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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON D.C. 20549
 FORM 10-K
 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
  Delaware
    
    23-2596710(State or other jurisdiction of incorporation)
    
    (I.R.S. Employer Identification Number)2100 McKinney Ave., Suite 1515Dallas, Texas
    
    75201(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:
 
 
 
 o þ
 o þ
 þ o
 o
  Large accelerated filer
o
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company
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TABLE OF CONTENTS
 PagePART IItem 1 and 2. Business and Properties
    
    
    1Item 1A. Risk Factors
    
    
    3Item 2. Properties (see Item 1. Business and Properties)
    
    
    11Item 3. Legal Proceedings
    
    
    11Item 4. Submission of Matters to a Vote of Security Holders
    
    
    11PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    12Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 8. Financial Statements and Supplementary Data
    
    
    21Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    21Item 9A. Controls and Procedures
    
    
    21Item 9B. Other Information
    
    
    22PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    23Item 11. Executive Compensation
    
    
    26Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    32Item 13. Certain Relationships and Related Transactions and Director Independence
    
    
    34Item 14. Principal Accountant Fees and Services
    
    
    35PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    35SIGNATURES
    
    
    36SubsidiariesCertification of Chief Executive Officer Pursuant to Section 302Certification of Vice President - Finance Pursuant to Section 302Certification Pursuant to 18 U.S.C. Section 1350




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PART I
 
 Items 1 and 2. Business and Properties.
     Recent Developments
   Target Markets
   1




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Gaming
 Architainment
 Commercial & Industrial
 Retail
 Public Infrastructure
 Sales and Distribution Strategy
  OEM Partnerships
  2




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Direct Sales Efforts in Emerging Markets
  Competition
   Properties
  
 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.
  3




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It is difficult to evaluate the likelihood that we will achieve or maintain profitability in
the future.
  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.
   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.
  
    
    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.
  4




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If our Optimized Digital Lighting technology does not achieve market acceptance, prospects for
our growth and profitability may be limited.
   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.
  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.
   5




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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.
   
    
    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.
  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.
  
    
    identification and availability of appropriate and affordable contract
manufacturers;
    
    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.
  6




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If we are not able to compete effectively against larger lighting manufacturers with greater
resources, our prospects for future success will be jeopardized.
     If we are unable to manage any future growth effectively, our profitability and liquidity
could be adversely affected.
  We are subject to legal, political and economic risks abroad.
   7




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
    
    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.
  Our products could contain defects that could reduce sales or result in claims against us.
  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.
  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.
  If we are unable to obtain and protect our intellectual property rights, our ability to
commercialize our products could be substantially limited.
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.
   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.
  
    
    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.
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Our common stock is considered a penny stock and may be difficult to sell.
  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.
  One stockholder owns a significant portion of our outstanding capital stock and is able to
influence our actions.
  Because there is a potential for significant future dilution of our existing stockholders,
their percentage ownership and control over company matters could be reduced.
  Anti-takeover provisions in our charter documents and under Delaware law could prevent or
delay a change in control of our company.
  10




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





ITEM 3. Legal Proceedings.


Philips Solid-State Lighting Solutions, Inc. v. Lighting
Science Group Corporation, et al.


:



    
    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).


(Lighting Science Group Corp. et al. v.
Koninklijke Philips Electronics N.V., et al.)
 
 ITEM 4. Submission of Matters to a Vote of Security Holders.
  11




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##### Table of Contents



PART II
 
 ITEM 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
   Common Stock
 HIGH
    
    LOW2007Fourth Quarter
    
    $
    10.60
    
    
    
    4.40Third Quarter
    
    
    11.40
    
    
    
    6.60Second Quarter
    
    
    10.40
    
    
    
    5.00First Quarter
    
    
    8.40
    
    
    
    5.802006Fourth Quarter
    
    $
    9.00
    
    
    
    3.40Third Quarter
    
    
    6.40
    
    
    
    3.00Second Quarter
    
    
    9.60
    
    
    
    4.40First Quarter
    
    
    13.00
    
    
    
    5.80
      12




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Number of SecuritiesNumber of Securities to be
    
    Weighted-Average
    
    Remaining AvailableIssued Upon Exercise of
    
    Exercise Price of
    
    for Future IssuanceOutstanding Options,
    
    Outstanding Options,
    
    Under EquityPlan
    
    Warrants and Rights
    
    Warrants and Rights
    
    Compensation PlansLighting Science
Group Corporation
2005 Equity Based
Incentive
    
    
    267,667
    
    
    $
    7.60
    
    
    
    232,333Compensation Plan
(approved by
security holders)
  
    
    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.
  
    
    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 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
 13




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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
     
    
    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
 Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
 Revenues
  Cost of Goods Sold
  14




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Selling, General and Administrative Expenses
  For the Year Ended:December 31, 2007
    
    December 31, 2006SG&A expenses
    
    $
    4,497,000
    
    
    $
    1,827,000
  Compensation and Related Expenses
  For the year ended:December 31, 2007
    
    December 31, 2006Compensation and related expenses
    
    $
    4,633,000
    
    
    $
    2,662,000
  Professional Fees
  For the Year Ended:December 31, 2007
    
    December 31, 2006Professional fees
    
    $
    2,303,000
    
    
    $
    725,000
  15




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Directors Fees
  For the Year Ended:December 31, 2007
    
    December 31, 2006Directors fees
    
    $
    267,000
    
    
    $
    448,000
  Depreciation and Amortization Expenses
  For the Year Ended:December 31, 2007
    
    December 31, 2006Depreciation and amortization
    
    $
    682,000
    
    
    $
    508,000
  Interest Expense (Net)
  For the Year Ended:December 31, 2007
    
    December 31, 2006Interest expense (net)
    
    $
    844,000
    
    
    $
    535,000
  Other Income (Net)
  For the Year Ended:December 31, 2007
    
    December 31, 2006Other income (net)
    
    $
    (491,000
    )
    
    $
    (3,134,000
    )
  16




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Dividends
and Accretion (Reversal of Accretion) of Preferred Stock Redemption Value
  For the Year Ended:December 31, 2007
    
    December 31, 2006Dividends on 6%
Convertible
Preferred Stock and
accretion(reversal of accretion) of preferred stock
redemption value
    
    $
    (1,561,000
    )
    
    $
    1,650,000
  Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005
 Revenues
  Cost of Goods Sold
  Selling, General and Administrative Expenses
  For the Year Ended:December 31, 2006
    
    December 31, 2005SG&A expenses
    
    $
    1,827,000
    
    
    $
    1,823,000
  17




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Compensation and Related Expenses
  For the year ended:December 31, 2006
    
    December 31, 2005Compensation and related expenses
    
    $
    2,662,000
    
    
    $
    1,977,000
  Professional Fees
  For the Year Ended:December 31, 2006
    
    December 31, 2005Professional fees
    
    $
    725,000
    
    
    $
    1,628,000
  Directors Fees
  For the Year Ended:December 31, 2006
    
    December 31, 2005Directors fees
    
    $
    448,000
    
    
    $
    294,000
  Depreciation and Amortization Expenses
  18




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For the Year Ended:December 31, 2006
    
    December 31, 2005Depreciation and amortization
    
    $
    508,000
    
    
    $
    488,000
  Interest Expense (Net)
  For the Year Ended:December 31, 2006
    
    December 31, 2005Interest expense (net)
    
    $
    535,000
    
    
    $
    5,000
  Other Income (Net)
  For the Year Ended:December 31, 2006
    
    December 31, 2005Other income (net)
    
    $
    3,134,000
    
    
    $
    (3,070,000
    )
  Dividends and Accretion (Reversal of Accretion) of Preferred Stock Redemption Value
  For the Year Ended:December 31, 2006
    
    December 31, 2005Dividends on
6% Convertible Preferred Stock and accretion(reversal of accretion) of preferred stock redemption value
    
    $
    1,650,000
    
    
    $
    1,203,000
 19




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Liquidity and Capital Resources
      20




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Item 8. Financial Statements and Supplementary Data.
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
   21




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Managements Annual Report on Internal Control over Financial Reporting
  Internal ControlIntegrated Framework
   Changes in Internal Control Over Financial Reporting
  
 Item 9B. Other Information.
  
 22




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PART III
 
 Item 10.
Directors, Executive Officers and Corporate Governance.
    Name
    
    Age
    
    PositionGovi Rao
    
    
    45
    
    
    Chief Executive Officer and ChairmanKenneth Honeycutt
    
    
    56
    
    
    President and Chief Operating OfficerStephen Hamilton
    
    
    43
    
    
    Vice President  FinanceKevin Furry
    
    
    43
    
    
    Chief Technology OfficerFrederic S. Maxik
    
    
    46
    
    
    Chief Scientific OfficerRobert E. Bachman
    
    
    65
    
    
    DirectorDavid Bell
    
    
    64
    
    
    DirectorDonald R. Harkleroad
    
    
    62
    
    
    DirectorRichard Kelson
    
    
    61
    
    
    DirectorBonnie Reiss
    
    
    52
    
    
    DirectorDaryl N. Snadon
    
    
    61
    
    
    DirectorRichard Weinberg
    
    
    48
    
    
    Director
 Govi Rao, 45,
 Kenneth Honeycutt, 56
 23




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Stephen Hamilton, 43
 Kevin Furry, 43,
 Fredric S. Maxik, 46
 Robert E. Bachman, 65
 David Bell, 64,
 Donald R. Harkleroad, 62
 Richard Kelson, 61,
 24




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Bonnie Reiss, 52
 Daryl N. Snadon, 61
 Richard Weinberg, 48,
 Members of Audit Committee and Audit Committee Financial Expert
  
  25




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Code of Ethics
  
 Section 16(a) Beneficial Ownership Reporting Compliance
   
 Item 11. Executive Compensation.
  26




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Summary Compensation Table
 Change inPensionValue andNonquali-fiedNon-Equity
    
    DeferredIncentive
    
    Compen-Stock
    
    Option
    
    Plan
    
    sation
    
    All OtherSalary
    
    Bonus
    
    Awards
    
    Awards
    
    Compensa-
    
    Earnings
    
    CompensationName and Principal Position
    
    Year
    
    ($)
    
    ($)
    
    ($) (1)
    
    ($) (1)
    
    tion
    
    ($)
    
    ($) (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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    291,133Govi 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 prospectus.(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. 27




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Employment Agreements
 Govi Rao
  Ronald E. Lusk
  Kevin Furry
  28




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Frederic S. Maxik
  Kenneth H. Honeycutt
  Outstanding Equity Awards At Fiscal Year-End
  29




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Option Awards
    
    Stock AwardsEquityIncentiveEquity
    
    PlanIncentive
    
    Awards:Equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Plan
    
    Market orIncentive
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Awards:
    
    PayoutPlan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Number of
    
    Value ofNumber
    
    
    
    
    
    Awards:
    
    
    
    
    
    
    
    
    
    
    
    
    
    Market
    
    Unearned
    
    Unearnedof
    
    Number of
    
    Number of
    
    
    
    
    
    
    
    
    
    
    
    
    
    Value of
    
    Shares,
    
    Shares,Securities
    
    Securities
    
    Securities
    
    
    
    
    
    
    
    
    
    Number of
    
    Shares or
    
    Units or
    
    Units orUnderlying
    
    Underlying
    
    Underlying
    
    
    
    
    
    
    
    
    
    Shares or Units of
    
    Units of
    
    Other
    
    OtherUnexercised
    
    Unexercised
    
    Unexercised
    
    Option
    
    
    
    
    
    Stock That
    
    Stock That
    
    Rights That
    
    Rights ThatOptions
    
    Options
    
    Unearned
    
    Exercise
    
    Option
    
    Have Not
    
    Have Not
    
    Have Not
    
    Have Not(#)
    
    (#)
    
    Options
    
    Price
    
    Expiration
    
    Vested
    
    Vested
    
    Vested
    
    VestedName
    
    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)
 
 (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
  30




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##### Table of Contents



Change inPensionValue andFees Earned or
    
    
    
    
    
    
    
    
    
    Non-Equity
    
    NonqualifiedPaid in
    
    Stock
    
    Option
    
    Incentive Plan
    
    Deferred
    
    All OtherCash
    
    Awards
    
    Awards
    
    Compensation
    
    Compensation
    
    Compensation
    
    TotalName
    
    ($) (1)
    
    ($)
    
    ($) (2)
    
    ($)
    
    Earnings
    
    ($)
    
    ($)Robert E. Bachman (3)
    
    $
    47,500
    
    
    
    
    
    
    $
    49,625
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    97,125John Collingwood (4)
    
    $
    37,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    37,500Donald Harkleroad (5)
    
    $
    47,500
    
    
    
    
    
    
    $
    49,625
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    97,125Ronald E. Lusk (6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Daryl Snadon (7)
    
    $
    37,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    37,500Robert Woodson III (8)
    
    $
    9,425
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    58,302Robert H. Warshauer (9)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Govi Rao (10)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Richard Kelson (11)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    David Bell (11)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (Richard Weinberg (11)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Bonnie Reiss (11)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (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 prospectus.(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. 31




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##### Table of Contents



(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.    
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
  Shares BeneficiallyOwned(1)Name and Address of Beneficial Owner
    
    Number
    
    PercentDirectors and OfficersRobert 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
    %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
    
    
    
    
    %
 32




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##### Table of Contents



Shares BeneficiallyOwned(1)Name and Address of Beneficial Owner
    
    Number
    
    PercentRichard Weinberg
    
    
    
    
    
    
    
    %Directors and Executive Officers as a Group (12 persons)
    
    
    675,063
    
    
    
    3.0
    %Certain PersonsLED
Holdings, LLC (9)
    
    
    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
pecuniary interest, and this statement shall not be deemed to be an
admission that they are the beneficial owners of such securities. 33




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##### Table of Contents



Item 13. Certain Relationships and Related Transactions, and Director Independence.
 Guarantors of Line of Credit
   Warrant Shares /Total Value of Debt
    
    
    Common Shares to beName of Guarantor
    
    Position
    
    Guaranteed
    
    
    IssuedUGT Investors LP (1)
    
    Director
    
    $
    150,000
    
    
    
    26,250Daryl Snadon
    
    Director
    
    
    200,000
    
    
    
    35,000John Collingwood
    
    Director
    
    
    200,000
    
    
    
    35,000Ron Lusk
    
    Vice Chairman
    
    
    50,000
    
    
    
    8,750Jerome Hill
    
    Stockholder
    
    
    100,000
    
    
    
    17,500George Parker Young
    
    Stockholder
    
    
    50,000
    
    
    
    8,750Phil Lacerte
    
    Stockholder
    
    
    1,250,000
    
    
    
    118,750TOTAL
    
    
    
    $
    2,000,000
    
    
    
    250,000
 
 (1)
    
    Mr. Bachman is controlling shareholder in the sole corporate general
partner of USGT Investors, L.P.   Amount of Guarantees
    
    
    Warrant Shares to beName of Guarantor
    
    Position
    
    Provided
    
    
    IssuedRon Lusk
    
    Vice Chairman
    
    $
    275,000
    
    
    
    13,750Phibian S. Trust
    
    Stockholder
    
    
    75,000
    
    
    
    3,750Phil Lacerte
    
    Stockholder
    
    
    65,000
    
    
    
    3,250Daryl Snadon
    
    Director
    
    
    50,000
    
    
    
    2,500Edward Hawes
    
    Stockholder
    
    
    50,000
    
    
    
    2,500USGT Investors, LP (1)
    
    Director
    
    
    37,500
    
    
    
    1,875Baron Cass
    
    Stockholder
    
    
    48,750
    
    
    
    2,438Paul Schlosberg
    
    Stockholder
    
    
    48,750
    
    
    
    2,438TOTAL
    
    
    
    $
    650,000
    
    
    
    32,501
 
 (1)
    
    Mr. Bachman is controlling shareholder in the sole corporate general
partner of USGT Investors, L.P. 34




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##### Table of Contents



Parent Company
  
 Item 14. Principal Accounting Fees and Services.
  Audit Fees
  Audit-Related Fees
  Tax Fees
  All Other Fees
  Pre-Approval Policies
   
 PART IV
 
 Item 15. Exhibits, Financial Statements and Schedules.
  35




---



##### Table of Contents



SIGNATURES
  LIGHTING SCIENCE GROUP CORPORATIONMarch 31, 2008
    /s/ Govi RaoGovi Rao, Chairman and Chief Executive Officer   Signature
    
    Capacity in which Signed
    
    Date/s/ Govi Rao

Govi Rao
    
    Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
    
    March 31, 2008/s/ Stephen Hamilton

Stephen Hamilton
    
    Vice President  Finance

(Principal Financial and
Accounting Officer)
    
    March 31, 2008/s/ Robert E. Bachman

Robert E. Bachman
    
    Director
    
    March 31, 2008
 36




---



##### Table of Contents



Signature
    
    Capacity in which Signed
    
    Date/s/ David Bell

David Bell
    
    Director
    
    March 31, 2008/s/ Donald R. Harkleroad

Donald R. Harkleroad
    
    Director
    
    March 31, 2008/s/ Richard Kelson
    
    Director
    
    March 31, 2008Richard Kelson/s/ Bonnie Reiss

Bonnie Reiss
    
    Director
    
    March 31, 2008/s/ Daryl N. Snadon

Daryl N. Snadon
    
    Director
    
    March 31, 2008/s/ Richard Weinberg

Richard Weinberg
    
    Director
    
    March 31, 2008
 37




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##### Table of Contents



INDEX TO EXHIBITS
 EXHIBITNUMBER
    
    DESCRIPTION2.1
    
    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).
 38




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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION4.6
    
    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).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).
 39




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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION10.8+
    
    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.24.1*
    
    Power of Attorney (included as part of the signature page).31.1*
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of Vice President  Finance pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1*
    
    Certification of Chief Executive Officer and Vice President -
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 40




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##### Table of Contents



Item 8. Financial Statements.
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets as of December 31, 2007 and 2006
    
    F-3Consolidated Statements of Operations for each of the two years in the
period ended December 31, 2007
    
    F-4Consolidated Statements of Stockholders Equity (Deficit) for each of
the two years in the period ended December 31, 2007
    
    F-5Consolidated Statements of Cash Flows for each of the two years in the
period ended December 31, 2007
    
    F-6Notes to the Consolidated Financial Statements
    
    F-7
 F - 1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
     
 F - 2




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##### Table of Contents

--------------------------------------------------------------------------------

LIGHTING SCIENCE GROUP CORPORATION
AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE
SHEETS
 December 31, 2007
    
    
    December 31, 2006ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    11,399,429
    
    
    $
    86,080Accounts
receivable, net of allowance for doubtful accounts  (Note 1)
    
    
    1,392,064
    
    
    
    110,217Inventory, net of allowances (Note 3)
    
    
    3,786,966
    
    
    
    432,613Prepaid expenses and other current assets
    
    
    1,180,028
    
    
    
    1,134,588Total current assets
    
    
    17,758,487
    
    
    
    1,763,498PROPERTY AND EQUIPMENT, net (Note 4)
    
    
    1,149,024
    
    
    
    360,031OTHER ASSETSReorganized value in excess of amounts allocable to identifiable assets (Note 1)
    
    
    
    
    
    
    2,793,224Intangible assets, net (Notes 1 and 4)
    
    
    9,314,982
    
    
    
    1,196,122Other long-term assets
    
    
    1,141,532
    
    
    
    Goodwill (Note 1)
    
    
    13,479,900
    
    
    
    154,097Total other assets
    
    
    23,936,414
    
    
    
    4,143,443TOTAL ASSETS
    
    $
    42,843,925
    
    
    $
    6,266,972LIABILITIES
AND STOCKHOLDERS EQUITY (DEFICIT)CURRENT LIABILITIESAccounts payable
    
    $
    2,357,399
    
    
    $
    344,280Accrued expenses
    
    
    3,662,669
    
    
    
    270,874Accrued dividend on 6% Convertible Preferred Stock
    
    
    5,435
    
    
    
    54,814Line of credit
    
    
    
    
    
    
    2,044,948Note payable  related party  current portion (Note 7)
    
    
    
    
    
    
    81,250Total current liabilities
    
    
    6,025,503
    
    
    
    2,796,166OTHER LIABILITIESNote payable
 related party  long-term portion (Note 7)
    
    
    
    
    
    
    62,500Liability under derivative contracts (Note 8)
    
    
    1,007,600
    
    
    
    6,290,191Total other liabilities
    
    
    1,007,600
    
    
    
    6,352,691TOTAL LIABILITIES
    
    
    7,033,103
    
    
    
    9,148,857COMMITMENTS AND CONTINGENCIES (Note 11)6% CONVERTIBLE PREFERRED STOCK, $.001 par value, 2,656,250 shares authorized,
215,652 (2006  2,065,653) shares issued and outstanding, liquidation value of $690,086 (2006  $6,610,089) (Note 8)
    
    
    364,895
    
    
    
    2,173,181STOCKHOLDERS EQUITY (DEFICIT)Series B
Preferred Stock, $.001 par value, 2,000,000 shares authorized, issued and outstanding
    
    
    2,000
    
    
    
    Common stock, $.001 par value, 495,000,000 shares authorized,
21,958,482 (2006  3,232,202) shares issued and outstanding
    
    
    21,959
    
    
    
    3,232Additional paid-in-capital
    
    
    68,523,254
    
    
    
    16,503,354Accumulated deficit
    
    
    (33,111,567
    )
    
    
    (21,561,652
    )Accumulated other comprehensive income
    
    
    10,281
    
    
    
    TOTAL STOCKHOLDERS EQUITY (DEFICIT)
    
    
    35,445,927
    
    
    
    (5,055,066
    )TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
    
    $
    42,843,925
    
    
    $
    6,266,972
  F - 3




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##### Table of Contents



LIGHTING SCIENCE GROUP CORPORATION
AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 Year Ended
    
    
    Year EndedDecember 31, 2007
    
    

December 31, 2006Revenue
    
    $
    2,775,682
    
    
    $
    436,172Cost of goods sold
    
    
    (2,170,149
    )
    
    
    (350,724
    )Gross margin
    
    
    605,533
    
    
    
    85,448Operating expenses:Selling, general and administrative
    
    
    4,496,695
    
    
    
    1,826,802Compensation and related expenses
    
    
    4,632,728
    
    
    
    2,661,835Professional fees
    
    
    2,303,208
    
    
    
    724,567Directors fees
    
    
    266,671
    
    
    
    448,030Depreciation and amortization
    
    
    681,798
    
    
    
    507,805Total operating expenses
    
    
    12,381,100
    
    
    
    6,169,039Operating loss
    
    
    (11,775,567
    )
    
    
    (6,083,591
    )Other income (expense)Interest income
    
    
    138,279
    
    
    
    15,834Interest expense
    
    
    (982,068
    )
    
    
    (550,839
    )Other, net (Note 8)
    
    
    (491,171
    )
    
    
    (3,134,427
    )Total other income (expense)
    
    
    (1,334,960
    )
    
    
    (3,669,432
    )Loss before
dividends on 6% Convertible Preferred Stock and
accretion (reversal of accretion) of preferred stock
redemption value
    
    
    (13,110,527
    )
    
    
    (9,753,023
    )Dividends on 6% Convertible Preferred Stock and
accretion (reversal of accretion) of preferred stock
redemption value (Note 8)
    
    
    (1,560,612
    )
    
    
    1,649,513Net loss attributable to common stock
    
    
    (11,549,915
    )
    
    
    (11,402,536
    )Items included in accumulated comprehensive income
    
    
    10,281
    
    
    
    Net comprehensive loss
    
    $
    (11,539,634
    )
    
    $
    (11,402,536
    )Basic net loss per weighted average common share
    
    $
    (1.36
    )
    
    $
    (3.94
    )Weighted average number of common shares outstanding
    
    
    8,515,956
    
    
    
    2,891,877
  F - 4




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##### Table of Contents



LIGHTING
SCIENCE GROUP CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
 AccumulatedOtherSeries B Preferred Stock
    
    
    Common Stock
    
    
    Additional
    
    
    Accumulated
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Paid In Capital
    
    
    Deficit
    
    
    Income
    
    
    TotalBalance January 1, 2006, as
previously reported
    
    
    
    
    
    $
    
    
    
    
    55,474,591
    
    
    $
    55,475
    
    
    $
    12,830,833
    
    
    $
    (10,159,116
    )
    
    $
    
    
    
    $
    2,727,192Adjust for reverse 1 for 20
reverse stock split effected January
25, 2008 (Note 1)
    
    
    
    
    
    
    
    
    
    
    (52,700,860
    )
    
    
    (52,701
    )
    
    
    52,701
    
    
    
    
    
    
    
    
    
    
    
    Balance, January 1, 2006, as restated
    
    
    
    
    
    
    
    
    
    
    2,773,731
    
    
    
    2,774
    
    
    
    12,883,534
    
    
    
    (10,159,116
    )
    
    
    
    
    
    
    2,727,192Conversion of 6% Convertible
Preferred Stock to common stock
    
    
    
    
    
    
    
    
    
    
    39,062
    
    
    
    39
    
    
    
    122,831
    
    
    
    
    
    
    
    
    
    
    
    122,870Issue of common stock in payment of
operating expenses
    
    
    
    
    
    
    
    
    
    
    366,672
    
    
    
    367
    
    
    
    1,925,645
    
    
    
    
    
    
    
    
    
    
    
    1,926,012Issue of common stock to settle
dividends on the 6% Convertible
Preferred Stock
    
    
    
    
    
    
    
    
    
    
    59,648
    
    
    
    59
    
    
    
    301,912
    
    
    
    
    
    
    
    
    
    
    
    301,971Issue of common stock upon the
exercise of warrants
    
    
    
    
    
    
    
    
    
    
    10,871
    
    
    
    11
    
    
    
    65,215
    
    
    
    
    
    
    
    
    
    
    
    65,226Conversion of advances from director
to common stock
    
    
    
    
    
    
    
    
    
    
    343
    
    
    
    
    
    
    
    2,056
    
    
    
    
    
    
    
    
    
    
    
    2,056Cancellation of common stock
    
    
    
    
    
    
    
    
    
    
    (18,125
    )
    
    
    (18
    )
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    Fair value of a warrant issued for
payment of operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    368,698
    
    
    
    
    
    
    
    
    
    
    
    368,698Stock option expense recorded during
the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    784,943
    
    
    
    
    
    
    
    
    
    
    
    784,943Fair value of derivatives exercised
or converted during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,502
    
    
    
    
    
    
    
    
    
    
    
    48,502Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,402,536
    )
    
    
    
    
    
    
    (11,402,536
    )Balance December 31, 2006
    
    
    
    
    
    
    
    
    
    
    3,232,202
    
    
    
    3,232
    
    
    
    16,503,354
    
    
    
    (21,561,652
    )
    
    
    
    
    
    
    (5,055,066
    )Conversion of 6% Convertible
Preferred Stock to common stock
    
    
    
    
    
    
    
    
    
    
    987,318
    
    
    
    987
    
    
    
    5,211,784
    
    
    
    
    
    
    
    
    
    
    
    5,212,771Issue of common stock in payment of
operating expenses
    
    
    
    
    
    
    
    
    
    
    81,631
    
    
    
    82
    
    
    
    639,073
    
    
    
    
    
    
    
    
    
    
    
    639,155Issue of common stock to settle
dividends on the 6% Convertible
Preferred Stock
    
    
    
    
    
    
    
    
    
    
    44,397
    
    
    
    44
    
    
    
    263,861
    
    
    
    
    
    
    
    
    
    
    
    263,905Issue of common stock upon the
exercise of warrants
    
    
    
    
    
    
    
    
    
    
    1,017,537
    
    
    
    1,018
    
    
    
    6,684,942
    
    
    
    
    
    
    
    
    
    
    
    6,685,960Fair value of a warrant issued for
payment of operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    260,541
    
    
    
    
    
    
    
    
    
    
    
    260,541Common stock issued to investors in
private placement
    
    
    
    
    
    
    
    
    
    
    666,663
    
    
    
    667
    
    
    
    3,999,130
    
    
    
    
    
    
    
    
    
    
    
    3,999,797Common and Preferred stock issued to
purchase net assets and operations
of LED Holdings
    
    
    2,000,000
    
    
    
    2,000
    
    
    
    15,928,733
    
    
    
    15,929
    
    
    
    24,575,229
    
    
    
    
    
    
    
    
    
    
    
    24,593,158Other payments received from
Directors under Section 16 of
Exchange Act
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,977
    
    
    
    
    
    
    
    
    
    
    
    10,977Additional paid-in capital recorded
as a result of the application of
push-down accounting in the reverse
takeover accounting for the
acquisition of the net assets of
Lighting Science Group Corporation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,821,576
    
    
    
    
    
    
    
    
    
    
    
    11,821,576Stock option expense recorded during
the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    416,958
    
    
    
    
    
    
    
    
    
    
    
    416,958Share issue costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,864,171
    )
    
    
    
    
    
    
    
    
    
    
    (1,864,171
    )Other Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,281
    
    
    
    10,281Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,549,915
    )
    
    
    
    
    
    
    (11,549,915
    )Balance December 31, 2007
    
    
    2,000,000
    
    
    $
    2,000
    
    
    
    21,958,482
    
    
    $
    21,959
    
    
    $
    68,523,254
    
    
    $
    (33,111,567
    )
    
    $
    10,281
    
    
    $
    35,445,927
  F - 5




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##### Table of Contents



LIGHTING SCIENCE GROUP CORPORATION  AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,2007
    
    
    2006OPERATING ACTIVITIESNet loss
attributable to common stock
    
    $
    (11,549,915
    )
    
    $
    (11,402,536
    )Adjustments to reconcile net loss to net cash used by operating activities:Expenses paid by issuance of common stock
    
    
    639,155
    
    
    
    1,926,012Expenses paid by issuance of common share warrants
    
    
    260,541
    
    
    
    368,698Non-cash stock option compensation expense
    
    
    416,958
    
    
    
    784,943Accretion
(reversal of accretion ) of 6% convertible preferred stock redemption value
    
    
    (1,808,286
    )
    
    
    1,245,504Fair value adjustment to liabilities under derivative contracts
    
    
    163,353
    
    
    
    3,134,1276% Convertible Preferred Stock dividends settled by issuance of common stock
    
    
    242,774
    
    
    
    301,971Loss on disposal of assets
    
    
    4,095
    
    
    
    Depreciation and amortization
    
    
    681,798
    
    
    
    507,805Changes in:Accounts receivable
    
    
    854,872
    
    
    
    (100,442
    )Prepaid expenses
    
    
    (943,620
    )
    
    
    (1,004,109
    )Inventory
    
    
    (2,367,458
    )
    
    
    184,905Accounts payable
    
    
    697,763
    
    
    
    96,311Accrued expenses and other liabilities
    
    
    3,342,414
    
    
    
    110,402Net cash used by operating activities
    
    
    (9,365,557
    )
    
    
    (3,846,409
    )INVESTING ACTIVITIESPurchase of net assets of LED Holdings
    
    
    (10,436,031
    )
    
    
    Cash held by subsidiary upon acquisition
    
    
    990,483
    
    
    
    Purchase of intangible assets
    
    
    (3,362
    )
    
    
    Purchase of property and equipment
    
    
    (760,027
    )
    
    
    (157,968
    )Net cash used by investing activities
    
    
    (10,208,937
    )
    
    
    (157,968
    )FINANCING ACTIVITIESLoans from directors and officers
    
    
    
    
    
    
    32,056Repayment of loans from directors and officers
    
    
    
    
    
    
    (30,000
    )Receipt of other payments from stockholders
    
    
    10,977
    
    
    
    Proceeds
from draws on line of credit
    
    
    
    
    
    
    2,044,948Repayment of amounts due under line of credit
    
    
    (2,044,948
    )
    
    
    Payment of amounts due under notes payable
    
    
    (143,750
    )
    
    
    (6,250
    )Common and Series B Preferred stock issued to purchase net assets of LED Holdings
    
    
    24,445,548
    
    
    
    Proceeds
from exercise of common stock warrants, net of related costs
    
    
    6,100,158
    
    
    
    65,226Proceeds from private placement, net of related costs
    
    
    2,509,577
    
    
    
    Net cash provided by financing activities
    
    
    30,877,562
    
    
    
    2,105,980Effect of
exchange rate fluctuations on cash and cash equivalents
    
    
    10,281
    
    
    
    Net increase (decrease) in cash
    
    
    11,313,349
    
    
    
    (1,898,397
    )Cash at
beginning of year
    
    
    86,080
    
    
    
    1,984,477Cash at end of year
    
    $
    11,399,429
    
    
    $
    86,080Interest paid
    
    $
    43,783
    
    
    $
    45,9556% Convertible Preferred Stock dividends paid and deducted in arriving at Net Loss
    
    $
    4,900
    
    
    $
    108,227SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIESConversion of 6% Convertible Preferred Stock to Common Stock
    
    $
    5,265,117
    
    
    $
    Conversion of loans from directors and officers to Common Stock
    
    $
    
    
    
    $
    2,056
  F - 6




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##### Table of Contents



LIGHTING SCIENCE GROUP CORPORATION  AND SUBSIDIARIES
 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Nature of Business
   Business Combination with LED Holdings
   Cash held by subsidiary
    
    $
    990,483Accounts receivable
    
    
    2,136,719Inventory
    
    
    986,894Fixed assets
    
    
    198,686Intangible assets
    
    
    5,719,209Goodwill
    
    
    1,620,200Other long term assets, including investment in LED Effects
Japan, KK
    
    
    182,462Total assets acquired
    
    
    11,834,653Less: Accounts payable and accrued liabilities assumed
    
    
    (408,139
    )Net assets acquired
    
    $
    11,426,514Less: cash acquired
    
    
    (990,483
    )Net non-cash assets acquired
    
    $
    10,436,031
 F - 7




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##### Table of Contents



Net non-cash assets acquired
    
    $
    10,436,031Cash received directly by the Company from LED Holdings
    
    
    14,009,517$
    24,445,548
 Reverse Takeover Accounting
 Business Combinations
  Cash and cash equivalents
    
    $
    677,000Other current assets
    
    
    4,656,000Fixed assets
    
    
    587,000Patents and technology
    
    
    3,900,000Goodwill
    
    
    11,859,700Estimated fair value of assets
    
    
    21,679,700Less: Fair value of current liabilities
    
    
    (3,948,000
    )Total estimated fair value of net assets at the closing date
of the transaction
    
    $
    17,731,700
 Push Down Accounting
  F - 8




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##### Table of Contents



Technology
    
    
    
    
    
    Totaland Patents
    
    
    Goodwill

    
    
    AdjustmentIntangible
assets fair value per independent
valuation
    
    $
    3,900,000
    
    
    $
    11,859,700
    
    
    $
    15,759,700Less: reallocation of intangible assets
existing at closing
    
    
    Reorganized value in excess of amounts
allocable to identifiable assets
    
    
    
    
    
    
    (2,793,224
    )
    
    
    (2,793,224
    )Patents and intellectual property
    
    
    (990,803
    )
    
    
    
    
    
    
    (990,803
    )Goodwill recorded prior to closing date
    
    
    
    
    
    
    (154,097
    )
    
    
    (154,097
    )Net adjustment to intangible assets pursuant
to application of push-down accounting
    
    $
    2,909,197
    
    
    $
    8.912,379
    
    
    $
    11,821,576
  Reverse Stock Split
  Summary of Significant Accounting Policies
 Use of Estimates
  Cash
and Cash Equivalents
   F - 9




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##### Table of Contents



Accounts Receivable
  Inventory
  Prepaid
Expenses and Other Current Assets
  Property
and Equipment
   Other Assets
  Intangible
Assets
  Technology and patents
    
    $
    2,769,771Trademarks
    
    
    355,500Customer relations
    
    
    717,833Software
    
    
    1,876,105$
    5,719,209
   F - 10




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##### Table of Contents



Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,2007
    
    
    2006Proprietary rights agreement
    
    $
    147,433
    
    
    $
    354,333Technology and patents
    
    
    263,805
    
    
    
    60,200Trademarks
    
    
    4,500
    
    
    
    Customer relationships
    
    
    12,167
    
    
    
    Software
    
    
    85,000
    
    
    
    $
    512,905
    
    
    $
    414,533
 Reorganization Value
  Goodwill and Other Intangible Assets
  Impairment
  F - 11




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##### Table of Contents



Financial Instruments
 Accounting for Derivative Instruments and Hedging
Activities
  Revenue
   Research and Development
  Stock Based Compensation
 Share-Based Payment
 Income taxes
 Accounting for Income Taxes
 F - 12




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##### Table of Contents



Earnings per share
  Comparative Consolidated Financial Statements
  NOTE 2: FAIR VALUE OF FINANCIAL INSTRUMENTS
 Disclosures About Fair Value of Financial Instruments
  NOTE 3: INVENTORY
  December 31,
    
    
    December 31,2007
    
    
    2006Deposits paid to contract manufacturers
    
    $
    159,820
    
    
    $
    31,878Raw materials and components
    
    
    3,273,774
    
    
    
    255,767Work-in-process
    
    
    221,493
    
    
    
    Finished goods
    
    
    131,879
    
    
    
    144,968$
    3,786,966
    
    
    $
    432,613
  F - 13




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NOTE 4: PROPERTY, EQUIPMENT AND OTHER ASSETS
  December 31,
    
    
    December 31,2007
    
    
    2006Leasehold improvements
    
    $
    184,609
    
    
    $
    5,526Office furniture, fixtures and telephone equipment
    
    
    201,301
    
    
    
    97,072Computer equipment
    
    
    439,435
    
    
    
    113,249Production and test equipment
    
    
    320,961
    
    
    
    94,989Tooling and molds
    
    
    328,843
    
    
    
    200,414Total property and equipment
    
    
    1,475,149
    
    
    
    511,250Accumulated depreciation
    
    
    (326,126
    )
    
    
    (151,219
    )$
    1,149,023
    
    
    $
    360,031
   December
    
    
    December31, 2007
    
    
    31, 2006Proprietary rights agreements
    
    $
    
    
    
    $
    1,063,000Technology
and patents
    
    
    2,890,268
    
    
    
    1,204,000Trademarks
    
    
    5,539,496
    
    
    
    Software
    
    
    2,000,000
    
    
    
    Customer relationships
    
    
    730,000
    
    
    
    Total intangible assets
    
    
    11,159,764
    
    
    
    2,267,000Less: accumulated amortization
    
    
    (1,844,782
    )
    
    
    (1,070,878
    )$
    9,314,982
    
    
    $
    1,196,122
  Original Fair
    
    EstimatedIntangible asset
    
    Value
    
    Useful LifeTechnology and intellectual property
    
    $
    6,790,000
    
    
    7.5 yearsTrademarks
    
    
    360,000
    
    
    20.0 yearsSoftware
    
    
    2,000,000
    
    
    5.0 yearsCustomer relationships
    
    
    730,000
    
    
    15 yearsGoodwill
    
    
    13,479,900
    
    
    Not determinable
  2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012Technology and intellectual property
    
    $
    905,000
    
    
    $
    905,000
    
    
    $
    905,000
    
    
    $
    905,000
    
    
    $
    905,000Trademarks
    
    
    18,000
    
    
    
    18,000
    
    
    
    18,000
    
    
    
    18,000
    
    
    
    18,000Software
    
    
    400,000
    
    
    
    400,000
    
    
    
    400,000
    
    
    
    400,000
    
    
    
    200,000Customer 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
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NOTE 5: LINE OF CREDIT AND GUARANTEES
    NOTE 6: INCOME TAXES
    F - 15




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NOTE 7: NOTES PAYABLE  RELATED PARTIES
 Note to Phibian S Trust
   Loans from Directors and Officers
   NOTE 8: PREFERRED STOCK
 Private Placement with Institutional and Accredited Investors
     F - 16




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Year Ended
    
    
    Year EndedDecember 31
    
    
    December 31,2007
    
    
    2006Fair value of
liability for
derivative contracts,
beginning of period
    
    $
    6,290,191
    
    
    $
    3,327,437Adjustment to fair
value of current
derivative contacts
during the period,
recorded in Other
Income (Expense)
during the period
    
    
    163,353
    
    
    
    3,085,625Add fair value of new
derivative contracts
accounted for using
variable accounting
during the period
    
    
    145,205
    
    
    
    Less allocation of
fair value of
derivative liability
to additional paid-in
capital on conversion
or exercise of
derivative
instruments
    
    
    (5,591,149
    )
    
    
    (122,871
    )Fair value of
liability for
derivative contracts,
end of period
    
    $
    1,007,600
    
    
    $
    6,290,191
 F - 17




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Embedded conversion feature associated withWarrants
    
    the 6% Convertible Preferred StockExercise/Conversion Price
    
    $
    6.00
    
    
    $
    6.00Fair Value of the Companys Common
Stock
    
    $
    8.60
    
    
    $
    8.60Expected life in years
    
    
    2.4
    
    
    
    2.4Expected 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
   NOTE 9: STOCKHOLDERS EQUITY
 March 2007 Private Placement
  F - 18




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##### Table of Contents



th
  Series B Stock
   Equity Based Compensation Plan
    F - 19




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##### Table of Contents



Exercise price
    
    $17.40 - $6.00Fair market value of the underlying stock on date of
grant
    
    $8.20 - $3.00Option term
    
    3.0 years  7.0 yearsEstimated volatility
    
    75%Expected dividend yield
    
    0.0%Risk free rate
    
    5.25% - 3.75%Calculated fair value per share
    
    $8.20 - $3.00
    WeightedAverageExerciseStock Options
    
    Shares
    
    
    PriceOutstanding and exercisable, beginning of year
    
    
    231,500
    
    
    $
    7.00Granted
    
    
    86,500
    
    
    $
    9.20Exercised
    
    
    
    
    
    
    Forfeited
    
    
    (50,333
    )
    
    
    ($6.78
    )Outstanding and exercisable, end of period
    
    
    267,667
    
    
    $
    7.80Options vested at end of period
    
    
    182,667
    
    
    $
    7.68Weighted average fair value of options
granted during the year ended December 31,
2007
    
    $
    4.96
 F - 20




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WeightedAverageGrant DateNon-vested Stock Options
    
    Shares
    
    
    Fair ValueNon-vested at beginning of period
    
    
    127,833
    
    
    $
    5.00Granted
    
    
    86,500
    
    
    $
    4.00Vested
    
    
    (81,942
    )
    
    $
    (4.59
    )Forfeited
    
    
    (47,392
    )
    
    $
    (6.78
    )Non-vested at end of period
    
    
    85,000
    
    
    $
    8.14
   Restricted Stock Agreement
   December 31,2007Prepaid expenses and other current assets
    
    $
    662,508Other
long-term assets
    
    
    1,048,952$
    1,711,460
 F - 21




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Warrants for the Purchase of Common Stock
  Warrant Holder
    
    Reason for Issuance
    
    No. of common shares
    
    Exercise Price
    
    Expiry dateInvestors in March 2007
Private Placement (Note 9)
    
    March 2007 Private
Placement A
Warrants
    
    
    722,365
    
    
    $
    7.00
    
    
    March 9, 2012 to
June 29, 2012Line of Credit Guarantors
(Note 5)
    
    Financing guarantees
    
    
    126,250
    
    
    $
    6.00
    
    
    September 22, 2011
through March 31,
20126% Convertible Preferred
stockholders (Note 8)
    
    Private Placement
    
    
    326,255
    
    
    $
    6.00
    
    
    May 10, 2010The Equity Group
    
    Consulting services
    
    
    37,500
    
    
    $
    16.00
    
    
    February 10, 2010ICurie
    
    Marketing Agreement
    
    
    6,250
    
    
    $
    6.40
    
    
    September 13, 2011Officers and Directors (Note 7)
    
    Bridge Financing
    
    
    8,000
    
    
    $
    30.00
    
    
    April 20, 2010ABM Industries Inc.
    
    Marketing services
    
    
    57,500
    
    
    $8.00  $10.40
    
    March 2, 2008 through July 31,
2009Total
    
    
    
    
    1,284,120
   NOTE 10: SEGMENT INFORMATION
  NOTE 11: COMMITMENTS AND CONTINGENCIES
 Lease Commitments
  Year
    
    Amount2008
    
    $
    899,4262009
    
    
    906,1202010
    
    
    926,5262011
    
    
    960,1302012
    
    
    682,815Thereafter
    
    
    187,407
  F - 22




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Commission Agreements with Directors
  Registration Rights Agreement
   Agreements with Contract Manufacturers
  Other Contingencies
  NOTE 12: SUBSEQUENT EVENTS
 Legal Action
  F - 23




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
    
    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, the Company believes it is (and LED Effects has
been since its inception) considered a leader in this fixture and component space, and it
continues 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.
  Termination of Employment Agreement
   F - 24