions exempt from the registration requirements under the Securities Act of 1933, as amended:

• On February 11, 2008, we issued 5,438 shares of common stock, in the aggregate, to four directors in a private placement as compensation for serving as a director during the third quarter of 2007.

• On February 11, 2008, we issued 2,143 shares of common stock to an employee in a private placement pursuant to such employee’s employment agreement.

• On February 11, 2008, we issued 93,750 shares of common stock in a private placement to two warrant holders pursuant to the exercise of warrants.

• On March 12, 2008, we issued 10,000 shares of common stock in a private placement to a holder of 6% Convertible Preferred Stock upon conversion of 18,750 shares of 6% Convertible Preferred Stock.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

CAUTIONARY STATEMENTS REGARDING FORWARD LOOKING STATEMENTS

          This Annual Report contains certain forward-looking statements regarding management’s plans and objectives for future operations including plans and objectives relating to our marketing efforts and future economic performance. Any statement in this Annual Report and in the documents incorporated by reference into this Annual

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Report that is not a statement of an historical fact constitutes a “forward-looking statement.” Further, when we use the words “may,” “expect,” “anticipate,” “plan,” “believe,” “seek,” “estimate,” “intend,” and similar words, we intend to identify statements and expressions that may be forward-looking statements. We believe it is important to communicate certain of our expectations to our investors. The forward-looking statements and associated risks set forth in this Annual Report include or relate to, among other things, (a) our projected sales and profitability, (b) our growth strategies, (c) anticipated trends in our industry, (d) our ability to obtain and retain sufficient capital for future operations, (e) our anticipated needs for working capital, and (f) the outcome of any litigation against us. These statements may be found under “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and “DESCRIPTION OF BUSINESS,” as well as in this Annual Report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “RISK FACTORS” and matters described in this Annual Report generally.

Overview

          We design, manufacture and market intelligent, environmentally friendly LED lighting solutions for consumer and professional applications. Our patented and patent-pending designs in power management, thermal management, controls and micro-electronics are engineered to enhance lighting performance, reduce energy consumption, lower maintenance costs and eliminate the use of hazardous materials. From concepts to delivery, our value proposition is to deliver immediate cost savings and environmental benefits to the end-user.  

          Our revenues are primarily derived from sales of display lighting products, lighting products for the gaming industry, certain custom developed lighting installations, lowbay fixtures and standard form factor bulbs. Although our financial results are dependent in part on the pricing and cost of these products, they are currently primarily dependent on the level of selling, general and administrative (“SG&A”), compensation and other operating expenses.

          LED Holdings, LLC, a Delaware limited liability company (“LED Holdings”), was formed on or about June 5, 2007 for the purpose of acquiring on June 14, 2007 100% of the operations and net assets of LED Effects, Inc. (“LED Effects”), a California-based company engaged in the business of designing, developing and manufacturing LED lighting applications.

          On October 4, 2007, we entered into the Exchange Agreement with LED Holdings. Pursuant to the Exchange Agreement, we acquired substantially all of the assets of LED Holdings including, among other things, $15,000,000 in cash and cash equivalents, 180 shares of common stock of LED Effects Japan KK, 200 shares of common stock of Kabushiki Kaisha LED Systems, leases, equipment, inventory, accounts receivable, contracts, permits, records, and intellectual property. In exchange for these assets, we issued 2,000,000 shares of our newly designated Series B Preferred Stock, par value $.001 per share (“Series B Stock”) and 15,928,734 shares of our common stock to LED Holdings. We refer to this transaction as the “Acquisition.”

          We accounted for the Acquisition as a reverse merger. Accordingly, for accounting and financial reporting purposes, Lighting Science Group was treated as the acquired company, and LED Holdings was treated as the acquiring company. Therefore, the historical financial statements presented in Item 8 of this Form 10-K for the period beginning on June 14, 2007 and ending on December 31, 2007 and the amounts used in management’s discussion and analysis included in Item 7 as they relate to this period are those of LED Holdings, and the change in reporting entity has been presented in accordance with FAS 154. Because LED Holdings had no operations prior to its acquisition of the net assets of LED Effects, the historical financial statements included in Item 8 of this Form 10-K for periods prior to June 14, 2007 are those of LED Effects. Therefore, the historical financial statements presented in Item 8 of this Form 10-K for the period beginning on June 14, 2007 and ending on December 31, 2007 includes the operations of LED Holdings from June 14, 2007 through October 4, 2007 and the consolidated operations of LED Holdings and Lighting Science Group from October 4, 2007 through December 31, 2007. See Note 1 to the Consolidated Financial Statements.

          After consummation of the Acquisition, we made several changes to our management team. Mr. Govi Rao now serves as our Chairman and Chief Executive Officer. Mr. Rao formally served as the Chief Executive Officer of

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LED Holdings. Mr. Ken Honeycutt continues to serve as our President and Chief Operating Officer. Other members of the senior management team include:

• Kevin Furry — Chief Technology Officer

• Fred Maxik — Chief Scientific Officer

• Stephen Hamilton – Vice President – Finance

• Zach Gibler — Chief Business Development Officer

• Lynn Vera — Chief Human Resources Officer

• Paul Kallmes — IP Strategist

Results of Operations

Period from June 14, 2007 through December 31, 2007 Compared to the Results of Operations of LED Effects, Inc. for the Period from January 1, 2007 through June 13, 2007 and Together Compared to the Results of Operations of LED Effects, Inc. for the Year Ended December 31, 2006

Revenues

          Revenues for the period beginning June 14, 2007 and ending December 31, 2007 (the “December 2007 Stub Period”) were $4,616,000, as compared to $3,675,000 for the period beginning January 1, 2007 and ending June 13, 2007 (the “June 2007 Stub Period”). This increase in revenues is primarily due to the Acquisition on October 4, 2007. Total revenues for the Company and LED Effects for the year ended December 31, 2007 were $8,291,000 compared to $8,858,000 for LED Effects for the year ended December 31, 2006. Revenues decreased in 2007 due to a reduction in project revenues in Japan in 2007, which was partially offset by the addition of the revenues of Lighting Science Group as a result of the Acquisition during the fourth quarter of 2007.

Cost of Goods Sold

          Cost of goods sold for the December 2007 Stub Period was $3,527,000, as compared to $2,606,000 for LED Effects for the June 2007 Stub Period. The increase in cost of goods sold between these periods was primarily due to the increase in the volume of sales arising from the Acquisition, which caused costs to increase as a result of the increase in the number of retail display, lowbays and standard form factor bulbs sold. As compared to the year ended December 31, 2006, total cost of goods sold for the Company and LED Effects for the year ended December 31, 2007 remained relatively constant.

Selling, General and Administrative Expenses

          Summarized in the table below are Selling, General and Administrative (“SG&A”) expenses for the December 2007 Stub Period, the June 2007 Stub Period and the year ended December 31, 2006:

	December 2007 Stub Period		June 2007 Stub Period
	(June 14, 2007 through		(January 1, 2007		Year ended
	December 31, 2007)		through June 13, 2007)		December 31, 2006
SG&A expenses	$	2,438,000	$	227,000	$	517,000

          SG&A expenses for the December 2007 Stub Period increased significantly compared to the June 2007 Stub Period primarily as a result of the increase in operating costs resulting from the Acquisition in October 2007. Specifically, Lighting Science Group increased marketing expenses for new products introduced by it during 2007 and increased research and development expenses. SG&A expenses for the year ended December 31, 2007 also increased over the amounts incurred by LED Effects for the year ended December 31, 2006 due to increases in marketing expenses and increased research and development expenses.

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Compensation and Related Expenses

          Summarized in the table below are compensation and related expenses comparing the December 2007 Stub Period, the June 2007 Stub Period and the year ended December 31, 2006:

	December 2007 Stub Period		June 2007 Stub Period
	(June 14, 2007 through		(January 1, 2007		Year ended
	December 31, 2007)		through June 13, 2007)		December 31, 2006
Compensation and related expenses	$	2,418,000	$	221,000	$	429,000
Compensation and related expenses incurred by the Company in the December 2007 Stub Period increased by approximately $2,197,000 compared to the amounts incurred in the June 2007 Stub Period primarily as a result of the increase in staff costs resulting from the Acquisition. Specifically, following the Acquisition, we increased the size of our management team, our sales and marketing group and our research and development group. Compensation and related expenses for the year ended December 31, 2007 increased significantly from the amounts incurred by LED Effects for the year ended December 31, 2006 primarily because of an increase in the size of the management team, sales and marketing groups and our research and development group.
Professional Fees
Summarized in the table below are professional fees comparing the December 2007 Stub Period, the June 2007 Stub Period and the year ended December 31, 2006:
	December 2007 Stub Period		June 2007 Stub Period
	(June 14, 2007 through		(January 1, 2007 through		Year ended
	December 31, 2007)		June 13, 2007)		December 31, 2006
Professional fees	$	1,291,000	$	118,000	$	52,000
Professional fees incurred by the Company in the December 2007 Stub Period increased by approximately $1,173,000 from the amount incurred during the June 2007 Stub Period. The principal reason for this increase was that we incurred legal fees in conjunction with the filing and issuance of patents as well as expenses for contract accounting and audit services related to the integration of the business processes of LED Holdings and Lighting Science Group. We also had an increase in consulting costs relating to marketing, supply chain development and information technology outsourcing. These costs were incurred in an effort to accelerate the roll out of our new products and enhance our capacity to manage increased customer activity. The total professional fees incurred for the year ended December 31, 2007 increased from the amounts that were incurred by LED Effects for the year ended December 31, 2006 mainly due to higher legal costs in conjunction with the filing and issuance of patents as well as expenses for contract accounting and audit services related to the integration of the business processes of LED Holdings and Lighting Science Group.
Directors’ Fees
Summarized in the table below are directors’ fees comparing the December 2007 Stub Period, the June 2007 Stub Period and the year ended December 31, 2006:
	December 2007 Stub Period		June 2007 Stub Period
	(June 14, 2007 through		(January 1, 2007 through		Year ended
	December 31, 2007)		June 13, 2007)		December 31, 2006
Directors’ fees	$	88,000	$	—	$	—

          The Company accrued directors’ fees of $12,500 per director for its non-executive directors’ in the fourth quarter of 2007. LED Effects did not incur any director fees during the June 2007 Stub Period or during the year ended December 31, 2006.

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Depreciation and Amortization Expenses

          Summarized in the table below are depreciation and amortization expenses comparing the December 2007 Stub Period, the June 2007 Stub Period and the year ended December 31, 2006:

	December 2007 Stub Period		June 2007 Stub Period
	(June 14, 2007 through		(January 1, 2007			Year ended
	December 31, 2007)		through June 13, 2007)			December 31, 2006
Depreciation and amortization expense	$	670,000	$	7,000		$	26,000
The increase in the Company’s depreciation and amortization expense for the December 2007 Stub Period over the amounts incurred during the June 2007 Stub Period and for the year ended December 31, 2006, is mainly due to the increase in amortization of the intangible assets acquired pursuant to the asset acquisition between LED Effects and LED Holdings in June 2007 and the Acquisition in October 2007.
Interest Income (Net)
Summarized in the table below is interest income, net of interest expense, comparing the December 2007 Stub Period, the June 2007 Stub Period and the year ended December 31, 2006:
	December 2007 Stub Period		June 2007 Stub Period
	(June 14, 2007 through		(January 1, 2007			Year ended
	December 31, 2007)		through June 13, 2007)			December 31, 2006
Interest income, net	$	172,000	$	1,000		$	—
Interest income, net of interest expense, realized by the Company in the December 2007 Stub Period increased over the amount realized in the June 2007 Stub Period and the year ended December 31, 2006 because of increased total average cash balances held by the Company during the December 2007 Stub Period. The higher cash balances were primarily a result of certain private placements completed in June 2007 and September 2007.
Other Income (Net)
Summarized in the table below is other income, net of other expenses, comparing the December 2007 Stub Period, the June 2007 Stub Period and the year ended December 31, 2006:
	December 2007 Stub Period		June 2007 Stub Period
	(June 14, 2007 through		(January 1, 2007			Year ended
	December 31, 2007)		through June 13, 2007)			December 31, 2006
Other income, net	$	330,000	$	(35,000	)	$	(1,000	)

          Other income realized by the Company in the December 2007 Stub Period relates primarily to the change in the fair value of our derivative instruments (preferred stock conversion rights and common stock purchase warrants) that were acquired as a result of the Acquisition in October 2007. Other expense realized in the June 2007 Stub Period relates primarily to a loss on the disposal of fixed assets and a provision recorded on certain accounts receivable.

Provision for income tax expense

          Summarized in the table below is the provision for income tax expense comparing the December 2007 Stub Period, the June 2007 Stub Period and the year ended December 31, 2006:

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	December 2007 Stub Period			June 2007 Stub Period
	(June 14, 2007 through			(January 1, 2007		Year ended
	December 31, 2007)			through June 13, 2007)		December 31, 2006
Provisions for income tax expense		$—		$	172,000	$	667,000
For the December 2007 Stub Period, the Company realized a significant loss for tax purposes. The Company did not record any benefit related to these tax losses because of the level of accumulated tax losses that are being carried forward by Lighting Science Group. The provision for income taxes recorded by LED Effects for the June 2007 Stub Period was significantly less than the provision for income taxes that it recorded for the year ended December 31, 2006 because the total income before provision for income taxes was higher for the year ended December 31, 2006.
Dividends and Accretion (Reversal of Accretion) of Preferred Stock Redemption Value
Summarized in the table below are dividends on 6% Convertible Preferred Stock and accretion (reversal of accretion) of preferred stock redemption value comparing the December 2007 Stub Period, the June 2007 Stub Period and the year ended December 31, 2006:
	December 2007 Stub Period			June 2007 Stub Period
	(June 14, 2007 through			(January 1, 2007		Year ended
	December 31, 2007)			through June 13, 2007)		December 31, 2006
Dividends on 6% Convertible Preferred Stock and reversal of accretion of preferred stock redemption value	$	(414,000	)		$—		$—

          The Company commenced recording dividends and reversal of accretion on the shares of Lighting Science Group’s 6% Convertible Preferred Stock subsequent to the Acquisition. Upon the conversion of approximately 300,000 shares of preferred stock, the Company reversed the accretion of the redemption liability that had been recorded related to such 6% Convertible Preferred Stock. LED Effects did not issue any 6% Convertible Preferred Stock and recorded no expense related thereto.

Liquidity and Capital Resources

          Our primary sources of liquidity are our cash reserves and cash flows from operating activities. Cash outflows are primarily tied to procurement of inventory and payment of salaries, benefits and other operating costs. As previously discussed, on October 4, 2007, we entered into the Exchange Agreement with LED Holdings, whereby LED Holdings contributed all of its assets including, among other things, $15,000,000 in cash and cash equivalents, 180 shares of common stock of LED Effects Japan KK, 200 shares of common stock of Kabushiki Kaisha LED Systems, leases, equipment, inventory, accounts receivable, contracts, permits, records, and intellectual property to us, in exchange for a combination of preferred and common stock representing, on a fully-diluted basis, 70% of our common stock and 80% of our voting power.

          In March 2007, we entered into a Securities Purchase Agreement with a group of accredited investors for a private placement of common stock and A and B Warrants. The private placement resulted in gross proceeds of $4.0 million in March 2007 from the issuance of common stock. Through the date of this report, the Company has received gross proceeds of approximately $5.8 million from the exercise of A and B Warrants by certain investors. All B Warrants not exercised by the holders on or prior to November 5, 2007 expired pursuant to their terms. B Warrants with a total exercise value of $61,000 expired at the close of business on November 5, 2007 unexercised.

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The remaining A Warrants have a five year term and expire between March 2012 and November 2012 and may be exercised by the holders at any time prior to expiration.

          In June 2006, we negotiated a $2.0 million line of credit with one of our banks, which was subsequently amended to increase the amount available thereunder to up to $2.5 million commensurate with the aggregate dollar value of the guarantees provided to the bank by Guarantors. In conjunction with the acquisition of the assets of LED Holdings, we terminated the $2.5 million line of credit. There were no prepayment penalties associated with terminating the line of credit. Also on October 4, 2007, we paid the remaining balance of $87,500, along with all accrued interest, which was due on the Note Payable to the Phibian S Trust.

          We pay dividends on our 6% Convertible Preferred Stock four times annually: February 10, May 10, August 10 and November 10. Prior to entering into the Exchange Agreement with LED Holdings, we had the right to settle any dividend payment with the issuance of common stock, assuming certain criteria are met and notice is given to the 6% Convertible Preferred stockholders. We settled our February 2007, May 2007 and August 2007 6% Convertible Preferred Stock dividend obligations by issuing a total of 803,000 common shares.

          The issuance of common stock and Series B Stock to LED Holdings constituted a “Change of Control” pursuant to the terms of the Amended and Restated Certificate of Designation of the 6% Convertible Preferred Stock. As a result, we may no longer settle dividend payments with the issuance of common stock. Therefore, we are required to settle all remaining dividend obligations with the payment of cash. Based on the 6% Convertible Preferred Stock currently outstanding, we expect to pay up to $100,000 annually to satisfy the dividend obligation. Furthermore, the issuance of common stock and Series B Stock to LED Holdings will significantly limit the amount of net operating losses that we will be permitted under applicable provisions of the Internal Revenue Code to utilize annually to offset taxable income, if any, in future fiscal years.

          While we believe that our current balances along with the cash received from the sale of our products will be sufficient to meet our cash needs for the next twelve month period, other potential sources of outside capital include entering strategic business relationships, bank borrowings, and public or private sales of shares of our capital stock or debt or similar arrangements. If we raise funds by selling additional shares of our common stock or securities convertible into our common stock, the effective ownership interest of our existing stockholders will be diluted. If we are unable to obtain sufficient outside capital when needed, our business and future prospects will be adversely affected and we could be forced to suspend or discontinue operations.

          Philips Solid State Lighting Solutions, Inc. filed a civil lawsuit against us on February 19, 2008. The lawsuit seeks injunctive relief and unspecified compensatory and treble damages and attorneys’ fees for alleged infringement of five (5) related patents. We believe that this lawsuit is without merit and intend to dispute the claim. We cannot, however, determine with certainty the outcome or resolution of this lawsuit or the timing for its resolution. We may incur expenses in defending this litigation and damages if we are found liable. If the final resolution of this litigation is unfavorable to us, our financial condition, results of operations and cash flows might be adversely affected.

          Currently, our strategy includes the outsourcing of certain manufacturing operations. Accordingly, except for any expenditures required to produce production tooling and molds for use by our contract manufacturers, we have made minimal investments in plant and equipment. If we increase sales and product deliveries, we may be required to make additions to our operations, administrative and management teams. Further, if we were to undertake the manufacture of certain or all of our products, capital expenditures would increase.

          We have embarked upon an aggressive design and development program in conjunction with bringing our products to market. If, as management believes, we are successful marketing our current products and developing additional new products, additional capital may be needed to fund the manufacturing process to produce finished goods and support the required investment in working capital. In the event orders are received from established retailers and distributors of lighting products and other end user customers, management believes that traditional lending sources would be available to provide a portion of the capital needed to cover the manufacturing and receivables cycles. However, we may still be required to raise additional capital to meet our obligations and to complete the commercialization of certain of our products currently being developed and to increase our marketing efforts.

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Item 8. Financial Statements and Supplementary Data.

          The financial statements and supplementary data required by this item are included in Part IV, Item 15 of this Annual Report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

          Evaluation of Disclosure Controls and Procedures

          We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that are designed to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

          We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Vice President — Finance of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report. Based on that evaluation, our Chief Executive Officer and Vice President — Finance concluded that our disclosure controls and procedures as of December 31, 2007 were effective.

          Management’s Annual Report on Internal Control over Financial Reporting

          Our management is responsible for establishing and maintaining adequate internal control over financial reporting as that term is defined in Securities Exchange Act of 1934, as amended, Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

          In order to evaluate the effectiveness of our internal control over financial reporting as of December 31, 2007, as required by Section 404 of the Sarbanes-Oxley Act of 2002, our management conducted an assessment based on the criteria set forth inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

          Under the supervision and with the participation of our management, including our Chief Executive Officer and Vice President — Finance, we conducted an evaluation of the effectiveness of our internal control over financial reporting in connection with preparation of this Annual Report. As a result of these assessments, we have concluded that we have maintained effective internal control over financial reporting as of December 31, 2007.

          This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. We were not required to have, nor have we engaged our

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independent registered public accounting firm to perform, an audit on our internal control over financial reporting pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report.

          Changes in Internal Control Over Financial Reporting

          There were no changes in our internal control over financial reporting during the fourth quarter of fiscal 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

          None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

          Our board of directors consists of eight (8) directors. Our bylaws allow for the number of directors to be set by the board of directors. Directors are elected annually to serve one-year terms.

          In connection with the Exchange Agreement, we entered into the Stockholder Voting Agreement, dated as of October 4, 2007, by and among us, LED Holdings, Ronald E. Lusk, Donald R. Harkleroad, Daryl N. Snadon and Robert E. Bachman (the “Voting Agreement”). The Voting Agreement governs the voting of stock held by LED Holdings and the other parties thereto in the election of members of the board of directors and has a term of two years. It provides that the board of directors of the Company is to consist of nine directors with: (i) four persons designated by the holders of the majority of the Series B Stock, (ii) four persons designated by the board of directors and (iii) the Chief Executive Officer of the Company.

          Set forth below is information concerning our directors and executive officers:

Name	Age		Position
Govi Rao		45	Chief Executive Officer and Chairman
Kenneth Honeycutt		56	President and Chief Operating Officer
Stephen Hamilton		43	Vice President — Finance
Kevin Furry		43	Chief Technology Officer
Frederic S. Maxik		46	Chief Scientific Officer
Robert E. Bachman		65	Director
David Bell		64	Director
Donald R. Harkleroad		62	Director
Richard Kelson		61	Director
Bonnie Reiss		52	Director
Daryl N. Snadon		61	Director
Richard Weinberg		48	Director

          Govi Rao, 45, joined us as Chief Executive Officer and Chairman of our board of directors in October 2007 in connection with our acquisition of the assets of LED Holdings. Since June 14, 2007, Mr. Rao has also served as President and CEO of LED Holdings, our largest stockholder which beneficially owns 75.2% of our common stock. Prior to that, Mr. Rao served as Vice President and General Manager for Phillips Solid State Lighting from January 2006 through June 2007. From March 2003 through December 2005, he served as Vice President of Business Creation and Brand for Phillips Lighting Company, and he was Senior Director of Professional Business for Phillips Lighting Company from July 2002 through February 2003. Mr. Rao does not serve as a director of any other public company.

          Kenneth Honeycutt, 56, joined us as President and Chief Operating Officer in June 2007. He also served as a member of our board of directors from June 2007 to October 2007. Mr. Honeycutt served as CEO of K2

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Associates, a consulting firm specializing in strategy, performance improvement, and executive coaching, from August, 2006 to June, 2007. From 2002 to July, 2006, he was President and CEO of Acuity Brands Inc., a provider of lighting fixtures and specialty chemical products. Prior to that, Mr. Honeycutt was President of Lithonia Lighting Group, a provider of lighting equipment for commercial, industrial, outdoor, and residential applications.

          Stephen Hamilton, 43, served as our Chief Financial Officer from November 2005 through October 4, 2007. He served as Vice President-Corporate Controller from October 4, 2007 through February 11, 2008. He was appointed to serve as our Vice President — Finance on February 12, 2008. Prior to joining us, Mr. Hamilton was a consultant with Grant Knauth, LLP from September 2004 through October 2005, and he served as Chief Financial Officer of Quadrem International Holdings, Limited, a multi-national company operating an electronic marketplace from January 2001 through September 2004.

          Kevin Furry, 43, joined us as Chief Technology Officer in October 2007 in connection with our acquisition of the assets of LED Holdings. Since June 14, 2007, Mr. Furry has also served as a manager of LED Holdings, our largest stockholder which beneficially owns 75.2% of our common stock. Prior to joining us, from 1993 through June 13, 2007, Mr. Furry served as President of LED Effects, Inc., an entity whose assets were acquired by LED Holdings.

          Fredric S. Maxik, 46, served as our Chief Technology Officer from June 2004 to October 2007. He also served as a director from August 2004 to October 2007. He was appointed Chief Scientific Officer in October 2007. After graduating from Bard College with a bachelor’s degree in physics and philosophy, Mr. Maxik began his career with Sansui Electronics in 1983 in Tokyo, Japan where he became vice president of product development. In 1990, he was recruited to the position of vice president of product development for Onkyo Electronics in Osaka, Japan. In 1993, Mr. Maxik formed a product development consulting firm. In 2002, he formed an environmental products company, which developed the intellectual property that eventually became the principal asset of Lighting Science, Inc. that was acquired by us in June 2004. Mr. Maxik received his honorary PhD in physics from the University of Hong Kong in 1993.

          Robert E. Bachman, 65, has served as a director for us since September 2003. He is the president and a director of USGT Investors Management Company, Inc., a Dallas-based investment/merchant bank that is the general partner of USGT Investors, L.P., a private venture capital/equity fund. Mr. Bachman serves as the chairman of the audit committee of our board of directors. Mr. Bachman’s service as a member of the board of directors is governed by the Voting Agreement.

          David Bell, 64, was appointed a member of our board of directors in October 2007 in connection with our acquisition of the assets of LED Holdings. Mr. Bell filled one of the four vacancies resulting from the acquisition and was appointed pursuant to the Voting Agreement discussed above. Since March 16, 2006, Mr. Bell has served as Chairman Emeritus of The Interpublic Group of Companies (''Interpublic’’), a provider of advertising, specialized marketing and communication services. Previously, he served as Interpublic’s Co-Chairman from January 2005 until March 15, 2006, Chairman and Chief Executive Officer from February 2003 to January 2005 and Vice Chairman from June 2001 to February 2003. From March 1999 to 2001, Mr. Bell served as Chairman and Chief Executive Officer of True North Communications, Inc., a provider of advertising and marketing communication services. From 1992 to March 1999, he served as Chairman and Chief Executive Officer of Bozell Worldwide. Mr. Bell serves on the Board of Directors of Warnaco Group Inc., Primedia, Inc. and DHB Industries Inc. Mr. Bell is currently Chairman of PRO-AD PAC (the advertising industry’s political action committee) and is the Chairman of the Board of Directors of The National Forest Foundation and Co-Chairman of the Advertising Council Advisory Group. Mr. Bell is also an operating advisor of Pegasus Capital Advisors, L.P. (“Pegasus Capital”). Pegasus Capital is an affiliate of LED Holdings, our largest stockholder which beneficially owns 75.2% of our common stock.

          Donald R. Harkleroad, 62, has served as a director for us since September 2003. He is president of The Bristol Company, an Atlanta-based holding company with interests in the food, technology, and merchant banking industries. Mr. Harkleroad’s service as a member of the board of directors is governed by the Voting Agreement.

          Richard Kelson, 61, was appointed a member of our board of directors in October 2007 in connection with our acquisition of the assets of LED Holdings. Mr. Kelson filled one of the four vacancies resulting from the

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acquisition and was appointed pursuant to the Voting Agreement discussed above. Mr. Kelson currently serves as a member of the Board of Directors of MeadWestvaco Corporation and PNC Financial Services Group, Inc. He retired from Alcoa, Inc. in 2006, where he served as Chairman’s Counsel. Mr. Kelson also served as Alcoa’s Executive Vice President and Chief Financial Officer for nearly a decade. Prior to that, he was Alcoa’s Executive Vice President — Environment, Health and Safety and General Counsel, and a member of the Executive Counsel, which is the senior leadership group that provides strategic direction for the company. Since June 14, 2007, Mr. Kelson has served as a member of LED Holdings, our largest stockholder which beneficially owns 75.2% of our common stock. Mr. Kelson is also an operating advisor of Pegasus Capital. Pegasus Capital is an affiliate of LED Holdings, our largest stockholder which beneficially owns 75.2% of our common stock.

          Bonnie Reiss, 52, was appointed a member of our board of directors in October 2007 in connection with our acquisition of the assets of LED Holdings. Ms. Reiss filled one of the four vacancies resulting from the acquisition and was appointed pursuant to the Voting Agreement discussed above. Ms. Reiss has more than 25 years of experience in business and entertainment law, political organizing, finance and event production, as well as management of non-profits. Ms. Reiss served as Senior Adviser to Arnold Schwarzenegger’s Gubernatorial Campaign in 2003 and served as the senior advisor to the Governor during his first term, where she was involved in all policy development, state budgeting, political strategy, homeland security and legislative analysis. She served on the California State Board of Education from 2003-2005 and continues to advise the Governor as a board member of the California Recovery Team. Ms. Reiss is also an operating advisor of Pegasus Capital. Pegasus Capital is an affiliate of LED Holdings, our largest stockholder which beneficially owns 75.2% of our common stock.

          Daryl N. Snadon, 61, has served as a director for us since September 2003. He is the owner of Beltway Development Company, a Dallas-based real estate development company with a 30-year operating history. Mr. Snadon is the principal owner of 25 separate commercial properties in Texas and other states. He serves as an officer and director of numerous privately held corporations, as managing partner of numerous joint ventures, and as a member or partner of numerous limited liability companies and partnerships. Mr. Snadon’s service as a member of the board of directors is governed by the Voting Agreement.

          Richard Weinberg, 48, was appointed a member of our board of directors in October 2007 in connection with our acquisition of the assets of LED Holdings. Mr. Weinberg filled one of the four vacancies resulting from the acquisition and was appointed pursuant to the Voting Agreement discussed above. Mr. Weinberg joined Pegasus Capital as a partner in 2005. Pegasus Capital is an affiliate of LED Holdings, our largest stockholder which beneficially owns 75.2% of our common stock. Mr. Weinberg has over 23 years of business development and complex financial and legal restructuring experience. From 2000 to 2005, Mr. Weinberg served as CEO of G-I Holdings (f/k/a GAF Corporation), leading that entity’s bankruptcy restructuring efforts, and from 1993 to 2005, he served as General Counsel and a senior executive of GAF Materials Corporation and International Specialty Chemicals, Inc., building products and specialty chemicals companies, respectively.

          Members of Audit Committee and Audit Committee Financial Expert

          The members of the Audit Committee are:

Richard Kelson
David Bell
Robert Bachman

          Richard Kelson is designated as the “audit committee financial expert” of our Audit Committee. Mr. Kelson is independent of our management, and we believe he meets the criteria set forth in the regulations with respect to the qualifications of an “audit committee financial expert.”

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          Code of Ethics

          We have adopted a code of ethics that is applicable to all our employees and, in particular, to our senior officers including our Chief Executive Officer and Vice President — Finance. A copy of the code of ethics may be obtained from us without charge by writing to us at the following address:

          Lighting Science Group Corporation
          2100 McKinney Avenue, Suite 1515
          Dallas, Texas 75201

          Section 16(a) Beneficial Ownership Reporting Compliance

          Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and officers, and persons who own more than ten percent of our common stock, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock. Directors, officers and persons who own more than ten percent of our common stock are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.

          To our knowledge, based solely on a review of the copies of such reports furnished to us, during the year ended December 31, 2007, we complied with all Section 16(a) filing requirements applicable to our directors, officers and ten percent stockholders except: Mr. Robert Bachman (2 late filings/4 late transactions); Mr. John Collingwood (1 late filing/3 late transactions); Mr. Stephen Hamilton (1 late filing/1 late transaction); Mr. Donald Harkleroad (2 late filings/4 late transactions); Mr. Shane Hartman (1 late filing/1 late transaction); Mr. Ronald Lusk (1 late filing/1 late transaction); Mr. Daryl Snadon (2 late filings/6 late transactions); Mr. Robert Woodson (1 late filing/1 late transaction); and Ardsley Advisory Partners (2 late filings/4 late transactions).

Item 11. Executive Compensation.

          The following table summarizes the overall compensation earned over each of the past two fiscal years ending December 31, 2007 by (1) each person who served as our principal executive officer during fiscal 2007; and (2) our two most highly compensated executive officers as of December 31, 2007 with compensation during fiscal 2007 of $100,000 or more (the “Named Executive Officers”).

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Summary Compensation Table

														Change in Pension Value
														and Nonqualified
Name and							Stock			Option		Non-Equity		Deferred Compensation		All Other
Principal			Salary		Bonus		Awards			Awards		Incentive Plan		Earnings		Compensation
Position	Year		($)		($)		($) (1)			($) (1)		Compensation		($)		($) (2)			Total ($)
Ronald E. Lusk		2007	$	294,647	$	300,000		—			—		—		—	$	51,900	(4)	$	646,547
(Chairman, President and Chief Executive Officer) (3)		2006	$	250,000		—		—		$	41,133		—		—		—		$	291,133
Govi Rao		2007	$	109,193		—		—			—		—		—		—		$	109,193
(Chairman and Chief Executive Officer) (5)		2006		—		—		—			—		—		—		—			—
Ken Honeycutt		2007	$	154,304		—	$	662,500	(7)		—		—		—		—		$	816,804
(President and Chief Operating Officer) (6)		2006		—		—		—			—		—		—		—			—
Frederic Maxik		2007	$	250,000		—		—			—		—		—		—		$	250,000
(Chief Scientific Officer)		2006	$	250,000		—		—		$	1,660		—		—		—		$	251,660

(1)	Reflects dollar amount expensed by us during the applicable fiscal year for financial statement reporting purposes pursuant to FAS 123R. FAS 123R requires us to determine the overall value of the options as of the date of grant based upon the Black-Scholes method of valuation, and to then expense that value over the service period over which the options become exercisable (vest). As a general rule, for time-in-service-based options, we will immediately expense any option or portion thereof which is vested upon grant, while expensing the balance on a pro rata basis over the remaining vesting term of the option. For a description FAS 123R and the assumptions used in determining the value of the options under the Black-Scholes model of valuation, see the notes to the financial statements included with this Form 10-K.
(2)	Includes all other compensation not reported in the preceding columns, including (i) perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is less than $10,000; (ii) any “gross-ups” or other amounts reimbursed during the fiscal year for the payment of taxes; (iii) discounts from market price with respect to securities purchased from the company except to the extent available generally to all security holders or to all salaried employees; (iv) any amounts paid or accrued in connection with any termination (including without limitation through retirement, resignation, severance or constructive termination, including change of responsibilities) or change in control; (v) contributions to vested and unvested defined contribution plans; (vi) any insurance premiums paid by, or on behalf of, the company relating to life insurance for the benefit of the named executive officer; and (vii) any dividends or other earnings paid on stock or option awards that are not factored into the grant date fair value required to be reported in a preceding column.
(3)	Mr. Lusk was paid $195,833 as salary for serving as our Chairman and Chief Executive Officer from January 1, 2007 through October 3, 2007. Mr. Lusk was paid $98,814 as salary for serving as our Vice Chairman from October 4, 2007 to December 31, 2007. Mr. Lusk resigned on March 10, 2008.
(4)	Includes $51,900 that was indirectly paid to Mr. Lusk for the business use of a private airplane.
(5)	Mr. Rao joined us as our Chairman and Chief Executive Officer on October 4, 2007.
(6)	Mr. Honeycutt became our President and Chief Operating Officer on June 5, 2007.
(7)	Includes 62,500 shares of restricted stock awarded to Mr. Honeycutt pursuant to his employment agreement that vested during the year. The total restricted stock award for Mr. Honeycutt was 250,000 shares of common stock. The restricted stock award vests 25% on each of the grant date and each of the three anniversaries thereafter.

Employment Agreements

Govi Rao

          On October 4, 2007, in conjunction with our entry into the Exchange Agreement with LED Holdings, we entered into an employment agreement with Govi Rao (the “Rao Employment Agreement”). Pursuant to the Rao Employment Agreement, Mr. Rao will serve as our Chief Executive Officer and, without additional compensation, as Chairman of our board of directors. The Rao Employment Agreement has a term commencing on October 4, 2007 and continues until its termination. The Rao Employment Agreement may be terminated, without severance,

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by Mr. Rao voluntarily or by us with “cause.” In the event that Mr. Rao’s employment is terminated by us without “cause” or by Mr. Rao with “good reason,” Mr. Rao would be entitled to severance pay equal to his annual base salary. If Mr. Rao’s employment is terminated prior to the first anniversary of the Rao Employment Agreement’s commencement and we owe severance, Mr. Rao would instead be entitled to a severance of two times his annual base salary. Under the Rao Employment Agreement, Mr. Rao is entitled to an annual base salary of $425,000 and a monthly automobile allowance of $1,500. We may also pay Mr. Rao bonuses at such times and in such amounts as our board of directors determines, and Mr. Rao is entitled to participate in 2005 Plan.

Ronald E. Lusk

          In 1999, we entered into a three-year employment agreement with Mr. Lusk. Upon completion of the initial three-year term, Mr. Lusk’s agreement was automatically renewed for successive one-year periods. On October 4, 2007, in conjunction with our entry into the Exchange Agreement with LED Holdings, we terminated this employment agreement and entered into a new employment agreement with Mr. Lusk (the “New Lusk Employment Agreement”). Pursuant to the New Lusk Employment Agreement, Mr. Lusk was to serve as our Vice Chairman. The New Lusk Employment Agreement had a term commencing on October 4, 2007 and was to continue until the fifth anniversary of that date. It could be terminated at any time, without severance, by Mr. Lusk voluntarily or by us with “cause.” In the event that Mr. Lusk’s employment is terminated by us without “cause” or by Mr. Lusk with “good reason,” Mr. Lusk would be entitled to severance pay equal to his annual base salary. If Mr. Lusk’s employment was terminated prior to the first anniversary of the New Lusk Employment Agreement’s commencement and we owed severance, Mr. Lusk would instead be entitled to a severance of two times his annual base salary. Under the New Lusk Employment Agreement, Mr. Lusk was entitled to an annual base salary of $400,000. Mr. Lusk was also entitled to participate the 2005 Plan. On March 10, 2008, the New Lusk Employment Agreement was terminated by mutual agreement between us and Mr. Lusk. In conjunction with this termination, we entered into a letter agreement (the “Lusk Separation Agreement”) with Mr. Lusk whereby he resigned as a director and employee of the Company. Pursuant to the Lusk Separation Agreement, Mr. Lusk is entitled to $300,000 in severance, which was to be paid within seven business days after execution of the agreement and is entitled to an additional $300,000 in severance payable in equal installments over a period of twelve months from the date of execution of the Lusk Separation Agreement. The Lusk Separation Agreement also contains customary mutual release, non-competition, non-solicitation and confidentiality provisions.

Kevin Furry

          On October 4, 2007, in conjunction with our entry into the Exchange Agreement with LED Holdings, we entered into an employment agreement with Kevin Furry (the “Furry Employment Agreement”). Pursuant to the Furry Employment Agreement, Mr. Furry will serve as our Chief Technology Officer. The Furry Employment Agreement has a term commencing on October 4, 2007 and continues until the fifth anniversary of that date. The Furry Employment Agreement may be terminated at any time, without severance, by Mr. Furry voluntarily or by us with “cause.” In the event that Mr. Furry’s employment is terminated by us without “cause” or by Mr. Furry with “good reason,” Mr. Furry would be entitled to severance pay equal to $62,500. Under the Furry Employment Agreement, Mr. Furry is entitled to an annual base salary of $250,000. We may also pay Mr. Furry bonuses at such times and in such amounts as our board of directors determines, and Mr. Furry is entitled to participate in the 2005 Plan. Further, upon termination, Mr. Furry may receive further payments as consideration for certain non-competition and non-solicitation covenants in the Furry Employment Agreement.

Frederic S. Maxik

          On June 1, 2004 in connection with the acquisition of Lighting Science, Inc., we entered into a three-year employment agreement with Mr. Maxik. On October 4, 2007, in conjunction with our entry into the Exchange Agreement with LED Holdings, we terminated this employment agreement and entered into a new employment agreement with Mr. Maxik (the “New Maxik Employment Agreement”). Pursuant to the New Maxik Employment Agreement, Mr. Maxik will serve as our Chief Scientific Officer. The New Maxik Employment Agreement has a term commencing on October 4, 2007 and continues until the fifth anniversary of that date. It may be terminated at any time, without severance, by Mr. Maxik voluntarily or by us with “cause.” In the event that Mr. Maxik’s employment is terminated by us without “cause” or by Mr. Maxik with “good reason,” Mr. Maxik would be entitled to severance pay equal to his annual base salary. If Mr. Maxik’s employment is terminated prior to the first

26

anniversary of the New Maxik Employment Agreement’s commencement and we owe severance, Mr. Maxik would instead be entitled to a severance of two times his annual base salary. Under the New Maxik Employment Agreement, Mr. Maxik is entitled to an annual base salary of $250,000. We may also pay Mr. Maxik bonuses at such times and in such amounts as our board of directors determines, and Mr. Maxik is entitled to participate the 2005 Plan.

Kenneth H. Honeycutt

          On August 2, 2007, we entered into a three-year employment agreement with Mr. Honeycutt (the “Old Honeycutt Employment Agreement”). Under the Old Honeycutt Employment Agreement, Mr. Honeycutt was entitled to an annual salary of $250,000 and other benefits. Mr. Honeycutt was also awarded 250,000 shares of restricted common stock of the Company. The restricted stock vests 25% upon grant and 25% on each of the following three anniversary dates of the initial grant. On October 4, 2007, in conjunction with our entry into the Exchange Agreement with LED Holdings, we terminated the Old Honeycutt Employment Agreement and entered into a new employment agreement with Mr. Honeycutt (the “New Honeycutt Employment Agreement”). Pursuant to the New Honeycutt Employment Agreement, Mr. Honeycutt will serve as our President and Chief Operating Officer. It has a term commencing on October 4, 2007 and continues until the third anniversary of that date. The New Honeycutt Employment Agreement may be terminated at any time, without severance, by Mr. Honeycutt voluntarily or by us with “cause.” In the event that Mr. Honeycutt’s employment is terminated by us without “cause” or by Mr. Honeycutt with “good reason,” Mr. Honeycutt would be entitled to severance pay equal to his annual base salary. If Mr. Honeycutt’s employment is terminated prior to the first anniversary of the New Honeycutt Employment Agreement’s commencement and we owe severance, Mr. Honeycutt would instead be entitled to a severance of two times his annual base salary. Under the New Honeycutt Employment Agreement, Mr. Honeycutt is entitled to an annual base salary of $250,000. We may also pay Mr. Honeycutt bonuses at such times and in such amounts as our board of directors determines, and Mr. Honeycutt is entitled to participate the 2005 Plan. Mr. Honeycutt also agreed to waive his right to accelerated vesting of his restricted stock upon the “change in control” (as defined in Mr. Honeycutt’s Restricted Stock Award Agreement dated August 7, 2007) resulting from the transactions effectuated pursuant to the Exchange Agreement.

Outstanding Equity Awards At Fiscal Year-End

          The following table provides certain information concerning unexercised options, stock that has not vested, and equity incentive plan awards held by each of our Named Executive Officers that were outstanding as of December 31, 2007.

Option Awards

Stock Awards

Equity Incentive

Equity Incentive

Equity Incentive Plan Awards:

Plan Awards:

Number

Market Value

Plan Awards:

Market or

Number of

Number of

Number of

of Shares

of Shares

Number of

Payout Value of

Securities

Securities

Securities

or Units

or Units

Unearned

Unearned

Underlying

Underlying

Underlying

of Stock

of Stock

Shares, Units or

Shares, Units or

Unexercised

Unexercised

Unexercised

Option

That

That

Other Rights That

Other Rights

Options

Options

Unearned

Exercise

Option

Have Not

Have Not

Have Not

That Have Not

(#)

(#)

Options

Price

Expiration

Vested

Vested

Vested

Vested

Name

Exercisable

Unexercisable

(#)

($)

Date

(#)

($)

(#)

($)

Ronald E. Lusk

6,667

(2)

3,334

(3)

—

$

6.40

2/21/2011

—

—

—

—

(Chairman and Chief Executive Officer) (1)

Govi Rao

—

—

—

—

—

—

—

—

—

(Chairman and Chief Executive Officer) (4)

Ken Honeycutt

—

—

—

—

—

187,500

(6)

$

1,612,500

(7)

—

—

(President) (5)

Frederic Maxik

334

(8)

167

(9)

—

$

6.40

2/21/2009

—

—

—

—

(Chief Technology Officer)

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(1)	Mr. Lusk served as our Chairman and Chief Executive Officer from January 1, 2007 through October 3, 2007. Thereafter, he served as our Vice Chairman. Mr. Lusk resigned on March 10, 2008.
(2)	These options were granted on February 21, 2006. 3,334 of these options were fully exercisable (vested) upon grant and 3,333 became fully exercisable (vested) on February 21, 2007.
(3)	These options were granted on February 21, 2006. These options will become exercisable (vested) on February 21, 2008, assuming continued provision of services as an officer or director.
(4)	Mr. Rao became Chairman and Chief Executive Officer on October 4, 2007.
(5)	Mr. Honeycutt became our President and Chief Operating Officer on June 5, 2007.
(6)	Mr. Honeycutt was awarded 250,000 shares of restricted stock on August 5, 2007, pursuant to his employment agreement. 62,500 shares vested on August 5, 2007. 62,500 shares, 62,500 shares and 62,500 shares vest on August 5, 2008, August 5, 2009 and August 5, 2010, respectively.
(7)	Assumes a market value of $8.60 per share of common stock, as reported by the over the counter bulletin board on December 31, 2007.
(8)	These options were granted on February 21, 2006. 167 of these options were fully exercisable (vested) upon grant and 167 became fully exercisable (vested) on February 21, 2007.
(9)	These options were granted on February 21, 2006. These options will become exercisable (vested) on February 21, 2008, assuming continued provision of services as an officer.

Director Compensation

     The following table shows the overall compensation earned for the 2007 fiscal year with respect to each person who was a director as of December 31, 2007.

									Change in Pension
									Value and
							Non-Equity		Nonqualified
	Fees Earned or						Incentive Plan		Deferred		All Other
	Paid in Cash		Stock Awards		Option Awards		Compensation		Compensation		Compensation		Total
Name	($) (1)		($)		($) (2)		($)		Earnings		($)		($)
Robert E. Bachman (3)	$	47,500		—	$	49,625		—		—		—	$	97,125
John Collingwood (4)	$	37,500		—		—		—		—		—	$	37,500
Donald Harkleroad (5)	$	47,500		—	$	49,625		—		—		—	$	97,125
Ronald E. Lusk (6)		—		—		—		—		—		—		—
Daryl Snadon (7)	$	37,500		—		—		—		—		—	$	37,500
Robert Woodson III (8)	$	9,425		—		—		—		—		—	$	58,302
Robert H. Warshauer (9)		—		—		—		—		—		—		—
Govi Rao (10)		—		—		—		—		—		—		—
Richard Kelson (11)		—		—		—		—		—		—		—
David Bell (11)		—		—		—		—		—		—		—
Richard Weinberg (11)		—		—		—		—		—		—		—
Bonnie Reiss (11)		—		—		—		—		—		—		—

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(1)	No fees have been shown as earned or paid in cash for the fourth quarter of 2007. We anticipate that we will finalize the compensation arrangements for the current members of the board of directors in the second quarter of 2008.
(2)	Reflects dollar amount expensed by us during the applicable fiscal year for financial statement reporting purposes pursuant to FAS 123R. FAS 123R requires us to determine the overall value of the options as of the date of grant based upon the Black-Scholes method of valuation, and to then expense that value over the service period over which the options become exercisable (vest). As a general rule, for time-in-service-based options, we will immediately expense any option or portion thereof which is vested upon grant, while expensing the balance on a pro rata basis over the remaining vesting term of the option. For a description FAS 123R and the assumptions used in determining the value of the options under the Black-Scholes model of valuation, see the notes to the financial statements included with this Form 10-K.
(3)	As of December 31, 2007, Mr. Bachman held options to purchase 51,250 shares of our common stock.
(4)	As of December 31, 2007, Mr. Collingwood held options to purchase 3,500 shares of our common stock. Mr. Woodson resigned from the board of directors in March 2007.
(5)	As of December 31, 2007, Mr. Harkleroad held options to purchase 56,250 shares of our common stock.
(6)	Pursuant to Mr. Lusk’s employment agreement, he was paid an annual salary of $400,000 for service as our Vice-Chairman. The salary paid to Mr. Lusk in his capacity as Vice Chairman during 2007 was included in the Summary Compensation Table. Mr. Lusk served as our Chairman and Chief Executive Officer from January 1, 2007 through October 3, 2007. Thereafter, he served as our Vice Chairman. Mr. Lusk resigned on March 10, 2008.
(7)	As of December 31, 2007, Mr. Snadon held options to purchase 3,500 shares of our common stock.
(8)	As of December 31, 2007, Mr. Woodson, III held options to purchase 3,500 shares of our common stock. Mr. Woodson resigned from the board of directors in March 2007.
(9)	Mr. Warshauer resigned as our President and a director in March 2007.
(10)	Mr. Rao joined us as our Chairman and Chief Executive Officer on October 4, 2007. As an executive officer of the Company, Mr. Rao does not receive any additional compensation as a member of the board of directors.
(11)	Joined the board of directors in October 2007.

          Through September 30, 2007, each independent non-employee director received compensation of $50,000 per year for service on the board of directors. To date this compensation has been paid by the issuance of shares of our common stock. Members of the board of directors are also eligible for participation in the 2005 Plan.

          From June 1, 2007 through September 30, 2007, the Company also paid $30,000 annually to each of Mr. Bachman and Mr. Harkleroad, who acted as the chairs of the Audit Committee and Executive and Compensation Committees, respectively.

          We anticipate that we will finalize the compensation arrangements for the current members of the board of directors in the second quarter of 2008.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

          The following table sets forth as of March 24, 2008, the beneficial ownership of common stock of the Company by (i) each named executive officer or director, (ii) each person who was known to us to be the beneficial owner of more than five percent of the outstanding shares of common stock and (iii) directors and executive officers of the Company as a group (12 persons). Govi Rao, Chairman and Chief Executive Officer; Kenneth Honeycutt, President and Chief Operating Officer; Frederic Maxik, Chief Scientific Officer, Kevin Furry, Chief Technology Officer; and Stephen Hamilton, Vice President — Finance, are currently the only executive officers of the Company. Except as otherwise indicated, the address for each beneficial owner is Lighting Science Group Corporation, 2100 McKinney Avenue, Suite 1515, Dallas, TX 75201. The applicable percentage ownership is based on 22,069,810 shares of common stock issued and outstanding as of March 24, 2008, plus, on an individual basis, the right of that individual to obtain common stock upon exercise of stock options or warrants or upon the conversion of 6% Convertible Preferred Stock or Series B Stock within 60 days of March 24, 2008.

	Shares Beneficially
	Owned(1)
Name and Address of Beneficial Owner	Number		Percent
Directors and Officers
Robert E. Bachman (2)		131,205		*	%
David Bell		—		—	%
Kevin Furry		—		—	%
Stephen Hamilton (3)		19,285		*	%
Donald R. Harkleroad (4)		124,154		*	%
Kenneth Honeycutt (5)		250,000		1.1	%

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	Shares Beneficially
	Owned(1)
Name and Address of Beneficial Owner	Number		Percent
Richard Kelson		—		—	%
Ron E. Lusk (6)		270,513		1.2	%
Fredric S. Maxik (7)		3,613		*	%
Govi Rao		—		—	%
Bonnie Reiss		—		—	%
Daryl N. Snadon (8)		146,807		—	%
Richard Weinberg		—		—	%
Directors and Executive Officers as a Group (12 persons)		675,063		3.0	%
Certain Persons
LED Holdings, LLC (8)		18,583,523		75.2	%

*	Less than 1%.
(1)	Beneficial ownership as reported in the above table has been determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended. The persons and entities named in the table have sole voting and investment power with respect to all shares shown as beneficially owned by them, except as noted below.
(2)	Includes 5,554 shares of common stock issuable to USGT Investors, L.P. pursuant to the conversion of 6% Convertible Preferred Stock, 22,187 shares of common stock issuable to USGT Investors, L.P. upon the exercise of warrants, and 51,250 shares of common stock issuable to USGT Investors, L.P. pursuant to the exercise of stock options issued under the 2005 Plan. Mr. Bachman is controlling shareholder in the sole corporate general partner of USGT Investors, L.P. and may be deemed to have voting and/or investment power with respect to the shares owned by USGT Investors, L.P.
(3)	Includes 19,000 shares of common stock issuable upon the exercise of incentive stock options issued under the 2005 Plan.
(4)	Includes 8,334 shares of common stock issuable to The Bristol Company pursuant to the conversion of 6% Convertible Preferred Stock, 2,344 shares of common stock issuable to The Bristol Company upon exercise of warrants, and 56,250 shares of common stock issuable to The Bristol Company upon exercise of stock options issued under the 2005 Plan. Mr. Harkleroad is sole shareholder of The Bristol Company and may be deemed to have sole voting and/or investment power with respect to the shares owned by The Bristol Company.
(5)	Includes 250,000 shares of common stock issuable pursuant to Mr. Honeycutt’s restricted stock award agreement.
(6)	Includes 22,500 shares of common stock issuable upon exercise of warrants and 10,000 shares of common stock issuable upon the exercise of stock options issued under the 2005 Plan. Includes shares of common stock held by the Ronald E. Lusk Revocable Trust. Mr. Lusk is the trustee of the Ronald E. Lusk Revocable Trust and may be deemed to have voting and/or investment power with respect to the shares owned by the Ronald E. Lusk Revocable Trust. Mr. Lusk served as our Chairman and Chief Executive Officer from January 1, 2007 through October 3, 2007. Thereafter, he served as our Vice Chairman. Mr. Lusk resigned on March 10, 2008.
(7)	Includes 500 shares of common stock issuable upon the exercise of incentive stock options issued under the 2005 Plan.
(8)	Includes 15,594 shares of common stock issuable upon conversion of 6% Convertible Preferred Stock, 31,886 shares of common stock issuable upon the exercise of warrants and 3,500 shares of common stock issuable upon exercise of incentive stock options issued under the 2005 Plan.
(9)	Includes 2,654,789 shares of common stock issuable upon conversion of 2,000,000 shares of Series B Preferred Stock. PP IV (AIV) LED, LLC (“PPAIV”), PP IV LED, LLC (“PPLED”), Richard Kelson (“Mr. Kelson”) and LED Effects, Inc. (“LED”, together with PPAIV, PPLED, and Mr. Kelson, the “LED Holdings Members”) are members of LED Holdings. PPAIV and PPLED are funds managed by Pegasus Capital Partners, L.P. The LED Holdings Members do not directly own any of the common stock or Series B Preferred Stock of the Lighting Science Group Corporation. The LED Holdings Members share voting and dispositive power over the shares of common stock and Series B Preferred Stock of Lighting Science Group Corporation only as members of LED Holdings and by virtue of such status may be deemed to be the beneficial owner of the shares of common stock and Series B Preferred Stock of the Lighting Science Group Corporation held by LED Holdings. The LED Holdings Members disclaim beneficial ownership of the shares of common stock and Series B Preferred Stock held by LED Holdings, except to the extent of any

30

pecuniary interest, and this statement shall not be deemed to be an admission that they are the beneficial owners of such securities.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

          Guarantors of Line of Credit

          On June 29, 2006, we entered into agreements with one of our banks to obtain a $2.0 million line of credit. Amounts due under the line of credit were guaranteed by a group of directors and stockholders (the “Guarantors”). The amount of the line of credit available for use by us at any point in time was equal to the aggregate value of guarantees that were negotiated between the bank and the Guarantors at that time. Between December 2006 and March 2007, we amended the line of credit to increase the amount available thereunder to up to $2,500,000. At May 28, 2007, Guarantors had provided guarantees for the entire $2.5 million balance of the line of credit. We also entered into agreements to lease equipment in March 2007. The total value of the leased equipment is $150,000. At May 28, 2007, Guarantors had provided guarantees for the entire amount of the leases.

          The Guarantors of the initial $2.0 million line of credit included the following current and former directors, officers and stockholders who were issued the respective number of shares of common stock and warrants to purchase common stock:

				Warrant Shares/
		Total Value of Debt		Common Shares to be
Name of Guarantor	Position	Guaranteed		Issued
UGT Investors LP (1)	Director	$	150,000		26,250
Daryl Snadon	Director		200,000		35,000
John Collingwood	Director		200,000		35,000
Ron Lusk	Vice Chairman		50,000		8,750
Jerome Hill	Stockholder		100,000		17,500
George Parker Young	Stockholder		50,000		8,750
Phil Lacerte	Stockholder		1,250,000		118,750
TOTAL		$	2,000,000		250,000

(1) Mr. Bachman is controlling shareholder in the sole corporate general partner of USGT Investors, L.P.

          The warrants and shares of common stock listed in the table above were issued to the Guarantors during the third quarter of 2006. The warrants have an exercise price of $6.00 per share of common stock and a term of five years.

          In 2007, we issued warrants to the following Guarantors as consideration for providing additional guarantees enabling us to obtain the additional amount available under our line of credit and under the guaranteed equipment deposits:

		Amount of Guarantees		Warrant Shares to be
Name of Guarantor	Position	Provided		Issued
Ron Lusk	Vice Chairman	$	275,000		13,750
Phibian S. Trust	Stockholder		75,000		3,750
Phil Lacerte	Stockholder		65,000		3,250
Daryl Snadon	Director		50,000		2,500
Edward Hawes	Stockholder		50,000		2,500
USGT Investors, LP (1)	Director		37,500		1,875
Baron Cass	Stockholder		48,750		2,438
Paul Schlosberg	Stockholder		48,750		2,438
TOTAL		$	650,000		32,501

(1) Mr. Bachman is controlling shareholder in the sole corporate general partner of USGT Investors, L.P.

31

          The above warrants have an exercise price of $6.00 per share and have a term of five years.

          Parent Company

          LED Holdings may be deemed to be our “parent” by virtue of its beneficial ownership of our voting securities. LED Holdings beneficially owns 2,000,000 shares of our Series B Preferred Stock and 15,928,734 shares of our common stock, which represents approximately 80% of our voting power.

Item 14. Principal Accounting Fees and Services.

          Fees billed for services provided by Turner, Stone & Company, L.L.P. related to the fiscal years ended December 31, 2006 and 2005 were as follows:

          Audit Fees

          Audit fees billed by Turner, Stone & Company, L.L.P. totaled approximately $158,370 and $57,600 for the years ended December 31, 2007 and 2006, respectively. Audit fees include fees for audit of our annual financial statements, review of our quarterly financial statements, services associated with securities filings and, for 2007, the audit of the financial statements of LED Holdings and its predecessor companies, pursuant to our acquisition of the assets of LED Holdings.

          Audit-Related Fees

          Audit-related fees billed by Tuner, Stone & Company, L.L.P. totaled approximately $4,800 for the year ended December 31, 2007. We were not billed for any audit-related fees for the year ended December 31, 2006. The $4,800 billed in 2007 consisted of due diligence-related costs incurred in conjunction with our acquisition of the assets of LED Holdings in October 2007.

          Tax Fees

          No tax fees have been paid to Turner, Stone & Company, L.L.P. for any period.

          All Other Fees

          No other fees other than those set out above have been paid to the Turner, Stone & Company, L.L.P.

          Pre-Approval Policies

          As required by the Sarbanes-Oxley Act, all audit and non-audit services performed by independent registered public accounting firms must be pre-approved by our Audit Committee unless the pre-approval provision is waived in applicable securities rules and regulations of the SEC. The Audit Committee may delegate to one or more members of the Committee the authority to grant pre-approval of non-audit services. The decision of any member to whom such authority is delegated to pre-approve non-audit services will be presented to the full Audit Committee for its approval at its next scheduled meeting.

          During fiscal year 2007, the Audit Committee approved 100% of the audit services provided by Turner, Stone & Company, L.L.P.

PART IV

Item 15. Exhibits, Financial Statements and Schedules.

          (a) The following documents are filed as part of this report:

          1. Index to Consolidated Financial Statements, Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets as of December 31, 2007 and 2006, Consolidated Statements of Operations and

32

Comprehensive Income for the two years in the period ended December 31, 2007, Consolidated Statements of Changes in Stockholders’ Equity for each of the two years in the period ended December 31, 2007, Consolidated Statements of Cash Flows for each of the two years in the period ended December 31, 2007, and Notes to Consolidated Financial Statements.

          2. The financial statement schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or the Notes to Consolidated Financial Statements.

          Exhibits: The exhibits required to be filed by this Item 15 are set forth in the Index to Exhibits accompanying this report.

SIGNATURES

          Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

LIGHTING SCIENCE GROUP CORPORATION
May 19, 2009	/s/ Govi Rao
	Govi Rao, Chairman and Chief Executive Officer

          Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates as indicated therein.

Signature	Capacity in which Signed	Date
/s/ Govi RaoGovi Rao	Chairman of the Board and Chief Executive Officer (Principal Executive Officer)	May 19, 2009
/s/ Kathryn Reynolds WallbrinkKathryn Reynolds Wallbrink	Senior Vice President, Strategy and Finance (Principal Financial Officer)	May 19, 2009
/s/ Stephen HamiltonStephen Hamilton	Vice President — Finance (Principal Accounting Officer)	May 19, 2009
/s/ Robert E. Bachman(by Govi Rao, Attorney-in-Fact*) Robert E. Bachman	Director	May 19, 2009

33

Signature	Capacity in which Signed	Date
/s/ David Bell(by Govi Rao, Attorney-in-Fact*) David Bell	Director	May 19, 2009
/s/ Donald R. Harkleroad(by Govi Rao, Attorney-in-Fact*) Donald R. Harkleroad	Director	May 19, 2009
/s/ Richard Kelson(by Govi Rao, Attorney-in-Fact*) Richard Kelson	Director	May 19, 2009
/s/ Bonnie Reiss(by Govi Rao, Attorney-in-Fact*) Bonnie Reiss	Director	May 19, 2009
/s/ Daryl N. Snadon(by Govi Rao, Attorney-in-Fact*) Daryl N. Snadon	Director	May 19, 2009
/s/ Richard Weinberg(by Govi Rao, Attorney-in-Fact*) Richard Weinberg	Director	May 19, 2009

* Pursuant to Power of Attorney filed herewith

34

INDEX TO EXHIBITS

EXHIBIT
NUMBER	DESCRIPTION
2.1	Stock Purchase Agreement dated as of June 1, 2004, by and among The Phoenix Group Corporation, Lighting Science, Inc., certain stockholders of The Phoenix Group Corporation and Frederic Maxik (previously filed as Exhibit 2.1 to the Current Report on Form 8-K filed on June 15, 2004, File No. 0-20354, and incorporated herein by reference).
2.2	Exchange and Contribution Agreement, dated as of October 4, 2007 between the Company and LED Holdings LLC (previously filed as Exhibit 4.1 to the Current Report on Form 8-K filed on October 11, 2007, File No. 0-20354, and incorporated herein by reference).
3.1	Amended and Restated Certificate of Incorporation of Lighting Science Group Corporation (previously filed as Exhibit 3.1 to the Registration Statement on Form S-1 (333-142018) filed on February 12, 2008, File No. 0-20354, and incorporated herein by reference).
3.2	Amended and Restated By-laws of Lighting Science Group Corporation (previously filed as Exhibit 3.1 to the Current Report on Form 8-K filed on October 11, 2007, File No. 0-20354, and incorporated herein by reference).
4.1	Securities Purchase Agreement dated as of May 12, 2005, by and among Lighting Science Group Corporation and the purchasers set forth on Exhibit A thereto (previously filed as Exhibit 99.2 to the Current Report on Form 8-K filed on May 16, 2005, File No. 0-20354, and incorporated herein by reference).
4.2	Form of Warrant granted pursuant to the Securities Purchase Agreement dated as of May 12, 2005 (previously filed as Exhibit 99.3 to the Current Report on Form 8-K filed on May 16, 2005, File No. 0-20354, and incorporated herein by reference).
4.3	Form of Warrant issued to certain directors, officers and security holders as consideration for providing guarantees pursuant to the Line of Credit (previously filed as Exhibit 10.1 to the Current Report on Form 8-K filed on September 22, 2006, File No. 0-20354, and incorporated herein by reference).
4.4	Amended and Restated Certificate of Designation of 6% Convertible Preferred Stock (previously filed as Exhibit 4.1 to the Current Report on Form 8-K filed on January 9, 2007, File No. 0-20354, and incorporated herein by reference).
4.5	Securities Purchase Agreement, dated as of March 9, 2007 among Lighting Science Group Corporation and the purchasers identified on the signature pages thereto (previously filed as Exhibit 10.1 to the Current Report on Form 8-K filed on March 12, 2007, File No. 0-20354, and incorporated herein by reference).
4.6	Form of Warrant A, dated March 9, 2007 (previously filed as Exhibit 10.2 to the Current Report on Form 8-K filed on March 12, 2007, File No. 0-20354, and incorporated herein by reference).
4.7	Form of Warrant B, dated March 9, 2007 (previously filed as Exhibit 10.3 to the Current Report on Form 8-K filed on March 12, 2007, File No. 0-20354, and incorporated herein by reference).
4.8	Form of Warrant, dated                    , 2007 (previously filed as Exhibit 10.4 to the Current Report on Form 8-K filed on March 12, 2007, File No. 0-20354, and incorporated herein by reference).

35

EXHIBIT
NUMBER	DESCRIPTION
4.9	Certificate of Designation of Series B Stock (previously filed as Exhibit 4.2 to the Current Report on Form 8-K filed on October 11, 2007, File No. 0-20354, and incorporated herein by reference).
4.10	Registration Rights Agreement dated October 4, 2007 between the Company and LED Holdings LLC (previously filed as Exhibit 4.3 to the Current Report on Form 8-K filed on October 11, 2007, File No. 0-20354, and incorporated herein by reference).
4.11	Stockholder Voting Agreement dated October 4, 2007 among the Company, LED Holdings LLC, Ronald Lusk, Robert Bachman, Daryl Snadon and Donald Harkleroad (previously filed as Exhibit 4.4 to the Current Report on Form 8-K filed on October 11, 2007, File No. 0-20354, and incorporated herein by reference).
10.1+	Lighting Science Group 2005 Equity Based Compensation Plan (previously filed as Exhibit A to the Proxy Statement on Schedule 14A filed on November 29, 2006, File No. 0-20354, and incorporated herein by reference).
10.2	Trademark Assignment Agreement dated October 4, 2007 between the Company and LED Holdings, LLC (previously filed as Exhibit 10.1 to the Current Report on Form 8-K filed on October 11, 2007, File No. 0-20354, and incorporated herein by reference).
10.3	Indemnification Letter Agreement dated October 4, 2007 between the Company and LED Holdings, LLC (previously filed as Exhibit 10.2 to the Current Report on Form 8-K filed on October 11, 2007, File No. 0-20354, and incorporated herein by reference).
10.4+	Employment Agreement dated as of October 4, 2007 by and between Lighting Science Group Corporation and Ronald E. Lusk (previously filed as Exhibit 10.5 to the Current Report on Form 8-K filed on October 11, 2007, File No. 0-20354, and incorporated herein by reference).
10.5+	Employment Agreement, dated as of October 4, 2007, by and between Lighting Science Group Corporation and Fredric Maxik (previously filed as Exhibit 10.6 to the Current Report on Form 8-K filed on October 11, 2007, File No. 0-20354, and incorporated herein by reference).
10.6+	Employment Agreement dated as of October 4, 2007 by and between Lighting Science Group Corporation and Kevin Furry (previously filed as Exhibit 10.3 to the Current Report on Form 8-K filed on October 11, 2007, File No. 0-20354, and incorporated herein by reference).
10.7+	Employment Agreement dated October 4, 2007 between Lighting Science Group Corporation and Kenneth Honeycutt (previously filed as Exhibit 10.7 to the Current Report on Form 8-K filed on October 11, 2007, File No. 0-20354, and incorporated herein by reference).
10.8+	Employment Agreement dated October 4, 2007 between Lighting Science Group Corporation and Govi Rao (previously filed as Exhibit 10.4 to the Current Report on Form 8-K filed on October 11, 2007, File No. 0-20354, and incorporated herein by reference).
10.9+	Letter Agreement dated March 10, 2008 between Lighting Science Group Corporation and Ronald E. Lusk (previously filed as Exhibit 10.1 to the Current Report on Form 8-K filed on March 11, 2008, File No. 0-20354, and incorporated herein by reference).
21.1	Subsidiaries of Lighting Science Group Corporation. (previously filed as Exhibit 21.1 to the Annual Report on Form 10-K filed on March 31, 2008, File No. 0-20354, and incorporated herein by reference)

36

EXHIBIT
NUMBER	DESCRIPTION
24.1*	Power of Attorney.
31.1*	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Senior Vice President, Strategy and Finance pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Chief Executive Officer and Vice President, Strategy and Finance pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Filed herewith
+	Management contract or compensatory plan

37

Item 8. Financial Statements.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets as of December 31, 2007 and 2006 of Lighting Science Group Corporation and LED Effects, Inc., respectively	F-3
Consolidated Statements of Operations for Lighting Science Group Corporation for the period June 14, 2007 through December 31, 2007, for LED Effects, Inc. for the period January 1, 2007 through June 13, 2007 and for LED Effects, Inc. for the year ended December 31, 2006	F-4
Consolidated Statements of Stockholders’ Equity for Lighting Science Group Corporation for the period June 14, 2007 through December 31, 2007 and for LED Effects, Inc. for the period January 1, 2007 through June 13, 2007 and for the year ended December 31, 2006	F-5
Consolidated Statements of Cash Flows for Lighting Science Group Corporation for the period June 14, 2007 through December 31, 2007 and for LED Effects, Inc. for the period January 1, 2007 through June 13, 2007 and for the year ended December 31, 2006	F-7
Notes to the Consolidated Financial Statements	F-8

F - 1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Lighting Science Group Corporation and LED Effects, Inc.

We have audited the accompanying consolidated balance sheets of Lighting Science Group Corporation (LSGC) and LED Effects, Inc. (LED) (collectively, “the companies”) as of December 31, 2007 and 2006, respectively, and the related consolidated statements of operations, stockholders’ equity and cash flows of LSGC for the period June 14, 2007 through December 31, 2007, for LED for the period January 1, 2007 through June 13, 2007 and the year ended December 31, 2006. These financial statements are the responsibility of the companies’ managements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the companies as of December 31, 2007 and December 31, 2006, and the results of the companies’ operations and cash flows for the periods set forth above, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the financial statements, the companies changed their method of accounting for the transaction in which LSGC became a majority-owned subsidiary of LED Holdings, LLC on October 4, 2007.

/s/ Turner, Stone & Company, LLP                    
Turner, Stone & Company, LLP

Certified Public Accountants
Dallas, Texas
May 15, 2009

F - 2

LIGHTING SCIENCE GROUP CORPORATION AND LED EFFECTS, INC.

CONSOLIDATED BALANCE SHEETS

	Lighting Science Group			LED Effects, Inc.
	Corporation			and Subsidiary
	Consolidated			Consolidated
	Balance Sheet			Balance Sheet
	December 31, 2007			December 31, 2006
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	11,399,429		$	1,828,776
Accounts receivable, net of allowances for doubtful accounts		1,392,064			634,467
Inventories, net of allowances		3,786,966			1,128,530
Prepaid expenses and other current assets		1,180,028			92,237
Total current assets		17,758,487			3,684,010
PROPERTY AND EQUIPMENT, net		1,149,024			169,820
OTHER ASSETS
Minority investment, at cost		—			86,528
Intangible assets, net		9,314,982			—
Goodwill		44,222,226			—
Other long-term assets		1,141,532			13,320
Total other assets		54,678,740			99,848
TOTAL ASSETS	$	73,586,251		$	3,953,678
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		2,357,399			329,013
Accrued expenses		3,668,104			—
Note payable to bank		—			100,000
Total current liabilities		6,025,503			429,013
OTHER LIABILITIES
Minority interest in income of subsidiary		—			84,523
Deferred income taxes		—			395,375
Liability under derivative contracts		1,007,600			—
Total other liabilities		1,007,600			479,898
TOTAL LIABILITIES		7,033,103			908,911
COMMITMENTS AND CONTIGENCIES (Note 12)
6% CONVERTIBLE PREFERRED STOCK, $.001 par value, 2,656,250 shares authorized, 215,652 shares issued and outstanding in 2007, liquidation value of $690,086		364,895			—
STOCKHOLDERS’ EQUITY
Series B Preferred Stock, $.001 par value, 2,000,000 shares authorized, issued and outstanding in 2007		2,000			—
Common stock, $.001 par value, 495,000,000 shares authorized, 21,958,482 shares issued and outstanding in 2007		21,959			11,541
Additional paid-in-capital		71,056,282			—
Retained earnings (deficit)		(4,902,269	)		3,042,203
Accumulated other comprehensive income (loss)		10,281			(8,977	)
TOTAL STOCKHOLDERS’ EQUITY		66,188,253			3,044,767
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	73,586,251		$	3,953,678

The accompanying notes are an integral part of the consolidated financial statements.

F - 3

LIGHTING SCIENCE GROUP CORPORATION AND LED EFFECTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Lighting Science Group
	Corporation
	Consolidated Statement			LED Effects, Inc
	of Operations For			Consolidated Statement			LED Effects, Inc.
	Period From June 14,			of Operations For The			Consolidated Statement of
	2007 to December 31,			Period January 1, 2007			Operations For The Year
	2007			to June 13, 2007			Ended December 31, 2006
Revenue	$	4,616,111		$	3,675,132		$	8,858,068
Cost of goods sold		3,526,750			2,606,445			6,061,922
Gross margin		1,089,361			1,068,687			2,796,146
Operating expenses:
Selling, general and administrative		2,437,756			226,758			516,538
Compensation and related expenses		2,417,704			221,013			428,755
Professional fees		1,291,068			117,780			52,201
Directors fees		87,500			—			—
Depreciation and amortization		669,861			6,691			25,969
Total operating expenses		6,903,889			572,242			1,023,463
Income (loss) from operations		(5,814,528	)		496,445			1,772,683
Other income (expense)
Interest income		211,043			1,520			3,102
Interest expense		(39,366	)		(454	)		(3,386	)
Other, net		329,785			(35,472	)		(883	)
Total other income (expense)		501,462			(34,406	)		(1,167	)
Income (loss) before provision for income tax expenses, minority interest in income (loss) of subsidiary, dividends on 6% Convertible Preferred Stock and accretion (reversal of accretion) of preferred stock redemption value		(5,313,066	)		462,039			1,771,516
Provision for income tax expense		—			172,244			666,665
Dividends on 6% Convertible Preferred Stock and accretion (reversal of accretion) of preferred stock redemption value		(413,999	)		—			—
Income (loss) before minority interest in loss of subsidiary	$	(4,899,067	)	$	289,795		$	1,104,851
Minority interest in loss of subsidiary		(3,902	)		(2,583	)		(84,523	)
Net income (loss) attributable to common stock	$	(4,902,969	)	$	287,212		$	1,020,328
Items included in comprehensive income
Foreign currency translation income (loss)		10,281			(82,135	)		(8,977	)
Net comprehensive income (loss)	$	(4,892,688	)	$	205,077		$	1,011,351
Basic and diluted net loss per weighted average common share	$	(0.28	)
Basic and diluted weighted average number of common shares outstanding		17,419,959

The accompanying notes are an integral part of the consolidated financial statements.

F - 4

Lighting Science Group Corporation

Consolidated Statement of Stockholders’ Equity

For the Period From June 14, 2007 to December 31, 2007

														Accumulated
														Other
	Series B Preferred Stock				Common Stock				Additional		Accumulated			Comprehensive
	Shares		Amount		Shares		Amount		Paid In Capital		Deficit			Income		Total
Balance June 14, 2007		—	$	—		13,947,472	$	13,948	$	18,078,086	$	—		$	—	$	18,092,034
Issuance of capital stock by LED Holdings		2,000,000		2,000		1,981,175		1,981		7,750,060		—			—		7,754,041
Lighting Science Group common stock deemed acquired by LED Holdings in conjuction with the reverse merger transaction		—		—		5,778,449		5,778		44,053,646		—			—		44,059,424
Conversion of 6% Convertible Preferred Stock to common stock		—		—		160,001		172		534,612		—			—		534,784
Issuance of common stock upon the exercise of warrants		—		—		91,385		80		546,719		—			—		546,799
Stock option expense		—		—		—		—		93,159		—			—		93,159
Net loss for the period June 14, 2007 to December 31, 2007		—		—		—		—		—		(4,902,269	)		—		(4,902,269	)
Foreign currency translation gain		—		—		—		—		—		—			10,281		10,281
Balance December 31, 2007		2,000,000	$	2,000		21,958,482	$	21,959	$	71,056,282	$	(4,902,269	)	$	10,281	$	66,188,253

The accompanying notes are an integral part of the consolidated financial statements.

F - 5

LED Effects, Inc. and Subsidiary
Consolidated Statement of Stockholders’ Equity

							Accumulated
							Other
	Common Stock				Retained		Comprehensive
	Shares		Amount		Earnings		Loss			Total
Balance December 31, 2005		756	$	11,541	$	2,021,875	$	—		$	2,033,416
Other comprehensive loss								(8,977	)		(8,977	)
Net income		—		—		1,020,328		—			1,020,328
Balance December 31, 2006		756		11,541		3,042,203		(8,977	)		3,044,767
Other comprehensive loss		—		—		—		(82,135	)		(82,135	)
Net income		—		—		287,212		—			287,212
Balance June 13, 2007		756	$	11,541	$	3,329,415	$	(91,112	)	$	3,249,844

The accompanying notes are an integral part of the consolidated financial statements.

F - 6

LIGHTING SCIENCE GROUP CORPORATION AND LED EFFECTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

				LED Effects, Inc. and			LED Effects, Inc.
	Lighting Science			Subsidiary			and Subsidiary
	Group Corporation			Consolidated			Consolidated
	Consolidated			Statement of Cash			Statement of Cash
	Statement of Cash			Flows For The			Flows For The
	Flows For The Period			Period From January			Year Ended
	From June 14, 2007 to			1, 2007 to June 13,			December 31,
	December 31, 2007			2007			2006
OPERATING ACTIVITIES
Net income (loss) for the period attributable to common stock	$	(4,902,969	)	$	287,212		$	1,020,328
Adjustments to reconcile net income (net loss) to net cash provided by (used by) operating activities:
Non-cash stock option compensation expense		93,159			—			—
Accretion of 6% convertible preferred stock redemption value		132,277			—			—
Fair value adjustment to liabilities under derivative contracts		(895,507	)		—			—
Provision for deferred income tax expense		—			5,737			498,602
Depreciation and amortization		669,861			6,691			25,969
Changes in:
Accounts receivable		186,577			(902,313	)		(61,892	)
Prepaid expenses and other long-term assets		(64,784	)		(2,499	)		16,464
Inventories		(656,781	)		135,925			(117,051	)
Accounts payable		1,389,845			(97,932	)		190,788
Income taxes payable		—			160,062			36,674
Accrued expenses and other liabilities		(1,699,542	)		—			—
Deposits on contracts		—			—			(981,100	)
Net cash provided by (used by) operating activities		(5,747,864	)		(407,117	)		628,782
INVESTING ACTIVITIES
Cash held by Lighting Science Group upon acquisition		1,234,871			—			—
Purchase of property and equipment		(1,236,899	)		—			(52,953	)
Other, net		—			3,545			—
Net cash provided by (used by) investing activities		(2,028	)		3,545			(52,953	)
FINANCING ACTIVITIES
Note payable borrowings		—			—			100,000
Repayment of amounts due under notes payable		(87,500	)		(100,000	)		—
Minority investment, at cost		—			—			(86,528	)
Amount due minority shareholder		—			2,583			84,523
Proceeds from exercise of common stock warrants, net of related costs		546,799			—			—
Proceeds from issuance of stock for cash		7,754,041			—			—
Net cash provided by (used by) financing activities		8,213,340			(97,417	)		97,995
Effect of exchange rate fluctuations on cash and cash equivalents		10,281			(82,135	)		(8,977	)
Net increase (decrease) in cash		2,473,729			(583,124	)		664,847
Cash balance at beginning of period		8,925,700			1,828,776			1,163,929
Cash balance at end of period	$	11,399,429		$	1,245,652		$	1,828,776
Interest paid during the period	$	39,366		$	454		$	3,386
Taxes paid during the period	$	—		$	62,915		$	138,557
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Conversion of 6% Convertible Preferred Stock to common stock	$	534,784		$	—		$	—
Non-cash portion of reverse merger net acquisition price	$	36,305,383		$	—		$	—

The accompanying notes are an integral part of the consolidated financial statements.

F - 7

LIGHTING SCIENCE GROUP CORPORATION
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION AND CHANGE OF REPORTING ENTITY

In October 2007, LED Holdings, LLC (“LED Holdings”), a private holding company incorporated in Delaware, acquired approximately 70% participating interest and an 80% voting interest in Lighting Science Group Corporation (“LSG”). As a result of the acquisition, LSG became a majority-owned subsidiary of LED Holdings as of October 2007 (the “Transaction”). Pursuant to the Transaction, LED Holdings contributed substantially all of its assets to LSG in exchange for 2,000,000 shares of Series B Preferred stock and 15,928,733 shares of common stock of LSG. LSG correctly identified LED Holdings as the accounting acquirer in the Transaction and recorded the fair value of the goodwill and identifiable intangible assets that were acquired from LSG by LED Holdings in the Transaction. While LSG correctly identified the Transaction as a reverse-merger in which LED Holdings was the accounting acquirer, LSG continued to report its consolidated financial statements using the push-down method of accounting by recording the goodwill and fair values of the intangible assets that were acquired in the Transaction by LED Holdings in its own accounts.

In response to comment letters received from the staff of the Securities and Exchange Commission, LSG has subsequently determined that LED Holdings (and its historical financial statements) is the continuing entity for financial reporting purposes and the share exchange has been treated as a recapitalization of LSG. These consolidated financial statements have been prepared as if LED Holdings (the “Company”) had always been the reporting entity and that it had changed its name on the date of the Transaction and reorganized its capital stock. Accordingly the Company has revised the financial statements to reflect the change in reporting entity.

The Company believes that the consolidated statement of stockholders’ equity in the Company’s 2007 Form 10-K should be restated to disclose the effect of this reverse merger recapitalization on a retroactive basis for the equivalent number of shares received in the reverse merger after giving effect to any difference in par value of the registrant’s and accounting acquirer’s stock by an offset in paid in capital. Based on this, the Company believes the consolidated statement of stockholders’ equity should be revised to properly disclose the effects of the reverse merger by retroactively restating the 15,928,733 shares of common stock issued to LED Holdings (accounting acquirer). In addition, the Company has identified LED Effects, Inc. (“LED Effects”) as the predecessor entity to LED Holdings. As such, the consolidated statements of operations, the consolidated statements of cash flow and the consolidated statements of stockholders’ equity of LED Effects for the period January 1, 2007 through June 13, 2007 and for the year ended December 31, 2006 and the balance sheet of LED Effects as of December 31, 2006 are shown as the comparative financial statements.

As noted above, the Company determined that LED Holdings was the accounting acquirer in the Transaction and calculated the fair value of the goodwill and identifiable intangible assets that were acquired by LED Holdings. The original calculation of the goodwill acquired in the Transaction was calculated based on the fair value of the assets contributed to LSG by LED Holdings. The Company has recalculated the goodwill acquired in the Transaction based on the closing price of LSG’s common stock on the Over-the-Counter Bulletin Board immediately prior to the date of the Transaction. This adjustment resulted in the Company recording an additional $30,742,326 in goodwill.

The following table shows the amounts disclosed in the consolidated balance sheet as filed originally compared to the amounts in the restated consolidated balance sheet:

F - 8

				December 31, 2007
	December 31, 2007			as reported in			Effect of
	as restated			original filing			change
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	11,399,429		$	11,399,429		$	—
Accounts receivable, net of allowances for doubtful accounts		1,392,064			1,392,064			—
Inventories, net of allowances		3,786,966			3,786,966			—
Prepaid expenses and other current assets		1,180,028			1,180,028			—
Total current assets		17,758,487			17,758,487			—
PROPERTY AND EQUIPMENT, net		1,149,024			1,149,024			—
OTHER ASSETS
Intangible assets, net		9,314,982			9,314,982			—
Goodwill		44,222,226			13,479,900			30,742,326
Other long-term assets		1,141,532			1,141,532			—
Total other assets		54,678,740			23,936,414			30,742,326
TOTAL ASSETS	$	73,586,251		$	42,843,925		$	30,742,326
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	2,357,399		$	2,357,399		$	—
Accrued expenses		3,668,104			3,668,104			—
Total current liabilities		6,025,503			6,025,503			—
OTHER LIABILITIES
Liability under derivative contracts		1,007,600			1,007,600			—
TOTAL LIABILITIES		7,033,103			7,033,103			—
6% CONVERTIBLE PREFERRED STOCK, $0.001 par value, 2,656,250 shares authorized, 215,652 shares issued and outstanding (liquidation value of $690,086)		364,895			364,895			—
STOCKHOLDERS’ EQUITY
Series B Preferred stock $0.001 par value, 2,000,000 shares authorized and issued		2,000			2,000			—
Common stock $0.001 par value, 495,000,000 shares authorized, 21,958,482 shares issued and outstanding		21,959			21,959			—
Additional paid in capital		71,056,282			68,523,254			2,533,028
Deficit		(4,902,269	)		(33,111,567	)		28,209,298
Accumulated comprehensive income		10,281			10,281			—
TOTAL STOCKHOLDERS’ EQUITY		66,188,253			35,445,927			30,742,326
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	73,586,251		$	42,843,925		$	30,742,326

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

Acquisition of LED Effects

On June 14, 2007, LED Holdings entered into an Asset Contribution Agreement with LED Effects, whereby LED Effects contributed substantially all of its assets, including leases, equipment, inventory, accounts receivable, contracts, permits, records, intellectual property and common stock in two Japanese companies, to LED Holdings and LED Holdings assumed substantially all of the liabilities related to LED Effects’ LED business. In accordance

F - 9

with the agreement, LED Effects received 100% of the Class B members interest, representing approximately 49.7% of the total voting members equity of LED Holdings.

The following net assets were acquired by LED Holdings from LED Effects:

Current assets
Cash and cash equivalents	$	1,245,652
Accounts receivable,		1,536,780
Inventory		992,604
Non-Current assets
Property and equipment		159,585
Minority interest at cost		86,528
Intangible assets		5,980,000
Deposits		15,819
Goodwill		1,620,000
Current liabilities assumed
Accounts payable and accrued liabilities		(298,906	)
Total purchase price of LED Effects	$	11,338,062

Reverse Takeover of LSG by LED Holdings

On October 4, 2007, LED Holdings entered into an Exchange and Contribution Agreement (the “Exchange Agreement”) with LSG, pursuant to which LED Holdings acquired 2,000,000 shares of LSG’s newly designated Series B Preferred Stock, par value $.001 per share (“Series B Stock”) and 318,574,665 shares of the LSG’s Common Stock (15,928,733 shares of common stock on a post reverse split basis, as noted below), par value $.001 per share (“Common Stock” and collectively with the Series B Stock, the “Exchange Consideration”) representing 70% of the fully-diluted capital stock of the Company and 80% of the voting rights of all outstanding shares of capital stock of the Company as of October 4, 2007., in exchange for contributing substantially all of its net assets to LSG.

The total purchase price of the net assets of LSG are calculated as follows:

Market value of Common Stock of LSG issued to LED Holdings	$	47,382,573
Add: Transaction costs		1,091,453
Total purchase price of LSG	$	48,474,026

The following table shows the allocation of the net assets of LSG on the date of the reverse merger:

Cash and cash equivalents	$	824,900
Other current assets		5,090,592
Fixed assets		587,000
Patents and technology		3,900,000
Other long-term assets		1,214,588
Goodwill		42,605,552
Estimated fair value of assets		54,222,632
Less: Fair value of current liabilities		(3,845,499	)
Liability under derivative contracts		(1,903,107	)
Total estimated fair value of net assets at the closing date of the transaction	$	48,474,026

F - 10

Reverse Stock Split

On January 25, 2008, the Company completed a 1 for 20 reverse split of its common stock. All appropriate common stock share and per share amounts included in these consolidated financial statements have been restated to reflect the reverse stock split.

Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates.

Cash and Cash Equivalents

All highly liquid investments with original maturities of three months or less at date of purchase are carried at cost, which approximates fair value, and are considered to be cash equivalents.

The Company maintains balances in cash accounts which could exceed federally insured limits of $100,000 or in cash accounts that are not eligible for federal deposit insurance. The Company has not experienced any losses from maintaining balances in such cash accounts. Management believes that the Company does not have significant credit risk related to its cash accounts.

Accounts Receivable

The Company records accounts receivable as its products are shipped to customers. The Company and LED Effects record accounts receivable reserves for known collectability issues, as such issues relate to specific transactions or customer balances. As of December 31, 2007 and 2006, accounts receivable of the Company and LED Effects, are reflected net of reserves of $463,633 and $312,455, respectively. The Company writes off accounts receivable when it becomes apparent, based upon age or customer circumstances, that such amounts will not be collected. Generally, the Company does not require collateral for its accounts receivables.

Inventory

Inventories, which consist of raw materials and components, work-in-process and finished lighting products, are stated at the lower of cost or market with cost being determined on a first-in, first-out basis. Deposits paid to contract manufacturers and raw material and components suppliers related to future purchases are also classified in inventory in the consolidated balance sheet.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist primarily of employee benefits and prepaid insurance. Prepaid expenses are amortized over the period during which the service is provided or the length of the specific contract.

Property and Equipment

Property and equipment are carried at depreciated cost. Depreciation is provided using the straight-line method over the estimated economic lives of the assets, which range from two to five years.

Depreciation expense was $85,859, $6,691 and $25,969 for the period June 14, 2007 through December 31, 2007, for the period January 1, 2007 through June 13, 2007 and for the year ended December 31, 2006 for each of the Company, LED Effects and LED Effects, respectively.

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Other Assets

Other assets consist of intangible assets that were acquired from LSG pursuant to the Transaction in October 2007 and from LED Effects. Other assets also includes certain long-term prepaid expenses (see Note 10) and an investment in the common stock of LED Systems. The investment in LED Systems is carried at cost.

Intangible Assets

Amortization expense was recorded on the Company’s intangible assets for the periods as shown in the following chart:

	LSG for the		LED Effects for		LED Effects
	period June 14,		the period		for the year
	2007 through		January 1, 2007		ended
	December 31,		through June 13,		December 31,
	2007		2007		2006
Technology and patents	$	207,792	$	—	$	—
Trademarks		9,000		—		—
Customer relationships		24,334		—		—
Software		200,000		—		—
	$	441,126	$	—	$	—

Impairment

The Company evaluates the carrying value of its long-lived assets and identifiable intangibles when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The review includes an assessment of industry factors, contract retentions, cash flow projections and other factors the Company believes are relevant.

Based upon its internal review as of September 30, 2007, the Company determined that no impairment to the Company’s intangible assets had occurred. See Note 13.

Financial Instruments

In conjunction with the Exchange Agreement, the Company has assumed certain preferred stock and warrant agreements , the terms of which qualify these financial instruments under SFAS 133 -Accounting for Derivative Instruments and Hedging Activities, as derivatives. Such derivatives have not been designated as hedging instruments. Accordingly, all derivatives are recorded at fair value on the consolidated balance sheet and changes in the fair value of such derivatives are recorded in operations each period and are reported in Other income (expense).

A predecessor company issued warrants for the purchase of common stock as compensation for providing bridge loans to the predecessor company in 2005. In December 2006, the Company offered to adjust the terms of the warrants as described in Note 8. Accordingly, the Company has recorded these warrants at their fair value on the consolidated balance sheet and changes in the fair value of such warrants are recorded in operations each period and are reported in other income (expense), in accordance with SFAS 123 (R).

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Revenue

Product sales are recorded when the products are shipped and title passes to customers. Where sales of product are subject to certain customer acceptance terms, revenue from the sale is recognized once these terms have been met. Amounts received as deposits against future deliveries of products are recorded as unearned revenue on the consolidated balance sheet until such product is delivered and title passes to the customer.

Revenue is not recognized on the shipment of products to customers under shared savings programs. Under shared savings programs, the Company recognizes revenue over the useful life of the lights based on the agreed sharing of electricity savings. Lights shipped to customers under shared savings agreements are classified as property and equipment on the Company’s consolidated balance sheet and are depreciated over the estimated useful life of the lights.

Research and Development

The Company expenses all research and development costs, including amounts for design prototypes and modifications made to existing prototypes, as incurred, except for prototypes that have alternative future uses. All costs incurred for building of production tooling and molds are capitalized and amortized over the estimated useful life of the tooling set or mold. The Company has recorded research and development costs of $322,416, $ — and $ — for the period June 14, 2007 through December 31, 2007, for the period January 1, 2007 through June 13, 2007 and for the year ended December 31, 2006 for each of the Company, LED Effects and LED Effects, respectively.

Stock Based Compensation

On July 6, 2005, the Board of Directors of a predecessor company adopted the Lighting Science Group Corporation 2005 Equity Based Compensation Plan (the “2005 Plan”) and a proposal to implement this plan was approved at the annual shareholders’ meeting in August 2005, with further amendments made to the 2005 Plan approved at subsequent annual shareholders meetings. The Company adopted the fair value method of accounting for employee stock compensation cost pursuant to SFAS No. 123 (R) -Share-Based Payment. Accordingly, compensation cost is based on the fair value of options or other equity instruments measured at the date of grant and compensation cost is charged to operations over the expected service period.

Income taxes

The Company employs the asset and liability method in accounting for income taxes pursuant to SFAS No. 109 —Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities and net operating loss carryforwards, and are measured using enacted tax rates and laws that are expected to be in effect when the differences are reversed.

In June 2006, the FASB issued interpretation 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted FIN 48 as of June 14, 2007 and the adoption of FIN 48 had no material impact on the Company’s consolidated financial statements.

Earnings per share

Basic earnings per share is computed based upon the weighted average number of common shares deemed outstanding during the periods as recalculated in the statement of stockholders’ equity for the period June 14, 2007 through December 31, 2007. Diluted earnings per share are based upon the weighted average number of common shares outstanding during the periods plus the number of incremental shares of common stock contingently issuable upon the conversion of the preferred stock and the exercise of warrants and stock options. No effect has been given to the assumed exercise of warrants or stock options because the effect would be anti-dilutive. See Notes 9 and 10. No earnings per share has been calculated for any period prior to June 14, 2007 because LED Effects was not a publicly traded company and was not required to disclose this information.

NOTE 3: FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107 —Disclosures About Fair Value of Financial Instruments, requires that the Company disclose estimated fair values of financial instruments.

Cash and cash equivalents, accounts receivable, notes and accounts payable, amounts due under the line of credit, accrued expenses and other current liabilities are carried at book value amounts which approximate fair value due to the short-term maturity of these instruments. As discussed in Note 10, the embedded conversion feature associated

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with the 6% Convertible Preferred Stock and the warrants issued to the 6% Convertible Preferred Stock purchasers have been determined to be derivative instruments and are recorded at market. As discussed in Note 8, the Company has applied variable accounting to the warrants issued to certain directors and officers of a predecessor company. These warrants have been recorded at fair value.

NOTE 4: INVENTORY

At December 31, 2007 and 2006, inventory is comprised of the following:

			December 31,
	December 31,		2006 LED
	2007 LSG		Effects
Deposits paid to contract manufacturers	$	159,820	$	—
Raw materials and components		3,273,774		853,471
Work-in-process		221,493		275,059
Finished goods		131,879		—
	$	3,786,966	$	1,128,530

At December 31, 2007 and 2006, the Company provided an allowance for the decline in market value of certain raw materials and components of approximately $415,000 and $73,000, for each of the Company and LED Effects, respectively, which is netted against the balance of raw materials and components in the table above.

NOTE 5: PROPERTY, EQUIPMENT AND OTHER ASSETS

At December 31, 2007 and 2006, property and equipment consists of the following:

				December 31,
	December 31,			2006 LED
	2007 LSG			Effects
Leasehold improvements	$	184,609		$	207,750
Office furniture, fixtures and telephone equipment		201,301			168,138
Computer equipment		439,435			—
Production and test equipment		320,961			—
Tooling and molds		328,843			—
Total property and equipment		1,475,149			375,888
Accumulated depreciation		(326,125	)		(206,068	)
	$	1,149,024		$	169,820

At December 31, 2007, the Company had no shared savings program agreements under which lights or fixtures have been recorded as property and equipment on the consolidated balance sheet.

At December 31, 2007 and 2006, intangible assets consist of the following:

				December 31,
	December 31,			2006 LED
	2007 LSG			Effects
Technology and patents	$	8,069,764		$	—
Trademarks		360,000			—
Software		2,000,000			—
Customer relationships		730,000			—
Total intangible assets		11,159,764			—
Less: accumulated amortization		(1,844,782	)		—
	$	9,314,982		$	—

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SFAS No. 142, Goodwill and Other Intangible Assets, specifies that intangible assets that have finite lives are to be amortized over their useful lives. The values of the intangible assets are all based on appraisals conducted by independent third parties. The intangible assets, their original fair values and their useful lives are detailed below:

	Original Fair		Estimated Useful
Intangible asset	Value		Life
Technology and intellectual property	$	8,069,764	7.5 years
Trademarks		360,000	20.0 years
Software		2,000,000	5.0 years
Customer relationships		730,000	15 years
Goodwill		44,222,226	Not determinable

The chart below shows the estimated amortization expense for the Company’s intangible assets for each of the next five years:

	2008		2009		2010		2011		2012
Technology and intellectual property	$	905,000	$	905,000	$	905,000	$	905,000	$	905,000
Trademarks		18,000		18,000		18,000		18,000		18,000
Software		400,000		400,000		400,000		400,000		200,000
Customer relationships		49,000		49,000		49,000		49,000		49,000
	$	1,372,000	$	1,372,000	$	1,372,000	$	1,372,000	$	1,172,000

NOTE 6: LINE OF CREDIT AND GUARANTEES

In June 2006, the a predecessor company entered into agreements with one of its banks to obtain a $2,000,000 line of credit. The predecessor company increased the line of credit to $2,500,000 between January and March 2007. Amounts due under the line of credit are guaranteed by a group of directors and shareholders of the predecessor company (the “Guarantors”).As consideration for providing guarantees and enabling the predecessor company to obtain the line of credit, the predecessor company issued common stock and warrants for the purchase of common stock of the predecessor company to the Guarantors. The predecessor company issued 156,250 shares of common stock and 126,250 warrants for the purchase of shares of common stock to the Guarantors. The warrants have an exercise price of $6.00 per common share and have a five year term. The number of warrants outstanding and the expiration date of the warrants is shown in Note 10.

At December 31, 2006, LED Effects had an outstanding balance of $100,000 on a revolving line of credit. The line of credit bears interests at 8.5% and matures on June 1, 2007. As of June 1, 2007 all amounts due under the facility were repaid and the line of credit was terminated.

NOTE 7: INCOME TAXES

The Company accounts for corporate income taxes in accordance with SFAS No. 109 —Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, future tax benefits, such as those from net operating loss carry forwards, are recognized to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as set forth below in the period that includes the enactment date.

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At the time of the reverse merger transaction and resulting change in control, the Company had accumulated approximately $75,000,000 in tax loss carryforwards. As a result of the change in control, the Company will be limited in the amount of loss carryforwards that it may apply to its taxable income in any tax year. These net losses expire from 2012 through 2027. To the extent the Company is able to utilize available tax loss carryforwards that arose from operations in tax years prior to September 26, 2003, any benefit realized will be credited to additional paid in capital.

Other than the deferred tax asset relating to the Company’s net operating losses which will be available to apply to the Company’s future taxable income, which the Company estimates totaled approximately $10,200,000 at December 31, 2007, and which has been fully offset by a valuation allowance, the Company does not have any other significant deferred tax assets or liabilities. The Company has recorded an increase in the valuation allowance of approximately $3,300,000 for the period June 14, 2007 through December 31, 2007. The net operating loss carryforwards are available to offset future taxable income of the Company.

At December 31, 2007, the Company had the following operating loss carryforwards available to offset future U.S. income taxes, subject to expiration:

Year of Expiration	Income Tax Loss
2012	$	2,293,432
2018		2,293,432
2019		2,293,432
2020		2,293,432
2021		2,293,432
2022		2,293,432
2023		2,293,432
2024		2,293,432
2025		2,293,432
2026		2,293,432
2027		9,937,230
Total	$	32,871,550

In June 2006, the FASB issued interpretation 48, Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted FIN 48 as of June 14, 2007 and the adoption of FIN 48 has no material impact on the Company’s consolidated financial statements.

Prior to entering into the Exchange Agreement, all operations of LED Holdings were carried through a limited liability corporation (“LLC”). As a result, all income taxes related to the income of LED Holdings business for the period June 14, 2007 through October 3, 2007 is passed through to its LED Holdings stockholders. As the income taxes payable or recoverable related to the operations of LED Holdings was passed through to its stockholders, the Company has not recorded a tax provision for either current or deferred taxes during this period. The Company has also not included in the chart above any tax loss carryforwards or the offset of any taxable income against such tax loss carryforwards, related to the operation of its business for the period June 14, 2007 through October 3, 2007.

LED Effects

The significant components of income before income taxes and the consolidated income tax provision (benefit) for LED Effects for the period January 1, 2007 through June 13, 2007 and for the year ended December 31, 2006 are as follows:

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	For the period			For the year
	January 1, 2007			ended
	through June 13,			December 31,
	2007			2006
Income before taxes and minority interest in income of subsidiary
Domestic	$	429,793		$	461,117
Foreign		32,246			1,310,399
Total	$	462,039		$	1,771,516
Income tax expense
Current provision
Federal	$	121,176		$	127,055
State		45,331			41,008
Foreign		—			—
Total current income tax expense		166,507			168,063
Deferred income tax expense
Federal		890			40,577
State		(6,117	)		12,490
Foreign		10,964			445,535
Total deferred income tax expense		5,737			498,602
Income tax expense	$	172,244		$	666,665

NOTE 8: RELATED PARTY TRANSACTIONS

Loans from Directors and Officers

During the first and second quarters of 2005, members of the board of directors and certain officers of a predecessor company (the “Lender” or “Lenders”) agreed to loan the predecessor company an aggregate of $476,000 on a short-term basis. A portion of the compensation under the terms of the notes issued by the predecessor company to each Lender, required the Company to issue warrants to the Lenders for a total of 23,800 shares of common stock to be purchased at an exercise price of $30.00 per share.

In December 2006, the predecessor company offered to adjust the price of the warrants issued to the Lenders to $6.00 per share if the Lenders agreed to exercise the warrants currently. If the warrants were not exercised currently, the exercise price would remain $30.00 per share. At December 31, 2007, 15,800 warrants had been exercised. In accordance with SFAS 123 (R), the Company recorded the then fair value of the unexercised warrants on the consolidated balance sheet with the change in such fair value being recorded in Other income (expense) in the Consolidated Statements of Operations.

NOTE 9: PREFERRED STOCK

Private Placement with Institutional and Accredited Investors

On May 12, 2005, a predecessor company closed on a private placement with a group of institutional and accredited investors, including certain officers and directors of the predecessor company, for the sale of 2,260,966 shares of the predecessor company’s 6% Convertible Preferred Stock (the “6% Convertible Preferred Stock”) along with warrants to purchase additional shares of the predecessor company’s common stock. The 6% Convertible Preferred Stock was priced at $3.20 per share, and the predecessor company received proceeds of $7,235,086 of which $276,000 represented conversion of officer and board member loans and $24,086 represented accrued interest and commitment fees thereon. Initially, each share of 6% Convertible Preferred Stock is convertible at any time at the election of the holder at $16.00 per share into common stock, subject to full ratchet anti-dilution adjustments.

F - 17

During the period from October 4, 2007 through December 31, 2007, 300,001 shares of 6% Convertible Preferred Stock were converted by the holders to common stock of the Company. At December 31, 2007, 215,652 shares of 6% Convertible Preferred Stock remained outstanding.

The 6% Convertible Preferred Stock ranks ahead of the common stock of the Company upon liquidation of the Company. The 6% Convertible Preferred Stock also ranks ahead of the common stock with respect to the payment of dividends. The 6% Convertible Preferred Stock ranks pari passu with the Series B Stock with respect to liquidation preference and the payment of dividends. The dividend rate on the 6% Convertible Preferred Stock is $3.84 per share per annum (6% effective yield) and such dividends are fully cumulative, accruing, without interest, from the date of original issuance of the 6% Convertible Preferred Stock through the date of redemption or conversion thereof. The Company must redeem any outstanding 6% Convertible Preferred Stock on May 10, 2010.

Initially, the warrants were exercisable at the election of the holder into a total of approximately 339,150 shares of common stock at an initial exercise price of $19.20 per share (also subject to adjustment pursuant to anti-dilution provisions) on either a cash or cashless exercise basis. The warrants expire five years from the date of issuance.

On June 6, 2006, the predecessor company agreed to amend the terms of the then outstanding 6% Convertible Preferred Stock and the warrants issued to purchasers of the 6% Convertible Preferred Stock. The predecessor company agreed to adjust the conversion price of the 6% Convertible Preferred Stock then outstanding to $10.00 per common share compared to the original conversion price of $16.00 per common share. This adjustment resulted in an increase in the total number of shares of common stock that may be required to be issued by the predecessor company in the future to holders of the 6% Convertible Preferred Stock from 8,262,612 shares to approximately 661,009 shares. The predecessor company also agreed that, at December 31, 2006, it would further adjust the conversion price of the then outstanding 6% Convertible Preferred Stock to $6.00 per common share from the current exercise price of $10.00 if the then current market price of the predecessor company’s common stock (as defined in the agreement) was less than $10.00 per common share. As the current market price did not exceed $10.00 per share at December 31, 2006, the conversion price of the outstanding 6% Convertible Preferred Stock was further adjusted to $6.00 per common share at December 31, 2006, the total number of shares of common stock that may be required to be issued by the Company also increased from approximately 661,009 common shares to approximately 1,101,690. The predecessor company has filed a registration statement with the Securities and Exchange Commission covering the approximately 1,101,690 shares that may be required to be issued. The registration statement was declared effective on July 14, 2006.

On June 6, 2006, the predecessor company also agreed to amend the terms of the warrants issued to the purchasers of the 6% Convertible Preferred Stock. The predecessor company agreed to immediately adjust the exercise price of the approximately 339,150 outstanding warrants from $19.20 per common share to $6.00 per common share. The adjustment of the terms of these warrants does not change the total number of common shares that the predecessor company may be required to issue in the future to holders of the warrants. During the period October 4, 2007 through December 31, 2007, no warrants were exercised.

Pursuant to SFAS 133 and EITF No. 00-19, the embedded conversion feature associated with the 6% Convertible Preferred Stock and the warrants issued to the 6% Convertible Preferred Stock purchasers have been determined to be derivative instruments. Accordingly, the fair value of these derivative instruments has been recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to the 6% Convertible Preferred Stock. Such discount is being accreted from the date of issuance to the redemption date of the 6% Convertible Preferred Stock and totaled $(424,456) for the period October 4, 2007 through December 31, 2007. The accretion of the discount is negative due to a net conversion of 6% Convertible Preferred stock by the holders during the period.

The following table presents the change in the fair value of the derivatives as disclosed in the Company’s 2007 consolidated balance sheet:

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	Period June 14, 2007
	through December 31, 2007
Fair value of liability for derivative contracts, beginning of period	$	—
Fair value of derivative liability assumed through the reverse merger with LSG		1,903,107
Adjustment to fair value of current derivative contacts during the period, recorded in Other Income (Expense) during the period		(357,461	)
Less allocation of fair value of derivative liability to additional paid-in capital on conversion or exercise of derivative instruments		(538,046	)
Fair value of liability for derivative contracts, end of period	$	1,007,600

The Company computes fair value of these derivatives using the Black-Scholes valuation model. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The Company’s derivative instruments have characteristics significantly different from traded options, and the input assumptions used in the model can materially affect the fair value estimate. The assumptions used in this model to estimate fair value of each derivative instrument and the resulting value of the derivative liability as of December 31, 2007 are as follows:

				Embedded conversion feature
				associated with the 6%
	Warrants			Convertible Preferred Stock
Exercise/Conversion Price	$	6.00		$	6.00
Fair Value of the Company’s Common Stock	$	8.60		$	8.60
Expected life in years		2.4			2.4
Expected volatility		75	%		75	%
Expected dividend yield		0.0	%		0.0	%
Risk free rate		3.06	%		3.06	%
Calculated fair value per share	$	4.80		$	4.80

The 6% Convertible Preferred Stock is Mandatorily Redeemable Preferred Stock as defined by SFAS 150 —Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, and would also qualify as “Preferred Stocks Subject to Mandatory Redemption Requirements or Whose Redemption is Outside the Control of the Issuer” as defined by Accounting Series Release (“ASR”) No. 268 —Redeemable Preferred Stocks. The conversion feature associated with the 6% Convertible Preferred Stock is not a nonsubstantive or minimal feature and therefore the provisions of ASR No. 268 have been applied in classifying the 6% Convertible Preferred Stock separate from Stockholders’ Equity (Deficit).

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NOTE 10: STOCKHOLDERS’ EQUITY

March 2007 Private Placement

On March 9, 2007, a predecessor company completed a private placement with a group of accredited investors for net proceeds of $3.6 million. The predecessor company issued approximately 666,663 shares of common stock at a price of $6.00 per share. The predecessor company also issued approximately 500,000 A Warrants for the purchase of common stock to the investor group. The warrants have an exercise price of $7.00 per share and have a term of five years. The predecessor company also issued approximately 666,663 B Warrants for the purchase of additional shares of common stock. Each B Warrant is comprised of one share of common stock and 0.75 warrants for the purchase of common stock. The exercise price of each B Warrant is $6.00 per unit. These B Warrants can be exercised by the holder at any time up to the 90^th trading day after the effective date of a registration statement that was filed by the predecessor company to register the common stock issued to the investors on March 9, 2007. The Registration statement was declared effective by the SEC on June 28, 2007. Therefore, all B Warrants were required to be exercised by the holder on or before November 5, 2007. On October 4, 2007, at the date of the Exchange Agreement, 89,851 B Warrants were outstanding.

During the period October 4, 2007 through December 31, 2007, the holders of approximately 79,667 B Warrants exercised such warrants. On November 5, 2007, 10,184 B Warrants expired unexercised. During the period from October 4, 2007 through December 31, 2007, no A Warrants were exercised. At December 31, 2007, approximately 722,365 A Warrants were outstanding.

Series B Stock

On October 4, 2007, LSG issued 2,000,000 shares of Series B Stock as partial consideration for the assets of LED Holdings pursuant to the Exchange Agreement. Shares of Series B Stock are convertible at any time at the option of the holder, at a conversion price equal to $5.650166808 per share of common stock. The conversion price is subject to adjustment for subsequent stock splits, stock dividends and similar events and subject to certain anti-dilution adjustments.

Each share of Series B Stock is entitled to 3.5 votes for each share of common stock into which it is convertible. Shares of Series B Stock are entitled to a liquidation preference over other classes of our capital stock except the 6% Convertible Preferred Stock, in which case the Series B Stock is pari passu. The liquidation preference per share is equal to the purchase price of the Series B Stock plus interest, which accrues at the rate of 6% per annum. The liquidation right and preference is applicable in the event of our liquidation, a merger of our Company with or into another entity or the sale by us of all or substantially all of our business or operating assets. The holders of at least a majority of the outstanding Series B Stock have the right to purchase up to an aggregate of $10 million of the Company’s common stock, for cash, in one or more transactions at a 15% discount to the average closing price of the Company’s common stock for the thirty consecutive trading days immediately preceding the date of the purchase or purchases.

Equity Based Compensation Plan

Effective September 1, 2005, a predecessor company implemented the 2005 Plan. Awards granted under the 2005 Plan may include incentive stock options, which are qualified under Section 422 of the Internal Revenue Code (the “Code”), stock options other than incentive stock options, which are not qualified under Section 422 of the Code, stock appreciation rights, restricted stock, phantom stock, bonus stock and awards in lieu of obligations, dividend equivalents and other stock-based awards. Awards may be granted to employees, members of the Board of Directors, and consultants. The 2005 Plan is administered by the Compensation Committee of the Board of Directors. Vesting periods and terms for awards are determined by the plan administrator. The exercise price of each stock option or stock appreciation right is equal to or greater than the market price of the Company’s stock on the date of grant and no stock option or stock appreciation right granted shall have a term in excess of ten years.

On October 4, 2007, there were approximately 267,667 stock options outstanding. No options were exercised during the period from October 4, 2007 through December 31, 2007. The fair value of the options is determined by using a Black-Scholes pricing model that includes the following variables: 1) exercise price of the instrument, 2) fair

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market value of the underlying stock on date of grant, 3) expected life, 4) estimated volatility, 5) expected dividend yield and 6) the risk-free interest rate. The Company utilized the following assumptions in estimating the fair value of the options granted under the Plan:

Exercise price	$17.40 - $6.00
Fair market value of the underlying stock on date of grant	$8.20 - $3.00
Option term	3.0 years – 7.0 years
Estimated volatility	75%
Expected dividend yield	0.0%
Risk free rate	5.25% - 3.75%
Calculated fair value per share	$8.20 - $3.00

As noted previously, the Black-Scholes model was not developed for use in valuing employee stock options, but was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because changes in the subjective assumptions can materially affect the fair value estimate, and because employee stock options have characteristics significantly different from those of traded options, the use of the Black-Scholes option pricing model may not provide a reliable estimate of the fair value of employee stock options. For purposes of this calculation, the Company has utilized the simplified method specified in Staff Accounting Bulletin No. 107 for estimating the expected life in years of the options. Under this approach, the expected term is presumed to be the mid-point between the vesting date and the end of the contractual term. The Company has estimated volatility of its stock based on the historical volatility of the Company’s common stock. The Company has estimated the future volatility of its common stock based on the actual volatility of its common stock over the past year.

A summary of the option awards that were outstanding under the Company’s 2005 Plan as of December 31, 2007 and the changes for the period June 14, 2007 through December 31, 2007 is presented below:

			Weighted
			Average
	Underlying		Exercise
Stock Options	Shares		Price
Outstanding and exercisable, beginning of period		—		—
Granted during period		—		—
Stock option agreements assumed pursuant to Exchange Agreement		267,667	$	7.80
Exercised		—		—
Forfeited		—		—
Outstanding and exercisable, end of period		267,667	$	7.80
Options vested at end of period		267,667	$	7.80
Weighted average fair value of options granted during the period June 14, 2007 through December 31, 2007				—

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At December 31, 2007, the average remaining term for outstanding stock options is 3.2 years. On October 4, 2007, all remaining outstanding unvested stock options vested with the change in control resulting from the consummation of the Exchange Agreement..

As of December 31, 2007, there was a total of $228,724 of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2005 Plan. That cost is expected to be recognized over a weighted-average period of 2.5 years.

Restricted Stock Agreement

In August 2007, a predecessor company entered into a restricted stock agreement with one of its executives under which it may be required to issue up to 250,000 shares of common stock. The restricted stock vests as follows: (i) 25% on award date and (ii) 25% on each anniversary date of the grant, The Company valued the restricted stock grant at $2,650,000, being the value of the shares on the day the agreement was completed. The total cost of the restricted stock grant will be recognized in the statement of operations over an estimated period of 2.5 years. On October 4, 2007, a total of 187,500 shares of this restricted stock agreement were unvested.

During the year ended December 31, 2007, $165,915 has been recognized as compensation expense. The remaining unamortized balance of the restricted stock award has been included in the following accounts:

	December 31, 2007
Prepaid expenses and other current assets	$	662,508
Other long-term assets		1,048,952
	$	1,711,460

Warrants for the Purchase of Common Stock

At December 31, 2007, the Company has issued the following warrants for the purchase of common stock:

		No. of
	Reason for	common		Exercise
Warrant Holder	Issuance	shares		Price		Expiry date
Investors in March 2007 Private Placement (Note 9)	March 2007 Private Placement A Warrants		722,365	$	7.00	March 9, 2012 to June 29, 2012
Line of Credit Guarantors (Note 5)	Financing guarantees		126,250	$	6.00	September 22, 2011 through March 31, 2012
6% Convertible Preferred stockholders (Note 8)	Private Placement		326,255	$	6.00	May 10, 2010
The Equity Group	Consulting services		37,500	$	16.00	February 10, 2010
ICurie	Marketing Agreement		6,250	$	6.40	September 13, 2011
Officers and Directors (Note 7)	Bridge Financing		8,000	$	30.00	April 20, 2010
ABM Industries Inc.	Marketing services		57,500	$ $	8.00 10.40	March 2, 2008 through July 31, 2009
Total			1,284,120

At December 31, 2007, all warrants are fully vested.

In accordance with the Marketing Agreement with ICurie, the Company has received from ICurie options to purchase 18,750 shares of common stock of ICurie. The strike price of the options is $6.40 per share and the term of

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the options is five years. At December 31, 2007, the Company has recorded a valuation allowance against the full value of the stock options recorded in its accounts.

NOTE 11: SEGMENT INFORMATION

For the period June 14, 2007 through December 31, 2007 and for the period January 1, 2007 through June 13, 2007, the Company and LED Effects, respectively, have determined that the United States was the only geographic segment that which had in excess of 10% of the net sales or net assets. For the period June 14, 2007 through December 31, 2007 and for the period January 1, 2007 through June 13, 2007, the United States segment generated $4,506,423 and $79,775 of the total sales of the Company and LED Effects, respectively. At December 31, 2007, the United States segment held substantially all of the net assets of the Company.

For the year ended December 31, 2006, LED Effects determined that the United States and Japan were the only geographic segments which had in excess of 10% of its net sales or net assets. For the year ended December 31, 2006, the following net sales were recognized in these two jurisdictions:

	US		Japan		Total
LED Effects — Year ended December 31, 2006	$	6,453,361	$	2,404,707	$	8,858,068

At December 31, 2006, LED Effects recorded the total assets in each of these two geographic segments as follows:

	US		Japan		Total
LED Effects — Year ended December 31, 2006	$	2,274,556	$	1,679,122	$	3,953,678

NOTE 12: COMMITMENTS AND CONTINGENCIES

Lease Commitments

At December 31, 2007, the Company has the following commitments under operating leases for property and equipment for each of the next five years:

Year	Amount
2008	$	899,426
2009		906,120
2010		926,526
2011		960,130
2012		682,815
Thereafter		187,407

During the period June 14, 2007 through December 31, 2007 and January 1, 2007 through June 13, 2007, the Company and LED Effects incurred rent expense of approximately $264,700 and $27,700. During the year ended December 31, 2006, LED Effects incurred rent expense of approximately $60,000.

Commission Agreements with Directors

The Company is obligated to pay outside directors a commission of 3% of the proceeds for any Shared Savings Program contracts which a director is responsible for closing. During the second quarter or 2005, the Company entered into a sales commission agreement with J. Michael Poss, the chief financial officer of the Company at the time an officer and a member of the board of directors, to pay Mr. Poss a commission of 6% of the contract proceeds for any Shared Savings Program and 3% of revenue for other product sales which he is responsible for closing. The Board of Directors terminated these agreements in the second quarter of 2008.

Registration Rights Agreement

In connection with the March 2007 Private Placement (Note 9), the Company has agreed to provide certain registration rights to the investors that participated in the Private Placement. Under the agreement, the Company

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agreed to register the common shares issued to the investors as well the common shares underlying the common stock warrants and the A and B Warrants issued. The registration rights clause provides for liquidated damages and for the issue of common shares under a cashless exercise formula in the event a registration statement was not declared effective by the SEC within 120 days of the March 9, 2007, the closing date, or if the registration statement is not maintained effective for a period of two years following the closing date. The liquidated damages total an amount equal to one percent of the purchase price of the common stock issued for each thirty (30) day period effectiveness of a registration statement is not maintained. The Company will be granted relief from these penalties in certain circumstances if the Securities and Exchange Commission does not allow the Company to register the total number of shares of common stock issued and all the common stock underlying the A Warrants and the B Warrants pursuant to a limitation to the registration under Section 415(a)(1) of the Securities Act.

In connection therewith, on April 11, 2007, the Company filed on Form SB-2, a preliminary Registration Statement under the Securities Act of 1933, related to the resale of all common stock that is issued or issuable by the Company in connection with the March 2007 Private Placement. The Registration Statement was declared effective by the SEC on June 26, 2007.

Agreements with Contract Manufacturers

The Company currently depends on a small number of contract manufacturers to manufacture its products. If any of these contract manufacturers were to terminate their agreements with the Company or fail to provide the required capacity and quality on a timely basis, the Company may be unable to manufacture and ship products until replacement contract manufacturing services could be obtained.

Other Contingencies

From time to time, the Company may become involved in lawsuits or other legal proceedings through the ordinary course of operating its business. The Company does not believe these actions will have a material effect on its consolidated financial statements.

NOTE 13: SUBSEQUENT EVENTS

Legal Action

On February 19, 2008, Philips Solid-State Lighting Solutions, Inc. (“Philips”) filed a civil lawsuit in the United States District Court for the District of Massachusetts (“Massachusetts I”) against: (i) the Company; (ii) LED Holdings; and (iii) LED Effects, Inc., an entity whose assets were acquired by LED Holdings. Philips Solid-State Lighting Solutions, Inc., et al. v. Lighting Science Group Corporation et al., U.S. District Court, District of Massachusetts, Civil Action No. 1:08-cv-10289. The lawsuit alleges that the defendants have infringed five (5) related patents all formerly owned by Color Kinetics, Inc., a company acquired by Philips’ parent, Koninklijke Philips Electronics N.V., in August 2007. The asserted patents are all directed to the use of light emitting diodes to produce different colors of light. The complaint did not specify any particular accused products. The lawsuit seeks injunctive relief and unspecified compensatory and damages and attorneys’ fees for the alleged patent infringement. In September 2008, Philips specifically alleged infringement of one or more claims of the patents by twenty-six (26) Company products originating out of LED Effects which utilize red, green and blue light emitting diodes to produce various colors of light and one version of the EYELEDS product which has not yet been sold in the United States. The twenty-six (26) accused Company products have not and do not represent a significant portion of the Company’s revenues.

On March 7, 2008, the Company and LED Effects filed a complaint in Sacramento, California Superior Court (“California I”) against Koninklijke Philips Electronics N.V., Philips Electronics North America Corporation and Philips Solid-State Lighting Solutions, Inc. as successor to Color Kinetics Inc. (collectively, “Philips Electronics”). Lighting Science Group Corporation, et al. v. Koninklijke Philips Electronics, N.V., et al., Superior Court of the State of California, County of Sacramento, Case Number 34-2008-00005454. The complaint alleges breach of the covenant of good faith and fair dealing, breach of fiduciary duty, intentional interference with economic relationship, negligent interference with economic relationship, violation of Business & Professions Code § 17200, and misappropriation of trade secrets by Philips Electronics. The complaint requests injunctive and monetary relief.

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The Complaint was amended on March 19, 2008 to add LED Holdings as a plaintiff. Philips Electronics removed the matter to federal court in the Eastern District of California, whereupon the Company filed a motion for remand to state court. On June 3, 2008, the federal court remanded the case back to California Superior Court.

On October 7, 2008, the Superior Court in California I issued a preliminary injunction against Philips Solid State Lighting Solutions, Inc., Koninklijke Philips Electronics N.V. and Philips Electronics North America Corporation (collectively “Philips”) preventing Philips from using or relying on any confidential or trade secret information obtained from LSG. In granting the motion for a preliminary injunction sought by LSG, the court found that LSG was “likely to prevail on the merits” in its action pending against Philips.

On January 16, 2009, Philips filed a cross-complaint in the California I action against plaintiffs alleging six claims: (i) breach of contract, (ii) intentional interference with contract, (iii) intentional interference with contract with respect to the Times Square Ball project, (iv) misappropriation of trade secrets, (v) unfair competition, and (vi) declaratory relief. The Company has filed its answer.

On April 18, 2008, Philips amended its complaint in the Massachusetts I action to add Philips Electronics as a plaintiff and to assert declaratory judgment claims which, for the most part, are mirror images of the claims made in the California I action. The District Court in the Massachusetts I action has ordered that the patent issues proceed and Philips’ declaratory judgment counterclaims be stayed.

On July 9, 2008, the Company, LED Effects and LED Holdings answered the amended complaint in the Massachusetts I action and asserted counterclaims that they do not infringe, the patents are invalid, the patents are unenforceable due to inequitable conduct before the Patent Office, and other defenses.

On September 23, 2008, after receiving a letter from Philips asserting infringement of two patents that were not asserted in Massachusetts I, the Company filed a declaratory judgment action in the United States District Court for the Eastern District of California (“California II”) seeking to declare U.S. Patent No. 7,250,774 owned by Philips invalid and not infringed. Lighting Science Group Corporation v. U.S. Philips Corporation and Koninklije Philips Electronics N.V., U.S. District Court, Eastern District of California, Civil Action No. 2:08-cv-2238.

On September 26, 2008, Philips filed a complaint in the United States District Court for the District of Massachusetts (“Massachusetts II”) alleging that the Company infringes U.S. Patent No. 6,697,448 directed to the use of light emitting diodes to produce different colors of light and previously owned by Color Kinetics, Inc. and U.S. Patent No. 7,250,774 directed to a luminaire structure. Philips Solid-State Lighting Solutions, Inc., et al. v. Lighting Science Group Corporation, et al., U.S. District Court, District of Massachusetts, Civil Action No. 1:08-cv-11650. The complaint does not specify the products accused of infringement. The Company moved, in part, to dismiss, transfer or stay the Massachusetts II action in favor of the California II action. Philips moved to consolidate the Massachusetts II action with the Massachusetts I action.

On December 1, 2008, Philips moved to dismiss or transfer the California II action. On February 3, 2009 the California II action was dismissed in favor of the Massachusetts II action proceeding.

On February 9, 2009, in the Massachusetts I action, the Court consolidated proceedings regarding U.S. Patent No. 6,697,448 with the Massachusetts I action, leaving only U.S. Patent No. 7,250,774 directed to a luminaire structure in the Massachusetts II action. The Company has filed its answer and counterclaims. A motion by the Company to stay the Massachusetts II action while the Massachusetts I action goes forward is presently before the Court.

Discovery has been proceeding in the California I and Massachusetts I actions. In the California I action, Philips was sanctioned for failure to properly respond to discovery requests and Philips paid the Company five thousand United States dollars (US$5,000.00).

Various discovery and procedural motions are pending in the California I action and the Massachusetts I action.

On March 17, 2009, the Company and Philips entered into a Stay Agreement to stay all the pending actions for thirty (30) days in order to facilitate settlement discussions.

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The Company intends to vigorously pursue its claims against Philips and to vigorously defend the claims asserted by Philips if a settlement cannot be reached.

Termination of Employment Agreement

On March 10, 2008, the Company entered into a letter agreement (the “Separation Agreement”) with Ronald E. Lusk, the Company’s Vice Chairman and a director, pursuant to which Mr. Lusk has resigned as a director and employee of the Company. Mr. Lusk will be paid $300,000 in severance within seven business days after execution of the Separation Agreement and is entitled to an additional $300,000 in severance payable in equal installments over a period of twelve months from the date of execution of the Separation Agreement. The Separation Agreement also contains customary mutual release, non-competition, non-solicitation and confidentiality provisions.

In addition, in connection with his resignation, the Company and Mr. Lusk have entered into an agreement pursuant to which the Company will sell to Mr. Lusk on an exclusive basis light emitting diode (LED) fixtures for use in commercial indoor parking garages sold through parking lot management companies.

Acquisition of Lighting Partner B.V.

On April 22, 2008, Lighting Science Coöperatief U.A (“Purchaser”)., a cooperative incorporated under the laws of the Netherlands and wholly-owned subsidiary of the Company, entered into a definitive Share Purchase Agreement (the “Purchase Agreement”) with the Company, as Guarantor,C. van de Vrie Holding B.V., a private company with limited liability incorporated under the laws of the Netherlands, W. van de Vrie Holding B.V., a private company with limited liability incorporated under the laws of the Netherlands, R.Q. van de Vrie Holding B.V., a private company with limited liability incorporated under the laws of the Netherlands, Q. van de Vrie Jr. Holding B.V., a private company with limited liability incorporated under the laws of the Netherlands, Y.B. van de Vrie Holding B.V., a private company with limited liability incorporated under the laws of the Netherlands (collectively, the “Sellers”), Mr. C. van de Vrie, an individual residing in the Netherlands, Mr. W. van de Vrie, an individual residing in the Netherlands, Mr. R. Q. van de Vrie, an individual residing in the Netherlands, Mr. Q. van de Vrie, an individual residing in the Netherlands, Mr. Y.B. Borghart van de Vrie, an individual residing in the Netherlands (collectively the individuals, the “Shareholders”) and Lighting Partner B.V., a private company with limited liability incorporated under the laws of the Netherlands (“LPBV”), pursuant to which the Company acquired all of the outstanding capital shares of LPBV from the Sellers for a combination of $5,000,000 in cash paid by the Purchaser and guaranteed by the Company and 4,632,000 shares of common stock (the “Consideration Shares”) of the Company, par value $0.001 per share.

Pursuant to the terms of the Purchase Agreement and subject to the conditions thereof, each Seller received its pro rata portion of $5,000,000 and 4,632,000 shares of the Company’s common stock based on the number of capital shares of LPBV held by such Seller on the closing date of the acquisition, subject to the holdback described below. As a result, LPBV became an indirect wholly-owned subsidiary of the Company.

For a period of one year following the closing of the acquisition, each Seller is prohibited from offering, selling, contracting to sell, pledging, granting any option to purchase, making any short sale, or otherwise disposing of 75% of the Consideration Shares; provided, however, that if LED Holdings registers for sale any of its shares of the Company’s common stock, the Sellers may register for sale (pursuant to the piggyback registration rights described below) and sell a proportionate percentage of the Consideration Shares.

Further, in order to satisfy any indemnification obligations under the Purchase Agreement, 1,120,000 of the Consideration Shares will be held back by the Company for a period of two years from the closing date. Any indemnification that the Company may be entitled to will be subject to the limitations set forth in the Purchase Agreement.

In connection with the acquisition, the Company assumed expenses of approximately $1,200,000 incurred due to the change of control of LPBV, which includes bonus payments to certain employees of LPBV.

In connection with the acquisition, the Company sold 2,083,333 shares of common stock to LED Holdings, the holder of approximately 70% of the outstanding common stock of the Company prior to the acquisition, for proceeds of $10,000,000 pursuant to a Stock Subscription Agreement dated April 22, 2008, by and among the

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Company, LED Holdings and PP IV LED LLC. The proceeds were used to fund the amount of the cash payment to the Sellers, to pay the Company’s costs and bridge financing (described below) repayment related to the acquisition and for working capital purposes. The common stock was issued to LED Holdings at an effective price per share of $4.80 under a pre-existing “follow-on” investment option it acquired through the Company’s acquisition of LED Holdings’ business and net assets in October 2007. LED Holdings’ follow-on investment option entitled LED Holdings to purchase up to $10,000,000 in shares of common stock at a 15% discount from the average closing price of the common stock (as reported on the OTC Bulletin Board) for the thirty (30) consecutive trading days immediately prior to the purchase; however, the Company and LED Holdings agreed to decrease such discount from 15% to approximately 5% from the average closing price of the common stock (as reported on the OTC Bulletin Board) for the thirty (30) consecutive trading days immediately prior to the purchase, which is reflected in the effective price per share.

Also, in conjunction with the closing of the LPBV acquisition, the Company entered into a $4,000,000 bridge loan on April 18, 2008 with Bank of Texas, N.A. at an interest rate of 5.25% per annum secured by the Company’s deposits at Bank of Texas due May 1, 2008. This loan was repaid in full on April 24, 2008.

At December 31, 2008, LPBV did not comply with the debt covenants set forth in its term loan facility and line of credit with ABN AMRO Bank.

Acquisition of Net Assets of Lamina Lighting, Inc. (“Lamina”)

On July 29, 2008, the Company, through LLI Acquisition, Inc.(“LLIAI”), a wholly-owned subsidiary, entered into a definitive agreement to acquire substantially all of the net assets of Lamina for cash proceeds of $4,500,000. LLIAI also agreed to pay earn-out payments of up to $10,500,000 to Lamina based on (i) (1)(i) the product of 85% and (ii)(x) the product of (A) 0.50 and (B) the aggregate amount of revenue in excess of $6,000,000 realized in accordance with generally accepted accounting principles by the Seller and/or the Company and its subsidiaries and affiliates during the year ended December 31, 2008 from the sale of substrate technology component parts and combination products, plus (y) the aggregate amount of revenue realized in accordance with generally accepted accounting principles by the Company and its subsidiaries and affiliates during the year ended December 31, 2009 from the sale of substrate technology component parts and combination products (as set forth in the Purchase Agreement), minus (2) the amount of the Cash Payment, and minus (3) the cost to Purchaser or its affiliates to remedy any pre-closing product warranty claims pursuant to the Purchase Agreement.

In conjunction with the acquisition of the net assets of Lamina, the Company entered into a Loan Authorization Agreement (the “Loan Agreement”) with the Bank of Montreal (“BMO”), whereby BMO established a $20 million revolving line of credit for the Company. The Loan Agreement provides for monthly payments of interest only at prime plus 0.5% and matures on written demand by BMO, but in no event later than July 25, 2009. Any outstanding balance under the Loan Agreement is payable on written demand by BMO, provided that the Company will have 14 business days to make any such payment. The line of credit has been guaranteed by Pegasus Partners IV, LP (“Pegasus IV”), a private equity fund managed by Pegasus Capital Advisors, LP (“Pegasus Capital”) the controlling stockholder of LED Holdings. In return for providing the guaranty of the line of credit, the Company issued a warrant for the purchase of 942,857 shares of common stock of the Company. The warrant has an exercise price of $7.00 per share and a term of five years. As consideration for the guarantee by Pegasus IV, the Company agreed to pay, on the last day of the Credit Facility Period (defined below), a transaction fee equal to (x) 1% of the average daily outstanding principal amount and accrued but unpaid interest under the line of credit during the period beginning on the date the credit facility is established through the date the credit facility is repaid in full or otherwise discharged (the “Credit Facility Period”) multiplied by (y) the quotient equal to the number of days in the Credit Facility Period divided by 365 days. The Company also paid certain costs to Pegasus Capital for its assistance in securing the financing and performing due diligence on the acquisition of the assets of Lamina.

The Company also entered into a Registration rights Agreement with Pegasus IV which gives Pegasus IV certain demand and piggy-back registration rights with respect to the warrant issued to it. Further, in the event that the line of credit is called by BMO prior to the end of the maximum one-year term and the Company has not obtained alternative financing, Pegasus IV has agreed, pursuant to a certain letter agreement dated as of July 25, 2008 (the “Bridge Loan Agreement”), to extend a bridge loan to the Company for up to six months for the amount of the then outstanding aggregate principal amount of the line of credit plus an additional $2 million (up to an aggregate of $20 million). In consideration for the bridge loan and pursuant to a fee letter agreement dated July 25, 2008 (the “Fee Letter Agreement”), by and between the Company and Pegasus IV, upon the closing of the bridge loan, the Company would pay a commitment fee of $200,000 and issue Pegasus IV additional warrants for the number of

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shares of Common Stock equal to 33% of the quotient of the aggregate principal amount of the bridge loan extended, divided by $7.00. The Company has agreed to pay Pegasus IV, on the last day of the Bridge Loan Period (defined below), a transaction fee equal to (x) 1% of the average daily outstanding principal amount and accrued but unpaid interest under the bridge loan during the period beginning on the date the bridge loan is extended through the date the bridge loan is repaid in full or otherwise discharged (the “Bridge Loan Period”) multiplied by (y) the quotient equal to the number of days in the Bridge Loan Period divided by 365 days. If extended, the bridge loan will be secured by substantially all of the assets of the Company and its subsidiaries and will be guaranteed by all direct and indirect domestic subsidiaries of the Company.

Bridge Financing

On December 19, 2008, the Company borrowed an aggregate principal amount of $2,000,000 from Pegasus IV and certain officers of the Company (the Bridge Note”). In particular, the Company borrowed $1,950,000 from Pegasus IV and $25,000 from Govi Rao, Chairman and Chief Executive Officer of the Company. In exchange for these loans, the Company issued an unsecured Bridge Note to each of Pegasus IV, Mr. Rao and the other lenders, which bear interest at the rate of 8% per annum. The original maturity date of the Bridge Notes was March 2, 2009. Of the original Bridge Notes, the maturity date of $1,992,000 of such Bridge Notes was extended to June 30, 2009.

Issue of Series C Preferred Stock and Warrants

On December 31, 2008, the Company entered into letter agreements with two of its law firms, pursuant to which the Company issued 251,739 shares of the Company’s newly designated Series C Preferred Stock, par value $.001 per share (the “Series C Preferred Stock”), and warrants (the “Warrants”) to purchase 3,776,078 shares of the Company’s common stock, in satisfaction of all amounts due such firms for legal services rendered in 2008. At the time of executing the Letter Agreements, the Company had previously been advised by such law firms and Pegasus IV that the law firms and Pegasus IV intended to enter into written agreements whereby the law firms would resell the Series C Preferred Stock and the Warrants to Pegasus IV. The Warrants to purchase common stock are exercisable only following the dissolution, winding-up or change of control of the Company or the repurchase or other acquisition by the Company of all of the Series C Preferred Stock and have an exercise price of $.85 per share.

Borrowing under Promissory Notes

In February 2009, the Company signed a promissory note agreement with Pegasus IV that would allow the Company to borrow up to $7.0 million in aggregate (the “February Note”). The February Note is to mature on June 30, 2009. As a condition to entering into the February Note, Pegasus IV and the Company entered into a letter agreement dated February 13, 2009 between the Company and Pegasus IV (the “Letter Agreement”). Pursuant to the terms of the Letter Agreement and the February Note, the Company agreed to use its best efforts to conduct a rights offering during the second fiscal quarter of 2009 (the “Offering”) for preferred or common stock of the Company, the net proceeds of which would raise approximately $30 million. The February Note and the Letter Agreement require that any net cash proceeds of an Offering generally be applied to the payment of: (i) the unpaid principal amount of the February Note, together with accrued interest thereon; (ii) the unpaid principal amount of the Company’s outstanding unsecured bridge loans, together with accrued interest thereon; (iii) the anticipated cash needs of the Company during 2009, net of other available financings; and (iv) the Company’s outstanding borrowings that are guaranteed by Pegasus Capital or an affiliate of Pegasus Capital.

In April and May 2009, the Company signed additional promissory note agreements (the “Additional Promissory Notes”) with Pegasus IV that would allow the Company to borrow up to $2.0 million and $0.5 million in the aggregate, respectively. The Additional Promissory Notes mature on May 15, and May 31, 2009, respectively, and bear interest at a rate of 8% and 14% per annum, respectively. As a condition to entering into the Additional Promissory Notes, Pegasus IV and the Company agreed that such notes would be subject to the Letter Agreement as noted above.

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Convertible Note Issuance

On May 15, 2009, the Company entered into a convertible note agreement (the “Convertible Note”) for approximately $31.6 million with Pegasus IV. Pursuant to the Convertible Note, the Company borrowed approximately $13.2 million on May 15, 2009 and may borrow an additional $18.5 million on or after May 29, 2009. Interest on any outstanding principal balance under the Convertible Note accrues at the rate of 14% per annum. All principal and accrued interest on the Convertible Note is due on the earlier of (a) July 31, 2009 or (b) the date the Offering is consummated (the “Closing Date”). However, if the registration statement for the Offering is declared effective by the SEC prior to July 31, 2009, the maturity date would be extended until the Closing Date, but in no event will the maturity date be later than September 3, 2009. The Convertible Note may not be prepaid and is immediately due and payable upon the Company’s failure to pay any of its material debts when due.

In accordance with the Convertible Note, the Company must use the proceeds to: (a) pay in full the $1.95 million note granted to Pegasus IV on December 18, 2008, together with accrued interest thereon, (b) pay in full the February Note, together with accrued interest thereon, (c) pay in full the Additional Notes, together with accrued interest thereon, and (d) pay outstanding principal amounts under the BMO line of credit. Further, so long as any amounts remain outstanding under the Convertible Note, the Company must obtain the prior written consent of Pegasus IV prior to borrowing more than $5.0 million in the aggregate pursuant to the BMO line of credit.

The Convertible Note amends the terms of the Offering, as previously set forth in the Letter Agreement and the February Note, and provides that: (a) the Offering would consist of the offering of at least 38,916,295 units at $1.006 per unit, (b) each unit would consist of 1.006 shares of newly designated Series D Non-Convertible Preferred Stock and a warrant to purchase one share of the Company’s common stock at an exercise price of $6.00, and (c) the Company must use its reasonable best efforts to cause the registration statement for the Offering to be declared effective by the SEC on or before July 31, 2009. Pegasus IV would also have the right to acquire any units not otherwise subscribed for pursuant to the terms of the Offering.

On the Closing Date, each $1.006 of outstanding principal and interest on the Convertible Note would automatically convert into one unit in the Offering, and the Company would be released from all liability in respect of the repayment of principal and interest. Additionally, the Convertible Note provides Pegasus IV with the option to convert all or a portion of the outstanding principal and interest on the Convertible Note into a number of units equal to one unit for each $1.006 of outstanding principal and interest.

Goodwill and Intangible Asset Impairment

At December 31, 2008, the Company completed an impairment test on the book value of its goodwill and identifiable intangible assets. The Company identified and recorded impairment charges related to the goodwill and other identifiable intangible assets acquired in the Transaction. The total impairment charges recorded during the year ended December 31, 2008 that were related to the goodwill and other identifiable intangible assets acquired in the Transaction were as follows:

Goodwill arising in the Transaction	$	42,605,552
Technology and patents acquired in the Transaction		2,419,984
Total impairment charge	$	45,025,536

At the time of the Transaction, the valuation of goodwill and other intangible assets was determined using acceptable methods based on growth projections tied to the development of the respective markets and products. Due to a number of factors, including: (i) the slower than expected pace at which the Company was able to develop products for these markets, (ii) product failures, (iii) delays in obtaining key certifications for products, (iv) customer delays on custom projects, (v) market slowdown in construction spending and (vi) reduction in the market price for the Company’s common stock and the multiple attributed to our common stock, the results of these projections became questionable. The amount of the impairment will be recorded in our consolidated statement of operations for the year ended December 31, 2008. In accordance with SFAS 142, these impairments will result in a new cost basis for the goodwill and other intangible assets.

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