Exhibit 10.3


    Factoring
      Agreement

    


    This
      Agreement, dated January 5, 2007 (the "Effective Date"), is between Lighting
      Science Group Corporation with offices at 2100 McKinney Avenue, Suite 1555,
      Dallas, Texas 75201 (hereinafter called "Seller"), and Allied Capital Partners,
      L.P., with offices at 5151 Belt Line Rd., Suite 500, Dallas, Texas 75254
      (hereinafter called "Allied").

    


    The
      Seller desires to sell its Accounts to Allied on the following terms, conditions
      and provisions and, therefore, it is agreed as follows:

    


    	1.  	
            Definitions.
              As used in this Agreement and all other documents or instruments executed
              and delivered in connection with this
              Agreement:

          


    


    	1.1  	
            The
              capitalized words used herein (singular, plural or in any tense) shall
              have the same definitions as those set forth in the Uniform Commercial
              Code as adopted by the State of Texas, effective July 1,
              2001.

          


    


    	1.2  	
            "Without
              Recourse" shall mean the Seller of Accounts is not obligated to pay
              or
              repurchase an Account sold to Allied unless Seller breaches its warranties
              or representations concerning such Account. “With Recourse” or "Recourse"
              means Seller shall pay or repurchase Accounts acquired by Allied that
              are
              not paid according to the terms of the
              invoice.

          


    


    	1.3  	
            “Face
              Amount” shall mean the total amount of each Account, including taxes,
              delivery charges, etc.

          


    


    	1.4  	
            An
              Account shall be deemed to be "Disputed" if (i) the Account Debtor
              disputes an Account, including the amount owing, timely delivery of
              the
              goods, conformity of the goods or services to the order, or any other
              aspect of the sale giving rise to the Account for any reason whatsoever,
              even if the dispute has no merit, is in bad faith or is unreasonable,
              (ii)
              the Account contains mistakes, is not correct or was sent in error,
              or
              (iii) all of the following three conditions exist: (a) the Account
              is not
              paid within 90 days of its invoice date unless Factor agrees in writing
              to
              other terms, (b) the Account Debtor will not communicate the reason
              for
              non-payment to Allied, and (c) the Seller fails to produce, within
              such
              time period, good and sufficient evidence that nonpayment is due to
              the
              Account Debtor's financial inability to pay, the pendency of a bankruptcy
              proceeding by or against the Account Debtor or some reason other than
              a
              dispute of the type referred to above.

          


    


    	1.5  	
            “New
              Commitment” shall mean any written commitment Seller may receive during
              the Term of this Agreement from a 

          


    third
      party to provide working capital financing or factoring to Seller, which
      commitment Seller intends to accept.

    


    1.6
      “Discount” shall mean the sum of the following, subject to adjustment as set
      forth below: (i)1.75% of the Face Amount of each Account sold to Allied under
      this Agreement for the Initial Payment Period and (ii) .066% for each 1 day
      period (or portion thereof) that the Account remains unpaid after the Initial
      Payment Period (as hereinafter defined), until the earlier of (a) the date
      it is
      paid in full or repurchased by the Seller in accordance with this Agreement,
      or
      (b) if the Account is not one that the Seller is or becomes obligated to pay
      or
      repurchase, 150 days from the date of the invoice of the Account. In the event
      the Wall
      Street Journal
      Prime
      shall have increased or decreased on the first business day of each calendar
      quarter during the Term from its percentage as of the first business day of
      the
      previous calendar quarter, or as of the Effective Date if this term is applied
      on the first business day of the calendar quarter immediately following the
      Effective Date, the Discount shall increase or decrease
      proportionally.

    


    	1.7  	
            “Initial
              Payment Period” shall mean the period of 30 days from the date Allied has
              purchased an Account under this
              Agreement.

          


    


    	1.8  	
            “Purchase
              Price” shall mean the Face Amount of the Account less the
              Discount.

          


    


    	1.9  	
            “Wall
              Street Journal Prime”
              shall mean the “prime rate” quoted by The
              Wall Street Journal
              as
              the national average base rate on loans posted by at least 75% of the
              nation’s largest banks.

          


    


    	1.10  	
            “Seller’s
              Business” is manufacture and distribution of LED lighting
              applications.

          


    


    Other
      words used herein, which are capitalized, shall have the definitions prescribed
      herein. Variations of words defined herein shall have the same meaning as the
      defined terms.

    


    



    	2.  	
            Offer
              to Sell.
              Seller may, at its option, offer to sell, assign and transfer to Allied
              its existing and hereinafter arising, acquired or created Accounts.
              Any
              such offer shall be made on an assignment form prescribed by Allied
              (the
              "Schedule") sent to Allied at its above stated office and accompanied
              by a
              copy of (i) each invoice, (ii) the bill of lading, shipping documents
              or
              other proof of delivery, (iii) the contract or purchase order (or purchase
              order number which corresponds with the invoice), and (iv) such other
              documentation as may be requested by Allied for each Account listed
              on the
              Schedule.

          


    


    	3.  	
            Acceptance
              of Offer.
              Allied may accept Seller's offer to sell Accounts at its above stated
              office by either (i) paying the Purchase Price (less the Reserve, defined
              below) with respect to all Accounts appearing on the Schedule submitted
              to
              Allied, or (ii) by marking out the Accounts which appear on the Schedule
              and which Allied is unwilling to purchase, paying the Purchase Price
              (less
              the Reserve) for the remaining Accounts, and sending a copy of the
              Schedule to Seller which shows which Accounts were rejected. Allied
              shall
              not be obligated to purchase any Account that Seller offers to sell
              to
              Allied.

          


    


    



    	4.  	
            Reserve.
              Allied may, at its sole option and discretion, defer making payment
              to
              Seller of a portion of the Purchase Price payable for all Accounts
              purchased under this Agreement which have not been paid by the Account
              Debtor or paid or repurchased by Seller's payment of the Repurchase
              Price
              to Allied, up to an aggregate amount equal to18.25% of the Face Amount
              of
              all such Accounts (the "Reserve"). The Reserve shall not bear interest.
              The remaining portion of the Purchase Price payable for each Account
              purchased hereunder and which constitutes part of the Reserve is payable
              by Allied to Seller, on request of Seller (limited to one request per
              week), after the earlier of (i) the date the Account is paid to Allied,
              or
              (ii) 150 days from the date of the invoice of the Account, unless the
              Reserve is increased as herein provided or the Account is or becomes
              one
              that the Seller is obligated to repurchase or pay. An
              Account is not deemed paid to Allied unless the payment instrument
              is
              actually paid and, in the case of payments of more than $500,000, until
              after 5 days from receipt of the payment instrument excluding wire
              transfers. Notwithstanding
              the preceding limitation on the Reserve, in the event Seller breaches
              any
              representation, warranty, term, condition or provision of this Agreement,
              or if in Allied's reasonable judgment it is necessary to increase the
              Reserve to protect Allied from losses due to a Dispute of any Account,
              returns or other contingencies, or Seller's unsatisfied obligations
              and
              liabilities, Allied is entitled to increase the amount of the Reserve
              without Seller's consent. If any Account owned by Allied is not paid
              within 75 days of the date of the invoice related thereto, Allied may
              presume that the Account may be Disputed and may increase the Reserve
              by
              an amount equal to that portion of the Purchase Price previously paid
              by
              Allied plus the Discount unless Factor agrees in writing to other terms.
              In the event Allied notifies Seller that it has increased the Reserve,
              Seller shall immediately refund to Allied a portion of the Purchase
              Price
              previously paid by Allied for the purchase of Seller's Accounts which
              is
              equal to the increased amount of the Reserve. After the Term of this
              Agreement defined below has expired and Seller has paid its liabilities
              to
              Allied and fulfilled its obligations arising hereunder, Allied shall
              pay
              the balance of the Purchase Price payable for all Accounts purchased
              hereunder which constitutes Reserve (if any) to Seller. The purpose
              of the
              Reserve is to provide Allied with additional collateral to secure payment
              of Seller's liabilities and performance of Seller's obligations arising
              under this Agreement. Allied shall be entitled to offset or recoup
              from
              the Reserve the amount of any liabilities owing by Seller to Allied,
              whether presently existing or hereinafter arising, and whether or not
              arising under this Agreement, including, but not limited to, Seller's
              obligation to repurchase Accounts or to pay Accounts pursuant to the
              provisions of this Agreement. Seller acknowledges that the Reserve
              is not
              a cash deposit, but represents the balance of Allied's liability to
              Seller
              for payment of the Purchase Price, subject to its right of offset or
              recoupment and its security interest in the Reserve. Allied shall provide
              Seller with a monthly statement of accounting of transactions affecting
              the Reserve.

          


    


    	5.  	
            Seller’s
              Repurchase Obligation.
              In
              addition to all other rights of Allied hereunder, Allied may require
              that
              Seller repurchase, by payment of the Repurchase Price together with
              any
              other unpaid fees then owing to Allied, any Account that has been
              purchased by Allied: (i) for which Seller has breached its warranty
              or
              representation concerning such Account as set forth herein; or (ii)
              which
              was purchased by Allied With Recourse. If any Account purchased by
              Allied
              is one that Seller is or becomes obligated to pay or repurchase under
              this
              Agreement and is not paid within the Initial Payment Period, Allied,
              at
              Allied’s sole discretion, may elect to: (i) retain ownership of the
              Account until the earlier of either the date the Account is paid by
              the
              Account Debtor or 90 days after the invoice date of the Account unless
              Factor agrees in writing to other terms, or (ii) at any time require
              Seller to repurchase the Account at the Repurchase Price. The purchase
              price for any Account, which Seller is required to repurchase from
              Allied
              under this Agreement is the Face Amount of the Account (the “Repurchase
              Price”). If Seller ever becomes obligated to repurchase an Account from
              Allied, it shall not become the owner of such Account until it has
              paid
              the Repurchase Price to Allied.

          


    


    	6.  	
            Minimum
              Sales.
              If Seller fails to offer to sell and assign to Allied a monthly minimum
              of
              $0 in Accounts which are acceptable to Allied, Seller will pay to Allied
              the difference between the Discount on all Accounts purchased by Allied
              from Seller during the month and $0.

          


    


    	7.  	
            Recourse.
              Except as provided below, all Accounts sold and purchased hereunder
              are
              sold With Recourse on Seller. Allied and Seller may agree in writing
              that
              the Accounts of a specific Account Debtor or specific Accounts shall
              be
              purchased Without Recourse on Seller. 

          


    


    	8.  	
            Account
              Warranties.
              Seller warrants, represents, covenants and agrees that the presently
              existing and hereafter arising, acquired or created Accounts of Seller
              sold to Allied or in which Allied obtains a security interest: (i)
              are not
              and will not be Disputed; (ii) will be paid when due (unless the Account
              was purchased Without Recourse); (iii) are owned solely by Seller,
              which
              has the power to transfer the Accounts, and that its title to the Accounts
              is free of all adverse claims, liens, security interests and restrictions
              on transfer, encumbrance or pledge, except as created by this Agreement;
              (iv) set forth the correct and complete terms of sale, which have not
              been
              and will not be altered or amended; (v) are valid and owing, and all
              goods
              and services giving rise to the Accounts have been provided or delivered
              in accordance with Seller's agreement with the Account Debtor; (vi)
              will
              not be paid by a preference payment or fraudulent transfer (as defined
              by
              the Bankruptcy Code or the relevant law of any state); (vii) are not
              and
              shall not become subject to a defense or claim in recoupment or setoff
              that can be asserted against Allied; (viii) are not owing by Account
              Debtors that were subject to insolvency or bankruptcy proceedings
              concerning which Seller had any notice as of the date the Account is
              sold,
              or in which Seller owns an interest of any kind; (ix) shall be reflected
              on Seller's books and records as having been transferred, sold and
              conveyed to Allied if Allied purchases such Accounts; and (x) shall
              be
              evidenced by an invoice, and each invoice shall have printed on the
              face
              thereof a statement, approved by Allied, notifying the Account Debtor
              that
              the invoice has been sold and assigned to Allied and is payable only
              to
              Allied (or jointly to Allied and Seller) at the address designated
              in such
              notice and that, if the Account is paid, the Account will be paid by
              the
              Account Debtor in accordance with such instructions. The warranties
              and
              representations set forth herein shall apply as of the date each Account
              is sold hereunder and shall continue with respect to each Account until
              each such Account is paid. If Seller breaches any warranty, covenant
              or
              agreement set forth above, Seller shall repurchase the applicable Account
              for the Repurchase Price, or pay the Account; such payment or repurchase
              shall cure Seller’s default for breach of warranty with respect to such
              Account. All warranties and representations of Seller under this Agreement
              are continuing warranties and representations.


          


    


    



    	9.  	
            Other
              Warranties and Covenants of Seller.
              Seller further warrants, represents, covenants and agrees that as of
              the
              Effective Date and at all times during the Term of this Agreement:
              (i)
              Seller is and shall be able to pay its debts as they become due; (ii)
              Seller's (a) principal executive office is located in the State of
              Texas,
              (b) Seller’s Jurisdiction of Organization or state of incorporation or
              charter is the State of Delaware and (c) exact legal name is as set
              forth
              in the first paragraph of this Agreement, and Seller does not operate
              under any trade name or assumed name except: LSG, LSGC, Lighting Science
              Group; (iii) Allied is and shall remain Seller's sole factor, and Seller
              will not sell its Accounts to any other person, firm or corporation
              during
              the Term; (iv) after written notice by Allied to Seller and automatically,
              without notice, after Seller's default under this Agreement, Seller
              shall
              not, without the prior written consent of Allied in each instance,
              (a)
              grant any extension of time for payment of any Accounts or any other
              Collateral which includes a monetary obligation, (b) compromise or
              settle
              any Accounts or any such other Collateral for less than the full amount
              thereof, (c) release in whole or in part any Account Debtor or other
              person liable for payment of Accounts or any other such Collateral,
              or (d)
              grant any credits, discounts, allowances, deductions, return
              authorizations or the like with respect to any Accounts or any such
              other
              Collateral; (v) before sending any invoice to an Account Debtor with
              respect to an Account that has been sold to Allied, Seller shall mark
              the
              same with a notice of assignment as may be required by Allied; (vi)
              Seller
              maintains and shall continue to maintain complete and accurate business
              records of the type normally maintained by businesses similar to Seller,
              and all financial records, statements, books and other documents shall
              be
              made available for Allied's inspection and shall be true and accurate
              in
              all respects; (vii) the Accounts and Collateral are and shall at all
              times
              remain free and clear of liens, claims and encumbrances other than
              the
              security interests granted to Allied hereunder; (viii) the Accounts
              assigned to Allied by Seller shall become the sole property of Allied
              and
              Seller’s sale and assignment of accounts shall pass legal and equitable
              title to Allied free and clear of liens, claims and encumbrances; (ix)
              Seller insures and shall continue to insure its business and its assets
              in
              a manner customary for businesses of the type of Seller's business,
              and
              Seller will insure its inventory and goods in transit for their full
              value
              or the maximum attainable; (x) Seller will not sell, encumber or move
              the
              Collateral except in the ordinary course of its business, without the
              prior written consent of Allied; (xi) Seller is and shall remain in
              compliance with all federal, state and local tax laws, rules and
              regulations and shall furnish Allied with evidence thereof on demand;
              (xii) Seller will preserve its present legal formation and existence
              and
              not, in one transaction or series of related transactions, merge into
              or
              consolidate with any other entity, change the form of its legal existence,
              or sell all or substantially all of its assets; (xiii) Seller will
              not
              change the state where it is located, will not change the state where
              it
              is incorporated or organized and will not change its organizational
              documents, and will not change its name without providing Allied with
              at
              least 30 days prior written notice; and, (xiv)
              Seller shall from time to time realize sales or income from other business
              activity; however, Allied will not factor any of Seller’s other business
              activity other than those business activities set forth in Paragraph
              1.10
              above.
              Seller also agrees that, if an Account purchased by Allied authorizes
              the
              Account Debtor to discount the Face Amount of the Account for prompt
              payment, the Seller shall pay to Allied an amount equal to the discount
              taken by the Account Debtor (even if not properly taken) and Allied
              is
              authorized to offset such discount against the Reserve. All warranties
              and
              representations of Seller under this Agreement are continuing warranties
              and representations. 

          


    


    	10.  	
            Notice
              to Allied.
              Seller shall immediately notify Allied of (i) a Dispute of any Account
              sold or encumbered under this Agreement, (ii) any other breach of warranty
              or default in Seller's covenants and agreements set forth herein, (iii)
              Seller’s discovery of evidence of Insolvency of an Account Debtor, and
              (iv) the filing and service of a lawsuit or adversary proceeding related
              to an Account purchased by Allied or the payment related thereto
              (including, but not limited to, preference or fraudulent transfer
              litigation), (v) any claim of a lien in the Collateral of Allied
              (including federal tax liens), (vi) any change in controlling ownership
              of
              Seller, and (vii) Seller’s failure to pay any tax it may owe at any time
              for any reason, when due.

          


    


    	11.  	
            Security
              Interest in Collateral.
              To secure Seller’s payment to Allied of all amounts owing to Allied
              hereunder or damages arising due to Seller’s breach of the terms,
              warranties, representations, or conditions of this Agreement or any
              other
              agreement by and between Allied and Seller, whether now or hereafter
              owing
              to Allied, Seller grants to Allied a Security Interest in all of its
              presently existing and hereafter arising, acquired or created: All
              amounts
              owing to Seller under this Factoring Agreement including the Purchase
              Price and Reserve and all proceeds thereof, Accounts (including Accounts
              that are proceeds of Inventory) and the following property of Seller
              (but
              only to the extent it constitutes proceeds, payment, or secures or
              assures
              payment of Accounts, or is returned goods): Chattel Paper, Supporting
              Obligations, Instruments, Inventory that is goods returned by an Account
              Debtor, Documents and Letter-of Credit Rights. Seller agrees as follows
              with respect to the aforementioned Collateral: (i) Allied shall have
              the
              right at any time and in its sole discretion to enforce Seller's rights
              against the Account Debtors and obligors; (ii) Seller will not pledge,
              hypothecate or encumber the Collateral during the Term of this Agreement
              and while it is indebted or otherwise obligated to Allied; (iii) Allied
              may exercise all rights and remedies of an unpaid seller with respect
              to
              Accounts, Supporting Obligations, and Chattel Paper constituting
              Collateral hereunder, including the right of replevin, reclamation
              and
              stoppage in transit; (iv) Seller has the risk of loss of the Collateral;
              (v) Allied shall have no duty to collect the Collateral or preserve
              or
              enforce any rights relating to the Collateral; and (vi) Factor may,
              at its
              sole discretion, be willing to subordinate its first lien position
              in
              certain accounts that Factor has declined to purchase. Any such release
              must be in writing and signed by Allied to be
              effective.

          


    


    	12.  	
            Inspection
              of Records.
              Any agent of Allied may audit, check, make abstracts from or copies
              of the
              books, records, receipts, correspondence, memoranda, and other papers
              or
              data relating to the Collateral, Accounts purchased under this Agreement,
              the obligations of Seller to Allied and any other transactions between
              Seller and Allied, or generally audit all of Seller's books and records
              at
              Seller's place of business upon Allied's demand therefore with 24-hour
              notice provided to Seller. Seller shall at all times maintain a complete
              set of books and records containing up-to-date posting of all of its
              cash
              and accrual transactions of any nature. 

          


    


    	13.  	
            Property
              of Allied/Proceeds and Returned Goods Held in Trust.
              After Allied has purchased an Account from Seller, (i) the Account
              and all
              proceeds thereof shall become the sole and absolute property of Allied,
              (ii) Allied may at any time in its sole discretion notify all Account
              Debtors of Accounts purchased by Allied that such Accounts have been
              sold
              and assigned to Allied and are payable only to Allied at the address
              provided by Allied, (iii) Seller shall immediately make proper entries
              on
              its books and records disclosing the absolute sale of such Accounts
              to
              Allied, (iv) Seller shall not hinder, delay or interfere with payment
              of
              Accounts and shall cooperate with and assist Allied in connection with
              Allied's handling, collection or other dealings with the Accounts and
              Account Debtors, including, without limitation, assisting Allied in
              obtaining written confirmation, statements or agreements from Account
              Debtors which specify or confirm any information requested by Allied
              with
              respect to the Accounts, and (v) Seller shall hold any check, commercial
              paper, notes, cash or other forms of payment of any Account sold to
              Allied
              which may come into Seller's possession or under its control (even
              if such
              payment is payable to Seller) in
              trust
              for the benefit of Allied and shall immediately turn over and deliver
              to
              Allied all such payments, in kind, and in the exact form received.
              Seller
              shall endorse any instrument or other form of payment which is payable
              to
              Seller, but which is paid on an Account sold to Allied hereunder. In
              the
              event of the return or non-acceptance, in whole or in part, of property,
              the sale of which resulted in Accounts which were sold and assigned
              to
              Allied, the Seller shall hold such property in
              trust
              for Allied, give to Allied immediate notice of such return or
              non-acceptance, immediately turn over such property to the custody
              and
              control of Allied, and legibly mark such merchandise as the property
              of
              Allied; thereafter, upon demand, Seller shall repurchase such property
              from and pay to Allied the invoice price thereof, and upon such payment
              the Seller shall be entitled to the redelivery of such property. If
              Seller
              fails to make such purchase and payment immediately upon demand, it
              shall
              be in default hereunder and Allied shall be entitled (in addition to
              its
              other remedies) to sell such property at public or private sale and
              to
              charge Seller's account with the difference between the invoice price
              of
              such property and the amount realized upon the sale, plus all charges,
              fees and commissions upon such sale. Allied may become a bidder and
              purchaser at any such sale.

          


    


    



    	14.  	
            Breach
              of Trust Fee.
              Seller's strict adherence to the provisions of Paragraph 13 is essential
              in order for Allied to purchase Seller's Accounts at the Discount and
              on
              the other terms set forth in this Agreement. Seller agrees that the
              provisions of such paragraph are of the essence of this Agreement and
              agrees to implement policies and procedures to ensure its consistent
              and
              prompt performance of its obligations hereunder. In the event Seller
              breaches its obligations under such paragraph for reasons other than
              excusable neglect (which shall be determined solely by Allied in its
              sole
              judgment and discretion), (i) Allied may immediately terminate this
              Agreement and charge the Termination Fee, as defined in Paragraph 17
              below, (ii) Seller shall pay to Allied a fee equal to 15% of the amount
              of
              any payment or other property which was received by Seller as property
              of
              Allied in addition to all other amounts owing to Allied, and (iii)
              Seller,
              at Allied's option, shall immediately repurchase all Accounts acquired
              by
              Allied which are then owing by the Account Debtors by payment of the
              Repurchase Price to Allied, even if such Accounts were purchased Without
              Recourse.

          


    


    	15.  	
            Power
              of Attorney.
              Seller makes, constitutes and appoints Allied as Seller's true and
              lawful
              attorney-in-fact with power of substitution and with power and authority
              to: (i) endorse the name of Seller or of any of its officers or agents
              upon any notes, checks, drafts, money orders, or other instruments
              of
              payment; (ii) sign and endorse the name of Seller or any of its agents
              upon any invoice, freight or express bill, bill of lading, storage
              or
              warehouse receipt, drafts against Account Debtors, assignments,
              verifications, demands under letters of credit and notices in connection
              with Accounts acquired by Allied or which are Collateral under this
              Agreement, and any instrument or document relating thereto or to Seller's
              rights therein; (iii) execute any agreement compromising and settling
              any
              Dispute or collection of any Account owned by Allied or owned by Seller,
              if Seller is in default hereunder, on terms and conditions acceptable
              to
              Allied in its sole discretion; (iv) bring suit in the name of Seller
              or
              Allied to collect any Account; (v) amend the terms of any Account owned
              by
              Allied or owned by Seller, if Seller is in default hereunder; (vi)
              execute
              any financing statements (including amendments) to perfect Allied's
              Security Interest granted by this Agreement; (vii) execute and file
              in the
              name of Seller or Allied, or both, mechanics' liens and all related
              notices and claims under any payment bond, in connection with goods
              or
              services sold by Seller for the improvement of realty; (viii) notify
              any
              Account Debtor obligated with respect to any Account purchased by Allied
              that the underlying Account has been assigned to Allied by Seller and
              that
              payment thereof is to be made to the order of and directly and solely
              to
              Allied; (ix) communicate directly with Account Debtors to verify the
              amount and validity of any Account and to collect payment; (x) if Allied
              (in its sole and absolute discretion) declares Seller to be in default
              hereunder, give written notice to such office and officials of the
              United
              States Post Office to effect such change or changes of address that
              all
              mail addressed to Seller may be delivered directly to Allied; and (xi)
              exercise reclamation rights of Seller and to file a claim in a bankruptcy
              proceeding of an Account Debtor (which Seller requests Allied to do).
              Seller's attorney-in-fact is hereby granted full power to do all necessary
              things to accomplish the above as fully and effectively as could Seller.
              Seller ratifies all that the attorney-in-fact shall lawfully do or
              cause
              to be done by virtue hereof. The power of attorney shall be irrevocable
              for the Term of this Agreement and all transactions
              hereunder.

          


    


    



    	16.  	
            Default.
              Except as specifically provided herein, the following events shall
              constitute a default under this Agreement: (i) Seller fails to pay
              any
              amounts owing hereunder or fails to fulfill its other obligations under
              this Agreement or fails to make payments or fulfill obligations under
              any
              other agreements that it may have with Allied, (ii) Seller's warranties
              or
              representations set forth herein prove to be untrue or false in any
              respect, (iii) Seller or any guarantor of the payment and performance
              of
              obligations hereunder becomes subject to any debtor-relief proceedings,
              (iv) any such guarantor fails to perform or observe any of such
              guarantor's obligations to Allied or to notify Allied of its intention
              to
              rescind, modify, terminate, or revoke any guaranty, or any such guaranty
              ceases to be in full force and effect for any reason whatsoever, or
              (v)
              Allied, for any reason, in good faith, deems itself insecure with respect
              to the prospect of repayment or performance of the obligations of Seller.
              If Client does not pay or perform its liabilities or obligations hereunder
              or any other event of default exists (in Allied’s sole determination),
              Allied may, without notice (except as required by Texas law), (i) enforce
              and foreclose its Security Interest in the Collateral in accordance
              with
              its rights under the Texas Uniform Commercial Code, (ii) notify any
              Account Debtor to make payment of any Account directly to Allied,
              regardless of whether such Accounts have been purchased by Allied or
              Allied has a Security Interest therein, (iii) initiate electronic debit
              or
              credit entries through the ACH system to Seller’s bank accounts or other
              deposit account maintained by Seller, wherever located, to collect
              all
              amounts owing to Allied by Seller, and (iv) exercise any one or all
              of its
              other rights and remedies set forth in this
              Agreement.

          


    


    	17.  	
            Term.
              Unless sooner terminated by either of the parties hereto, the initial
              Term
              of this Agreement shall commence on the Effective Date and continue
              for
              twelve months thereafter, and this Agreement shall automatically renew
              for
              additional twelve-month renewal Terms at the end of the initial Term
              and
              each renewal Term unless either party hereto gives written notice to
              the
              other at least 30 days prior to the end of the original Term or any
              renewal Term that the Term is not renewed. (Such initial Term and renewal
              Term is the "Term.") Allied may terminate this Agreement at any time
              (i)
              if the Seller is in default under this Agreement, by giving written
              notice
              to Seller, or (ii) by giving 30 days advance written notice to Seller.
              Provided Seller is not in default hereunder, Seller may terminate this
              Agreement at any time by giving 90
              days prior written notice to Allied, accompanied by the Termination
              Fee. A
              fee of 4% of $1,000,000 (the facility amount in Buyer’s proposal, accepted
              by Seller, dated December 14, 2006) shall be paid by Seller to Allied
              if
              this Agreement is terminated by Seller (except as hereinafter provided)
              or
              if this Agreement is terminated by Allied due to Seller's breach of
              any
              warranty, term, condition or provision of this Agreement (the "Termination
              Fee"); provided, however, the Termination Fee is waived if Seller is
              not
              in default and obtains a bank loan, secured by its Accounts, and pays
              all
              of its obligations to Allied from the loan proceeds or if Allied is
              paid
              off from the proceeds of additional equity offerings. The Termination
              Fee
              is not a penalty, but is a reasonable estimate of the damages Allied
              is
              likely to suffer as a result of termination, and constitutes agreed
              liquidated damages. All obligations hereunder shall continue in full
              force
              and effect with respect to all transactions entered into and obligations,
              whether absolute or contingent, existing or incurred before the end
              of the
              Term.

          


    


    	18.  	
            Right
              of First Offer.
              Seller hereby agrees that in the event Seller receives a New Commitment,
              Seller will (i) advise Allied in writing of the identity of the offeror
              of
              the New Commitment and the complete terms of the New Commitment, and
              (ii)
              accept Allied’s commitment if Allied elects, in its sole discretion, to
              offer to modify this Agreement to contain the same terms as the New
              Commitment.

          


    


    	19.  	
            Miscellaneous.
              The parties agree to the following additional
              terms:

          


    


    19.1
      This
      Agreement shall be binding upon and inure to the benefit of both parties and
      their legal representatives, successors and assigns.

    


    19.2
      This
      Agreement shall be construed and enforced in accordance with and governed by
      the
      laws of the State of Texas. Venue for the institution of any legal proceeding
      shall be in Dallas County, Texas. Each sale of an Account to Allied under this
      Agreement is an “Account Purchase Transaction” as defined by section 306.001(1)
      of the Texas Finance Code and is subject to such subtitle of the Texas Finance
      Code.

    


    19.3
      If
      any term of this Agreement is held to be illegal, invalid, or unenforceable,
      such determination shall not affect the validity of the remaining terms. Time
      is
      of the essence of this Agreement.

    


    19.4
      Seller authorizes Allied to file a Financing Statement describing the above
      described Collateral (and all amendments thereto and renewals thereof) any
      place
      Allied may deem necessary or appropriate, with or without the signature of
      Seller thereon. 

    


    19.5
      All
      notices under this Agreement shall be in writing and delivered personally,
      faxed
      or mailed by certified mail, return receipt requested, postage prepaid. The
      parties shall use the addresses or fax number set forth below for all notices,
      unless the party giving the notice has received written notice from the
      recipient of a change of address or fax number at least 10 days prior to the
      notice given under this Agreement.

    


    Allied
      Capital Partners, L.P.

    PO
      Box 676649

    Dallas,
      TX 75267-6649

    Hand
      Delivery or overnight delivery only:

    5151
      Beltline Road, Ste. 500

    Dallas,
      TX 75254

    Facsimile:
      972-404-0060

    


    Seller:

    Lighting
      Science Group Corporation

    2100
      McKinney Avenue, Suite 1555

    Dallas,
      TX 75201

    Facsimile:
      214-382-3631

    


    19.6
      Seller waives all notices of default, opportunity to cure, presentment, demand,
      protest, and notice of dishonor.

    


    19.7
      This
      Agreement constitutes the entire understanding between the parties. It may
      not
      be changed or terminated except in an instrument signed by both
      parties.

    


    19.8
      Allied shall not be deemed to have waived any of its rights and remedies unless
      the waiver is in writing and signed by Allied. A waiver by Allied of a right
      or
      remedy under this Agreement on one occasion shall not constitute a waiver of
      the
      right or remedy on any subsequent occasion.

    


    19.9
      Each
      statement of Seller’s account which Allied sends to Seller shall be deemed
      acceptable and binding upon Seller unless Allied receives written notice from
      Seller stating in detail and with particularity any exception thereto within
      30
      days after the date thereof.

    


    19.10
      Seller shall reimburse Allied for the following costs incurred by Allied in
      the
      course of performing its functions under this Agreement: credit research,
      certified mail postage, UCC searches and UCC filing fees, and wire transfer
      fees. The cost of credit reports and all other costs shall be reimbursed at
      Allied's actual cost. Seller also agrees to reimburse Allied the actual amount
      of costs and expenses, including reasonable attorney's fees, incurred by Allied
      in protecting, preserving or enforcing any lien, security interest, title,
      Collateral or other right granted by Seller to Allied or arising under
      applicable law, whether or not suit is brought, including but not limited to
      the
      defense of fraudulent transfer and preference claims, enforcement of this
      Agreement or recovery of any damages incurred by Allied as a result of the
      Seller's default. Seller shall also reimburse Allied for its actual costs in
      assuring Seller’s compliance with this Agreement, such as the cost of the
      federal tax lien search, UCC searches and Secretary of State Confirmations
      and
      certificates.

    


    19.11
      Seller agrees to execute any further documents and to take any further actions
      reasonably requested by Allied to evidence or perfect the Security Interest
      granted herein or the assignments of Accounts pursuant hereto, or to give effect
      to any of the rights granted to Allied under this Agreement. 

    


    19.12
      Seller has signed this agreement and submits the Agreement to Allied for
      acceptance at Allied’s offices in Dallas, Dallas County, Texas. Seller and
      Allied shall make all payments and perform all other obligations arising
      hereunder at Dallas County, Texas, and this Agreement is made and entered into
      at Dallas County, Texas. Dallas County, Texas, shall be the venue for any
      litigation arising under this Agreement. Client acknowledges that Allied Capital
      Partners, L.P. is the assumed name of Allied Capital Services, L.P., a Texas
      Limited Partnership, and that Allied Capital Services, L.P. also does business
      under the assumed name, TCC. All contracts, UCC filings and this factoring
      agreement shall only be binding upon and inure to the benefit of Allied Capital
      Services, L.P., if executed or filed in the name of Allied Capital Services,
      L.P. or in one of its aforementioned assumed names. In the event it becomes
      necessary for Allied to obtain a temporary restraining order or other injunctive
      relief in order to enforce the provisions of this Agreement, Seller hereby
      agrees to such an order, and the parties agree that the Court may require a
      bond
      which does not exceed the sum of $1,000.00 as a condition therefor, and such
      bond shall be reasonable and adequate in all respects and under all
      circumstances.

    


    19.13
      All
      amounts payable to Allied by Seller under this Agreement are payable on demand
      by Allied, except amounts payable under Paragraph 13 of this Agreement, for
      which no demand is required; Allied is authorized, at its sole option, to
      collect any payments owing by Seller to Allied under this Agreement by debit,
      offset or recoupment from or against the Reserve. In the event Seller is in
      default under any of the terms of this Agreement, Allied may, at its option,
      require Seller to repurchase all unpaid Accounts that were purchased by Allied,
      even if such Accounts were purchased Without Recourse. Interest shall accrue
      on
      all sums owing to Allied by Seller at 17% per annum, but not to exceed the
      highest rate permitted by law, as amended from time to time. The determination
      of the highest rate permitted by applicable Texas law shall be made by using
      the
      weekly ceiling, as applicable and as limited by statutorily fixed interest
      rate
      ceilings (the “Maximum Rate”). In no event shall the amount paid, or agreed to
      be paid to or charged by Allied for the use, forbearance, of detention of money
      or for the payment of performance of any covenant or obligation contained herein
      exceed the Maximum Rate, and if Allied receives interest which otherwise would
      cause the amount paid, charged, collected or demanded to exceed the Maximum
      Rate, and Allied receives interest which otherwise would exceed the Maximum
      Rate, such amount which would be excessive interest shall be applied to the
      reduction of the principal indebtedness and the balance, if any, shall be
      refunded the Seller. 

    


    


    Seller:

    Lighting
      Science Group Corporation

    


    By:      

    Name: Stephen
      A. Hamilton

    Title: Chief
      Financial Officer

    Date: ____________________________

    


    Accepted
      at Dallas, Dallas County, Texas by Allied Capital Partners, L.P. on the ________
      day of ________________________, 2007.

    


    ALLIED
      CAPITAL PARTNERS, L.P.

    


    By: ________________________________________

    Name: Clay
      Tramel

    Title: Chief
      Executive Officer