Report of Independent Registered Public Accounting Firm

To the Members of
LED Holdings, LLC

We have audited the accompanying consolidated balance sheets of LED Holdings, LLC and subsidiary (the Company) as of August 31, 2007 and June 14, 2007 and the related consolidated statements of operations, changes in members’ equity and cash flows for the period from June 14 to August 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of LED Holdings, LLC and subsidiary as of August 31, 2007 and June 14, 2007, and the consolidated results of their operations and cash flows for the period from June 14 to August 31, 2007, in conformity with United States generally accepted accounting principles.

/s/ Turner, Stone & Company, L.L.P.

Certified Public Accountants
Dallas, Texas
December 7, 2007

LED Holdings, LLC
Consolidated balance sheets as of August 31
and June 14, 2007

	August 31			June 14,
	2007			2007
Current assets
Cash and cash equivalents	$	10,334,341		$	8,925,700
Accounts receivable, net of allowance		1,177,109			1,536,780
Inventory, net of allowances		1,126,078			992,604
Prepaid expenses and other current assets		2,790			3,385
Total current assets		12,640,318			11,458,469
Property and equipment, net		201,217			117,410
Other assets
Investments, at cost		86,528			86,528
Intangible assets, net of amortization (Note 6)
Technology and patents		2,798,222			2,890,000
Software		1,933,333			2,000,000
Trademarks		355,250			360,000
Customer relationships		719,333			730,000
Goodwill		1,620,200			1,620,200
Deferred Tax asset		—			—
Deposits		12,434			12,434
Total assets	$	20,366,835		$	19,275,041
Current liabilities
Accounts payable	$	196,118		$	231,080
Accrued expenses		99,950			864,822
Total current liabilities		296,068			1,095,902
Minority Interest in income of subsidiary		90,313			87,106
Members’ equity
Class A Common, no par value shares 1,100,000 authorized 1,100,000 and 760,000 issued and outstanding, respectively, net of stock issuance expenses		9,335,128			6,835,128
Class B Common, no par value shares 1,000,000 authorized and outstanding		11,256,905			11,256,905
Retained deficit		(611,579	)		—
Total members’ equity		19,980,454			18,092,033
Total liabilities and members’ equity	$	20,366,835		$	19,275,041

The accompanying notes are an integral part of the consolidated financial statements.

LED Holdings, LLC
Consolidated Statement of Operations for the Period
June 14, 2007 — August 31, 2007

Revenue	$	1,270,683
Cost of goods sold		1,134,831
Gross margin		135,852
Operating expenses
Selling, general and administrative		278,122
Compensation and related expenses		184,651
Professional fees		166,365
Depreciation and amortization		178,124
Total operating expense		807,262
Loss from operations		(671,410	)
Other income
Interest income		62,491
Other, net		547
Total other income		63,038
Loss before minority interest in income of subsidiary		(608,372	)
Plus: Minority interest in income of subsidiary		(3,207	)
Net loss	$	(611,579	)

The accompanying notes are an integral part of the consolidated financial statements.

LED Holdings, LLC
Consolidated Statement of Changes in Members’ Equity
for the period June 14, 2007 through August 31, 2007

	Class A				Class B
	Shares		Class A		Shares		Class B		Retained
	Outstanding		Balance		Outstanding		Balance		Deficit			Total
Balance — June 14, 2007		760,000	$	6,835,128		1,000,000	$	11,256,905	$	—		$	18,092,033
Issuance of Class A Stock		250,000		2,500,000		—		—		—		$	2,500,000
Net Loss June 14, 2007 - August 31, 2007		—		—		—		—		(611,579	)	$	(611,579	)
Balance — August 31, 2007		1,010,000	$	9,335,128		1,000,000	$	11,256,905	$	(611,579	)	$	19,980,454

The accompanying notes are an integral part of the consolidated financial statements.

LED Holdings, LLC and Subsidiary
Consolidated Statement of Cash Flows
for the Period June 14, 2007 through August 31, 2007

Operating Activities
Net loss	(611,579	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization	178,124
Changes in:
Accounts receivable	359,671
Inventory	(133,474	)
Prepaid expenses and other assets	595
Accounts payable	(34,961	)
Accrued expenses	(764,872	)
Net cash used by operations	(1,006,496	)
Investing activities
Purchase of property and equipment	(88,070	)
Net cash used by investing activities	(88,070	)
Financing activities
Earnings due to minority interest	3,207
Issuance of 250,000 shares of Class A Common	2,500,000
Net cash provided by financing activities	2,503,207
Net increase in cash	1,408,641
Cash at beginning of period	8,925,700
Cash at end of period	10,334,341

The accompanying notes are an integral part of the consolidated financial statements.

LED HOLDINGS, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

LED Holdings, LLC (the “Company” or “LED Holdings”) is a Delaware corporation organized in 2007 for the purpose of acquiring the net assets of LED Effects, Inc. and subsidiary (“LED Effects”) a Nevada Corporation formed in 1993. During the period June 14, 2007 through August 31, 2007, LED Holdings had one subsidiary, LED Effects KK (Japan) (“LED Japan”). All intercompany accounts and transactions have been eliminated in the accompanying consolidated financial statements.

LED Holdings designs, engineer, manufactures and markets custom Light Emitting Diodes (“LED”) lighting and digital lighting controls for customers worldwide. Additionally, the Company is a certified value-added reseller for Phillips Solid State Lighting. The Company’s products are used for applications in architectural, special effects, display, stage, casino and theater lighting as well as components for video walls and slot machines. These systems use our own digital RGB control technology or industry standards such as CMX512.

Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates.

Cash and cash equivalents

All highly liquid investments with original maturities of three months or less at date of purchase are carried at cost, which approximates fair value, and are considered to be cash equivalents.

The Company maintains balances in cash accounts which could exceed federally insured limits or in cash accounts that are not eligible for federal deposit insurance. The Company has not experienced any losses from maintaining balances in such cash accounts. Management believes that the Company does not have significant credit risk related to its cash accounts.

Accounts Receivable

Account receivables are carried at the estimated net realizable value. The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence. The amounts in the allowance for doubtful accounts was $299,952 and $321,713 at August 31, 2007 and June 14, 2007, respectively.

Inventories

Inventories, which consist of raw materials and components and work-in-process are stated at standard costs which approximate the First In, First Out (FIFO) method of pricing inventory. See Note 3.

Property and equipment

Property and equipment are carried at depreciated cost. Depreciation is provided using the straight-line method over the estimated economic lives of the assets, which range from two to five years. Leasehold improvements are amortized over the term of the lease.

Depreciation expense for the period was $4,262.

Intangible Assets

Intangible assets include purchased intangibles of Technology/Patents, Trademarks, Customer Relations and Software. These assets have finite lives and are amortized over those lives which range from 5 years to 20 years. The Company also recorded Goodwill an intangible asset with an indeterminate life. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets are not amortized. Amortization of the assets begins in the first full month following their acquisition. See Note 6.

Amortization expense for the period was $173,862.

Impairment

The Company evaluates the carrying value of its long-lived assets and identifiable intangibles when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The review includes an assessment of industry factors, contract retentions, cash flow projections and other factors the Company believes are relevant.

Sales

The majority of the Company’s sales are based on projects that have a term of less than 3 months. These product sales are recorded when the products are shipped and title passes to customers. Where sales of product are subject to certain customer acceptance terms, revenue from the sale is recognized once these terms have been met.

As of the date of this report, the Company has no reason to believe that an allowance for material product returns is necessary.

Research and Development

The Company expenses all research and development costs as part of its normal on-going daily activities and is not segregated into specific identifiable activities. Research and development includes amounts for design prototypes and modifications made to existing prototypes, as incurred, except for prototypes that have alternative future uses. Costs incurred for building of production tooling and molds are capitalized and usually charged to the customer as part of the project. The Company does not provide for a separate designation for costs incurred in research and development.

Concentration of Credit Risk

A relatively limited number of customers account for a large percentage of the Company’s total sales. For the period June 14, 2007 through August 31, 2007, two customers represented sales of 10% or greater than the total consolidated sales. The sales to these customers accounted for approximately 25% and 18% of the total sales for the period. These customers also accounted for approximately 28% and 19%, respectively, of trade accounts receivable as of August 31, 2007. The Company closely monitors the credit risk associate with its customers

Members’ Equity

The Company records stock issuance expenses as a reduction of the total value of the equity securities issued. At August 31, 2007 and June 14, 2007, the Company had recorded $764,872 as stock, issuance expenses. These costs were related to the issue of Class A Common Stock and have been recorded as a reduction of the value of the Class A Common Stock.

NOTE 2: FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107 — Disclosures About Fair Value of Financial Instruments, requires that the Company disclose estimated fair values of financial instruments.

Cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other current liabilities are carried at book value amounts which approximate fair value due to the short-term maturity of these instruments.

NOTE 3: INVENTORY

At June 14, 2007 and August 31, 2007, respectively, inventory is comprised of the following:

	August 31, 2007			June 13, 2007
Raw Materials	$	802,409		$	839,462
Work in Process		403,909			244,472
Allowance for obsolete items		(80,240	)		(91,330	)
Net Inventory	$	1,126,078		$	992,604

NOTE 4: PROPERTY AND EQUIPMENT

     Property and equipment consists of the following:

	August 31, 2007		June 13, 2007
Equipment and furniture	$	—	$	—
Leasehold improvements		205,479		117,410
Total cost		205,479		117,410
Accumulated depreciation		4,262		0
Net book value	$	201,217	$	117,410

NOTE 5: INCOME TAXES

LED Holdings, LLC is a limited liability corporation (“LLC”). As a result, all income taxes related to the income of the business is passed through to its stockholders. As the income taxes payable or recoverable related to the operations of LED Holdings is passed through to the stockholders, LED Holdings has not recorded a tax provision for either current or deferred taxes.

NOTE 6: INTANGIBLE ASSETS

SFAS No. 142, Goodwill and Other Intangible Assets, specifies that intangible assets that have finite lives are to be amortized over their estimated useful lives. The values of the intangible assets are all based on appraisals conducted by independent third parties. The intangible assets of the Company, the original fair value and the useful lives are detailed below:

	Fair Value		Useful Life
Technology / Patents	$	2,890,000	7.5 years
Software	$	2,000,000	5.0 years
Trademarks	$	360,000	20.0 years
Customer relations	$	730,000	15.0 years
Goodwill	$	1,620,200	Not determinable

Below is the five year amortization table (in thousands) for the intangible assets:

	2008		2009		2010		2011		2012
Technology / Patents	$	385		385		385		385		385
Software		400		400		400		400		200
Trademarks		18		18		18		18		18
Customer relations		49		49		49		49		49
Total	$	852		852		852		852		652

NOTE 7: BUSINESS SEGMENT INFORMATION

The Company has determined that it has two reportable segments organized along geographical areas – LED Effects US and LED Effects Japan (Asia). The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies (Note 1). The LED Effects US segment consists of operations in the United States while the LED Effects Japan (Asia) segment operates primarily in Japan but also has projects in other Southeast Asia countries.

Summary of Net Sales by Geographic Area

	US		Japan		Total
2007	$	1,219,521	$	51,162	$	1,270,683

Summary of Net Assets by Geographic Segment

	US		Japan		Total
August 31,2007	$	18,952,541	$	1,414,294	$	20,366,835
June 14, 2007	$	17,892,813	$	1,382,228	$	19,275,041

NOTE 8: COMMITMENTS AND CONTINGENCIES

Leased office space

The Company occupies manufacturing, warehousing and office space in Rancho Cordova, CA that is leased for 5 years from a third party for approximately $14,500 per month under an agreement that concludes in 2012. The Company also leases space in Japan on a month-to-month basis at a total rate of approximately $650 per month.

Lease Payments
2007	72,785
2008	176,868
2009	182,174
2010	187,638
2011	193,268
2012	114,688

Legal Matters

From time to time, the Company may become involved in lawsuits or other legal proceedings through the ordinary course of operating its business. The Company does not believe these actions will have a material effect on its consolidated financial statements.

Agreements with Contract Manufacturers

The Company currently depends on a small number of contract manufacturers to manufacture its products. If any of these contract manufacturers were to terminate their agreements with the Company or fail to provide the required capacity and quality on a timely basis, the Company may be unable to manufacture and ship products until replacement contract manufacturing services could be obtained.

NOTE 9: SUBSEQUENT EVENTS

On October 4, 2007, LED Holdings entered into an Exchange and Contribution Agreement with Lighting Science Group Corporation (“Lighting Science) pursuant to which LED Holdings transferred and assigned substantially all of its assets including, among other things, $15,000,000, 180 shares of common stock of LED Effects Japan KK, 200 shares of common stock of Kabushiki Kaisha LED Systems, leases, equipment, inventory, accounts receivable, contracts, permits, records, and intellectual property to Lighting Science in exchange for 2,000,000 shares of Lighting Science’s newly designated Series B Preferred Stock, par value $.001 per share and 318,574,665 shares of Lighting Science’s Common Stock, par value $.001 per share and collectively with the Series B Stock, the exchange consideration representing 70% of the fully-diluted capital stock of Lighting Science and 80% of the voting power of all outstanding shares of capital stock of Lighting Science as of October 4, 2007. In conjunction with the transactions contemplated by the Exchange and Contribution Agreement, the Board of Directors of Lighting Science authorized a 1 for 20 reverse stock split, which will be submitted to Lighting Science’s stockholders for approval. Because LED Holdings holds approximately 80% of voting power of Lighting Science, it is anticipated that the reverse stock split will be approved.