UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


**WASHINGTON,
      DC 20549**





**FORM
      10-KSB**





x
      ANNUAL REPORT UNDER
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For
      the
      year ended May 31, 2007




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





For
      the
      transition period from ______________ to ______________





Commission
      file number:  0-27587






**ARKADOS
      GROUP, INC.**





(Name
      of
      small business issuer in its charter)





Delaware
                (State
                  or other jurisdiction
              22-3586087
                (I.R.S.
                  Employer Identification No.)of
                  incorporation or organization)


220
                    Old New Brunswick Road, Piscataway, NJ
                  (Address
                    of principal executive offices)
                08854
                  (Zip
                    Code)




Issuer’s
      telephone number: (732)
      465-9300




Securities
      registered under Section 12(b) of the Exchange Act:


Title
                of each class
            Name
                of each exchange on which registered___________________________________________
            ______________________________________________________________________________________
            ___________________________________________







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


Common
      Stock, $.0001 par value


(Title
      of
      class)







(Title
      of
      class)




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days.x  Yeso  No


Check
        if
        there is no disclosure of delinquent filers in response to Item 405 of
        Regulation S-B is not contained in this form, and no disclosure will be
        contained, to the best of registrant's knowledge in definitive proxy or
        information statements incorporated by reference in Part III of this Form
        10-KSB
        or any amendment to this Form 10-KSB.o
  Indicate
        by check mark whether the registrant is a shell company (as defined by Rule
        12b-2 of the Exchange Act:o Yesx
        No
  State
        issuer's revenues for its most recent fiscal year.  $131,360
  The
        aggregate market value of the voting common equity held by non-affiliates(1) computed
        by
        reference to the last price at which the common equity was sold on September
        12,
        2007 was $8,340,919.  As of September 13, 2007, there were 26,082,221
        shares of common stock, $.0001 par value, outstanding.
  Transitional
        Small Business Disclosure Format (check one):o Yesx No
  (1) 
         The information provided shall in no way be construed as an admission that
        any person whose holdings are excluded from the figure is not an affiliate
        or
        that any person whose holdings are included is an affiliate and any such
        admission is hereby disclaimed. The information provided is included solely
        for
        record keeping purposes of the Securities and Exchange
        Commission.













NOTE
      RE:
      FORWARD LOOKING INFORMATION





All
      statements in this annual report on Form 10-KSB that are not historical are
      forward-looking statements, including statements regarding our “expectations,”
“beliefs,” “hopes,” “intentions,” “strategies,” or the like. Such statements are
      based on management's current expectations and are subject to a number of risks
      and uncertainties that could cause actual results to differ materially from
      those set forth or implied by any forward looking statements. Some of these
      risks are detailed in Part I, Item 1 “Risk Factors” and elsewhere in this
      report. We caution investors that there can be no assurance that actual results
      or business conditions will not differ materially from those projected or
      suggested in such forward-looking statements as a result of various factors,
      including, but not limited to, the risk factors discussed in this Annual Report
      on Form 10-KSB. We expressly disclaim any obligation or undertaking to release
      publicly any updates or revisions to any forward-looking statements contained
      herein to reflect any change in our expectations with regard thereto or any
      change in events, conditions, or circumstances on which any such statements
      are
      based.









NOTE
      RE:
      CERTAIN MARKS





This
      Annual Report on Form 10-KSB contains registered and unregistered trademarks
      of
      Arkados Group, Inc and its subsidiaries and other companies, as
      indicated.  Unless otherwise clear from the context or noted in this
      Annual Report, marks identified by “®”
and “TM”
are
      registered marks and trademarks of Arkados Group, Inc. or its
      subsidiaries.  All other trademarks and service marks are the property
      of their respective owners.  iPod® is a registered trademark of Apple
      Computer, Inc.  HomePlug® is a registered trademark of the HomePlug
      Powerline Alliance, of which Arkados is a member.










































–
2
          –


**PART
      I**





ITEM
                1.
            DESCRIPTION
                OF BUSINESS.





The
      registrant, Arkados Group, Inc., was incorporated in the State of Delaware
      in
      1998. We are principally engaged in developing and marketing technology and
      solutions enabling broadband communication, multimedia, and networking over
      standard household electrical lines. We conduct these activities principally
      through Arkados, Inc., which is a wholly owned subsidiary. In September 2006,
      we
      changed our corporate name from CDKnet.com, Inc., to its current form to align
      our corporate identity with the “Arkados” brand developed by our subsidiary. Our
      Arkados subsidiary is a member of the HomePlug Powerline Alliance, an
      independent trade organization which has developed global specifications for
      high-speed powerline communications.





Our
      executive offices are located at 220 Old New Brunswick Road, Piscataway, NJ
      08854. We can be reached at our principal offices by telephone at (732)
      465-9300. Arkados maintains a website atwww.arkados.com.





Except
      for the documents on our website that are expressly incorporated by reference
      into this report, the information contained on our website is not incorporated
      by reference into this report and should not be considered to be a part of
      this
      report. This includes the website referred to in the paragraph above, as well
      as
      other websites that we refer to elsewhere in this report. All of these website
      addresses are included in this document as inactive textual references
      only.





**Recent
      Development**





On
      March
      3, 2007 we completed the merger of Arkados Wireless Technologies, Inc., our
      wholly owned subsidiary (“Merger Sub”) with Aster Wireless, Inc. a Delaware
      corporation (“Aster”) pursuant to an Agreement and Plan of Merger dated February
      13, 2007 by and among Merger Sub and Arkados Group, Inc. In this merger, we
      acquired synergistic talent and technology which has helped improve the
      reliability and quality of audio streaming in our current generation chipset
      and
      we believe will help deliver our next-generation chips to market more quickly,
      with richer capabilities. This will translate to a better competitive position
      in the marketplace.  The technology enhances the reliable
      distribution  of multimedia content, potentially over multiple
      distribution media, and is designed to be embedded in new consumer electronics
      products and accessories for audio, video distribution, set-top boxes and other
      multimedia entertainment appliances.





**Overview**





Our
      solutions provide an embedded engine for a wide variety of products that address
      a number of market categories. We combine system-on-chip (SoC) semiconductors
      with software and platform hardware designs to enable high-speed digital
      transmission of voice, music, video, and data over the existing infrastructure
      of electrical power lines, both inside homes and buildings, and outdoors on
      a
      utility company’s power grid.





Our
      highly integrated semiconductors form the basis for bridging and converging
      products designed for the home networking and broadband communications markets
      with existing and new consumer electronic products such as stereo systems,
      television sets, intercoms and personal iPods©.  Products
      that use our semiconductors are easy to install and use since they create
      connectivity through electrical outlets and electrical wires already in
      use. We are designated as a “fabless” semiconductor company since we design
      semiconductors, without owning a fabrication facility but what we do is utilize
      our SoC to provide complete design solutions for hardware and software that
      allow customers to build devices that will distribute audio, video, voice,
      and
      data content throughout the whole house, building or smart grid
      infrastructure.





The
      markets we address are discussed in the following paragraphs, and can be divided
      into three categories: The in-home market, with the sub-categories of computer
      networking and consumer Audio/Video Networking (also known as “Multimedia
      Networking”); the to-the-home market, consisting of both access and “smart grid”
sub-segments; and the Multi-Dwelling/Multi-Tenant(MDU/MTU) unit market. We
      are
      developing solutions designed to enable products in each of these
      markets.





We
      address the in-home market with our whole house networking solutions for
      entertainment and broadband sharing. The market is primarily made up of two
      sub-categories – a) consumer electronic, PC, gaming, and networking devices that
      are






–
3
          –


traditionally
      sold through retail stores and b) professional installation market providing
      whole house audio, video, security, intercom and home automation devices.
      Networked devices allow consumers to share and enjoy music, video, photos,
      broadband connections to multiple devices throughout the house and connect
      a
      wide range of devices together such as stereo systems, televisions, digital
      photo frames, intercoms, computers, laptops, gaming consoles,
      DVRs,  surveillance systems, and other devices. Our customers in this
      market are those companies that develop and distribute these types of
      products in retail market as well as those companies who specialize in
      developing products and services for the professional installation
      market.





The
      to-the-home market is addressed with our solutions for broadband powerline
      communication (also known as “BPL”, or “last-mile” or “access” markets). We also
      supply on-the-grid solutions for the “smart grid” or “green power” market. For
      the to-the-home market, our target customers are primarily companies that supply
      components of the electrical grid to utility companies and service providers.
      These components use powerline communication technology for various reasons
      such
      as delivering broadband access to homes and businesses, and to implement new
      services that conserve energy and control the distribution of power from
      electric utility companies (commonly called “smart grid”
applications).




Another
      type of to-the-home customers we have are companies who own certain type of
      content such as music, movies, or any digital content that can be streamed
      over
      the internet to the home.  This type of service is commonly known as
      IPTV, internet radio, or subscription music service. Once the content is
      delivered to-the-home via broadband, Arkados provides secure and high quality
      solutions that will allow the content to be distributed to rooms and devices
      of
      their choice such as televisions, stereo systems, and digital photo frames
      without running new cables or incurring costly professional
      installation.  This type of solution allows the content owners to
      deliver the content directly to consumers,





The
      MDU/MTU market requires sharing a broadband connection and VoIP delivery within
      a large building (such as an apartment building). We have also developed
      solutions for this market which can be incorporated into a system by equipment
      manufacturers and system integration companies.





Our
      solutions are specifically designed for manufacturers of products destined
      for
      these various marketplaces. We have designed our solutions to permit our
      Original Design Manufacturers (“ODM”) and Original Equipment Manufacturers
      (“OEM”) customers to produce sophisticated, full-featured products with lower
      overall production cost, faster time-to-market, and a high degree of
      differentiation from their competitors. Our platform supports a
      system-based approach to networking and is designed to allow our customers
      to
      build products that are easy to install and operate, with intuitive and
      customizable user interfaces and be expandable with additional products using
      current generation chipset as well as with the new generation chip under
      development.





During
      the fiscal year ended May 31, 2007 (“Fiscal 2007”), we introduced our first
      commercially available system-on chip, the ArkTICTM AI-1100. The ArkTICTM AI-1100
      is designed to be embedded into various consumer electronics devices and deliver
      high-speed Internet connectivity and multimedia over the power lines in a home.
      The AI-1100 is the first in our ArkTICTM family of turnkey hardware and software
      solutions.





Arkados
      is a member of the HomePlug Powerline Alliance and IEEE P1901. HomePlug
      networking is the only globally recognized technology for high-speed powerline
      communication having multiple silicon manufacturers’ support and established
      compliance and interoperability certification.





**Corporate
      Background**





On
      May
      24, 2004, a wholly owned subsidiary we filed a merger certificate completing
      the
      acquisition of Miletos, Inc., a previously unaffiliated Delaware corporation
      (the “Merger”). The consideration for this Merger was 16,090,577 restricted
      shares of our common stock and the assumption of certain liabilities of Miletos'
      predecessor and former controlling equity holders. The merger was completed
      according to the terms of an Agreement and Plan of Merger dated as of May 7,
      2004. Miletos merged into our wholly owned subsidiary which changed its name
      to
“Arkados, Inc.”.





Simultaneously
      with the merger, we completed a private placement of 883,334 shares of our
      common stock for aggregate proceeds of $1,060,000, of which approximately
      $950,000 were subscriptions for cash, $50,000 (41,667 shares) was for
      outstanding debt of Arkados, and $59,800 (49,834 shares) was in lieu of
      consulting fees. The sale was made to 10 accredited investors (“Investors”)
      directly by us without any general solicitation or broker. The offering is
      claimed to be exempt from registration pursuant to Section 4(2) under the
      Securities Act of 1933, as amended. In addition, we settled liabilities relating
      to outstanding convertible notes and payables for 700,000 common
      shares.









–
4
          –


Prior
      to
      the merger, on March 23, 2004, Miletos acquired the assets and business of
      Enikia, LLC, a Delaware limited liability company at a public foreclosure sale,
      including the intellectual property upon which Arkados' development efforts
      are
      based. Miletos was formed in February 2004, by control affiliates of Enikia.
      These control affiliates were both secured creditors of Enikia and holders
      of
      the controlling equity interest in Enikia. They contributed a secured promissory
      note to Miletos in the initial principal amount of $9,221,000, dated June 1,
      2002. The promissory note also represents obligations to the lender for
      additional advances to Enikia by the control group which brought the aggregate
      principal due at the time of foreclosure to approximately $11,100,000. At the
      foreclosure sale, Miletos forgave $4,000,000 of the secured obligation in
      exchange for substantially all of the assets of Enikia. The merger has been
      treated as a reorganization of Arkados, Inc. via a reverse merger with Arkados
      Group, Inc.. The assets acquired at the foreclosure sale and certain liabilities
      assumed by Arkados Group, Inc. have been recorded as historical
      cost.





**Dependence
      on Financing Activities**





Although
      we have started to generate revenue during this fiscal year, we are
      dependent on outside sources of financing to continue the development of our
      semiconductors and software, and to further support sales. During fiscal 2007,
      we completed a series of debt financings in the aggregate principal amount
      of
      $5,052,577.  From June, 2007 to August 31, 2007 we completed an
      additional $485,000 of debt financing, of which all was for cash
      proceeds.





We
      have
      sought and will continue to seek various sources of financing but there are
      no
      binding commitments from anyone to provide us with financing. In addition,
      there
      is $9,176,892 principal amount of 6% Secured Convertible Debentures due December
      28, 2008 issued during the period from December 2004 to August 31, 2007
      outstanding, which has been an impediment to obtaining equity financing
      .  The documents, although amended in January 2007 to eliminate the
      requirement that the holders of 60.1% of the outstanding principal amount
      consent to our issuance of shares, debt or fixed convertible securities to
      finance our operations, continue to contain a full “ratchet down” provision
      which has a dilutive effect, which is triggered by future financing at an
      effective price lower than the conversion and warrant exercise price. While
      a
      substantial portion of the net proceeds of the sale of the Debentures was
      initially used to repay pre-existing debt, all of the proceeds during the fiscal
      year 2007 were used to support Arkados’ operations. There is no assurance that
      the holders will continue to provide additional funds to us or that future
      financing will not be impeded by the anti-dilution provisions of the documents.
      Our ability to continue our operations depends on our ability to obtain
      financing. If adequate funds are not available on acceptable terms, we may
      not
      be able to retain existing and/or attract new employees, support product
      development and fabrication, take advantage of market opportunities, develop
      or
      enhance new products, pursue acquisitions that would complement our existing
      product offerings or enhance our technical capabilities to develop new products
      or execute our business strategy.





**Industry
      Background**





Music,
      movies, and a wide range of communication services are experiencing a
      fundamental shift. The method of distributing the products, and in some cases
      the products themselves, are transitioning from old-fashioned methods and are
      now being replaced by new digital versions that are delivered via a new digital
      distribution model.





Arkados’
      solutions directly address this opportunity by enabling electrical power sockets
      to be turned into high-speed network ports, thereby providing a high-speed
      pathway through which digital information can travel both inside a home, and
      to
      the home. We believe that this shift creates demand for new products, and
      new products will require new types of semiconductors that incorporate digital
      technologies, supporting such functions as communication and media rendering.
      Our ArkTICTM family of turnkey hardware and software solutions is designed to
      address these requirements. In particular, Arkados has implemented a method
      that
      uses power lines as a pathway for the digital information, which allows end
      users to truly achieve “plug-and-play” simplicity without the hassles of
      custom-installed networks or the dropouts, unreliable coverage and security
      issues of wireless solutions.





Members
      of the Arkados team have been active in establishing standards for the industry
      since the year 2000. Standards are important in many industries. For example,
      wireless standards have brought about a ubiquitous, interoperable and affordable
      standard for portable data communication. Standards are important for a number
      of reasons, but especially when both consumers and service providers may be
      installing pieces of the ecosystem – as in the powerline communications
      industry. Working with the HomePlug Powerline Alliance, the Arkados team has
      contributed to the development of a number of specifications that were
      contributed to standards organizations, and members of the Arkados team continue
      to work in leadership positions in these organizations. We also work in a number
      of other bodies, including the IEEE P1901 Working Group.







–
5
          –


**Powerline
      Communication Enables Several Markets**





We
      view
      the market for powerline communication semiconductors comprising three major
      categories: In-Home which includes Computer Networking and Consumer Audio Visual
      Applications (or “Multimedia Networking”), Broadband Powerline (BPL), and
      MDU/MTU Networking.





***In-Home***




***Computer
      Networking***





This
      market category is defined as technology and solutions used to connect devices
      in a home through powerline or wireless means, for the purpose of sharing
      entertainment content or connectivity using HomePlug standard technology. This
      is a proven marketplace, with over 10 million HomePlug devices shipped to the
      market in consumer products available today. Many of these products are adapters
      that extend existing communications methods (such as networking computers
      through HomePlug-to-Ethernet or USB adapters, as opposed to installing long
      runs
      of cabling). Our solutions provide essential enabling technologies for products
      in this market





***Consumer
      Audio Visual Applications*** **or Multimedia
      Networking**





Known
      as
“home networking”, the “digital home”, the “connected home” and by several other
      monikers, this market has been heralded by many analysts as a burgeoning
      market for some time, particularly as it applies to the “digitalization” of
      traditional applications.





As
      an
      example, a home security system is traditionally installed by a professional
      installation company, consisting mainly of keypads, and sensors with video
      camera(s) installed only on very high end homes or commercial buildings
      with many feet of dedicated wiring for the system. With a digital system that
      [a] uses Internet Protocol (IP) and [b] can use the existing power lines instead
      of dedicated wiring, significant cost reductions are possible including
      affordable and easy to install video surveillance systems while simultaneously
      benefiting from all the advancements in networking and broadband
      communications such as remote viewing via the internet.





Here
      is
      another example that demonstrates the variety and versatility of the
      solutions.There are now over 100 million iPods and phones in the market. End
      users may simply place their iPod® into its charging base upon
      arriving home. If the charging base contains an Arkados solution, the music
      or
      podcast library on the iPod instantly becomes available throughout the home.
      While the user passes through the bedroom, they will be able to call up the
      iPod
      interface on an Arkados powered digital picture frame and choose a
      preferred playlist, which would then start playing on Arkados-powered connected
      speakers anywhere in the home. If they want to watch the latest podcast
      video episode of their favorite TV show (which has been downloaded to the iPod),
      the user will be able to simply pull up the menu on the Arkados-powered
      connected flat-screen TV and stream the video directly from the iPod. The user
      will also be able to simply toggle the TV screen menu to view the image from
      an
      Arkados-powered connected security camera mounted at their front
      door.





Some
      recent market forecasts and studies have weighed in on this continued transition
      from analog to digital for in-home products.





n
            Research
                firm iSuppli Corp recently released figures on the market for surveillance
                cameras, showing how closed-circuit security cameras will be replaced
                by
                IP-based security cameras over the next few years. Their figures
                showed
                that IP-based cameras would grow from under $500M in 2006 to over
                $5.5B in
                2011, while closed-circuit non-IP based solutions steadily declined.
                Arkados supplies IP based camera solutions that can be placed anywhere
                in
                or outside the building without running wires.  ABI Research
                commented on the market for networked home audio, which according
                to their
                definition “consists of audio and media servers....as connected client
                devices — often ones that can play video as well as audio — ...which can
                connect to a PC, dedicated audio server or directly to the Internet.
                It
                also includes compete networked audio systems..., as well as network
                connected speakers.” Arkados solutions address each of these components,
                and ABI predicted that this market will hit $7.2B by 2012. The networked
                audio market is just one segment of the entire market, as a 2006
                report
                quotes ABI predicted home networking and connected entertainment
                devices
                would grow to $85 billion by 2011.


n
            A
                report by the Diffusion Group predicted that the number of
                broadband-enabled televisions worldwide will surge to 162 million
                by 2011,
                driven by the rapid growth of broadband internet subscriptions. Arkados
                supplies solutions for IPTV.









–
6
          –


n
            The
                Consumer Electronics Association (CEA) released a study showing that
                72%
                of U.S. online adults now listen to audio on their home computers
                instead
                of through other devices and commented that the next step is to allow
                consumers to see the benefits of connecting their PC to their existing
                home audio system for a more enjoyable home audio experience. Arkados
                solutions directly support this application with synchronized home
                audio
                technology.





In
      general, these applications permit streaming audio from the internet without
      the
      use of a computer, whole house audio distribution and control, whole house
      distribution of video either streamed over IP (IPTV) or stored locally (PVR/DVR
      type of applications). In addition, technologies based on HomePlug
      specifications can be used to connect portable devices such as portable audio
      players and satellite receivers to remote speaker systems, distribute multimedia
      and HDTV throughout the home by simple use of already installed electrical
      wires.





The
      installer channel also benefits from products for this market, as it offers
      another option for connectivity in the home.





***MDU/MTU
      Networking***





This
      market category is defined as technology and solutions for the purpose of
      connecting individual rooms or units of a building (such as a hotel, apartment,
      or office complex) to an Internet connection or to other services. It is a
      mature market with an ever-increasing need for products that offer non-invasive
      and cost-effective installation. Powerline communication technology has the
      potential to become a significant player in this market segment. Arkados has
      acquired significant experience in this market and conducted feasibility studies
      that helped Arkados team to develop both the expertise and identify potential
      solutions suitable for this market.





***Broadband
      Powerline & Smart Grid Services***





This
      market category is defined as technology and solutions used to deliver Internet
      access and broadband services to homes via power lines. This is an early stage
      market. Utilities and service operators are testing proprietary technologies
      and
      services. Standards development has begun which will spur the market. Broadband
      Powerline has the potential to become a significant player along with DSL,
      Cable, and other access technologies. Overseas and rural markets offer
      substantial growth potential.





Arkados
      can develop and provide solutions for BPL which, according to analyst firm
      Research and Markets, will generate $4.95B in access revenue in 2013. They
      also
      predicted that “smart grid” applications of powerline communications technology
      will emerge as a major application.





Smart
      grid services allow utility companies to monitor consumption of electricity
      and
      in some cases shut down the appliances to reduce the load during peak times.
      In
      this marketplace, Arkados chips would be used inside of electricity meters, and
      a number of other components which are attached to the electrical grid. With
      smart grid technologies, utility companies are able to monitor electricity
      consumption inside homes attached to their grid. In its eventual form, the
      electric utilities can use this technology to send signaling that limits the
      use
      of certain in-home appliances during periods of time when demand for electricity
      is at its peak.  This allows the utility to improve their efficiency,
      and more effectively manage the demand for electricity, reducing the long-term
      need for power plant construction. Other benefits of smart technology include
      the ability to quickly identify outage areas, and to monitor the network for
      potential problems so that preventive measures can be taken.





The
      market for powerline communications in general has gained significant momentum
      with the following announcements:


n
            Powerline
                adaptors from German company devolo AG are to be used to stream IPTV
                to
                over 3.6 million households across Portugal, as part of telecommunications
                company Sonaecom's Clix SmarTV
                service


n
            Intel
                Corporation announced plans to include support for the HomePlug networking
                technology as an optional feature for desktop platforms by
                2008


n
            IBM
                and Houston-based utility CenterPoint Energy announced the creation
                of a
                coalition to digitize electrical grids by setting up the Intelligent
                Utility Network Coalition which will test out technologies that will
                give
                utilities serving consumers better usage information and make power
                distribution grids more reliable





–
7
          –


**Arkados
      and the HomePlug Powerline Alliance**





Members
      of the Arkados team participated in the creation of the HomePlug Powerline
      Alliance, an independent industry association.  The Alliance's mission
      is to enable and promote rapid availability, adoption and implementation of
      cost
      effective, interoperable and standards-based home powerline networks and
      products.  Formed in 2000, the Alliance developed the HomePlug 1.0
      specification that unified product vendors in support of a single powerline
      solution for home networking. In 2005, the Alliance ratified HomePlug AV
      specification that is going to enable 200Mbps class communication over power
      lines. In-Stat believes that HomePlug AV will be a potentially important
      technology for multimedia networking, as the technology could provide a home
      network backbone. Arkados has worked in significant ways to develop the HomePlug
      specifications including HomePlug 1.0 and HomePlug AV for in-home technologies,
      HomePlug BPL for broadband over powerline, and HomePlug Command &Control
      (C&C) for low-speed command and control applications.





Arkados
      is a Contributing Member of the Alliance. Members of the Arkados team hold
      leadership positions in the Alliance and in several HomePlug working groups.
      Oleg Logvinov, our president and CEO, serves as the Chief Strategy Officer
      of
      the HomePlug Alliance. Mr. Logvinov is also the immediate past president of
      the
      Alliance, having been succeeded by Matthew Theall of Intel. Additionally, Jim
      Reeber, our Director of Marketing has served as Chair of Marketing Working
      Group
      since 2003, and Grant Ogata, our Executive Vice President of Worldwide
      Operations, served as the Chairman of HomePlug Command and Control Working
      Group
      and was instrumental in spearheading the alliance’s efforts to develop a
      specification for a low-cost command and control technology in his role as
      the
      working group chair.





The
      HomePlug technology now dominates the marketplace. Market analyst In-Stat
      forecasted that by 2010, the technology based on HomePlug specifications will
      hold 85% of the worldwide market for powerline communications. The HomePlug
      Powerline Alliance has brought together both personal computer and consumer
      electronics companies on a global scale. Membership in the Alliance has grown
      to
      include more than 75 industry-leading companies. HomePlug Sponsor companies
      include Cisco; Comcast; GE Security, Inc., an affiliate of General Electric
      Co.;
      Intel Corporation; LG Electronics; Motorola; RadioShack Corporation; Samsung
      Electronics Co., Ltd.; Sharp Laboratories of America; TCL Group Holding Co.,
      Ltd; and Texas Instruments Incorporated (TI). Beside Arkados, contributor
      members include Conexant; Corporate Systems Engineering; Gigle Semiconductor;
      Huawei Technologies Co., Ltd.; Intellon Corporation; and SPiDCOM
      Technologies.





Arkados
      is also a member of the IEEE P1901 group that is focused on the development
      of
      powerline communication Physical Layer (PHY) and Media Access Control (MAC)
      specifications.





***Our
      Solution***





We
      are a
      fabless semiconductor company that develops comprehensive platform solutions,
      including system-on-chip (SoC) semiconductors, and firmware and software for
      manufacturers of networked multimedia appliances and feature-rich networking
      devices. Our platform solutions are designed to enable a systems-based approach
      to networking and will allow our customers to build products that are simple
      and
      intuitive to install, and easy to operate with intuitive and customizable user
      interfaces.





We
      believe that many of our customers plan to produce not just one component of
      a
      particular end-user system, but they will introduce many system components
      that
      work together. An example is the audio market; our customers would not just
      introduce a dock for an MP3 player, but would also produce a variety of
      speakers, control units, CD players, adapters, boom-box style rendering points,
      etc. Our solutions enable great versatility and value that allows our customers
      to create each of those components, sometimes with only a single hardware
      design.





The
      primary goal of our solutions is to enable our customers’ plan to develop and
      sell end-user systems. Our customers require a lower Bill of Materials (their
      cost for manufacturing a product), and better ways to produce a variety of
      components for end-user systems more quickly. We call our solutions “turnkey”
because they enable our customers to create entire lines of products without
      dedicating their resources to long product development cycles, or extensive
      software design.





–
8
          –


Our
      customers are also aware of our strategy to support a seamless transition to
      higher-speed technologies as they become available. This promotes long life-span
      of their development effort, and creates significant re-use of their software
      components.





We
      have
      included a powerful processor inside our SoC which allows applications to be
      run
      directly on-chip. Multiple vertical applications can be built by loading
      different firmware. This feature can broaden product offerings, and extend
      the
      product lifecycle. The Arkados implementation of HomePlug technology offers
      programmability that enables OEMs to extend the functionality of their products
      and produce a variety of products from a single design.





Key
      elements of our solution are as follows:




●
              Comprehensive
                  platform solutions.


Our
      platform solutions consist of an integrated package of hardware, firmware and
      software designed to enable our customers to develop differentiated products
      in
      a cost-effective manner with short time to market. In addition to a
      high-performance SoC, we plan to provide our customers with customizable, high
      functionality firmware and software development kits to allow them to rapidly
      develop and differentiate their products. As a result, we would be able to
      reduce our customers' investment in costly and time-consuming internal firmware
      and software development for their products, and from having to source different
      firmware and software for their end products from multiple
      suppliers.


●
                Customizable
                    firmware and software.
 Our
          firmware, which is sold as a bundled solution with our SoCs, includes a
          real-time operating system and a set of application specific modules that
          support a wide range of functions including Web-based management, audio
          distribution, traffic classifications, etc. Our software development kit
          includes a comprehensive suite of components, such as device link libraries
          and
          drivers, tools, sample code and documentation to create applications that
          would
          allow a wide range of networking devices and networked multimedia
          appliances.


●
                Targeted,
                    high-performance SoCs.


Our
      SoC
      solutions are specifically designed for the powerline communication market.
      They
      are driven by function-specific blocks that allow simultaneous execution of
      complex operations, such as transmission of data over power lines and MPEG
      audio
      decoding and playback. Our SoCs support most major peripheral connection
      protocols, including USB, Ethernet, Infrared, I2S, and a
      number of
      specialized and general purpose interfaces. This support enables connectivity
      to
      a variety of playback, display and content creation devices including cameras,
      PCs, televisions and car and home audio systems.





In
      contrast, competitors that do not provide comprehensive platform solutions
      such
      as ours may be able to produce a greater variety of customized ICs to more
      specifically address the particular requirements of an OEM. In addition,
      solutions which do not include customizable firmware and software like ours
      may
      allow OEMs to take advantage of a wider range of third-party developers. While,
      these alternative solutions may be lower in cost for simple data networking
      devices in comparison to our platform solutions, our solution will be more
      cost
      effective and has higher reliability and performance for multi-media networking
      including distributing audio and video throughout the home and outputting to
      existing consumer electronic products.





***Our
      Strategy***




Provided
      we are able to continue to finance our operations, our objective is to be the
      leading supplier of comprehensive platform solutions for high-performance and
      feature-rich networked multimedia appliances and networking
      devices.





Key
      elements of our strategy are:





●
            **Maintain
                a full platform solution approach with industry-leading SoCs, firmware
                and
                software.**We plan to continue to commit the resources of each of
                our hardware, firmware and software teams to drive innovation so
                that our
                solutions are at the forefront of the networked multimedia appliances
                and
                networking devices industries and capture a leading market share.
                We
                intend to continue to devote resources to increase the performance
                and
                functionality of our SoCs and expand the features and capabilities
                of our
                firmware and software. This enables great flexibility and value for
                our
                customers as they take products to consumer and enterprise
                markets.





–
9
          –


●
            **Maintain
                our focus on feature-rich networked multimedia appliances and networking
                devices.**We intend to build on our experience as a platform
                provider by continuing to focus primarily on customers that produce
                feature-rich networked multimedia appliances and networking devices.
                In
                addition, we intend to continue to work closely with manufacturers
                of
                other media rendering components to ensure that our platform solutions
                interface with their current and future technology components for
                optimal
                performance their end products.





●
            **Build
                on our leadership in the integration of powerline and audio rendering
                functions to secure the leadership position in networked multimedia
                appliances and networking devices.** We believe that the networked
                audio markets will continue to represent the largest volume opportunity
                for networked multimedia appliance and networking device manufacturers
                in
                the near term. We intend to continue to focus on advancing functionality
                and promoting our solutions to win designs in this large and growing
                market. By including these options in our platform, we create a
                foundation that enables our customers to incorporate new features
                more
                quickly.





●
            **Enable
                new growth markets, such as photo- and video-enabled networked multimedia
                appliances.** We intend to build on our existing expertise to be
                the leading provider of comprehensive platform solutions in new markets.
                We intend to continue to invest our research and development efforts
                and
                engineering resources to develop new platforms and products and to
                strengthen our technological expertise. One example is our reference
                design that employs both our solutions as well as Blackfin® Processors by
                Analog Devices to provide a cost- effective platform for a variety
                of
                video applications based on powerline distribution. We believe that
                our
                focus in this area creates optimized solutions for our customers
                and
                increases the revenue potential for companies throughout the value
                chain.





●
            **Expand
                our customer base while securing additional design wins with existing
                customers.**We plan to be the leading supplier of new designs to
                our existing customers, and to secure high market share with new
                customers
                entering this market. We intend to continue the expansion of our
                customer
                base by marketing our platform solutions to additional manufacturers
                of
                consumer devices. Further, we intend to broaden our reach within
                our
                existing customer base into their adjacent product lines that can
                utilize
                technologies that we intend to implement in the near future. By providing
                key hardware and software components to our customers, we believe
                we can
                deliver better value and features to our customers, while reducing
                design
                and manufacturing costs.





●
            **Create
                business arrangements with companies to better serve our common OEM
                customers.**We plan to go to market together with a number of
                companies who target specific areas of the marketplace. Since certain
                companies pursue many of the same customers who approve the products
                destined for the end-user, we plan to take advantage of this communality
                and together create solutions and offer even greater turnkey value.
                This
                approach offers OEM customers an easier point-of-contact and allows
                them
                to take advantage of efficiencies we have already built with our
                partners.





**Our
      Products**





We
      design
      and develop and are marketing highly integrated SoC semiconductors that are
      designed to cater to the markets for powerline communications. Our chip designs
      offer flexible solutions through programmability and remote firmware upgrades.
      Our customers have responded very favorably to our platform offerings which
      we
      call ArkTICTM, which is an abbreviation for the Arkados Total Integration
      ConceptTM.





Solutions
      from our ArkTICTM family
      of
      converged multimedia and networking solutions targets data-, audio-, photo-,
      and
      video-enabled networked multimedia appliances and networking
      devices.





The
      ArkTICTM family is a portfolio of turnkey hardware and software solutions that
      enable OEMs and ODMs to quickly develop digitally networked consumer electronic
      products with a competitive cost structure to address this rapidly developing
      market. Among other networking interfaces, the first member of the ArkTICTM
family will supports a powerline communication interface based on the HomePlug
      Powerline Specification 1.0.1.





–
10
          –


We
      started marketing our AI-1100 system-on-chip in Fiscal 2007. It is designed
      to
      be embedded into various consumer electronics and multimedia networking devices
      and deliver high-speed Internet/Networking connectivity and multimedia over
      the
      power lines in a home. The AI-1100 chip offers a single-chip integration of
      HomePlug 1.0.1 powerline technology, ARM 926-JES CPU operating at 160 MHz,
      dual
      Ethernet interfaces, I2S Audio Interface, and a wide variety of other interfaces designed
      to support connected home applications. Furthermore, the programmable nature
      of
      our implementation allows ODMs/OEMs to extend the functionality of these
      products and HomePlug technology.






ArkTICTM
      AI-1100 system-on-chip features:




·Based
                on
                HomePlug 1.0 Specification
              -  PHY/MAC
                sub-system is designed to allow for compliance with the HomePlug
                specification
              -  Arkados
                extensions for increased performance and future-proofing
              -  Programmable
                MAC functions for full flexibility
              ·ARM926
                Processor
              -  16k
                instruction cache & 4k data cache
              -  Memory
                Management Unit
              -  Embedded
                Trace Macrocell (ETM9)
              ·SDRAM
                Controller
              -  Supports
                external parts up to 256Mb
              ·SRAM
                Controller/Expansion Bus Interface
              -  Supports
                external boot Flash or external SRAM and acts as a general-purpose
                interface bus for external logic
              ·Ethernet
                controllers
              -  Standard
                MII port (802.3u) - or - PHY Emulation Port (PEP) MII (emulates Ethernet
                PHY)
              ·Video/Audio
                DSP Interface
              ·USB
                1.1
                Device
              ·Serial
                I/O
                Controllers
              ·I2S
                for
                direct connection to audio DAC
              ·IrDA
              -  6550d
                compatible UART
              ·GPIO
                Controller
              ·JTAG
                / Debug
                Interface
              ·0.18μ
CMOS,
                1.8V core, 3.3v I/O






Our
      AI-1100 is the first in a series of devices built around existing and emerging
      HomePlug Powerline Alliance networking specifications. This device supports
      the
      HomePlug 1.0.1 specification along with a variety of multimedia applications.
      Our Direct to SpeakerTM Internet Radio Reference Design (AI1100-DTS-INTR)
      received HomePlug 1.0 certification in August 2006. Furthermore, the
      programmable nature of the Arkados implementation allows OEMs to extend the
      functionality of the HomePlug technology. Future devices will include among
      other enhancements the implementation of new HomePlug standards, such as
      HomePlug AV and HomePlug BPL, as they become available.





We
      have
      modularized a core Orthogonal Frequency Division Multiplexing (OFDM) and
      communication platform to rapidly develop customized solutions for each
      powerline market. This enables efficient reuse and repurposing of technology
      blocks, which can be used to create many specific solutions.





–
11
          –


We
      also
      provide consulting, software, and applications support, thereby facilitating
      system integration in an effort to reduce our customers' time-to-market and
      our
      customers' development costs.





In
      the
      in-home networking portion of the market, we expect to deliver solutions for
      both computer-centric and entertainment-centric applications by combining both
      networking blocks and blocks that are capable of supporting end-user
      applications for consumer electronics products inside our chips. Our chips
      are
      designed to offer a high degree of programmability and may become an attractive
      solution for a diverse range of home-networking products that merge traditional
      consumer electronic functions with network-centric features.





In
      the
      MDU/MTU portion of the market, we expect to deliver highly integrated circuits
      that combine both networking blocks and blocks that are capable of supporting
      communications applications in demand from businesses such as hotels, office
      parks, shopping plazas, apartment buildings, etc. Downloadable firmware
      management capabilities make this an attractive solution for remote management
      and service applications.





In
      the
      broadband powerline portion of the market we expect to deliver highly integrated
      circuits that combine both networking blocks and blocks that are capable of
      supporting the communications applications that in demand from service providers
      and utility companies. This portion includes the “smart grid” and “green power”
applications that help utility companies to conserve energy and better manage
      their network. These include applications such as Automated Meter Reading,
      Peak
      Shaving, and a host of other applications that provide a variety of benefits
      and
      cost-saving measures. Downloadable firmware management capabilities would make
      this an attractive solution for remote management and service
      applications.





Some
      of
      the examples of the products that could be built based on the above-described
      semiconductors by ODMs and OEMs are:





●
            CONSUMER
                ELECTRONICS - Devices that bridge current devices and content with
                existing and new consumer electronic products throughout the
                home.  Enjoy music from iPod, internet, or PC throughout the
                whole house - Watch video downloaded from the internet on your big
                screen
                TV,  view all digital photos stored on your PC on a digital
                photo frame or download new photos to loved ones directly to a digital
                photo frame located thousands of miles away via internet.  A
                growing market that includes audio & video devices with embedded
                powerline technology. We expect this market to grow over the next
                few
                years as more video and audio products are released with networking
                technologies built-in. Televisions, stereos, powered speakers, receivers,
                DVD and CD players, digital picture frames, home intercom systems,
                and
                other products are targeted applications for powerline networking
                technology. Internet streaming content and home content servers should
                greatly increase the demand for HomePlug 1.0 and AV products. In
                particular, our solutions offer advanced features such as synchronized
                whole-house audio which, combined with its new ease of installation,
                may
                significantly broaden the marketplace for such
                applications.




●
              SOHO
                  NETWORK GEAR - New types of routers, switches, gateways, network
                  attached
                  storage, surveillance cameras, and other devices that offer various
                  types
                  of services to the SOHO (Small Office Home Office)
                  network.


●
            INTERNET
                TELEPHONY - As companies like Vonage, Comcast, Verizon and other
                service
                providers begin to roll-out new voice services to the home, an easy-to-use
                and reliable home network is needed. VoIP (Voice-over-IP) phones
                are
                currently produced by several vendors and we expect to see such products
                with HomePlug technology embedded into
                them.





●
            HOME
                SECURITY - Many companies have created home security cameras that
                are
                networked through various means. Early market entrants GigaFast,
                ST&T,
                and Asoka have already created powerline networked security cameras
                with
                embedded web servers that allow direct access to the camera's
                feed.





●
            SMART
                GRID – Many utility companies may implement applications that could
                provide benefits such as saving money due to automated operation,
                the
                ability to predict maintenance issues, implementing a self-healing
                grid
                architecture, reducing power outages, and making better use of their
                assets; managing the grid more intelligently to
                prevent  blackouts and power disruptions; recovering more
                quickly after a power disruption; increasing security; implementing
                real-time monitoring of the state of the network, and managing a
                response;
                managing the quality of the  power (to deliver differentiated
                services for businesses with sensitive electronics and computers;
                implementing “green power” programs that allow consumers to manage their
                electricity use and costs; and integrating control systems, power
                electronics, and
                distributed resources.







–
12
          –


**Customers**





By
      developing solutions to facilitate our customers’ rapid development of
      full-featured next-generation products at reasonable prices, we position our
      company to our customers as a builder of bridges. Our solutions are designed
      to
      bridge entertainment and internet content to devices around the home, and to
      bridge between communications technologies, such as WiFi and powerline, Ethernet
      and powerline, and even to-the-home and in-the-home powerline technologies.
      We
      believe the growth of digital technologies will increase beyond computing until
      a large percentage of devices in the home seamlessly connect to some form of
      digital content or communications.





Many
      of
      our existing and potential customers are also currently in a specific
      marketplace that is being affected by digital convergence and networking
      technologies. We believe traditional networking companies are moving into
      traditional consumer electronics areas, while the reverse is happening to
      consumer electronics companies. Arkados provides platform solutions that allow
      those companies to enter the new market space with ease and speed.





We
      believe we have gained considerable traction with our customers over the past
      few months. We have partnered with companies at recent trade shows to publicly
      display a wide variety of potential products that included whole-house audio
      solutions (including music player docking stations, audio bridges, powered
      speakers, computer drivers for whole-house networked distribution of sound,
      and
      internet radio), and whole-house video distribution systems (including
      Internet-based TV adapters, surveillance systems, and digital picture
      frames).





Our
      solutions have been shown in a number of public venues, including the 2007
      International Consumer Electronics Show, Microsoft’s WinHEC 2007, and other
      conferences. Our prototypes or products have been publicly announced and/or
      demonstrated by Analog Devices, Channel Vision, devolo AG, GigaFast, GoodWay,
      Meiloon, PAC Electronics, Tatung, and Zylux. Many of these companies are
      suppliers to top tier brands in the market place. Several of these
      relationships, among others, have progressed into sales of chips, software
      development services, and related revenue.





We
      have
      also been involved with our customers in a number of projects relating to
      Broadband Over Powerline trials in several areas of the world. We have worked
      with them to design and implement a variety of products for this
      marketplace.




While
      we
      have had some semiconductor sales in the past few quarters, most of our revenue
      has come from design and development agreements. We expect that such agreements
      will lead to volume orders, but we cannot assure you that they will. We are
      targeting the sale of our powerline connectivity products to a broad range
      of
      communications, computing and consumer electronics ODMs/OEMs, but we have not
      yet derived significant product revenue from these ODMs/OEMs due to lengthy
      development cycle to develop and produce finished products. We are working
      closely with many of the leading communications, digital entertainment and
      consumer electronics companies some of which may result in design wins and
      orders for our integrated circuits. Several OEMs are sampling and testing our
      AI-1100 SoC chips, and one has announced a product incorporating our chip,
      but
      factors such as design issues, compatibility issues and manufacturing errors
      could delay the functioning of the products and prevent us from making sales.
      As
      is evidenced by the HomePlug certification of one of our reference designs,
      we
      are focused on delivering a wide array of reference designs that can help guide
      our customers through the product-to-market cycle.





**Strategic
      Relationships**





In
      July
      2004, Arkados entered into a five-year Silicon Product Development and Product
      Collaboration Agreement with GDA Technologies, Inc., under which GDA assists
      Arkados in translating Arkados chip designs into a mask that can be used by
      a
      semiconductor foundry to manufacture Arkados designed integrated circuits in
      a
      cost effective manner. We paid GDA $175,000 under the agreement in Fiscal 2007
      and will pay GDA 20% of production costs as compensation for production
      management services. In addition, we issued 150,000 shares of our restricted
      common stock to GDA for nominal consideration.





–
13
          –


We
      have
      also entered into go-to-market strategies with a number of ODMs and other
      technology companies. Since many companies in this space target the same
      customer base as we do, we plan to collaborate to create solutions and offer
      even greater turnkey value for OEMs. We have announced relationships and
      strategies with several companies, including GigaFast and Tatung. Tatung
      Corporation, a multi-billion dollar product design and manufacturing
      company, and Arkados are developing whole-house digital media solutions
      that can distribute music and video from a multitude of sources such as an
      iPod®, music and video stored on computers, any internet radio station, and
      music and video download services to existing stereo systems, televisions,
      and
      speakers throughout the house.





**Manufacturing**




We
      have
      developed strategic alliances to implement our fabless manufacturing strategy.
      This is designed to allow us to concentrate on our design strengths, minimize
      fixed costs and capital expenditures, access advanced manufacturing facilities,
      and provide flexibility on sourcing multiple leading-edge technologies. We
      contract with third parties for all of our wafer fabrication and assembly,
      as
      well as for a portion of our design and testing. Our manufacturing process
      is
      designed to follow the following steps. After wafer fabrication by the foundry,
      third-party assembly vendors package the wafer die. The finished products are
      then sent for testing, either to third-party testers or to our internal test
      facility, before shipment to our customers. We expect to qualify each product,
      participate in process and package development, define and control the
      manufacturing process at our suppliers where possible and practicable, develop
      or participate in the development of test programs, and perform production
      testing of products in accordance with our quality management system. If
      possible, we plan to use multiple foundries, assembly houses, and test houses.
      At present, we are using foundries in Japan owned by Fujitsu and we also use
      third parties to aid in our test and qualification process.  Our
      efforts to develop multiple sources of supply have been hindered by our lack
      of
      adequate working capital.




**Patents,
      Licenses and Trademarks**





Our
      patent portfolio reflects our innovative development efforts and our forecasts
      of how we envision the market will evolve. We have been awarded 11 U.S. Patents,
      which we believe is an indicator that we have developed a good understanding
      regarding key industry developments. We believe our patents not only help us
      to
      safeguard our intellectual property, but will help us to position our company
      as
      a leader in this space. We believe that some of our recently awarded patents
      are
      integral to the implementation of powerline communication networks, which may
      create value in our company given the global market for this technology and
      the
      vast number of potential players in the marketplace.





We
      rely
      on trade secret, patent, copyright, and trademark laws to protect our
      intellectual property in our products and technology. We intend to continue
      this
      practice in the future. In addition to our issued U.S. patents, we have over
      30
      pending U.S. patent applications, and various corresponding international
      patents and applications.





To
      complement our own research and development efforts, we have also licensed,
      and
      expect to continue to license, from third parties a variety of intellectual
      property and technologies important to our business.





Although
      we have not received any notification from third parties that we are infringing
      any of their intellectual property, there may be third party patents or other
      intellectual property that we are infringing. If that were the case, third
      parties could assert infringement claims against us or seek an injunction on
      the
      sale of any of our products in the future. If such infringement were found
      to
      exist, we may attempt to acquire the requisite licenses or rights to use such
      technology or intellectual property. However, we cannot assure you that such
      licenses or rights could be obtained on favorable terms or at all.





**Research
      and Development**





We
      concentrate our research and development efforts on the design and development
      of new products for each of our principal markets. At this point, 14 of our
      19
      employees are dedicated to research and development.  Research and
      development expenditures were $1,395,257 in the year ended May 31, 2006 and
      $1,920,891 in the year ended May 31, 2007.





Our
      acquisition of Aster Wireless, near Rochester, NY strengthened our intellectual
      property pool and added four new R&D employees to the 10 that currently work
      in New Jersey. We have incorporated intellectual property developed by Aster
      that was developed through years of R&D under the guidance of industry
      giants such as Kodak®. This allows Arkados to offer a best-in-class platform for
      media-centric applications that demand reliable delivery of time-sensitive
      data.






–
14
          –


We
      also
      conduct fund certain research activities focused on other emerging product
      opportunities. Our future success is highly dependent upon our ability to
      develop complex new products, to transfer new products to volume production
      in a
      timely fashion, to introduce them to the marketplace ahead of the competition,
      to maintain competitive features, and to have them selected for design into
      products of leading systems manufacturers.





Our
      future success may also depend on assisting our customers with integration
      of
      our components into their new products, including providing support from the
      concept stage through design, launch, and production ramp. In this new converged
      marketplace, we believe the role of the traditional semiconductor provider
      is
      changing, and we have positioned ourselves as a platform provider that becomes
      an integral part of our customer’s product development process. We believe that
      our focus on application related features and software may contribute to our
      success.





**Competition**





Markets
      for our products are highly competitive and we expect that competition will
      continue to increase. We compete with other semiconductor suppliers that offer
      standard semiconductors, application-specific integrated circuits, and fully
      customized integrated circuits, including embedded software, chip, and
      board-level products.





Our
      competitive strategy has been to provide cost-effective integrated products
      bundled with software that is designed to support a turnkey approach for a
      variety of applications. We believe this approach, coupled with the benefits
      of
      powerline communications technology, allows us to effectively compete due the
      following aspects:




n
            Due
                to embedded HomePlug standard technology, we believe our product
                performance includes unique features such as whole-house connectivity,
                high throughput, ease of setup, and Quality-of-service mechanisms
                that
                preserve a positive end-user
                experience


n
            Due
                to the integration of our system-on-chip and firmware solutions,
                we
                believe our potential customers will benefit from quicker time-to-market,
                a competitive bill-of-materials cost, an enhanced feature set, and
                lower
                development costs


n
            Due
                to our reliance on international technology standards, we believe
                our
                solutions are able comply with regulatory requirements on a global
                basis





We
      face
      significant competition in our present and future product lines. We face
      competition both from established players that are beginning to focus on
      powerline networking technology, as well as recent entrants in the field. Some
      of these competitors already have products in the marketplace that are compliant
      with HomePlug Alliance 1.0.1 specification, while other competitors' products
      are based on proprietary technologies. Immediate key competitors in the HomePlug
      powerline networking segment include Afa Technologies, Conexant Systems Inc.,
      Intellon Corporation, and Maxim Integrated Products Inc.  DS2 and
      Panasonic build ICs that are incompatible with the HomePlug standard. Some
      of
      our competitors have substantially greater resources than we do. Some of them
      have already announced products based on HomePlug AV technology. We expect
      to
      face additional competition from new entrants in each of our markets, which
      may
      include both large domestic and international integrated circuit manufacturers
      and smaller, emerging companies. Many of our competitors have substantially
      greater financial, engineering, manufacturing, marketing, technical,
      distribution and other resources, broader product lines, greater intellectual
      property rights, and longer relationships with customers than we
      have.





In
      addition, there are other organizations worldwide that seek to foster the
      development of powerline connectivity technology solutions and may attempt
      to
      create technology standards that compete with the industry specifications
      established by the HomePlug Powerline Alliance. These include the Institute
      of
      Electrical and Electronics Engineers (IEEE) and the International
      Telecommunication Union (ITU) which may adopt standards different from, and
      incompatible with, the technology inside our products. We also participate
      in
      these standards efforts. Other industry organizations promote powerline
      communications, such as the Universal Powerline Association and the Consumer
      Electronics Powerline Communication Alliance (CEPCA). They have also established
      technology or coexistence specifications that may conflict with the HomePlug
      specifications.





As
      a
      member of the HomePlug Alliance, we are obligated to license Necessary Patent
      Claims (intellectual property rights without the use of which products cannot
      conform to the HomePlug specifications) to any member of the alliance (including
      competitors) on a reasonable and non-discriminatory basis (known as RaND) as
      defined in the alliance’s Sponsor Agreement and Contributor Agreement. Under our
      license and development agreements, we retain title to our patents, patent
      applications and other licensed technology, and to any improvements that we
      develop.








–
15
          –


As
      a
      provider of powerline home connectivity integrated circuits, we face additional
      competition from other home connectivity technologies such as twisted pair
      cable, coaxial cable and wireless media. Despite the broad array of different
      technologies deployed to date, we believe those technologies that do not require
      new wires such as HomePNA, MoCA, 802.11 and other wireless alternatives, will
      provide the competition to powerline solutions.





**Sales
      and Marketing**





We
      expect
      to sell our products worldwide using the following channels:





●
            Sales
                and marketing partnerships with established companies. These relationships
                generally help to establish the presence in the specific regions
                and
                access customers through already developed relationships. The benefits
                of
                using this channel are numerous, among them are added credibility,
                reduction of upfront sales and marketing expenses, acceleration of
                volume
                sales through incumbency of the customer base, and local customer
                support
                and account management.





●
            Advanced
                development partnerships with strategic customers. The benefits of
                using
                this channel are numerous. Among them are creation of product focus,
                reduction of upfront sales and marketing expenses, acceleration of
                sales
                volumes through early commitments, and creation of incremental development
                revenues.





●
            We
                are also developing a network of distributors that can support our
                customers worldwide. We have an agreement with Jedcom, a distributor
                in
                Taiwan. Under the terms of this agreement Jedcom is going to provide
                us
                with distribution, sales and marketing, and field application engineering
                support in Taiwan and certain regions of
                China.





We
      expect
      to develop our domestic sales force to include a network of direct sales
      regions. We expect to establish international sales offices and develop
      relationships with appropriate organizations located worldwide. We expect to
      supplement our direct sales force with sales representative organizations and
      distributors. The scope and development of our sales and marketing organization
      will depend, among other things, on the amount of capital available to us and
      when products are ready for testing.





Our
      marketing consists of various programs that help create awareness and promote
      the benefits of our various solutions, the worth of the company, and the
      value of our technology to our target industries. Much of the marketing is
      handled through press releases, website, involvement in trade shows and
      conferences, press interview opportunities, placed articles, newsletters, white
      papers, and through interpersonal relationships developed through numerous
      methods. We have at times hired agencies to assist with specialized
      functions.




**Regulatory
      Environment**




Our
      customers’ products, which contain our solutions for powerline communications
      technology must adhere to regulations about transmission power, permissible
      frequencies of operation and electromagnetic interference (EMI) for both U.S.
      and foreign governments. In some countries, certification tests must be
      performed to ensure a vendor’s products comply with the regulations. While it is
      our customers who are responsible to obtain certifications, we need to ensure
      international regulations are adhered to.





The
      Federal Communications Commission (FCC) administers regulations in the United
      States. Our solutions are unlicensed devices in the U.S. and receive no
      regulatory protection from interference from other devices and may not cause
      any
      harmful interference to licensed devices. Those who operate unlicensed devices
      must stop using a device when the FCC declares that the device is causing
      harmful interference. Products using our solutions over power lines both inside
      and outside the home are FCC-regulated and must comply with radiated emission
      limits and various other technical standards.





Outside
      of the United States, the International Electrotechnical Commission,
      International Special Committee on Radio Interference (IEC/CISPR) is the primary
      authority. IEC member states import IEC/CISPR standards into their own national
      laws either in whole or in part. Powerline communications regulations are based
      upon specific country requirements. In some countries, regulations may limit
      the
      use of powerline communications in certain circumstances or to certain power
      levels or frequency bands.







–
16
          –


Before
      products can be sold, most countries require electronic products to comply
      with
      safety testing or be certified. While it is our customers who are responsible
      to
      obtain certifications, we need to ensure international regulations are adhered
      to





Regulations
      and their enforcement and interpretation varies between countries. Regulatory
      change or certification methodologies may require a redesign of products
      containing our solutions. At its most severe, regulatory changes could terminate
      the use of products already in the marketplace.





**Backlog**




We
      expect
      sales outside of strategic partnership agreements to be made primarily pursuant
      to standard short-term purchase orders for delivery of standard products. We
      expect the quantity actually ordered by the customer, as well as the shipment
      schedules, to be frequently revised, without significant penalty, to reflect
      changes in the customer's needs. As a result, we believe that in the future,
      our
      backlog at any given time should not be used as a meaningful indicator of future
      revenues.





As
      of May
      31, 2007, we had a backlog of $157,000 of orders we believe are
      firm.





**Employees**





As
      of May
      31, 2007, we had 19 full-time equivalent employees, including our CEO, Oleg
      Logvinov. The majority (14) of our full time employees are engaged in research,
      development, engineering with the remainder being divided to marketing and
      administration.  Andreas Typaldos, our Chairman of the Board provides
      us with product marketing services, strategic planning and leadership in our
      capital raising efforts on a part-time basis.  Our future success
      depends, in part, on our ability to continue to attract, retain and motivate
      highly qualified technical, marketing, engineering, and management personnel.
      Due to the highly competitive nature of the marketplace that we operate in,
      we
      may from time to time lose key employees to certain of our competitors. We
      expect to be able to hire qualified personnel to fill open positions created
      by
      such occurrences, although there can be no assurance that we will be able to
      do
      this in the future. None of our employees are represented by collective
      bargaining agreements.





From
      time
      to time, we also employ outside contractors either for a specific project,
      or to
      supplement our staff on a temporary basis.





**Risk
      Factors**





An
      investment in our common stock is speculative in nature, involves a high degree
      of risk and should not be made by any investor who cannot afford the loss of
      their entire investment. Each prospective purchaser should carefully consider
      the following risks and speculative factors associated with our business and
      capital structure, as well as others described elsewhere in this report, before
      making any decision to buy, sell or hold our common stock.





This
      report contains certain statements relating to future events or the future
      financial performance of our company. Readers are cautioned that such statements
      are only predictions, involve risks and uncertainties, and that actual events
      or
      results may differ materially. In evaluating such statements, prospective
      investors should specifically consider the various factors identified in this
      memorandum, including the matters set forth below, which could cause actual
      results to differ materially from those indicated by such forward-looking
      statements.







–
17
          –


**Risks
      Related to Our Financial Condition**





***Dependence
      on financing.***





Since
      we
      are not generating significant revenue we are dependent on outside sources
      of
      financing. We have financed our operations by offering convertible debt (secured
      and unsecured) securities in private placements, in some cases with equity
      incentives for the investor in the form of warrants to purchase our common
      stock
      and have borrowed from affiliates of our Chairman of the Board. We have sought
      and will continue to seek various sources of financing but there are no
      commitments from anyone to provide us with financing. If we are unable to obtain
      financing, we may have to suspend operations, sell assets and will not be able
      to execute our business plan.





***Inability
      to obtain additional financing would result in the suspension of our
      business**.*





Our
      ability to continue our operations depends on our ability to obtain financing.
      If adequate funds are not available on acceptable terms, we may not be able
      to
      retain existing and/or attract new employees, support product development and
      fabrication, take advantage of market opportunities, develop or enhance new
      products, pursue acquisitions that would complement our existing product
      offerings or enhance our technical capabilities to develop new products or
      execute our business strategy.





***Terms  of  our
      outstanding 6% Secured Convertible Debentures due December 28, 2008 impedes
      our
      ability to obtain financing.***





There
      is
      $9,176,892 principal amount of 6% Secured Convertible Debentures due December
      28, 2008 issued during the period from December 2004 to August 31, 2007
      outstanding which has been an impediment to obtaining equity financing
      .  The documents, although amended in January 2007 to eliminate the
      requirement that the holders of 60.1% of the outstanding principal amount
      consent to our issuance of shares, debt or fixed convertible securities to
      finance our operations, continue to contain a full “ratchet down” provision
      which has a dilutive effect which is triggered by future financing at an
      effective price lower than the conversion and warrant exercise price. While
      a
      substantial portion of the net proceeds of the sale of the Debentures was
      initially used to repay pre-existing debt, all of the proceeds during the fiscal
      year 2007 were used to support Arkados’ operations. There is no assurance that
      the holders will continue to provide additional funds to us or that future
      financing will not be impeded by the anti-dilution provisions of the documents.
      Our ability to continue our operations depends on our ability to obtain
      financing. If adequate funds are not available on acceptable terms, we may
      not
      be able to retain existing and/or attract new employees, support product
      development and fabrication, take advantage of market opportunities, develop
      or
      enhance new products, pursue acquisitions that would complement our existing
      product offerings or enhance our technical capabilities to develop new products
      or execute our business strategy.





***If
      we lose key employees and consultants, including our Chairman and CEO, or are
      unable to attract or retain qualified personnel, our business could
      suffer.***




Our
      future success depends, in part, on our ability to continue to attract, retain
      and motivate highly qualified technical, marketing, engineering, and management
      personnel. Due to the highly competitive nature of the marketplace that we
      operate in, we may from time to time lose key employees to certain of our
      competitors.  We are highly dependent on our management, particularly
      our CEO, Oleg Logvinov and our Chairman, Andreas Typaldos.  The loss of the
      services of either of Mr. Logvinov, Mr. Typaldos or other personnel could have
      a
      material adverse effect on our operations.  Although Mr. Logvinov is a
      party to an employment agreement for his services until May 24, 2008, from
      time
      to time, our inability to make payments under the agreement may give him the
      right to terminate his employment with us at any time on short notice.  As
      of August 31, 2007, we have failed to make payments totaling $ 154,993 due
      to
      Mr. Logvinov, comprised of an unpaid bonus, salary and expenses.  We
      are negotiating a longer term agreement with Mr. Logvinov, but there can be
      no
      assurance that he will remain associated with us.  Similarly, Mr.
      Typaldos provides services to us on a month to month basis under a consulting
      agreement that expired on May 31, 2007 and there is no assurance that Mr.
      Typaldos will continue to devote time and attention to our
      business.





***Our
      independent registered public accounting firm has expressed doubt about our
      ability to continue as a going concern, which may hinder our ability to obtain
      future financing***





Our
      consolidated financial statements as of May 31, 2007 have been prepared under
      the assumption that we will continue as a going concern for the year ending
      May
      31, 2007. Our independent registered public accounting firm has issued a report
      that included an explanatory paragraph referring to our recurring losses from
      operations and net capital deficiency and expressing substantial doubt in our
      ability to continue as a going concern without additional capital becoming
      available. Our ability to continue as a going concern is dependent upon our
      ability to obtain additional equity or debt financing, attain further operating
      efficiencies, reduce expenditures, and, ultimately, to generate revenue. The
      financial statements do not include any adjustments that might result from
      the
      outcome of this uncertainty








–
18
          –


***If
      we fail to comply with the rules under the Sarbanes-Oxley Act related to
      accounting controls and procedures, or if material weaknesses or other
      deficiencies are discovered in our internal accounting procedures, our stock
      price could decline significantly and raising capital could be more
      difficult.***





If
      we
      fail to comply with the rules under the Sarbanes-Oxley Act related to accounting
      controls and procedures, or if material weaknesses or other deficiencies are
      discovered in our internal accounting procedures, our stock price could decline
      significantly and raising capital could be more difficult. Section 404 of the
      Sarbanes-Oxley Act requires annual management assessments of the effectiveness
      of our internal controls over financial reporting and a report by our
      independent auditors addressing these assessments. We are in the process of
      documenting and testing our internal control procedures, and we may identify
      material weaknesses in our internal control over financial reporting and other
      deficiencies. If material weaknesses and deficiencies are detected, it could
      cause investors to lose confidence in our Company and result in a decline in
      our
      stock price and consequently affect our financial condition. In addition, if we
      fail to achieve and maintain the adequacy of our internal controls, we may
      not
      be able to ensure that we can conclude on an ongoing basis that we have
      effective internal controls over financial reporting in accordance with Section
      404 of the Sarbanes-Oxley Act. Moreover, effective internal controls,
      particularly those related to revenue recognition, are necessary for us to
      produce reliable financial reports and are important to helping prevent
      financial fraud. If we cannot provide reliable financial reports or prevent
      fraud, our business and operating results could be harmed, investors could
      lose
      confidence in our reported financial information, and the trading price of
      our
      Common Stock could drop significantly. In addition, we cannot be certain that
      additional material weaknesses or significant deficiencies in our internal
      controls will not be discovered in the future.





We
      have
      recently hired a full-time CFO to review and remediate our disclosure controls.
      This is in response to a past issues where our management determined, in
      connection with their evaluation of the effectiveness of the design and
      operation of our disclosure controls and procedures, that such procedures were
      not effective to ensure that information required to be disclosed by us was
      recorded, processed and reported within the time periods specified in the SEC's
      rules and forms. In addition, major efforts will be undertaken in fiscal 2008
      to
      put in place appropriate policies and procedures to ensure that the Company
      is
      prepared to comply with the rules under the Sarbanes-Oxley Act. Although our
      management has taken actions to improve the effectiveness of these procedures,
      it has not been able to conclude that such controls are effective. Our stock
      price, ability to obtain financing and the listing of our common stock on the
      OTCBB would be adversely impacted if we are not able to improve these
      procedures.




***In
      previous years, we identified material weaknesses in our disclosure controls
      and
      procedure.. In addition, we may experience additional material weaknesses in
      the
      future. Any material weaknesses in our disclosure controls and procedures or
      our
      failure to remediate such material weaknesses could result in a material
      misstatement in our financial statements not being prevented or detected and
      could affect investor confidence in the accuracy and completeness of our
      financial statements, as well as our stock price.***




In
      previous years, we identified material weaknesses in our disclosure controls
      and
      procedures relating to our lack of sufficient internal accounting personnel
      necessary to ensure that adequate review of our financial statements and notes
      thereto is performed in a timely manner. During 2007, we hired a full-time
      CFO
      to review and remediate our disclosure controls.  Material weaknesses
      in our disclosure controls and procedures could result in material misstatements
      in our financial statements not being prevented or detected. We may experience
      difficulties or delays in completing remediation or may not be able to
      successfully remediate material weaknesses at all. Any material weakness or
      unsuccessful remediation could affect investor confidence in the accuracy and
      completeness of our financial statements, which in turn could harm our business
      and have an adverse effect on our stock price and our ability to raise
      additional funds.





***We
      have not generated significant revenue from our principal intended activities
      and we have been dependent on a mall number of customers for substantially
      all
      of out revenue.***







–
19
          –


While
      our
      most recent quarters have reflected what we believe is the beginning of regular
      customer activity, as a development stage company, we have generated limited
      revenue principally from providing development services and generating data
      in
      field test scenarios. We have not sold sufficient quantities of mass produced
      semiconductors, which is the primary part of our expected revenue stream going
      forward. In addition, substantially all of our revenue has been from a small
      number of customers. It is difficult, in a market that is rapidly evolving,
      to
      evaluate the future sales performance of powerline technology, and our
      implementation of it. We may not successfully address any of these risks and
      may
      never have significant revenue.





***We
      expect losses will continue for the foreseeable future. Our stock price may
      be
      affected by such losses***.





In
      our
      short history, we have not reported an operating profit and do not expect to
      report a profit in the near future, if at all. We have experienced losses from
      operations since Enikia, from whom we indirectly acquired our intellectual
      property assets, began operations. Losses are likely to continue, and may cause
      volatility in our stock price.






**Risks
      Related to Our BusinessPlans and Operations**





***Consumer
      demand may not develop as we anticipate, and our business will
      suffer.***





The
      initial and primary customers of our semiconductors are expected to be OEMs
      of
      devices with uses for connectivity. OEM acceptance of powerline technology
      will
      be driven by consumer demand for home connectivity. If consumer demand does
      not
      develop as we anticipate, our products will sell slowly, or not at all, and
      our
      business will suffer.





There
      are
      several factors that may affect the expansion of the home connectivity
      market:





●
            the
                emergence of competing standards for home
                connectivity





●
            new
                content or products that attract a large consumer
                base





●
            interoperability
                between different products in the same
                market




●
              the
                  success of marketing by OEMs
 ●
                  the
                      cost and availability of connected products using this technology
                      or
                      competing technologies
 
 We
            have
            only limited ability to influence in the resolution of the
            foregoing.





***Powerline
      solutions for home connectivity may not gain
      acceptance.***





Currently,
      Ethernet and Wireless technologies enjoy a large market share of the home
      connectivity market. As the market broadens beyond computer networking to
      include audio/video applications, it is unclear which medium will be
      predominant. Among the competing physical media, including coaxial cable,
      Ethernet, phone line, and wireless, many are actively supported by various
      trade
      associations that represent the interests of a variety of companies. Some have
      greater market acceptance. If powerline technology does not achieve market
      acceptance, there may be less demand or no demand at all, and our business
      will
      suffer.





***Powerline
      technologies, other than the technologies implemented by Arkados may
      proliferate.***





Arkados
      is developing products that comply with the specifications for powerline
      networking developed by members of the HomePlug Powerline Alliance. However,
      there may be other competing, independent efforts in this market. To the extent
      that a competing effort establishes the predominant industry standard for
      powerline technologies that are not based on Arkados' chosen technologies,
      or,
      if no standard predominates in each market, our business will
      suffer.





***Products
      that incorporate our chosen technologies may fail in operation, or fail to
      be
      certified by standards organizations.***





Our
      ODM/OEM customers may produce products that fail to work properly, either as
      a
      consequence of the inclusion of our semiconductors and software, or an unrelated
      problem; in which case, our business may suffer. If products that incorporate
      our solutions fail to pass standards test, our business will
      suffer.





–
20
          –


***We
      may be unable to sell large volumes of
      semiconductors.***





While
      we
      plan to attract customers with plans for large numbers of products, there may
      be
      cases when significant effort results in few semiconductors sold. When a company
      agrees to develop products that use our solutions, and agrees to purchase our
      solutions in volume, we consider the agreement a “design win.” Achieving a
      design win does not create a binding commitment from that customer. A design
      win
      is merely an expression of interest by a customer to make volume purchases,
      but
      at any time a customer can discontinue using our solutions. To the extent that
      we are unable to convert design wins into volume sales, our business will
      suffer.





***We
      may not be able to attract and retain engineering and technical
      talent.***





The
      needs
      of the business coupled with capital constraints will dictate our hiring, but
      we
      expect to need personnel in our technical and engineering disciplines, as well
      as in operational roles. Since powerline technology is a narrow engineering
      and
      technical specialty and we have limited financial resources, attracting
      experienced talent is difficult. If we are unable to attract and retain
      qualified personnel, our ability to develop and produce our products will be
      limited.





***Our
      solutions have a long development and sales cycle. We may continue to incur
      significant expenses before revenues are realized.***





Significant
      company resources must be dedicated to research and development, production
      and
      sales and marketing in order to properly sell solutions into our target markets.
      Products are developed based on a forecast from analysts, and we will incur
      substantial product development expenses before generating associated revenues.
      Customers typically spend two to nine months in testing before volume production
      of its own products, which incorporate our solution. Sales cycles are lengthy
      and produce delays between the time we incur expenses for research, development,
      sales and marketing efforts, and the time that we generate revenue, if any
      revenue is generated. If we do not generate revenue after we have incurred
      substantial expenses to develop and market any of our products, our business
      will suffer.





***We
      will depend on our OEM and ODM customers to produce successful products that
      incorporate our solutions***.





Our
      customers are OEMs and ODMs in our target markets. They integrate our IC's
      into
      their products. If their products are not successful, we may not sell volume
      quantities of our semiconductors. OEM and ODM products may be unsuccessful
      for
      many reasons which are beyond our control. Any of these reasons may harm our
      business.





***We
      will rely on third parties to fabricate, assemble and test our solutions, which
      may increase costs or create delays***.





As
      a
“fabless” semiconductor manufacturer, we do not own or operate a semiconductor
      fabrication, assembly or testing facility. We have entered into an agreement
      with GDA Technologies, Inc. to manage this process for us. In the future, GDA
      or
      contract foundries, and assembly and test houses selected by us may also be
      adversely affected for reasons beyond our control. This may result in our
      inability to obtain products within the time frames, volumes or costs we
      require, or at all. Any disruption in the availability of products, or problems
      associated with the delivery, quality or cost of fabrication, assembly and
      testing of our products may cause our business to suffer.





***Our
      specifications may result in unacceptable manufacturing yields from our
      suppliers, which may increase our product costs or reduce
      supplies.***





We
      write
      specifications and create designs and our third-party suppliers manufacture
      chips based on those specifications and designs. We have not yet entered into
      volume production of our products, and our specifications may fall short of
      producing volumes of semiconductors effectively and efficiently. This may cause
      dies on our wafers to function poorly. The term “yield” is used to express the
      proportion of functional die expressed as a percentage of total die on a wafer.
      If expected yields are not reached, our product costs will increase. We may
      also
      experience problems when our products are scaled to smaller geometries. Problems
      with yield may not be identified until late in the product development cycle,
      or
      even once an end-product is built and sold. Yield problems are difficult to
      detect, time consuming and expensive to correct. These issues could affect
      our
      intention to deliver products to customers in a timely manner.





–
21
          –


***Defects
      in our products could hurt the business by harming our reputation, decreasing
      our market acceptance, losing customer accounts, and creating liabilities for
      our company.***





Integrated
      circuits are highly complex products, and may contain defects or bugs which
      may
      not be detected until other products that incorporate our chips are shipped
      and
      being used by end-users. Defects may harm our reputation and make customers
      reluctant to buy our products. Correcting these defects is an expensive process.
      If defects are not discovered until after we have commenced commercial
      production of a new product, we might incur substantial additional development
      costs. If we fail to solve problems in time, we may incur product recall, repair
      or replacement costs. These problems may also result in claims against us by
      our
      customers or consumers. Any such problems could divert our company resources
      from other development efforts. Moreover, we would likely lose, or experience
      a
      delay in, the market acceptance of our products. We could also lose credibility
      with our current and prospective customers.





***Regulation
      in certain regions of the world (Japan as an example), which limits our
      international market.***





Our
      powerline communication products are designed to operate on frequencies that
      are
      currently restricted by government regulations in certain areas of the world,
      Japan as an example. As a result, our semiconductors cannot be used in products
      used in such areas at this time. The international market will remain limited
      unless the existing regulations are changed or until we develop products that
      can operate within the constraints imposed by the existing
      regulations.





***Future
      Federal Communications Commission, or FCC, regulation may restrict sales of
      our
      products adversely affecting our business.***





Our
      powerline communication products are designed to operate on frequencies that
      are
      not currently restricted by FCC regulations. OEM products incorporating our
      ICs
      are regulated by the FCC. Operation of these products currently is not
      restricted by the FCC as long as the products do not interfere with other radio
      frequency, or RF, bands licensed by the FCC. We cannot assure you that this
      will
      continue to be the case. Should government regulations change in the future,
      making operation of our customers' products at their current radio frequency
      bands subject to restrictive regulation, or subjecting the frequencies on which
      our products operate to restrictions, our customers' desire to purchase our
      products could diminish and our business may suffer.




***Our
      business is highly dependent on the expansion of the consumer digital
      entertainment electronics market.***





We
      expect
      that the main growth in our product demand will be driven by the consumer
      digital entertainment electronics market. We are focusing on audio/video
      transmission and distribution products for the in-home use. We expect the
      consumer digital market to expand; however, our strategy may not be successful.
      Given current economic conditions in the United States and internationally,
      as
      well as the large installed base of consumer electronics products, consumer
      spending on home electronic products may not increase as expected. In addition,
      the potential decline in consumer confidence and consumer spending could have
      a
      material adverse effect on our business.





***Our
      success depends on our ability to introduce new products on a timely
      basis.***





Our
      success depends upon our ability to develop new products for new and existing
      markets, to introduce these products in a timely manner, and to have these
      products gain market acceptance. The development of new products is highly
      complex and we may experience delays in developing and introducing them.
      Successful product development and introduction depend on a number of factors,
      including:




●
            proper
                new product definition,





●
            timely
                completion of design and testing of new
                products,





●
            assisting
                our customers with integration of our components into their new products,
                including providing support from the concept stage through design,
                launch
                and production ramp,





●
            successfully
                developing and implementing the software necessary to integrate our
                products into our customers'
                products,





●
            achievement
                of acceptable manufacturing yields,





–
22
          –


●
            availability
                of wafer, assembly, and test
                capacity,





●
            market
                acceptance of our products and the products of our
                customers





●
            obtaining
                and retaining industry certification
                requirements.





Although
      we seek to design products that have the potential to become industry standard
      products, we cannot assure you that the market leaders will adopt any products
      introduced by us, or that any products that may be initially accepted by our
      customers that are market leaders will become industry standard products. Both
      revenues and margins may be materially affected if new product introductions
      are
      delayed, or if our products are not designed into successive generations of
      our
      customers' products. We cannot assure you that we will be able to meet these
      challenges, or adjust to changing market conditions as quickly and
      cost-effectively as necessary to compete successfully. Our failure to develop
      and introduce new products successfully could harm our business and operating
      results.





Successful
      product design and development is dependent on our ability to attract, retain,
      and motivate qualified design engineers, of which there is a limited number.
      Due
      to the complexity and variety of CMOS, precision linear, and mixed-signal
      circuits, the limited number of qualified circuit designers and software
      engineers, and the limited effectiveness of computer-aided design systems in
      the
      design of such circuits, we cannot assure you that we will be able to
      successfully develop and introduce new products on a timely basis.




***Strong
      competition in the high-performance integrated circuit market may harm our
      business.***





The
      integrated circuit industry is intensely competitive and is characterized by
      rapid technological change, price erosion, and design and other technological
      obsolescence. Because of shortened product life cycles and even shorter
      design-in cycles in a number of the markets that we serve, particularly consumer
      entertainment, our competitors have increasingly frequent opportunities to
      achieve design wins in next-generation systems. In the event that competitors
      succeed in supplanting our products, our desired market share may not be
      attainable and/or sustainable and net sales, gross margins, and results of
      operations would be adversely affected.





In
      powerline communications, our principal competitors include Intellon, Conexant,
      Maxim, DS2, Panasonic Gigle Semiconductor, and Spidcom. In Network and Media
      Processors Conexant, Cirrus Logic, Micrel, Texas Instruments, Atmel, and Sharp.
      Many of our competitors have substantially greater financial, engineering,
      manufacturing, marketing, technical, distribution and other resources, broader
      product lines, greater intellectual property rights, and longer relationships
      with customers than we have. We also expect intensified competition from
      emerging companies and from customers who develop their own integrated circuit
      products. In addition, some of our current and future competitors maintain
      their
      own fabrication facilities, which could benefit them in connection with cost,
      capacity and technical issues.





Increased
      competition could adversely affect our business. We cannot assure you that
      we
      will be able to compete successfully in the future or that competitive pressures
      will not adversely affect our financial condition and results of operations.
      Competitive pressures could reduce market acceptance of our products and result
      in price reductions and increases in expenses that could adversely affect our
      business and our financial condition.





***Our
      products may be characterized by average selling prices that decline over short
      time periods; if we are unable to introduce new products with higher selling
      prices or reduce our costs, our business and operating results could be
      harmed.***





Historically
      in the integrated circuit industry, average selling prices of products have
      decreased over time, while manufacturing costs may remain fixed. If we are
      unable to introduce new products with higher margins or to reduce manufacturing
      costs to offset anticipated decreases in the prices of our products, our
      operating results may be adversely affected. In addition, because of high fixed
      costs in our industry, we are limited in our ability to reduce total costs
      quickly in response to any revenue shortfalls. Because of these factors, we
      may
      experience material adverse fluctuations in our future operating results on
      a
      quarterly or annual basis.





–
23
          –


***Our
      products are complex and could contain defects, which could reduce sales of
      those products or result in claims against us.***





Product
      development in the markets we serve is becoming more focused on the integration
      of multiple functions on individual devices. In addition to that, powerline
      communication is a relatively new technology. There is a general trend towards
      increasingly complex products. The greater integration of functions and
      complexity of operations of our products increases the risk that our customers
      or end users could discover latent defects or subtle faults after volumes of
      product have been shipped. This could result in:




●
            material
                recall and replacement costs for product warranty and
                support,





●
            adverse
                impact to our customer relationships by the occurrence of significant
                defects,





●
            delay
                in recognition or loss of revenues, loss of market share, or failure
                to
                achieve market acceptance, and





●
            diversion
                of the attention of our engineering personnel from our product development
                efforts.





The
      occurrence of any of these problems could result in the delay or loss of market
      acceptance of our products and would likely harm our business, and may result
      into our inability to secure a reasonable share of the market, In addition,
      any
      defects or other problems with our products could result in financial or other
      damages to our customers who could seek damages from us for their losses. A
      product liability claim brought against us, even if unsuccessful, would likely
      be time consuming and costly to defend.





***We
      rely on independent foundries to manufacture our products, which will subject
      us
      to increased risks.***




We
      rely
      on independent foundries to manufacture all of our wafers. In order to produce
      our silicon, we need to secure appropriate manufacturing services and
      capacities. Our reliance on outside foundries involves several risks and
      uncertainties, including the:





●
            inability
                to secure appropriate manufacturing services and
                capacities





●
            possibility
                of an interruption or loss of manufacturing
                capacity





●
            lack
                of control over delivery schedules, quality assurance, manufacturing
                yields and costs





●
            possible
                misappropriation of our intellectual
                property





●
            inability
                to reduce our costs as quickly as competitors who manufacture their
                own
                products and are not bound by set
                prices.




Market
      conditions could result in wafers being in short supply and prevent us from
      having adequate supply to meet our customer requirements. In addition, any
      prolonged inability to utilize third-party foundries because of fire, natural
      disaster, or otherwise, would have a material adverse effect on our financial
      condition and results of operations. If we are not able to obtain additional
      foundry capacity as required, our relationships with our customers would be
      harmed and, consequently, our sales would likely be reduced, and we may be
      forced to purchase wafers from higher-cost suppliers or to pay expediting
      charges to obtain additional supply, if we are able to acquire wafers at
      all.





In
      order
      to secure additional foundry capacity, we may enter into contracts that commit
      us to purchase specified quantities of silicon wafers over extended periods.
      In
      the future, we may not be able to secure sufficient capacity with foundries
      in a
      timely fashion or at all, and such arrangements, if any, may not be on terms
      favorable to us. Moreover, if we are able to secure foundry capacity, we may
      be
      obligated to utilize all of that capacity or incur penalties. These penalties
      may be expensive and could harm our financial results.





***We
      will be dependent on our subcontractors to perform some of the design and key
      manufacturing functions for us.***





We
      will
      depend on third-party subcontractors for the elements of the design, assembly,
      packaging, and testing of our products. International operations and sales
      may
      be subject to political and economic risks, including political instability,






–
24
          –


currency
      controls, exchange rate fluctuations, and changes in import/export regulations,
      tariff and freight rates, as well as the risks of natural disaster. Although we
      will seek to reduce our dependence on a limited number of subcontractors as
      demand for our products merits, the concentration of subcontractors and
      manufacturing operations in certain areas of the World could subject us to
      the
      risks of conducting business internationally, including political and economic
      conditions in such regions as Asia, India, etc. Disruption or termination of
      the
      assembly, packaging or testing of our products could occur, and such disruptions
      could harm our business and operating results. In addition, we are unable to
      predict whether events such as the epidemic of SARS will have a negative effect
      on the design, supply, testing, and packaging of our products.





***We
      may be unable to protect our intellectual property rights from third-party
      claims and litigation.***





Our
      success depends on our ability to obtain patents and licenses and to preserve
      our other intellectual property rights covering our technology, applications,
      products, and development and testing tools. We seek patent protection for
      those
      inventions and technologies for which we believe such protection is suitable
      and
      is likely to provide a competitive advantage to us. We also rely substantially
      on trade secrets, proprietary technology, non-disclosure and other contractual
      agreements, and technical measures to protect our technology, application,
      design, and manufacturing know-how, and work actively to foster continuing
      technological innovation to maintain and protect our competitive position.
      We
      cannot assure you that steps taken by us to protect our intellectual property
      will be adequate, that our competitors will not independently develop or patent
      substantially equivalent or superior technologies or be able to design around
      patents that we may receive, or that our intellectual property will not be
      misappropriated. Also, the laws of some foreign countries may not protect our
      intellectual property as much as the laws of the United States.





***Potential
      intellectual property claims and litigation could subject us to significant
      liability for damages and could invalidate our proprietary
      rights.***




The
      semiconductor industry is characterized by frequent litigation regarding patent
      and other intellectual property rights. Even if we receive a patent grant we
      would not be able to offer any assurance that it will not be invalidated,
      circumvented, or challenged, that rights granted under the patent will provide
      competitive advantages to us, or that any of our pending or future patent
      applications will be issued with the scope of the claims sought by us, if at
      all. As is typical in the semiconductor industry, we expect that we and our
      customers may have received and may receive in the future, communications from
      third parties asserting patents, mask work rights, or copyrights on certain
      of
      our products and technologies. In the event third parties were to make a valid
      intellectual property claim and a license was not available on commercially
      reasonable terms, our operating results could be harmed. Litigation, which
      could
      result in substantial cost to us and diversion of our resources, may also be
      necessary to defend us against claimed infringement of the rights of others.
      An
      unfavorable outcome in any such suit could have an adverse effect on our future
      operations and/or liquidity.





***If
      we are unable to make continued substantial investments in research and
      development, we may not be able to sell our products.***





We
      plan
      significant expenditures in research and development activities to develop
      products and solutions. If we fail to make sufficient expenditures in research
      and development programs, new technologies and process improvements implemented
      by our competitors could render our current and planned products obsolete,
      and
      our business could be harmed. Substantially all of our operating expenses are
      related to research and development.





***Pending
      litigation.***





We
      have
      reported that former officers of Enikia, LLC, the company from which we
      indirectly acquired patents and other assets relating to our planned products,
      have filed a lawsuit against Andreas Typaldos, our Chairman, Oleg Logvinov,
      our
      CEO, Enikia, Enikia's counsel, Arkados and us. The action is
      captionedRobert Dillon, et al. v. Andreas Typaldos et al. ,
      and was commenced in the Superior Court of New Jersey, Chancery Division,
      Somerset County (Docket No. C-12102-04). In August 2007 the Superior Court
      entered an order that states “Defendants, Enikia LLC, Andreas Typaldos, Oleg
      Logvinov and Miletos, Inc. are dismissed from, the case and ordered to attend
      binding arbitration of the claims against them pursuant to the {Enikia}
      operating agreement.  The remainder of the Superior Court matter is
      stayed pending arbitration in accordance with Elizabethtown Water Co. V.
      Watchung Square Assoc., L.L.C., 276 N.J. Super. 571, 577 (App Div.
      2005).”  We expect appeals to be filed and/or other plaintiffs to file
      for an arbitration  We cannot predict what impact this decision or, if
      filed and/or plaintiffs to file for, an arbitration appeal of his decision
      will
      have on our company.











–
25
          –


***Obligation
      to license certain intellectual property rights.***





As
      a
      member of the HomePlug Alliance, TIA TR30.1 and IEEE P1901, we are
      obligated to license certain intellectual property rights to our competitors,
      on
      a non-discriminatory basis, which may adversely affect our ability to
      compete.





**Risks
      Related To Our Common Stock And Its Market Value**





***If
      we fail to remain current on our reporting requirements, we could be removed
      from the OTC Bulletin Board which would limit the ability of broker-dealers
      to
      sell our securities and the ability of stockholders to sell their securities
      in
      the secondary market.***





Companies
      trading on the OTC Bulletin Board, such as us, must be reporting issuers under
      Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, and
      must
      be current in their reports under Section 13, in order to maintain price
      quotation privileges on the OTC Bulletin Board, and to be timely in such
      filings.  If we fail to remain current on our reporting requirements or
      file late three times in 12 calendar months, our stock could be removed from
      the
      OTC Bulletin Board.  As a result, the market liquidity for our securities
      could be severely adversely affected by limiting the ability of broker-dealers
      to sell our securities and the ability of stockholders to sell their securities
      in the secondary market.  There can be no assurance that in the future we
      will always be current in our reporting requirements.





***Our
      common stock is subject to the “penny stock” rules of the SEC and the trading
      market in our securities is limited, which makes transactions in our stock
      cumbersome and may reduce the value of an investment in our
      stock.***





SEC
      Rule
      15g-9 establishes the definition of a “penny stock,” for the purposes relevant
      to us, as any equity security that has a market price of less than $5.00 per
      share or with an exercise price of less than $5.00 per share, subject to certain
      exceptions.  For any transaction involving a penny stock, unless exempt,
      the rules require:





●
            that
                a broker or dealer approve a person’s account for transactions in penny
                stocks; and





●
            the
                broker or dealer receive from the investor a written agreement to
                the
                transaction, setting forth the identity and quantity of the penny
                stock to
                be purchased.





In
      order
      to approve a person’s account for transactions in penny stocks, the broker or
      dealer must:





●
            obtain
                financial information and investment experience objectives of the
                person;
                and





●
            make
                a reasonable determination that the transactions in penny stocks
                are
                suitable for that person and the person has sufficient knowledge
                and
                experience in financial matters to be capable of evaluating the risks
                of
                transactions in penny stocks.





The
      broker or dealer must also deliver, prior to any transaction in a penny stock,
      a
      disclosure schedule prescribed by the SEC relating to the penny stock
      market, which, in highlight form:





●
            sets
                forth the basis on which the broker or dealer made the suitability
                determination; and




●
            that
                the broker or dealer received a signed, written agreement from the
                investor prior to the transaction.




Generally,
      brokers may be less willing to execute transactions in securities subject to
      the
“penny stock” rules.  This may make it more difficult for investors to
      dispose of our common stock and cause a decline in the market value of our
      stock.




Disclosure
      also has to be made about the risks of investing in penny stocks in both public
      offerings and in secondary trading and about the commissions payable to both
      the
      broker-dealer and the registered representative, current quotations for the
      securities and the rights and remedies available to an investor in cases of
      fraud in penny stock transactions.  Finally, monthly statements have to be
      sent disclosing recent price information for the penny stock held in the account
      and information on the limited market in penny stocks.





–
26
          –


***The
      market price of our common stock may be adversely affected by several
      factors.***





The
      market price of our common stock could fluctuate significantly in response
      to
      various factors and events, including:





●
            our
                ability to execute our business
                plan;




●
              operating
                  results below expectations;


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




●
            loss
                of any strategic relationship;




●
            industry
                developments;




●
            economic
                and other external factors; and




●
            period-to-period
                fluctuations in our financial
                results.




In
      addition, the securities markets have from time to time experienced significant
      price and volume fluctuations that are unrelated to the operating performance
      of
      particular companies.  These market fluctuations may also materially and
      adversely affect the market price of our common stock.





***We
      have not paid dividends in the past and do not expect to pay dividends in the
      future.  Any return on investment may be limited to the value of our common
      stock*.**





We
      have
      never paid cash dividends on our capital stock and do not anticipate paying
      cash
      dividends on our capital stock in the foreseeable future.  The payment of
      dividends on our capital stock will depend on our earnings, financial condition
      and other business and economic factors affecting us at such time as the board
      of directors may consider relevant.  If we do not pay dividends, our common
      stock may be less valuable because a return on your investment will only occur
      if our common stock price appreciates.





***A
      sale of a substantial number of shares of our common stock may cause the price
      of our common stock to decline.***





If
      our
      stockholders sell substantial amounts of our common stock in the public market,
      including shares issued upon the exercise of outstanding options or warrants,
      the market price of our common stock could fall.  These sales also may make
      it more difficult for us to sell equity or equity-related securities in the
      future at a time and price that we deem reasonable or appropriate. 
Stockholders who have been issued shares in our subsidiary’s merger with Aster
      Wireless in March 2007 will be able to sell their shares pursuant to Rule 144
      under the Securities Act of 1933, beginning one year after the stockholders
      acquired the shares and stockholders that acquired shares in the merger with
      Miletos in May 2004, unless they are affiliates, are free on any restrictions
      on
      the resales of their shares.  In addition, it should be noted that the
      SEC has proposed to amend Rule 144 to shorten the period of time that shares
      have to be held to rely on the rule for resales without filing a registration
      statement under the Securities Act of 1933, as amended, to as little as six
      months.  If amended, the rule is expected to be applicable to the
      purchasers of securities prior to the amended rules, effective
      date.





***Provisions
      contained in outstanding secured convertible debentures provide holders a
      greater share in the proceeds of a cash sale or merger than the amount of the
      outstanding debt.***





Certain
      provision of $9,176,892 outstanding secured convertible debentures require
      the
      redemption of such debentures and the warrants issued in connection with the
      sale of the debentures in the event of a cash sale of our business of cash
      merger that would give the debenture holders a return substantially greater
      than
      the outstanding debt and interest.  Such payments would before cash
      could be distributed either to general creditors or the holders of our common
      stock.  The sale of these debentures has been the principal source of
      our working capital since December 2005 and no authorization on the part of
      our
      stockholder is require for our continuing to issue these
      securities.  Although we have sought and continue to seek equity
      financing to replace the sale of these securities as our primary source of
      working capital, we have not been able to do so and there is no assurance that
      we will be able to do so in the future.




**Available
      Information**





We
      file
      annual, quarterly and current reports, proxy statements and other information
      with the Securities and Exchange Commission (“SEC”). You may read and copy any
      document we file at the SEC's public facilities located at 100 F Street N.E.,
      Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information
      on
      the public reference room. The SEC maintains a web site (www.sec.gov  ) that contains annual, quarterly and current
      reports, proxy statements and other information that we and other issuers file
      electronically with the SEC.




–
27
          –


**Executive
      Officers of the Registrant**





Our
      executive officers are:





**Name**
            
            **Position**Andreas
                Typaldos
            
            Chairman
                of the BoardOleg
                Logvinov
            
            President,
                CEO and a DirectorBarbara
                Kane-Burke
            
            CFO
                and Assistant SecretaryGrant
                Ogata
            
            Executive
                Vice President of Worldwide
                Operations





Andreas
      Typaldos is a principal stockholder and was appointed Chairman of our Board
      in
      February, 2005. Although our by-laws provide that the Chairman of the Board's
      primary responsibilities relate to the conduct of board and stockholder
      meetings, Mr. Typaldos also serves as a consultant to us on a part-time basis
      and has a significant impact on our strategic planning, marketing and capital
      raising activities. He has thirty years of software experience as an
      entrepreneur and founder/investor of a number of technology companies. In 1997,
      Mr. Typaldos founded Enikia, LLC, whose technology and assets were subsequently
      acquired by an entity controlled by Mr. Typaldos and merged into our Arkados,
      Inc. subsidiary in May 2004. Mr. Typaldos serves as CEO of Xandros, Inc., a
      privately held company engaged in the sale of Linux desktop applications. From
      September 1998 until June 2003, as founder and principal investor, Mr. Typaldos
      also built a multi-million dollar software consulting business, e-Vantage
      Solutions, Inc., until that company's consulting activities ended shortly after
      September 11, 2001. In addition, from September 1999 until December
      2001,****Mr. Typaldos was active as Interim Chairman and CEO
      at NetGain Development, Inc., which was an internet incubator/investment firm
      that funded internet and enabling technology companies, including Enikia, Linux
      Global Partners, and other internet and technology companies. Prior to that,
      Mr.
      Typaldos founded his first consulting and software company in 1973 and in 1978,
      founded a successor company, AxsOne (formerly known as Computron), which he
      took
      public in 1995 and of which he as President until 1994 and Chairman/CEO until
      1996. AxsOne is an international client/server and internet-based enterprise
      applications software company that supplies Fortune 5000 companies with records
      and content management and compliance software (i.e., email and Instant
      Messaging-IM management), as well as financial applications and workflow
      solutions.  Mr. Typaldos has a Bachelors of Science Degree from
      Columbia University in Mathematical Methods for Engineering and Operations
      Research. He also holds a Masters of Science Degree in Computer Science from
      Pratt Institute. Mr. Typaldos serves on the Board of Directors and Advisory
      Boards of a number of companies and non-profit organizations.





Oleg
      Logvinov was appointed President, CEO and a director on August 12, 2004 and
      has
      served as President of Arkados since we merged Miletos into Arkados. Prior
      to
      the merger, from February, 2000 to March, 2004, Mr. Logvinov served as Vice
      President of Engineering and later as President of Enikia LLC. From March,
      1998
      to February, 2000, he served as Senior Director of Product Development and
      System Engineering at OpenCon Systems Inc., a telecommunications software
      service provider, and later CyberPath Inc., a venture-funded VoDSL Gateway
      company spun off by OpenCon Systems Inc. Prior to that, he held senior
      management positions at NITECH, INC from1996 to 1998, and CEM, Inc from 1991
      to
      1996. Mr. Logvinov holds a masters degree in electrical engineering from the
      Technical University of Ukraine (KPI). He has also worked as a senior research
      scientist and later research team leader at an R&D laboratory at the
      Technical University of Ukraine and the Ukraine Department of Energy.  Oleg
      Logvinov is the Chief Strategy Officer and immediate past President of the
      HomePlug Powerline Alliance. Mr. Logvinov is a frequent industry speaker,
      representing both the HomePlug alliance and Arkados at conferences around the
      world.




Barbara
      Kane-Burke was appointed CFO in April of 2007. She was most recently the
      Corporate Controller for Pharmos Corp, a NASDAQ-traded biopharmaceutical company
      where she was instrumental in helping Pharmos meet its financial disclosure
      obligations under Sarbanes-Oxley.  Previously, she was CFO and
      Treasurer of Whitewing Environmental Corp, and with Hoechst Celanese/Clariant,
      where her duties included acting as Controller for a business unit supplying
      raw
      materials to the semiconductor industry.  Ms. Kane-Burke is
      responsible for all of Arkados’ accounting, tax compliance, financial aspects of
      acquisition planning, establishing and maintaining of banking relationships,
      and
      all other financial and treasury functions.  Ms. Kane-Burke earned an
      MBA in Accounting and Taxation from Fairleigh Dickinson University and a BA
      in
      Education from East Stroudsburg University in Pennsylvania.





Grant
      Ogata joined Arkados in March 2007 as Executive Vice President of Worldwide
      Operations. Mr. Ogata had been working with Arkados in a part-time capacity
      since September 2006. Mr. Ogata was formerly Vice President of Global Sourcing
      and Product Development of RadioShack Corporation Mr. Ogata has 28 years of
      experience in the consumer electronics industry.  At RadioShack, Mr.
      Ogata was responsible for developing hundreds of innovative products,
      establishing key strategic partners and managing global sourcing and product
      development offices in Japan, Taiwan, Hong Kong, China and Fort Worth, Texas.
      Throughout the years, and through a six-year expatriate assignment in Asia,
      Mr.
      Ogata gained intricate knowledge and contacts with key consumer electronic
      manufacturers around the world. He has been instrumental in beginning the
      transition of Arkados from a research and development company with solutions
      for
      distributing audio and video through power lines, to a commercial enterprise
      that provides these solutions to top tier companies globally.








–
28
          –





ITEM
                2.
            DESCRIPTION
                OF PROPERTY.




Our
      executive offices are located at 220 Old New Brunswick Road, Piscataway, NJ
      08854. The facility is approximately 6,500 sq. feet, occupied pursuant to a
      lease which expires on June 30, 2009 and is adequate for our current
      activities.  As a result of the acquisition of Aster Wireless in March
      of 2007, we also have offices located at 150 Lucius Gordon Dr., West Henrietta,
      NY 14586. The facility is approximately 3,500 sq. feet, occupied pursuant to
      a
      lease which expires on February 29, 2008 and is adequate for our current
      activities  We may add to the space or seek larger facilities as our
      operations expand.




ITEM
                  3.
              LEGAL
                  PROCEEDINGS.


In
      December 2004, Robert Dillon,
      William Simons and Stephen Schuster (the “Plaintiffs”) named us, our Arkados,
      Inc. subsidiary, Enikia, LLC, Oleg Logvinov, our CEO, Andreas Typaldos, our
      Chairman, and others in a lawsuit. The action is captionedRobert Dillon, et
      al. v.
      Andreas Typaldos et al., and was commenced
      in the Superior
      Court of New Jersey, Chancery Division, Somerset County (Docket No. C-12102-04).
      The plaintiffs claim damages and allege, among other things entitlement to
      a
      portion of the Common Shares issued as consideration for Miletos, Inc. (an
      affiliate of Mr. Typaldos') merging into our Arkados subsidiary. We do not
      believe there is any merit to these claims, but discussions about settlement
      with plaintiffs' counsel occurred several months ago but did not result in
      a
      settlement. Whether or not any future discussions lead to a settlement, the
      resolution of this litigated matter could require a significant amount of our
      management's time and is detrimental to our business. Plaintiff Dillon, a holder
      of membership interests in Enikia and the other plaintiffs that hold options
      to
      acquire Enikia interests allege, among other things, that they are entitled
      to
      various forms of equitable relief and unspecified damages. Litigation is
      currently pending regarding what parties and what issues should be decided
      in
      arbitration rather than in Superior Court of New Jersey. We believe claims
      against the Company are wholly without merit and intend to vigorously defend
      against the claims against us unless the claims can be settled for nuisance
      value.  In August 2007 the Superior Court entered an order that states
“Defendants, Enikia LLC, Andreas Typaldos, Oleg Logvinov and Miletos, Inc. are
      dismissed from, the case and ordered to attend binding arbitration of the claims
      against them pursuant to the {Enikia} operating agreement.  The
      remainder of the Superior Court matter is stayed pending arbitration in
      accordance with Elizabethtown Water Co. V. Watchung Square Assoc., L.L.C.,
      276
      N.J. Super. 571, 577 (App Div. 2005).”  We expect appeals to be filed
      and/or plaintiffs to file for arbitration.We cannot predict what
      impact this
      decision or, if filed and/or plaintiffs to file for, an arbitration appeal
      of
      his decision will have on our company.





The
      outcome of any litigation is inherently uncertain and we are required under
      our
      certificate of incorporation, bylaws and employment agreements to indemnify
      our
      officers and directors for certain liabilities, including the cost of defending
      litigation brought against them in their capacity as such. Nevertheless, a
      portion of our indemnification liability is insured and shares of our common
      stock were escrowed at the time of the merger in which Arkados is the surviving
      corporation, to indemnify us against certain claims being made in the above
      actions.




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


Not
      applicable.


















–
29
          –


**PART
      II**




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


Our
      common stock is currently quoted on the Over-The-Counter Bulletin Board under
      the symbol “AKDS.OB”.





**Market
      Information**





Our
      shares of common stock were first quoted on the Over-The-Counter Bulletin Board
      in 1999. The following table presents the high and low bid prices per share
      of
      our common stock as quoted for the quarter ended August 31, 2007 and each
      quarter in the years ended May 31, 2007 and May 31, 2006 which information
      was
      provided by NASDAQ Trading and Market Services.




High
                Bid
            
            
            Low
                Bid*First
                Quarter 2008 through :*August
                31 2007
            
            $
            0.42
            
            
            $
            0.40Fiscal
                Year ended May 31, 2007High
                Bid
            
            
            Low
                Bid*Quarter
                ended:*May
                31, 2007
            
            $
            0.45
            
            
            $
            0.28February
                28, 2007
            
            $
            0.60
            
            
            $
            0.16November
                30, 2006
            
            $
            0.70
            
            
            $
            0.20August
                31, 2006
            
            $
            0.95
            
            
            $
            0.51Fiscal
                Year ended May 31, 2006High
                Bid
            
            
            Low
                Bid*Quarter
                ended:*May
                31, 2006
            
            $
            0.88
            
            
            $
            0.47February
                29, 2006
            
            $
            0.85
            
            
            $
            0.51November
                30, 2005
            
            $
            1.05
            
            
            $
            0.56August
                31, 2005
            
            $
            0.90
            
            
            $
            0.41




The
      above
      prices represent inter-dealer quotations, without markup, markdown or
      commissions, and may not represent actual transactions. The trading volume
      of
      our common stock fluctuates and may be limited or nonexistent from time to
      time.
      As a result, the above prices should not be considered to represent a liquid
      trading market.





**Holders**





As
      of
      September 13, 2007 we had 203 stockholders of record of our common
      stock.





**Dividend
      Policy**




We
      have
      paid no dividends on our common stock and we do not expect to pay cash dividends
      in the foreseeable future. The terms of the $9,176,892 principal amount
      outstanding of 6% Secured Convertible Debentures due December 28, 2008 prohibit
      our payment of any cash dividends or distributions without the consent of the
      holders of 60% of the principal amount outstanding at the time of such dividend
      or distribution. We currently do not have surplus from which we could pay
      dividends and intend to retain any future earnings to finance the growth and
      development of our business.





–
30
          –


**Recent
      Sales Of Unregistered Securities; Use Of Proceeds From Registered
      Securities**




Information
      concerning our sales of unregistered securities during the period covered by
      this report has been reported by us on previously filed reports on Form 10-QSB
      and Form 8-K.





**Equity
      Compensation Plan Information**





The
      following table sets forth certain information about our equity compensation
      plans and agreements as of May 31, 2007:





**Plan
                Category**
            **Number
                of securities**
              **to
                be issued upon**
              **exercise
                of**
              **outstanding
                options,**
              **warrants
                and rights**
              
              **(a)**
            **Weighted-average**
              **exercise
                price of**
              **outstanding
                options,**
              **warrants
                and rights**
              
              **(b)**
            **Number
                of securities**
              **remaining
                available**
              **for
                future issuance**
              **under
                equity**
              **compensation
                plans**
              **(excluding
                securities**
              **reflected
                in column**
              **(a))**
              
              **(c)**Equity
                compensation plans
              approved
                by security holders
            5,000
            $30.00
            55,000Equity
                compensation plans not
              approved
                by security holders
            12,530,048
            $0.58
            2,649,952**Total**
            12,535,048
            
            2,704,952





Our
      board
      adopted a stock option plan in 1998 which was approved by stockholders. The
      plan
      reserved 3,000,000 shares of old common stock for issuance upon the granting
      of
      incentive and non-qualified stock option until 2008 with terms up to 10 years
      from the dated of grant. As a result of a reverse stock split the number of
      shares available for grant was reduced to 60,000.





In
      2004,
      our board approved our 2004 Stock Option and Restricted Stock Plan (the “2004
      Plan”) and set aside 6,000,000 shares for grant pursuant to incentive and
      non-qualified stock options, and restricted stock awards. The 2004 Plan was
      amended by the board in June 2006, to increase the number of shares subject
      to
      options that can be granted to our officers, directors, employees and
      consultants to 10,000,000; it was later amended in March 2007 to increase this
      amount to 15,000,000. The 2004 Plan has not been approved by our stockholders
      and accordingly, no “incentive stock options” as defined in the Internal Revenue
      Code can be granted until such approval is obtained. The 2004 plan is currently
      administered by our board of directors. There are options to purchase 3,202,952
      shares outstanding under the 2004 Plan, as amended.





In
      March
      2006, our board approved the issuance of 180,000 warrants to purchase shares
      of
      our common stock for $0.85 per share to an investor relations consultant. The
      issuance of the warrants has not been approved by our stockholders.





In
      March
      2007, our board approved the issuance of 240,000 options to purchase shares
      of
      our common stock for $0.40 per share to an investor relations consultant. The
      issuance of the options  has not been approved by our
      stockholders.





–
31
          –




ITEM
                    6.
                MANAGEMENT'S
                    DISCUSSION AND ANALYSIS OR PLAN OF
                    OPERATIONS


Readers
      are urged to carefully review and consider the various disclosures made by
      us in
      this Form 10-KSB for the period ended May 31, 2007, and our other filings with
      the U.S. Securities and Exchange Commission. These reports and filings attempt
      to advise interested parties of the risks and factors that may affect our
      business, financial condition and results of operations and prospects. The
      forward-looking statements made in this Form 10-KSB speak only as of the date
      hereof and we disclaim any obligation to provide updates, revisions or
      amendments to any forward-looking statements to reflect changes in our
      expectations or future events.





**Plan
      of Operation**





We
      are a
      semiconductor company engaged in research and development activities focused
      on
      the segment of the industry that provides the technology and solutions enabling
      broadband communications over standard electricity lines. Arkados is member
      of
      an alliance of over 80 companies referred to as the HomePlug Powerline Alliance,
      “HomePlug.” HomePlug's mission is to enable and promote rapid availability,
      adoption and implementation of cost effective, interoperable and standards-based
      home powerline networks and products. Arkados is also a member of newly created
      IEEE P1901 group that is focused on the standardization of the powerline
      communication technology.





During
      the year ended May 31, 2007:





●
            We
                began to shift our focus to sales and marketing and customer acquisition
                mode, after developing and demonstrating reference designs and prototypes
                of end-user products that utilized our A-1000 chip, the first in
                our
                family of ArkTICÔ  solutions
                and demonstrated its capabilities and competitive
                advantages.




●
            Along
                with several early customers and potential customers, we demonstrated
                such
                prototypes and reference designs at several industry trade shows
                and
                conferences, including at the Consumer Electronic Show (CES) held in Las
                Vegas on January 5 - 8, 2007. Since the introduction of our solutions,
                we
                have publicly demonstrated our solutions with the following companies:
                Analog Devices, Channel Vision, devolo AG, GigaFast, GoodWay, Meiloon,
                PAC
                Electronics, Tatung, and Zylux.





●
            We
                have participated in a broad variety of public events and conferences
                including the CES, WinHEC, HomePlug Executive Seminars, GlobalComm,
                United
                Powerline Technology Counsel events, Computex, Digital Hollywood,
                Intel
                Developer’s Forum, HomePlug Powerline Technology Conferences, Connections
                conferences, ACCESS ’06 Executive business forum, CEDIA and
                CeBIT.





We
      are
      currently demonstrating our chip and reference design products to individual
      potential customers, including both OEMs and ODMs. Such potential customers,
      if
      they ultimately agree to design our chips into their end-user products (as
      is
      the case with OEMs) or in the products of their own OEM customers (as is the
      case with ODMs), could be responsible for the introduction of multiple end-user
      products into the market, based on the timetables required for such product
      introductions. Such an event could in turn produce multiple revenue streams,
      including revenues streams from each potential OEM customer that uses our chips
      in their end-user products. In the case of each potential ODM customer that
      uses
      our chips in the designs of the multiple OEM customers served by each ODM,
      there
      could be multiple revenue streams attributable to each ODM that chooses to
      work
      with our chips. In both case, however, such revenue streams will affect future
      quarters, based on the timetable associated with the deployment of end-user
      products by such OEM and ODM customers. Thus far, one such ODM has publicly
      announced their offering of a product incorporating our AI-1100
      SoC.





We
      have
      demonstrated prototypes or products with our customers in a variety of venues
      such as the 2007 Consumer Electronics Show, CEBIT 2007, Parks Associates’
Connections conferences, CEDIA, HomePlug Executive Seminars and Powerline
      Technology Conferences, Intel Developer Forum 2006, WinHEC
      conferences.





–
32
          –


We
      have
      reported the initial sales of our chips, which are to be used in an iPod®
dock, as well as in other applications. We believe this marked the beginning
      of
      our transition from a research and development entity to a commercial
      enterprise. As a part of actively pursing key strategic customers, we have
      used
      our hardware/software platform to customize prototypes for specific
      accounts.





We
      have
      positioned ourselves to service significant demand from any major electronics
      or
      networking manufacturer. We have held discussions at various levels with
      household names in those industries, and we believe that many of these talks
      may
      lead to firm orders in growing quantities.





We
      require additional funding for the expansion of our research and development
      efforts and the expansion of our sales and marketing organization, and to fund
      consulting and manufacturing work needed in order for our chip to be ready
      and
      available for mass production. We also plan to develop various end-user product
      prototypes and reference designs to support our marketing efforts.





We
      will
      contract with third parties for all of our wafer fabrication and assembly,
      as
      well as for a portion of our design and testing. This “fabless” manufacturing
      strategy is designed to allow us to concentrate on our design strengths,
      minimize fixed costs and capital expenditures, access advanced manufacturing
      facilities, and provide flexibility on sourcing multiple leading-edge
      technologies through strategic alliances. We expect to qualify each product,
      participate in process and package development, define and control the
      manufacturing process at our suppliers where possible and practicable, develop
      or participate in the development of test programs, and perform production
      testing of products in accordance with our quality management system. If
      possible, we plan to use multiple foundries, assembly houses, and test
      houses.





We
      have
      not had significant revenue from operations since inception and, as of May
      31,
      2007, are still a development stage company. Furthermore, we have financed
      operating losses since September 2004 with the proceeds primarily from related
      party lending from our major stockholder and affiliated lenders, as well as
      other stockholders and lenders, and from a capital raise to qualified investors
      through a retail brokerage firm. From December 2005 to May 31, 2007, we sold
      an
      aggregate $8,428,461 of 6% secured convertible debentures due December 28,
      2008
      of which $6,145,884 was purchased by institutional investors and the balance
      of
      $2,282,576 by a limited liability company owned equally by our Chairman's wife
      and another director, Kathryn Typaldos and $45,000 principal amount to the
      partners of Sommer & Schneider LLP, our principal securities counsel to
      settle an equivalent amount of past due legal fees. During the fiscal year
      2006,
      we paid down a substantial portion of outstanding short term debt and other
      liability and have issued approximately 600,000 shares of our common stock
      in
      satisfaction of approximately $406,000 of short term liabilities. During the
      period from June 1, 2007 to August 31, 2007, we raised an additional $485,000
      in
      cash.  Despite these milestones in improving our financial position,
      our business plan to aggressively market our chips remains constrained by our
      limited capital resources





If
      we are
      unable to raise funds to finance our working capital needs, we will not have
      the
      capital necessary for ongoing operations and for making our chip ready for
      mass
      production and we could lose professional staff necessary to develop our
      products and the value of our technology could be impaired. In addition, the
      lack of adequate funding could jeopardize our development and delivery schedule
      of our planned products. Such delays could in turn jeopardize relationships
      with
      our current customers, strategic partners and prospective
      suppliers.









–
33
          –


**Critical
      Accounting Policies**





Financial
      Reporting Release No. 60 requires all companies to include a discussion of
      critical accounting policies or methods used in the preparation of financial
      statements. Our accounting policies are described in Note 2 of the notes to
      our
      consolidated financial statements included in this report. Our consolidated
      financial statements are prepared in accordance with accounting principles
      generally accepted in the United States of America, which requires management
      to
      make estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those estimates.
      The following is a brief discussion of the more significant accounting policies
      and methods used by us. In addition, Financial Reporting Release No. 67 was
      recently released by the SEC to require all companies to include a discussion
      to
      address, among other things, liquidity, off-balance sheet arrangements,
      contractual obligations and commercial commitments.





Basis
      of Presentation





Our
      consolidated financial statements have been prepared assuming we will continue
      as a going concern despite substantial doubt as to our ability to do so.
      Management anticipates losses in the foreseeable future and plans to finance
      losses by raising additional capital. If we are unable to continue as a going
      concern, adjustments would have to be made to the carrying value of
      assets.





Revenue
      Recognition





We
      recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101,
      Revenue Recognition in Financial Statements, as amended (“SAB 101”). SAB 101
      requires that four basic criteria must be met before revenue can be recognized:
      (1) persuasive evidence of an arrangement exists; (2) delivery has occurred
      or
      services rendered; (3) the fee is fixed or determinable; and (4) collectibility
      is reasonably assured. Under the provisions of SAB 101, we recognize revenue
      when products are shipped, and the collection of the resulting receivable is
      probable. If revenues are from a long term arrangement, revenue are recognized
      when pre-determined milestones, which generally are related to substantial
      scientific or technical achievement, are accomplished.





Accounting
      for Stock Based Compensation





The
      computation of the expense associated with stock-based compensation requires
      the
      use of a valuation model. SFAS 123(R) is a new and very complex accounting
      standard, the application of which requires significant judgment and the use
      of
      estimates, particularly surrounding Black-Scholes assumptions such as stock
      price volatility, expected option lives, and expected option forfeiture rates,
      to value equity-based compensation. We currently use a Black-Scholes option
      pricing model to calculate the fair value of its stock options. We primarily
      use
      historical data to determine the assumptions to be used in the Black-Scholes
      model and have no reason to believe that future data is likely to differ
      materially from historical data. However, changes in the assumptions to reflect
      future stock price volatility and future stock award exercise experience could
      result in a change in the assumptions used to value awards in the future and
      may
      result in a material change to the fair value calculation of stock-based awards.
      SFAS 123(R) requires the recognition of the fair value of stock compensation
      in
      net income. Although every effort is made to ensure the accuracy of our
      estimates and assumptions, significant unanticipated changes in those estimates,
      interpretations and assumptions may result in recording stock option expense
      that may materially impact our financial statements for each respective
      reporting period.





Accounting
      for Registration Payment Arrangements





The
      Company has reviewed the accounting for registration rights terms relating
      to
      the shares of common stock issuable upon the conversion and exercise,
      respectively, of the 6% Secured Convertible Debentures and related warrants
      under the recently adopted FSP EITF 00-19-2. The Company granted demand
      registration rights to the purchasers of the 6% Secured Debentures which
      requires the Company to file an initial registration 45 days following demand.
      Under the registration rights agreement, the Company incurs a penalty if it
      fails to file within the 45 day period or if the SEC had not declared the
      registration effective 90 days after filing. The holders of the 6% Secured
      Debentures have not demanded registration. The Company believes it can comply
      with a demand for registration in a timely manner and therefore no accrual
      for
      the registration rights penalties has been made.










–
34
          –


**The
      Year ended May 31, 2007**




During
      the year ended May 31, 2007, we had $132,000 of revenues compared to $111,000
      for the same period in 2006. Revenues were a combination of revenues from chip
      sales in the amount of $78,000 and revenues from service contracts in the amount
      of $54,000 related to the achievement of certain milestones remaining under
      a
      long term development contract.  The chips are to be used in an iPod®
dock which was demonstrated at CES earlier this year, as well as in other
      applications.  Total operating expenses for the year ended May 31,
      2007 were $5.2 million compared to total operating expenses for the same period
      of 2006 of $3.6 million.  In both periods, the most significant
      expenses were personnel, professional fees and related expenses, which increased
      in the most recent period as we demonstrated our products and increased
      marketing staff and efforts.  Of the total $5.2 million in operating
      expenses in fiscal 2007, $959,000 was related to the issuance of stock and
      stock
      options for services rendered by both our employees, Chairman and outside
      consultants.  The incremental cost  related to the Aster
      acquisition recognized in the 4th quarter alone was $147,000.  As
      result of the increase in outstanding debt, our interest expense increased
      during the year from $465,000 in 2006 to $744,000 in 2007.





**The
      Year ended May 31, 2006**





Because
      we currently do not have nor have we ever had since inception any business
      operations as a development stage company, we did not have any recurring
      revenues for the 2005 Fiscal Year.





During
      the year ended May 31, 2006, we had revenues of $112,000 which were realized
      as
      the result of achieving certain benchmarks in a long term arrangement for
      services and products with one client compared to $832,910 realized from
      activities with the same client during the prior year. We estimated gross margin
      from the receivable based upon cost estimates we prepared for the provision
      of
      all of the services and products in the arrangement. We recorded $78,000 of
      labor, material and supplies, and outside fabrication cost as Cost of Goods
      Sold
      relying on these estimates, compared to $599,620 during the prior year. Total
      operating expenses for the year ended May 31, 2006 were $3.6 million compared
      to
      $6.878 million in the same period of fiscal year 2005. In both periods, the
      most
      significant expenses were personnel, professional fees and related expenses.
      Research and development expenses during the year were $1.4 million. Of the
      total $4.6 million in operating expenses in fiscal year 2006, approximately
      $856,000 was related to the issuance of stock and stock options for services
      rendered by both our employees and outside consultants. In the prior year
      period, this amount was $4.85 million. Given our reliance on outside sources
      of
      capital, we expect significant additional charges relating to stock
      compensation.





**Liquidity
      and Capital Resources**





Our
      principal source of operating capital has been provided in the form of equity
      investments and, the private placement of debt securities coupled with warrants
      and related party loans. We do not have any significant sources of revenue
      from
      our operations. No assurance can be given that we can engage in any public
      or
      private sales of our equity or debt securities to raise working capital. We
      have
      depended, in part, upon loans from our present stockholders or management and
      there can be no assurances that our present stockholders or management will
      make
      any additional loans to us.





During
      the year ended May 31, 2007, we were able to raise gross proceeds of
      $5,052,577 from the sale of convertible notes and warrants to accredited
      investors, which includes $2,950,000 from the sale of secured convertible
      debentures and warrants to institutional investors and a limited partnership
      that is a related party. The net cash provided from these financing activities
      exceeded the amount of cash consumed by operations during the period by
      approximately $438,309.





On
      July
      6, 2007, we reached an agreement with more than the requisite holders of 2/3
      of
      the outstanding $1,066,500 principal amount of 6% Convertible Subordinated
      Notes
      due July 7, 2007 to extend the due date of the Notes to June 30, 2008. In
      exchange for the amendment, the Company agreed to issue approximately 188,200
      three year warrants to purchase shares of the Company’s common stock for $0.85
      per share and lowered conversion prices in the Notes to $0.85.





There
      can
      be no assurance that our efforts to convert our outstanding debt or to raise
      additional capital will be successful, or even if successful will fund our
      planned operations or capital commitments.





As
      of the
      year ended May 31, 2007, we had cash of approximately $406,000 and negative
      working capital of $2,739,224 compared to cash of $10,000 and negative working
      capital of $2,725,783 at May 31, 2006. The decrease in working capital is
      related to the movement during Fiscal Year 2007 from long term to short term
      partially offset by higher payables balances. Subsequent to May 31, 2007, we
      sold an additional $485,000 of 6% secured convertible debentures due December
      28, 2008 which was used to support normal operating activities.




Our
      present material commitments are the compensation of our employees, including
      our executive officers, and professional and administrative fees and expenses
      associated with the preparation of our filings with the Securities and Exchange
      Commission and other regulatory requirements.





**Commitments**





We
      do not
      have any commitments which are required to be disclosed in tabular form as
      of
      May 31, 2007.





**Off
      Balance Sheet Arrangements**





We
      do not
      have any off balance sheet arrangements.






ITEM
                  7.
              FINANCIAL
                  STATEMENTS.
  Our
        financial statements are filed under this Item 7, beginning on page F-1 of
        this
        report.


–
35
          –
 
 **Arkados
        Group, Inc. and Subsidiaries**


**Development
      Stage Enterprise**






**CONTENTS**

















**Page**REPORT
                  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            F
–
                1CONSOLIDATED
                FINANCIAL STATEMENTSConsolidated
                Balance Sheet
            F
–
                2Consolidated
                Statement of Operations
            F
–
                3Consolidated
                Statement of Changes in Stockholders' Deficiency
            F
–
                4 to 5Consolidated
                Statement of Cash Flows
            F
–
                6NOTES
                TO THE CONSOLIDATED FINANCIAL STATEMENTS
            F
–
                7 to
              F
–
                24
























–
36
          –


**Report
      of Independent Registered Public Accounting Firm**






Board
      of
      Directors and Stockholders


Arkados
      Group, Inc. and Subsidiaries




We
      have
      audited the accompanying consolidated balance sheet of Arkados Group, Inc.
      and
      subsidiaries . (A Development Stage Enterprise) as of May 31, 2007, and the
      related consolidated statements of operations, stockholders' deficit, and cash
      flows for each of the years ended May 31, 2007 and 2006 and for the period
      March
      24, 2004 (inception) to May 31, 2007. These financial statements are the
      responsibility of the Company's management. Our responsibility is to express
      an
      opinion on these financial statements based on our audit. The financial
      statements for the period March 24, 2004 (inception) to May 31, 2004 reflect
      total revenues and a net loss of $0 and $693,833, respectively, of the
      cumulative totals. The other auditors' report has been furnished to us in our
      opinion, insofar as it relates to amounts included for such period, is based
      solely on the report of such other auditors.





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





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the consolidated financial position of the Company as of
      May
      31, 2007, and the results of its operations and cash flows for each of the
      years
      ended May 31, 2007 and 2006 and for the period March 24, 2004 (inception) to
      May
      31, 2007 in conformity with generally accepted accounting principles in the
      United States.





The
      accompanying financial statements have been prepared assuming that Arkados
      Group, Inc. will continue as a going concern. As more fully described in Note
      2,
      the Company has incurred recurring operating losses and will have to obtain
      additional capital to sustain operations. These conditions raise substantial
      doubt about the Company's ability to continue as a going concern. Management's
      plans in regard to these matters are also described in Note 2. The financial
      statements do not include any adjustments to reflect the possible effects on
      the
      recoverability and classification of assets or the amounts and classification
      of
      liabilities that may result from the outcome of this uncertainty.




By:
            /s/*Sherb & Co., LLP*SHERB
                & CO, LLPCertified
                Public Accountants


New
      York,
      New York


September 10,
      2007






















F–1


ARKADOS
      GROUP, INC. and Subsidiaries


Consolidated
      Balance Sheet


(A
      Development Stage Enterprise)







May
                31, 2007AssetsCurrent
                Assets:Cash
            
            $
            406,457Accounts
                receivable, net
            
            
            117,066Inventory
            
            
            34,334Total
                Current Assets
            
            
            557,857Deferred
                financing costs
            
            
            281,711Equipment,
                net
            
            
            46,916Intangible
                assets, net
            
            
            485,825Prepaid
                and other assets
            
            
            52,596$
            1,424,905Liabilities
                and Stockholders' DeficiencyCurrent
                Liabilities:Accrued
                expense and other liabilities
            
            $
            1,293,675Payroll
                taxes and related penalties and interest payable
            
            
            936,905Short
                Tem Debt
            
            
            1,066,500Total
                Current Liabilities
            
            
            3,297,080Convertible
                Debentures, including related party debt
            
            
            8,237,061Commitments
                and Contingencies
            
            
            —Stockholders'
                DeficiencyConvertible
                Preferred Stock - $.0001 par value;5,000,000
                shares authorized, zero shares outstanding
            
            
            —Common
                stock, $.0001 par value, 100,000,000 sharesauthorized,
                26,082,221 issued and outstanding
            
            
            2,608Additional
                Paid in capital
            
            
            15,934,712Treasury
                Stock
            
            
            (16,000
            )Accumulated
                Deficit during development stage
            
            
            (26,030,556
            )Total
                Stockholders' deficiency
            
            
            (10,109,236
            )$
            1,424,905









See
      notes
      to consolidated financial statements.




F–2


ARKADOS
      GROUP, INC. and Subsidiaries


Consolidated
      Statement of Operations


(A
      Development Stage Enterprise)






CumulativeDuring
                theDevelopmentYear
                Ended
            
            
            Year
                Ended
            
            
            Stage
                (MarchMay
                31,
            
            
            May
                31,
            
            
            24,
                2004 to2006
            
            
            2007
            
            
            May
                31, 2007)Net
                Sales
            
            $
            112,094
            
            
            $
            131,735
            
            
            $
            1,077,412Cost
                of Goods Sold
            
            
            79,980
            
            
            
            95,546
            
            
            
            775,819Gross
                Profit
            
            
            32,114
            
            
            
            36,189
            
            
            
            301,593Research
                and Development Expenses
            
            
            1,395,257
            
            
            
            1,920,892
            
            
            
            4,565,001General
                and Administrative Expenses
            
            
            2,196,401
            
            
            
            3,404,288
            
            
            
            11,924,058Net
                Loss From Operations
            
            
            (3,559,544
            )
            
            
            (5,288,991
            )
            
            
            (16,187,466
            )Interest
                Income (Expense)
            
            
            (465,472
            )
            
            
            (744,084
            )
            
            
            (1,565,823
            )Net
                Loss Before Income Taxes
            
            
            (4,025,016
            )
            
            
            (6,033,075
            )
            
            
            (17,753,290
            )Provision
                for Income Taxes
            
            
            —
            
            
            
            —
            
            
            
            —Net
                Loss
            
            $
            (4,025,016
            )
            
            $
            (6,033,075
            )
            
            $
            (17,753,290
            )Net
                loss per share – basic and diluted
            
            $
            (0.17
            )
            
            $
            (0.24
            )Weighted
                Average of Common SharesOutstanding –
                basic and
                diluted
            
            
            23,777,360
            
            
            
            25,152,463










See
      notes
      to consolidated financial statements.






F–3


ARKADOS
      GROUP, INC. and Subsidiaries


Consolidated
      Statement of Stockholders' Deficiency


(A
      Development Stage Enterprise)


Inception
      March 24, 2004 to May 31, 2004 and the Years Ended May 31, 2005, 2006 and
      2007










Preferred
                  Stock
            
            
            Common
                  Stock
            
            
            Additional
              Paid
                in
            
            
            Accumulated
              Deficit
              During
              Development
            
            
            Treasury
            
            
            Total
              Stockholders'Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Stage
            
            
            Stock
            
            
            DeficiencyBalance
                as of March 24, 2004Post
                foreclosure sale
            
            
            —
            
            
            $
            —
            
            
            
            5,569
            
            
            $
            5,569
            
            
            $
            1,988,185
            
            
            $
            (8,277,267
            )
            
            $
            —
            
            
            $
            (6,283,513
            )Effect
                of Reorganization and Merger–May 24, 2004
            
            
            —
            
            
            
            —
            
            
            
            21,473,364
            
            
            
            (3,422
            )
            
            
            4,105,180
            
            
            
            —
            
            
            
            (16,000
            )
            
            
            4,085,758Sale
                of shares pursuant to PPM
            
            
            —
            
            
            
            —
            
            
            
            841,666
            
            
            
            84
            
            
            
            950,116
            
            
            
            —
            
            
            
            —
            
            
            
            950,200Issuance
                of shares for settlement of debts
            
            
            —
            
            
            
            —
            
            
            
            181,068
            
            
            
            18
            
            
            
            168,185
            
            
            
            —
            
            
            
            —
            
            
            
            168,203Amortization
                of stock compensation
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            359,537
            
            
            
            —
            
            
            
            —
            
            
            
            359,537Net
                loss (March 24,2004 to May 31, 2004)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (693,833
            )
            
            
            —
            
            
            
            (693,833
            )Balance
                as of May 31, 2004
            
            
            —
            
            
            
            —
            
            
            
            22,501,667
            
            
            
            2,250
            
            
            
            7,571,202
            
            
            
            (8,971,100
            )
            
            
            (16,000
            )
            
            
            (1,413,648
            )Shares
                issued for services
            
            
            —
            
            
            
            —
            
            
            
            575,000
            
            
            
            58
            
            
            
            724,753
            
            
            
            —
            
            
            
            —
            
            
            
            724,811Debt
                converted to equity
            
            
            —
            
            
            
            —
            
            
            
            125,000
            
            
            
            13
            
            
            
            75,483
            
            
            
            —
            
            
            
            —
            
            
            
            75,496Issuance
                of options for services
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            198,169
            
            
            
            —
            
            
            
            —
            
            
            
            198,169Valuation
                of equity rights and beneficial conversion features of debt
                raise
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            234,353
            
            
            
            —
            
            
            
            —
            
            
            
            234,353Amortization
                of stock compensation
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            3,617,681
            
            
            
            —
            
            
            
            —
            
            
            
            3,617,681Net
                Loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (7,001,365
            )
            
            
            —
            
            
            
            (7,001,365
            )Balance
                as of May 31, 2005
            
            
            —
            
            
            
            —
            
            
            
            23,201,667
            
            
            
            2,321
            
            
            
            12,421,641
            
            
            
            (15,972,465
            )
            
            
            (16,000
            )
            
            
            (3,564,503
            )















F–4


ARKADOS
      GROUP, INC. and Subsidiaries


Consolidated
      Statement of Stockholders' Deficiency


(A
      Development Stage Enterprise)


Inception
      March 24, 2004 to May 31, 2004 and the Years Ended May 31, 2005, 2006 and
      2007


continued






Preferred
                      Stock
                
                
                Common
                      Stock
                
                
                Additional
                  Paid
                    in
                
                
                Accumulated
                  Deficit
                  During
                  Development
                
                
                Treasury
                
                
                Total
                  Stockholders'Shares
                
                
                Amount
                
                
                Shares
                
                
                Amount
                
                
                Capital
                
                
                Stage
                
                
                Stock
                
                
                Deficiency


Balance
                as of May 31, 2005
            
            
            —
            
            
            $
            —
            
            
            
            23,201,667
            
            
            $
            2,321
            
            
            $
            12,421,6419
            
            
            $
            (15,972,465
            )
            
            $
            (16,000
            )
            
            $
            (3,564,503
            )Shares
                issued for services
            
            
            —
            
            
            
            —
            
            
            
            75,000
            
            
            
            8
            
            
            
            22,492
            
            
            
            —
            
            
            
            —
            
            
            
            22,500Debt
                converted to equity
            
            
            —
            
            
            
            —
            
            
            
            609,786
            
            
            
            61
            
            
            
            405,683
            
            
            
            —
            
            
            
            —
            
            
            
            405,744Shares
                issued for debt accommodations and penalties
            
            
            —
            
            
            
            —
            
            
            
            466,600
            
            
            
            47
            
            
            
            267,253
            
            
            
            —
            
            
            
            —
            
            
            
            267,300Options
                issued for services
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            69,170
            
            
            
            —
            
            
            
            —
            
            
            
            69,170Valuation
                of equity rights and beneficial conversion features of debt
                raise
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            404,555
            
            
            
            —
            
            
            
            —
            
            
            
            404,555Amortization
                of stock compensation
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            497,347
            
            
            
            —
            
            
            
            —
            
            
            
            497,347Net
                Loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (4,025,016
            )
            
            
            —
            
            
            
            (4,025,016
            )Balance
                as of May 31, 2006
            
            
            —
            
            
            $
            —
            
            
            
            24,353,053
            
            
            $
            2,437
            
            
            $
            14,088,141
            
            
            $
            (19,997,481
            )
            
            $
            (16,000
            )
            
            $
            (5,922,903
            )Shares
                issued for services
            
            
            —
            
            
            
            —
            
            
            
            475,000
            
            
            
            47
            
            
            
            341,953
            
            
            
            —
            
            
            
            —
            
            
            
            342,000Options
                issued for services
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            197,923
            
            
            
            —
            
            
            
            —
            
            
            
            197,923Valuation
                of equity rights
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            424,247
            
            
            
            —
            
            
            
            —
            
            
            
            424,247Amortization
                of stock compensation
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            418,997
            
            
            
            —
            
            
            
            —
            
            
            
            418,997Exercise
                of options
            
            
            —
            
            
            
            —
            
            
            
            175,604
            
            
            
            17
            
            
            
            1,739
            
            
            
            —
            
            
            
            —
            
            
            
            1,756Issuance
                of common stock for Aster Acquisition
            
            
            —
            
            
            
            —
            
            
            
            1,078,564
            
            
            
            107
            
            
            
            461,712
            
            
            
            —
            
            
            
            —
            
            
            
            461,819Net
                Loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (6,033,075
            )
            
            
            —
            
            
            
            (6,033,075
            )Balance
                as of May 31, 2007
            
            
            —
            
            
            $
            —
            
            
            
            26,082,221
            
            
            $
            2,608
            
            
            
            15,934,712
            
            
            $
            (26,030,556
            )
            
            $
            (16,000
            )
            
            $
            (10,109,236
            )








See
      notes
      to consolidated financial statements.






F–5


ARKADOS
      GROUP, INC. and Subsidiaries


Consolidated
      Statement of Cash Flow


(A
      Development Stage Enterprise)






CumulativeDuring
                theDevelopmentYear
                Ended
            
            
            Year
                Ended
            
            
            Stage
                (MarchMay
                31,
            
            
            May
                31,
            
            
            24,
                2004 to2006
            
            
            2007
            
            
            May
                31, 2007)Cash
                Flows From Operating ActivitiesNet
                Loss
            
            $
            (4,025,016
            )
            
            $
            (6,033,075
            )
            
            $
            (17,753,289
            )Adjustments
                to reconcile net loss to net cash providedby
                (used) in operating activities:Depreciation
                and Amortization
            
            
            103,428
            
            
            
            305,667
            
            
            
            541,232Common
                stock and warrants issued for services
            
            
            856,317
            
            
            
            958,920
            
            
            
            6,715,435Warrants
                and Beneficial Conversion Rights with Debt
            
            
            404,555
            
            
            
            424,247
            
            
            
            1,063,15Accounts
                Receivable
            
            
            15,022
            
            
            
            (107,668
            )
            
            
            (117,066
            )Inventory
            
            
            —
            
            
            
            (34,334
            )
            
            
            (34,334Deferred
                Expenses
            
            
            (235,828
            )
            
            
            145,429
            
            
            
            (269,151
            )Prepaid
                and Other assets
            
            
            (27,225
            )
            
            
            (30,395
            )
            
            
            (57,620
            )Payroll
                taxes and related penalties and interest payable
            
            
            —
            
            
            
            (22,916
            )
            
            
            (22,916
            )Accounts
                Payable and accrued expenses
            
            
            (822,950
            )
            
            
            648,754
            
            
            
            (31,922
            )Net
                Cash Provided by (Used) in Operating Activities
            
            
            (3,731,697
            )
            
            
            (3,745,371
            )
            
            
            (9,966,976
            )Cash
                Flows from Investing ActivitiesPurchases
                of capital expenditures and Patents
            
            
            (1,174
            )
            
            
            (31,852
            )
            
            
            (134,889
            )Net
                Cash Used in Investing Activities
            
            
            (1,174
            )
            
            
            (31,852
            )
            
            
            (134,889
            )Cash
                Provided by Financing ActivitiesRelated
                party payables
            
            
            731,005
            
            
            
            —
            
            
            
            1,399,026Debt
                discount
            
            
            (153,322
            
            
            
            (424,247
            )
            
            
            (577,569
            )Contribution
                of capital
            
            
            —
            
            
            
            —
            
            
            
            1,232,646Exercise
                of Stock Options
            
            
            —
            
            
            
            1,756
            
            
            
            1,756Repayment
                of debt
            
            
            (344,256
            )
            
            
            —
            
            
            
            (344,256
            )Issuance
                of Debentures
            
            
            3,942,384
            
            
            
            5,052,577
            
            
            
            9,744,961Repayment
                of related party payables
            
            
            (452,621
            )
            
            
            (446,406
            )
            
            
            (949,027
            )Net
                Cash Provided by Financing Activities
            
            
            3,723,190
            
            
            
            4,183,680
            
            
            
            10,507,537Net
                (Decrease) Increase in Cash
            
            
            (9,681
            )
            
            
            406,457
            
            
            
            406,172Cash,
                beginning of the period
            
            
            9,681
            
            
            
            —
            
            
            
            285Cash,
                end of the period
            
            $
            —
            
            
            $
            406,457
            
            
            $
            406,457





Supplemental
                disclosures of cash flow information:Cash
                paid for interest during the year
            
            $
            35,352
            
            
            $
            757Cash
                paid for taxes during the year
            
            
            —
            
            
            
            —Non
                cash investing activities:Acquisition
                of Aster Wireless
            
            
            —
            
            
            
            461,819Non
                cash financing activities:Common
                stock and warrants issued for services
            
            $
            92,210
            
            
            $
            342,000Shares
                and warrants issued with debt andbeneficial
                conversion feature rights
            
            
            671,855
            
            
            
            —Conversion
                of debt for equity
            
            
            405,744
            
            
            $
            —Conversion
                of accrued interest to debt
            
            
            —
            
            
            
            263,431








Notes
      to
      consolidated financial statements.






F–6


Arkados
      Group, Inc. & Subsidiaries(A Development Stage Enterprise)


NOTES
      TO
      FINANCIAL STATEMENTS


YEARS
      ENDED MAY 31, 2007 AND 2006








1.
            DESCRIPTION
                OF BUSINESS





Arkados
      Group, Inc. (the “Company”), pursuant to an “Agreement and Plan of Merger”,
      (“the Merger Agreement”) dated May 7, 2004 and consummated on May 24, 2004,
      merged a wholly owned subsidiary, CDK Merger Corp., with Miletos, Inc. (the
      “Merger”). CDK Merger Corp. was renamed “Arkados, Inc.” On August 30, 2006 the
      Company changed its name from CDKNET.COM, Inc. to Arkados Group, Inc. All
      references to CDKENT.COM, Inc. have been changed accordingly. Since Arkados
      Group, Inc. and subsidiaries prior to May 7, 2004 had no meaningful operations,
      this merger has been recorded as a reorganization of Arkados, Inc. via a reverse
      merger with Arkados Group, Inc. Currently the Company is a development stage
      enterprise, which is a fabless semiconductor manufacturer that designs,
      develops, markets, and sells technology and solutions enabling broadband
      communications over standard electricity lines. The Company is a member of
      an
      alliance of several companies referred to as the HomePlug Powerline Alliance,
      “HomePlug” for developing the standard of such technologies.





Miletos,
      Inc. was a newly established entity, which acquired the assets and business
      of
      Enikia, LLC in a public foreclosure sale on March 23, 2004 in exchange for
      the
      forgiveness of $4,000,000 of secured debt and the assumption of certain
      outstanding liabilities. The assets and certain liabilities acquired at the
      foreclosure sale have been recorded at historical cost basis. The new entity,
      Miletos, Inc. was predominately owned by a controlled group, which was the
      same
      controlled group of Enikia, LLC and the same group became majority
      holders.





The
      accompanying financials have been presented on a development stage basis using
      March 24, 2004 as the date of inception.





Pursuant
      to the Merger Agreement, the consideration for the merger consisted of
      16,340,577 shares of the Company's restricted common stock (250,000 of such
      common shares were contingent shares and were returned for cancellation as
      they
      were not called upon as a result of a breach of a warranty or representation)
      and 3,634,642 stock options at prices ranging from $.01 to $1.20 per share.
      In
      addition $950,200 was raised through the sale of equity for working capital
      of
      the Company.






2.
            SUMMARY
                OF SIGNIFICANT ACCOUNTING
                POLICIES





a.
            Basis
                of Presentation - The accompanying consolidated financial statements
                have been prepared assuming that the Company will continue as a going
                concern. The Company has incurred net losses of approximately $18
                million
                since inception including a net loss of approximately $6 million
                for the
                recent year ended May 31, 2007. Additionally, the Company had a net
                working capital deficiency and shareholders' deficiencies at May
                31, 2006
                and 2007, and negative cash flow from operations since inception.
                These
                conditions raise substantial doubt about the Company's ability to
                continue
                as a going concern. Management expects to incur additional losses
                in the
                foreseeable future and recognizes the need to raise capital to remain
                viable. The accompanying consolidated financial statements do not
                include
                any adjustments that might be necessary should the Company be unable
                to
                continue as a going concern.





b.
            Principles
                of consolidation - The consolidated financial statements include the
                accounts of Arkados Group, Inc. (the “Parent”), and it's wholly owned
                subsidiaries. Intercompany accounts and transactions have been eliminated
                in consolidation.





c.
            Business
                combinations  We account for acquired businesses using the
                purchase method of accounting which requires that the assets and
                liabilities assumed be recorded at the date of acquisition at their
                respective fair values. Because of the expertise required to value
                intangible assets and IPR&D, we typically engage a third party
                valuation firm to assist management in determining those values.
                Valuation
                of intangible assets and IPR&D entails significant estimates and
                assumptions including, but not limited to: determining the timing
                and
                expected costs to complete projects, estimating future cash flows
                from
                product sales, and developing appropriate discount rates and probability
                rates by project. We believe that the fair values assigned to the
                assets
                acquired and liabilities assumed are based on reasonable assumptions.
                To
                the extent actual results differ from those estimates, our future
                results
                of operations may be affected by incurring charges to our statements
                of
                operations. Additionally, estimates for purchase price allocations
                may
                change as subsequent information becomes
                available.





F–7


d.
            Cash
                and cash equivalents - The Company considers investments in highly
                liquid instruments with a maturity of three months or less to be
                cash
                equivalents.





e.
            Allowance
                for doubtful accounts - The Company records a bad debt expense /
                allowance based on management’s estimate of uncollectible accounts. The
                Company has not recorded any bad debt expense in each of the years
                ended
                May 31, 2006 and 2007.





f.
            Equipment
                - Equipment is recorded at cost. Depreciation is provided on the
                straight-line method based upon the estimated useful lives of the
                respective assets. Equipment is being depreciated over a period of
                seven
                years. Maintenance, repairs and minor renewals are charged to operations
                as incurred, whereas the cost of significant betterments is capitalized.
                Upon the sale or retirement of property and equipment, the related
                costs
                and accumulated depreciation are eliminated from the accounts and
                gains or
                losses are reflected in operations.





g.
            Impairment
                of Long-Lived Assets - The Company reviews long-lived assets, certain
                identifiable assets and goodwill related to those assets on a quarterly
                basis for impairment whenever circumstances and situations change
                such
                that there is an indication that the carrying amounts may not be
                recovered. To the extent there has been any impairment such impairment
                has
                been record in the statement of
                operations.





h.
            Fair
                Value of Financial Instruments - The carrying value of cash, accounts
                receivable, other receivables, accounts payable and accrued expenses
                approximate their fair values based on the short-term maturity of
                these
                instruments. The carrying amounts of debt were also estimated to
                approximate fair value. The Company can not estimate the fair value
                of the
                remaining outstanding payroll taxes, penalties and interest recorded
                in
                connection with the merger.





i.
            Revenue
                Recognition - The Company derives revenues from two sources – sales of
                products and revenues related to service and custom development
                activities.  For product sales, revenue is recognized when our
                products are shipped to our customers. Shipping documents and the
                completion of any customer acceptance requirements, when applicable,
                are
                used to verify product delivery or that services have been
                rendered.  Shipping costs are charged to cost of sales as
                incurred.  For sales related to development, the Company
                recorded revenues pursuant to one long term development contract.
                The
                revenues are earned and recorded are based on pre-determined milestones.
                When revenues within a pre-determined milestone have been partially
                earned, the Company records such progress billings as “Revenues earned not
                yet billed.” Such revenues are billable under the terms of the arrangement
                once the milestone has been fully completed. The Company also monitors
                estimated costs to complete such long term contract to the revenues
                to be
                earned to ensure that if there is an estimated loss to record to
                complete
                their obligation to fulfill the terms of such development contract,
                such
                loss existed. As of May 31, 2007, there were no long term contracts
                for which revenues were yet to be earned
                outstanding.





j.
            Shipping
                and Handling Costs - Shipping and handling costs are normally FOB the
                Company’s factory, prepay and add. These costs are included in cost of
                goods sold.





k.
            Inventory
                and Reserves– Inventories are stated on a first-in first-out basis at
                the lower of cost or market value. Cost includes fabricated wafers,
                purchased integrated circuits, subcontractor costs (such as assembly
                and
                test). Any write-down of inventory to reduce carrying value to lower
                of
                cost or market value is charged to cost of
                sales.





l.
            Advertising
                Costs - All advertising costs, are expensed as incurred. The Company
                has not had any advertising costs in each of the last two
                years.





m.
            Loss
                Per Share - Basic net loss per common share is computed by dividing
                net loss by the weighted average number of shares of common stock
                outstanding. For the years ended May 31, 2007 and 2006, diluted loss
                per
                share is the same as basic loss per share since the inclusion of
                approximately 13 million stock options and warrants and as well as
                9
                million shares of common stock issuable upon conversion of convertible
                indebtedness would be
                anti-dilutive.





F–8


Stock
      Options– On June 1, 2005 (the first day of our 2006 fiscal year), the
      Company adopted SFAS 123-R using modified prospective application, as permitted
      under SFAS 123-R. Accordingly, prior period amounts have not been restated.
      Under the application, the Company is required to record compensation expense
      for all awards granted after the date of adoption and for the unvested portion
      of previously granted awards that remain outstanding at the date of adoption.
      Per the provisions of SFAS 123-R, the Company has adopted the policy to
      recognize compensation expense on a straight-line attribution
      method.





The
      stock-based employee compensation expense has been determined utilizing a fair
      value method, the Black-Scholes option-pricing model.





In
      accordance with SFAS 123R, the fair value of each option grant has been
      estimated as of the date of the grant using the Black-Scholes option pricing
      model with the following weighted average assumptions:





The
      Company has recorded compensation expense for the years ended May 31, 2006
      and
      2007,in the amounts of $589,017 and $958,918,respectviely attributed to the
      issuance and vesting of stock options and warrants for services.





For
                Years Ended May 31,2007
            
            2006Risk
                free interest rate
            4.48%-5.125%
            
            5.00%Expected
                life
            3-6
                years
            
            4
                yearsDividend
                rate
            0.00%
            
            0.00%Expected
                volatility
            43%-121%
            
            43%





n.
            Use
                of Estimates - The preparation of financial statements in conformity
                with generally accepted accounting principles requires management
                to make
                estimates and assumptions that affect the reported amounts of assets
                and
                liabilities and disclosure of contingent assets and liabilities at
                the
                date of the financial statements and revenues and expenses during
                the
                reporting period. Actual results could differ from those
                estimates.





o.
            Comprehensive
                Income - SFAS No. 130, “Reporting Comprehensive Income”, establishes
                standards for reporting and displaying comprehensive income, comprising
                net income and other non-owner changes in equity, in the financial
                statements. For all periods presented, comprehensive income was the
                same
                as net income.





p.
            Recent
                Accounting Pronouncements -




In
      February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for
      Financial Assets and Financial Liabilities—Including an Amendment of FASB
      Statement No. 115*, which is effective for the Company in fiscal years
      beginning July 1, 2008. This statement permits an entity to choose to
      measure many financial instruments and certain other items at fair value at
      specified election dates. Subsequent unrealized gains and losses on items for
      which the fair value option has been elected will be reported in earnings.
      The
      Company is currently evaluating the potential impact of this statement on its
      consolidated financial position, results of operations and cash
      flows.




In
      September 2006, the FASB issued SFAS No. 157, *Fair Value
      Measurements*. SFAS No. 157 defines fair value, establishes a framework
      for measuring fair value in accordance with generally accepted accounting
      principles, and expands disclosures about fair value measurements. The
      provisions of SFAS No. 157 are effective for the Company for fiscal years
      beginning July 1, 2008. We are evaluating the impact of the provisions of
      this statement on our consolidated financial position, results of operations
      and
      cash flows.




In
      June
      2006, the FASB published FASB Interpretation No. (“FIN”) 48, *Accounting
      for Uncertainty in Income Taxes—an interpretation of FASB Statement
      No. 109* which clarifies the accounting for uncertainty in income taxes
      recognized in an enterprise’s financial statements in accordance with SFAS
      No. 109, *Accounting for Income Taxes*. FIN 48 prescribes a
      recognition threshold and measurement attribute for the financial statement
      recognition and measurement of a tax position taken or expected to be taken
      in a
      tax return. FIN 48 also provides guidance on derecognition, classification,
      interest and penalties, accounting in interim periods, disclosure, and
      transition. FIN 48 is effective for our Company in fiscal years beginning
      July 1, 2007. Any differences between








F–9


the
      amounts recognized in the statements of financial position prior to the adoption
      of FIN 48 and the amounts reported after adoption will be accounted for as
      a cumulative-effect adjustment recorded to the beginning balance of retained
      earnings. In addition, the adoption of FIN 48 will result in the
      reclassification of certain unrecognized tax benefits from current to
      non-current liabilities in our statement of financial position. We are currently
      evaluating the potential impact of the implementation of FIN 48 on our
      consolidated financial position, results of operations and cash
      flows.




In
      February 2006, the FASB issued SFAS No. 155, *Accounting for Certain
      Hybrid Financial Instruments, an amendment of*SFAS No. 133,
*Accounting for Derivative Instruments and Hedging Activities* and SFAS
      No. 140, *Accounting for Transfers and Servicing of Financial Assets and
      Extinguishments of Liabilities*. These Statements permit fair value
      remeasurement for any hybrid financial instrument that contains an embedded
      derivative that otherwise would require bifurcation. These Statements are
      effective for all financial instruments acquired or issued after July 1,
      2007. The adoption of SFAS No. 155 is not expected to have a material
      effect on our consolidated financial position, results of operations or cash
      flows.




3.
              ACQUISITION
                  OF ASTER WIRELESS TECHNOLOGIES,
                  INC.
 On
        March
        3, 2007 we completed the merger (“Aster Merger) of Arkados Wireless
        Technologies, Inc., a wholly owned subsidiary of the Company (“Merger Sub”) with
        Aster Wireless, Inc. a Delaware corporation (“Aster”) pursuant to that Agreement
        and Plan of Merger dated February 13, 2007 by and among the Company, Merger
        Sub
        and Aster (the “Merger Agreement”).  The assets and liabilities of
        Aster are recorded as of the acquisition date at their estimated fair values.
        The reported consolidated financial condition and results of operations of
        Arkados after completion of the Aster Merger reflects these values, but will
        not
        be restated retroactively to reflect the historical consolidated financial
        position or results of operations at Aster. Arkados issued 1,000,000 shares
        of
        Arkados common stock upon the cancellation of all shares of Aster capital
        stock
        outstanding.  Under the terms of the Aster Merger, the Aster employees
        received 50% of their deferred payroll which was paid 50% in cash and the
        balance by the issuance of 78,564 shares of 50% in Arkados
        stock.





The
      purchase price is as follows (table in thousands):





Fair
                value of Arkados shares issued at closing
            
            $
            462Transaction
                costs incurred by Arkados
            
            
            22Purchase
                price
            
            $
            484




The
      fair
      value of the Arkados shares used in determining the purchase price was $0.43
      per
      share, which was the price of Arkados common stock on the day that the closing
      took place, March 2,2007





The
      purchase price has been allocated based on a valuation of Aster’s tangible and
      intangible assets and liabilities an their following fair values (in
      thousands)





Total
                current assets
            
            $
            20Property
                and equipment and other assets
            
            
            17Intangible
                assets
            
            
            493Total
                current liabilities
            
            
            (71
            )Total
            
            $
            462








F–10


The
      Company’s 2007 consolidated statement of operations includes the results of
      operations from Aster from March 3, 2007 forward.  The following table
      presents unaudited pro forma consolidated results of operations for Arkados
      for
      the years ended May 31, 2006 and 2007 as though the Aster acquisition was
      completed as of the beginning of each period.





**Year
                Ended**
              **May
                31, 2006**
            
            
            **Year
                Ended**
              **May
                31, 2007**Net
                loss attributable to common shareholders
            
            $
            (4,562,406
            )
            
            $
            (6,576,100
            )Net
                loss per share attributable to common shareholdersBasic
                and diluted
            
            $
            (.18
            )
            
            
            (.25
            )Weighted
                average shares outstanding
            
            
            24,855,924
            
            
            
            25,982,128









4.
            CONCENTRATION
                OF CREDIT RISK





The
      Company's accounts receivable were concentrated with three
      customers.  Accounts Receivable balances for the years ending May 31,
      2007 and 2006 were $117,066 and $9,398, respectively on revenues of $131,735
      and
      $112,094 for the same respective periods.





The
      Company, periodically may have cash in excess of $100,000, the Federal Deposit
      Insurance Corp. “FDIC” insurable limit. As of May 31, 2007 the cash balance was
      $406,457, $306,457 above the insurable limit.








5.
            EQUIPMENT





At
      May
      31, 2007 equipment consists of the following:





Furniture
            
            $
            10,840Computers
            
            
            14,028Equipment
            
            
            39,343Total
            
            
            64,211Less:
                Accumulated depreciation
            
            
            (17,294
            )Net
            
            $
            46,916





Depreciation
      expense for the years ended May 31, 2007 and 2006 was $4,000 and $4,000,
      respectively.













F–11


6.
            INTANGIBLE
                ASSETS





The
      Company owns 45 patents and patents pending, which are currently, being used
      in
      the development of the Company's products. Excluding the value assigned to
      patents as part of the Aster acquisition, the Company had recorded $472,509
      of
      gross patents costs and $432,713 of accumulated amortization as of May 31,
      2007. The annual amortization of such intangible assets approximates $30,000
      for
      the next year.





The
      Company has allocated the intangible assets associated with the Aster
      acquisition to Personnel, Patents and Technology.  The total value,
      the number of years to be amortized, and the annual expense associated with
      such
      amortization are contained in the table below.





Total
              Cost
            
            
            #
                of years
              Amortization
            
            
            Annual
              AmortizationPersonnel
            
            $
            113,750
            
            
            
            1
            
            
            $
            113,750Patent
            
            
            227,500
            
            
            
            5
            
            
            
            45,500Technology
            
            
            152,203
            
            
            
            5
            
            
            
            30,441Total
            
            $
            493,453
            
            
            
            
            
            
            $
            189,691








































F–12


7.
            PAYROLL
                TAX LIABILITIES





Enikia
      was in arrears for several years in its payment of federal and state payroll
      taxes. Pursuant to the Merger Agreement, the Parent assumed up to $1.2 million
      of the delinquent payroll taxes due and outstanding with the remaining
      difference an assumed liability of the major shareholder of the Company. During
      the year ended May 31, 2006, the Company made payments to both Federal and
      State
      of NJ taxing authorities in the amount of $874,000. The payments represented
      payroll taxes withheld by Miletos from its employees but not remitted to the
      taxing authorities.  During the year ended May 31, 2007, an additional
      $64,106 payment was made to the State of NJ for payment of payroll taxes.
      Currently, there is $960,000 still recorded on the Company's books as due and
      outstanding to both the federal and state tax authorities for penalties and
      interest incurred by Enikia related to its payroll liabilities. The Company
      does
      not believe that it has a legal obligation to pay anything more to any taxing
      authority, but until such clearance is received from the appropriate agencies,
      the Company has elected to keep the liability on its books.







8.
            ACCRUED
                EXPENSES AND OTHER LIABILITIES





As
      of May
      31, 2007, accrued expenses and other liabilities consist of the following
      approximate amounts:




Accrued
                compensation
            
            $
            96,242Accrued
                interest payable
            
            
            571,440Accrued
                technical and engineering fees
            
            
            47,202Liabilities
                assumed per merger agreement
            
            
            34,673Accrued
                other
            
            
            36,682$
            786,239







9.
            CONVERTIBLE
                DEBENTURES AND RELATED PARTY
                PAYABLES





2004
      6% Convertible Notes - During the period from October to November 2005, the
      Company borrowed $500,000 from certain of its existing stockholders for working
      capital needs and such obligation is represented by notes. The notes, recorded
      as Related Party Payables, bore interest at 6% per annum and contained certain
      conversion features which would have been triggered if the Company had sold
      equity at or above $1.25 per share. No expense was recorded for the beneficial
      conversion feature, since conversion price was always at or above market. The
      notes' maturity was initially October 15, 2005, which was extended from time
      to
      time by the holders. In February 2006, them Company and holders of $175,000
      of
      the outstanding principal of the notes agreed to discharge the Company's
      obligations for 160,765 shares of common stock and the payment of $81,018.
      The
      remaining $325,000 of principal outstanding is due October 15, 2006 and is
      held
      by an affiliate of the Company's Chairman of the Board.





10%
      Convertible Notes - During the period from March 18, 2005 to May 12, 2005,
      the Company issued $750,000 of 10% convertible extendable notes initially due
      June 8, 2005 (the “10% Notes”). The due date of the 10% Notes was extended at
      the Company's option to September 8, 2005 by the Company's payment of an
      extension fee aggregating $20,000 for the entire issue and paying interest
      due
      on the 10% Notes to June 8, 2005. The Company paid $37,500 of principal with
      related interest on September 18, 2005 in full payment of two of the outstanding
      notes and obtained the extension of the $712,500 then remaining notes by paying
      an additional sum of $20,000 and issuing 85,000 shares of common stock to the
      remaining holders of the 10% Notes. An expense of $76,500 was recorded related
      to the issuance of the 85,000 shares of common stock, using a share price of
      $.90. The Company paid $22,167 of principal pursuant to a mandatory prepayment
      provision in September, 2005. Principal and accrued interest on the 10% Notes
      are convertible at the holders' option into shares of the Company's common
      stock
      only after an event of default, as defined in the Notes at the lower of $0.67
      or
      the average closing bid price of the Company's common stock on the ten trading
      days preceding conversion. The conversion right is limited in that it may not
      be
      exercised by a holder to the extent it would result in such holder becoming
      the
      beneficial owner of more than 4.99% of the Company's common stock. The 10%
      Notes
      were issued with 825,000 of three year common stock warrant exercisable for
      $0.67 per share in the basis of one warrant for each $1 of
      principal.









F–13


On
      December 20, 2005, the Company paid $261,398 in satisfaction of a portion of
      the
      10% Notes, of which $254,333 was principal and $7,064 was interest. The Company
      previously reported that it did not make principal and interest payments
      totaling $707,591 due on December 8, 2005 to holders of the Notes and the grace
      period for such payment expired December 19, 2005. Holders of remaining $436,000
      principal of the Notes agreed to extend the Maturity Date of the Notes to
      January 15, 2006 and waived all prior defaults. The remaining principal balance
      and interest was satisfied pursuant to agreements with the remaining holders
      of
      the 10% Notes on February 1, 2006 by the Company's payment of $268,824 and
      the
      issuance of 293,116 shares of common stock.





$200,000
      Short Term Borrowing - Beginning on June 10, 2005 and ending June 15, 2005,
      the Company borrowed an aggregate of $200,000 from two lenders that are not
      affiliates of the Company. During the quarter ended August 31, 2005 $100,000
      of
      these notes were repaid and during the quarter ended November 30, 2005 the
      remaining $100,000 plus accrued interest on the notes was repaid.





2005
      6% Convertible Notes - During the quarters ended August 31, 2005 and
      November 30, 2005, the Company raised $912,500 and $154,000,
      respectively, of gross proceeds from the private placement of an aggregate
      of 10.665 units (the “Units”) each consisting of $100,000 principal amount 6%
      convertible subordinated promissory notes (the “6% Notes”) and 14,286 detached
      warrants (the “Warrants”) to purchase a like number of shares of the Company's
      common stock, for $0.35 per share. The Company issued an aggregate of 152,359
      Warrants to the purchasers of the Units, which have been valued at $74,802
      and
      will be amortized as interest expense over the term of the 6% Notes. In
      addition, the Company issued 238,213 common stock warrants exercisable at $0.65
      as part compensation to the placement agent, which have been valued at $111,668
      and will be amortized as interest expense along with other expenses of the
      offering. Both the $0.35 and $0.65 Warrants have a “net exercise” provision that
      permits the holder to convert the Warrants into shares of the Company's common
      stock. The 6% Notes (1) are due July 7, 2007 with interest at the annual rate
      of
      6% from the date of original issuance (increasing to 12% per annum from an
      event
      of default as defined in the 6% Notes); (2) are unsecured obligations of the
      Company and subordinated to senior secured loans to the Company (if any) from
      banks, finance companies and similar institutions that extend credit in the
      regular cause of such institution's business; (3) are convertible, subject
      to
      certain conditions and at two different price levels ($1.125 and $1.575 for
      a
      period of twenty trading days following the bid price of common stock closing
      above $1.50 and $2.50, respectively, for a period of five consecutive trading
      days), into shares of common stock; and (4) may be redeemed by the Company
      in
      certain limited circumstances described below prior to maturity. Since the
      beneficial conversion feature of the 6% Notes is (at the lowest price) at a
      price greater than the market price of the stock upon issuance of the 6% Notes,
      no value has been estimated or recorded for the beneficial conversion
      feature.





On
      July
      6, 2007, the Company reached an agreement with more that the requisite holders
      of 2/3 of the outstanding $1,066,500 principal amount of 6% Convertible
      Subordinated Notes due July 7, 2007 to extend the due date of the Notes to
      June
      30, 2008. In exchange for the amendment, the Company agreed to issue
      approximately 188,200 three year warrants to purchase shares of the Company’s
      common stock for $0.85 per share and lowered conversion prices in the Notes
      to
      $0.85.





Related
      Party Borrowings - Through December 19, 2005, the Company borrowed $253,075
      from three directors and one stockholder. These advances were due on demand
      with
      interest at the annual rate of 6% and $225,000 was paid on January 10, 2006.
      See
      subsequent event for conversion of the remaining balance into shares of the
      Company's common stock with the holders.





6%
      Secured Debentures - On December 19, 2005, the Company borrowed $267,900
      from one of the accredited investors that ultimately purchased 6% secured
      convertible debentures (the “6% Secured Debentures”) in the December 28, 2005
      financing. The loan was made on an unsecured basis, was due on demand and was
      forgiven in exchange for $267,900 of the $2.0 million principal amount of the 6%
      Secured Debentures and related warrants. On December 28, 2005, the Company
      issued $2.0 million aggregate principal amount and authorized $3.5 million
      6%
      Secured Debentures to three institutional investors. The 6% Secured Debentures
      have a term of three years and mature on December 28, 2008, pay interest at
      the
      rate of 6% per annum, initially payable semi-annually on January 1 and July
      1 of
      each year beginning July 1, 2006, and are secured by a grant of a security
      interest into substantially all of the Company's assets. The Company may elect
      to pay interest on the 6% Secured Debentures in cash or in shares of common
      stock, subject to certain conditions related to the market for such shares
      stock
      and the registration of the shares issuable upon conversion of the 6% Secured
      Debentures under the Securities Act of 1933, as amended (the “Securities
      Act”).





F–14


The
      6%
      Secured Debentures are convertible at any time at the option of the holder
      into
      shares of the Company's common stock at a price of $0.85 per share, subject
      to
      adjustment as set forth therein. If, after the effective date of the
      registration statement we agreed to file under the Securities Act (the
“Registration”), the closing price for the Company's common stock exceeds $1.70
      for any 20 consecutive trading days, The Company may, within one trading day
      after the end of such period, require the holders of the 6% Secured Debentures
      to immediately convert all or part of the then outstanding principal amount
      of
      their 6% Secured Debentures. The terms of the conversion rights also contain
      certain dilution provisions.





The
      Company has reviewed the accounting for registration rights terms relating
      to
      the shares of common stock issuable upon the conversion and exercise,
      respectively, of the 6% Secured Convertible Debentures and related warrants
      under the recently adopted FSP EITF 00-19-2. The Company granted demand
      registration rights to the purchasers of the 6% Secured Debentures which
      requires the Company to file an initial registration 45 days following demand.
      Under the registration rights agreement, the Company incurs a penalty if it
      fails to file within the 45 day period or if the SEC had not declared the
      registration effective 90 days after filing. The holders of the 6% Secured
      Debentures have not demanded registration. The Company believes it can comply
      with a demand for registration in a timely manner and therefore no accrual
      for
      the registration rights penalties has been made.”





On
      December 28, 2005, pursuant to the purchase agreements with the purchasers
      of
      the 6% Secured Debentures, the Company issued warrants to purchase an aggregate
      of 941,176 shares of common stock for $1.00 per share, on or prior to December
      28, 2010 and short term warrants to purchase up to an aggregate of 941,176
      additional shares of common stock for $0.85 per share, each subject to
      anti-dilution adjustments, including a “full ratchet down” to the purchasers of
      the 6% Secured Debentures. The short term warrants are exercisable at any time
      prior to the earlier of December 28, 2007 (subsequently changed to December
      28,
      2010) or twelve months after the effective date of the Registration Statement.
      If no effective registration statement is obtained after one year then such
      warrants have a cashless exercise option feature.





Upon
      the
      occurrence of certain events of default defined in the 6% Secured Debentures,
      including events of default under the transaction documents related to the
      financing, the full principal amount of the 6% Secured Debentures, together
      with
      interest and other amounts owing, become immediately due and payable, the
      principal obligation increases to 130% of the principal balance and the interest
      rate increases to 18%.





The
      transaction documents relating to the 6% Secured Debentures issued in December
      2005 contained a covenant that the Company would obtain the conversion of an
      aggregate of $746,600 principal and related interest into shares of the
      Company's Common Stock at or above $0.67 per share on or before January 15,
      2006. On February 1, 2006, as part of the sale of an additional $375,884 of
      the
      6% Secured Debentures described above, the Company and the holders of all
      outstanding 6% Debentures agreed to modify the covenant to permit the Company
      to
      issue 604,956 shares of common stock and pay $405,744 in full satisfaction
      of
      such outstanding principal and interest concurrently with the additional
      investment and waived prior defaults. Two of the parties that agreed to accept
      shares of common stock in lieu of repayment were directors of the Company,
      of
      which one received 75,078 shares in satisfaction of $50,303 of principal and
      interest and the other received 76,969 shares in lieu of $51,989 of principal
      and interest.





On
      February 1, 2006, and February 24, 2006 the Company issued $375,884 and
      $500,000, respectively, of additional principal of 6% Secured Debentures on
      substantially the same terms as those debentures issued on December 28, 2005.
      As
      a result, an aggregate of $2,875,884 of these debentures were outstanding as
      of
      February 28, 2006. On February 1, 2006 and February 24, 2006 the Company issued
      176,887 and 235,294 additional short and long term warrants, respectively,
      to
      the purchasers of the additional 6% Secured Debentures. As a result, there
      were
      1,353,357 short and 1,353,357 long term warrants outstanding as of May 31,
      2007.





On
      March
      31, 2006, the Company issued $500,000 additional principal of the 6% Secured
      Debentures to a limited liability company owned equally by the wife of our
      chairman and another director on substantially the same terms as the 6% Secured
      Debentures issued on December 28, 2005. After giving effect to this additional
      issuance, there was $3,375,884 principal amount of the 6% Secured Debentures
      outstanding, as well as 1,588,651 of the five year and 1,588,651 of the short
      term warrants outstanding.





The
      Company received an advance of $500,000 from one of the holders of 6% Secured
      Debentures on June 1, 2006.  The advance was due on demand and
      forgiven in exchange for $500,000 principal amount of 6% Secured Debentures
      and
      related warrants on June 30, 2006.





F–15


The
      Company issued $1,773,471 aggregate principal amount of 6% Secured Debentures
      on
      June 30, 2006.  The consideration received by the Company for the
      Secured Debentures consisted of $500,000 cash, forgiveness of repayment of
      the
      $500,000 advance received June 1, 2006, forgiveness of $773,470 related party
      debt due to Andreas Typaldos, the Company’s Chairman and principal shareholder
      and a limited partnership controlled by his wife. The debentures have a term
      of
      three years and mature on December 28, 2008. The 6% Secured Debentures pay
      interest at the rate of 6% per annum, payable semi-annually on January 1 and
      July 1 of each year beginning January 1, 2007.  These debentures are
      on substantially the same terms as, and rank pari passu to, an aggregate of
      $3,875,884 of 6% Secured Debentures outstanding as of May 31,
      2006.  The Company issued 834,575 short term and 834,574 long term
      warrants to the purchasers of the 6% Secured Debentures and entered into a
      security agreement granting the purchasers a security interest in its assets
      to
      secure the Company’s obligations under the debentures. Obligations under the
      debentures are guaranteed by the Company’s wholly-owned operating
      subsidiary.  At the same time, the outstanding short term warrants were
      amended to expire at the earlier of December 28, 2010 or the twelve months
      after
      the effective date of the Registration Statement.





On
      June
      30, 2006, the Company signed a letter amendment to the consulting agreement
      with
      Andreas Typaldos dated May 21, 2004. The amendment removes the condition that
      the Company raise $1,000,000 of equity financing before paying consulting fees
      that accrued at the rate of $15,000 per month commencing June 1, 2006 as an
      inducement for Mr. Typaldos forgiving the $360,000 of accrued and unpaid fees
      in
      exchange for the $360,000 principal amount of 6% Secured Debentures and related
      warrants.





On
      August
      18, 2006, the Company entered into an amendment agreement with the holders
      of
      the $3,875,884 principal amount of 6% Secured Debentures outstanding as of
      May
      31, 2006, including a limited liability company owned by the wife of our
      Chairman, and one of our directors. The Amendment agreement makes material
      changes to the securities purchase agreements, warrants, registration rights
      agreements, security agreements and other ancillary documents we executed in
      connection with an aggregate of $3,875,884 of 6% debentures the Company sold
      during the period from December 28, 2005 to March 31, 2006.  The
      material changes give the holders the same rights of redemption in the event
      of
      a cash purchase of our assets as those held by the of $1,773,470.83 aggregate
      principal amount of 6% Secured Debentures issued on June 30, 2006. As a result
      of the Amendment, all of  the 6% Secured Debentures and warrants must
      be redeemed by the Company at a premium if it agrees to sell all of the
      Company’s assets to a third party for cash and cash equivalents. In addition, as
      a result of the amendment, all holders of the 6% Secured Debentures have the
      right to have shares of Common Stock issuable upon conversion of the debentures
      and exercise of the related warrants registered for resale under the Securities
      Act of 1933 within 60 days after receiving written demand of the holders of
      60.1% of such securities and have it declared effective 90 days
      thereafter.





On
      September 26, 2006, October 19, 2006 and November 30, 2006, the Company issued
      $500,000, $500,000 and $400,000, respectively, of additional principal of the
      6%
      Secured Debentures on substantially the same terms as the 6% Secured Debentures
      previously issued by the Company.  The Company issued 658,824 short
      term and 658,824 long term warrants to the purchasers of the 6% Secured
      Debentures.





On
      January 8, 2007, the Company entered into an amendment agreement with the
      holders of the 6% Secured Debentures.  The Amendment agreement makes
      material changes to the securities purchase agreements, warrants, registration
      rights agreements, security agreements and other ancillary documents we executed
      in connection with the 6% debentures the Company sold during the period from
      December 28, 2005 to January 8, 2007, including removing the negative covenant
      prohibiting the Company from issuing stock, warrants or convertible securities
      at a fixed price to finance its operations, permitting the issuance of
      additional secured debentures and warrants on the same terms as the outstanding
      such securities, and providing that interest due on the debentures on January
      1,
      2007 and July 1, 2007 be added to principal on those dates.





On
      January 8, 2007 and February 28, 2007, the Company issued $288,000 and $327,000,
      respectively, of additional principal of the 6% Secured Debentures on
      substantially the same terms as the 6% Secured Debentures previously issued
      by
      the Company.  The Company issued 289,410 short and 289,410 long term
      warrants issued with these 6% Secured Debentures.







F–16


On
      September 26, 2006, October 19, 2006 and November 30, 2006, the Company issued
      $500,000, $500,000 and $400,000, respectively, of additional principal of the
      6%
      Secured Debentures on substantially the same terms as the 6% Secured Debentures
      previously issued by the Company.  The Company issued 658,824 short
      term and 658,824 long term warrants to the purchasers of the 6% Secured
      Debentures.





During
      the fourth quarter of 2007, the Company issued an aggregate of $1,264,106 of
      additional principal of the 6% Secured Debentures on substantially the same
      terms as the 6% Secured Debentures previously issued by the
      Company.  The Company issued 594,874 short term and 594,874 long term
      warrants to the purchasers of the 6% Secured Debentures.  The
      individual issuances are identified below:





March
                12, 2007
            
            $
            20,000March
                28, 2007
            
            
            150,000April
                15, 2007
            
            
            115,000April
                30, 2007
            
            
            70,000May
                10,2007
            
            
            380,000May
                31, 2007
            
            
            529,106Total
                during the 4th
                quarter of
                2007
            
            $
            1,264,106





During
      fiscal year 2007, a debt discount was recorded of $241,860 and $318,681,
      respectively for such short and long term warrants issued with these 6% Secured
      Debentures. The amortization recorded attributed to the debt discounts amounted
      to $164,594 and has been recorded as interest expense for the year ended May
      31,
      2007.





The
      maturities of debt, including related party debt and excluding the debt discount
      of $454,831, are as follows:




Year
                  ended May 31, 2007
              
              $
              —2008
              
              
              —2009
              
              $
              9,758,392


Other
      Obligations - As a consequence of the Company raising a aggregate of $3
      million of financing since June 2004, pursuant to the Company's May 2004
      employment agreement with its chief executive officer, $91,875 of deferred
      salary payments for the period from May 2004 to January 2006 representing 24.5%
      of his agreed salary for such period and a bonus of $65,333 was due December
      29,
      2005. While the deferred salary of $91,875 has been paid, the bonus of $65,333
      remains outstanding. The Company’s chief executive officer temporarily waived
      the right to receive immediate payment of the $65,333 until May 31,
      2007.  The Company’s failure to pay this bonus and other amounts due
      under the employment agreement gives the chief executive the right to terminate
      the agreement and continue to receive salary at the annual rate of $300,000
      for
      twelve months following the date of such termination.


















F–17


10.
            INCOME
                TAXES





At
      May
      31, 2007, the Company has available unused net operating loss carryovers
      approximately $18,730,000**that may be applied against future
      taxable income and expire at various dates through 2027. The Company has a
      deferred tax asset arising from such net operating loss deductions and has
      recorded an increase to the full valuation allowance in the amount of $1,630,000
      for the year ended May 31, 2007  since the likelihood of realization
      of the tax benefits cannot be determined.





2007Deferred
                tax asset:Net
                operating loss carryforward
            
            $
            6,550,000Valuation
                allowance
            
            
            (6,550,000
            )Net
                deferred tax asset
            
            $
            —





A
      reconciliation of the statutory federal income tax benefit to actual tax benefit
      is as follows:





Year
                Ended
              May
                31, 2006
            
            Year
                Ended
              May
                31, 2007Statutory
                federal income tax benefit
            35%
            
            35%Permanent
                timing differences -equity
                rights
            (25%)
            
            (8%)Income
                tax benefit not utilized
            (10%)
            
            (27%)Actual
                tax benefit
            —
            
            —





The
      Company has had greater than 50% change in ownership of certain stock holdings
      by shareholders of the Company pursuant to Section 382 of the Internal Revenue
      Code, the net operating losses may be limited as to its utilization on an annual
      basis. Currently no such evaluation has been performed.





The
      Company has applied to the New Jersey Economic Development Authority (NJEDA)
      to
      seek approval to sell its New Jersey Net Operating Loss carryforwards
      under the State of New Jersey’s Technology Business Tax Certificate
      Transfer Program (the “Program”).  The Company has approximately $5.3
      million of NJ tax loss carryforwards that would apply under this program. The
      Program allows qualified technology and biotechnology businesses in New Jersey
      to sell unused amounts of net operating loss carryforwards and defined research
      and development tax credits for cash. The State renews the Program annually
      and
      currently limits the aggregate proceeds to $60,000,000. We cannot be certain
      if
      we will be able to sell any of our current or future New Jersey loss
      carryforwards or tax credits under the Program.





11.
            SHAREHOLDERS'
                DEFICIENCY





2004
      transactions




a.
            On
                May 7, 2004, CDKNET.com, Inc and Miletos entered into an “Agreement and
                Plan of Merger” (“the Merger Agreement”). On May 24, 2004, the merger was
                consummated between a wholly owned subsidiary of CDKNET.com, Inc
                (CDK
                Merger Corp) and Miletos, Inc. The successor subsidiary was renamed
                Arkados, Inc. Because CDKNET.com, Inc and its subsidiaries had no
                meaningful operations prior to May 7, 2004 and equity ownership in
                CDKNET.com, Inc. in an amount greater than 50% was issued to the
                shareholders of Miletos, Inc., this transaction has been recorded
                as a
                reorganization of Arkados, Inc. via a reverse merger with CDKNET.com,
                Inc.





F–18


b.
            In
                May 2004, prior to the consummation of the aforementioned reverse
                merger,
                the Company; (a) issued 200,000 common shares for services rendered
                by
                several individuals valued at $1.50 a share and were expensed prior
                to the
                consummation of the aforementioned reverse merger, (b) converted
                $150,834
                of indebtedness owed to a law firm affiliated with the former CEO
                for
                150,000 shares of common stock, (c) converted $165,000 of convertible
                debentures and related accrued of $51,539 for 549,866 shares of common
                stock.





c.
            Pursuant
                to the Merger Agreement, as amended, the consideration for the merger
                consisted of 16,340,577 shares of the Company's restricted common
                stock
                (250,000 of such common shares are contingent shares and will be
                returned
                for cancellation unless called upon as a result of a breach of warranty),
                39,401 shares of common stock to the former employees of Enikia,
                100,000
                shares were issued to the major shareholder to assume the satisfaction
                of
                certain outstanding 401K liabilities due to the employees of the
                predecessor entity, 2,484,644 stock options exercisable at $.01 per
                share,
                1,149,998 stock options exercisable at $1.20 per share. In addition
                $950,200 was raised through the sale of 791,833 shares of common
                stock of
                the Company, 41,667 shares of common stock were issued to satisfy
                $50,000
                of indebtedness, and 49,833 shares of common stock for $59,800 of
                services
                rendered related to the equity raise. The $59,800 of services rendered
                was
                recorded as a cost of raising such
                equity.





d.
            The
                883,334 shares issued, pursuant to the terms of the Purchase Agreement
                relating to the aforementioned equity raise, have certain registration
                rights. In addition, such shareholders are entitled to liquidated
                damages,
                if a registration statement, registering such shares, is not filed
                within
                90 days of June 1, 2004 or if the registration statement is not declared
                effective until 120 days after June 1, 2004, or 180 days if such
                registration statement is subject to review by the Securities and
                Exchange
                Commission. Such liquidated damages are calculated monthly based
                on the
                delayed days of such registration not being effective. Such calculation
                is
                2% per month of the purchase price paid by such shareholders for
                the
                883,333 shares purchased limited to an aggregate of 18% of the aggregate
                purchase price paid for the 883,333 shares purchased. The Company
                accrued
                $190,800 in penalties for the failure to register such shares
                issued.





e.
            The
                major shareholder of the Company allocated 2,345,410 shares of his
                shares
                in the Company to satisfy assumed obligations of Enikia for services
                previously rendered to the predecessor entities. Pursuant to Topic
                5T of
                the Staff Accounting Bulletins, such contribution of the common shares
                of
                the Company have been recorded as a contribution by the shareholder
                to the
                Company in satisfaction of such liabilities recorded of $1,288,185.
                The
                major shareholder continues to negotiate for the allocation of additional
                shares to satisfy a separate assumed liability for services previously
                rendered to Enikia for capital transaction services. The recorded
                estimated value of such services yet to be negotiated is
                $700,000.





2005
      transactions





f.
            During
                fiscal 2005, the Company issued 575,000 shares of common stock net
                of
                another 1,050,000, which was returned for non performance. These
                shares
                were valued at the fair market value of such stock upon issuance
                at prices
                ranging from $.50 to $2.15 per share. The aggregate compensation
                expense
                recorded in this fiscal year for these shares issued was
                $724,811





g.
            During
                fiscal 2005, the Company issued 610,000 options at an exercise price
                of
                $1.20 per share which was above fair market value to its employees
                and
                directors and 1,725,000 options to third parties for services rendered
                at
                exercise prices ranging from $.01 to $1.20 per share. No compensation
                has
                been recorded for the options issued to employees and directors.
                The
                options to third parties have been valued at $900,461, which $582,292
                has
                yet to be expensed due to the term of such services being
                performed.





h.
            The
                Company recorded $234,143 of interest expense related to the valuation
                of
                the detachable warrants and the beneficial conversion feature of
                $750,000
                in debt raised from March to May 2005. This debt matured on June
                8, 2005,
                hence predominately all of such interest expense was recorded in
                fiscal
                2005.





i.
            In
                August 2004, a vendor converted $75,496 of payables for 125,000 shares
                of
                common stock.





F–19


2006
      transactions





j.
            During
                the year ended May 31, 2006, the Company issued 750,000 stock options
                with
                an exercise price of $.45 per share to management and its employees,
                which
                vest over four years. Another 100,000 fully vested stock options
                with an
                exercise price of $.45 were issued to a consultant, an expense of
                $52,420
                was recorded for these stock
                options.





k.
            On
                March 20, 3006, the Company issued warrants to purchase up to 180,000
                shares of our common stock for $0.85 per share to Emerging Capital
                Markets
                LLC as part compensation for investor relations consulting services
                for a
                three month period. The warrants vest in equal thirds on the first
                day of
                April, May and June 2006, provided there is no material breach of
                the
                related consulting agreement. Such investor relations consulting
                services
                agreement also provides for cash compensation in the amount of $20,000
                per
                month for three months. This investor relations consulting agreement
                also
                provides for the requirement to obtain approval form this individual
                for
                any potential reverse stock splits greater than 1 for 5 and has the
                option
                to renew such agreement for another three months on the same
                terms





2007
      transactions




l.
            In
                June 2006, the Company approved the issuance of 475,000 shares of
                Arkados
                stock, or $342,000, to Mr. Andreas Typaldos in recognition of his
                effort s
                to obtain financing for Arkados.




m.
            During
                the first quarter of 2007, the Company issued to management and its
                employees: 1,785,000 stock options with exercise prices ranging from
                $.43
                to $.85; all of which vest over four
                years.




n.
            During
                the third quarter of 2007, the Company issued 100,000 shares with
                an
                exercise price of $.40 per share to the incoming CFO as a component
                of her
                employment contract.  Another 240,000 stock options with an
                exercise price of $.50, vesting over 6 months, were issued to a
                consultant; an expense of $80,917 was recorded for these stock
                options.




o.
            On
                March 3, 2007, Arkados Wireless Technologies, Inc., our wholly owned
                subsidiary, filed a merger certificate completing the acquisition
                of Aster
                Wireless, Inc., a previously unaffiliated Delaware
                corporation.  The consideration for the Merger was 1,000,000
                restricted shares of our common stock. In addition, the Company
                issued an aggregate of 259,000 seven-year options to four employees
                through the acquisition exercisable at $0.405 per share which vest
                over 4
                years aggregate of 78,564 shares of restricted stock to such
                employees.  We also issued 300,000 seven-year options to a
                consultant which vest on March 1, 2008 and are exercisable at $0.405
                per
                share; an expense of $100,146 was
                recognized.




p.
            During
                the fourth quarter of 2007, the Company issued 3,010,000 stock options
                with exercise prices ranging from $.33 to $.40 per share to management
                and
                its employees, which vest over four years. Another 50,000 fully vested
                stock options with an exercise price of $.50 were issued to a consultant;
                an expense of $16,858 was recorded for these stock
                options.




q.
            The
                Company issued 175,604 shares of its common stock with gross proceeds
                of
                $1,756 from the exercise of options by
                employees.




r.
            For
                the year ended May 31, 2007, the Company incurred a non-cash charge
                of
                $418,997 for the amortization of stock
                options.




11.
              STOCK-BASED
                  COMPENSATION


The
      Company accounted for its stock option plans under APB No. 25, “Accounting for
      Sock Issued to Employees,” (“APB 25”), under which no compensation cost is
      recognized through May 31, 2005 and provided pro-forma disclosure only as
      provided for under SFAS No. 123 and 148.





Effective
      June 1, 2005, the Company adopted SFAS no. 123R “Accounting for Stock-Based
      Compensation” (“SFAS 123”).





F–20




Compensation
      based stock option and warrant activity for warrants and qualified and
      unqualified stock options are summarized as follows:






Shares
            
            
            Weighted
              Average
              Exercise
                PriceOutstanding
                at May 31, 2004
            
            
            3,894,142
            
            
            $
            0.79Granted
            
            
            2,330,000
            
            
            
            1.39Exercised
            
            
            —
            
            
            
            —Expired
                or cancelled
            
            
            (131,500
            )
            
            
            57.19Outstanding
                at May 31, 2005
            
            
            6,092,642
            
            
            $
            0.75Granted
            
            
            1,125,000
            
            
            
            0.52Exercised
            
            
            —
            
            
            
            —Expired
                or cancelled
            
            
            (330,990
            )
            
            
            2.40Outstanding
                at May 31, 2006
            
            
            6,886,652
            
            
            $
            0.64Granted
            
            
            5,824,000
            
            
            
            0.49Exercised
            
            
            (175,604
            )
            
            
            0.01Expired
                or cancelled
            
            
            —
            
            
            
            —Outstanding
                at May 31, 2007
            
            
            12,535,048
            
            
            $
            0.58

















































F–21


Information,
      at date of issuance, regarding stock option grants during the year ended May
      31,
      2007.





Shares
            
            
            Weighted-
              Average
              Exercise
              Price
            
            
            Weighted-
              Average
              Fair
              ValueYear
                ended May 31, 2007Exercise
                price exceeds market price
            
            
            —
            
            
            $
            —
            
            
            $
            —Exercise
                price equals market price
            
            
            5,824,000
            
            
            
            0.49
            
            
            
            0.42Exercise
                price is less than market price
            
            
            —
            
            
            
            —
            
            
            $
            —





The
      following table summarizes information about warrants and options outstanding
      and exercisable at May 31, 2007:





Outstanding
                and exercisableNumber
              Outstanding
            
            
            Weighted-
              average
              remaining
                life
              In
                years
            
            
            Weighted-
              Average
              Exercise
              Price
            
            
            Number
              ExercisableRange
                of exercise prices:$.01
              to $1.00
            
            
            
            10,298,264
            
            
            
            4.45
            
            
            $
            0.43
            
            
            
            4,938,798$1.01
              - $5.00
            
            
            
            2,231,784
            
            
            
            4.01
            
            
            $
            1.20
            
            
            
            2,281,784$5.01
              - $40.00
            
            
            
            5,000
            
            
            
            0.97
            
            
            $
            30.00
            
            
            
            5,00012,535,048
            
            
            
            
            
            
            
            
            
            
            
            7,225,582





The
      compensation expense attributed to the issuance of the options and warrants
      will
      be recognized as they vest / earned. These stock options and warrants are
      exercisable for three to ten years from the grant date.





The
      employee stock option plan stock options are exercisable for ten years from
      the
      grant date and vest over various terms from the grant date to three
      years.





The
      issuance of warrants attributed to debt issuances are summarized as
      follows:


Shares
            
            
            Weighted
              Average
              Exercise
                PriceOutstanding
                at May 31, 2004
            
            
            —
            
            
            $
            —Granted
            
            
            825,000
            
            
            
            .67Exercised
            
            
            —
            
            
            
            —Expired
                or cancelled
            
            
            —
            
            
            
            —Outstanding
                at May 31, 2005
            
            
            825,000
            
            
            $
            .67Granted
            
            
            3,567,874
            
            
            
            .88Exercised
            
            
            —
            
            
            
            —Expired
                or cancelled
            
            
            —
            
            
            
            —Outstanding
                at May 31, 2006
            
            
            4,392,874
            
            
            $
            .84Granted
            
            
            4,655,366
            
            
            
            .93Exercised
            
            
            —
            
            
            
            —Expired
                or cancelled
            
            
            —
            
            
            
            —Outstanding
                at May 31, 2007
            
            
            9048,240
            
            
            
            .88








F–22


Information,
      at date of issuance, regarding warrant grants during the year ended May 31,
      2007.





Shares
            
            
            Weighted-
              Average
              Exercise
              Price
            
            
            Weighted-
              Average
              Fair
              ValueYear
                ended May 31, 2007Exercise
                price exceeds market price
            
            
            4,657,160
            
            
            $
            93
            
            
            $
            .10Exercise
                price equals market price
            
            
            —
            
            
            
            —
            
            
            
            —Exercise
                price is less than market price
            
            
            —
            
            
            
            —
            
            
            
            —







The
      following table summarizes information about warrants and exercisable at May
      31,
      2007:





Outstanding
                and exercisableNumber
              Outstanding
            
            
            Weighted-
              average
              remaining
                life
              in
                years
            
            
            Weighted-
              Average
              Exercise
              Price
            
            
            Number
              ExercisableRange
                of exercise prices:$.01
              to $.35
            
            
            
            152,359
            
            
            
            3.1
            
            
            $
            .35
            
            
            
            152,359$.36
              - $.99
            
            
            
            4,979,547
            
            
            
            1.3
            
            
            $
            .81
            
            
            
            4,979,547$1.00
            
            
            
            3,916,334
            
            
            
            2.4
            
            
            $
            1.00
            
            
            
            3,916,3349,048,240
            
            
            
            
            
            
            
            
            
            
            
            9,048.240





Interest
      expense attributed to the aforementioned warrants is being amortized over the
      ratable term of each respective debt arrangement. See loans payable
      above.






12.
                COMMITMENTS
                    AND CONTINGENCY


a.
            The
                Company leases office space in Piscataway, New Jersey pursuant to
                a lease
                that began on May 8, 2006 and which expires on June 30, 2009. The
                annual
                base rent is approximately $101,000.  The Company leases office
                space in New Jersey pursuant to a lease that began on March 1, 2007
                and
                which expires on June 30, 2009. The annual base rent is approximately
                $108,000. There are no other material rental or lease commitment
                arrangements as of May 31,
                2007.





Total
      rental expenses for the years ended May 31, 2007 and 2006 was approximately
      $108,242 and $40,000, respectively.





b.
            The
                Company and its' subsidiary, Arkados, have entered into employment
                agreements with all of the employees of Arkados, including the CEO,
                CFO
                and VP of Worldwide Operations of the Company. The general terms
                of the
                combined employment agreements are; (a) each employment agreement
                provides
                for a base salary up to $300,000 depending on the employment position
                of
                such employee, (b) each employee will receive standard employment
                benefits
                comparable to those previously
                provided.





c.
            The
                Company may be subject to future lawsuits relating to unresolved
                claims
                against Enikia LLC as a result of the contribution of debt owed to
                a
                control group of Enikia being contributed to Miletos, Inc. and Miletos
                purchasing the assets of Enikia at a public foreclosure sale in partial
                satisfaction of the $11,116,803 obligation of Enikia to such control
                group. Some of these claims have alleged fraud, several claims have
                been
                settled and others continue to be unresolved. The Company maintains
                that
                such claims are without basis because of the statutory provision
                of New
                Jersey law governing creditors rights following a public foreclosure
                sale
                and in that it had no privatcy of contract with the
                claimants.






F–23


13.
                    SUBSEQUENT
                        EVENTS
 On
          July
          6, 2007, the Company reached an agreement with more than the requisite
          holders
          of 2/3 of the outstanding $1,066,500 principal amount of 6% Convertible
          Subordinated Notes due July 7, 2007 to extend the due date of the Notes
          to June
          30, 2008. In exchange for the amendment, the Company agreed to issue
          approximately 188,200 three year warrants to purchase shares of the Company’s
          common stock for $0.85 per share and lowered conversion prices in the Notes
          to
          $0.85.  This issuance triggered anti-dilution provisions in 4,144,568
          outstanding warrants to purchase shares of common stock, lowering the exercise
          price of such warrants from $1.00 to $0.85 and increasing the number of
          shares
          that could be obtained upon the exercise of such warrants by 731,394 to
          a total
          of 4,875,962 .
 
 During
          the period from July 10, 2007 to August 31, 2007, three of the Company’s
          directors loaned the Company an aggregate of $485,000.  These advances
          are due on demand and the Company is discussing converting these advances
          into a
          longer term investment, however there can be no assurance that such an
          agreement
          could be reached.
 
 The
          Company and its Chairman agreed to extend a consulting agreement initially
          entered into in May, 2004 on a month to month basis at the rate of $15,000
          per
          month.
 F–24


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




On
      March
      18, 2005, our Board of Directors voted to dismiss, Radin, Glass & Co., LLP
      (“Radin, Glass”) and appointed Sherb & Co., LLP (“Sherb”) as our independent
      public accountant for the years ending May 31, 2005 and 2007. We notified Radin,
      Glass of its dismissal on March 24, 2005.





The
      reports issued by Radin, Glass on our consolidated financial statements of
      as of
      and for the fiscal years ended May 31, 2004 and May 31, 2003 and the period
      from
      March 24, 2004 (date of inception) to May 31, 2004 did not contain any adverse
      opinion or disclaimer of opinion, nor were they qualified or modified as to
      uncertainty, audit scope or accounting principles, except that Radin, Glass'
      report with respect to these periods contained an explanatory paragraph
      indicating that there was substantial doubt as to our ability to continue as
      a
      going concern.





During
      the fiscal years ended May 31, 2004 and May 31, 2003 and the period from March
      24, 2004 (date of inception) to May 31, 2004 and through the date of our filing
      the Form 8-K reporting the change of auditors, there were no disagreements
      between Radin, Glass and our management on any matter of accounting principles
      or practices, financial statement disclosure, or auditing scope or procedure,
      which, if not resolved to the satisfaction of Radin, Glass, would have caused
      Radin, Glass to make reference to the subject matter of the disagreements in
      connection with its reports on our consolidated financial statements for such
      periods, nor have there been any reportable events as listed in Item 304
      (a)(1)(iv) of Regulation S-B.





Prior
      to
      engaging Sherb as its independent accountant, neither we nor anyone acting
      on
      our behalf consulted with Sherb regarding any of the matters or events set
      forth
      in Item 304(a)(2)(i) and (ii) of Regulation S-B. We provided Radin, Glass with
      a
      copy of the foregoing disclosures, and a letter from Radin, Glass confirming
      its
      agreement with these disclosures was filed as Exhibit 16.1 to our Form 8-K
      Report dated March 18, 2005.







ITEM
                8A.
            CONTROLS
                AND PROCEDURES





**Evaluation
      of Disclosure Controls and Procedures**





Our
      senior management is responsible for establishing and maintaining a system
      of
      disclosure controls and procedures (as defined in Rule 13a-15 and 15d-15 under
      the Exchange Act) designed to ensure that information required to be disclosed
      by us in the reports that we file or submit under the Exchange Act is recorded,
      processed, summarized and reported within the time periods specified in the
      SEC's rules and forms. Disclosure controls and procedures include, without
      limitation, controls and procedures designed to ensure that information required
      to be disclosed by an issuer in the reports that it files or submits under
      the
      Act is accumulated and communicated to the issuer's management, including its
      principal executive officer or officers and principal financial officers, to
      allow timely decisions regarding required disclosure.





In
      performing its audit of our Consolidated Financial Statements for Fiscal 2006,
      our independent auditors, Sherb & Co., LLP “ Sherb”, notified our Board of
      Directors of a material weakness in internal controls under standards
      established by the American Institute of Certified Public Accountants.
      Reportable conditions and material weaknesses involve matters coming to the
      attention of our auditors relating to significant deficiencies in the design
      or
      operation of internal controls that, in their judgment, could adversely affect
      our ability to record, process, summarize, and report financial data consistent
      with the assertions of management in the consolidated financial
      statements.





A
      material weakness is a control deficiency or combination of control deficiencies
      that results in more than a remote likelihood that a material misstatement
      of
      the annual or interim financial statements will not be prevented or detected.
      As
      of May 31, 2006, we did not maintain effective controls related to transactional
      accounting and financial reporting and reported these findings in our Form
      10-KSB Annual Report for the year ended May 31, 2006. These deficiencies
      included a lack of timely and sufficient financial statement account
      reconciliation and analysis and lack of sufficient support resources within
      the
      accounting and finance department. Management believes that such control
      deficiencies represented a material weakness in internal control over financial
      reporting that resulted in a reasonable likelihood that a material misstatement
      in our financial statements will not be prevented or detected by our employees
      in the normal course of performing their assigned functions.





During
      the fiscal quarter ended February 28, 2007 we hired a full time financial
      executive who became Chief Financial Officer in April 2007
      and  undertook to remedy the deficiencies and prepare our accounting
      systems to comply with the management






–
37
–


reporting
      and audit requirements with respect to internal controls in accordance with
      Section 404 of Sarbanes-Oxley applicable to us for the fiscal years ending
      May
      31, 2008 and May 31, 2009, respectively.   As noted below, our
      evaluation of our disclosure controls and procedures permitted management to
      conclude that such controls were effective as of May 31, 2007.  Due to
      its small size and limited financial resources, the Company’s CFO, is the only
      employee involved in accounting and financial reporting.  As a result,
      there is no segregation of duties within the accounting function, leaving all
      aspects of financial control and physical control of cash in the hands of the
      same employee.  The CFO is currently working to put it in place
      compensating levels of controls to provide for greater segregation of
      duties.  This assessment should not be considered a report on efficacy
      of such controls as would be required under Section 404 of SOX in connection
      with the audit of our financial statements for the year ending May 31,
      2008.




We
      have
      carried out an evaluation under the supervision and with the participation
      of
      our management, including our Chief Executive Officer and Chief Accounting
      Officer, of our disclosure controls and procedures as defined in Exchange Act
      Rule 13(a)-15(e). In designing and evaluating our disclosure controls and
      procedures, we recognize that any disclosure controls and procedures, no matter
      how well designed and operated, can only provide reasonable assurance of
      achieving the desired control objective. Due to the material weakness in
      internal control over financial reporting previously noted and insufficient
      passage of time to test the enacted changes to determine if such changes are
      effective as at and prior to May 31, 2007, management concluded that our
      disclosure controls and procedures are effective.





**Changes
      in Internal Controls Over Financial Reporting**





As
      a
      result of the identification of a material weakness described above, we have
      implemented the following changes:





·
            We
                have hired a full time financial executive in January 2007, who was
                appointed Chief Financial Officer in April
                2007


·
            Organized
                an Audit Committee consisting of our two outside
                directors


·
            Began
                the implementation of formalized policies, procedures and process
                documentation





Although
      we have implemented the measures described above and believe they are effective,
      we have not evaluated such controls against any standard, such as the framework
      provided by Committee of Sponsoring Organizations of the Treadway Commission
      (COSO) and expect that such documentation and testing will take significant
      time and effort. We expect to make additional changes to our controls as we
      continue to prepare to comply with the management reporting requirements of
      Section 404 of Sarbanes-Oxley. We recognize that "tone at the top" is a key
      element to an organization's control environment and are focused and
      committed to providing the correct tone and structure within the company. We
      cannot assure you that we will not in the future identify further
      deficiencies in our controls. However, we plan to continue to review and make
      any necessary changes to the overall design of our control environment
      in order to enhance our corporate governance and reporting
      practices.





Other
      than those described above, there have been no significant changes in our
      internal control over financial reporting that occurred during the last
      fiscal quarter of the fiscal year ended May 31, 2007 that have materially
      affected, or are reasonably likely to materially affect, our internal
      control over financial reporting.







ITEM
                8B.
            OTHER
                INFORMATION





None.










–
38
–


**PART
      III**










ITEM
                9.
            DIRECTORS,
                EXECUTIVE OFFICERS AND CORPORATE****GOVERNANCE





In
      accordance with Instruction E.3. of Form 10-KSB, we plan to incorporate the
      information required in response to this Item 9 by reference to our definitive
      information statement or proxy or file an amendment to this report to provide
      such information before 120 days after May 31, 2007.






ITEM
                10.
            EXECUTIVE
                COMPENSATION





In
      accordance with Instruction E.3. of Form 10-KSB, we plan to incorporate the
      information required in response to this Item 10 by reference to our definitive
      information statement or proxy or file an amendment to this report to provide
      such information before 120 days after May 31, 2007.






ITEM
                11.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                MANAGEMENT





In
      accordance with Instruction E.3. of Form 10-KSB, we plan to incorporate the
      information required in response to this Item 10 by reference to our definitive
      information statement or proxy or file an amendment to this report to provide
      such information before 120 days after May 31, 2007.








ITEM
                12.
            CERTAIN
                RELATIONSHIPS AND RELATED
                TRANSACTIONS





In
      accordance with Instruction E.3. of Form 10-KSB, we plan to incorporate the
      information required in response to this Item 12 by reference to our definitive
      information statement or proxy or file an amendment to this report to provide
      such information before 120 days after May 31, 2007.






















–
39
–


ITEM
                13.
            EXHIBITS





EXHIBIT
      INDEX





**Incorporated
                by Reference****Exhibit**
              **Number**
            **Exhibit
                Description**
            
            **Form**
            **File**
              **Number**
            **Exhibit**
            **Filing**
              **Date**
            **Filed**
              **Herewith**2.1
            Agreement
                and Plan of Merger dated as of May 7, 2004 between CDKnet.com, Inc.,
                CDK
                Merger Corp., Miletos, Inc. and Andreas Typaldos, as Representative
                of
                Certain Stockholders of Miletos, Inc.
            
            10-KSB
            0-27587
            2.1
            9/17/042.2
            Amendment
                dated May 21, 2004 to the Agreement and Plan of Merger dated as of
                May 7,
                2004 between CDKnet.com, Inc., CDK merger Corp., Miletos, Inc. and
                Andreas
                Typaldos, as Representative of Certain Stockholders of Miletos,
                Inc.
            
            10-KSB
            0-27587
            2.2
            9/17/042.3
            Amendment
                Number 2, dated January 19, 2005, amending the Agreement and Plan of
                Merger, dated as of May 7, 2004, by and among CDKNet.Com, Inc., CDK
                Merger
                Corp., and Miletos, Inc., and Andreas Typaldos, in his individual
                capacity
                and as representative of the following stockholders of the Company:
                Renee
                Typaldos, Patra Holdings LLC, Andreas Typaldos Family Limited Partnership
                and Renee Typaldos Family Partnership, Ltd.
            
            10-QSB
            0-27587
            2.1
            1/23/062.4
            AGREEMENT
                AND PLAN OF MERGER dated as of February 13, 2007, among Arkados Group,
                Inc., a Delaware corporation, Arkados Wireless Technologies, Inc.,
                a
                Delaware corporation and a newly formed wholly owned subsidiary Arkados
                Group, Inc. and Aster Wireless Inc., a Delaware
                corporation.
            
            8-K
            0-27587
            2.1
            2/21/073.1
            Articles
                of Incorporation of the Registrant.
            
            10-SB
            0-27587
            3.1
            10/7/993.2
            Amendment
                to the Articles of Incorporation.
            
            10-SB
            0-27587
            3.2
            10/7/993.3
            By-Laws
                of the Registrant.
            
            10-SB
            0-27587
            3.3
            10/7/993.4
            Certificate
                of Merger of the Registrant.
            
            10-SB
            0-27587
            3.4
            10/7/993.5
            Amendment
                to the Articles of Incorporation.
            
            10-SB
            0-27587
            3.5
            10/7/993.6
            Amended
                and Restated Series A Designation
            
            10-QSB
            0-27587
            3.1
            2/14/033.7
            Amendment
                to Certificate of Incorporation (Reverse Split ) filed November 31,
                2003.
            
            10-QSB
            0-27587
            3.1
            2/17/043.8
            Certificate
                of Amendment to Certificate of Incorporation
            
            10-QSB
            0-27587
            3.2
            2/17/043.9
            Certificate
                of Ownership and Merger dated August 30, 2006.
            
            8-K
            0-27587
            3.1
            9/1/06





–
40
–


4.1
            Specimen
                of Common Stock Certificate.
            
            10-KSB
            0-27587
            4.1
            10/10/064.2*
            Form
                of Stock Option Grant Agreement under the CDKnet.com, Inc. 2004 Stock
                Option and Restricted Stock Plan.
            
            10-KSB
            0-27587
            4.7
            9/17/044.3
            Form
                of 6% Secured Convertible Debenture due December 28, 2008
            
            8-K/A
            0-27587
            4.1
            7/11/064.4
            Form
                of Common Stock Purchase Warrant (long term and short term warrants
                differ
                as to price and expiration date as set forth in footnotes to the
                form
                filed)
            
            8-K/A
            0-27587
            4.2
            7/11/064.5
            Registration
                Rights Agreement, dated as of December 28, 2005, by and among the
                Registrant, Bushido Capital Master Fund, L.P., Gamma Opportunity
                Capital
                Partners, L.P. Class A, and Gamma Opportunity Capital Partners, L.P.
                Class
                C
            
            8-K/A
            0-27587
            4.3
            7/11/064.6
            Form
                of Request for Extension of 6% Convertible Subordinated Note due
                July 7,
                2007
            
            8-K
            0-27587
            4.2
            7/17/074.7
            Form
                of three year warrant exercisable at $0.85
            
            8-K
            0-27587
            4.3
            7/17/0710.1*
            Technology
                Horizons Corp. 1998 Equity Incentive Plan.
            
            10-SB
            0-27587
            10.1
            10/7/9910.2
            Registration
                Rights Agreements dated as of May 21, 2004 between CDKnet.Com, Inc.
                and
                several stockholders.
            
            10-KSB
            0-27587
            10.17.1
              10.17.2
            9/17/0410.3*
            Consulting
                Agreement dated as of May 21, 2004 between CDKnet.Com, Inc. and Andreas
                Typaldos.
            
            10-KSB
            0-27587
            10.18
            9/17/0410.4*
            Employment
                Agreement dated as of May 23, 2004 between CDKnet.Com, Inc. and Oleg
                Logvinov.
            
            10-KSB
            0-27587
            10.19
            9/17/0410.5
            Silicon
                Product Development Production Collaboration Agreement dated July
                28, 2004
                between GDA Technologies, Inc. and Arkados, Inc.
            
            10-KSB
            0-27587
            10.23
            9/17/0410.6
            Form
                of 10% convertible extendible note due June 8, 2005 in the aggregate
                authorized principal amount of $750,000
            
            10-QSB
            0-27587
            10.1
            4/19/0510.7
            Form
                of three year warrant exercisable at $0.67
            
            10-QSB
            0-27587
            10.2
            4/19/0510.8
            Form
                of registration rights agreement relating to the 10% convertible
                extendible notes and three year warrants
            
            10-QSB
            0-27587
            10.3
            4/19/0510.9*
            Stock
                Option Grant Agreement dated June 21, 2005
            
            8-K
            0-27587
            10.1
            6/24/0510.10
            Form
                of Securities Purchase Agreement
            
            8-K
            0-27587
            10.1
            7/14/0510.11
            Form
                of 6% Convertible Subordinated Note due July 7, 2007 in the aggregate
                authorized principal amount of $2.4 million
            
            8-K
            0-27587
            10.2
            7/14/05





–
41
–


10.12
            Form
                of three year warrant exercisable at $0.35
            
            8-K
            0-27587
            10.3
            7/14/0510.13
            Securities
                Purchase Agreement, dated as of December 28, 2005, by and among the
                Registrant, Bushido Capital Master Fund, L.P., Gamma Opportunity
                Capital
                Partners, L.P. Class A, and Gamma Opportunity Capital Partners, L.P.
                Class
                C
            
            8-K
            0-27587
            99.1
            1/4/0610.14
            Security
                Agreement, dated as of December 28, 2005, by and among the Registrant,
                Gamma Opportunity Capital Partners, L.P. Class A, and Gamma Opportunity
                Capital Partners, L.P. Class C
            
            8-K
            0-27587
            99.2
            1/4/0610.15
            Subsidiary
                Guarantee dated as of December 28, 2005 executed by Arkados,
                Inc.
            
            8-K
            0-27587
            99.3
            1/4/0610.16
            Waiver
                dated as of January 17, 2006 to the Securities Purchase Agreement,
                dated
                as of December 28, 2005, by and among the Registrant, Bushido Capital
                Master Fund, L.P., Gamma Opportunity Capital Partners, L.P. Class
                A, and
                Gamma Opportunity Capital Partners, L.P. Class C
            
            10-QSB
            0-27587
            10.1
            1/23/0610.17
            Additional
                Issuance Agreement dated February 1, 2006 between the Registrant
                and
                Bushido Capital Master Fund, L.P.
            
            8-K
            0-27587
            99.4
            2/6/0610.18
            Amended
                and Restated Extension Waiver and Debt Conversion Agreement dated
                as of
                February 1, 2006 by and among the Registrant and each of the holders
                of
                the Registrant’s outstanding 10% Convertible Extendable Notes originally
                due June 8, 2005, 6% Convertible Notes original due October 15, 2005
                and
                that Grid Note dated October 15, 2004
            
            8-K
            0-27587
            99.5
            2/6/0610.19
            Debt
                Conversion Agreement (Note) dated as of January 11, 2006 between
                the
                Registrant and William Carson
            
            8-K
            0-27587
            99.6
            2/6/0610.20
            Debt
                Conversion Agreement (Advances) dated as of January 11, 2006 between
                the
                Registrant and William Carson
            
            8-K
            0-27587
            99.7
            2/6/0610.21
            Debt
                Conversion Agreement (Advances) dated as of January 11, 2006 between
                the
                Registrant and Gennaro Vendome
            
            8-K
            0-27587
            99.8
            2/6/0610.22
            Second
                Additional Issuance Agreement dated February 24, 2006 between the
                Registrant and Bushido Capital Master Fund, L.P., Gamma Opportunity
                Capital Partners, L.P. Class A, and Gamma Opportunity Capital Partners,
                L.P. Class C
            
            8-K
            0-27587
            99.5
            3/2/0610.23
            Third
                Additional Issuance Agreement dated March 31, 2006 between the Registrant
                and Cargo Holdings LLC
            
            8-K
            0-27587
            99.6
            4/6/06





–
42
–


10.24
            Letter
                Agreement dated march 31, 2006 between the Registrant and Bushido
                Capital
                Master Fund, L.P., Gamma Opportunity Capital Partners, L.P. Class
                A, and
                Gamma Opportunity Capital Partners, L.P. Class C
            
            8-K
            0-27587
            99.7
            4/6/0610.25
            Warrant
                agreement dated March 20, 2006 issued to Emerging Capital Markets
                LLC
            
            8-K
            0-27587
            99.8
            4/6/0610.26
            Lease
                Agreement effective May 8, 2006 between Arkados, Inc. and Bridgeview
                Plaza
                Associates.
            
            8-K
            0-27587
            99.1
            5/9/0610.27
            Securities
                Purchase Agreement, dated as of December 28, 2005, by and among the
                Registrant, Bushido Capital Master Fund, L.P., Gamma Opportunity
                Capital
                Partners, L.P. Class A, and Gamma Opportunity Capital Partners, L.P.
                Class
                C
            
            8-K/A
            0-27587
            99.1
            7/11/0610.28
            Security
                Agreement, dated as of December 28, 2005, by and among the Registrant,
                Gamma Opportunity Capital Partners, L.P. Class A, and Gamma Opportunity
                Capital Partners, L.P. Class C
            
            8-K/A
            0-27587
            99.2
            7/11/0610.29
            Subsidiary
                Guarantee dated as of December 28, 2005 executed by Arkados,
                Inc.
            
            8-K/A
            0-27587
            99.3
            7/11/0610.30*
            Letter
                Amendment dated June 30, 2006 to the Consulting Agreement with Andreas
                Typaldos dated May 21, 2004
            
            8-K/A
            0-27587
            99.4
            7/11/0610.31
            Amendment
                Agreement dated August 18, 2006 between CDKnet.com, Inc., Bushido
                Capital
                Master Fund, LP, Gamma Opportunity Capital Partners, LP (Classes
                A and C),
                and Cargo Holdings LLC
            
            8-K
            0-27587
            99.1
            8/24/0610.32
            Additional
                Issuance Agreement dated September 26, 2006 between Arkados Group,
                Inc.,
                Bushido Capital Master Fund, LP, Pierce Diversified Strategy Master
                Fund,
                LLC - Series BUS, Andreas Typaldos and Andreas Typaldos Family Limited
                Partnership
            
            8-K
            0-27587
            99.5
            10/2/0610.33
            Waiver
                and Amendment Agreement dated September 26, 2006 between Arkados
                Group,
                Inc. and Bushido Capital Master Fund, L.P., Gamma Opportunities Capital
                Partners, LP Class A, Gamma Opportunities Capital Partners, LP Class
                C and
                Cargo Holdings LLC
            
            8-K
            0-27587
            99.6
            10/2/06




10.34
            Waiver
                and Amendment Agreement dated October 24, 2006 between Arkados Group,
                Inc.
                and Bushido Capital Master Fund, L.P., Gamma Opportunities Capital
                Partners, LP Class A, Gamma Opportunities Capital Partners, LP Class
                C and
                Cargo Holdings LLC
            
            8-K
            0-27587
            99.6
            10/30/0610.35
            Third
                Additional Issuance Agreement dated November 30, 2006 between Arkados
                Group, Inc., Bushido Capital Master Fund, LP, Pierce Diversified
                Strategy
                Master Fund, LLC – Series BUS, Andreas Typaldos and Andreas Typaldos
                Family Limited Partnership
            
            8-K
            0-27587
            99.6
            12/5/06





–
43
–


10.36
            Waiver
                and Amendment Agreement dated November 30, 2006 between Arkados Group,
                Inc. and Bushido Capital Master Fund, L.P., Gamma Opportunities Capital
                Partners, LP Class A, Gamma Opportunities Capital Partners, LP Class
                C and
                Cargo Holdings LLC
            
            8-K
            0-27587
            99.7
            12/5/0610.37
            Fourth
                Additional Issuance Agreement dated January 8, 2007 between Arkados
                Group,
                Inc., Bushido Capital Master Fund, LP, Pierce Diversified Strategy
                Master
                Fund, LLC – Series BUS, Andreas Typaldos and Andreas Typaldos Family
                Limited Partnership
            
            8-K
            0-27587
            99.8
            5/11/0710.38
            Fifth
                Additional Issuance Agreement dated February 28, 2007 between Arkados
                Group, Inc., Bushido Capital Master Fund, LP, Pierce Diversified
                Strategy
                Master Fund, LLC – Series BUS, Andreas Typaldos and Andreas Typaldos
                Family Limited Partnership
            
            8-K
            0-27587
            99.9
            5/11/0710.39
            Sixth
                Additional Issuance Agreement dated March 6, 2007 between Arkados
                Group,
                Inc., Crucian Transition, Inc., Bushido Capital Master Fund, LP,
                Pierce
                Diversified Strategy Master Fund, LLC – Series BUS, Andreas Typaldos and
                Andreas Typaldos Family Limited Partnership
            
            8-K
            0-27587
            99.10
            5/11/0710.40
            Waiver
                and Amendment Agreement dated January 8, 2007 between Arkados Group,
                Inc.
                and Bushido Capital Master Fund, L.P., Gamma Opportunities Capital
                Partners, LP Class A, Gamma Opportunities Capital Partners, LP Class
                C and
                Cargo Holdings LLC
            
            8-K
            0-27587
            99.11
            5/11/0710.41
            Waiver
                and Amendment Agreement dated February 28, 2007 between Arkados Group,
                Inc. and Bushido Capital Master Fund, L.P., Gamma Opportunities Capital
                Partners, LP Class A, Gamma Opportunities Capital Partners, LP Class
                C and
                Cargo Holdings LLC
            
            8-K
            0-27587
            99.12
            5/11/0710.42
            Waiver
                and Amendment Agreement dated March 6, 2007 between Arkados Group,
                Inc.
                and Bushido Capital Master Fund, L.P., Gamma Opportunities Capital
                Partners, LP Class A, Gamma Opportunities Capital Partners, LP Class
                C and
                Cargo Holdings LLC
            
            8-K
            0-27587
            99.13
            5/11/0710.43
            Seventh
                Additional Issuance Agreement dated March 6, 2007 between Arkados
                Group,
                Inc., Crucian Transition, Inc., Bushido Capital Master Fund, LP,
                Pierce
                Diversified Strategy Master Fund, LLC – Series BUS, Andreas Typaldos and
                Andreas Typaldos Family Limited Partnership
            
            8-K
            0-27587
            99.14
            5/11/0710.44
            Waiver
                and Amendment Agreement dated May 7, 2007 between Arkados Group,
                Inc. and
                Bushido Capital Master Fund, L.P., Gamma Opportunities Capital Partners,
                LP Class A, Gamma Opportunities Capital Partners, LP Class C and
                Cargo
                Holdings LLC
            
            8-K
            0-27587
            99.15
            5/11/07







–
44
–


10.45
            Eighth
                Additional Issuance Agreement dated May 30, 2007 between Arkados
                Group,
                Inc., Crucian Transition, Inc., Bushido Capital Master Fund, LP,
                Pierce
                Diversified Strategy Master Fund, LLC – Series BUS, Andreas Typaldos,
                Andreas Typaldos Family Limited Partnership, Kathryn Typaldos, Herbert
                H.
                Sommer and Joel C. Schneider
            
            8-K
            0-27587
            99.16
            6/05/0710.46
            Ninth
                Additional Issuance Agreement dated May 31, 2007 between Arkados
                Group,
                Inc., Crucian Transition, Inc., Bushido Capital Master Fund, LP,
                Pierce
                Diversified Strategy Master Fund, LLC – Series BUS, Andreas Typaldos,
                Andreas Typaldos Family Limited Partnership, Kathryn Typaldos, Herbert
                H.
                Sommer and Joel C. Schneider
            
            8-K
            0-27587
            99.17
            6/05/0710.47
            Waiver
                and Amendment Agreement dated May 30, 2007 between Arkados Group,
                Inc. and
                Bushido Capital Master Fund, L.P., Gamma Opportunities Capital Partners,
                LP Class A, Gamma Opportunities Capital Partners, LP Class C and
                Cargo
                Holdings LLC
            
            8-K
            0-27587
            99.18
            6/05/0710.48
            Waiver
                and Amendment Agreement dated May 31, 2007 between Arkados Group,
                Inc. and
                Bushido Capital Master Fund, L.P., Gamma Opportunities Capital Partners,
                LP Class A, Gamma Opportunities Capital Partners, LP Class C and
                Cargo
                Holdings LLC
            
            8-K
            0-27587
            99.19
            6/05/07




10.49*
            Limited
                waiver letter dated October 10, 2006 relating to the Employment Agreement
                dated as of May 23, 2006 between Arkados Group, Inc. (formerly CDKnet.com,
                Inc.) and Oleg Logvinov
            
            10-KSB
            0-27587
            10.34
            10/10/0610.50*
            Limited
                waiver letter dated November 9, 2006 relating to the employment 
                agreement dated as of May 23, 2004 between Arkados Group, Inc.
                (formerly  CDKnet.com, Inc.) and Oleg Logvinov.
            
            10-QSB
            0-27587
            10.1
            1/12/0710.51*
            Employment
                Agreement dated as of December 27, 2007 between Arkados Group, Inc.
                and
                Barbara Kane-Burke.
            
            8-K
            02-27587
            99.1
            4/25/0710.52
            Solicitation
                Agreement between Arkados Group, Inc. and Trident Partners,
                Ltd
            
            8-K
            0-27587
            99.1
            7/17/0710.53*
            Letter
                Amendment dated September 10, 2007 to the Consulting Agreement with
                Andreas Typaldos dated May 21, 2004
            
            
            0-27587
            10.53
            
            X14.1
            Code
                of Business Conduct and Ethics
            
            10-KSB
            0-27587
            14.1
            9/17/0414.2
            Code
                of Ethics for Financial Executives
            
            10-KSB
            0-27587
            14.2
            9/17/0421
            Subsidiaries
                of the Registrant.
            
            
            
            
            
            X









–
45
–


31.1
            Certification
                of Chief Executive Officer of Periodic Report pursuant to Rule 13a-14a
                and
                Rule 15d-14(a).
            
            
            
            
            
            X31.2
            Certification
                of Chief Financial Officer of Periodic Report pursuant to Rule 13a-14a
                and
                Rule 15d-14(a).
            
            
            
            
            
            X32.1
            Certification
                of Chief Executive Officer of pursuant to 18 U.S.C. - Section
                1350.
            
            
            
            
            
            X32.2
            Certification
                of Chief Financial Officer of pursuant to 18 U.S.C. - Section
                1350.
            
            
            
            
            
            X





*Compensation
      plans or arrangements in which directors or executive officers are eligible
      to
      participate.


































–
46
–





ITEM
                14.
            PRINCIPAL
                ACCOUNTANT FEES AND SERVICES





**Audit
      Fees**





The
      aggregate fees billed and unbilled for the fiscal years ended May 31, 2006
      and
      2007 for professional services rendered by our principal accountants for the
      audits of our annual financial statements, and the review of our financial
      statements included in our quarterly reports on Form 10-QSB were approximately
      $108,242 and $35,500, respectively.





**Audit-Related
      Fees**





The
      aggregate fees billed for the fiscal years ended May 31, 2006 and 2007 for
      assurance and related services rendered by our principal accountants related
      to
      the performance of the audit or review of our financial statements, specifically
      accounting research, were $0 and $0, respectively.





**Tax
      and Other Fees**





There
      aggregate fees billed for the fiscal years ended May 31, 2006 and 2007 for
      tax
      related or other services rendered by our principal accountants in connection
      with the preparation of our federal and state tax returns was $0 and $9,000,
      respectively.





**Approval
      of Non-audit Services and Fees**





We
      created an Audit committee during fiscal or 2007, consisting solely of
      independent directors and, consistent with SEC policies and guidelines regarding
      audit independence, the Audit Committee will responsible for the pre-approval
      of
      all audit and permissible non-audit services provided by our principal
      accountants on a case-by-case basis.



































–
47
–


**SIGNATURES**





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




**Arkados
                Group, Inc. (Registrant)**By:
            /s/ Oleg
              LogvinovPresident
              and Chief Executive
              Officer


By:
              /s/ Barbara
                Kane-BurkeChief
                  Financial Officer (Principal
                Financial
                  and Accounting Officer)Date:   
September
                13, 2007




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




Date:   
September
                    13, 2007
                By:
                /s/ Oleg
                  LogvinovOleg Logvinov,
                    President, Chief
                  Executive
                    Officer and a Director


Date:   
September
                      13, 2007
                  By:
                  /s/ Gennaro
                    VendomeGennaro
                        Vendome, Director
 Date:   
September
                        13, 2007
                    By:
                    /s/ William
                      H.
                      CarsonWilliam
                          H. Carson, Director
 Date:   
September
                          13, 2007
                      By:
                      /s/ Andreas
                        TypaldosAndreas
                            Typaldos, Chairman


–
48
–