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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended: December 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER: 0-20354
 Lighting Science Group Corporation
  Delaware
    
    23-2596710(State or other jurisdiction of incorporation)
    
    (I.R.S. Employer Identification Number)120 Hancock LaneWestampton, New Jersey
    
    08060(Address of principal executive office)
    
    (Zip Code)
 Registrants telephone number, including area code: (609) 265-1401
 Securities registered pursuant to Section 12(b) of the Exchange Act: None
 Securities registered pursuant to Section 12(g) of the Exchange Act:
 Title of each Class:
 
 
 
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  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
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TABLE OF CONTENTS
 PagePART IItem 1 and 2. Business and Properties
    
    
    1Item 1A. Risk Factors
    
    
    4Item 2. Properties (see Item 1. Business and Properties)
    
    
    12Item 3. Legal Proceedings
    
    
    12Item 4. Submission of Matters to a Vote of Security Holders
    
    
    13PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    
    14Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 8. Financial Statements and Supplementary Data
    
    
    25Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    25Item 9A(T). Controls and Procedures
    
    
    25Item 9B. Other Information
    
    
    27PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    28Item 11. Executive Compensation
    
    
    31Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    36Item 13. Certain Relationships and Related Transactions and Director Independence
    
    
    39Item 14. Principal Accounting Fees and Services
    
    
    42PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    42SIGNATURES
    
    
    43EX-21.1EX-24.1EX-31.1EX-31.2EX-32.1




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PART I
 
 Items 1 and 2. Business and Properties.
      Significant Transactions
  1




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Target Markets
   Gaming
 Architainment
 Commercial & Industrial
 Retail
 Public Infrastructure
 Sales and Distribution Strategy
  2




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OEM Partnerships
  Direct Sales Effort
  Competition
   Properties
  Location
    
    Estimated Monthly Rental Cost
    
    Expiration dateSatellite Beach, Florida
    
    $
    25,000
    
    
    September 2012Dallas, Texas
    
    $
    15,000
    
    
    October, 2012Rancho Cordova, California
    
    $
    15,000
    
    
    August 2012
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Location
    
    Estimated Monthly Rental Cost
    
    Expiration dateGoes, The Netherlands
    
    $
    11,000
    
    
    November 2010Tokyo, Japan
    
    $
    7,000
    
    
    December 2009Westampton, New Jersey
    
    $
    5,000
    
    
    August 2009Castle Hill, Australia
    
    $
    3,000
    
    
    October 2011
 
 Item 1A. Risk Factors.
 Risks Related to Our Business
 The current economic downturn and uncertainty and turmoil in the equity and credit markets
could continue to adversely impact our clients, diminish the demand for our products, and harm our
operations and financial performance.
  We have a limited amount of revenues and a history of losses and may be unable to continue
operations unless we can generate sufficient operating income by completing the commercialization
of, and the successful marketing of, our products.
  Since inception we have not achieved profitability, and it is difficult to evaluate the
likelihood that we will achieve or maintain profitability in the future. Therefore, if we are
unable to obtain outside sufficient capital when needed, our business and future prospects will be
adversely affected and we could be forced to suspend or discontinue operations.
  4




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If our developed technology does not achieve market acceptance, prospects for our growth and
profitability may be limited.
  If we are unable to integrate our acquisitions into our operations, our business and future
prospects will or could be adversely affected.
  5




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Our products could contain defects that could reduce sales or result in claims against us.
  We rely upon key members of our management team and other key personnel and a loss of any key
personnel could prevent or significantly delay the achievement of our goals.
  If critical components and raw materials that we utilize in our products become unavailable,
we may incur delays in shipment that could damage our business.
    6




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If the companies to which we outsource the manufacture of our products fail to meet our
requirements for quality, quantity and timeliness, we may incur delays in shipment that could harm
our revenues and reputation in the marketplace.
    
    
    lack of direct control over production capacity and delivery schedules;
    
    lack of direct control over quality assurance, manufacturing yields and production
costs; and
    
    risk of loss of inventory while in transit.
  If we are unable to increase production capacity for our products in a timely manner, we may
incur delays in shipment and our revenues and reputation in the marketplace could be harmed.
  
    
    identification and availability of appropriate and affordable contract
manufacturers;
    
    ability of our current contract manufacturers to allocate more existing capacity to
us or their ability to add new capacity quickly;
    
    availability of critical components used in the manufacture of our products;
    
    establishment of adequate management information systems, financial controls and
supply chain management and quality control procedures; and
    
    ability of our future contract manufacturers to implement our manufacturing
processes.
  7




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We are subject to legal, political and economic risks abroad.
    
    
    intellectual property protection risks;
    
    employment law risks;
    
    differing contracting process including the ability to enforce agreements;
    
    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 compete effectively against larger lighting manufacturers with greater
resources, our prospects for future success will be jeopardized.
   8




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If we are unable to manage any future growth effectively, our profitability and liquidity
could be adversely affected.
  Risks Related to Intellectual Property
 We are currently involved in patent infringement litigation with Philips Solid State Lighting
Solutions, Inc. and certain of its affiliates, the unfavorable outcome of which might have a
material adverse effect on our financial condition, results of operations and cash flows.
  If we are unable to respond effectively as new lighting technologies and market trends emerge,
our competitive position and our ability to generate revenues and profits may be harmed.
  If we are unable to obtain and protect our intellectual property rights, our ability to
commercialize our products could be substantially limited.
  9




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Risks Related to Our Common Stock
 Because our stock price is volatile, it can be difficult for stockholders to predict the value
of our shares at any given time.
  
    
    changes in expectations as to our future financial performance;
    
    our involvement in litigation;
    
    announcements of technological innovations or new products by us or our
competitors;
    
    announcements by us or our competitors of significant contracts, acquisitions,
strategic partnerships, joint ventures or capital commitments;
    
    changes in laws and government regulations;
    
    developments concerning our proprietary rights;
    
    public perception relating to the commercial value or reliability of any of our
lighting products;
    
    future sales of our common stock or issues of other equity securities convertible
into or exercisable for the purchase of common stock; and
    
    general stock market conditions.
 Trading in our common stock is sporadic and an established trading market may not be developed
or sustained.
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At its current levels, our common stock is considered a penny stock and may be difficult to
sell.
  Because we have never paid dividends on our common stock and have no plans to do so, the only
return on your investment will come from any increase in the value of the common stock.
  Two stockholders and certain of their affiliates, collectively, beneficially  own
a significant portion of our outstanding capital stock and are able to
influence our actions.
  Because there is a potential for significant future dilution of our existing stockholders,
their percentage ownership and control over company matters could be reduced.
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Anti-takeover provisions in our charter documents and under Delaware law could prevent or
delay a change in control of our company.
  
 ITEM 2. Properties (see Items 1 and 2. Business and Properties).
 
 ITEM 3. Legal Proceedings.
 Philips Solid-State
Lighting Solutions, Inc., et al. v. Lighting Science Group Corporation et al.
 Lighting Science Group Corporation, et al. v. Koninklijke
Philips Electronics, N.V., et al.
   Lighting Science
Group Corporation v. U.S. Philips
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##### Table of Contents



Corporation and Koninklije Philips Electronics N.V.
 Philips Solid-State
Lighting Solutions, Inc., et al. v. Lighting Science Group Corporation, et al.
        
 ITEM 4. Submission of Matters to a Vote of Security Holders.
  1.
    
    The following directors were elected to serve one-year terms, and the following
number of stockholder votes were cast for each director:
 Stockholder Votes
    
    Abstentions andNominee
    
    For
    
    Votes WithheldRobert Bachman
    
    
    22,430,960
    
    
    
    26,233David Bell
    
    
    21,056,398
    
    
    
    1,400,795Donald Harkleroad
    
    
    22,430,945
    
    
    
    26,248
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Stockholder Votes
    
    Abstentions andNominee
    
    For
    
    Votes WithheldRichard Kelson
    
    
    21,057,268
    
    
    
    1,399,925Govi Rao
    
    
    22,378,519
    
    
    
    78,674Bonnie Reiss
    
    
    22,378,819
    
    
    
    78,674Daryl Snadon
    
    
    22,423,635
    
    
    
    33,558Richard Weinberg
    
    
    21,056,348
    
    
    
    1,400,845
  2.
    
    The amendment to the Lighting Science Group Corporation 2005 Equity-Based Incentive
Compensation Plan (the 2005 Plan) to increase the number of shares authorized pursuant
to the 2005 Plan from 500,000 shares to 5,000,000 shares, to increase for Covered
Employees (as defined in the Amended Plan) the maximum number of shares (underlying
awards) that may be granted from 100,000 shares to 500,000 shares in any fiscal year, and
to revise the 2005 Plan to avoid adverse tax consequences resulting from changes in
applicable laws was approved with the following number of stockholder votes being cast:
 Broker Non-Votes For
    
    Votes Against
    
    Votes / Abstained22,349,971
    
    
    97,838
    
    
    
    9,384
 
 PART II
 
 ITEM 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
   Common Stock
    
    HIGH
    
    LOW2009First Quarter
    
    $
    0.90
    
    
    $
    0.522008Fourth Quarter
    
    $
    3.30
    
    
    $
    0.36Third Quarter
    
    $
    5.30
    
    
    $
    1.65Second Quarter
    
    $
    7.20
    
    
    $
    4.80First Quarter
    
    $
    10.20
    
    
    $
    2.852007Fourth Quarter
    
    $
    10.60
    
    
    $
    4.40Third Quarter
    
    $
    11.40
    
    
    $
    6.60Second Quarter
    
    $
    10.40
    
    
    $
    5.00First Quarter
    
    $
    8.40
    
    
    $
    5.80
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Number of SecuritiesNumber of Securities to be
    
    Weighted-Average
    
    Remaining AvailableIssued Upon Exercise of
    
    Exercise Price of
    
    for Future IssuanceOutstanding
    
    Outstanding
    
    UnderOptions, Warrants and
    
    Options, Warrants and
    
    Equity CompensationPlan
    
    Rights
    
    Rights
    
    PlansEquity Compensation
Plans Approved by
Security Holders
    
    
    895,667
    
    
    $
    5.77
    
    
    
    3,263,083Equity Compensation
Plans Not Approved
by Security Holders
    
    
    
    
    
    
    
    
    
    
    
   15




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 CAUTIONARY STATEMENTS REGARDING FORWARD LOOKING STATEMENTS
 This Annual Report contains certain forward-looking statements regarding managements plans
and objectives for future operations including plans and objectives relating to our marketing
efforts and future economic performance. Any statement in this Annual Report and in the documents
incorporated by reference into this Annual Report that is not a statement of an historical fact
constitutes a forward- looking statement. Further, when we use the words may, expect, anticipate, plan,
believe, seek, estimate, intend, and similar words, we intend to identify statements and
expressions that may be forward-looking statements. We believe it is important to communicate
certain of our expectations to our investors. The forward-looking statements and associated risks
set forth in this Annual Report include or relate to, among other things, (a) our projected sales
and profitability, (b) our growth strategies, (c) anticipated trends in our industry, (d) our
ability to obtain and retain sufficient capital for future operations, (e) our anticipated needs
for working capital, and (f) the outcome of any litigation against us. These statements may be
found under  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS  and  DESCRIPTION OF BUSINESS , as well as in this Annual Report generally.
Actual events or results may differ materially from those discussed in forward-looking statements
as a result of various factors, including, without limitation, the risks outlined under  RISK
FACTORS  and matters described in this Annual Report generally.
 Overview
     16




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Results of Operations
 Year Ended December 31, 2008 compared to the Period June 14, 2007 through December 31, 2007
(December Stub Period) and for LED Effects for the Period January 1, 2007 through June 13, 2007
(June 2007 Stub Period).
 Revenues
  Cost of Goods Sold
  17




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Sales and Marketing Expenses
  Aggregate of theDecember StubDecember Stub
    
    
    
    
    
    Period and thePeriod (June 14,
    
    June Stub Period
    
    June Stub PeriodYear Ended
    
    2007 through
    
    (January 1, 2007
    
    (Year EndedDecember
    
    December
    
    through June
    
    December31, 2008
    
    31, 2007)
    
    13, 2007)
    
    31, 2007)Sales and Marketing
Expenses
    
    $
    5,848,000
    
    
    $
    963,000
    
    
    $
    108,000
    
    
    $
    1,071,000
  Operations Expenses
  Aggregate of theDecember StubDecember Stub
    
    
    
    
    
    Period and thePeriod (June 14,
    
    June Stub Period
    
    June Stub PeriodYear Ended
    
    2007 through
    
    (January 1, 2007
    
    (Year EndedDecember
    
    December
    
    through June
    
    December31, 2008
    
    31, 2007)
    
    13, 2007)
    
    31, 2007)Operations Expenses
    
    $
    13,786,000
    
    
    $
    2,396,000
    
    
    $
    128,000
    
    
    $
    2,524,000
  18




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General and Administrative Expenses
  Aggregate of theDecember StubDecember Stub
    
    
    
    
    
    Period and thePeriod (June 14,
    
    June Stub Period
    
    June Stub PeriodYear Ended
    
    2007 through
    
    (January 1, 2007
    
    (Year EndedDecember
    
    December
    
    through June
    
    December31, 2008
    
    31, 2007)
    
    13, 2007)
    
    31, 2007)General and
administrative
expenses
    
    $
    23,225,000
    
    
    $
    2,875,000
    
    
    $
    330,000
    
    
    $
    3,205,000
  Impairment of Goodwill and Other Intangible Assets
  Aggregate of theDecember StubDecember Stub
    
    
    
    
    
    Period and thePeriod (June 14,
    
    June Stub Period
    
    June Stub PeriodYear Ended
    
    2007 through
    
    (January 1, 2007
    
    (Year EndedDecember
    
    December
    
    through June
    
    December31, 2008
    
    31, 2007)
    
    13, 2007)
    
    31, 2007)Impairment of
goodwill and other
intangible assets
    
    $
    53,110,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
  19




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Depreciation and Amortization Expenses
  Aggregate of theDecember StubDecember Stub
    
    
    
    
    
    Period and thePeriod (June 14,
    
    June Stub Period
    
    June Stub PeriodYear Ended
    
    2007 through
    
    (January 1, 2007
    
    (Year EndedDecember
    
    December
    
    through June
    
    December31, 2008
    
    31, 2007)
    
    13, 2007)
    
    31, 2007)Depreciation and
amortization
    
    $
    4,354,000
    
    
    $
    670,000
    
    
    $
    7,000
    
    
    $
    677,000
  Interest Expense (Net)
  Aggregate of theDecember StubDecember Stub
    
    
    
    
    
    Period and thePeriod (June 14,
    
    June Stub Period
    
    June Stub PeriodYear Ended
    
    2007 through
    
    (January 1, 2007
    
    (Year EndedDecember
    
    December
    
    through June
    
    December31, 2008
    
    31, 2007)
    
    13, 2007)
    
    31, 2007)Interest expense (net)
    
    $
    1,237,000
    
    
    $
    (172,000
    )
    
    $
    (1,000
    )
    
    $
    (173,000
    )
 20




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Other Income (Net)
  Aggregate of theDecember StubDecember Stub
    
    
    
    
    
    Period and thePeriod (June 14,
    
    June Stub Period
    
    June Stub PeriodYear Ended
    
    2007 through
    
    (January 1, 2007
    
    (Year EndedDecember
    
    December
    
    through June
    
    December31, 2008
    
    31, 2007)
    
    13, 2007)
    
    31, 2007)Other income
(expense)(net)
    
    $
    319,000
    
    
    $
    744,000
    
    
    $
    (35,000
    )
    
    $
    709,000
  Income Tax Expense (Benefit)
  Aggregate of theDecember StubDecember Stub
    
    
    
    
    
    Period and thePeriod (June 14,
    
    June Stub Period
    
    June Stub PeriodYear Ended
    
    2007 through
    
    (January 1, 2007
    
    (Year EndedDecember
    
    December
    
    through June
    
    December31, 2008
    
    31, 2007)
    
    13, 2007)
    
    31, 2007)Income tax expense
(benefit)
    
    $
    (2,207,000
    )
    
    $
    
    
    
    $
    172,000
    
    
    $
    172,000
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Liquidity and Capital Resources
    Aggregate AmountBorrowed UnderDate
    
    Notes
    
    Maturity DateDecember 19, 2008
    
    $2.0 million
    
    March 2, 2009February 13, 2009
    
    $7.0 million
    
    June 30, 2009April 17, 2009
    
    $2.0 million
    
    May 15, 2009May 11, 2009
    
    $0.5 million
    
    May 31, 2009
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Item 8. Financial Statements and Supplementary Data.
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A(T). Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
   Managements Annual Report on Internal Control over Financial Reporting
  Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
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
    
    We failed to implement processes to ensure periodic monitoring of our existing
internal control activities over financial reporting.
    
    We did not maintain sufficient staffing of personnel with an appropriate level of
knowledge, experience and training in the application of U.S. generally accepted
accounting principles, SEC reporting requirements and in internal control over
financial reporting commensurate with our financial reporting requirements.
    
    Due to our limited resources and our continued integration of the acquisitions of
LPBV and Lamina during fiscal year 2008 and the Acquisition during fiscal year 2007,
we were unable to: (i) adequately assess whether our existing controls were operating
as designed and (ii) effectively implement additional necessary controls. Further,
certain controls that were identified as requiring remediation or implementation were
not completed as of December 31, 2008.
    
    
    The hiring of key additional accounting staff and financial reporting staff;
    
    The acquisition of accounting and financial reporting research tools for the use of our
staff;
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
    
    The initiation of an ongoing and comprehensive review of financial controls and
procedures to address the issues identified above and to bring us into compliance with the
requirements of the Sarbanes-Oxley Act with respect to internal controls and procedures;
    
    The implementation of an Enterprise Resource Planning software program designed to
automate and systematize internal control over financial reporting; and
    
    The engagement of the services of an independent internal controls consultant to
document, test and develop current and expanded internal controls and procedures.
   Changes in Internal Control Over Financial Reporting
  
 Item 9B. Other Information.
  27




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PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance.
    Name
    
    Age
    
    PositionZach Gibler
    
    
    42
    
    
    Chief Executive OfficerKathryn
L. Reynolds
    
    
    45
    
    
    Senior Vice President, Strategy and FinanceStephen Hamilton
    
    
    44
    
    
    Vice President  FinanceFrederic Maxik
    
    
    47
    
    
    Chief Scientific OfficerGovi Rao
    
    
    46
    
    
    ChairmanRobert Bachman
    
    
    67
    
    
    DirectorDavid Bell
    
    
    65
    
    
    DirectorDonald Harkleroad
    
    
    61
    
    
    DirectorRichard Kelson
    
    
    62
    
    
    DirectorBonnie Reiss
    
    
    53
    
    
    DirectorDaryl Snadon
    
    
    62
    
    
    DirectorRichard Weinberg
    
    
    49
    
    
    Director
 Zach
Gibler
 28




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Kathryn
L. Reynolds, 45
 Stephen Hamilton, 44
 Fredric Maxik, 47
 Govi
Rao, 46
 29




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Robert
Bachman, 67
 David Bell, 65
 Donald Harkleroad, 63
 Richard Kelson, 62
 Bonnie Reiss, 53
 Daryl Snadon, 62
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Richard Weinberg, 49
 Members of Audit Committee and Audit Committee Financial Expert
  
  Code of Ethics
  
 Section 16(a) Beneficial Ownership Reporting Compliance
   
 Item 11. Executive Compensation.
  31




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Summary Compensation Table
 Change inPensionValue andNonquali-Non-
    
    fiedEquity
    
    DeferredIncentive
    
    Compen-Name and
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Option
    
    Plan
    
    sation
    
    All OtherPrincipal
    
    
    
    
    
    Salary
    
    Bonus
    
    Stock Awards
    
    Awards
    
    Compensa-
    
    Earnings
    
    CompensationPosition
    
    Year
    
    ($)
    
    ($)
    
    ($) (1)
    
    ($) (2)
    
    tion
    
    ($)
    
    ($) (3)
    
    Total ($)Govi Rao
    
    
    2008
    
    
    $
    425,000
    
    
    
    
    
    
    $
    416,666
    
    
    $
    34,625
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    876,291(Chairman and
Chief
Executive
Officer) (4)
    
    
    2007
    
    
    $
    109,193
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    109,193Ken Honeycutt
    
    
    2008
    
    
    $
    268,568
    
    
    
    
    
    
    $
    1,325,000
    
    
    $
    34,625
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,628,193(President and
Chief
Operating
Officer) (5)
    
    
    2007
    
    
    $
    154,304
    
    
    
    
    
    
    $
    938,540
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,092,844Frederic Maxik
    
    
    2008
    
    
    $
    250,000
    
    
    
    
    
    
    $
    194,444
    
    
    $
    207,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    652,194(Chief
Scientific
Officer)
    
    
    2007
    
    
    $
    250,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    250,000
 
 (1)
    
    Reflects the dollar amount expensed by us during the applicable fiscal year for financial statement
reporting purposes pursuant to FAS 123R. For a description of the assumptions used in calculating the fair
value of equity awards under FAS 123R, see the notes to the financial statements included with this report on
Form 10-K.(2)
    
    Reflects the dollar amount expensed by us during the applicable fiscal year for financial statement
reporting purposes pursuant to FAS 123R. FAS 123R requires us to determine the overall value of the options as
of the date of grant based upon the Black-Scholes method of valuation, and to then expense that value over the
service period over which the options become exercisable (vest). As a general rule, for time-in-service-based
options, we will immediately expense any option or portion thereof which is vested upon grant, while expensing
the balance on a pro rata basis over the remaining vesting term of the option. For a description of 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 report on Form 10-K.(3)
    
    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.(4)
    
    Mr. Rao joined us as our Chairman and Chief Executive
Officer on October 4, 2007. Effective as of
June 11, 2009, Mr. Rao no longer served as our Chief Executive
Officer.(5)
    
    Mr. Honeycutt served as our President and Chief Operating Officer from June 5, 2007 until February 2, 2009. 32




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##### Table of Contents



Employment Agreements
 Govi Rao
  Frederic Maxik
  Kenneth Honeycutt
  33




---



##### Table of Contents



Outstanding Equity Awards At Fiscal Year-End
  Option Awards
    
    Stock AwardsEquityIncentiveEquity
    
    PlanIncentive
    
    Awards:Equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Plan
    
    Market orIncentive
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Awards:
    
    PayoutPlan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Number of
    
    Value ofNumber
    
    
    
    
    
    Awards:
    
    
    
    
    
    
    
    
    
    
    
    
    
    Market
    
    Unearned
    
    Unearnedof
    
    Number of
    
    Number of
    
    
    
    
    
    
    
    
    
    Number of
    
    Value of
    
    Shares,
    
    Shares,Securities
    
    Securities
    
    Securities
    
    
    
    
    
    
    
    
    
    Shares or
    
    Shares or
    
    Units or
    
    Units orUnderlying
    
    Underlying
    
    Underlying
    
    
    
    
    
    
    
    
    
    Units of
    
    Units of
    
    Other
    
    OtherUnexercised
    
    Unexercised
    
    Unexercised
    
    Option
    
    
    
    
    
    Stock That
    
    Stock That
    
    Rights That
    
    Rights ThatOptions
    
    Options
    
    Unearned
    
    Exercise
    
    Option
    
    Have Not
    
    Have Not
    
    Have Not
    
    Have Not(#)
    
    (#)
    
    Options
    
    Price
    
    Expiration
    
    Vested
    
    Vested
    
    Vested
    
    VestedName
    
    Exercisable
    
    Unexercisable
    
    (#)
    
    ($)
    
    Date
    
    (#)
    
    ($) (1)
    
    (#)
    
    ($)Govi Rao
    
    
    
    
    
    
    12,500
    (2)
    
    
    
    
    
    $
    4.90
    
    
    
    4/17/2013
    
    
    
    375,000
    (3)
    
    $
    243,750
    
    
    
    
    
    
    
    Ken Honeycutt
    
    
    
    
    
    
    12,500
    (4)
    
    
    
    
    
    $
    4.90
    
    
    
    4/17/2013
    
    
    
    125,000
    (5)
    
    $
    46,250
    
    
    
    
    
    
    
    Frederic Maxik
    
    
    501
    (6)
    
    
    
    
    
    
    
    
    
    $
    6.40
    
    
    
    2/21/2009
    
    
    
    175,000
    (8)
    
    $
    64,750
    
    
    
    
    
    
    
    
    
    
    
    75,000
    (7)
    
    
    
    
    
    $
    4.90
    
    
    
    4/17/2013
 
 (1)
    
    Assumes a market value of $0.37 per share of common stock, as reported by the OTC Bulletin Board on December 31, 2008.(2)
    
    These options were granted on April 17, 2008. 4,166, 4,167 and 4,166 of these options vested or will vest on April
17, 2009, April 17, 2010, and April 17, 2011, respectively.(3)
    
    Mr. Rao was awarded 375,000 shares of restricted stock on May 7, 2008. As long as Mr. Rao remains employed by us,
his shares of restricted stock vest as follows: (i) 33% vest on the date that the Companys gross revenues from the sale
of products or licensing of technology (Recognized Revenue) equals $50 million, (ii) an additional 34% of the shares
vest on the date that the Companys Recognized Revenue equals $115 million, and (iii) the remaining 33% of the shares
vest on the date that the Companys Recognized Revenue equals $150 million. Any restricted shares that have not vested
prior to May 7, 2011 will automatically vest.(4)
    
    These options were granted on April 17, 2008. 4,166, 4,167 and 4,166 of these options were scheduled to vest on
April 17, 2009, April 17, 2010, April 17, 2011 and April 17, 2012, respectively, but will not vest because Mr. Honeycutt
was terminated as of March 1, 2009.(5)
    
    Mr. Honeycutt was awarded 250,000 shares of restricted stock on August 5, 2007, pursuant to his employment agreement.
62,500 of these shares vested on each of August 5, 2007 and August 5, 2008. 62,500 of the remaining 125,000 awarded
shares of restricted stock were scheduled to vest on each of August 5, 2009 and August 5, 2010, but will not vest because
Mr. Honeycutt was terminated as of March 1, 2009.(6)
    
    These options were granted on February 21, 2006. 167 of these options were fully exercisable (vested) upon grant and
167 became fully exercisable (vested) on February 21, 2007. The remaining 167 options became exercisable (vested) on the
change of control of the Company on October 4, 2007.(7)
    
    These options were granted on April 17, 2008. 25,000 of these options vested or will vest on each of April 17,
2009, April 17, 2010, and April 17, 2011.(8)
    
    Mr. Maxik was awarded 175,000 shares of restricted stock on May 7, 2008. As long as Mr. Maxik remains employed by
us, his shares of restricted stock vest as follows: (i) 33% vest on the date that the Companys gross revenues from the
sale of products or licensing of technology (Recognized Revenue) equals $50 million, (ii) an additional 34% of the
shares vest on the date that the Companys Recognized Revenue equals $115 million, and (iii) the remaining 33% of the
shares vest on the date that the Companys Recognized Revenue equals $150 million. Any restricted shares that have not
vested prior to May 7, 2011 will automatically vest. 34




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##### Table of Contents



Director Compensation
  Change inPensionFees
    
    
    
    
    
    
    
    
    
    
    
    
    
    Value andEarned or
    
    
    
    
    
    
    
    
    
    Non-Equity
    
    NonqualifiedPaid in
    
    Stock
    
    Option
    
    Incentive Plan
    
    Deferred
    
    All OtherCash
    
    Awards
    
    Awards
    
    Compensation
    
    Compensation
    
    Compensation
    
    TotalName
    
    ($) (1)
    
    ($)
    
    ($)
    
    ($)
    
    Earnings
    
    ($)
    
    ($)Robert
Bachman
    
    $
    80,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    80,000Donald
Harkleroad
    
    $
    80,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    80,000Daryl
Snadon
    
    $
    80,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    80,000Richard
Kelson
    
    $
    80,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    80,000Ronald Lusk
(2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    626,692
    (3)
    
    $
    626,692David Bell
    
    $
    80,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    80,000Richard
Weinberg (4)
    
    $
    80,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    80,000Bonnie Reiss
    
    $
    80,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    80,000
 
 (1)
    
    Each of our non-employee directors was issued 6,380 shares of our common
stock between June 16, 2008 and June 26, 2008 in settlement of director fees
for the fourth fiscal quarter of 2007 and the first fiscal quarter of 2008;
3,498 shares of our common stock on August 25, 2008 in settlement of director
fees for the second fiscal quarter of 2008; 8,439 shares of our common stock on
November 11, 2008 in settlement of director fees for the third fiscal quarter
of 2008; and 33,956 shares of our common stock on March 20, 2009 in settlement
of director fees for the fourth fiscal quarter of 2008.(2)
    
    Mr. Lusk resigned as a member of our board of directors on March 10, 2008.(3)
    
    Includes $84,647 paid to Mr. Lusk as compensation for his services as Vice
Chairman during 2008 and $542,045 paid to Mr. Lusk pursuant to his separation
agreement.(4)
    
    Mr. Weinberg serves on our board of directors as a designee of Pegasus
Capital. Pursuant to the policies of Pegasus Capital, any fees paid to Mr.
Weinberg are for the benefit of Pegasus Capital. 35




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##### Table of Contents



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
   36




---



##### Table of Contents



Common Stock
    
    6% Convertible 
Preferred Stock
    
    Series B Preferred Stock
    
    Series C Preferred
 StockShares
    
    Percent
    
    Shares
    
    Percent
    
    Shares
    
    Percent
    
    Shares
    
    PercentName and Address of
    
    Beneficially
    
    of
    
    Beneficially
    
    of
    
    Beneficially
    
    of
    
    Beneficially
    
    ofBeneficial Owner
    
    Owned (1)
    
    Class
    
    Owned (1)
    
    Class
    
    Owned (1)
    
    Class
    
    Owned (1)
    
    ClassDirectors and
Executive OfficersRobert Bachman (2)
    
    
    181,916
    
    
    
    *
    
    
    
    10,413
    
    
    
    5.3
    %David Bell
    
    
    52,273
    
    
    
    *Zach Gibler
(3)
    
    
    87,500
    
    
    
    *Stephen
Hamilton (4)
    
    
    89,952
    
    
    
    *Donald
Harkleroad (5)
    
    
    178,198
    
    
    
    *
    
    
    
    15,625
    
    
    
    7.9
    %Kenneth Honeycutt
    
    
    125,000
    
    
    
    *Richard
Kelson (6)
    
    
    78,410
    
    
    
    *Fredric
Maxik (7)
    
    
    203,112
    
    
    
    *Govi Rao (8)
    
    
    555,626
    
    
    
    1.8
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,764
    (14)
    
    
    4.7
    %Bonnie Reiss
(9)
    
    
    78,409
    
    
    
    *Kathryn L.
Reynolds (10)
    
    
    55,000
    
    
    
    *Daryl Snadon
(11)
    
    
    198,080
    
    
    
    *
    
    
    
    29,238
    
    
    
    14.8
    %Richard Weinberg
    
    
    
    
    
    
    Directors and
Executive Officers
as a Group (12
persons)
    
    
    1,758,476
    
    
    
    5.7
    %
    
    
    55,276
    
    
    
    28.0
    %
    
    
    
    
    
    
    
    
    
    
    11,764
    
    
    
    4.7
    %Certain PersonsLED Holdings, LLC
(12)(13)
    
    
    20,666,856
    (14)
    
    
    62.9
    %
    
    
    
    
    
    
    
    
    
    
    2,000,000
    (15)
    
    
    100
    %Pegasus Partners
IV, LP (13)
    
    
    56,670,563
    (16)
    
    
    82.3
    %
    
    
    
    
    
    
    
    
    
    
    2,000,000
    (15)
    
    
    100
    %
    
    
    239,975
    (17)
    
    
    95.3
    %AG Offshore
Convertibles Ltd.
(18)
    
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    50.8
    %Philip R.
Lacarte (18)
    
    
    
    
    
    
    
    
    
    
    10,374
    
    
    
    5.3
    %
 
 *
    
    Less than 1%. 37




---



##### Table of Contents



(1)
    
    The number and percentage of shares of our common stock, 6% Convertible Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock beneficially owned is determined under
the rules of the Securities and Exchange Commission and is not necessarily indicative of
beneficial ownership for any other purpose. Under these rules, beneficial ownership includes
any shares for which a person has sole or shared voting power or investment power.(2)
    
    Includes 5,554 shares of common stock issuable to USGT Investors, L.P. pursuant to the
conversion of 6% Convertible Preferred Stock, 22,187 shares of common stock issuable to USGT
Investors, L.P. upon the exercise of warrants, and 49,687 shares of common stock issuable to
USGT Investors, L.P. pursuant to the exercise of stock options issued under the Amended and
Restated Equity-Based Compensation Plan. Mr. Bachman is controlling shareholder in the sole
corporate general partner of USGT Investors, L.P. and may be deemed the beneficial owner of
the shares held by USGT Investors, L.P.(3)
    
    Includes 25,000 shares of common stock issuable to Mr. Gibler
upon the exercise of stock options and 62,500 shares of restricted
stock issued to Mr. Gibler under the Amended and Restated
Equity-Based Compensation Plan.(4)
    
    Includes 34,667 shares of common stock issuable to Mr. Hamilton upon the exercise of stock
options and 55,000 shares of restricted stock issued to Mr. Hamilton under the Amended and
Restated Equity-Based Compensation Plan.(5)
    
    Includes 8,333 shares of common stock issuable to The Bristol Company pursuant to the
conversion of 6% Convertible Preferred Stock, 2,343 shares of common stock issuable to The
Bristol Company upon exercise of warrants, and 54,687 shares of common stock issuable to The
Bristol Company upon exercise of stock options issued under the Amended and Restated
Equity-Based Compensation Plan. Mr. Harkleroad is the sole shareholder of The Bristol Company
and may be deemed the beneficial owner of the shares held by The Bristol Company.(6)
    
    Excludes 18,012,067 shares of common stock held directly by LED Holdings, LLC (LED
Holdings) and 2,654,789 shares of common stock issuable upon conversion of 2,000,000 shares
of Series B Preferred Stock held directly by LED Holdings. Mr. Kelson shares voting and
dispositive power over our shares of common stock and our Series B Preferred Stock only as a
member and manager of LED Holdings and by virtue of such status may be deemed to be the
beneficial owner of the shares of common stock and our Series B Preferred stock held by LED
Holdings. Mr. Kelson disclaims beneficial ownership of our shares of common stock and Series B
Preferred Stock held directly by LED Holdings, except to the extent of any pecuniary interest.(7)
    
    Includes 25,000 shares of common stock issuable to Mr. Maxik upon the exercise of stock
options and 175,000 shares of restricted stock issued to Mr. Maxik under the Amended and
Restated Equity-Based Compensation Plan.(8)
    
    Includes 4,166 shares of common stock issuable to Mr. Rao upon the exercise of stock options
and 375,000 shares of restricted stock issued to Mr. Rao under the Amended and Restated
Equity-Based Compensation Plan. Also includes 176,460 shares of common stock issuable to Mr.
Rao upon exercise of warrants. Excludes 18,012,067 shares of common stock held directly by
LED Holdings and 2,654,789 shares of common stock issuable upon conversion of 2,000,000 shares
of Series B Preferred Stock held directly by LED Holdings. Mr. Rao shares voting and
dispositive power over our shares of common stock and our Series B Preferred Stock only as a
manager of LED Holdings and by virtue of such status may be deemed to be the beneficial
owner of the shares of common stock and our Series B Preferred stock held by LED Holdings. Mr.
Rao disclaims beneficial ownership of our shares of common stock and Series B Preferred Stock
held directly by LED Holdings, except to the extent of any pecuniary interest.(9)
    
    Includes 78,409 shares of common stock held by B&T Holdings, LLC. Ms. Reiss owns 50% of the
stock of B&T Holdings, LLC and may be deemed to have shared voting and/or investment power
with respect to the shares owned by B&T Holdings, LLC.(10)
    
    Includes 55,000 shares of restricted stock issued to Ms.
Reynolds under the Amended and Restated Equity-Based Compensation
Plan.(11)
    
    Includes 15,594 shares of common stock issuable to Mr. Snadon upon conversion of 6%
Convertible Preferred Stock, 31,886 shares of common stock issuable to Mr. Snadon upon the
exercise of warrants and 2,500 shares of common stock issuable to Mr. Snadon upon exercise of
stock options issued under the Amended and Restated Equity-Based Compensation Plan.(12)
    
    The principal address and principal office of LED Holdings, LLC is c/o Pegasus Capital
Advisors, L.P., 99 River Road, Cos Cob, CT 06807.(13)
    
    PP IV (AIV) LED, LLC (PPAIV), PP IV LED, LLC (PPLED), Pegasus Partners IV, LP
(Pegasus IV), Richard Kelson, Pegasus Investors IV, L.P. (PIIV), Pegasus Investors IV GP,
L.L.C. (PIGP), Pegasus Capital, LLC (PLLC), Craig Cogut and LED Effects, Inc. are members
of LED Holdings (the LED Holdings Members). Other than 36,003,707 shares of common stock
issuable upon the exercise of warrants directly beneficially owned by Pegasus IV and 78,410
shares of common stock directly beneficially owned by Mr. Kelson, the LED Holdings Members do
not directly own any of our common stock or our Series B Preferred Stock. The LED Holdings
Members share voting and dispositive power over our shares of common stock and our Series B
Preferred Stock only as members of LED Holdings and by virtue of such status may be deemed to
be the beneficial owners of the shares of common stock and Series B Preferred Stock held by
LED Holdings. The LED Holdings Members disclaim beneficial ownership of the shares of common
stock and Series B Preferred Stock held by LED Holdings, except to the extent of any pecuniary
interest, and this statement shall not be deemed to be an admission that they are the
beneficial owners of such securities. Pegasus IV, PPAIV and PPLED are funds managed by
Pegasus Capital Advisors, L.P. PIIV is the general partner of Pegasus IV and PIGP is the
general partner of PIIV. PIGP is wholly owned by Pegasus Capital, LLC (PCLLC). PCLLC may
be deemed to be directly or 38




---



##### Table of Contents



indirectly controlled by Craig Cogut. By virtue of the foregoing, PIIV, PIGP, PCLLC and Mr.
Cogut may be deemed to share voting power and power to direct the disposition of the
securities held by Pegasus IV. Each of PIIV, PIGP, PCLLC and Mr. Cogut disclaims beneficial
ownership of any of our securities owned by Pegasus IV. The principal address and principal
office of Pegasus IV and certain affiliates is c/o Pegasus Capital Advisors, L.P., 99 River
Road, Cos Cob, CT 06807.(14)
    
    Includes 18,012,067 shares of common stock held by, and 2,654,789 shares of common stock
issuable to, LED Holdings upon conversion of 2,000,000 shares of Series B Preferred Stock.(15)
    
    Holders of our Series B Preferred Stock are entitled to 3.5 votes for each share of common
stock into which such share of Series B Preferred Stock is then convertible and have voting
rights and powers equal to the voting rights and powers of the common stock (except as
otherwise expressly provided in the Certificate of Designation of Series B Preferred Stock or
as required by law), voting together with the common stock as a single class.(16)
    
    Includes 18,012,067 shares of common stock held directly by LED Holdings and 2,654,789 shares
of common stock issuable to LED Holdings upon conversion of 2,000,000 shares of Series B
Preferred Stock held directly by LED Holdings (as discussed in
footnote 14, above). Also
includes 36,003,707 shares of common stock issuable upon exercise of warrants issued to
Pegasus IV or issuable to Pegasus IV in connection with the conversion of the Convertible
Note.(17)
    
    Holders of our Series C Preferred Stock are entitled to 15 votes per share of Series C
Preferred Stock and have voting rights and powers equal to the voting rights and powers of the
common stock (except as otherwise expressly provided in the Certificate of Designation of
Series C Preferred Stock or as required by law), voting together with the common stock as a
single class.(18)
    
    AG Offshore Convertibles Ltd. and Mr. Lacarte have not filed reports regarding their
ownership of the Companys common stock with the SEC pursuant to Sections 13 or 16 of the
Securities Exchange Act of 1934, as amended, and therefore the Company is not in a position to
disclose such holders beneficial ownership of the Companys common stock. 
 Item 13. Certain Relationships and Related Transactions, and Director Independence.
 Parent Company
  Transactions with Pegasus Capital and its Affiliates
    39




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##### Table of Contents



Guarantors of Line of Credit
   40




---



##### Table of Contents



Warrant Shares /Total Value of
    
    
    Common Shares toName of Guarantor
    
    Position
    
    Debt Guaranteed
    
    
    be IssuedUSGT Investors, L.P. (1)
    
    Director
    
    $
    150,000
    
    
    
    26,250Daryl Snadon
    
    Director
    
    
    200,000
    
    
    
    35,000John Collingwood
    
    Former Director
    
    
    200,000
    
    
    
    35,000Ron Lusk (2)
    
    Former Officer and Director
    
    
    50,000
    
    
    
    8,750Jerome Hill
    
    Stockholder
    
    
    100,000
    
    
    
    17,500George Parker Young
    
    Stockholder
    
    
    50,000
    
    
    
    8,750Phil Lacerte
    
    Stockholder
    
    
    1,250,000
    
    
    
    118,750TOTAL
    
    
    
    $
    2,000,000
    
    
    
    250,000
 
 (1)
    
    Mr. Bachman is controlling shareholder in the sole corporate general partner of USGT Investors, L.P.(2)
    
    Mr. Lusk resigned as Vice Chairman of the Company on March 10, 2008.   Amount of
    
    
    Warrant Shares toName of Guarantor
    
    Position
    
    Guarantees Provided
    
    
    be IssuedRon Lusk (1)
    
    Former Officer and Director
    
    $
    275,000
    
    
    
    13,750Phibian S. Trust
    
    Stockholder
    
    
    75,000
    
    
    
    3,750Phil Lacerte
    
    Stockholder
    
    
    65,000
    
    
    
    3,250Daryl Snadon
    
    Director
    
    
    50,000
    
    
    
    2,500Edward Hawes
    
    Stockholder
    
    
    50,000
    
    
    
    2,500USGT Investors, L.P. (2)
    
    Director
    
    
    37,500
    
    
    
    1,875Baron Cass
    
    Stockholder
    
    
    48,750
    
    
    
    2,438Paul Schlosberg
    
    Stockholder
    
    
    48,750
    
    
    
    2,438TOTAL
    
    
    
    $
    650,000
    
    
    
    32,501
 
 (1)
    
    Mr. Lusk resigned as Vice Chairman of the Company on March 10, 2008.(2)
    
    Mr. Bachman is controlling shareholder in the sole corporate general partner of USGT Investors, L.P.   41




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##### Table of Contents



Item 14. Principal Accounting Fees and Services.
  Audit Fees
   Audit-Related Fees
  Tax Fees
  All Other Fees
  Pre-Approval Policies
   
 PART IV
 
 Item 15. Exhibits, Financial Statements and Schedules.
   42




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##### Table of Contents



SIGNATURES
   July 1, 2009
    /s/ Zach GiblerZach Gibler, Chief Executive Officer  Signature
    
    Capacity in which Signed
    
    Date/s/ Zach Gibler
    
    Chief Executive Officer
    
    July 1, 2009Zach Gibler
    
    (Principal Executive Officer)/s/ Kathryn L. Reynolds
    
    Senior Vice President, Strategy & Finance
    
    July 1, 2009Kathryn L. Reynolds
    
    (Principal Financial Officer)/s/ Stephen Hamilton
    
    Vice President  Finance
    
    July 1, 2009Stephen Hamilton
    
    (Principal Accounting Officer)/s/ Robert E. Bachman
    
    Director
    
    July 1, 2009(by Kathryn L. Reynolds, Attorney-in-Fact*)Robert E. Bachman/s/ David Bell
    
    Director
    
    July 1, 2009(by Kathryn L. Reynolds, Attorney-in-Fact*)David Bell
 43




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##### Table of Contents



Signature
    
    Capacity in which Signed
    
    Date/s/ Donald R. Harkleroad
    
    Director
    
    July 1, 2009(by Kathryn L. Reynolds, Attorney-in-Fact*)Donald R. Harkleroad/s/ Richard Kelson

(by Kathryn L. Reynolds, Attorney-in-Fact*)
    
    Director
    
    July 1, 2009Richard Kelson/s/
Govi Rao
    
    Chairman
    
    July 1, 2009(by Kathryn L. Reynolds, Attorney-in-Fact*)Govi Rao/s/ Bonnie Reiss
    
    Director
    
    July 1, 2009(by Kathryn L. Reynolds, Attorney-in-Fact*)Bonnie Reiss/s/ Daryl N. Snadon
    
    Director
    
    July 1, 2009(by Kathryn L. Reynolds, Attorney-in-Fact*)Daryl N. Snadon/s/ Richard Weinberg
    
    Director
    
    July 1, 2009(by Kathryn L. Reynolds, Attorney-in-Fact*)Richard Weinberg
 
 *
    
    pursuant to Power of Attorney filed herewith 44




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##### Table of Contents



INDEX TO EXHIBITS
 EXHIBITNUMBER
    
    DESCRIPTION2.1
    
    Stock Purchase Agreement dated as of June 1, 2004, by and among
The Phoenix Group Corporation, Lighting Science, Inc., certain
stockholders of The Phoenix Group Corporation and Frederic Maxik
(previously filed as Exhibit 2.1 to the Current Report on Form 8-K
filed on June 15, 2004, File No. 0-20354, and incorporated herein
by reference).2.2
    
    Exchange and Contribution Agreement, dated as of October 4, 2007,
between the Company and LED Holdings LLC (previously filed as
Exhibit 4.1 to the Current Report on Form 8-K filed on October 11,
2007, File No. 0-20354, and incorporated herein by reference).2.3
    
    Share Purchase Agreement, dated April 22, 2008, by and among
Lighting Science Coöperatief U.A., Lighting Science Group
Corporation, C. van de Vrie Holding B.V., W. van de Vrie Holding
B.V., R.Q. van de Vrie Holding B.V., Q. van de Vrie Jr. Holding
B.V., Y.B. van de Vrie Holding B.V. and Lighting Partner B.V.
(certain schedules and exhibits have been omitted and the Company
agrees to furnish to the Commission supplementally a copy of any
omitted schedules and exhibits upon request) (previously filed as
Exhibit 2.1 to the Current Report on Form 8-K filed on April 24,
2008, File No. 0-20354, and incorporated herein by reference).2.4
    
    Asset Purchase Agreement, dated July 29, 2008, by and among LLI
Acquisition, Inc., Lighting Science Group Corporation, Lamina
Lighting, Inc., and the stockholders listed on the signature pages
thereto (previously filed as Exhibit 2.1 to the Current Report on
Form 8-K filed on July 29, 2008, File No. 0-20354, and
incorporated herein by reference).3.1
    
    Amended and Restated Certificate of Incorporation of Lighting
Science Group Corporation (previously filed as Exhibit 3.1 to the
Registration Statement on Form S-1 (333-142018) filed on February
12, 2008, File No. 0-20354, and incorporated herein by reference).3.2
    
    Amended and Restated By-laws of Lighting Science Group Corporation
(previously filed as Exhibit 3.1 to the Current Report on Form 8-K
filed on October 11, 2007, File No. 0-20354, and incorporated
herein by reference).4.1
    
    Securities Purchase Agreement dated as of May 12, 2005, by and
among Lighting Science Group Corporation and the purchasers set
forth on Exhibit A thereto (previously filed as Exhibit 99.2 to
the Current Report on Form 8-K filed on May 16, 2005, File No.
0-20354, and incorporated herein by reference).4.2
    
    Form of Warrant granted pursuant to the Securities Purchase
Agreement dated as of May 12, 2005 (previously filed as Exhibit
99.3 to the Current Report on Form 8-K filed on May 16, 2005, File
No. 0-20354, and incorporated herein by reference).4.3
    
    Form of Warrant issued to certain directors, officers and security
holders as consideration for providing guarantees pursuant to the
Line of Credit (previously filed as Exhibit 10.1 to the Current
Report on Form 8-K filed on September 22, 2006, File No. 0-20354,
and incorporated herein by reference).4.4
    
    Amended and Restated Certificate of Designation of 6% Convertible
Preferred Stock (previously filed as Exhibit 4.1 to the Current
Report on Form 8-K filed on January 9, 2007, File No. 0-20354, and
incorporated herein by reference).
 45




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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION4.5
    
    Securities Purchase Agreement, dated as of March 9, 2007 among
Lighting Science Group Corporation and the purchasers identified
on the signature pages thereto (previously filed as Exhibit 10.1
to the Current Report on Form 8-K filed on March 12, 2007, File
No. 0-20354, and incorporated herein by reference).4.6
    
    Form of Warrant A, dated March 9, 2007 (previously filed as
Exhibit 10.2 to the Current Report on Form 8-K filed on March 12,
2007, File No. 0-20354, and incorporated herein by reference).4.7
    
    Form of Warrant B, dated March 9, 2007 (previously filed as
Exhibit 10.3 to the Current Report on Form 8-K filed on March 12,
2007, File No. 0-20354, and incorporated herein by reference).4.8
    
    Form of Warrant, dated ___, 2007 (previously filed as Exhibit 10.4
to the Current Report on Form 8-K filed on March 12, 2007, File
No. 0-20354, and incorporated herein by reference).4.9
    
    Certificate of Designation of Series B Stock (previously filed as
Exhibit 4.2 to the Current Report on Form 8-K filed on October 11,
2007, File No. 0-20354, and incorporated herein by reference).4.10
    
    Stockholder Voting Agreement dated October 4, 2007 among the
Company, LED Holdings LLC, Ronald Lusk, Robert Bachman, Daryl
Snadon and Donald Harkleroad (previously filed as Exhibit 4.4 to
the Current Report on Form 8-K filed on October 11, 2007, File No.
0-20354, and incorporated herein by reference).4.11
    
    Amended and Restated Registration Rights Agreement, dated April
22, 2008, by and among Lighting Science Group Corporation, C. van
de Vrie Holding B.V., W. van de Vrie Holding B.V., R.Q. van de
Vrie Holding B.V. and Q. van de Vrie Jr. Holding B.V., Y.B. van de
Vrie Holding B.V. and LED Holdings, LLC (previously filed as
Exhibit 4.1 to the Current Report on Form 8-K filed on April 24,
2008, File No.0-20354, and incorporated by reference).4.12
    
    Stock Subscription Agreement, dated as of April 22, 2008, by and
among Lighting Science Group Corporation, LED Holdings LLC and PP
IV LED LLC (previously filed as Exhibit 4.2 to the Current Report
on Form 8-K filed on April 24, 3008, File No.0-20354, and
incorporated by reference).4.13
    
    Form of Lighting Science Group Corporation 2005 Equity-Based
Compensation Plan Stock Option Agreement, dated
___, ___ (previously filed as Exhibit 4.13 to the Registration
Statement on Form S-8 filed on May 5, 2008, File No. 0-20354, and
incorporated herein by reference).4.14
    
    Form of Lighting Science Group Corporation 2005 Equity-Based
Compensation Plan Employee Incentive Stock Option Agreement, dated
___, ___ (previously filed as Exhibit 4.14 to
the Registration Statement on Form S-8 filed on May 5, 2008, File
No. 0-20354, and incorporated herein by reference).4.15
    
    Form of Lighting Science Group Corporation 2005 Equity-Based
Compensation Plan Restricted Stock Award Agreement, dated
___, ___ (previously filed as Exhibit 4.15 to the
Registration Statement on Form S-8 filed on May 5, 2008, File No.
0-20354, and incorporated herein by reference).
 46




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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION4.16
    
    Amended and Restated Registration Rights Agreement, dated as of
January 23, 2009, by and between Lighting Science Group
Corporation and Pegasus Partners IV, L.P. (previously filed as
Exhibit 4.1 to the Current Report on Form 8-K filed on January 30,
2009, File No. 0-20354, and incorporated herein by reference).4.17
    
    Warrant to Purchase Common Stock, dated July 25, 2008, by and
between Lighting Science Group Corporation and Pegasus Partners
IV, L.P. (previously filed as Exhibit 4.2 to the Current Report on
Form 8-K filed on July 29, 2008, File No. 0-20354, and
incorporated herein by reference).4.18
    
    Certificate of Designation of Series C Preferred Stock of Lighting
Science Group Corporation (previously filed as Exhibit 4.1 to the
Current Report on Form 8-K filed on January 7, 2009, File No.
0-20354, and incorporated herein by reference).4.19
    
    Warrant to Purchase Common Stock, dated December 31, 2008, by and
between Lighting Science Group Corporation and Morrison & Foerster
LLP (previously filed as Exhibit 4.2 to the Current Report on Form
8-K filed on January 7, 2009, File No. 0-20354, and incorporated
herein by reference).4.20
    
    Warrant to Purchase Common Stock, dated December 31, 2008, by and
between Lighting Science Group Corporation and Haynes and Boone,
LLP (previously filed as Exhibit 4.3 to the Current Report on Form
8-K filed on January 7, 2009, File No. 0-20354, and incorporated
herein by reference).10.1#
    
    Amended and Restated Equity Based Compensation Plan (previously
filed as Appendix A to the Proxy Statement on Schedule 14A filed
on September 18, 2008, File No. 0-20354 and incorporated herein by
reference).10.2
    
    Trademark Assignment Agreement dated October 4, 2007 between the
Company and LED Holdings, LLC (previously filed as Exhibit 10.1 to
the Current Report on Form 8-K filed on October 11, 2007, File No.
0-20354, and incorporated herein by reference).10.3
    
    Indemnification Letter Agreement dated October 4, 2007 between the
Company and LED Holdings, LLC (previously filed as Exhibit 10.2 to
the Current Report on Form 8-K filed on October 11, 2007, File No.
0-20354, and incorporated herein by reference).10.4#
    
    Employment Agreement, dated as of October 4, 2007, by and between
Lighting Science Group Corporation and Fredric Maxik (previously
filed as Exhibit 10.6 to the Current Report on Form 8-K filed on
October 11, 2007, File No. 0-20354, and incorporated herein by
reference).10.5#
    
    Employment Agreement dated as of October 4, 2007 by and between
Lighting Science Group Corporation and Kevin Furry (previously
filed as Exhibit 10.3 to the Current Report on Form 8-K filed on
October 11, 2007, File No. 0-20354, and incorporated herein by
reference).10.6#
    
    Employment Agreement dated October 4, 2007 between Lighting
Science Group Corporation and Kenneth Honeycutt (previously filed
as Exhibit 10.7 to the Current Report on Form 8-K filed on October
11, 2007, File No. 0-20354, and incorporated herein by reference).10.7#
    
    Employment Agreement dated October 4, 2007 between Lighting
Science Group Corporation and Govi Rao (previously filed as
Exhibit 10.4 to the Current Report on Form 8-K filed on October
11, 2007, File No. 0-20354, and incorporated herein by reference).
 47




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##### Table of Contents



EXHIBITNUMBER
    
    DESCRIPTION10.8#
    
    Employment Agreement, dated
October 4, 2007, between Lighting
Science Group Corporation and Zach Gibler (previously filed as
Exhibit 10.1 to the Current Report on Form 8-K filed on
June 11, 2009, File No. 0-20354, and incorporated herein by reference).10.9#
    
    Employment Letter, effective as of March 9, 2009, from Lighting
Science Group Corporation to Kathryn L. Reynolds
(previously filed as Exhibit 10.1 to the Current Report on Form
8-K filed on March 26, 2009, File No. 0-20354, and incorporated
herein by reference).10.10#
    
    Letter Agreement dated March 10, 2008 between Lighting Science
Group Corporation and Ronald E. Lusk (previously filed as Exhibit
10.1 to the Current Report on Form 8-K filed on March 11, 2008,
File No. 0-20354, and incorporated herein by reference).10.11
    
    Settlement Agreement dated October 2, 2008, by and among Lighting
Science Group Corporation, Ronald E. Lusk and Match, Inc.
(previously filed as Exhibit 10.1 to the Current Report on Form
8-K filed on October 6, 2008, File No. 0-20354, and incorporated
herein by reference).10.12
    
    Engagement Agreement, dated April 21, 2008, by and between
Lighting Science Group Corporation and Pegasus Capital Advisors
IV, L.P. (previously filed as Exhibit 10.1 to the Current Report
on Form 8-K filed on April 24, 2008, File No. 0-20354, and
incorporated herein by reference).10.13+
    
    Technology Development and Supply Agreement, dated April 30, 2008,
by and between Lighting Science Group Corporation and Jamestown
One Times Square, L.P. (previously filed as Exhibit 10.1 to the
Current Report on Form 8-K filed on May 6, 2008, File No. 0-20354,
and incorporated herein by reference).10.14
    
    Letter of Authorization, dated June 20, 2008, by and between
Lighting Science Group Corporation and Melco Crown (COD)
Developments Limited (previously filed as Exhibit 10.1 to the
Current Report on Form 8-K filed on June 30, 2008, File No.
0-20354, and incorporated herein by reference).10.15
    
    Loan Authorization Agreement, dated July 25, 2008, by and between
Lighting Science Group Corporation and Bank of Montreal
(previously filed as Exhibit 10.1 to the Current Report on Form
8-K filed on July 29, 2008, File No. 0-20354, and incorporated
herein by reference).10.16
    
    Side Letter Agreement, dated July 25, 2008, by and between
Lighting Science Group Corporation and Pegasus Capital Advisors,
L.P. (previously filed as Exhibit 10.2 to the Current Report on
Form 8-K filed on July 29, 2008, File No. 0-20354, and
incorporated herein by reference).10.17
    
    Bridge Loan Agreement, dated July 25, 2008, by and between
Lighting Science Group Corporation and Pegasus Partners IV, L.P.
(previously filed as Exhibit 10.3 to the Current Report on Form
8-K filed on July 29, 2008, File No. 0-20354, and incorporated
herein by reference).10.18
    
    Fee Letter Agreement, dated July 25, 2008, by and between Lighting
Science Group Corporation and Pegasus Partners IV, L.P.
(previously filed as Exhibit 10.4 to the Current Report on Form
8-K filed on July 29, 2008, File No. 0-20354, and incorporated
herein by reference).
 48




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EXHIBITNUMBER
    
    DESCRIPTION10.19
    
    Promissory Note, dated December 18, 2008, between Lighting Science
Group Corporation, as borrower, and Pegasus Partners IV, L.P., as
lender (previously filed as Exhibit 10.1 to the Current Report on
Form 8-K filed on December 24, 2008, File No. 0-20354, and
incorporated herein by reference).10.20
    
    First Amendment to Promissory Note, effective as of March 2, 2009,
between Lighting Science Group Corporation, as borrower, and
Pegasus Partners IV, L.P., as lender (previously filed as Exhibit
10.1 to the Current Report on Form 8-K filed on April 3, 2009,
File No. 0-20354, and incorporated herein by reference).10.21
    
    Promissory Note, dated December 18, 2008, between Lighting Science
Group Corporation, as borrower, and Govi Rao, as lender
(previously filed as Exhibit 10.2 to the Current Report on Form
8-K filed on December 24, 2008, File No. 0-20354, and incorporated
herein by reference).10.22
    
    First Amendment to Promissory Note, effective as of March 2, 2009,
between Lighting Science Group Corporation, as borrower, and Govi
Rao, as lender (previously filed as Exhibit 10.2 to the Current
Report on Form 8-K filed on April 3, 2009, File No. 0-20354, and
incorporated herein by reference).10.23
    
    Promissory Note, dated February 13, 2009, between Lighting Science
Group Corporation, as borrower, and Pegasus Partners IV, L.P., as
lender (previously filed as Exhibit 10.1 to the Current Report on
Form 8-K filed on February 20, 2009, File No. 0-20354, and
incorporated herein by reference).10.24
    
    Letter Agreement, dated February 13, 2009, between Lighting
Science Group Corporation and Pegasus Partners IV, L.P.
(previously filed as Exhibit 10.2 to the Current Report on Form
8-K filed on February 20, 2009, File No. 0-20354, and incorporated
herein by reference).10.25
    
    Promissory Note, dated April 17, 2009, between Lighting Science
Group Corporation, as borrower, in favor of Pegasus Partners IV,
L.P., as lender (previously filed as Exhibit 10.1 to the Current
Report on Form 8-K filed on April 23, 2009, File No. 0-20354, and
incorporated herein by reference).21.1*
    
    Subsidiaries of Lighting Science Group Corporation.24.1*
    
    Power of Attorney31.1*
    
    Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of Senior Vice President, Strategy and Finance
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*
    
    Certification of Chief Executive Officer and Senior Vice
President, Strategy and Finance pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
 
 *
    
    Filed herewith+
    
    Confidential treatment has been granted with respect to certain provisions of this agreement#
    
    Management contract or compensatory plan or arrangement 49




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##### Table of Contents



Item 8. Financial Statements.
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm  McGladrey & Pullen, LLP
    
    F-2Report of Independent Registered Public Accounting Firm  Turner, Stone and Company, LLP
    
    F-3Consolidated Balance Sheets as of December 31, 2008 and 2007 of Lighting Science Group
Corporation
    
    F-4Consolidated Statements of Operations for Lighting Science Group Corporation for the year
ended December 31, 2008 and for the period June 14, 2007 through December 31, 2007, and for
LED Effects, Inc. for the period January 1, 2007 through June 13, 2007
    
    F-5Consolidated Statements of Stockholders Equity for Lighting Science Group Corporation
for the year ended December 31, 2008 and for the period June 14, 2007 through December 31, 2007
    
    F-6Consolidated Statement of Stockholders Equity for LED Effects, Inc. for the period January 1,
2007 through June 13, 2007
    
    F-7Consolidated Statements of Cash Flows for Lighting Science Group Corporation for the year
ended December 31, 2008 and for the period June 14, 2007 through December 31, 2007 and for LED
Effects, Inc. for the period January 1, 2007 through June 13, 2007
    
    F-8Notes to the Consolidated Financial Statements
    
    F-9
 F - 1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 Report of Independent Registered Public Accounting Firm
 
     
 F - 2




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
     
 F - 3




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##### Table of Contents



LIGHTING SCIENCE GROUP CORPORATION AND SUBSIDIARIES  
 CONSOLIDATED BALANCE SHEETS
 December 31,2008
    
    
    2007ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    254,538
    
    
    $
    11,399,429Accounts receivable, net of allowances for doubtful accounts
    
    
    6,633,888
    
    
    
    1,392,064Inventories, net of allowances
    
    
    12,202,774
    
    
    
    3,786,966Deferred income tax
    
    
    671,782
    
    
    
    Prepaid expenses and other current assets
    
    
    1,517,690
    
    
    
    1,180,028Total current assets
    
    
    21,280,672
    
    
    
    17,758,487PROPERTY AND EQUIPMENT, net
    
    
    3,630,888
    
    
    
    1,149,024OTHER ASSETSIntangible assets, net
    
    
    17,452,632
    
    
    
    9,314,982Goodwill
    
    
    6,799,962
    
    
    
    44,222,226Other long-term assets
    
    
    389,113
    
    
    
    1,141,532Total other assets
    
    
    24,641,707
    
    
    
    54,678,740TOTAL ASSETS
    
    $
    49,553,267
    
    
    $
    73,586,251LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESShort-term debt (includes $2,000,000 of related party loans)
    
    $
    22,206,713
    
    
    $
    Current portion of long-term debt
    
    
    2,362,540
    
    
    
    Accounts payable
    
    
    6,419,248
    
    
    
    2,357,399Accrued expenses
    
    
    4,159,502
    
    
    
    3,668,104Unearned revenue
    
    
    1,001,704
    
    
    
    Total current liabilities
    
    
    36,149,707
    
    
    
    6,025,503OTHER LIABILITIESLong-term debt, less current portion
    
    
    96,443
    
    
    
    Deferred income taxes
    
    
    2,049,074
    
    
    
    Liability under derivative contracts
    
    
    3,654
    
    
    
    1,007,600Total other liabilities
    
    
    2,149,171
    
    
    
    1,007,600TOTAL LIABILITIES
    
    
    38,298,878
    
    
    
    7,033,103COMMITMENTS AND CONTINGENCIES (Note 15)6% CONVERTIBLE PREFERRED STOCK, $.001 par value, 2,656,250 shares authorized,
196,902 (2007 - 215,652) shares issued and outstanding, liquidation value of $630,086
in 2008 (2007 - $690,086)
    
    
    459,532
    
    
    
    364,895STOCKHOLDERS EQUITYSeries B Preferred Stock, $.001 par value, 2,000,000 shares authorized, issued and
outstanding in 2008 (2007 - 2,000,000), liquidation value of $16,132,619 (2007 - $15,219,452)
    
    
    2,000
    
    
    
    2,000Series C Preferred Stock, $.001 par value, 251,739 shares authorized, issued and
outstanding in 2008 (2007 - none), liquidation value $3,209,666 (2007 - none)
    
    
    252
    
    
    
    Common stock, $.001 par value, 495,000,000 shares authorized, 28,985,897 (2007 -
21,958,482) shares issued and outstanding
    
    
    28,986
    
    
    
    21,959Additional paid-in-capital
    
    
    112,505,607
    
    
    
    71,056,282Accumulated deficit
    
    
    (99,865,725
    )
    
    
    (4,902,269
    )Accumulated other comprehensive income (loss)
    
    
    (1,876,263
    )
    
    
    10,281TOTAL STOCKHOLDERS EQUITY
    
    
    10,794,857
    
    
    
    66,188,253TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    49,553,267
    
    
    $
    73,586,251
 The accompanying notes are an integral part of the consolidated financial statements.
 F - 4




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##### Table of Contents



LIGHTING SCIENCE GROUP CORPORATION AND LED EFFECTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
 Lighting Science
    
    
    LED Effects, Inc. andLighting Science
    
    
    Group Corporation
    
    
    SubsidiaryGroup Corporation
    
    
    Consolidated
    
    
    ConsolidatedConsolidated
    
    
    Statement of
    
    
    Statement ofStatement of
    
    
    Operations For
    
    
    Operations For TheOperations For
    
    
    Period From June
    
    
    Period January 1,The Year Ended
    
    
    14, 2007 to
    
    
    2007 to June 13,December 31, 2008
    
    
    December 31, 2007
    
    
    2007Revenue
    
    $
    20,758,593
    
    
    $
    4,616,111
    
    
    $
    3,675,132Cost of goods sold
    
    
    16,688,600
    
    
    
    3,526,750
    
    
    
    2,606,445Gross margin
    
    
    4,069,993
    
    
    
    1,089,361
    
    
    
    1,068,687Operating expenses:Sales and marketing
    
    
    5,847,833
    
    
    
    962,597
    
    
    
    107,708Operations
    
    
    13,786,163
    
    
    
    2,396,355
    
    
    
    127,574General and administrative
    
    
    23,224,561
    
    
    
    2,875,076
    
    
    
    330,269Impairment of goodwill and other intangible assets
    
    
    53,110,133
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    4,354,028
    
    
    
    669,861
    
    
    
    6,691Total operating expenses
    
    
    100,322,718
    
    
    
    6,903,889
    
    
    
    572,242Income (loss) from operations
    
    
    (96,252,725
    )
    
    
    (5,814,528
    )
    
    
    496,445Other income (expense)Interest income
    
    
    188,460
    
    
    
    211,043
    
    
    
    1,520Interest expense
    
    
    (1,425,446
    )
    
    
    (39,366
    )
    
    
    (454
    )Other, net
    
    
    318,748
    
    
    
    743,784
    
    
    
    (35,472
    )Total other income (expense)
    
    
    (918,238
    )
    
    
    915,461
    
    
    
    (34,406
    )Income (loss) before income tax expense (benefit) and minority
interest in income of subsidiary
    
    
    (97,170,963
    )
    
    
    (4,899,067
    )
    
    
    462,039Income tax expense (benefit)
    
    
    (2,207,507
    )
    
    
    
    
    
    
    172,244Income (loss) before minority interest in income of subsidiary
    
    
    (94,963,456
    )
    
    
    (4,899,067
    )
    
    
    289,795Minority interest in income of subsidiary
    
    
    
    
    
    
    (3,902
    )
    
    
    (2,583
    )Net income (loss)
    
    $
    (94,963,456
    )
    
    $
    (4,902,969
    )
    
    $
    287,212Items included in comprehensive incomeForeign currency translation income (loss)
    
    
    (1,886,544
    )
    
    
    10,281
    
    
    
    (82,135
    )Comprehensive income (loss)
    
    $
    (96,850,000
    )
    
    $
    (4,892,688
    )
    
    $
    205,077Basic and diluted net loss per weighted average common share
    
    $
    (3.55
    )
    
    $
    (0.28
    )Basic and diluted weighted average number of common shares outstanding
    
    
    26,781,431
    
    
    
    17,419,959
 The accompanying notes are an integral part of the consolidated financial statements.
 F - 5




---



##### Table of Contents



Lighting Science Group Corporation

Consolidated Statements of Stockholders Equity
For the Period From June 14, 2007 to December 31, 2007
And For the Year Ended December 31, 2008
 AccumulatedOtherSeries B Preferred Stock
    
    Series C Preferred Stock
    
    Common Stock
    
    Additional
    
    Accumulated
    
    ComprehensiveShares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Paid In Capital
    
    Deficit
    
    Income (Loss)
    
    TotalBalance June 14,
2007
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    13,947,472
    
    
    $
    13,948
    
    
    $
    18,078,086
    
    
    $
    
    
    
    $
    
    
    
    $
    18,092,034Issuance of capital
stock by LED
Holdings
    
    
    2,000,000
    
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    1,981,175
    
    
    
    1,981
    
    
    
    7,750,060
    
    
    
    
    
    
    
    
    
    
    
    7,754,041Lighting Science
Group common stock
deemed acquired by
LEDHoldings in
conjuction with
the reverse
merger
transaction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,778,449
    
    
    
    5,778
    
    
    
    44,053,646
    
    
    
    
    
    
    
    
    
    
    
    44,059,424Conversion of 6%
Convertible
Preferred Stock to
common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    160,001
    
    
    
    172
    
    
    
    534,612
    
    
    
    
    
    
    
    
    
    
    
    534,784Issuance of common
stock upon the
exercise of
warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91,385
    
    
    
    80
    
    
    
    546,719
    
    
    
    
    
    
    
    
    
    
    
    546,799Stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93,159
    
    
    
    
    
    
    
    
    
    
    
    93,159Net loss for the
period June 14,
2007 to December
31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,902,269
    )
    
    
    
    
    
    
    (4,902,269
    )Foreign currency
translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,281
    
    
    
    10,281Balance December
31, 2007
    
    
    2,000,000
    
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    21,958,482
    
    
    
    21,959
    
    
    
    71,056,282
    
    
    
    (4,902,269
    )
    
    
    10,281
    
    
    
    66,188,253Sale of common
stock to related
party
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,083,333
    
    
    
    2,083
    
    
    
    9,997,917
    
    
    
    
    
    
    
    
    
    
    
    10,000,000Common stock issued
in connection with
Lighting Partners
acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,632,000
    
    
    
    4,632
    
    
    
    22,228,968
    
    
    
    
    
    
    
    
    
    
    
    22,233,600Preferred stock
isssued for payment
of operating
expenses
    
    
    
    
    
    
    
    
    
    
    251,739
    
    
    
    252
    
    
    
    
    
    
    
    
    
    
    
    3,209,414
    
    
    
    
    
    
    
    
    
    
    
    3,209,666Stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,050,187
    
    
    
    
    
    
    
    
    
    
    
    2,050,187Fair value of
warrants issued in
connection with
debt guaranty
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,476,464
    
    
    
    
    
    
    
    
    
    
    
    1,476,464Common stock issued
upon exercise of
warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101,391
    
    
    
    101
    
    
    
    693,425
    
    
    
    
    
    
    
    
    
    
    
    693,526Common stock issued
under restricted
stock award
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62,500
    
    
    
    63
    
    
    
    662,437
    
    
    
    
    
    
    
    
    
    
    
    662,500Director and other
compensation paid
in common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138,191
    
    
    
    138
    
    
    
    639,862
    
    
    
    
    
    
    
    
    
    
    
    640,000Fair value of
derivatives
exercised or
converted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    10
    
    
    
    492,447
    
    
    
    
    
    
    
    
    
    
    
    492,457Repurchase of
common stock
pursuant to reverse
stock split
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,796
    )
    
    
    
    
    
    
    
    
    
    
    (1,796
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (94,963,456
    )
    
    
    
    
    
    
    (94,963,456
    )Foreign currency
translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,886,544
    )
    
    
    (1,886,544
    )Balance December
31, 2008
    
    
    2,000,000
    
    
    $
    2,000
    
    
    
    251,739
    
    
    $
    252
    
    
    
    28,985,897
    
    
    $
    28,986
    
    
    $
    112,505,607
    
    
    $
    (99,865,725
    )
    
    $
    (1,876,263
    )
    
    $
    10,794,857
 The accompanying notes are an integral part of the consolidated financial statements.
 F - 6




---



##### Table of Contents



LED Effects, Inc. and Subsidiary

Consolidated Statement of Stockholders Equity
 AccumulatedOtherCommon Stock
    
    Retained
    
    ComprehensiveShares
    
    Amount
    
    Earnings
    
    Loss
    
    TotalBalance January 1, 2007
    
    
    756
    
    
    $
    11,541
    
    
    $
    3,042,203
    
    
    $
    (8,977
    )
    
    $
    3,044,767Net income
    
    
    
    
    
    
    
    
    
    
    287,212
    
    
    
    
    
    
    
    287,212Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (82,135
    )
    
    
    (82,135
    )Balance June 13, 2007
    
    
    756
    
    
    $
    11,541
    
    
    $
    3,329,415
    
    
    $
    (91,112
    )
    
    $
    3,249,844
 The accompanying notes are an integral part of the consolidated financial statements.
 F - 7




---



##### Table of Contents



LIGHTING SCIENCE GROUP CORPORATION AND LED EFFECTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
 LED Effects, Inc.Lighting Science
    
    
    Lighting Science
    
    
    and SubsidiaryGroup Corporation
    
    
    Group Corporation
    
    
    ConsolidatedConsolidated
    
    
    Consolidated
    
    
    Statement of CashStatement of Cash
    
    
    Statement of Cash
    
    
    Flows For TheFlows For The Year
    
    
    Flows For The Period
    
    
    Period FromEnded December 31,
    
    
    From June 14, 2007 to
    
    
    January 1, 2007 to2008
    
    
    December 31, 2007
    
    
    June 13, 2007OPERATING ACTIVITIESNet income (loss) for the period
    
    $
    (94,963,456
    )
    
    $
    (4,902,969
    )
    
    $
    287,212Adjustments to reconcile net income (loss) to net cash used by operating activities:Expenses paid by issuance of common stock
    
    
    1,302,500
    
    
    
    
    
    
    
    Expenses paid by issuance of Series C Preferred Stock
    
    
    3,209,666
    
    
    
    
    
    
    
    Expenses paid by issuance of common stock warrants
    
    
    1,476,464
    
    
    
    
    
    
    
    Impairment of goodwill and other intangible assets
    
    
    53,110,133
    
    
    
    
    
    
    
    Stock compensation expense
    
    
    2,050,187
    
    
    
    93,159
    
    
    
    Accretion of 6% convertible preferred stock redemption value
    
    
    94,607
    
    
    
    132,277
    
    
    
    Fair value adjustment to liabilities under derivative contracts
    
    
    (415,628
    )
    
    
    (895,507
    )
    
    
    Income tax benefits
    
    
    (2,207,507
    )
    
    
    
    
    
    
    5,737Depreciation and amortization
    
    
    4,354,028
    
    
    
    669,861
    
    
    
    6,691Changes in operating assets and liabilities, net of acquisitions:Accounts receivable
    
    
    258,754
    
    
    
    186,577
    
    
    
    (902,313
    )Prepaid expenses and other assets
    
    
    865,179
    
    
    
    (64,784
    )
    
    
    (2,499
    )Inventories
    
    
    320,766
    
    
    
    (656,781
    )
    
    
    135,925Accounts payable
    
    
    1,123,060
    
    
    
    1,799,816
    
    
    
    (97,932
    )Income taxes payable
    
    
    
    
    
    
    
    
    
    
    160,062Accrued expenses and other liabilities
    
    
    (373,358
    )
    
    
    (1,699,542
    )
    
    
    Unearned revenue
    
    
    1,001,704
    
    
    
    
    
    
    
    Net cash used by operating activities
    
    
    (28,792,901
    )
    
    
    (5,337,893
    )
    
    
    (407,117
    )INVESTING ACTIVITIESCash held by Lighting Science Group upon reverse merger
    
    
    
    
    
    
    824,900
    
    
    
    Purchase of net assets of Lighting Partner B.V. (includes cash payment of $5,000,000
and cash closing costs of $1,190,000)
    
    
    (6,190,000
    )
    
    
    
    
    
    
    Purchase of net assets of Lamina Lighting, Inc. (includes cash payment of $4,500,000
and cash closing costs of $263,383)
    
    
    (4,763,383
    )
    
    
    Purchase of property and equipment
    
    
    (1,671,303
    )
    
    
    (1,236,899
    )
    
    
    Other, net
    
    
    
    
    
    
    
    
    
    
    3,545Net cash provided by (used in) investing activities
    
    
    (12,624,686
    )
    
    
    (411,999
    )
    
    
    3,545FINANCING ACTIVITIESRepayment of amounts due under notes payable
    
    
    
    
    
    
    (87,500
    )
    
    
    (100,000
    )Repurchase of common stock pursuant to reverse stock split
    
    
    (1,796
    )Amount due minority shareholder
    
    
    
    
    
    
    
    
    
    
    2,583Proceeds from draws on line of credit and other short-term borrowings
    
    
    21,073,243
    
    
    
    
    
    
    
    Payment of long-term debt
    
    
    (1,038,709
    )
    
    
    
    
    
    
    Proceeds from sale of common stock
    
    
    10,000,000
    
    
    
    
    
    
    
    Proceeds from exercise of common stock warrants, net of related costs
    
    
    693,526
    
    
    
    546,799
    
    
    
    Issuance of capital stock by LED Holdings
    
    
    
    
    
    
    7,754,041
    
    
    
    Net cash provided by (used in) financing activities
    
    
    30,726,264
    
    
    
    8,213,340
    
    
    
    (97,417
    )Effect of exchange rate fluctuations on cash and cash equivalents
    
    
    (453,568
    )
    
    
    10,281
    
    
    
    (82,135
    )Net increase (decrease) in cash
    
    
    (11,144,891
    )
    
    
    2,473,729
    
    
    
    (583,124
    )Cash balance at beginning of period
    
    
    11,399,429
    
    
    
    8,925,700
    
    
    
    1,828,776Cash balance at end of period
    
    $
    254,538
    
    
    $
    11,399,429
    
    
    $
    1,245,652Interest paid during the period
    
    $
    468,088
    
    
    $
    39,366
    
    
    $
    454Taxes paid during the period
    
    $
    
    
    
    $
    
    
    
    $
    62,915SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIESConversion of 6% Convertible Preferred Stock to common stock
    
    $
    
    
    
    $
    534,784
    
    
    $
    6% Convertible Preferred Stock dividends paid and deducted in arriving at net loss
    
    $
    37,670
    
    
    $
    
    
    
    $
    Value of common stock issued in connection with Lighting Partner BV transaction
    
    $
    22,233,600
    
    
    $
    
    
    
    $
    Non-cash portion of reverse merger net acquisition price
    
    $
    
    
    
    $
    36,305,383
    
    
    $
    
 The accompanying notes are an integral part of the consolidated financial statements.
 F - 8




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##### Table of Contents



LIGHTING SCIENCE GROUP CORPORATION  AND SUBSIDIARIES  
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1: BASIS OF PRESENTATION AND CHANGE OF REPORTING ENTITY
   NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
 Nature of Business
  PercentageCompany Name
    
    OwnershipLighting Science Group Limited (U.K.)
    
    
    100
    %LSGC Pty. Ltd (Australia)
    
    
    100
    %LLI Acquisition, Inc. (Delaware) **
    
    
    100
    %Lighting Science Coöperatief U.A. (The Netherlands) *
    
    
    100
    %Lighting Partner B.V. (The Netherlands) (LPBV) *
    
    
    100
    %LSGC LLC (Delaware)
    
    
    100
    %LED Effects, Japan K.K. (Japan)
    
    
    100
    %LED Systems K.K. (Japan) ***
    
    
    60
    %
 
 *
    
    consolidated effective May 1, 2008**
    
    consolidated effective August 1, 2008***
    
    consolidated effective October 1, 2008  F - 9




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##### Table of Contents



Reverse Stock Split
  Use of Estimates
  Foreign Currency Translation
  Cash and Cash Equivalents
   Accounts Receivable
  Inventories
  F - 10




---



##### Table of Contents



Property and Equipment
   Intangible Assets
  Impairment of Long-Lived Assets
   Goodwill
   F - 11




---



##### Table of Contents



Derivatives
  Revenue
  Research and Development
  Product Warranties
  Stock Based Compensation
   Income taxes
   F - 12




---



##### Table of Contents



Earnings per share
  Segment Reporting
  New Accounting Pronouncements
     F - 13




---



##### Table of Contents



Comparative Consolidated Financial Statements
  NOTE 3: LIQUIDITY AND CAPITAL RESOURCES
       F - 14




---



##### Table of Contents



NOTE 4: ACQUISITIONS
  Acquisition of LED Effects
   Current assetsCash and cash equivalents
    
    $
    1,245,652Accounts receivable,
    
    
    1,536,780Inventory
    
    
    992,604Non-Current assetsProperty and equipment
    
    
    159,585Minority interest at cost
    
    
    86,528Intangible assets
    
    
    5,980,000Deposits
    
    
    15,819Goodwill
    
    
    1,620,000Current liabilities assumedAccounts payable and accrued liabilities
    
    
    (298,906
    )Total purchase price of LED Effects
    
    $
    11,338,062
   EstimatedUseful LifeAcquisition
    
    
    At AcquisitionIntangible Asset
    
    Fair Value
    
    
    DateTechnology and patents
    
    $
    2,890,000
    
    
    7.5 yearsTrademarks
    
    
    360,000
    
    
    20 yearsCustomer relationships
    
    
    730,000
    
    
    15 yearsSoftware
    
    
    2,000,000
    
    
    5 yearsGoodwill
    
    
    1,620,000
    
    
    Not determinable$
    7,600,000
 F - 15




---



##### Table of Contents



Reverse Merger of LSG by LED Holdings
   Common
stock and Preferred Stock of LSG issued to LED Holdings
    
    $
    47,382,573Add: Transaction costs
    
    
    1,091,453Total purchase price of LSG
    
    $
    48,474,026
  Cash and cash equivalents
    
    $
    824,900Other current assets
    
    
    5,090,592Fixed assets
    
    
    587,000Patents and technology
    
    
    3,900,000Other long-term assets
    
    
    1,214,588Goodwill
    
    
    42,605,552Estimated fair value of assets
    
    
    54,222,632Less: Fair value of current liabilities
    
    
    (3,845,499
    )Liability under derivative contracts
    
    
    (1,903,107
    )Fair value of net assets acquired in reverse merger
    
    $
    48,474,026
   EstimatedUseful LifeAcquisition
    
    
    At AcquisitionIntangible Asset
    
    Fair Value
    
    
    DateTechnology and patents
    
    $
    3,900,000
    
    
    7.5 years
 F - 16




---



##### Table of Contents



Acquisition of LPBV
  Cash
    
    $
    5,000,0004,632,000 shares of common stock
    
    
    22,233,600Transaction fees
    
    
    1,190,000Total purchase price of LPBV
    
    $
    28,423,600
  Current assetsAccounts receivable, net
    
    $
    5,118,296Inventories, net
    
    
    7,037,400Other current assets
    
    
    446,333Non-current assetsProperty and equipment, net
    
    
    940,448Intangible assets
    
    
    14,600,000Goodwill
    
    
    11,332,480Current liabilitiesAccounts payable and accrued expenses
    
    
    (2,033,712
    )Other current liabilities
    
    
    (704,088
    )Short-term debt
    
    
    (2,069,177
    )Long-term debt
    
    
    (2,561,974
    )Deferred taxes and other liabilities
    
    
    (3,682,406
    )Fair value of net assets acquired
    
    $
    28,423,600
   EstimatedUseful LifeAcquisition
    
    
    At AcquisitionIntangible Asset
    
    Fair Value
    
    
    DateTechnology and patents
    
    $
    500,000
    
    
    5 yearsTrademarks
    
    
    1,500,000
    
    
    5 yearsCustomer relationships
    
    
    5,400,000
    
    
    
    3.5 to 10 yearsLicense agreements
    
    
    6,900,000
    
    
    10 yearsNon-competition agreements
    
    
    300,000
    
    
    2 years$
    14,600,000
 F - 17




---



##### Table of Contents



Acquisition of Net Assets of Lamina Lighting, Inc.
   Total cash payment
    
    $
    4,500,000Transaction fees
    
    
    263,383Total purchase price of Lamina
    
    $
    4,763,383
  Current assetsAccounts receivable, net
    
    $
    382,282Inventories, net
    
    
    1,699,173Other current assets
    
    
    181,519Non-current assetsProperty and equipment
    
    
    1,121,154Intangible assets
    
    
    2,445,000Current LiabilitiesAccounts payable and accrued expenses
    
    
    (1,065,745
    )Total purchase price of Lamina net assets
    
    $
    4,763,383
   F - 18




---



##### Table of Contents



EstimatedUseful LifeAcquisition
    
    
    At AcquisitionIntangible Asset
    
    Fair Value
    
    
    DateTrademarks
    
    $
    712,500
    
    
    20 yearsCustomer relations
    
    
    990,000
    
    
    10 yearsLicense agreements
    
    
    742,500
    
    
    10 years$
    2,445,000
 Pro-Forma Results for Acquisitions
   2008Revenue
    
    
    
    
    
    $
    28,622,000Net loss
    
    
    
    
    
    
    (103,244,000
    )Basic net loss per share
    
    
    
    
    
    $
    (3.58
    )Diluted net loss per share
    
    
    
    
    
    $
    (3.58
    )
 NOTE 5: FAIR VALUE MEASUREMENT OF FINANCIAL INSTRUMENTS
   F - 19




---



##### Table of Contents



NOTE 6: INVENTORIES
  December 31,
    
    
    December 31,2008
    
    
    2007Raw materials and components
    
    $
    13,342,589
    
    
    $
    3,848,594Work-in-process
    
    
    1,365,431
    
    
    
    221,493Finished goods
    
    
    2,359,754
    
    
    
    131,879Allowance for obsolete and slow moving raw materials
    
    
    (4,865,000
    )
    
    
    (415,000
    )$
    12,202,774
    
    
    $
    3,786,966NOTE 7: PROPERTY, EQUIPMENT AND OTHER ASSETSProperty and equipment consists of the following:December 31,
    
    
    December 31,2008
    
    
    2007Leasehold improvements
    
    $
    1,075,377
    
    
    $
    184,609Office furniture and equipment
    
    
    3,507,767
    
    
    
    640,736Tooling and production and test equipment
    
    
    4,269,401
    
    
    
    649,804Total property and equipment
    
    
    8,852,545
    
    
    
    1,475,149Accumulated depreciation
    
    
    (5,221,657
    )
    
    
    (326,125
    )$
    3,630,888
    
    
    $
    1,149,024Intangible assets consist of the following:December 31,
    
    
    December 31,2008
    
    
    2007Technology and patents
    
    $
    5,152,501
    
    
    $
    8,069,764Trademarks
    
    
    1,566,900
    
    
    
    360,000Software
    
    
    2,000,000
    
    
    
    2,000,000Customer relationships
    
    
    6,049,000
    
    
    
    730,000Licenses
    
    
    7,642,500
    
    
    
    Non-competition agreements
    
    
    300,000
    
    
    
    Total intangible assets
    
    $
    22,710,901
    
    
    
    11,159,764Less: Accumulated amortization
    
    
    (5,258,269
    )
    
    
    (1,844,782
    )$
    17,452,632
    
    
    $
    9,314,982
  F - 20




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##### Table of Contents



Goodwill arising on the acquisition of Lighting Science Group
    
    $
    42,605,552Technology and patents acquired on the acquisition of Lighting
Science Group
    
    
    2,419,984Goodwill arising on the acquisition of LPBV
    
    
    6,159,000Trademarks acquired on the acquisition of LPBV
    
    
    796,741Technology and patents acquired on the acquisition of LPBV
    
    
    322,856Customer relationships acquired on the acquisition of LPBV
    
    
    806,000Total impairment charge
    
    $
    53,110,133
   EstimatedOriginal Fair
    
    Accumulated
    
    Net Carrying
    
    Remaining UsefulIntangible Asset
    
    Value
    
    Amortization
    
    Value
    
    LifeTechnology and intellectual property
    
    $
    5,152,501
    
    
    $
    (2,014,218
    )
    
    $
    3,138,283
    
    
    
    1.5 to 15.5 yearsTrademarks
    
    
    1,566,900
    
    
    
    (158,922
    )
    
    
    1,407,988
    
    
    4.5  to 20.0 yearsSoftware
    
    
    2,000,000
    
    
    
    (1,000,000
    )
    
    
    1,000,000
    
    
    0.5 yearsCustomer relationships
    
    
    6,049,000
    
    
    
    (850,994
    )
    
    
    5,198,006
    
    
    
    3.5 to 13.5 yearsLicense agreements
    
    
    7,642,500
    
    
    
    (1,114,762
    )
    
    
    6,527,738
    
    
    10.0 yearsNon-competition agreements
    
    
    300,000
    
    
    
    (119,373
    )
    
    
    180,627
    
    
    1.5 yearsGoodwill
    
    
    6,799,962
    
    
    
    
    
    
    
    6,799,962
    
    
    Not subject to amortization
  2009
    
    $
    3,274,3242010
    
    
    2,154,1872011
    
    
    2,123,2322012
    
    
    1,994,5692013
    
    
    1,772,611Thereafter
    
    
    6,133,709$
    17,452,632
 NOTE 8: SHORT-TERM DEBT
  F - 21




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##### Table of Contents



BalanceOutstandingatDecemberMaximum
    
    
    
    
    
    
    31, 2008Facility
    
    Facility
    
    
    Interest Rate
    
    
    (USD)ABN AMRO Bank,
revolving line of
credit
    
    
    500,000
    
    
    
    6.90%
    
    
    $
    330,137IFN Finance, working
capital line,
availability based
on 90% of the value
of trade receivable
invoices
    
    
    4,000,000
    
    
    
    7.15%
    
    
    
    1,876,576Promissory notes
issued to related
parties due July 31,
2009
    
    US$
    2,000,000
    
    
    
    8.0%
    
    
    
    2,000,000Bank of Montreal,
demand line of
credit
    
    US$
    20,000,000
    
    
    
    7.25%
    
    
    
    18,000,000Total short-term debt
    
    
    
    
    
    
    
    
    
    $
    22,206,713
 
    F - 22




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##### Table of Contents



NOTE 9: LONG-TERM DEBT
  December 31,
    
    
    
    
    
    
    December 31,2008
    
    
    Maturity date
    
    
    2008ABN AMRO Bank, 10 year term loan,
payable in forty equal installments
beginning April 1, 2004
    
    
    1,575,000
    
    
    January 1, 2014
    
    $
    2,220,278ABN AMRO Bank, 5 year term loan,
payable in twenty equal installments
beginning April 1, 2004
    
    
    50,000
    
    
    January 1, 2009
    
    
    70,485Leases
    
    
    122,330
    
    
    various
    
    
    168,2201,747,330
    
    
    
    
    
    
    
    2,458,983Less current portion of long-term debt
    
    
    (1,675,916
    )
    
    
    
    
    
    
    (2,362,540
    )Long-term portion of long-term debt
    
    
    71,414
    
    
    
    
    
    
    $
    96,443
   2009
    
    $
    2,362,5402010
    
    
    51,7932011
    
    
    44,6502012
    
    
    2013
    
    
    Thereafter
    
    
    $
    2,458,983
 NOTE 10: INCOME TAXES
  F - 23




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##### Table of Contents



For the period
    
    
    LED EffectsFor the year
    
    
    June 14, 2007
    
    
    For the periodended
    
    
    through
    
    
    January 1,December 31,
    
    
    December 31,
    
    
    2007 through2008
    
    
    2007
    
    
    June 13, 2007Income (loss) before taxes
and minority interest in
income of subsidiaryDomestic
    
    $
    (92,269,577
    )
    
    $
    (4,730,555
    )
    
    $
    429,793Foreign
    
    
    (4,901,386
    )
    
    
    (168,512
    )
    
    
    32,246Total
    
    $
    (97,170,963
    )
    
    $
    (4,899,067
    )
    
    $
    462,039Income tax expense (benefit)Current provisionFederal
    
    
    
    
    
    
    
    
    
    $
    121,176State
    
    
    
    
    
    
    
    
    
    
    45,331Current income tax expense
    
    $
    
    
    
    $
    
    
    
    $
    166,507Deferred income tax expense
(benefit)Federal
    
    $
    (1,264,436
    )
    
    
    
    
    
    $
    890State
    
    
    
    
    
    
    
    
    
    
    (6,117
    )Foreign
    
    
    (943,071
    )
    
    
    
    
    
    
    10,964Deferred income tax expense
(benefit)
    
    $
    (2,207,507
    )
    
    $
    
    
    
    $
    5,737Income tax expense (benefit)
    
    $
    (2,207,507
    )
    
    $
    
    
    
    $
    172,244
  For the periodFor the year
    
    
    June 14, 2007ended
    
    
    throughDecember 31,
    
    
    December 31,2008
    
    
    2007Loss before taxes and minority
interest in income of subsidiary
    
    $
    (97,170,963
    )
    
    $
    (4,899,067
    )Income tax benefit applying United
States federal statutory rate
    
    $
    (33,038,127
    )
    
    $
    (1,665,683
    )Permanent differencesImpairment charge
    
    
    18,057,445
    
    
    
    Other
    
    
    134,060
    
    
    
    (91,603
    )Increase in valuation allowance
    
    
    12,478,941
    
    
    
    2,576,446Rate difference between United States
federal statutory rate and Netherlands
statutory rate
    
    
    355,136
    
    
    
    Income tax benefit eliminated by IRS
Section 382 limitation
    
    
    
    
    
    
    (762,012
    )Other
    
    
    (194,961
    )
    
    
    (57,148
    )Income tax benefit recorded
    
    $
    (2,207,507
    )
    
    
    
 F - 24




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##### Table of Contents



December 31,
    
    
    December 31,2008
    
    
    2007Deferred tax assetsNet operating loss carryforwards
    
    $
    22,551,486
    
    
    $
    11,176,327Net operating loss carryforward
recorded by foreign subsidiary
    
    
    923,988
    
    
    
    Stock options
    
    
    1,186,205
    
    
    
    808,242Inventories
    
    
    729,808
    
    
    
    Accounts receivable
    
    
    33,435
    
    
    
    Accrued liabilities
    
    
    217,441
    
    
    
    Other
    
    
    
    
    
    
    44,435Total deferred tax assets
    
    
    25,642,362
    
    
    
    12,029,003Less: valuation allowance
    
    
    (24,507,944
    )
    
    
    (12,029,003
    )Net deferred tax assets
    
    $
    1,134,418
    
    
    $
    Deferred tax liabilitiesDerivatives
    
    $
    (96,879
    )
    
    $
    Intangible assets
    
    
    (2,414,831
    )
    
    
    Total deferred tax liabilities
    
    
    (2,511,710
    )
    
    
    Net deferred tax liabilities
    
    $
    (1,377,292
    )
    
    $
    
  United States
    
    
    The NetherlandsIncome Tax Loss
    
    
    Income Tax LossYear of Expiration
    
    Carryforwards
    
    
    Carryforwards2012
    
    $
    2,293,432
    
    
    $
    2016
    
    
    
    
    
    
    3,695,9512018
    
    
    2,293,432
    
    
    
    2019
    
    
    2,293,432
    
    
    
    2020
    
    
    2,293,432
    
    
    
    2021
    
    
    2,293,432
    
    
    
    2022
    
    
    2,293,432
    
    
    
    2023
    
    
    2,293,432
    
    
    
    2024
    
    
    2,293,432
    
    
    
    2025
    
    
    2,293,432
    
    
    
    2026
    
    
    2,293,432
    
    
    
    2027
    
    
    9,937,230
    
    
    
    2028
    
    
    33,456,349
    
    
    
    Total
    
    $
    66,327,899
    
    
    $
    3,695,951
 F - 25




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##### Table of Contents



NOTE 11: RELATED PARTY TRANSACTIONS
 Pegasus Capital
    Loans from Directors and Officers
   F - 26




---



##### Table of Contents



NOTE 12: PREFERRED STOCK
 Private Placement with Institutional and Accredited Investors
       F - 27




---



##### Table of Contents



Year Ended December 31,
    
    
    Period June 14, 20072008
    
    
    through December 31, 2007Fair value of
liability for
derivative
contracts,
beginning of period
    
    $
    1,007,600
    
    
    $
    Fair value of
derivative
liability assumed
through the reverse
merger with LSG
    
    
    
    
    
    
    1,903,107Adjustment to fair
value of current
derivative contacts
during the period,
recorded in other
income (expense)
during the period
    
    
    (511,489
    )
    
    
    (357,461
    )Less allocation of
fair value of
derivative
liability to
additional paid-in
capital on
conversion or
exercise of
derivative
instruments
    
    
    (492,457
    )
    
    
    (538,046
    )Fair value of
liability for
derivative
contracts, end of
period
    
    $
    3,654
    
    
    $
    1,007,600
  Embedded ConversionFeature Associated With The6% Convertible PreferredWarrants
    
    StockExercise/Conversion Price
    
    $
    6.00
    
    
    $
    6.00Fair Value of the Companys
Common Stock
    
    $
    0.37
    
    
    $
    0.37Expected life in years
    
    
    1.4
    
    
    
    1.4Expected volatility
    
    
    75
    %
    
    
    75
    %
 F - 28




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##### Table of Contents



Embedded ConversionFeature Associated With The6% Convertible PreferredWarrants
    
    StockExpected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Risk free rate
    
    
    0.48
    %
    
    
    0.48
    %Calculated fair value per share
    
    $
    0.04
    
    
    $
    0.04
  NOTE 13: STOCKHOLDERS EQUITY
 Acquisition of LPBV
  March 2007 Private Placement
 th
  Series B Preferred Stock
   F - 29




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##### Table of Contents



Series C Preferred Stock
 pari passu
   Equity Based Compensation Plan
   F - 30




---



##### Table of Contents



Exercise price
    
    $
    17.40 - $6.00Fair market value of the underlying stock on date of
grant
    
    $
    8.20 - $3.00Option term
        
    3.0 years  7.0 yearsVesting term
    
    
    2.0 to 4.0 yearsEstimated volatility
    
    
    75
    %Expected dividend yield
    
    
    0.0
    %Risk free rate
    
    
    5.25% - 3.75
    %Calculated fair value per share
    
    $
    8.20 - $3.00
   WeightedAverageStock Options
    
    Underlying Shares
    
    
    Exercise PriceOutstanding and exercisable, June 14, 2007
    
    
    
    
    
    $
    Options assumed on the reverse merger with LSG
    
    
    267,667
    
    
    $
    7.80Granted during the period
    
    
    
    
    
    $
    Exercised during the period
    
    
    
    
    
    $
    Forfeited during the period
    
    
    
    
    
    $
    Outstanding and exercisable, December 31, 2007
    
    
    267,667
    
    
    $
    7.80Granted during the year
    
    
    729,000
    
    
    $
    4.90Exercised during the year
    
    
    
    
    
    
    Forfeited during the year
    
    
    (101,000
    )
    
    $
    (4.90
    )Outstanding, December 31, 2008
    
    
    895,667
    
    
    $
    5.77Exercisable at December 31, 2008
    
    
    267,667
    
    
    $
    7.83Options expected to vest
    
    
    628,000
    
    
    $
    4.90Weighted average fair value of options
granted during the year ended December 31,
2008
    
    
    
    
    
    $
    2.77
 F - 31




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##### Table of Contents



Restricted Stock Agreements
    F - 32




---



##### Table of Contents



WeightedAverageGrant DateNon-vested restricted stock
    
    # of shares
    
    
    Fair ValueNon-vested restricted stock, June 14, 2007
    
    
    
    
    
    $
    0.00Restricted stock grants assumed upon reverse merger
    
    
    187,500
    
    
    $
    10.60Granted
    
    
    
    
    
    $
    0.00Vested
    
    
    
    
    
    $
    0.00Cancelled
    
    
    
    
    
    $
    0.00Non-vested restricted stock, December 31, 2007
    
    
    187,500
    
    
    $
    10.60Granted
    
    
    841,250
    
    
    $
    4.90Vested
    
    
    (62,500
    )
    
    $
    (10.60
    )Cancelled
    
    
    
    
    
    
    Non-vested restricted stock, December 31, 2008
    
    
    966,250
    
    
    $
    5.64
  Warrants for the Purchase of Common Stock
  No. ofReason for
    
    Common
    
    Exercise
    
    ExpirationWarrant Holder
    
    Issuance
    
    Shares
    
    Price
    
    DateInvestors in March 2007 Private Placement (Note 13)
    
    March 2007 Private Placement A Warrants
    
    
    722,362
    
    
    $
    7.00
    
    
    March 9, 2012 to June 29, 2012Pegasus IV (Note 8)
    
    Guarantee of BMO line of credit
    
    
    942,857
    
    
    $
    7.00
    
    
    July 25, 2013Line of Credit Guarantors
    
    Financing guarantees
    
    
    121,375
    
    
    $
    6.00
    
    
    September 22, 2011 through March 31, 20126% Convertible Preferred stockholders (Note 12)
    
    Private Placement
    
    
    232,504
    
    
    $
    6.00
    
    
    May 10, 2010The Equity Group
    
    Consulting services
    
    
    37,500
    
    
    $
    16.00
    
    
    February 10, 2010ICurie
    
    Marketing Agreement
    
    
    6,250
    
    
    $
    6.40
    
    
    September 13, 2011Officers and Directors
    
    Bridge Financing
    
    
    8,000
    
    
    $
    30.00
    
    
    April 20, 2010ABM Industries Inc.
    
    Marketing services
    
    
    57,500
    
    
    $
    8.00  -$10.40
    
    
    July 31, 2009 to December 31, 2009Total
    
    
    
    
    2,128,348
  F - 33




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##### Table of Contents



NOTE 14: INTERNATIONAL SALES
  LED Effectsfor theLSG for the
    
    
    periodperiod June
    
    
    January 1,LSG for the
    
    
    14, 2007
    
    
    2007year ended
    
    
    through
    
    
    throughDecember 31,
    
    
    December 31,
    
    
    June 13,Revenue by Geographical Region
    
    2008
    
    
    2007
    
    
    2007United States
    
    $
    10,165,476
    
    
    $
    4,564,949
    
    
    $
    3,595,357The Netherlands
    
    
    2,623,873
    
    
    
    
    
    
    
    Other
    
    
    7,969,244
    
    
    
    51,162
    
    
    
    79,775$
    20,758,593
    
    
    $
    4,616,111
    
    
    $
    3,675,132
 Total Assets by Geographical region
    
    December 31, 2008
    
    
    December 31, 2007United States
    
    $
    39,136,026
    
    
    $
    72,803,664The Netherlands
    
    
    9,866,344
    
    
    
    Other
    
    
    550,897
    
    
    
    782,587$
    49,553,267
    
    
    $
    73,586,251
 NOTE 15: COMMITMENTS AND CONTINGENCIES
 Lease Commitments
  Year
    
    Amount2009
    
    $
    1,077,1522010
    
    
    1,011,2582011
    
    
    928,7832012
    
    
    574,9192013
    
    
    11,726Thereafter
    
    
    
  F - 34




---



##### Table of Contents



Agreements with Contract Manufacturers
  Legal Action
      F - 35




---



##### Table of Contents



Other Contingencies
  F - 36




---



##### Table of Contents



NOTE 16: SUBSEQUENT EVENTS
 Borrowing under Promissory Notes
   Convertible Note Issuance
     F - 37