SECURITIES
      AND EXCHANGE COMMISSION




**Washington,
      D.C. 20549**




FORM
      10-KSB






(X)
      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF


THE
      SECURITIES EXCHANGE ACT OF 1934




**For
      the fiscal year ended December 31, 2006**




**or**




(
      ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF


THE
      SECURITIES EXCHANGE ACT OF 1934




**For
      the transition period from __________ to __________**





**Commission
      file number 0-20354**









**LIGHTING
      SCIENCE GROUP CORPORATION**


(Name
      of
      small business issuer in its charter)




Delaware
            23-2596710______________________________________
            ______________________________________(State
                or other jurisdiction of incorporation or organization)
            (I.R.S.
                Employer Identification No.)2100
                McKinney Avenue, Suite 1555
              Dallas,
                Texas
            75201______________________________________
            ______________________________________(Address
                of principal executive offices)
            (Zip
                Code)




214-382-3630


(Issuer’s
      telephone number, including area code)




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




NONE


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


Common
      Stock, $0.001 par value per share




(Title
      of
      Class)




Check
      whether the issuer (1) has filed all reports required to be filed by Section
      13
      or 15(d) of the Securities Exchange Act of 1934 during the past 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. X_ YES
      __  ___
      NO




Check
      here if there is no disclosure of delinquent filers in response to Item 405
      of
      Regulation S-B contained in this form, and no disclosure will 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-KSB or any
      amendment to this Form 10-KSB. _____





Indicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Securities Exchange Act of 1934)  YES X NO





Total
      revenue for the year ended December 31, 2006 was $436,172.





As
      of March 26, 2007, the aggregate market value of the Registrant’s Common
      Stock held by non-affiliates was $26.0 million **** based
      upon the closing price of $0.33 **** on
      March
      26, 2007.








Check
      whether the issuer has filed all documents and reports required to be filed
      by
      Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 after the
      distribution of securities under a plan confirmed by a court. X_ YES
      __  ___
      NO





The
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date was 78,758,967 at March 19,
      2007.





**TABLE
      OF CONTENTS**




**PART
      I**




ITEM
      1.
      DESCRIPTION OF BUSINESS


General
      Overview


Business
      Overview


Corporate
      Developments / Significant Transactions


Sources
      of Revenue


Employees


Forward-Looking
      Statements


Risk
      Factors


ITEM
      2.
      DESCRIPTION OF PROPERTY


ITEM
      3.
      LEGAL PROCEEDINGS


ITEM
      4.
      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS




**PART
      II**




ITEM
      5.
      MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS


Market
      Information


Unregistered
      Issuances of of Common Stock and Other Securities during the Year


ITEM
      6.
      MANAGEMENT’S DISCUSSION AND ANALYSIS


ITEM
      7.
      FINANCIAL STATEMENTS


ITEM
      8.
      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE


ITEM
      8A.
      CONTROLS AND PROCEDURES


ITEM
      8B.
      OTHER INFORMATION




**PART
      III**




ITEM
      9.
      DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
      GOVERNANCE; COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT


ITEM
      10.
      EXECUTIVE COMPENSATION


ITEM
      11.
      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS


ITEM
      12.
      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE


ITEM
      13.
      EXHIBITS


ITEM
      14.
      PRINCIPAL ACCOUNTANT FEES AND SERVICES




**FINANCIAL
      STATEMENTS**




REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


CONSOLIDATED
      BALANCE SHEET


CONSOLIDATED
      STATEMENTS OF OPERATIONS


CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS





**PART
      I**




**ITEM
      1. DESCRIPTION OF BUSINESS**





***General
      Overview***





We
      are a
      Delaware corporation incorporated 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 light emitting
      diodes (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.





***Business
      Overview***




*Products*




**Flashlights** - Our
      flashlight is currently available on the website of the Home Depot. We are
      aggressively marketing this product to other retailers as well as through
      distributors.





**Cabinet
      Lighting** - We
      market cabinet and display case lighting products to potential users in the
      retail, hotel and recreation industries.





**Floodlights** - We
      market these lights through lighting distributors and on a direct basis in
      certain industries. The Company currently is selling lights in a number of
      form
      factors including R-16, MR-16, R-20, R-25, R-30, G-11 and S-6.





**Parking
      Garage Lighting** - We
      have established direct contact with major parking garage operators across
      the
      country and these parking garage lights are available for outright sales, as
      well as under the Shared Savings Program. We have an agreement with Philips
      Solid State Lighting to market and distribute our lowbay lighting fixtures
      under
      the Philips brand name. In conjunction therewith, we have formed an alliance
      with Amtech Lighting Services to market our parking garage lights and fixtures
      to facilities that Amtech services.





**Outdoor
      Lighting** - We
      expect to make streetlights available under our Shared Savings Program either
      directly or pursuant to our Energy Service Company partners.





*New
      Products Released in 2006*





In
      2006,
      we made considerable progress with regards to research and development, and
      in
      early 2007 were granted
      our eighth, ninth and tenth U.S. patents for Optimized Digital Lighting® (ODL®)
      technologies. We have also used our research and development efforts to improve
      upon our existing products, and recently the Florida Fish and Wildlife
      Conservation Commission certified our LED R30 Amber Flood Light as
      wildlife-friendly lighting.





New
      products introduced in 2006 include:





**A
      New R30 Floodlight**





We
      unveiled an LED R30 floodlight that provides the equivalent light output of
      a 65
      watt incandescent bulb but uses 80% less energy and has a lifetime that is
      up to
      20 times longer. The new floodlight, powered by ODL technology, is designed
      for
      use both indoors and outdoors, in recessed cans and other applications that
      require a standard screw base socket.





**New
      LED-Based MR-16 and R-30 Lamps**





We
      collaborated with OSRAM Opto Semiconductors to release our new LED-based MR-16
      and R-30 lamps. These new energy-efficient lamps offer a direct alternative
      to
      the highly popular MR-16, or metalized reflector halogen lamp, and the standard
      R-30 incandescent and PAR-30 halogen lamps currently used in the
      marketplace.








*New
      Initial Orders and Strategic Relationships*





We
      also
      established key relationships in 2006, including an agreement with OSRAM Opto
      Semiconductors, one of the world's leaders in LED technology, to utilize their
      OSTAR lighting product in our LED-based R-16 compact floodlights for use in
      the
      estimated multi-billion dollar industrial, commercial and consumer
      markets.





We
      received during 2006 initial orders from Comercializadora PalaBar de Mexico,
      S.
      de R.L, a distributor located in Mexicali, Mexico, and Super Vision
      International, Inc., a world leader in solid-state LED and fiber optic lighting
      systems. Comercializadora PalaBar de Mexico, S. de R.L, placed an initial
      purchase order for more than 1,000 LED bulbs and fixtures, including our R30,
      R25, R16, MR16 bulbs and lowbay fixtures. This initial order provided the
      PalaBar de Mexico sales force with samples and inventory to be immediately
      showcased and installed at a number of businesses throughout Mexico.





We
      also
      commenced during 2006 a strategic OEM relationship with Super Vision
      International. Super Vision placed an initial order for our suite of LED
      lighting products to be sold under Super Vision’s new SaViTMLED brand. Super
      Vision sells systems and controls primarily to the commercial, architectural,
      signage, swimming pool and retail lighting industries.





*Sales
      and Distribution*





We
      sell
      our ODL products through traditional commercial and retail distribution channels
      and on a direct basis. Currently, we sell products through lighting and
      electrical distributors, parking garage operators, distributors in the spa,
      hospitality and leisure sectors, retailers of energy efficient products and
      the
      Company’s own website. The Company intends to continue to expand the number of
      distribution channels through which it will sell products.





*New
      Distribution Agreements in 2006*





We
      have
      seen an increase in new orders in 2006, a direct result of our aggressive
      efforts to establish additional distribution relationships. We have also made
      considerable progress in seeking and establishing new distributors for our
      lighting products, and are pleased with the responses that we have received.
      The
      new distribution agreements enable us to expand our reach within both the
      commercial and retail spaces, and eventually should improve the predictability
      of our revenue stream. We believe the relationships forged have been mutually
      beneficial, and we continue to actively explore opportunities to sell our
      products through a variety of channels. We believe our lighting technology
      will
      drive a paradigm shift in the white LED, general illumination market.





New
      distribution agreements entered into during 2006 include:





New
      Agreement in Asia, Australia, and New Zealand





We
      entered into an agreement with OptiLED Holdings Co. Ltd. for distribution of
      our
      ODL lowbay lighting fixtures in the People’s Republic of China (including the
      Hong Kong and Macau special administrative regions), Taiwan, Japan, Korea,
      Australia, and New Zealand. The Company made its first shipments of lowbay
      fixtures to OptiLED in December 2006 and January 2007.





Melcher
      Enterprises Distribution Agreement





We
      entered into a distribution agreement with Melcher Enterprises, a Nevada-based
      distribution company, to distribute our high efficiency, LED lighting fixtures
      and bulbs based on our ODL technology. Melcher opened a showroom in Las Vegas,
      Nevada to display our new lowbay lighting fixture, R-30 floodlight, MR-16 bulb
      and certain other LED products.





Exclusive
      Agreement with Universal Companies for LED Votive Candle
      Distribution





We
      entered into a distribution agreement with Universal Companies Inc., which
      represents that it is the leading single source supplier to the spa industry
      in
      North America. Universal is distributing our LED votive candles to its customers
      in the spa industry on an exclusive basis. Universal supplies spa products
      to
      over 45,000 customers in the U.S., Canada and Mexico. Products are sold through
      its direct mail catalogues and account executives who directly market to some
      of
      the largest spas in the United States.





Agreement
      with Energy Efficiency Retailer Current Energy





Current
      Energy is presently retailing our R-30, flame tip bulbs and flashlights, all
      designed with our ODL technology. In addition, Current Energy is offering our
      LED votive candle sets.





*New
      Installations in 2006*





Merrill
      Lynch Shared Savings Program Installation of Parking Garage Lighting
      Fixtures





Following
      an extensive beta test, Merrill Lynch & Co. Inc. entered an agreement to
      become the first shared savings customer for Optimized Digital Lighting ODL
      lowbay lighting fixtures for installation in one of the garages at Merrill
      Lynch’s Pennington, NJ corporate campus. Subsequent to entering the shared
      savings agreement, the Company’s interest in the shared savings agreement was
      purchased by a third party.





AAA
      Container and Amtech Lighting Services Factory Installation of ODL
      Fixtures





AAA
      Containers, Inc. and Amtech Lighting Services, an ABM Industries Incorporated
      subsidiary, installed our proprietary lowbay lighting fixtures in AAA’s
      manufacturing facility in Cerritos, California. The newly installed LED lighting
      replaced existing incandescent and fluorescent fixtures over a key manufacturing
      line in the factory.





The
      City
      Of Raleigh, N orth
      Carolina





The
      City
      of Raleigh, North Carolina has purchased and installed 141 Optimized Digital
      Lighting ODL lowbay fixtures for use in the Raleigh municipal parking deck
      as
      part of a joint project with CREE, Inc., a leading LED semiconductor company.
      Amtech Lighting Services, a subsidiary of ABM industries, performed the
      installation of the lowbay LED lights.








***Operations***





In
      order
      to minimize our investment in plant and equipment and enable us to focus on
      research and development, our manufacturing strategy is to outsource the
      manufacture of our Optimized Digital Lighting products, and, therefore, we
      do
      not own or operate a manufacturing facility. We currently partner with a small
      number of contract manufacturers to manufacture our products at plants in
      various locations throughout the world. These manufacturers supply all necessary
      raw materials (other than certain critical components such as LEDs, which we
      procure directly), amd provide all necessary facilities and labor to manufacture
      our products.





We
      currently have multiple sources of supply for the LEDs used in the assembly
      of
      our lighting products. We currently buy LEDs from two domestic manufacturers
      and
      two foreign manufacturers. We are confident that all suppliers currently have
      adequate capacity to provide sufficient quantities of LEDs to meet our
      forecasted needs. Our lighting products incorporate a proprietary power supply
      module. These modules are fabricated by two manufacturers, each of which we
      believe has adequate capacity to produce estimated quantities of power modules
      to meet our forecasted needs. One domestic supplier and several foreign
      suppliers provide microelectronic components for the various lighting products.
      We have no sole source supply for any of the assemblies required for the
      manufacture of our lighting products.





***Corporate
      Developments and Significant Transactions***





*Director
      Loans to Lighting Science Group; Issuance of Warrants to
      Directors*





On
      March
      30, 2005, certain individual members of our board of directors and members
      of
      senior management agreed to loan Lighting Science Group an aggregate of $340,000
      on a short-term basis pursuant to the terms of promissory notes from Lighting
      Science Group and in favor of each of the individual lenders. The members of
      the
      board and senior management who agreed to loan us funds and the amounts loaned
      by each individual are as follows: John A. Collingwood - $100,000, Ronald E.
      Lusk - $30,000, Stan T. Waldrop - $30,000, Philip R. Lacerte - $30,000, Robert
      E. Bachman (through USGT Investors L.P.) - $30,000, Donald R. Harkleroad
      (through the Bristol Company) - $30,000, Robert L. Woodson, III - $30,000,
      Daryl
      N. Snadon - $30,000, and Fredric S. Maxik (through the Phibian S Trust) -
      $30,000. Mr. Lusk loaned Lighting Science Group an additional $15,000 on April
      29, 2005 and $5,000 on May 2, 2005. Mr. Snadon loaned us an additional $100,000
      on May 3, 2005 and Mr. Harkleroad loaned us an additional $16,000 on May 6,
      2005. The board members and officers who loaned Lighting Science Group funds
      in
      this transaction are collectively referred to as the Lenders. Proceeds from
      each
      of the loans were used to fund our continuing operating expenses, including
      salaries, legal and accounting fees, and for working capital purposes and other
      costs and expenses. Pursuant to the terms of the notes issued by us to each
      Lender, we have: (i) paid interest to each Lender at a rate of 9.50% per annum;
      (ii) paid a 10% commitment fee to each Lender and (iii) issued a warrant to
      each
      Lender for the purchase of 30,000 shares of our common stock (or 100,000 shares
      in the case of Mr. Collingwood, 130,000 shares in the case of Mr. Snadon, 46,000
      shares in the case of Mr. Harkleroad and 50,000 shares in the case of Mr. Lusk)
      for a total of 476,000 shares. The principal and interest due on the notes
      were
      due on May 30, 2005. A total of $300,086 of such loans, including accrued
      interest and commitment fees of $24,086, were converted to 6% Convertible
      Preferred Stock.





The
      warrants issued to the Lenders for the purchase of 476,000 shares of our common
      stock are exercisable at $1.50 per share. Eight warrants for 30,000 shares
      of
      common stock and one warrant for 100,000 shares of common stock vested on the
      date of issuance, April 20, 2005. On April 29, 2005 and May 2, 2005, we issued
      warrants for 15,000 and 5,000 shares of common stock, respectively, to Mr.
      Lusk.
      On May 3, 2005, we issued a warrant for 100,000 shares of common stock to Mr.
      Snadon and on May 6, 2005, we issued a warrant for 16,000 shares to Mr.
      Harkleroad. All such warrants vested on the date of issuance. The warrants
      have
      anti-dilution and exercise price adjustment provisions for dividends and stock
      splits. Each warrant expires five years from the date of issuance.





On
      December 29, 2006, the Company offered to adjust the exercise price of the
      warrants issued to the Lenders. The Company agreed to adjust the exercise price
      of the warrants to provide for an exercise price of $0.30 per share contingent
      upon the Lenders exercising such warrants on or before February 15, 2007. The
      exercise price will remain at $1.50 for warrants that were not exercised. As
      of
      March 19, 2007 warrants for 316,000 of such shares were exercised at the
      adjusted price of $0.30 per share.





*Guarantors
      of Line of Credit*




On
      June
      29, 2006, the Company entered into agreements with one of its banks to obtain
      a
      $2,000,000 line of credit. Amounts due under the line of credit are guaranteed
      by the Guarantors. The amount of the line of credit available for use by the
      Company at any point in time will be equal to the aggregate value of guarantees
      that have been negotiated between the bank and the Guarantors at that time.
      At
      various times between December 2006 and March 2007, the Company amended the
      line
      of credit to increase the amount available thereunder to up to $2,500,000.
      At
      March 19, 2007, Guarantors had provided guarantees for the entire $2,500,000
      balance of the line of credit. The Company also entered into agreements to
      lease
      equipment in March 2007. The total value of the leased equipment is up to
      $150,000. At March 19, 2007, Guarantors had provided guarantees for the entire
      amount of the leases.




The
      Guarantors of the initial $2,000,000 line of credit include the following
      directors, officers and stockholders who have been issued the respective number
      of shares of common stock and warrants to purchase common stock:











**Name
                of Guarantor**
            
            
            **Position**
            
            
            **Total
                Value of Debt Guaranteed**
            
            
            **Shares**
              **Underlying**
              **Warrants/Common
                Shares Issued**USGT
                Investors LP
            
            
            Director(1
            )
            $
            150,000
            
            
            525,000Daryl
                Snadon
            
            
            Director
            
            
            200,000
            
            
            700,000John
                Collingwood
            
            
            Director
            
            
            200,000
            
            
            700,000Ron
                Lusk
            
            
            Chief
                Executive Officer
            
            
            50,000
            
            
            175,000Jerome
                Hill
            
            
            
            
            
            100,000
            
            
            350,000George
                Parker Young
            
            
            
            
            
            50,000
            
            
            175,000Phil
                Lacerte
            
            
            
            
            
            1,250,000
            
            
            2,375,000$
            2,000,000
            
            
            5,000,000




(1)
            Mr.
                Bachman is the controlling shareholder of 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 $0.30 per share of common stock and a term of five years.





In
      the
      first quarter of 2007, the Company issued warrants to the following Guarantors
      as consideration for providing additional guarantees enabling the Company to
      obtain the additional amount available under its line of credit and under the
      guaranteed leases:








**Name**
            
            
            **Position**
            
            
            **Amount
                of Guarantees Provided**
            
            
            **#
                of Shares Underlying Warrants Issued**Phil
                Lacerte
            
            
            
            
            $
            65,000
            
            
            65,000Daryl
                Snadon
            
            
            Director
            
            $
            50,000
            
            
            50,000Edward
                Hawes
            
            
            
            
            $
            50,000
            
            
            50,000USGT
                Investors, LP (1)
            
            
            Director
            
            $
            37,500
            
            
            37,500Baron
                Cass
            
            
            
            
            $
            48,750
            
            
            48,750Paul
                Schlosberg
            
            
            
            
            $
            48,750
            
            
            48,750$
            300,000
            
            
            300,000





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





The
      warrants listed in the table above have an exercise price of $0.30 per share
      and
      have a term of five years.





As
      of
      March 19, 2007, Guarantees for an additional $350,000 of the amended line of
      credit and equipment leases had been received from the Guarantors. The Company
      anticipates it will execute warrant agreements for the purchase of 350,000
      shares of common stock with the Guarantors in the second quarter of 2007. The
      warrants will have an exercise price of $0.30 per share and a term of five
      years.





*March
      2007 Private Placement*





On
      March
      9, 2007, the Company completed a private placement with a group of accredited
      investors whereby the Company received gross proceeds of $4.0 million. The
      Company issued approximately 13.3 million shares of common stock to the investor
      group at $0.30 per share along with warrants for the purchase of approximately
      10.0 million shares of common stock The warrants have an exercise price of
      $0.35
      per share and have a term of five years.





The
      Company also issued warrants for the purchase of approximately 13.3 million
      equity units. Each equity unit is comprised of one share of common stock and
      0.75 warrants for the purchase of common stock. The equity units are exercisable
      at any time up to the 90 th trading
      day subsequent to the effective date of a registration statement the Company
      is
      required to file within 45 days of the closing of the transaction. The exercise
      price of the equity units is $0.30 per unit. When the warrants for the units
      are
      exercised, the additional warrants for the purchase of common stock will have
      an
      exercise price of $0.35 per share and will have a term of five years from the
      date of issuance.





The
      net
      cash proceeds from the private placement are expected to be used for working
      capital and other general corporate purposes, including retiring the balance
      due
      under our line of credit.








***Sources
      of Revenue***





During
      2006, the Company recorded net revenue of $436,172, which was generated from
      the
      sale of the Company’s lighting products. Net revenue in 2006 was primarily
      related to sales of lowbay fixtures, R-series floodlights and candle
      sets.





***Employees***





As
      of
      March 19, 2007, we had 13 full-time employees. We believe that our relationship
      with our employees is good. None of our employees is represented by an employee
      union.





***Forward-Looking
      Statements***





THIS
      FORM
      10-KSB INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE
      PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, INCLUDING WITH RESPECT TO
      THE
      FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF LIGHTING SCIENCE
      GROUP. WHEN USED HEREIN, THE WORDS “ANTICIPATE,” “BELIEVE,” “ESTIMATE” AND
“EXPECT” AND SIMILAR EXPRESSIONS, AS THEY RELATE TO LIGHTING SCIENCE GROUP OR
      ITS MANAGEMENT, ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. MOREOVER
      SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT
      MAY
      CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN SUCH
      FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS INCLUDING BUT NOT
      LIMITED TO, THE FACTORS DISCUSSED IN THIS FORM 10-KSB UNDER THE HEADING “RISK
      FACTORS”. FORWARD-LOOKING STATEMENTS SPEAK ONLY AS TO THE DATE HEREOF AND WE
      DISCLAIM ANY RESPONSIBILITY TO UPDATE FORWARD-LOOKING STATEMENTS TO REFLECT
      SUBSEQUENT EVENTS.








***Risk
      Factors***





***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 development of, and successfully marketing of, our
      products.***





Since
      we
      emerged from bankruptcy on September 26, 2003, we have sustained operating
      losses. For the years ended December 31, 2006 and 2005, we had limited revenues
      of $436,172 and $72,564, respectively, and as of December 31, 2006 and 2005,
      we
      had an accumulated deficit of $21,561,652 and $10,159,116, respectively. We
      expect to begin generating more revenues from the sale of our products during
      2007. Our ability to generate revenue is, however, dependent on receiving
      purchase commitments from new customers as well as the timing that such purchase
      commitments, if any, are received.





***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 profitability on an annual basis. As we concentrate
      on
      sales and growth and 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 or 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, the proceeds of draws against our $2,500,000 line of
      credit and amounts available under our working capital facility will be
      sufficient to meet our operating needs during 2007, the actual amount of funds
      that we will need will be determined by many factors, many of which are beyond
      our control. These factors include 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 and the amount of working capital
      investments we are required to make.





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 other than the line of credit recently obtained by us
      and
      the working capital facility. 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
      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 Optimized Digital Lighting
      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 may serve directly,
      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
      long-term business strategy includes penetration of the general lighting market
      with our ODL and other 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 our products,
      or reduce the attractiveness to potential customers of our products that
      incorporate LEDs. In addition, the characteristics of our Optimized Digital
      Lighting 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 Ronald E. Lusk 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
      Ronald E. Lusk and other key personnel. The loss of Mr. Lusk, the CEO, or other
      key personnel could prevent or significantly delay the achievement of our goals.
      We have employment agreements with Ronald E. Lusk, Fredric S. Maxik, and K.
      Shane Hartman. We maintain a key man life insurance policy with respect to
      Fredric S. Maxik. 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.





***If
      critical components that we currently purchase from our suppliers become
      unavailable, we may incur delays in shipment which could damage our
      business.*** **





We
      depend
      on our suppliers for certain 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 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 there can be no assurance that an adequate alternative source of
      supply could be found at an acceptable cost.





We
      could
      experience shortages of standard electronic components as well as custom
      components specific to our products. If our suppliers are unable to meet our
      demand for critical components at reasonable costs, and if we are unable to
      obtain an alternative source or the price for an alternative source is
      prohibitive, our ability to maintain timely and cost-effective production of
      our
      products will or could be harmed. 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 harm our revenues and damage our reputation and
      our
      relationships 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 substantially all of the manufacture and assembly of our products,
      and
      do not own or operate a manufacturing facility. 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 all necessary
      raw materials (other than certain critical components such as LEDs, which we
      procure directly), provide all necessary facilities and labor to manufacture
      our
      products, and stock and arrange for transport of our finished goods, generally
      by ship, to our distributors and customers. 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 manufacture and distribute 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;





·
            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 plan to sell our Optimized Digital
      Lighting 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 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 Optimized Digital Lighting 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 modules of our management
      information system, 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
      have limited experience conducting operations internationally, which may make
      expansion more difficult and costly than we expect and adversely affect our
      revenue growth and profitability.*** **





We
      currently outsource the manufacture of our products to international facilities.
      To the extent that we continue to outsource to international locations, we
      are
      exposed to 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 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 our relationship with
      our customers. 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.








**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 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 thirty (34) patent applications. From these applications, ten (10) patents
      have been issued, two (2) have been approved and are awaiting patent issuance,
      sixteen (16) 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. 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.





***If
      we are unable to protect our intellectual property rights adequately, the value
      of our products could be diminished.***





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.





**ITEM
      2. DESCRIPTION OF PROPERTY**





We
      sublease office space in Dallas, Texas for $10,000 per month under a
      month-to-month agreement. We have leased space in Satellite Beach, Florida
      for
      our research and development and assembly activities through February 2009
      for
      approximately $4,000 per month. We also lease office space in Hong Kong and
      storage space in Dallas, Texas on a month-to-month basis at a total rate of
      approximately $650 per month.





**ITEM
      3. LEGAL PROCEEDINGS**





As
      of the
      date of this annual report, there is no pending litigation against us. To our
      knowledge, there is not any threatened legal action in connection with our
      activities, other than the following items:





In
      February 2007, we received a letter from another corporate entity, alleging
      that
      our corporate name infringes rights of that other entity. We dispute these
      allegations.




In
      March
      2007, we received a letter from another unrelated corporate entity, alleging
      that certain of our products infringe U.S. patents owned by the other entity.
      One of our customers received a similar letter, relating to certain products
      that the customer purchases from us and then resells. We are currently
      investigating these allegations to assess whether or not any of the allegations
      could have merit.








**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





We
      held
      our Annual Meeting of Shareholders on December 21, 2006. The following matters
      were voted on by our shareholders at the Annual Meeting:





1.
            The
                following directors were elected to serve for one-year terms ending
                in the
                year 2007 with the following number of shareholder votes being
                cast:





**Nominee**
            
            
            **Shareholder
                Votes For**
            
            
            **Shareholder
                Votes Against**
            
            
            **Abstentions
                and Votes Withheld**Robert
                Bachman
            
            
            55,567,788
            
            
            241,823
            
            
            -John
                Collingwood
            
            
            55,567,719
            
            
            241,892
            
            
            -Donald
                Harkleroad
            
            
            55,566,850
            
            
            243,761
            
            
            -Ronald
                Lusk
            
            
            55,622,939
            
            
            186,672
            
            
            -Frederic
                Maxik
            
            
            55,467,856
            
            
            341,755
            
            
            -Daryl
                Snadon
            
            
            55,567,856
            
            
            241,755
            
            
            -Robert
                Warshauer
            
            
            55,414,038
            
            
            395,573
            
            
            -Robert
                Woodson III
            
            
            55,436,606
            
            
            373,005
            
            
            -




All
      nominees for director were elected.





The
      other
      proposals that were voted on by stockholders, and the results of the stockholder
      vote are as follows:





**Proposal**
            
            **Votes
                For**
            
            **Votes
                Against**
            
            **Broker
                Non-Votes / Abstained**2.
                Ratification of the appointment of Turner, Stone & Company, L.L.P. as
                independent auditors of our Company, for the fiscal year ending December
                31, 2006
            
            
            55,680,306
            
            
            3,379
            
            
            125,9263.
                Approval of an amendment to the Lighting Science Group Corporation
                2005
                Equity Based Incentive Compensation Plan, to reserve an additional
                5,000,000 shares of our common stock for issuance
                thereunder
            
            
            35,726,597
            
            
            1,547,196
            
            
            18,535,8184.
                Approval of an amendment to the Lighting Science Group Corporation
                2005
                Equity Based Incentive Compensation Plan to increase the per person
                award
                limitations in a fiscal year from 500,000 shares of common stock
                to
                2,000,000 shares of common stock
            
            
            34,820,756
            
            
            2,263,703
            
            
            18,725,1525.
                Ratification of the grant of 2,000,000 stock options to Robert
                Warshauer
            
            
            35,505,179
            
            
            1,573,267
            
            
            18,731,165











**PART
      II**





**ITEM
      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS**





*Market
      Information*





Our
      common stock is quoted on the Over-the-Counter Bulletin Board, or the OTC
      Bulletin Board, which is a quotation service administered by the National
      Association of Securities Dealers. Our trading symbol on the OTC Bulletin Board
      is “LSGP.OB.”




Because
      the OTC Bulletin Board is a limited and sporadic trading market, there may
      be no
      established trading market for our common stock. 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****2006**Fourth
                Quarter
            
            
            0.45
            
            
            0.17Third
                Quarter
            
            
            0.32
            
            
            0.15Second
                Quarter
            
            
            0.48
            
            
            0.22First
                Quarter
            
            
            0.65
            
            
            0.29**2005**Fourth
                Quarter
            
            
            0.90
            
            
            0.24Third
                Quarter
            
            
            1.65
            
            
            0.73Second
                Quarter
            
            
            1.65
            
            
            0.73First
                Quarter
            
            
            2.08
            
            
            1.45




There
      are
      approximately 1,250 holders of our common stock. We have not paid cash dividends
      on our common stock and do not intend to pay cash dividends in the foreseeable
      future due to our limited funds for operations. 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.
      Therefore, any return on your investment would come only from an increase in
      the
      value of the stock.





*Unregistered
      Issuance of Common Stock and Other Securities during the Year*





The
      Company has relied upon Section 4(2) of the Securities Act of 1933 as amended
      and the rules promulgated thereunder, including, but not limited to, Regulation
      D for exemptions of transactions not involving a public offering.





·
            On
                February 21, 2006 the company granted common stock options to its
                directors. The total number of stock options granted was 1,800,000.
                The
                options have an exercise price of $0.32 per share. One-third of the
                options vested when granted and the balance of the options vest over
                a
                period two years. The options have a term of five
                years.


·
            On
                February 21, 2006 the company granted common stock options to its
                directors, officers and employees. The total number of stock options
                granted was 705,000. The options have an exercise price of $0.32
                per
                share. One-third of the options vested when granted and the balance
                of the
                options vest over a period two years. The options have a term of
                three
                years


·
            On
                February 23, 2006, the Company issued 100,000 shares of its common
                stock
                in a private placement to a consultant in conjunction with his consulting
                agreement.


·
            On
                February 28, 2006 the Company granted an employee 50,000 common stock
                options. The options have an exercise price of $0.29 per share. One-third
                of the options vested when granted and the balance of the options
                vest
                over a period of two years. The term of the options is three
                years.


·
            On
                March 3, 2006, the Company issued a warrant for the purchase of 400,000
                shares of its common stock to ABM Industries, Inc. (“ABM”) in conjunction
                with a marketing agreement with ABM. The warrants have an exercise
                price
                of $0.40 per share and can be exercised at any time after the date
                of
                issuance through the second anniversary date of the
                issuance.


·
            On
                March 9, 2006, the Company granted its newly appointed President
                2,000,000
                common stock options. The options have an exercise price of $0.30
                per
                share. One-half of the options vested when granted and the balance
                of the
                options vest over a three-year period. The term of the options is
                five
                years.


·
            On
                April 19, the Company issued 149,570 shares of common stock in a
                private
                placement to its five outside directors as compensation for services
                rendered during the three-month period ended March 31, 2006.


·
            On
                June 15, 2006, the Company issued 74,903 shares of common stock in
                a
                private placement to two suppliers to settle its accounts with the
                suppliers.


·
            On
                June 19, 2006, the Company issued 59,706 shares of common stock to
                a
                supplier in a private placement in settlement of its account with
                the
                supplier.


·
            On
                July 17, 2006, the Company issued in a private placement 100,000
                shares to
                a new employee pursuant to his employment
                agreement.


·
            On
                August 18, 2006 the Company issued 190,180 shares of common stock
                in a
                private placement to its five outside directors as compensation for
                services rendered during the three-month period ended September 30,
                2006.


·
            On
                August 18, 2006, the Company issued 38,074 shares of common stock
                in a
                private placement to a supplier to settle its account with the
                supplier.


·
            On
                August 25, 2006, the Company issued 27,778 shares of common stock
                in a
                private placement to a supplier to settle its account with the
                supplier.


·
            On
                September 18, 2006, the Company issued 3,125,000 shares of common
                stock in
                a private placement to the Guarantors as compensation for providing
                guarantees of the line of credit that was negotiated by the
                Company.


·
            On
                September 22, 2006, the Company issued 1,875,000 warrants for the
                purchase
                of common stock to the Guarantors as compensation for providing guarantees
                of the line of credit negotiated by the Company. The warrants have
                an
                exercise price of $0.30 per common share and have a term of five
                years.


·
            On
                September 20, 2006, the Company issued 200,000 shares of common stock
                in a
                private placement to a supplier for the payment of rent for the
                three-month period ended December 31,
                2006.


·
            On
                October 4, 2006, the Company issued 26,716 shares of common stock
                in a
                private placement to a supplier to settle its account with the
                supplier.


·
            On
                October 6, 2006, the Company issued 1,132,740 shares of common stock
                to
                its five outside directors and its chief executive officer in a private
                placement as compensation for services rendered during the three-month
                period ended September 30, 2006 and for participation with certain
                committees of the board of directors throughout the year ended December
                31, 2005 and the nine-months ended September 30,
                2006.


·
            On
                October 31, 2006, the Company issued 93,942 shares of common stock
                in a
                private placement to three suppliers to settle its accounts with
                the
                individual suppliers.


·
            On
                October 31, 2006, the Company issued 90,000 shares of common stock
                in a
                private placement to five employees as incentive
                compensation.


·
            On
                December 5, 2006, we issued 34,484 shares of common stock in a private
                placement to two suppliers to settle our accounts with the individual
                suppliers.


·
            On
                December 19, 2006, we issued 1,625,000 shares of common stock in
                a private
                placement to settle our account with the
                supplier.


·
            On
                December 28, 2006, we issued 265,364 shares of common stock to a
                supplier
                in a private placement in settlement of our
                account.


·
            On
                December 29, 2006, we issued 130,000 shares of common stock to one
                of our
                directors in a private placement upon the exercise by the director
                of
                common stock warrants.


·
            On
                January 5, 2007, we issued 28,572 shares of common stock to two suppliers
                in a private placement in settlement of its accounts with the individual
                suppliers.


·
            On
                January 11, 2007, we issued 30,000 shares of common stock to one
                of our
                directors in a private placement upon the exercise by the director
                of
                common stock warrants.


·
            On
                January 12, 2007, we issued 30,000 shares of common stock to one
                of our
                shareholders in a private placement upon the exercise by the director
                of
                common stock warrants.


·
            On
                January 22, 2007, we issued 30,000 shares of common stock to one
                of our
                directors in a private placement upon the exercise by the director
                of
                common stock warrants.


·
            On
                January 23, 2007, we issued 300,000 warrants for the purchase of
                common
                stock to the Guarantors as compensation for providing guarantees
                of the
                line of credit negotiated by the Company. The warrants have an exercise
                price of $0.30 per share and have a term of five
                years.


·
            On
                January 23, 2007, we issued 6,854 shares of common stock to one of
                our
                directors in a private placement as settlement of an advance provided
                to
                the Company.


·
            On
                February 2, 2007, we issued 26,316 shares of common stock in a private
                placement to two suppliers to settle our accounts with the individual
                suppliers.


·
            On
                February 9, 2007, we issued stock options to ten employees in a private
                placement. The stock options have an exercise price of $0.37 per
                share and
                have a term of five years.


·
            On
                February 21, 2007, we issued 96,000 shares of common stock to two
                of our
                directors in a private placement upon the exercise by the directors
                of
                common stock warrants.


·
            On
                February 21, 2007, we issued 208,335 shares of common stock in a
                private
                placement to our five outside directors for services rendered in
                the
                three-month period ended December 31,
                2006.


·
            On
                March 5, 2007, we issued 26,316 shares of common stock in a private
                placement to two suppliers to settle our accounts with the individual
                suppliers.


·
            On
                March 9, 2007, we issued 13,333,265 shares of common stock to a group
                of
                twenty-two accredited investors in a private placement. We also issued
                warrants for the purchase of 9,999,949 shares of common stock to
                the group
                of twenty-two accredited investors. The warrants have an exercise
                price of
                $0.35 per share and have a term of five years. We also issued warrants
                for
                the purchase of 13,333,265 equity units (comprised of one share of
                common
                stock and 0.75 warrants for the purchase of common stock) to the
                accredited investors. The equity unit warrants have an exercise price
                of
                $0.30 per share and must be exercised on or before the 90thtrading day following the effective date of a registration statement
                to be
                filed by the Company prior to the 45thday subsequent to the closing of the private placement. The warrants
                to be
                issued within the equity units would have an exercise price of $0.35
                per
                share and would have a term of five years from the date of exercise
                of the
                equity warrants. Gross cash proceeds from the financing were $4.0
                million
                and will be used for transaction expenses, working capital and other
                general corporate purposes.










**ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS**





Information
      contained herein, other than historical information, should be considered
      forward-looking and subject to various risk factors and uncertainties. Although
      we believe that the expectations reflected in any of our forward looking
      statements are reasonable, actual results could differ materially from those
      projected or assumed in any of our forward looking statements.  Our future
      financial condition and results of operations, as well as any forward looking
      statements, are subject to change and inherent risks and uncertainties. 
For a detailed description of the factors that could cause actual results to
      differ materially from those expressed in any forward looking statement, please
      see the “ DESCRIPTION
      OF BUSINESS - Risk Factors ”
section
      herein.




**Overview**




We
      are a
      producer of lighting products utilizing Optimized Digital LightingTM (ODL®)
      technology, a refinement of light emitting diode (“LED”) technology. We have
      recently made the transition to an operating company, focusing on sales and
      growth in the lighting industry marketplace.




Our
      revenues are primarily derived from sales of lowbay fixtures, standard form
      factor bulbs (including R-16, MR-16, R-20, R-25, R-30, G-11 and S-6), candles,
      and flashlights. **** 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 and
      interest expenses.





**Results
      of Operations**





*Revenues*





For
      the
      year ended December 31, 2006, total revenues of $436,000, were higher than
      in
      the comparable period of 2005. We began offering products for sale during the
      second half of 2005 and had only nominal sales in prior periods. For the year
      ended December 31, 2006, our revenues consisted of sales of lighting
      products.





*Cost
      of Goods Sold*





For
      the
      year ended December 31, 2006, cost of goods sold were $351,000 compared to
      $33,000, for the prior year. The increase in cost of goods sold over this period
      was primarily due to the increased sales volume.





*Selling,
      General and Administrative Expenses*





Summarized
      in the table below are SG&A expenses comparing the year ended December 31,
      2006 with the year ended December 31, 2005:





For
                the year ended:December
                31, 2006
            
            
            December
                31, 2005SG&A
                expenses
            
            $
            1,827,000
            
            $
            1,823,000





SG&A
      expenses for the year ended December 31, 2006 increased slightly from the
      comparable periods in 2005. SG&A expenses for the ended December 31, 2006
      were primarily related to costs incurred by us for research and development
      activities, customer testing, sales, marketing and production overhead costs.
      We
      recorded a reserve for obsolescence against the carrying value of certain raw
      materials and components of approximately $85,000 and $87,000 in the years
      ended
      December 31, 2006 and December 31, 2005, respectively.





*Compensation
      and Related Expenses*





Summarized
      in the table below are compensation and related expenses comparing the year
      ended December 31, 2006 with the year ended December 31, 2005:





For
                the year ended:December
                31, 2006
            
            
            December
                31, 2005Compensation
                and related expenses
            
            $
            2,662,000
            
            $
            1,977,000





Compensation
      and related expenses increased by approximately $685,000 for the year ended
      December 31, 2006 compared to the year ended December 31, 2005 as a result
      primarily of stock option expenses. We granted stock options to employees,
      directors and consultants in the fourth quarter of 2005 and in the first quarter
      of 2006. The total amounts of the stock option expense recorded for the years
      ended December 31, 2006 and 2005 were $785,000 and $111,000, respectively.








*Professional
      Fees*





Summarized
      in the table below are professional fees comparing the year ended December
      31,
      2006 with the year ended December 31, 2005:





For
                the year ended:December
                31, 2006
            
            
            December
                31, 2005Professional
                fees
            
            $
            725,000
            
            $
            1,628,000





Professional
      fees decreased by approximately $903,000 in the year ended December 31, 2006
      compared to the year ended December 31, 2005. The principal reason for this
      decrease was that we had recorded expenses during the year ended December 31,
      2005 related to our filing of the initial registration statement for the common
      stock to be issued upon the conversion of the 6% Convertible Preferred Stock,
      the warrants issued to purchasers of the 6% Convertible Preferred Stock, and
      other common stock registered pursuant to lock-up agreements. The professional
      fees in the year ended December 31, 2006 related primarily to the filing of
      patent applications and to costs associated with our requisite securities
      filings.





*Directors’
      Fees*





Summarized
      in the table below are directors’ fees comparing the year ended December 31,
      2006 with the year ended December 31, 2005:





For
                the year ended:December
                31, 2006
            
            
            December
                31, 2005Directors’
                fees
            
            $
            448,000
            
            $
            294,000





Total
      directors fees increased by $154,000 during the year ended December 31, 2006
      compared to the year ended December 31, 2005. The increase is due primarily
      to
      the payment of additional fees paid to directors in September 2006 for their
      increased participation on board committees.





*Depreciation
      and Amortization Expenses*





Summarized
      in the table below are depreciation and amortization expenses comparing the
      year
      ended December 31, 2006 with the year ended December 31, 2005:





For
                the year ended:December
                31, 2006
            
            
            December
                31, 2005Depreciation
                and amortization
            
            $
            508,000
            
            $
            488,000





Depreciation
      and amortization expense increased only slightly in the year ended December
      31,
      2006 as compared to the year ended December 31, 2005, due to the increased
      depreciation expense related to capital assets acquired during 2005 and
      2006.








*Interest
      Expense (Net)*





Summarized
      in the table below is interest expense, net of interest income, comparing the
      year ended December 31, 2006 with the year ended December 31, 2005:





For
                the year ended:December
                31, 2006
            
            
            December
                31, 2005Interest
                expense (net)
            
            $
            535,000
            
            $
            5,000





Interest
      expense, net of interest income, increased substantially in the year ended
      December 31, 2006 compared to the year ended December 31, 2005. In the year
      ended December 31, 2006, approximately $480,000 of the interest expense recorded
      related to the amortization of the guarantee fees that were paid to a group
      of
      directors and stockholders (the “Guarantors”) to provide guarantees of the line
      of credit negotiated with our lender in June 2006. Interest expense also
      increased as a result of additional borrowing during 2006 under our line of
      credit. In 2005, we had no significant interest bearing debt as all amounts
      previously borrowed from a group of officers and directors were either repaid
      from the proceeds of the issue of the 6% Convertible Preferred Stock or were
      converted to 6% Convertible Preferred Stock





*Other
      Income (Net)*





Summarized
      in the table below is other income, net of other expenses, comparing the year
      ended December 31, 2006 with the year ended December 31, 2005:





For
                the year ended:December
                31, 2006
            
            
            December
                31, 2005Other
                income (net)
            
            $
            3,134,000
            
            $
            (3,070,000
            )





Other
      income, net of other expenses, decreased from an income of $3,070,000 in the
      year ended December 31, 2005 to an expense of $3,134,000 in the year ended
      December 31, 2006. The majority of this decrease in income is related to an
      increase in the value of the derivative instruments (preferred stock conversion
      rights and common share purchase warrants) related to the 6% Convertible
      Preferred Stock and Bridge Loan Warrants. In accordance with generally accepted
      accounting principles, these derivatives are valued on a quarterly basis taking
      into account a number of variables including current market price for common
      stock and current interest rates.





*Dividends
      and Accretion of Preferred Stock Redemption Value*





Summarized
      in the table below are dividends on 6% Convertible Preferred Stock and accretion
      of preferred stock redemption value comparing the year ended December 31, 2006
      with the year ended December 31, 2005:





For
                the Year Ended:December
                31, 2006
            
            
            December
                31, 2005Dividends
                on 6% Convertible Preferred Stock and accretion of preferred stock
                redemption value
            
            $
            1,650,000
            
            $
            1,203,000





The
      total
      dividends on the 6% Convertible Preferred Stock and the accretion of the
      redemption value of the 6% Convertible Preferred Stock increased significantly
      in the year ended December 31, 2006 compared to the year ended December 31,
      2005. Because the 6% Convertible Preferred Stock was issued in May 2005, we
      recorded the accretion and accrued and paid dividends for a longer period in
      2006, resulting in the higher expenses in 2006.








**Liquidity
      and Capital Resources**





We
      believe our current cash balances together with revenues received from the
      sale
      of our products will be sufficient to meet our operating needs in 2007. The
      actual amount of funds we will need will be determined by several factors,
      many
      of which are beyond our control. These factors include timing and volume of
      sales transactions, market acceptance of our products, the success of our
      research and development efforts (including any unanticipated delays), the
      cost
      and timing of obtaining new patent rights, regulatory changes, competition,
      technological developments in the market, evolving industry standards and the
      amount of working capital investments we are required to make.





In
      March
      2007, we entered into a Securities Purchase Agreement with a group of accredited
      investors for a private placement of common stock, warrants and equity unit
      warrants. The private placement resulted in gross proceeds of $4.0 million.
      We
      could receive additional proceeds from the private placement from the exercise
      of the equity unit warrants. The equity unit warrants must be exercised on
      or
      prior to the 90 th trading
      day subsequent to effective date of a registration statement to be filed by
      us
      within 45 days of the closing of the private placement.





In
      June
      2006, we negotiated a $2.0 million line of credit with one of our banks. The
      line of credit is guaranteed by the Guarantors. Between December 2006 and March
      2007 the line of credit was 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 the Guarantors. At March 19, 2007, the
      Guarantors had provided guarantees for the entire $2.5 million of the line
      of
      credit and none of the available line of credit had been drawn by the Company.





On
      January 4, 2007, we entered into a factoring agreement, also referred to as
      the
      working capital facility, between the Company and Allied Capital Partners,
      L.P.
      for a one-year term. Pursuant to the working capital facility, we may borrow
      up
      to $10.0 million against customer invoices sold or otherwise transferred to
      Allied Capital. Thus, our ability to borrow under this working capital facility
      will be limited by the extent of our customer invoices. The working capital
      facility is anticipated to be secured by our accounts receivables and other
      credit-related documents received from our customers. Bank of Texas, N.A.,
      which
      currently holds a first charge on all our personal property assets, has agreed
      to take a subordinate security interest in such collateral.





We
      pay
      dividends on our 6% Convertible Preferred Stock four times annually: February
      10, May 10, August 10 and November 10. We have 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 paid a cash
      dividend of approximately $108,000 in February 2006. We issued 423,538 common
      shares to settle the May 2006 dividend, issued 434,462 common shares to settle
      the August 10, 2006 dividend, issued 334,168 shares of common stock to settle
      the November 10, 2006 dividend and issued 306,137 shares of common stock to
      settle the February 10, 2007 dividend. We expect that it will continue to issue
      dividends in the form of common stock in 2007 in order to conserve cash.




Other
      potential sources of outside capital include entering strategic business
      relationships, additional bank borrowings, public or private sales of shares
      of
      our capital stock or debt or similar arrangements. We do not have any committed
      sources of outside capital at this time other than the line of credit obtained
      by us in June 2006 and the working capital facility arrangement entered into
      in
      January 2007. It is uncertain whether we will be able to obtain outside capital
      when we need it or on terms that are acceptable. 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.





Our
      strategy includes the outsourcing of manufacturing operations. Accordingly,
      there are no significant investments in plant or equipment expected in the
      next
      twelve months except for any expenditures required to produce production tooling
      and molds for use by our contract manufacturers. Additionally, if we increase
      sales and product deliveries, we may be required to make additions to our
      operations and administrative management teams.





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 increase our marketing efforts .





**ITEM
      7. FINANCIAL STATEMENTS**





The
      consolidated financial statements required to be filed pursuant to this Item
      7
      begin on Page F-2 of this report. Such consolidated financial statements are
      hereby incorporated by reference into this Item 7. The Supplementary Data
      requirement as set forth in Item 302 of Regulation S-K is inapplicable to
      Lighting Science Group.





**ITEM
      8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**





None.





**ITEM
      8A. CONTROLS AND PROCEDURES**





Disclosure
      Controls and Procedures .
      Our
      management, with the participation of our principal executive officer and
      principal financial officer, have evaluated the effectiveness of our disclosure
      controls and procedures (as such term is defined in Rules 13a-15(e) and
      15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
      Act”) as of the end of the period covered by this report. Based upon such
      evaluation, our principal executive officer and principal financial officer
      have
      concluded that, as of the end of such period, our disclosure controls and
      procedures are effective in timely alerting our management to material
      information relating to us to be included in the reports that we file or submit
      pursuant to the Exchange Act.




Internal
      Control Over Financial Reporting .
      There
      have been no changes in our internal controls over financial reporting (as
      such
      term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during
      the fourth quarter of 2006 or the first quarter of 2006 that have materially
      affected, or are reasonably likely to materially affect, our internal control
      over financial reporting.





**ITEM
      8B. OTHER INFORMATION**





None.








**ITEM
      9. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT**





Our
      directors and executive officers at December 31, 2006, their ages, their titles,
      their years of employment with us, and their principal occupation for the last
      five years are as follows:




Ronald
      E. Lusk, 50 ,
      has
      served as our Chairman of the board of directors and CEO since November 1998.
      Mr. Lusk has over 23 years of diverse business and management expertise
      contributing to his direct ownership and control of various companies,
      predominately in the healthcare industry. Mr. Lusk currently serves as a
      director on the boards of several private companies. With the resignation of
      Mr.
      Warshauer as our President on March 9, 2007, Mr. Lusk was appointed as President
      in addition to his then current titles.




J.
      Michael Poss, 55 ,
      has
      served as our Executive Vice President - Legal since May 2005. Mr. Poss served
      as our chief financial officer from May 2002 to May 2005. Prior to his
      association with us, Mr. Poss served as executive vice president of Zix
      Corporation from April 2000 through February 2002 where he was involved in
      sales, marketing, investor relations, and the negotiation of strategic alliance
      agreements with industry-leading partners. Prior to moving to Zix Corporation,
      Mr. Poss held the position of chief financial officer of The Perot Group, the
      family office operation of Ross Perot. Before joining Mr. Perot in 1979, Mr.
      Poss worked for Arthur Young & Company. He was awarded his Certified Public
      Accountant designation in 1978, and he received a Bachelor of Business
      Administration degree from the University of Texas at Austin in 1973. Mr. Poss
      is also a licensed attorney, having graduated from the University of Texas
      Law
      School in 1976. Mr. Poss also served as a director of Lighting Science Group
      from September 2003 through August 2005. Effective March 9, 2007, Mr. Poss
      resigned as an officer and employee of Lighting Science Group. Mr. Poss
      continues to act as a consultant to the Company and as corporate secretary
      of
      the Company.




Stephen
      A. Hamilton, 42 ,
      joined
      us as Chief Financial Officer in November 2005. From September 2004 until
      joining Lighting Science Group, Mr. Hamilton served as a Senior Consultant
      at
      Grant Knauth LLP, a consulting firm specializing in technical outsourcing and
      acted as project manager on major client assignments. From June 2000 through
      September 2004, Mr. Hamilton was with Quadrem International Holdings Limited,
      a
      private company operating an international electronic marketplace. He served
      as
      CFO of Quadrem from January 2001 through September 2004, during which time
      he
      was responsible for all financial functions. From May 1995 through May 2000,
      Mr.
      Hamilton served as Controller and then Group Controller at Noranda Inc., a
      publicly traded, multi-national mining and metals producer where he was
      responsible for negotiating, performing due diligence and assessing financing
      for, acquisitions, preparing regulatory documents and achieving cost savings
      through the restructuring of administrative and support processes. Mr. Hamilton
      received is Bachelor of Commerce from the University of Toronto, and is a
      Chartered Accountant. Effective March 9, 2007, Mr. Hamilton was appointed our
      assistant corporate secretary.





Fredric
      S. Maxik, 46 ,
      has
      served as our Chief Technology Officer since June 2004. 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, Mr.
      Maxik
      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. Mr. Maxik has served as a
      director of Lighting Science Group since August 2004.




Robert
      E. Bachman, 64 ,
      has
      served as a director of Lighting Science Group 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 board of directors.




John
      A. Collingwood, 67 ,
      has
      served as a director of Lighting Science Group since August 2004. He is a
      private investor and serves as an officer and/or director of several privately
      held companies and was previously a major shareholder of Lighting Science,
      Inc.
      prior to our acquisition on June 1, 2004. Mr. Collingwood is an alumnus of
      the
      University of Kansas, and graduated from the University of the Americas in
      Chouloa, Mexico with a degree in International Business Administration.




Donald
      R. Harkleroad, 62 ,
      has
      served as a director of Lighting Science Group 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 serves as the chairman of the compensation committee of our board
      of
      directors.




Daryl
      N. Snadon, 60 ,
      has
      served as a director of Lighting Science Group 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.





Robert
      H. Warshauer, 49 ,
      was
      appointed our President in March 2006. Prior to joining us, Mr. Warshauer served
      as managing director and a member of the board of directors of Giuliani Capital
      Advisors LLC (“GCA”), a boutique financial advisory and investment banking firm,
      a subsidiary of Giuliani Partners. From 1999 to 2004, Mr. Warshauer was a Senior
      Managing Director and member of the Board of Directors at Ernst & Young
      Corporate Finance LLC. Mr. Warshauer obtained an MBA from New York University
      and a BSBA from Bucknell University. Mr. Warshauer is also a Certified Public
      Accountant. Effective March 9, 2007, Mr. Warshauer resigned as our President
      and
      as a director of the Company but continues to serve as an employee of the
      Company.





Robert
      L. Woodson, III, 57 ,
      has
      been a director of Lighting Science Group since 1998 and previously served
      as
      our President and Chief Operating Officer from January 1999 to November 2000.
      Prior to joining Lighting Science Group, Mr. Woodson was president of HFI Home
      Care Management LP, a company that acquires and manages home health agencies,
      from 1994 through 1997, and executive vice president and secretary of
      HealthFirst, Inc., a company that manages home health agencies, from 1992
      through 1994. In March 2000, Mr. Woodson resigned as an executive officer of
      Lighting Science Group but continues to serve as a director. Effective March
      9,
      2007, Mr. Woodson resigned as a member of the Board of Directors of the
      Company.




*Members
      of Audit Committee and Audit Committee Financial Expert*




The
      members of the Audit Committee are:


Robert
        E. Bachman, Chairman
 Donald
          R. Harkleroad
 Daryl
          N. Snadon





Robert
      E.
      Bachman is designated as the “audit committee financial expert” of our Audit
      Committee. Mr. Bachman 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.”




*Code
      of Ethics*




We
      have
      adopted a code of ethics that is applicable to all our employees and, in
      particular, to our senior officers.




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 1555


Dallas,
      Texas 75201





Section 16(a)
      under the Exchange Act requires our directors and officers and beneficial owners
      of more than 10% of our common stock to file with the SEC an initial report
      of
      ownership of our stock on Form 3 and reports of changes in ownership on
      Form 4 or Form 5. Persons subject to Section 16 are required by
      SEC regulations to furnish us with copies of all Section 16(a) forms that
      they file. Under SEC rules, certain forms of indirect ownership and ownership
      of
      our common stock by certain family members are covered by these reporting
      requirements. As a matter of practice, our administrative staff assists our
      officers and directors in preparing initial ownership reports and reporting
      ownership changes, and typically files these reports on their
      behalf.





Based
      solely upon a review of Forms 3 and 4 and amendments thereto furnished to us
      under Rule 16a-3(e) under the Exchange Act during our most recent fiscal year
      and Forms 5 and amendments thereto furnished to us with respect to our most
      recent fiscal year, and any written representation referred to in Item 405(b)(1)
      of Item 405 of Regulation S-B, we believe that persons who, during the fiscal
      year, were a director, officer, and/or beneficial owner of more than ten percent
      of our common stock, including Mr. Robert Bachman, Mr. John Collingwood, Mr.
      Donald Harkleroad, Mr. Daryl Snadon and Mr. Robert Woodson, failed to file
      on a
      timely basis, as disclosed in the above Forms, a number of reports required
      by
      Section 16(a) of the Exchange Act during the most recent fiscal year or prior
      fiscal years, failed to report a number of transactions on a timely basis,
      and
      failed to file required Forms due to administrative errors.








**ITEM
      10. EXECUTIVE COMPENSATION**





The
      following table summarizes the overall compensation earned over each of the
      past
      two fiscal years ending December 31, 2006 by (1) each person who served as
      the
      principal executive officer of the Company during fiscal 2006; and (2) the
      Company’s two most highly compensated executive officers as of December 31, 2006
      with compensation during fiscal 2006 of $100,000 or more (the “Named Executive
      Officers”).





**Summary
      Compensation Table**








**Name
                and Principal Position**
            
            
            **Year**
            
            
            **Salary
                ($)**
            
            
            **Bonus
                ($)**
            
            
            **Stock
                ($)**
            
            
            **Option
                Awards ($) (1)**
            
            
            **Non-Equity
                Incentive Plan Compensation ($)**
            
            
            **Change
                in Pension Value and Non-Qualified Deferred Compensation Earnings
                ($)**
            
            
            **All
                Other Compensation ($) (2)**
            
            
            **Total
                ($)**Ronald
                E. Lusk
            
            
            2005
            
            $
            253,846
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            253,846Chairman
                and Chief Executive Officer
            
            
            2006
            
            $
            250,000
            
            $
            -
            
            $
            -
            
            $
            41,133
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            291,133Frederic
              Maxik
            
            
            2005
            
            $
            250,000
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            250,000Chief
              Technology Officer
            
            
            2006
            
            $
            250,000
            
            $
            -
            
            $
            -
            
            $
            1660
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            251,660Stephen
                A. Hamilton(3)
            
            
            2005
            
            $
            16,095
            
            $
            20,000
            
            $
            -
            
            $
            12,803
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            48,898Chief
                Financial Officer
            
            
            2006
            
            $
            170,000
            
            $
            -
            
            $
            -
            
            $
            3,300
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            173,300Robert
                H. Warshauer (4)
            
            
            2005
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -President
            
            
            2006
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            402,313
            
            $
            -
            
            $
            -
            
            $
            1,820
            
            $
            404,133




(1)****Reflects
                dollar amount expensed by the company during the applicable fiscal
                year
                for financial statement reporting purposes pursuant to FAS 123R.
                FAS 123R
                requires the Company 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, the Company 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. Hamilton’s employment with the Company began in November
                2005.(4)
                Mr. Warshauer resigned as President of the Company in March
                2007.











**Employment
      Agreements**





*Ronald
      E. Lusk*





We
      entered into a three-year employment agreement with Mr. Lusk during fiscal
      year
      1999. Upon completion of the initial three-year term, Mr. Lusk’s agreement was
      automatically renewed for successive one-year periods. The Company may terminate
      this agreement as of any renewal date upon 90 days advance written notice to
      Mr.
      Lusk. In addition, we may terminate his agreement upon his death or disability
      or upon just cause. In the event Mr. Lusk’s employment agreement is terminated
      by us without cause or by Mr. Lusk upon a change in control of the Company,
      the
      Company is obligated to pay Mr. Lusk the compensation that he would otherwise
      be
      entitled to receive had the agreement not been terminated.




*Fredric
      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. Pursuant to his
        employment agreement, Mr. Maxik is entitled to receive a base annual salary
        of
        $250,000, which he may elect to receive in shares of our common stock. 
Upon completion of the initial three-year term, Mr. Maxik’s employment agreement
        will automatically be renewed for successive one-year periods; provided,
        however, we may terminate his agreement as of the renewal date by
        providing him with 90 days advance written notice. In addition, we may
        terminate Mr. Maxik’s employment agreement upon his death or disability or for
        just cause. In the event we terminate Mr. Maxik’s agreement without cause or Mr.
        Maxik terminates his agreement for good reason, including upon a change in
        control of the Company, we are obligated to pay Mr. Maxik the compensation
        that
        he would otherwise be entitled to receive had the agreement not been
        terminated.





*Stephen
      A. Hamilton*





Mr.
      Hamilton does not currently have an employment agreement with the
      Company.





*Robert
      H. Warshauer*




On
        March
        7, 2007, we entered into a revised employment agreement with Mr. Warshauer,
        which amended Mr. Warshauer’s employment agreement dated March 7, 2006. Pursuant
        to the amended agreement, Mr. Warshauer resigned from his position as our
        president and as a member of our board of directors. Additionally, Mr. Warshauer
        agreed to continue to serve as our employee until December 31, 2007 and will
        retain full health and medical benefits and 1,333,333 fully vested stock
        options, which will remain exercisable for three months following term of
        the
        amended employment agreement.  Mr. Warshauer is entitled to receive a
        salary of $1.





**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,
      2006.





**Name
                and Position**
            
            
            **Number
                of Securities Underlying Unexercised Options (#
                Exercisable)**
            
            
            
            
            **Number
                of Securities Underlying Unexercised Options (#
                Unexercisable)**
            
            
            
            
            
            **Equity
                Incentive Plan Awards: Number of securities Underlying Unexercised
                Unearned Options (#)**
            
            
            **Option
                Exercise Price ($)**
            
            
            **Option
                Expiration Date**
            
            
            **Number
                of Share s or Units of stock That have Not Vested
                (#)**
            
            
            **Market
                value of Shares or Units of Stock that Have Not Vested
                ($)**
            
            
            **Equity
                Incentive Plan Awards: Number of Unearned Shares, Units or Other
                Rights
                That Have Not Vested (#)**
            
            
            **Equity
                Incentive Plan Awards: Market or Payout Value of Unearned Shares,
                Units or
                Other Rights That Have Not Vested ($)**Ronald
                E. Lusk
            
            
            66,667
            
            (1
            )
            
            133,333
            
            
            (2
            )
            
            -
            
            $
            0.32
            
            
            2/21/2011
            
            
            -
            
            
            -
            
            
            -
            
            
            -Chairman
                and Chief Executive OfficerStephen
                A. Hamilton
            
            
            40,000
            
            (3
            )
            
            20,000
            
            
            (4
            )
            
            -
            
            $
            0.45
            
            
            11/28/2009
            
            
            -
            
            
            -
            
            
            -
            
            
            -Chief
                Financial Officer
            
            
            6,667
            
            (1
            )
            
            13,333
            
            
            (5
            )
            
            -
            
            $
            0.32
            
            
            2/21/2009
            
            
            -
            
            
            -
            
            
            -
            
            
            -Robert
                H. Warshauer (9)
            
            
            1,000,000
            
            (6
            )
            
            1,000,000
            
            
            (7
            )
            
            -
            
            $
            0.30
            
            
            3/9/2011
            
            
            -
            
            
            -
            
            
            -
            
            
            -PresidentFrederick
                S. Maxik
            
            
            3,333
            
            (1
            )
            
            6,667
            
            
            (8
            )
            
            -
            
            $
            0.32
            
            
            2/21/2009
            
            
            -
            
            
            -
            
            
            -
            
            
            -Chief
                Technology Officer




(1)
                These options were granted on February 21, 2006 and were fully exercisable
                (vested) upon grant.(2)
                These options were granted on February 21, 2006. 66,667 and 66,667
                of
                these options will become exercisable (vested) on February 21, 2007
                and
                February 21, 2008, respectively, assuming continued provision of
                services
                as an officer or director.(3)
                These options were granted on November 28, 2005. 20,000 and 20,000
                of
                these options became exercisable (vested) on November 28, 2005 and
                November 28, 2006, respectively.(4)
                These options were granted on November 28, 2005 and will become
                exercisable (vested) on November 28, 2007 assuming continued provision
                of
                services as an officer.(5)
                These options were granted on February 21, 2006. 6,667 and 6,667
                of these
                options will become exercisable (vested) on February 21, 2007 and
                February
                21, 2008, respectively, assuming continued provision of services
                as an
                officer.(6)
                These options were granted on March 9, 2007 in connection with Mr.
                Warshauer’s employment agreement, and were fully exercisable (vested) upon
                grant.(7)
                These options were granted on March 9, 2007 in connection with Mr.
                Warshauer’s employment agreement. 333,333, 333,333 and 333,333 of these
                options will become exercisable (vested) on March 7, 2008, March
                7, 2009
                and March 7, 2010, respectively, assuming continued provision of
                services
                as an officer.(8)
                These options were granted on February 21, 2006. 3,333 and 3334 of
                these options will become exercisable (vested) on February 21, 2007
                and
                February 21, 2008, respectively, assuming continued provision of
                services
                as an officer.(9)
                In March 2007 Mr. Warshauer resigned as President of the
                Company.








**Director
      Compensation**





The
      following table shows the overall compensation earned for the 2006 fiscal year
      with respect to each person who was a director as of December 31,
      2006.





**Name**
            
            **Fees
                Earned or Paid In cash ($)**
            
            **Stock
                Awards ($)**
            
            **Option
                Awards ($)(1)**
            
            **Non-Equity
                Incentive Plan Compensation ($)**
            
            **Change
                In Pension Value and Nonqualified Deferred Compensation Earnings
                ($)**
            
            **All
                Other Compensation ($)**
            
            **Total
                ($)**Robert
                E. Bachman (2)
            
            $
            91,400
            
            $
            -
            
            $
            164,534
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            255,934John
                Collingwood (3)
            
            $
            105,200
            
            $
            -
            
            $
            8,302
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            113,502Donald
                Harkleroad (4)
            
            $
            82,430
            
            $
            -
            
            $
            164,534
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            246,964Ronald
                E. Lusk (5)
            
            $
            13,800
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            13,800Daryl
                Snadon (6)
            
            $
            105,200
            
            $
            -
            
            $
            8,302
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            113,502Robert
                Woodson III (7)
            
            $
            50,000
            
            $
            -
            
            $
            8,302
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            58,302$
            448,030
            
            $
            -
            
            $
            353,974
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            802,004





(1)
                Reflects dollar amount expensed by the company during the applicable
                fiscal year for financial statement reporting purposes pursuant to
                FAS
                123R. FAS 123R requires the Company 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, the Company 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)
                As of December 31, 2006, Mr. Bachman held options to purchase 900,000
                shares of the Company’s common stock.(3)
                As of December 31, 2006, Mr. Collingwood held options to purchase
                70,000
                shares of the Company’s common stock.(4)
                As of December 31, 2006, Mr. Harkleroad held options to purchase
                1,000,000
                shares of the Company’s common stock.(5)
                As of December 31, 2006, Mr. Lusk held options to purchase 200,000
                shares
                of the Company’s common stock.(6)
                As of December 31, 2006, Mr. Snadon held options to purchase 70,000
                shares
                of the Company’s common stock.(7)
                As of December 31, 2006, Mr. Woodson, III held options to purchase
                70,000
                shares of the Company’s common stock. In March 2007, Mr. Woodson resigned
                as a member of the Board of
                Directors.





Each
      independent director receives compensation of $50,000 per year for service
      on
      our board of directors. To date this compensation has been paid by the issuance
      of our common stock. Members of the board of directors are also eligible for
      participation in the 2005 Plan.








**ITEM
      11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT**





The
      following table sets forth certain information with respect to beneficial
      ownership of our common stock as of March 19, 2007, by:





·
            each
                person who is known by us to beneficially own more than five percent
                of
                our common stock·
            each
                of our directors at that date and nominees and named executive officers;
                and·
            all
                directors and officers as a group.




**Shares
                Beneficially Owned(1)(2)****Name
                and Address of Beneficial Owner**
            
            
            **Number**
            
            
            **Percent*****Directors
                and Officers***Robert
                E. Bachman (3)
            
            
            2,393,737
            
            
            3.0
            %John
                A. Collingwood (4)
            
            
            5,153,883
            
            
            6.5
            %Steve
                Hamilton (5)
            
            
            190,900
            
            
            0.2
            %Don
                R. Harkleroad (6)
            
            
            2,251,143
            
            
            2.8
            %Ron
                E. Lusk (7)(17)
            
            
            6,910,258
            
            
            8.7
            %Fredric
                S. Maxik (8)(17)
            
            
            72,250
            
            
            0.1
            %Daryl
                N. Snadon (9)
            
            
            2,825,096
            
            
            3.5
            %Directors
                and Officers as a Group
            
            
            19,797,267
            
            
            24.9
            %***Certain
                Persons***AG
                Offshore Convertibles Ltd. (10)
            
            
            13,174,040
            
            
            14.4
            %Philip
                R. Lacerte (11)
            
            
            7,693,740
            
            
            9.8
            %Ardsley
                Partners Renewable Energy Fund, LP (12)
            
            
            11,240,848
            
            
            13.0
            %Columbus
                Capital Partners, LP (13)
            
            
            5,209,166
            
            
            6.3
            %Winslow
                Hedge Fund, Ltd. (14)
            
            
            5,833,334
            
            
            7.0
            %Lagunitas
                Partners, LP (15)
            
            
            6,710,666
            
            
            8.0
            %Xerion
                Partners Master Fund II (16)
            
            
            4,358,659
            
            
            5.3
            %




(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)
            Unless
                otherwise indicated, the address of each person in the above table
                is
                Lighting Science Group Corporation, 2100 McKinney Avenue, Suite 1555,
                Dallas, TX 75201.(3)
            Includes
                111,074 shares of common stock issuable upon conversion of 10,413
                shares
                of 6% Convertible Preferred Stock, 443,739 shares of common stock
                issuable
                upon exercise of warrants and 900,000 shares issuable upon exercise
                of
                incentive stock options issued under the Lighting Science Group
                Corporation 2005 Equity Based Incentive Compensation Plan. Includes
                2,313,025 shares of common stock held by USGT Investors, L.P. 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.(4)
            Includes
                50,004 shares of common stock issuable upon conversion of 4,688 shares
                of
                6% Convertible Preferred Stock, 564,063 shares of common stock issuable
                upon exercise of warrants and 70,000 shares issuable upon exercise
                of
                incentive stock options issued under the Lighting Science Group
                Corporation 2005 Equity Based Incentive Compensation Plan.(5)
            Includes
                180,000 shares of common stock issuable upon exercise of incentive
                stock
                options issued under the Lighting Science Group Corporation 2005
                Equity
                Based Incentive Compensation Plan.(6)
            Includes
                166,667 shares of common stock issuable upon conversion of 15,625
                shares
                of 6% Convertible Preferred Stock, 46,876 shares of common stock
                issuable
                upon exercise of warrants and 1,000,000 shares issuable upon exercise
                of
                incentive stock options issued under the Lighting Science Group
                Corporation 2005 Equity Based Incentive Compensation Plan. Includes
                2,251,143 shares of common stock held beneficially by the Bristol
                Company.
                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.(7)
            Includes
                450,000 shares of common stock issuable upon exercise of warrants
                and
                200,000 shares of common stock issuable upon the exercise of incentive
                stock options issued under the Lighting Science Group Corporation
                2005
                Equity Based Incentive Compensation Plan. Includes 5,591,097 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.(8)
            Includes
                10,000 shares of common stock issuable upon the exercise of incentive
                stock options issued under the Lighting Science Group Corporation
                2005
                Equity Based Incentive Compensation Plan(9)
            Includes
                311,884 shares of common stock issuable upon conversion of 29,238
                shares
                of 6% Convertible Preferred Stock, 637,715 shares of common stock
                issuable
                upon exercise of warrants and 70,000 shares issuable upon exercise
                of
                incentive stock options issued under the Lighting Science Group
                Corporation 2005 Equity Based Incentive Compensation Plan.
              Compensation
                Plan.(10)
            Includes 10,000,000
                shares of common stock issuable upon conversion of 937,500 shares
                of 6%
                Convertible Preferred Stock and 2,812,500 shares of common stock
                issuable
                upon exercise of warrants.(11)
            Includes 110,657
                shares of common stock issuable upon conversion of 10,374 shares
                of 6%
                Convertible Preferred Stock and 96,122 shares of common stock issuable
                upon exercise of warrants. Mr. Lacerte served as our Executive Vice
                President of Sales and Marketing from October 12, 2004 until his
                resignation on October 4, 2005.the Lighting Science Group Corporation
                2005
                Equity Based Incentive Compensation Plan.


(12)
            Includes
                2,408,753 shares of common stock issuable upon exercise of warrants
                and
                5,620,424 shares of common stock issuable upon exercise of equity
                unit
                warrants (including the exercise of the common stock warrants included
                in
                the units).(13)
            Includes
                1,116,250 shares of common stock issuable upon exercise of warrants
                and
                2,604,583 shares of common stock issuable upon exercise of equity
                unit
                warrants (including the exercise of the common stock warrants included
                in
                the units).(14)
            Includes
                1,250,000 shares of common stock issuable upon exercise of warrants
                and
                2,916,667 shares of common stock issuable upon exercise of equity
                unit
                warrants (including the exercise of the common stock warrants included
                in
                the units).(15)
            Includes
                1,438,000 shares of common stock issuable upon exercise of warrants
                and
                3,355,333 shares of common stock issuable upon exercise of equity
                unit
                warrants (including the exercise of the common stock warrants included
                in
                the units).(16)
            Includes
                1,109,375 shares of common stock issuable upon exercise of warrants
                and
                2,067,767 shares of common stock issuable upon exercise of equity
                unit
                warrants (including the exercise of the common stock warrants included
                in
                the units).(17)
            Pursuant
                to the terms of their employment agreement, individual had (or has,
                in the
                case of Mr. Maxik) the ability to elect to receive salary and other
                forms
                of cash compensation in the form of equity securities of Lighting
                Science
                Group.








**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**





*Director
      Loans to Lighting Science Group; Issuance of Warrants to
      Directors*





On
      March
      30, 2005, certain individual members of our board of directors and members
      of
      senior management agreed to loan Lighting Science Group an aggregate of $340,000
      on a short-term basis pursuant to the terms of promissory notes from Lighting
      Science Group and in favor of each of the individual lenders. The members of
      the
      board and senior management who agreed to loan us funds and the amounts loaned
      by each individual are as follows: John A. Collingwood - $100,000, Ronald E.
      Lusk - $30,000, Stan T. Waldrop - $30,000, Philip R. Lacerte - $30,000, Robert
      E. Bachman (through USGT Investors L.P.) - $30,000, Donald R. Harkleroad
      (through the Bristol Company) - $30,000, Robert L. Woodson, III - $30,000,
      Daryl
      N. Snadon - $30,000, and Fredric S. Maxik (through the Phibian S Trust) -
      $30,000. Mr. Lusk loaned Lighting Science Group an additional $15,000 on April
      29, 2005 and $5,000 on May 2, 2005. Mr. Snadon loaned us an additional $100,000
      on May 3, 2005 and Mr. Harkleroad loaned us an additional $16,000 on May 6,
      2005. The board members and officers who loaned Lighting Science Group funds
      in
      this transaction are collectively referred to as the Lenders. Proceeds from
      each
      of the loans were used to fund our continuing operating expenses, including
      salaries, legal and accounting fees, and for working capital purposes and other
      costs and expenses. Pursuant to the terms of the notes issued by us to each
      Lender, we have: (i) paid interest to each Lender at a rate of 9.50% per annum;
      (ii) paid a 10% commitment fee to each Lender and (iii) issued a warrant to
      each
      Lender for the purchase of 30,000 shares of our common stock (or 100,000 shares
      in the case of Mr. Collingwood, 130,000 shares in the case of Mr. Snadon, 46,000
      shares in the case of Mr. Harkleroad and 50,000 shares in the case of Mr. Lusk)
      for a total of 476,000 shares. The principal and interest due on the notes
      were
      due on May 30, 2005. A total of $300,086 of such loans, including accrued
      interest and commitment fees of $24,086, were converted to Preferred Stock
      in
      the private placement described on page 1 of this prospectus and the remaining
      $200,000 of such loans were repaid from proceeds of the private
      placement.





The
      warrants issued to the Lenders for the purchase of 476,000 shares of our common
      stock are exercisable at $1.50 per share. Eight warrants for 30,000 shares
      of
      common stock and one warrant for 100,000 shares of common stock vested on the
      date of issuance, April 20, 2005. On April 29, 2005 and May 2, 2005, we issued
      warrants for 15,000 and 5,000 shares of common stock, respectively, to Mr.
      Lusk.
      On May 3, 2005, we issued a warrant for 100,000 shares of common stock to Mr.
      Snadon and on May 6, 2005, we issued a warrant for 16,000 shares to Mr.
      Harkleroad. All such warrants vested on the date of issuance. The warrants
      have
      anti-dilution and exercise price adjustment provisions for dividends and stock
      splits. Each warrant expires five years from the date of issuance.





On
      December 29, 2006, the Company offered to adjust the exercise price of the
      warrants issued to the Lenders. The Company agreed to adjust the exercise price
      of the warrants to provide for an exercise price of $0.30 per share contingent
      upon the Lenders exercising such warrants on or before January 31, 2007. The
      exercise price will remain $1.50 for Warrants that were not exercised. As of
      March 19, 2007, warrants for 316,000 of such shares had been exercised at the
      adjusted price of $0.30 per share.





*Acquisition
      of Lighting Science, Inc.*




On
      June
      1, 2004, we acquired Lighting Science, Inc. by purchasing all of its outstanding
      stock in exchange for 4,796,276 shares of common stock and Lighting Science
      Group’s obligation to issue up to an additional 4,499,965 shares of common stock
      upon the satisfaction of certain conditions under the stock purchase agreement.
      Two of our directors, Fredric S. Maxik and John A. Collingwood, had significant
      relationships with Lighting Science, Inc. Mr. Maxik was the chief executive
      officer of Lighting Science, Inc. and the co-trustee of a trust that was a
      major
      stockholder of Lighting Science, Inc. Mr. Collingwood was also a major
      stockholder of Lighting Science, Inc. As part of the acquisition of Lighting
      Science, Inc., Lighting Science Group agreed to use our best efforts to cause
      the election of Mr. Maxik and Mr. Collingwood to Lighting Science Group’s board
      of directors. The acquisition of Lighting Science, Inc. was previously disclosed
      on Lighting Science Group’s Form 8-K filed with the Securities and Exchange
      Commission on June 15, 2004. As part of the acquisition Mr. Maxik entered into
      an employment agreement with Lighting Science Group.





*Note
      Payable to Trust of Stockholder and Chairman Ronald E. Lusk / Exchange of Note
      and Series A Preferred Stock for Common Stock*




We
      were
      previously obligated under the terms of a line of credit agreement to Match,
      Inc. outstanding in the amount of $1,851,299 principal balance and $341,226
      in
      accrued interest at March 31, 2005. Ronald E. Lusk, Chairman of Lighting Science
      Group, controls Match, Inc. as Trustee of the Ronald E. Lusk Revocable Trust.
      The line of credit agreement with Match, Inc. was available up to a limit of
      $2
      million, bore interest at prime plus 1% on the note balance and prime plus
      2% on
      any unpaid interest amounts, was due on demand and was unsecured.




On
      July
      25, 1994, Lighting Science Group sold, for proceeds of $2 million, 533,333
      shares of Series A Preferred Stock with cumulative dividends of $0.30 per annum
      for each share and conversion rights to common stock at a price of $3.75 per
      share. Under the terms of the Disclosure Statement and Plan of Reorganization
      under which Lighting Science Group emerged from bankruptcy, Match, Inc., the
      holder of the Series A Preferred Stock, waived such rights, including voting
      and
      conversion rights. No dividends had been paid with respect to this class of
      stock. At March 31, 2005, the cumulative unpaid dividend with respect to the
      Series A Preferred Stock was $1,670,685. Thus, the total liquidation preference
      of the Series A Preferred Stock was $3,670,685 as of March 31, 2005.





In
      contemplation of our private placement of 6% Convertible Preferred Stock that
      was completed in May 2005, our financial advisor and our investment-banking
      representative had both advised that the outstanding debt and the Series A
      Preferred Stock would preclude us from successfully completing the financing
      transaction and should be eliminated through conversion into common stock.
      The
      board of directors concurred with this assessment, and accordingly, a special
      committee of independent directors consisting of Directors Robert E. Bachman,
      Donald R. Harkleroad, and Robert L. Woodson, III was formed on March 14, 2005
      to
      negotiate with Mr. Lusk to exchange the Series A Preferred Stock and the amount
      owed on the debt for shares of common stock.





The
      special committee took note of the fact that for the month of March 2005, the
      closing prices for the common stock had ranged between $1.48 and $1.90 per
      share. The proposal submitted by Mr. Lusk offered to set the exchange ratio
      at
      $1.725 per share, which represented the five-day average closing price as of
      March 15, 2005. Mr. Lusk also proposed to reduce the amount of the accrued
      interest on the line of credit with Match, Inc. by $250,000. Thus, the number
      of
      shares for which the Series A Preferred Stock and the cumulative dividend would
      be exchanged was equal to 2,127,933 ($3,670,685 / $1.725) under the proposal
      presented by Mr. Lusk. Using the same conversion price of $1.725 proposed by
      Mr.
      Lusk, the total of $1,942,525 ($2,192,525 - $250,000) due on the line of credit
      would be convertible into 1,126,101 shares of common stock of Lighting Science
      Group. The committee also noted that the trading range for the stock at the
      end
      of the month of March was closer to the lower end of the range ($1.48) at the
      time that the analysis was being completed. The special committee reported
      the
      results of our analysis to the board.





The
      board
      of directors (with Mr. Lusk abstaining and one director absent) reviewed the
      analysis prepared by the special committee. Based upon the exchange ratio of
      $1.725 per share offered by Mr. Lusk with respect to both the exchange of the
      Series A Preferred Stock and the debt, as well as the proposal by Mr. Lusk
      to
      reduce the accrued interest on the line of credit by $250,000, the board
      concluded that the offer was fair to Lighting Science Group and voted to approve
      the transactions contained in the proposal from Mr. Lusk. A total of 3,254,034
      shares of common stock were issued in exchange for the Series A Preferred Stock
      and the amount due under the line of credit agreement on May 5,
      2005.




*Other
      Loans from Directors and Officers*




On
      November 25, 2003, Ronald E. Lusk, the Chairman of Lighting Science Group,
      advanced $50,000 to Lighting Science Group for purposes of meeting general
      and
      administrative expenses. The loan provided for interest at a rate of prime
      plus
      1%. Mr. Lusk elected to forego any interest that was otherwise due with respect
      to the loan. No interest on the loan had previously been recorded by Lighting
      Science Group. Any such interest would not have been material. During 2004,
      Mr.
      Lusk advanced Lighting Science Group an additional $29,541 for general corporate
      purposes. During the third quarter of 2004, Lighting Science Group repaid the
      outstanding balances on these advances.




On
      August
      10, 2006, Donald Harkleroad, a Director of the Company, advanced $30,000 to
      the
      Company.  The loan bears interest at Prime Rate plus 1%.  The loan was
      repaid November 13, 2006. On December 14, 2006, Mr. Lusk advanced the Company
      $2,056. The Company issued 6,854 shares of common stock to settle this advance
      in January 2007.







*Guarantors
      of Line of Credit*




On
      June
      29, 2006 the Company entered into agreements with one of our banks to obtain
      a
      $2,000,000 line of credit. Amounts due under the line of credit are guaranteed
      by the Guarantors. The amount of the line of credit available for use by the
      Company at any point in time will be equal to the aggregate value of guarantees
      that have been negotiated between the bank and the Guarantors at that time.
      Between December 2006 and March 2007, the Company amended the line of credit
      to
      increase the amount available thereunder to up to $2,500,000. At March 19,
      2007,
      Guarantors had provided guarantees for the entire $2,500,000 balance of the
      line
      of credit. The Company also entered into agreements to lease equipment in March
      2007. The total value of the leased equipment is $150,000. At March 19, 2007,
      Guarantors had provided guarantees for the entire amount of the
      leases.




The
      Guarantors of the initial $2,000,000 line of credit include the following
      directors, officers and stockholders who have been issued the respective number
      of shares of common stock and warrants to purchase common stock:







**Name
                of Guarantor**
            
            
            **Position**
            
            
            **Total
                Value of Debt Guaranteed**
            
            
            **Shares
                Underlying Warrants/Common Shares Issued**USGT
                Investors LP
            
            
            Director(1
            )
            $
            150,000
            
            
            525,000Daryl
                Snadon
            
            
            Director
            
            
            200,000
            
            
            700,000John
                Collingwood
            
            
            Director
            
            
            200,000
            
            
            700,000Ron
                Lusk
            
            
            Chief
                Executive Officer
            
            
            50,000
            
            
            175,000Jerome
                Hill
            
            
            
            
            
            100,000
            
            
            350,000George
                Parker Young
            
            
            
            
            
            50,000
            
            
            175,000Phil
                Lacerte
            
            
            
            
            
            1,250,000
            
            
            2,375,000$
            2,000,000
            
            
            5,000,000




(1)
            Mr.
                Bachman is the controlling shareholder of 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 $0.30 per share of common stock and a term of five years.





In
      the
      first quarter of 2007, the Company issued warrants to the following Guarantors
      as consideration for providing additional guarantees enabling the Company to
      obtain the additional amount available under our line of credit and under the
      guaranteed leases:







**Name**
            
            
            **Position**
            
            
            **Amount
                of Guarantees Provided**
            
            
            **#
                of Shares Underlying Warrants Issued**Phil
                Lacerte
            
            
            
            
            $
            65,000
            
            
            65,000Daryl
                Snadon
            
            
            Director
            
            $
            50,000
            
            
            50,000Edward
                Hawes
            
            
            
            
            $
            50,000
            
            
            50,000USGT
                Investors, LP (1)
            
            
            Director
            
            $
            37,500
            
            
            37,500Baron
                Cass
            
            
            
            
            $
            48,750
            
            
            48,750Paul
                Schlosberg
            
            
            
            
            $
            48,750
            
            
            48,750$
            300,000
            
            
            300,000





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





The
      warrants listed in the table above have an exercise price of $0.30 per share
      and
      have a term of five years.





As
      of
      March 19, 2007, Guarantees for an additional $350,000 of the amended line of
      credit and equipment leases had been received from the Guarantors. The Company
      anticipates that it will execute warrant agreements for the purchase of 350,000
      shares of common stock with the Guarantors in the second quarter of 2007.
      The warrants will have an exercise price of $0.30 per share and a term of five
      years.














**ITEM
      13. EXHIBITS**





**Exhibit
                Number**
            **Description**3.1
            Amended
                and Restated Certificate of Incorporation of Lighting Science Group
                Corporation (1)3.2
            Amended
                and Restated By-laws of Lighting Science Group Corporation
                (1)4.1
            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 (2)4.2
            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
                (3)4.3
            Form
                of Warrant granted pursuant to the Securities Purchase Agreement
                dated as
                of May 12, 2005 (3)4.4
            Registration
                Rights Agreement dated as of May 12, 2005, by and among Lighting
                Science
                Group Corporation and the persons and entities listed on Exhibit
                A thereto
                (3)4.5
            Warrant
                dated as of February 15, 2005, by and between Lighting Science Group
                Corporation and Giuliani Capital Advisors LLC (4)4.6
            Form
                of Warrant issued to certain directors, officers and security holders
                as
                consideration for providing guarantees pursuant to the Line of Credit
                (10)4.7
            Amended
                and Restated Certificate of Designation (5)4.8
            Securities
                Purchase Agreement, dated as of March 9, 2007 among Lighting Science
                Group
                Corporation and the purchasers identified on the signature pages
                thereto
                (9)4.9
            Form
                of Warrant A, dated March 9, 2007 (9)4.10
            Form
                of Warrant B, dated March 9, 2007 (9)4.11
            Form
                of Warrant, dated __________, 2007 (9)10.1
            Employment
                Agreement dated as of February 26, 1999 by and between Lighting Science
                Group Corporation (upon assignment from Iatros Health Network Inc.)
                and
                Ronald E. Lusk (6)10.2
            Employment
                Agreement dated as of June 1, 2004 by and among Lighting Science,
                Inc.,
                The Phoenix Group Corporation and Fredric Maxik (2)10.3
            Employment
                Agreement dated as of November 15, 2000 by and between The Phoenix
                Group
                Corporation and K. Shane Hartman (6)10.4
            Consulting
                Agreement dated as of October 6, 2006 between Lighting Science Group
                Corporation and Philip R. Lacerte (11)10.5
            Loan
                Agreement dated as of June 29, 2006 between Lighting Science Group
                Corporation and Bank of Texas, N.A.(8)10.6
            Revolving
                Promissory Note dated as of June 29, 2006 between Lighting Science
                Group
                Corporation and Bank of Texas, N.A. (8)10.7
            Pledge
                and Security Agreement dated as of June 29, 2006 between Lighting
                Science
                Group Corporation and Bank of Texas, N.A. (8)10.8
            Letter
                Agreement Amendment to the Loan Agreement dated as of December 29,
                2006
                between Lighting Science Group Corporation and Bank of Texas, N.A.
                (5)10.9
            Amended
                Revolving Promissory Note dated as of December 29, 2006 between Lighting
                Science Group Corporation and Bank of Texas, N.A. (5)10.10
            Factoring
                Agreement dated as of January 4, 2007 between Lighting Science Group
                Corporation and Allied Capital Partners, L.P. (5)24
            Power
                of attorney (filed
                herewith)31.1
            13a-14
              Certification of Ronald E.
              Lusk31.2
            13a-14
              Cretification of Stephen A.
              Hamilton32.1
            1350
              Certification of Ronald E.
              Lusk32.2
            1350
              Certification of Stephen
              A.Hamilton





1.
            Incorporated
                by reference to the Registrant’s Registration Statement on Form SB-2 filed
                with the Securities and Exchange Commission on July 12,
                2005.2.
            Incorporated
                by reference to the Registrant's current report on Form 8-K filed
                with the
                Securities and Exchange Commission on June 15, 2004.3.
            Incorporated
                by reference to the Registrant's current report on Form 8-K filed
                with the
                Securities and Exchange Commission on May 16, 2005.4.
            Incorporated
                by reference to the Registrant's current report on Form 8-K filed
                with the
                Securities and Exchange Commission on February 22, 2005.5.
            Incorporated
                by reference to Registrant's current report on Form 8-K filed with
                the
                Securities and Exchange Commission on January 9, 2007.6.
            Incorporated
                by reference to the Registrant's quarterly report on Form 10-QSB
                filed
                with the Securities and Exchange Commission on August 16, 2004.7.
            Incorporated
                by reference to the Registrant's quarterly report on Form 10-QSB
                filed
                with the Securities and Exchange Commission on November 16,
                2004.8.
            Incorporated
                by reference to the Registrant’s current report on Form 8-K filed with the
                Securities and Exchange Commission on July 6, 2006.9.
            Incorporated
                by reference to the Registrant’s current report on Form 8-K filed with the
                Securities and Exchange Commission on March 12, 2007.10.
            Incorporated
                by reference to the Registrant’s current report on Form 8-K filed with the
                Securities and Exchange Commission on September 22,
                2006.11.
            Incorporated
                by reference to the Registrant’s current report on Form 8-K filed with the
                Securities and Exchange Commission on October 12,
                2006.








**ITEM
      14. PRINCIPAL ACCOUNTANT 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 $46,000
      and $64,000 for the years ended December 31, 2006 and 2005, respectively. Audit
      fees include fees for audit of our annual financial statements, review of our
      quarterly financial statements, and services associated with securities
      filings.





*Audit-Related
      Fees*





All
      fees
      billed by Tuner, Stone & Company, L.L.P. were audit-related fees and no
      non-audit-related fees have been billed by Turner, Stone & Company, L.L.P.
      for any period.





*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.











**SIGNATURES**






In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on our behalf by the undersigned, thereunto duly
      authorized.




**LIGHTING
                SCIENCE GROUP CORPORATION**By:
            
            /s/
                RONALD E. LUSKRonald
                E. Lusk, Chairman,
              Chief
                Executive Officer, President and DirectorDate:
            
            April
                2, 2007






In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.






By:
            
            /s/
                RONALD E. LUSKRonald
                E. Lusk, Chairman, Chief Executive Officer, President and
                DirectorDate:
            
            April
                2, 2007By:
            
            /s/
                STEPHEN A. HAMILTONStephen
                A. Hamilton, Chief Financial Officer and Assistant Corporate
                SecretaryDate
            
            April
                2, 2007











By:
            
            /s/
                ROBERT E. BACHMANRobert
                E. Bachman, DirectorDate:
            
            April
                2, 2007By:
            
            /s/
                JOHN COLLINGWOODJohn
                Collingwood, DirectorDate:
            
            April
                2, 2007By:
            
            /s/
                DONALD R. HARKLEROADDonald
                R. Harkleroad, DirectorDate:
            
            April
                2, 2007By:
            
            /s/
                FRED MAXIKFred
                S. Maxik, DirectorDate:
            
            April
                2, 2007By:
            
            /s/
                DARYL SNADONDaryl
                Snadon, DirectorDate:
            
            April
                2, 2007











**LIGHTING
      SCIENCE GROUP CORPORATION**


**AND
      SUBSIDIARIES**






**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**




Report
                of Independent Registered Public Accounting Firm
            F-2Consolidated
                Balance Sheet
            F-3Consolidated
                Statements of Operations
            F-4Consolidated
                Statements of Stockholders’ Equity (Deficit)
            F-5Consolidated
                Statements of Cash Flows
            F-6Notes
                to the Consolidated Financial Statements
            F-7














F-1







**Report
        of Independent Registered Public Accounting Firm**
  To
            the
            Board of Directors and Stockholders of
 Lighting
            Science Group Corporation
 
 
 We
            have
            audited the accompanying consolidated balance sheet of Lighting Science
            Group
            Corporation and subsidiaries (the Company) as of December 31, 2006
 and
            the
            related consolidated statements of operations, stockholders’ equity (deficit)
            and cash flows for the years ended December 31, 2006 and 2005.
            These
 consolidated
            financial statements are the responsibility of the Company’s management. 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 audit 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 consolidated financial statements referred to above present
            fairly,
            in all material respects, the consolidated financial position of
            Lighting
 Science
            Group Corporation and subsidiaries as of December 31, 2006, and the consolidated
            results of their operations and cash flows for the two years then
 ended,
            in
            conformity with United States generally accepted accounting
            principles.
 
 
 /s/
            Turner, Stone & Company, L.L.P.
 
 Certified
            Public Accountants
 Dallas,
            Texas
 March
            19,
            2007




F-2







**LIGHTING
      SCIENCE GROUP CORPORATION**


**AND
      SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEET**


December
                31, 2006ASSETSCURRENT
                ASSETSCash
                and cash equivalents
            
            $
            86,080Accounts
                receivable, net of allowance for doubtful accounts of
                $4,219
            
            
            110,217Inventory,
                net of allowances (Note 5)
            
            
            432,613Prepaid
                expenses and other current assets
            
            
            1,134,588Total
                current assets
            
            
            1,763,498PROPERTY
                AND EQUIPMENT, net (Note 6)
            
            
            360,031OTHER
                ASSETSReorganized
                value in excess of amounts allocable to identifiable assets (Note
                3)
            
            
            2,793,224Intellectual
                property, net (Notes 2 and 6)
            
            
            1,048,483Proprietary
                rights agreement, net (Notes 2 and 6)
            
            
            147,639Goodwill
                (Note 2)
            
            
            154,097Total
                other assets
            
            
            4,143,443TOTAL
                ASSETS
            
            $
            6,266,972LIABILITIES
                AND STOCKHOLDERS’ EQUITY (DEFICIT)CURRENT
                LIABILITIESAccounts
                payable
            
            $
            344,280Accrued
                expenses
            
            
            270,874Accrued
                dividend on 6% Convertible Preferred Stock
            
            
            54,814Line
                of credit (Note 7)
            
            
            2,044,948Note
                payable - related party - current portion (Note 9)
            
            
            81,250Total
                current liabilities
            
            
            2,796,166OTHER
                LIABILITIESNote
                payable - related party - long-term portion (Note 9)
            
            
            62,500Liability
                under derivative contracts (Note 10)
            
            
            6,290,191Total
                other liabilities
            
            
            6,352,691TOTAL
                LIABILITIES
            
            
            9,148,857COMMITMENTS
                AND CONTINGENCIES (Note 12)6%
                CONVERTIBLE PREFERRED STOCK, $.001 par value, 2,656,250 shares authorized,
                2,065,653 shares issued
              and
                outstanding, liquidation value of $6,610,089 (Note 10)
            
            
            2,173,181STOCKHOLDERS’
                EQUITY (DEFICIT)Common
                Stock, $.001 par value, 495,000,000 shares authorized, 64,644,026
                shares
                issued and outstanding
            
            
            64,644Additional
                paid-in-capital
            
            
            16,441,942Accumulated
                Deficit
            
            
            (21,561,652
            )TOTAL
                STOCKHOLDERS’ EQUITY (DEFICIT)
            
            
            (5,055,066
            )TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
            
            $
            6,266,972




The
      accompany notes are an integral part of the consolidated financial
      statements




F-3







**LIGHTING
        SCIENCE GROUP CORPORATION**
 **AND
        SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
   Year
                    Ended
                  December
                    31,2006
                
                
                Year
                    Ended
                  December
                    31, 2005Revenue
                
                $
                436,172
                
                $
                72,564Cost
                    of goods sold
                
                
                (350,724
                )
                
                (33,110
                )Gross
                    margin
                
                
                85,448
                
                
                39,454Operating
                    expensesSelling,
                    general and administrative
                
                
                1,826,802
                
                
                1,823,020Compensation
                    and related expenses
                
                
                2,661,835
                
                
                1,976,549Professional
                    fees
                
                
                724,567
                
                
                1,627,684Directors
                    fees
                
                
                448,030
                
                
                294,445Depreciation
                    and amortization
                
                
                507,805
                
                
                487,766Total
                    operating expenses
                
                
                6,169,039
                
                
                6,209,464Operating
                    loss
                
                
                (6,083,591
                )
                
                (6,170,010
                )Other
                    income/(expense)Interest
                    income
                
                
                15,834
                
                
                72,732Interest
                    expense
                
                
                (550,839
                )
                
                (77,697
                )Other,
                    net, primarily change in fair value of theliability
                    for derivative contracts
                
                
                (3,134,427
                )
                
                3,069,638Total
                    other income/(expense)
                
                
                (3,669,432
                )
                
                3,064,673Net
                    loss
                
                
                (9,753,023
                )
                
                (3,105,337
                )Dividend
                    on 6% Convertible Preferred Stock andaccretion
                    of preferred stock redemption value (Note 10)
                
                
                1,649,513
                
                
                1,202,901Net
                    loss applicable to common stock
                
                $
                (11,402,536
                )
                $
                (4,308,238
                )Basic
                    net loss per weighted average common share
                
                $
                (0.20
                )
                $
                (0.08
                )Weighted
                    average number of common shares outstanding
                
                
                57,837,532
                
                
                53,807,907
  The accompany notes are an integral
          part of the
          consolidated financial statements
  F-4




**LIGHTING
          SCIENCE GROUP CORPORATION**
 **AND
          SUBSIDIARIES**
 **CONSOLIDATED
          STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)**
   **Preferred
                        Stock**
                    
                    
                    **Common
                        Stock****Shares**
                    
                    
                    **Amount**
                    
                    
                    **Shares**
                    
                    
                    **Amount**
                    
                    
                    **Stock
                        Subscriptions Receivable**
                    
                    
                    **Additional
                        Paid In Capital**
                    
                    
                    **Accumulated
                        Deficit**
                    
                    
                    **Total****Balance
                        December 31, 2004**
                    
                    
                    **533,333**
                    
                    **$**
                    **533**
                    
                    
                    **51,297,256**
                    
                    **$**
                    **51,297**
                    
                    **$**
                    **(26,000**
                    **)**
                    **$**
                    **8,229,648**
                    
                    **$**
                    **(4,180,193**
                    **)**
                    **$**
                    **4,075,285**Issuance
                        of common stock in private placement
                    
                    
                    -
                    
                    
                    -
                    
                    
                    83,333
                    
                    
                    83
                    
                    
                    -
                    
                    
                    9,917
                    
                    
                    -
                    
                    
                    10,000Issue
                        of common stock in payment of operating expenses
                    
                    
                    -
                    
                    
                    -
                    
                    
                    839,968
                    
                    
                    841
                    
                    
                    -
                    
                    
                    579,671
                    
                    
                    -
                    
                    
                    580,512Issue
                        of common stock pursuant to conversion of outstanding preferred
                        stock,
                        cumulative dividends on preferred stock and certain notes
                        payable
                    
                    
                    (533,333
                    )
                    
                    (533
                    )
                    
                    3,254,034
                    
                    
                    3,254
                    
                    
                    -
                    
                    
                    3,610,488
                    
                    
                    (1,670,685
                    )
                    
                    1,942,524Fair
                        value of a warrant issued for payment of operating
                        expenses
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    290,000
                    
                    
                    -
                    
                    
                    290,000Recording
                        of expense for stock options issued during the year
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    111,109
                    
                    
                    -
                    
                    
                    111,109Receipt
                        of amounts due under share subscription agreements
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    26,000
                    
                    
                    -
                    
                    
                    -
                    
                    
                    26,000Net
                        loss
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    (4,308,238
                    )
                    
                    (4,308,238
                    )**Balance
                        December 31, 2005**
                    
                    
                    **-**
                    
                    **$**
                    **-**
                    
                    
                    **55,474,591**
                    
                    **$**
                    **55,475**
                    
                    **$**
                    **-**
                    
                    **$**
                    **12,830,833**
                    
                    **$**
                    **(10,159,116**
                    **)**
                    **$**
                    **2,727,192**Conversion
                        of 6% Convertible Preferred Stock to common stock
                    
                    
                    -
                    
                    
                    -
                    
                    
                    781,250
                    
                    
                    781
                    
                    
                    -
                    
                    
                    122,089
                    
                    
                    -
                    
                    
                    122,870Issue
                        of common stock in payment of operating expenses
                    
                    
                    -
                    
                    
                    -
                    
                    
                    7,333,457
                    
                    
                    7,334
                    
                    
                    -
                    
                    
                    1,918,678
                    
                    
                    -
                    
                    
                    1,926,012Issue
                        of common stock to settle dividends on the 6% Convertible
                        Preferred
                        Stock
                    
                    
                    -
                    
                    
                    -
                    
                    
                    1,192,952
                    
                    
                    1,193
                    
                    
                    -
                    
                    
                    300,778
                    
                    
                    -
                    
                    
                    301,971Issue
                        of common stock upon the exercise of warrants
                    
                    
                    -
                    
                    
                    -
                    
                    
                    217,422
                    
                    
                    217
                    
                    
                    -
                    
                    
                    65,009
                    
                    
                    -
                    
                    
                    65,226Conversion
                        of advances from director to common stock
                    
                    
                    -
                    
                    
                    -
                    
                    
                    6,854
                    
                    
                    7
                    
                    
                    -
                    
                    
                    2,049
                    
                    
                    -
                    
                    
                    2,056Cancellation
                        of common stock
                    
                    
                    -
                    
                    
                    -
                    
                    
                    (362,500
                    )
                    
                    (363
                    )
                    
                    -
                    
                    
                    363
                    
                    
                    -
                    
                    
                    -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**
                    
                    
                    -
                    
                    $
                    -
                    
                    
                    64,644,026
                    
                    $
                    64,644
                    
                    $
                    -
                    
                    $
                    16,441,942
                    
                    $
                    (21,561,652
                    )
                    $
                    (5,055,066
                    )
  The accompany notes are an integral
            part of the
            consolidated financial statements
  F-5
 
  **LIGHTING
        SCIENCE GROUP CORPORATION**
 **AND
        SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
   Year
                    EndedDecember 31, 2006
                
                
                Year
                    Ended December 31, 2005OPERATING
                    ACTIVITIESNet
                    loss
                
                $
                (11,402,536
                )
                $
                (4,308,238
                )Adjustments
                    to reconcile net loss to net cash used by operating
                    activities:Depreciation
                    and amortization
                
                
                507,805
                
                
                487,766Loss
                    on disposal of assets
                
                
                -
                
                
                97,155Non-cash
                    stock option compensation expense
                
                
                784,943
                
                
                111,109Expenses
                    paid by issuance of common stock
                
                
                1,926,012
                
                
                580,512Non-cash
                    accrual of interest to related party
                
                
                -
                
                
                25,670Forgiveness
                    of accrued interest due to related party
                
                
                -
                
                
                (250,000
                )Fair
                    value adjustment to liabilities under derivative
                    contracts
                
                
                3,134,127
                
                
                (3,907,649
                )6%
                    Convertible Preferred Stock dividends settled by issuance of
                    common
                    stock
                
                
                301,971
                
                
                -Accretion
                    of 6% convertible preferred stock redemption value
                
                
                1,245,504
                
                
                927,677Expenses
                    paid by issuance of common stock warrants
                
                
                368,698
                
                
                290,000Conversion
                    of interest accrued to preferred stock
                
                
                -
                
                
                24,086Changes
                    in:Accounts
                    receivable
                
                
                (100,442
                )
                
                (8,634
                )Inventory
                
                
                184,905
                
                
                (603,748
                )Prepaid
                    expenses
                
                
                (1,004,109
                )
                
                33,060Accounts
                    payable
                
                
                96,311
                
                
                207,333Accrued
                    expenses and other liabilities
                
                
                110,402
                
                
                197,387Security
                    deposits
                
                
                -
                
                
                27,215Net
                    cash used by operating activities
                
                
                (3,846,409
                )
                
                (6,069,299
                )INVESTING
                    ACTIVITIESPurchase
                    of property and equipment
                
                
                (157,968
                )
                
                (155,247
                )Net
                    cash used by investing activities
                
                
                (157,968
                )
                
                (155,247
                )FINANCING
                    ACTIVITIESLoans
                    from directors and officers
                
                
                32,056
                
                
                476,000Repayment
                    of loans from directors and officers
                
                
                (30,000
                )
                
                (200,000
                )Principal
                    payment on note payable to related parties
                
                
                (6,250
                )
                
                (25,000
                )Proceeds
                    from draws on line of credit
                
                
                2,044,948
                
                
                -Proceeds
                    from exercise of common stock warrants
                
                
                65,226
                
                
                -Proceeds
                    from issuance of 6% Convertible Preferred Stock, net of issuance
                    costs
                
                
                -
                
                
                6,935,000Proceeds
                    from private placement, net of issuance costs
                
                
                -
                
                
                36,000Net
                    cash provided by financing activities
                
                
                2,105,980
                
                
                7,222,000Net
                    increase (decrease) in cash
                
                
                (1,898,397
                )
                
                997,454Cash
                    at beginning of year
                
                
                1,984,477
                
                
                987,023Cash
                    at end of year
                
                $
                86,080
                
                $
                1,984,477Interest
                    paid
                
                $
                45,955
                
                $
                3,011SUPPLEMENTAL
                    DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIESCommon
                    Stock issued in settlement of note payable and accrued interest
                    to related
                    party
                
                $
                -
                
                $
                1,942,524Reduction
                    of accrued interest on note to related party
                
                $
                -
                
                $
                250,000Conversion
                    of loans from directors and officers to 6% Convertible Preferred
                    Stock
                
                $
                -
                
                $
                276,000Conversion
                    of loans from directors and officers to Common Stock
                
                $
                2,056
                
                $
                -Exchange
                    of Series A Preferred Stock for Common Stock
                
                $
                -
                
                $
                3,670,685Proceeds
                    from issuance of 6% Convertible Preferred Stock to Liability
                    under
                    Derivative Contracts
                
                $
                -
                
                $
                6,935,000Preferred
                    stock dividends paid and deducted in arriving at Net Loss
                
                $
                108,227
                
                $
                215,269
  The
        accompany notes are an integral part of the
        consolidated financial statements .
  F-6
  **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**
 
 Lighting
          Science Group Corporation (the “Company”) is a Delaware corporation organized in
          June 1988. The Company’s wholly owned subsidiaries during the periods were
          Americare Management, Inc. and LSGC LLC, an 80% owned joint venture. Neither
          Americare Management, Inc. nor LSGC LLC had significant operations during
          the
          periods covered by these financial statements. All intercompany accounts
          and
          transactions have been eliminated in the accompanying consolidated financial
          statements.
 
 With
          its
          acquisition of certain intellectual property rights on June 1, 2004 (see
          Note
          2), the Company entered the field of solid state lighting. The Company
          designs,
          assembles and markets products for the commercial, industrial and consumer
          lighting markets. The Company has formed strategic alliances with a major
          parking facilities operator and a financial advisory services firm to target
          municipalities, public utility corporations, universities, large mall owners,
          parking lot owners, and other organizations as customers and partners for
          the
          Company’s products.
 
 On
          or
          about August 20, 2002, the Company filed a voluntary petition seeking
          debtor-in-possession status for relief under Chapter 11 of the United States
          Bankruptcy Code. During the summer of 2003, the Company filed a Disclosure
          Statement and Plan of Reorganization (collectively, the “Plan”) that was
          confirmed by the U.S. Bankruptcy Court for the Northern District of Texas
          - Ft.
          Worth Division (the “Court”) on September 16, 2003 with an effective date of
          September 26, 2003. Under the terms of the Plan, the holder of the Series
          A
          Preferred Stock, Match, Inc. (“Match”), a related party, agreed to waive its
          rights, including its voting and conversion rights, and the creditors of
          the
          Company received an aggregate of approximately 51% of the common stock
          of the
          restructured entity in exchange for notes, accounts payable, and other
          forms of
          debt held at the time of the filing of the petition. This feature of the
          Plan -
          the exchange of debt for greater than 50% of the equity in the restructured
          entity - qualified the Company to utilize the reporting guidelines of the
“Fresh
          Start” accounting rules contained in Statement of Position (“SOP”) 90-7 - *Financial
          Reporting by Entities in Reorganization Under the Bankruptcy
          Code* .
 
 **Summary
          of Significant Accounting Policies**
 
 Since
          the
          Chapter 11 bankruptcy filing, the Company has applied the provisions in
          SOP 90-7
          which does not change the application of generally accepted accounting
          principles in the preparation of financial statements. However, it does
          require
          that the financial statements for periods including and subsequent to filing
          the
          Chapter 11 petition distinguish between transactions and events that are
          directly associated with the reorganization from the ongoing operations
          of the
          business.
 
 **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. The Company has not experienced any losses from maintaining balances
          in
          such cash accounts in excess of federally insured limits of $100,000. Management
          believes that the Company does not have significant credit risk related
          to its
          cash accounts.
 
 **Inventories**
 
 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 debt guarantee fees
          paid
          to the guarantors of the line of credit obtained by the Company (see Note
          7),
          rent and prepaid insurance. The guarantee fees are being amortized over
          the
          one-year term of the line of credit and recorded as interest expense in
          the
          consolidated statements of operations. Other 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 $93,272 and $73,233 for the years ended December 31, 2006 and
          2005,
          respectively.
 
 **Other
          assets**
 
 Other
          assets consist of acquisition-related intangible assets and an intangible
          asset
          arising upon the Company’s emergence from bankruptcy.
 
 *Acquisition-related
          intangible assets*
 The
          acquisition of the stock of Lighting Science, Inc. on June 1, 2004 necessitated
          an allocation of the purchase price among the assets of the acquired company.
          An
          independent valuation firm was engaged by the Company to perform this allocation
          (Note 2). At the date of acquisition, Lighting Science, Inc. had recorded
          no
          tangible assets.
 
 Intellectual
          property, which includes, but is not limited to, provisional patents,
          copyrights, intellectual assets and proprietary know-how, was recorded
          effective
          June 1, 2004 as a part of the allocation of the purchase price of Lighting
          Science, Inc. The intellectual property is being amortized over twenty
          years
          beginning June 1, 2004.
 
 Amortization
          expense related to intellectual property was $60,200 for each of the years
          ended
          December 31, 2006 and 2005.
 
 The
          proprietary rights agreement between the Company and Fredric Maxik (the
          Company’s chief technology officer and the developer of the technology acquired
          by the Company), ensures that all intellectual property related to LED
          lighting
          created and/or
          developed by Maxik during his employment and for some period thereafter
          shall be
          assigned to the Company as well as precluding Maxik from competing with
          or
          providing services for entities in competition with the Company or that
          have
          technology similar to the Company for a period of time following his employment
          termination with the Company. This Agreement was recorded effective June
          1,
          2004, as part of the purchase price of Lighting Science, Inc. This asset
          is
          being amortized over three years, which is the period covered by the
          agreement.
 
 Amortization
          expense related to the proprietary rights agreement was $354,333 for each
          of the
          years ended December 31, 2006 and 2005.
 
 *Reorganization
          Value*
 As
          a
          result of the terms of the Plan, $2,793,224 is reflected as reorganization
          value
          in excess of amounts allocable to identifiable assets on the consolidated
          balance sheet. The circumstances giving rise to this presentation were
          created
          by a provision in the Plan that preserved the secured claim of Match (see
          Note
          10). Match, an entity controlled by Ronald E. Lusk, the Company’s chairman,
          agreed to the reaffirmation of its debt. As a result of this reaffirmation,
          which is part of the confirmation of the Plan, an offsetting entry to the
          reorganization value was recorded. In accordance with the provisions of
          Statement of Financial Accounting Standards (“SFAS”) No. 142 - *Goodwill
          and Other Intangible Assets* ,
          the
          reorganization value is treated the same as goodwill and is not amortized.
 
 *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, 2006, the Company has determined
          that no impairment to the Company’s intangible assets has occurred.
 
 **Financial** **Instruments**
 
 The
          Company has issued certain preferred stock and warrants, 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).
 
 The
          Company issued warrants for the purchase of common stock as compensation
          for
          providing bridge loans to the Company in 2005. In December 2006, the Company
          offered to adjust the terms of the warrants as described in Note 9. 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).
 
 **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.
 
 As
          of the
          date of this report, the Company has no reason to believe that an allowance
          for
          material product returns is necessary.
 
 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 molds. The Company has recorded
          research and development costs of $1,147,122 and $1,045,162 for the years
          ended
          December 31, 2006 and 2005, respectively, in selling, general and administrative
          expenses in the consolidated statements of operations.
 
 **Stock
          Based Compensation**
 
 On
          July
          6, 2005, the Board of Directors of the Company adopted the Lighting Science
          Group Corporation 2005 Equity Based Incentive Compensation Plan (the "2005
          Plan") and a proposal to implement this plan was approved at the annual
          shareholders’ meeting in August 2005. Further amendments to the 2005 Plan were
          approved at the annual shareholders meeting in December 2006. Effective
          with
          adoption of the plan, 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.
 
 **Earnings
          per share**
 
 Basic
          earnings per share are computed based upon the weighted average number
          of common
          shares outstanding during the periods. 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 conversion of the preferred
          stock or the exercise of warrants or stock options because the effect would
          be
          anti-dilutive. See Notes 10 and 11.
 
 **Comparative
          Consolidated Financial Statements**
 
 Certain
          amounts in the comparative consolidated financial statements have been
          reclassified from financial statements previously presented to conform
          to the
          presentation of the 2006 consolidated financial statements.
 
 
 
 **NOTE
          2: ACQUISITION OF LIGHTING SCIENCE, INC.**
 
 On
          June
          1, 2004, the Company acquired 100% of the outstanding common stock of Lighting
          Science, Inc., a Delaware corporation based in Las Vegas, Nevada, which
          owned
          certain intellectual property related to the design and development of
          an ODL
          light bulb. The Company acquired all of the issued and outstanding capital
          stock
          of Lighting Science, Inc. from Phibian S Trust, Edward I. Lanier, and John
          Collingwood in exchange for 4,796,276 shares of the Company’s common stock and
          the Company’s obligation to issue up to an additional 4,499,965 shares of the
          Company’s common stock upon the satisfaction of certain conditions under the
          stock purchase agreement. Those conditions were satisfied during the third
          quarter of 2004, and the additional shares of common stock were issued
          on or
          about September 3, 2004.
 
 The
          Company accounted for the acquisition as a purchase using the accounting
          standards established by SFAS No. 141 - *Business
          Combinations* ,
          and No.
          142 - *Goodwill
          and Other Intangible Assets.*
 
 The
          estimated fair values, as determined by an independent valuation firm,
          of assets
          acquired and liabilities assumed at June 1, 2004 are set out in the schedule
          below:
 
 Cash
                
                $
                10,000Intellectual
                    property
                
                
                1,204,000Proprietary
                    rights agreement
                
                
                1,063,000Goodwill
                
                
                154,097Total
                    assets acquired
                
                
                
                
                $
                2,431,097Note
                    payable assumed
                
                
                
                
                
                (200,000
                )Net
                    assets acquired
                
                
                
                
                $
                2,231,097
 
 
 
 **NOTE
          3: FRESH-START ACCOUNTING**
 
 The
          Court
          confirmed the Company’s Plan (Note 1) on September 16, 2003, and the Plan became
          effective as of September 26, 2003. It was determined that the Company’s
          reorganization value, computed immediately before the effective date, was
          $2,793,502, which consisted of the following:
 
 Cash
                
                $
                278Reorganized
                    value in excess of amounts allocable to identifiable
                    assets
                
                
                2,793,224Deferred
                    tax assets comprised of $57,000,000 of net operating loss
                    carry-forwards
                
                
                19,400,000Valuation
                    allowance against above deferred tax assets
                
                
                (19,400,000
                )Reorganization
                    value
                
                $
                2,793,502
 
 The
          Company adopted fresh-start reporting because holders of existing voting
          shares
          immediately before filing and confirmation of the Plan retained less than
          50% of
          the voting shares of the emerging entity, and its reorganization value
          was less
          than its post-petition liabilities and allowed claims.
 
 
 **NOTE
          4: 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 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
          9,
          the Company has applied variable accounting to the warrants issued to certain
          directors and officers. These warrants have been recorded at fair
          value.
 
 
 **NOTE
          5: INVENTORY**
 
 At
          December 31, 2006, inventory is comprised of the following:
 
 
 
 
 December
                    31, 2006Deposits
                    paid to contract manufacturers
                
                $
                31,878Raw
                    materials and components
                
                
                255,767Finished
                    goods
                
                
                144,968$
                432,613
 
 At
          December 31, 2006 the Company provided an allowance for the decline in
          market
          value of certain raw materials and components of approximately $140,000,
          which
          is netted against the balance of raw materials and components in the table
          above.
 
 **NOTE
          6: PROPERTY, EQUIPMENT AND OTHER ASSETS**
 
 Property
          and equipment consists of the following:
 
 December
                    31, 2006Leasehold
                    improvements
                
                $
                5,526Office
                    furniture, fixtures and telephone equipment
                
                
                97,072Computer
                    equipment
                
                
                113,249Test
                    equipment
                
                
                94,989Tooling
                    and molds
                
                
                200,414Total
                    property and equipment
                
                
                511,250Accumulated
                    depreciation
                
                
                (151,219
                )$
                360,031
 
 
 
 At
          December 31, 2006, 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.
 
 
 Intellectual
          property consists of the following:
 
 December
                    31, 2006Intellectual
                    property
                
                $
                1,204,000Accumulated
                    amortization
                
                
                (155,517
                )$
                1,048,483
 
 Proprietary
          rights agreement consists of the following:
 
 December
                    31, 2006Proprietary
                    rights agreement
                
                $
                1,063,000Accumulated
                    amortization
                
                
                (915,361
                )$
                147,639
 
 The
          estimated amortization expense for the next five years ended December 31
          for the
          intangible assets listed above is as follows:
 
 Amortization
                    ExpenseYear
                    ended
                
                
                IntellectualProperty
                
                
                Proprietary
                    RightsAgreement2007
                
                $
                60,200
                
                $
                147,6392008
                
                $
                60,200
                
                
                -2009
                
                $
                60,200
                
                
                -2010
                
                $
                60,200
                
                
                -2010
                
                $
                60,200
                
                
                -
 
 
 
 **NOTE
          7: LINE OF CREDIT**
 
 On
          June
          29, 2006, the Company entered into agreements with one of its banks to
          obtain a
          $2,000,000 line of credit. On December 29, 2006, the Company increased
          the total
          amount of the line of credit to $2,300,000. Amounts due under the line of credit
          are guaranteed by a group of directors and shareholders of the Company
          (the
“Guarantors”). The amount of the line of credit available for use by the Company
          at any point in time will be equal to the aggregate value of guarantees
          that
          have been negotiated between the bank and the guaranteeing directors and
          shareholders at that time. At December 31, 2006, the Guarantors had provided
          guarantees for $2,187,500 of the line of credit. The total amount of the
          line of
          credit drawn at December 31, 2006 was $2,044,948.
 
 The
          line
          of credit has a term of one year and provides for monthly payments of interest
          only at prime plus 1%. The Company also entered into a Security and Pledge
          Agreement with the bank on June 29, 2006 which gives the bank a general
          security
          interest in all of the Company’s personal property assets.
 
 As
          consideration for providing guarantees and enabling the Company to obtain
          the
          line of credit, the Company issued common stock and warrants for the purchase
          of
          common stock of the Company to the Guarantors. In September 2006, the Company
          issued 3,125,000 shares of common stock and 1,875,000 warrants for the
          purchase
          of shares of common stock to the Guarantors. The warrants have an exercise
          price
          of $0.30 per common share and have a five year term. The fair value of
          the
          warrants issued to the Guarantors was $241,985. The value of the common
          stock
          issued to the Guarantors is $937,500. At December 31, 2006, the Company
          accrued
          the fair value of an additional 187,500 warrants to be issued to those
          Guarantors that had provided additional guarantees for the increase in
          the line
          of credit. These warrants were issued in January 2007. The fair value of
          the
          common stock and the warrants issued to the Guarantors has been recorded
          as a
          prepaid expense and will be amortized over the term of the line of credit.
          During the year ended December 31, 2006, $480,202 was recognized as an
          expense
          in the consolidated statement of operations.
 
 
 **NOTE
          8: 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.
 
 Other
          than the deferred tax asset relating to the Company’s net operating losses,
          which totaled approximately $25,000,000 at December 31, 2006, 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
          a
          change in the valuation allowance of $1,800,000 and $2,300,000 for the
          years
          ended December 31, 2006 and 2005, respectively. The
          net
          operating loss carryforwards are available to offset future taxable income
          of
          the Company. These net operating losses expire from 2008 through 2020.
          The
          cumulative change in the fair value under derivative contracts of approximately
          $(773,522) (Note 10) has been treated as a permanent difference to calculate
          the
          total net operating losses available for carryforward to offset future
          periods’
taxable income.
 
 Benefits
          realized in future periods from the application of net operating losses
          incurred
          prior to September 26, 2003 of $19,400,000 will first reduce reorganization
          value in excess of amounts allocable to identifiable assets until exhausted
          and,
          thereafter, will be credited to additional paid in capital. Any benefits
          realized in future periods from net operating loss carryforwards generated
          after
          September 26, 2003 ($5,600,000 at December 31, 2006) will be recorded as
          a tax
          benefit in the consolidated statement of operations.
 
 
 **NOTE
          9: NOTES PAYABLE - RELATED PARTIES**
  **Match
          Loan**
 
 The
          Company was obligated under the terms of a line of credit agreement to
          Match
          outstanding in the amount of $1,851,299 in principal and $341,226 in accrued
          interest at March 31, 2005.
 
 The
          Company entered into an agreement with Match on April 12, 2005, under which
          Match agreed to reduce the accrued interest by $250,000 and exchange the
          debt
          for common stock at the exchange ratio of $1.725 per share. On May 5, 2005,
          the
          debt to Match of $1,851,299 plus $91,226 of accrued interest was exchanged
          for
          common stock. The reduction in accrued interest was recorded in other income/
          (expense) during May 2005. As a result of these transactions, the total
          of
          $1,942,525 due on the line of credit was exchanged for 1,126,101 shares
          of
          common stock of the Company on May 5, 2005.
  **Note
          to Phibian S Trust**
 
 Upon
          the
          acquisition of Lighting Science, Inc. the Company owed a balance of $200,000
          to
          Phibian S Trust of which the remaining balance of $143,750 is recorded
          as
          follows:
 
 December
                    31, 2006Notes
                    payable - related party - current portion
                
                $
                81,250Notes
                    payable - related party - long-term portion
                
                
                62,500$
                143,750
 
 
 The
          Phibian S Trust is a trust for the benefit of the children of Fredric Maxik,
          the
          chief technology officer of the Company. Currently, Mr. Maxik exercises
          no
          control over the trust, and has informed us that he disclaims all beneficial
          ownership in the trust. The note was issued by Lighting Science, Inc. to
          the
          trust in exchange for the assignment of certain provisional patents and
          intellectual property that formed the basis for the acquisition of Lighting
          Science, Inc. by the Company. The Company is obligated to pay the principal
          by
          making 36 equal monthly installments beginning on the fifteenth day of
          the month
          following the first full month that the Company begins generating revenue
          in the
          amount of $10,000 or more, as determined in accordance with generally accepted
          accounting principles. As an accommodation to the trust and in anticipation
          of
          near-term sales in excess of $10,000 per month, the Company made advance
          payments to the trust on this note in the amount of $25,000 in October
          2004 and
          $25,000 in May 2005. This note provides for no interest. However, under
          generally accepted accounting principles, an amount of interest should
          have been
          imputed. Such amount was not material.
 
 The
          Company first recorded revenues of more than $10,000 in August of 2005.
          As the
          $50,000 prepayment noted above related to approximately nine months of
          regular
          installment payments, the Company was to begin paying regular installment
          payments against the loan in June 2006.
 
 The
          trust
          agreed to defer any installment payments otherwise due to it during the
          period
          June 2006 through November 2006, until November 30, 2006. In return for
          the
          deferral of the installment payments, the Company has agreed to convert
          the note
          to an interest bearing note. Beginning November 30, 2006, the Company will
          make
          twenty-four monthly installment payments of $6,250 each. The note will
          bear
          interest at 10% beginning on July 15, 2006. Interest payments will be made
          on
          the note semi-annually, with the first payment due in December
          2006.
 
 **Loans
          from Directors and Officers**
 
 During
          the first and second quarters of 2005, members of the board of directors
          and
          certain officers of the Company (the “Lender” or “Lenders”) agreed to loan the
          Company an aggregate of $476,000 on a short-term basis, of which $220,000
          was
          received as of March 31, 2005 and the remaining $256,000 was received in
          the
          quarter ended June 30, 2005. Under the terms of the notes issued by the
          Company
          to each Lender, the Company: (i) paid interest to each Lender at a rate
          of 9.50%
          per annum; (ii) paid a 10% commitment fee to each Lender and (iii) issued
          warrants to the Lenders for a total of 476,000 shares of common stock to
          be
          purchased at an exercise price of $1.50 per share. The principal and interest
          on
          the notes were due on May 30, 2005. A total of $300,086 of such loans,
          including
          accrued interest and commitment fees of $24,086, were converted to 6%
          Convertible Preferred Stock in the private placement of preferred stock
          (Note
          10) and the remaining $200,000 of such loans and accrued interest and commitment
          fees thereon were repaid from proceeds of the May 2005 private placement.
 
 In
          December 2006, the Company offered to adjust the price of the warrants
          issued to
          the Lenders to $0.30 per share if the Lenders agreed to exercise the warrants
          currently. If the warrants were not exercised currently, the exercise price
          would remain $1.50 per share. At December 31, 2006, 130,000 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 Statement of Operations.
 
 In
          August
          2006, a Director of the Company, advanced $30,000 to the Company.  Interest
          was paid on the loan at Prime Rate plus 1%.  The loan was repaid in
          November 2006. In December 2006, another Director of the Company advanced
          the
          Company $2,056. The advance was converted to common stock at December 31,
          2006.
 
 
 
 **NOTE** **10:
          PREFERRED STOCK**
 
 **Exchange
          of Series A Preferred Stock held by Match for Common Stock**
 
 On
          April
          12, 2005 the Company announced that the Company and Match had negotiated
          the
          exchange of the 533,333 shares of Series A Preferred Stock held by Match
          and the
          Match debt (See Note 9) into common stock of the Company at a exchange
          ratio of
          $1.725 per share that was approximately 15% in excess of the market price
          of the
          stock at the date the exchange was proposed, resulting in fewer shares
          being
          issued to Match than would have been issued had the then current market
          price of
          the stock been used.
 
 The
          Series A Preferred Stock, owned by Match at the date of the exchange, carried
          cumulative dividends of $0.30 per annum per share. The cumulative unpaid
          dividend with respect to the Series A Preferred Stock was $1,680,000 as
          of March
          31, 2005, resulting in a total liquidation preference of $3,680,000 as
          of that
          date. However, for purposes of the exchange calculation, the amount of
          $1,670,685 was used to reflect the unpaid dividend on the date the exchange
          ratio of $1.725 per share was determined. This adjustment produced the
          slightly
          smaller liquidation value of $3,670,685 and this amount was used to record
          the
          dividend as a charge to accumulated deficit on the consolidated balance
          sheet.
          Thus, the Series A Preferred Stock owned by Match and the accumulated dividend
          thereon was exchanged for 2,127,933 shares of common stock on May 5, 2005.
          The
          accumulated dividend was recorded as an increase of the deficit in May
          2005.
 
 **Private
          Placement with Institutional and Accredited Investors**
 
 On
          May
          12, 2005, the Company closed on a private placement with a group of
          institutional and accredited investors, including certain officers and
          directors
          of the Company, for the sale of 2,260,966 shares of the Company’s 6% Convertible
          Preferred Stock (the “6% Convertible Preferred Stock”) along with warrants to
          purchase additional shares of the Company’s common stock. The 6% Convertible
          Preferred Stock was priced at $3.20 per share, and the 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 $0.80 per share into four
          shares of
          common stock, subject to full ratchet anti-dilution adjustments.
 
 During
          the year ended December 31, 2006, 195,313 shares of 6% Convertible Preferred
          Stock were converted by the holders to common stock of the Company. At
          December
          31, 2006, 2,065,653 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 dividend
          rate
          on the 6% Convertible Preferred Stock is $0.192 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
          6,782,889 shares of common stock at an initial exercise price of $0.96
          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 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 Company agreed to adjust the conversion
          price
          of the 6% Convertible Preferred Stock then outstanding to $0.50 per common
          share
          compared to the original conversion price of $0.80 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 Company in the future to holders
          of the
          6% Convertible Preferred Stock from 8,262,612 shares to 13,220,180 shares.
          The
          Company also agreed that, at December 31, 2006, it would further adjust
          the
          conversion price of the then outstanding 6% Convertible Preferred Stock
          to $0.30
          per common share from the current exercise price of $0.50 if the then current
          market price of the Company’s common stock (as defined in the agreement) was
          less than $0.50 per common share. As the current market price did not exceed
          $0.50 per share at December 31, 2006, the conversion price of the outstanding
          6%
          Convertible Preferred Stock was further adjusted to $0.30 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 13,220,180 common
          shares to 22,033,627. The Company has filed a registration statement with
          the
          Securities and Exchange Commission covering the 22,033,627 shares that
          may be
          required to be issued. The registration statement was declared effective
          on July
          14, 2006.
 
 On
          June
          6, 2006, the Company also agreed to amend the terms of the warrants issued
          to
          the purchasers of the 6% Convertible Preferred Stock. The Company agreed
          to
          immediately adjust the exercise price of the 6,782,889 outstanding warrants
          from
          $0.96 per common share to $0.30 per common share. The adjustment of the
          terms of
          these warrants does not change the total number of common shares that the
          Company may be required to issue in the future to holders of the warrants.
          Subsequent to the adjustment of the exercise price of the warrants, a holder
          of
          warrants exercised its warrants to purchase 23,438 common shares.
 
 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 $1,245,504 and $927,677 for the
          years
          ended December 31, 2006 and 2005, respectively. The change in the fair
          value of
          the liability for derivative contracts totaled $3,134,127 and $(3,907,649)
          for
          the years ended December 31, 2006 and 2005, respectively, and has been
          credited
          to Other income/(expense) in the consolidated statements of
          operations.
 
 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, 2006 are as follows:
 
 Warrants
                Embedded
                    conversion feature associated with the 6% Convertible Preferred
                    StockExercise/Conversion
                    Price
                $0.30
                $0.30Fair
                    Value of the Company’s Common Stock
                $0.42
                $0.42Expected
                    life in years
                3.4
                3.4Expected
                    volatility
                75%
                75%Expected
                    dividend yield
                0.0%
                0.0%Risk
                    free rate
                5.31%
                5.31%Calculated
                    fair value per share
                $0.27
                $0.27
 
 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).
  The
          Company incurred cash expenses totaling $700,859 related to this transaction
          which were charged to other income/ (expense) in the consolidated statement
          of
          operations during the three months ended June 30, 2005. Additionally, the
          Company issued warrants to purchase a total of 639,844 shares of the Company’s
          common stock at an initial exercise price of $1.50 per share (also subject
          to
          adjustment pursuant to anti-dilution provisions) to the firms which acted
          as the
          placement agent and as financial advisor for this transaction. The warrants
          expire five years from the date of issuance. The fair value of these warrants
          totaled $290,000 and such amount was charged to other income/ (expense)
          and
          credited to Additional Paid-In Capital during the three months ended June
          30,
          2005. In December 2006, 63,984 warrants were exercised by the holder after
          the
          Company offered to adjust the exercise price of the warrants to $0.30 per
          share.
 
 
 **NOTE
          1** **1:
          STOCKHOLDERS’ EQUITY**
 
 **Equity
          Based Compensation Plan**
 
 Effective
          September 1, 2005, the Company implemented the
          Lighting Science Group Corporation 2005 Equity Based Incentive Compensation
          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.
 
 The
          Company issued 4,555,000 and 730,000 Incentive Stock Options to employees
          and
          directors during the years ended December 31, 2006 and 2005, respectively,
          and
          50,000 Non-Qualified Stock Options to a consultant under the 2005 Plan
          during
          the year ended December 31, 2005. A portion of such options vest on the
          date of
          issuance, with the balance vesting over a period of two to three
          years.
 
 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
          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 during 2006 and 2005:
 
 Exercise
                    price
                $0.87
                    - $0.30Fairmarket value of the underlying stock on date of grant
                $0.87
                    - $0.30Option
                    term
                3.0
                    years - 5.0 yearsEstimated
                    volatility
                75%Expected
                    dividend yield
                0.0%Risk
                    free rate
                4.88%
                    - 3.75%Calculatedfair
                    value per share
                $0.41
                    - $0.17
 
 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.
 
 The
          fair
          value of the options issued during the years ended December 31, 2006 and
          2005
          totaled $897,870 and $226,324, respectively. The amount recorded in operating
          expense in the consolidated statements of operations based on service conditions
          and vesting were $784,943 and $111,109 for the years ended December 31,
          2006 and
          2005, respectively.
 
 A
          summary
          of the option awards under the Company’s 2005 Plan as of December 31, 2006 and
          changes during the year then ended is presented below:
 
 Stock
                    Options
                
                
                Shares
                
                
                Weighted
                    Average ExercisePriceOutstanding
                    and exercisable, beginning ofyear
                
                
                680,000
                
                $
                0.71Granted
                
                
                4,555,000
                
                
                0.31Exercised
                
                
                -
                
                
                -Forfeited
                
                
                (605,000
                )
                
                ($0.40
                )Outstanding
                    and exercisable, end ofyear
                
                
                4,630,000
                
                $
                0.36Options
                    vested at endof
                    year
                
                
                2,073,333
                
                $
                0.35Weighted
                    average fair value of options granted duringthe
                    year ended December 31, 2006
                
                $
                0.25
 
 At
          December 31, 2006, the average remaining term for outstanding stock options
          is
          3.0 years.
  A
          summary
          of the status of non-vested shares under the Company’s 2005 Plan as of December
          31, 2006, and changes during the year then ended is presented below:
 
 Non-vested
                    Stock Options
                
                
                Shares
                
                
                Weighted
                    Average Grant DateFair
                    ValueNon-vested
                    atbeginning of year
                
                
                420,000
                
                $
                0.34Granted
                
                
                4,555,000
                
                $
                0.25Vested
                
                
                (2,048,333
                )
                
                ($0.27
                )Forfeited
                
                
                (370,000
                )
                
                ($0.20
                )Non-vested
                    atend of year
                
                
                2,556,667
                
                $
                0.25
 
 As
          of
          December 31, 2006, there was a total of $228,116 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. The total fair value of shares vested during the year
          ended
          December 31, 2006, was $528,717. Note that this disclosure is provided
          in the
          aggregate for all awards that vest based on service conditions. There were
          no
          grants to officers, employees or directors during the periods of awards
          subject
          to performance vesting.
 
 During
          the three month period ended March 31, 2006, the Company granted 500,000
          common
          stock options to a consultant, subject to the consultant meeting certain
          performance measures over the two year term of its contract. If the performance
          criteria under the option grant are not met, no options will be issued
          to the
          consultant. In accordance with SFAS 123(R), no compensation expense has
          been
          included related to this stock option grant as the measurement date cannot
          be
          determined and no disincentive for non-performance exists in the
          contract.
 
 
 **Warrants
          for the Purchase of Common Stock**
 
 At
          December 31, 2006, the Company has issued the following warrants for the
          purchase of common stock:
  **Warrant
                    Holder**
                **Reason
                    for Issuance**
                **No.
                    of common shares**
                **Exercise
                    Price**
                **Expiry
                    date**Line
                    of Credit Guarantors (Note 7)
                Financing
                    guarantees
                1,875,000
                $0.30
                September
                    22, 20116%
                    Convertible Preferred stockholders (Note 10)
                Private
                    Placement
                6,759,451
                $0.30
                May
                    10, 2010Financial
                    advisors (Note 10)
                Private
                    Placement
                575,860
                $1.50
                May
                    10, 2010Giuliani
                    Capital Advisors
                Advisory
                    services
                1,650,000
                $0.60
                February
                    14, 2010The
                    Equity Group
                Consulting
                    services
                750,000
                $0.80
                February
                    10, 2010ICurie
                Marketing
                    Agreement
                500,000
                $0.32
                September
                    13, 2011Officers
                    and Directors (Note 9)
                Bridge
                    Financing
                346,000
                $1.50
                April
                    20, 2010ABM
                    Industries Inc.
                Marketing
                    services
                400,000
                $0.40
                March
                    2, 2008Total
                
                12,856,311
 
 At
          December 31, 2006, other then the warrants issued to ICurie, all warrants
          are
          fully vested. The warrants issued to ICurie vest on the following
          basis:
  **Vesting
                    Criteria**
                **%
                    of Warrants to vest**December
                    31, 2006
                25%December
                    31, 2007
                25%Upon
                    delivery by ICurie of 100,000thunit
                25%Upon
                    delivery by ICurie of 2,000,000thunit
                25%
 
 In
          accordance with the Marketing Agreement with ICurie, the Company has received
          from ICurie options to purchase 1,500,000 shares of common stock of ICurie.
          The
          vesting schedule for the options received by the Company is the same as
          the
          vesting schedule for the warrants that it has issued to ICurie. The strike
          price
          of the options is $0.32 per share and the term of the options is five years.
          At
          December 31, 2006, the Company has recorded a valuation allowance against
          the
          full value of the stock options recorded in its accounts.
 
 
 **NOTE
          12: COMMITMENTS AND CONTINGENCIES**
 
 **Leased
          office space**
 
 The
          Company occupies office space that is leased by an institutional shareholder
          of
          the Company for approximately $10,000 per month under a month to month
          agreement. The Company has leased space in Sunrise, Florida for its research
          and
          development and product assembly activities through January 2007 for
          approximately $2,500 per month. The Company also leases space in Hong Kong
          and
          storage space in Dallas, Texas on a month-to-month basis at a total rate
          of
          approximately $650 per month.
 
 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.
  **Executive
          Compensation**
 
 As
          of
          December 31, 2006, the Company was obligated under the terms of employment
          contracts for three of its executives. The terms of the contracts generally
          range between one and three years, and provide for annual salaries ranging
          between $150,000 and $250,000 per year. The annual compensation for the
          Company’s executives under these agreements is expected to be approximately
          $650,000 for 2007.
 
 **Commission
          Agreements with Directors**
 
 Pursuant
          to a resolution passed by the Board of Directors on February 7, 2005, 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 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.
 
 **Registration
          Rights Agreement**
 
 In
          connection with the issuance of 6% Convertible Preferred Stock (Note 10),
          the
          Company executed a Registration Rights Agreement with the purchasers thereof
          under which the Company agreed to register the common shares underlying
          the 6%
          Convertible Preferred Stock and related warrants. The Registration Rights
          Agreement provides for liquidated damages in the event a registration statement
          was not declared effective by the SEC within 150 days of the May 12, 2005
          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 two percent of the purchase price of the 6% Convertible
          Preferred Stock for each thirty (30) day period effectiveness of a registration
          statement is not maintained. No such damages have been incurred.
 
 In
          connection therewith, on
          July
          12, 2005, the Company filed on Form SB-2, a Registration Statement under
          the
          Securities Act of 1933, related to the resale of all common stock that
          may be
          issued by the Company related to the conversion of the 6% Convertible Preferred
          Stock or the exercise of warrants issued to the purchasers of the 6% Convertible
          Preferred Stock or to the financial advisors and placement agents for the
          transaction. This registration was declared effective by the SEC on August
          23,
          2005, and remains effective as of the date of this filing.
 
 **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.
  
 **NOTE
          13: SUBSEQUENT EVENTS**
 
 **Private
          Placement**
 
 On
          March
          9, 2007, the Company completed a private placement with a group of accredited
          investors for net proceeds of $3.6 million. The Company issued 13.3 million
          shares of common stock at a price of $0.30 per share. The Company also
          issued
          10.0 million warrants for the purchase of common stock to the investor
          group.
          The warrants have an exercise price of $0.35 per share and have a term
          of five
          years. The Company also issued to each investor in the private placement
          warrants for the purchase of additional equity units. Each additional equity
          unit is comprised of one share of common stock and 0.75 warrants for the
          purchase of common stock. The exercise price of each equity unit warrant
          is
          $0.30 per unit. These equity 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 will be filed
          by
          the Company to register the common stock issued to the investors on March
          9,
          2007.
 
 Under
          the
          terms of the Securities Purchase Agreement, the Company must file a registration
          statement with the SEC within 45 days of the closing of the private placement
          and use its commercially reasonable efforts to have the registration become
          effective by 120 days subsequent to the date of the private placement.
          If it is
          determined that the Company did not use its commercially reasonable efforts
          to
          have the registration statement become effective by 120 days subsequent
          to the
          date of the private placement, the Company could be liable for cash penalties
          of
          1% of the gross proceeds of the private placement per month that it does
          not do
          so, up to a maximum of 12% of the gross proceeds.
  **Common
          stock Issuances**
 
 Between
          January 1, 2007 and March 19, 2007, in addition to the common stock issued
          in
          conjunction with the March 9, 2007 private placement, the Company issued
          a total
          of 781,676 shares of common stock. These shares were issued in the ordinary
          course of business to settle existing obligations including the settlement
          of
          dividends on the 6% Convertible Preferred Stock (306,137 shares), settlement
          of
          accrued directors fees from the fourth quarter of 2006 (208,335 shares),
          and the
          exercise of warrants that were outstanding at December 31, 2006 (186,000
          shares).