e10qsb

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB


þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007


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

For the transition period from to

Commission file number 0-20354

Lighting Science Group Corporation

(Exact name of small business issuer as specified in its charter)


Delaware		23-2596710

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

2100 McKinney Ave., Suite 1515, Dallas, Texas 75201

(Address of principal executive offices)

214-382-3630

(Issuer’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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 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.

þ YES o NO

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.

o YES þ NO

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s class of common equity, as of the latest practical date: As of November 1, 2007, there were 434,486,291 shares of Common Stock issued and outstanding, 515,653 shares of 6% Convertible Preferred Stock issued and outstanding, and 2,000,000 shares of Series B Preferred Stock issued and outstanding.

Transitional Small Business Disclosure Format (Check one): o YES þ NO

LIGHTING SCIENCE GROUP CORPORATION
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(UNAUDITED)


	September 30, 2007
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,234,871
Accounts receivable	$	41,861
Inventory, net of allowances (Note 5)	$	2,137,581
Prepaid expenses and other current assets (Note 11)	$	939,841

Total current assets		4,354,154


PROPERTY AND EQUIPMENT, net (Note 6)	$	587,409


OTHER ASSETS
Reorganized value in excess of amounts allocable to identifiable assets (Note 3)	$	2,793,224
Intellectual property, net (Notes 2 and 6)	$	1,006,334
Prepaid expenses — long-term portion (Note 11)	$	1,214,588
Goodwill (Note 2)	$	154,097

Total other assets		5,168,243


TOTAL ASSETS	$	10,109,806


LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable	$	736,474
Accrued expenses (Note 11)	$	3,086,067
Accrued dividends on 6% Convertible Preferred Stock	$	19,642
Note payable — related party — current portion (Note 9)	$	75,000

Total current liabilities		3,917,183


OTHER LIABILITIES
Note payable — related party — long-term portion (Note 9)	$	12,500
Liability under derivative contracts (Note 10)	$	1,903,107

Total other liabilities		1,915,607


TOTAL LIABILITIES		5,832,790


COMMITMENTS AND CONTINGENCIES (Note 12)

6% CONVERTIBLE PREFERRED STOCK, $.001 par value, 2,656,250 shares authorized, 515,653 shares issued and outstanding, liquidation value of $1,650,090 (Note 10)	$	789,351


STOCKHOLDERS’ EQUITY

Common stock, $.001 par value, 495,000,000 shares authorized, 115,567,251 shares issued and outstanding	$	115,567
Additional paid-in-capital	$	31,933,623
Accumulated deficit	$	(28,561,525	)

TOTAL STOCKHOLDERS’ EQUITY		3,487,665

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	10,109,806

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

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LIGHTING SCIENCE GROUP CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	September 30, 2007			September 30, 2006			September 30, 2007			September 30, 2006
Revenue	$	451,678		$	125,522		$	845,307		$	262,516
Cost of goods sold		(324,294	)		(107,094	)		(650,513	)		(217,798	)


Gross margin		127,384			18,428			194,794			44,718


Operating expenses:
Selling, general and administrative		1,375,468			344,921			2,452,318			1,428,551
Compensation and related expenses		1,442,600			624,139			2,439,008			2,128,637
Professional fees		559,785			96,585			1,244,694			422,688
Directors fees		70,000			260,530			179,171			385,530
Depreciation and amortization		53,880			127,291			280,382			377,375


Total operating expenses		3,501,733			1,453,466			6,595,573			4,742,781


Operating loss		(3,374,349	)		(1,435,038	)		(6,400,779	)		(4,698,063	)


Other income (expense)
Interest income		14,888			901			17,404			14,982
Interest expense		(116,208	)		(172,451	)		(942,702	)		(175,361	)
Other, net (Note 10)		(1,281,823	)		314,240			(820,409	)		3,153,998

Total other income (expense)		(1,383,143	)		142,690			(1,745,707	)		2,993,619


Net loss		(4,757,492	)		(1,292,348	)		(8,146,486	)		(1,704,444	)


Dividends on 6% Convertible Preferred Stock and accretion of preferred stock redemption value (Note 10)		(873,143	)		432,091			(1,146,613	)		1,217,413


Net loss attributable to common stock	$	(3,884,349	)	$	(1,724,439	)	$	(6,999,873	)	$	(2,921,857	)


Basic net loss per weighted average common share	$	(0.04	)	$	(0.03	)	$	(0.08	)	$	(0.05	)


Weighted average number of common shares outstanding		106,749,254			58,191,254			85,116,237			56,283,577

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

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LIGHTING SCIENCE GROUP CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Nine Months			Nine Months
	Ended September			Ended September
	30, 2007			30, 2006
OPERATING ACTIVITIES
Net loss	$	(6,999,873	)	$	(2,921,857	)
Adjustments to reconcile net loss to net cash used by operating activities:
Expenses paid by issuance of common stock		639,155			1,211,708
Expenses paid by issuance of common share warrants		260,541			283,516
Non-cash stock option compensation expense		323,799			680,110
Accretion of 6% convertible preferred stock redemption value		(1,383,830	)		912,283
Fair value adjustment to liabilities under derivative contracts		520,814			(3,154,299	)
6% Convertible Preferred Stock dividends settled by issuance of common stock		242,774			203,091
Loss on disposal of assets		4,095			—
Depreciation and amortization		280,382			377,374
Changes in:
Accounts receivable		68,356			(9,069	)
Prepaid expenses		(1,019,841	)		(985,430	)
Inventory		(1,704,968	)		129,594
Accounts payable		392,194			57,473
Accrued expenses and other liabilities		2,780,021			143,420

Net cash used by operating activities		(5,596,380	)		(3,072,086	)


INVESTING ACTIVITIES
Purchase of property and equipment		(322,066	)		(116,931	)

Net cash used by investing activities		(322,066	)		(116,931	)


FINANCING ACTIVITIES
Loans from directors and officers		—			30,000
Receipt of other payments from stockholders		10,977			—
Proceeds from draws on Line of Credit		(2,044,948	)		1,253,804
Notes payable		(56,250	)		—
Proceeds from exercise of common stock warrants		5,579,446			7,031
Proceeds from private placement		3,578,012			—

Net cash provided by financing activities		7,067,237			1,290,835


Net increase (decrease) in cash		1,148,791			(1,898,182	)

Cash at beginning of period		86,080			1,984,477

Cash at end of period	$	1,234,871		$	86,295


Interest paid	$	97,784		$	19,974


6% Convertible Preferred Stock dividends paid and deducted in arriving at Net Loss	$	—		$	108,227


SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

Conversion of 6% Convertible Preferred Stock to Common Stock	$	4,730,505		$	122,871

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

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LIGHTING SCIENCE GROUP CORPORATION
AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

Nature of Business

Lighting Science Group Corporation (the “Company”) is a Delaware corporation organized in June 1988. The Company’s wholly owned subsidiary during the periods was LSGC LLC. Prior to February 1, 2007, the Company owned 80% of the common equity of LSGC LLC and on February 1, 2007 it acquired a 100% interest in the joint venture for a nominal purchase price. LSGC LLC had no significant operations during the periods covered by these financial statements. All intercompany accounts and transactions have been eliminated in the accompanying consolidated financial statements.

With its acquisition of certain intellectual property rights on June 1, 2004 (see Note 2); the Company entered the field of solid state lighting. The Company designs, assembles and markets products for the commercial, industrial and consumer lighting markets. The Company has formed strategic alliances with a major parking facilities operator and a financial advisory services firm to target municipalities, public utility corporations, universities, large mall owners, parking lot owners, and other organizations as customers and partners for the Company’s products.

On or about August 20, 2002, the Company filed a voluntary petition seeking debtor-in-possession status for relief under Chapter 11 of the United States Bankruptcy Code. During the summer of 2003, the Company filed a Disclosure Statement and Plan of Reorganization (collectively, the “Plan”) that was confirmed by the U.S. Bankruptcy Court for the Northern District of Texas — Ft. Worth Division (the “Court”) on September 16, 2003 with an effective date of September 26, 2003. Under the terms of the Plan, a related party that owned the Series A Preferred Stock, agreed to waive its rights, including its voting and conversion rights, and the creditors of the Company received an aggregate of approximately 51% of the common stock of the restructured entity in exchange for notes, accounts payable, and other forms of debt held at the time of the filing of the petition. This feature of the Plan – the exchange of debt for greater than 50% of the equity in the restructured entity – qualified the Company to utilize the reporting guidelines of the “Fresh Start” accounting rules contained in Statement of Position (“SOP”) 90-7 — Financial Reporting by Entities in Reorganization Under the Bankruptcy Code.

During the year ended December 31, 2006, the Company was no longer considered to be in the development stage. Since September 23, 2003, it has reported as a development stage company.

Summary of Significant Accounting Policies

Since the Chapter 11 bankruptcy filing, the Company has applied the provisions in SOP 90-7 which does not change the application of generally accepted accounting principles in the preparation of financial statements. However, it does require that the financial statements for periods including and subsequent to filing the Chapter 11 petition distinguish between transactions and events that are directly associated with the reorganization from the ongoing operations of the business.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the

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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 of $100,000 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.

Inventories

Inventories, which consist of raw materials and components, work-in-process and finished lighting products, are stated at the lower of cost or market with cost being determined on a first-in, first-out basis. Deposits paid to contract manufacturers and raw material and components suppliers related to future purchases are also classified in inventory in the consolidated balance sheet.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist primarily of employee benefits and prepaid insurance. Prepaid expenses are amortized over the period during which the service is provided or the length of the specific contract.

Property and equipment

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

Depreciation expense was $38,544 and $23,657 for the three-month periods ended September 30, 2007 and 2006 and $87,294 and $53,836 for the nine-month periods ended September 30, 2007 and 2006, respectively.

Other assets

Other assets consist of intangible assets and an intangible asset arising upon the Company’s emergence from bankruptcy.

Intangible assets

The acquisition of the stock of Lighting Science, Inc. on June 1, 2004 necessitated an allocation of the purchase price among the assets of the acquired company. An independent valuation firm was engaged by the Company to perform this allocation (Note 2). At the date of acquisition, Lighting Science, Inc. had recorded no tangible assets.

Intellectual property, which includes, but is not limited to, provisional patents, copyrights, intellectual assets and proprietary know-how, was recorded effective June 1, 2004 as a part of the allocation of the purchase price of Lighting Science, Inc. The intellectual property is being amortized over twenty years beginning June 1, 2004.

Amortization expense related to the acquired intellectual property was $15,050 for each of the three-month periods ended September 30, 2007 and 2006 and was $45,150 for each of the nine-month periods ended September 30, 2007 and 2006.

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The proprietary rights agreement between the Company and Fredric Maxik (the Company’s chief technology officer and the developer of the technology acquired by the Company), ensures that all intellectual property related to LED lighting created and/or developed by Maxik during his employment and for some period thereafter shall be assigned to the Company as well as precluding Maxik from competing with or providing services for entities in competition with the Company or that have technology similar to the Company for a period of time following his employment termination with the Company. This Agreement was recorded effective June 1, 2004, as part of the purchase price of Lighting Science, Inc. This asset is being amortized over three years, which is the period covered by the agreement.

Amortization expense related to the proprietary rights agreement was $0 and $88,583 during the three-month periods ended September 30, 2007 and 2006 and was $147,938 and $265,749 for the nine-month periods ended September 30, 2007 and 2006. At September 30, 2007, the intangible asset related to the proprietary rights agreement was fully amortized.

All other purchased intangible assets are amortized over a period between three and five years. The Company began amortizing these intangible assets during the three-month period ended June 30, 2007 and the total amortization expense during the three-month period ended September 30, 2007 was not significant.

Reorganization Value

As a result of the terms of the Plan, $2,793,224 is reflected as reorganization value in excess of amounts allocable to identifiable assets on the consolidated balance sheet. The circumstances giving rise to this presentation were created by a provision in the Plan that preserved the secured claim of a related party that agreed to the reaffirmation of its debt. As a result of this reaffirmation, which is part of the confirmation of the Plan, an offsetting entry to the reorganization value was recorded. In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142 — Goodwill and Other Intangible Assets, the reorganization value is treated the same as goodwill and is not amortized.

Impairment

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

Based upon its internal review as of September 30, 2007, the Company has determined that no impairment to the Company’s intangible assets has occurred.

Financial Instruments

The Company has issued certain preferred stock and warrants, the terms of which qualify these financial instruments under SFAS 133 — Accounting for Derivative Instruments and Hedging Activities, as derivatives. Such derivatives have not been designated as hedging instruments. Accordingly, all derivatives are recorded at fair value on the consolidated balance sheet and changes in the fair value of such derivatives are recorded in operations each period and are reported in Other Income (Expense).

The Company issued warrants for the purchase of common stock as compensation for providing bridge loans to the Company in 2005. In December 2006, the Company offered to adjust the terms of the warrants as described in Note 9. Accordingly, the Company has recorded these warrants at their fair value on the consolidated balance sheet and changes in the fair value of such warrants are recorded in operations each period and are reported in Other Income (Expense), in accordance with SFAS 123 (R).

Revenue

Product sales are recorded when the products are shipped and title passes to customers. Where sales of product are subject to certain customer acceptance terms, revenue from the sale is recognized once these

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terms have been met. Amounts received as deposits against future deliveries of products are recorded as deferred revenue on the consolidated balance sheet until such product is delivered and title passes to the customer.

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

Revenue is not recognized on the shipment of products to customers under shared savings programs. Under shared savings programs, the Company recognizes revenue over the useful life of the lights based on the agreed sharing of electricity savings. Lights shipped to customers under shared savings agreements are classified as property and equipment on the Company’s consolidated balance sheet and are depreciated over the estimated useful life of the lights.

Research and Development

The Company expenses all research and development costs, including amounts for design prototypes and modifications made to existing prototypes, as incurred, except for prototypes that have alternative future uses. All costs incurred for building of production tooling and molds are capitalized and amortized over the estimated useful life of the tooling set or molds. The Company has recorded research and development costs of $276,095 and $209,075 for the three-month periods ended September 30, 2007 and 2006, and $698,104 and $938,786 in the nine-month periods ended September 30 2007 and 2006,respectively, in selling, general and administrative expenses in the consolidated statements of operations.

Stock Based Compensation

On July 6, 2005, the Board of Directors of the Company adopted the Lighting Science Group Corporation 2005 Equity Based Incentive Compensation Plan (the “2005 Plan”) and a proposal to implement this plan was approved at the annual shareholders’ meeting in August 2005. Further amendments to the 2005 Plan were approved at the annual shareholders meeting in December 2006. Effective with adoption of the plan, the Company adopted the fair value method of accounting for employee stock compensation cost pursuant to SFAS No. 123 (R) — Share-Based Payment. Accordingly, compensation cost is based on the fair value of options or other equity instruments measured at the date of grant and compensation cost is charged to operations over the expected service period.

Income taxes

The Company employs the asset and liability method in accounting for income taxes pursuant to SFAS No. 109 — Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities and net operating loss carryforwards, and are measured using enacted tax rates and laws that are expected to be in effect when the differences are reversed.

Earnings per share

Basic earnings per share are computed based upon the weighted average number of common shares outstanding during the periods. Diluted earnings per share are based upon the weighted average number of common shares outstanding during the periods plus the number of incremental shares of common stock contingently issuable upon the conversion of the preferred stock and the exercise of warrants and stock options. No effect has been given to the assumed exercise of warrants or stock options because the effect would be anti-dilutive. See Notes 10 and 11.

Comparative Consolidated Financial Statements

Certain amounts in the comparative consolidated financial statements have been reclassified from financial statements previously presented to conform to the presentation of the 2007 consolidated financial statements.

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In management’s opinion, the accompanying consolidated interim financial statements contain all material adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods.

NOTE 2: ACQUISITION OF LIGHTING SCIENCE, INC.

On June 1, 2004, the Company acquired 100% of the outstanding common stock of Lighting Science, Inc., a Delaware corporation based in Las Vegas, Nevada, which owned certain intellectual property related to the design and development of an ODL light bulb. The Company acquired all of the issued and outstanding capital stock of Lighting Science, Inc. from Phibian S Trust, Edward I. Lanier, and John Collingwood in exchange for 4,796,276 shares of the Company’s common stock and the Company’s obligation to issue up to an additional 4,499,965 shares of the Company’s common stock upon the satisfaction of certain conditions under the stock purchase agreement. Those conditions were satisfied during the third quarter of 2004, and the additional shares of common stock were issued on or about September 3, 2004.

The Company accounted for the acquisition as a purchase using the accounting standards established by SFAS No. 141 — Business Combinations, and No. 142 — Goodwill and Other Intangible Assets.

The estimated fair values, as determined by an independent valuation firm, of assets acquired and liabilities assumed at June 1, 2004 are set out in the schedule below:


Cash	$	10,000
Intellectual property		1,204,000
Proprietary rights agreement		1,063,000
Goodwill		154,097

Total assets acquired	$	2,431,097
Note payable assumed		(200,000	)

Net assets acquired	$	2,231,097

NOTE 3: FRESH-START ACCOUNTING

The Court confirmed the Company’s Plan (Note 1) on September 16, 2003, and the Plan became effective as of September 26, 2003. It was determined that the Company’s reorganization value, computed immediately before the effective date, was $2,793,502, which consisted of the following:


Cash	$	278
Reorganized value in excess of amounts allocable to identifiable assets		2,793,224
Deferred tax assets comprised of $57,000,000 of net operating loss carry-forwards		19,400,000
Valuation allowance against above deferred tax assets		(19,400,000	)

Reorganization value	$	2,793,502

The Company adopted fresh-start reporting because holders of existing voting shares immediately before filing and confirmation of the Plan retained less than 50% of the voting shares of the emerging entity, and its reorganization value was less than its post-petition liabilities and allowed claims.

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NOTE 4: FAIR VALUE OF FINANCIAL INSTRUMENTS

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

Cash and cash equivalents, accounts receivable, notes and accounts payable, amounts due under the line of credit, accrued expenses and other current liabilities are carried at book value amounts which approximate fair value due to the short-term maturity of these instruments. As discussed in Note 10, the embedded conversion feature associated with the 6% Convertible Preferred Stock and the warrants issued to the 6% Convertible Preferred Stock purchasers have been determined to be derivative instruments and are recorded at market. As discussed in Note 9, the Company has applied variable accounting to the warrants issued to certain directors and officers. These warrants have been recorded at fair value.

NOTE 5: INVENTORY

At September 30, 2007, inventory is comprised of the following:


	September 30,
	2007
Deposits paid to contract manufacturers	$	360,409
Raw materials and components		1,643,038
Finished goods		134,134

	$	2,137,581

At September 30, 2007 the Company provided an allowance for the decline in market value of certain raw materials and components of approximately $295,000, which is netted against the balance of raw materials and components in the table above.

NOTE 6: PROPERTY, EQUIPMENT AND OTHER ASSETS

Property and equipment consists of the following:


	September 30,
	2007
Leasehold improvements	$	14,225
Office furniture, fixtures and telephone equipment		151,850
Computer equipment		154,234
Test equipment		96,489
Production equipment		159,324
Tooling and molds		248,368

Total property and equipment		824,490
Accumulated depreciation		(237,081	)

	$	587,409

At September 30, 2007, the Company had no shared savings program agreements under which lights or fixtures have been recorded as property and equipment on the consolidated balance sheet.

Intellectual property consists of the following:


	September 30,
	2007
Intellectual property	$	1,207,300
Accumulated amortization		(200,966	)

	$	1,006,334

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The estimated amortization expense for the next five years ended December 31 for the intangible assets listed above is as follows:


	Intellectual
Year ended	Property
2007	$	61,300
2008	$	61,300
2009	$	61,300
2010	$	61,300
2010	$	61,300

NOTE 7: LINE OF CREDIT AND GUARANTEES

In June 2006, the Company entered into agreements with one of its banks to obtain a $2,000,000 line of credit. The Company increased the line of credit to $2,500,000 between January and March 2007. Amounts due under the line of credit are guaranteed by a group of directors and shareholders of the Company (the “Guarantors”). The amount of the line of credit available for use by the Company at any point in time will be equal to the aggregate value of guarantees that have been negotiated between the bank and the guaranteeing directors and shareholders at that time. At September 30, 2007, no amount was drawn against the line of credit.

The line of credit has a term of one year and provides for monthly payments of interest only at prime plus 1%. Subsequent to the expiration of the initial term of the line of credit, the Company had extended the term of the line of credit through September 30, 2007. The Company also entered into a Security and Pledge Agreement with the bank on June 29, 2006 which gives the bank a general security interest in all of the Company’s personal property assets. The Company is currently negotiating a renewal of the line of credit.

As consideration for providing guarantees and enabling the Company to obtain the line of credit, the Company issued common stock and warrants for the purchase of common stock of the Company to the Guarantors. The Company issued 3,125,000 shares of common stock and 2,525,000 warrants for the purchase of shares of common stock to the Guarantors. The warrants have an exercise price of $0.30 per common share and have a five year term. The expiration date of the warrants is shown in Note 11. The fair value of the warrants issued to the Guarantors was $366,296. The value of the common stock issued to the Guarantors is $937,500. The fair value of the common stock and the warrants issued to the Guarantors has been recorded as a prepaid expense and will be amortized over the term of the line of credit. During the three-month periods ended September 30, 2007 and 2006, $85,230 and $105,392 was recognized as an expense in the consolidated statements of operations, respectively. During the nine-month periods ended September 30, 2007 and 2006, $854,396 and $105,392 was recognized in the consolidated statements of operations, respectively.

In October 2007, the Company terminated the line of credit agreement with the bank. The bank subsequently released all guarantees that it had received from the Guarantors.

NOTE 8: INCOME TAXES

The Company accounts for corporate income taxes in accordance with SFAS No. 109 — Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are recognized for the estimated future

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tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, future tax benefits, such as those from net operating loss carry forwards, are recognized to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as set forth below in the period that includes the enactment date.

Other than the deferred tax asset relating to the Company’s net operating losses, which totaled approximately $26,300,000 at September 30, 2007, and which has been fully offset by a valuation allowance, the Company does not have any other significant deferred tax assets or liabilities. The Company has recorded a change in the valuation allowance of approximately $400,000 and $648,000 for the three-month periods ended September 30, 2007 and 2006 and $1,430,000 and $1,560,000 for the nine-month periods ended September 30, 2007 and 2006, respectively. The net operating loss carryforwards are available to offset future taxable income of the Company. These net operating losses expire from 2008 through 2020. The cumulative change in the fair value under derivative contracts of approximately $(2,553,140) (Note 10) has been treated as a permanent difference to calculate the total net operating losses available for carryforward to offset future periods’ taxable income.

Benefits realized in future periods from the application of net operating losses incurred prior to September 26, 2003 of $19,400,000 will first reduce reorganization value in excess of amounts allocable to identifiable assets until exhausted and, thereafter, will be credited to additional paid in capital. Any benefits realized in future periods from net operating loss carryforwards generated after September 26, 2003 ($6,900,000 at September 30, 2007) will be recorded as a tax benefit in the consolidated statements of operations.

NOTE 9: NOTES PAYABLE – RELATED PARTIES

Note to Phibian S Trust

Upon the acquisition of Lighting Science, Inc. the Company owed a balance of $200,000 to Phibian S Trust of which the remaining balance of $100,000 is recorded as follows:


	September 30,
	2007
Notes payable – related party – current portion	$	75,000
Notes payable – related party – long-term portion		12,500

	$	87,500

The Phibian S Trust is a trust for the benefit of the children of Fredric Maxik, the chief technology officer of the Company. Currently, Mr. Maxik exercises no control over the trust, and has informed us that he disclaims all beneficial ownership in the trust. The note was issued by Lighting Science, Inc. to the trust in exchange for the assignment of certain provisional patents and intellectual property that formed the basis for the acquisition of Lighting Science, Inc. by the Company. The Company is obligated to pay the principal by making 24 equal monthly installments of $6,250 beginning November 30, 2006. The note bears interest at 10% and interest payments will be made on the note semi-annually, on June 15 and December 15.

In October 2007, the Company paid the remaining balance of the note, including any accrued interest thereon.

Loans from Directors and Officers

During the first and second quarters of 2005, members of the board of directors and certain officers of the Company (the “Lender” or “Lenders”) agreed to loan the Company an aggregate of $476,000 on a short-term basis, of which $220,000 was received as of March 31, 2005 and the remaining $256,000 was received in the quarter ended June 30, 2005. Under the terms of the notes issued by the Company to each Lender, the Company: (i) paid interest to each Lender at a rate of 9.50% per annum; (ii) paid a 10% commitment fee to each Lender and (iii) issued warrants to the Lenders for a total of 476,000 shares of

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common stock to be purchased at an exercise price of $1.50 per share. The principal and interest on the notes were due on May 30, 2005. A total of $300,086 of such loans, including accrued interest and commitment fees of $24,086, were converted to 6% Convertible Preferred Stock in the private placement of preferred stock (Note 10) and the remaining $200,000 of such loans and accrued interest and commitment fees thereon were repaid from proceeds of the May 2005 private placement.

In December 2006, the Company offered to adjust the price of the warrants issued to the Lenders to $0.30 per share if the Lenders agreed to exercise the warrants currently. If the warrants were not exercised currently, the exercise price would remain $1.50 per share. At September 30, 2007, 316,000 warrants had been exercised. In accordance with SFAS 123 (R), the Company recorded the then fair value of the unexercised warrants on the consolidated balance sheet with the change in such fair value being recorded in Other Income (Expense) in the Consolidated Statements of Operations.

NOTE 10: PREFERRED STOCK

Private Placement with Institutional and Accredited Investors

On May 12, 2005, the Company closed on a private placement with a group of institutional and accredited investors, including certain officers and directors of the Company, for the sale of 2,260,966 shares of the Company’s 6% Convertible Preferred Stock (the “6% Convertible Preferred Stock”) along with warrants to purchase additional shares of the Company’s common stock. The 6% Convertible Preferred Stock was priced at $3.20 per share, and the Company received proceeds of $7,235,086 of which $276,000 represented conversion of officer and board member loans and $24,086 represented accrued interest and commitment fees thereon. Initially, each share of 6% Convertible Preferred Stock is convertible at any time at the election of the holder at $0.80 per share into four shares of common stock, subject to full ratchet anti-dilution adjustments.

During the three-month period ended September 30, 2007, 737,500 shares of 6% Convertible Preferred Stock were converted by the holders to common stock of the Company. At September 30, 2007, 515,653 shares of 6% Convertible Preferred Stock remained outstanding.

The 6% Convertible Preferred Stock ranks ahead of the common stock of the Company upon liquidation of the Company. The 6% Convertible Preferred Stock also ranks ahead of the common stock with respect to the payment of dividends. The dividend rate on the 6% Convertible Preferred Stock is $0.192 per share per annum (6% effective yield) and such dividends are fully cumulative, accruing, without interest, from the date of original issuance of the 6% Convertible Preferred Stock through the date of redemption or conversion thereof. The Company must redeem any outstanding 6% Convertible Preferred Stock on May 10, 2010.

Initially, the warrants were exercisable at the election of the holder into a total of 6,782,889 shares of common stock at an initial exercise price of $0.96 per share (also subject to adjustment pursuant to anti-dilution provisions) on either a cash or cashless exercise basis. The warrants expire five years from the date of issuance.

On June 6, 2006, the Company agreed to amend the terms of the then outstanding 6% Convertible Preferred Stock and the warrants issued to purchasers of the 6% Convertible Preferred Stock . The Company agreed to adjust the conversion price of the 6% Convertible Preferred Stock then outstanding to $0.50 per common share compared to the original conversion price of $0.80 per common share. This adjustment resulted in an increase in the total number of shares of common stock that may be required to be issued by the Company in the future to holders of the 6% Convertible Preferred Stock from 8,262,612 shares to 13,220,180 shares. The Company also agreed that, at December 31, 2006, it would further adjust the conversion price of the then outstanding 6% Convertible Preferred Stock to $0.30 per common share from the current exercise price of $0.50 if the then current market price of the Company’s common stock (as defined in the agreement) was less than $0.50 per common share. As the current market price did not exceed $0.50 per share at December 31, 2006, the conversion price of the outstanding 6% Convertible Preferred Stock was

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further adjusted to $0.30 per common share at December 31, 2006, the total number of shares of common stock that may be required to be issued by the Company also increased from 13,220,180 common shares to 22,033,627. The Company has filed a registration statement with the Securities and Exchange Commission covering the 22,033,627 shares that may be required to be issued. The registration statement was declared effective on July 14, 2006.

On June 6, 2006, the Company also agreed to amend the terms of the warrants issued to the purchasers of the 6% Convertible Preferred Stock. The Company agreed to immediately adjust the exercise price of the 6,782,889 outstanding warrants from $0.96 per common share to $0.30 per common share. The adjustment of the terms of these warrants does not change the total number of common shares that the Company may be required to issue in the future to holders of the warrants. Subsequent to the adjustment of the exercise price of the warrants, a holder of warrants exercised its warrants to purchase 23,438 common shares. No warrants were exercised in the three-month period ended September 30, 2007.

Pursuant to SFAS 133 and EITF No. 00-19, the embedded conversion feature associated with the 6% Convertible Preferred Stock and the warrants issued to the 6% Convertible Preferred Stock purchasers have been determined to be derivative instruments. Accordingly, the fair value of these derivative instruments has been recorded as a liability on the consolidated balance sheet with the corresponding amount recorded as a discount to the 6% Convertible Preferred Stock. Such discount is being accreted from the date of issuance to the redemption date of the 6% Convertible Preferred Stock and totaled $(925,947) and $333,222 for the three-month periods ended September 30, 2007 and 2006 and $(1,383,830) and $912,283 for the nine-month periods ended September 30, 2007 and 2006, respectively. The accretion of the discount is negative in each of the three-month and nine-month periods ended September 30, 2007 due to the large number of shares of 6% Convertible Preferred stock that were converted by the holders during those periods.

The following table presents the change in the fair value of the derivatives for the three- and nine-month periods ended September 30, 2007 and 2006:


	Three-Month			Three-Month			Nine-Month			Nine-Month
	Period Ended			Period Ended			Period Ended			Period Ended
	September 30,			September 30,			September 30,			September 30,
	2007			2006			2007			2006
Fair value of liability for derivative contracts, beginning of period	$	3,174,282		$	364,507		$	6,290,191		$	3,327,437
Adjustment to fair value of current derivative contacts during the period, recorded in Other Income (Expense) during the period		1,320,027			(314,240	)		520,814			(3,154,299	)
Add fair value of new derivative contracts accounted for using variable accounting during the period		—			—			145,205			—
Less allocation of fair value of derivative liability to additional paid-in capital on conversion or exercise of derivative instruments		(2,591,202	)		—			(5,053,103	)		(122,871	)

Fair value of liability for derivative contracts, end of period	$	1,903,107		$	50,267		$	1,903,107		$	50,267

The Company computes fair value of these derivatives using the Black-Scholes valuation model. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. The Company’s derivative instruments have characteristics significantly different from traded options, and the input assumptions used in the model can materially affect the fair value estimate. The assumptions used in this model to estimate

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fair value of each derivative instrument and the resulting value of the derivative liability as of September 30, 2007 are as follows:


				Embedded conversion feature associated with the
	Warrants			6% Convertible Preferred Stock
Exercise/Conversion Price	$	0.30		$	0.30
Fair Value of the Company’s Common Stock	$	0.45		$	0.45
Expected life in years		2.6			2.6
Expected volatility		75	%		75	%
Expected dividend yield		0.0	%		0.0	%
Risk free rate		4.58	%		4.58	%
Calculated fair value per share	$	0.27		$	0.27

The 6% Convertible Preferred Stock is Mandatorily Redeemable Preferred Stock as defined by SFAS 150 — Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, and would also qualify as “Preferred Stocks Subject to Mandatory Redemption Requirements or Whose Redemption is Outside the Control of the Issuer” as defined by Accounting Series Release (“ASR”) No. 268 — Redeemable Preferred Stocks. The conversion feature associated with the 6% Convertible Preferred Stock is not a nonsubstantive or minimal feature and therefore the provisions of ASR No. 268 have been applied in classifying the 6% Convertible Preferred Stock separate from Stockholders’ Equity (Deficit).

The Company issued warrants to purchase a total of 639,844 shares of the Company’s common stock at an initial exercise price of $1.50 per share (also subject to adjustment pursuant to anti-dilution provisions) to the firms which acted as the placement agent and as financial advisor for this transaction. The warrants expire five years from the date of issuance. The fair value of these warrants totaled $290,000 and such amount was charged to other income/ (expense) and credited to Additional Paid-In Capital during the three months ended June 30, 2005. In December 2006, 63,984 warrants were exercised by the holder after the Company offered to adjust the exercise price of the warrants to $0.30 per share. In June 2007, 575,860 warrants were exercised by the holder after the Company offered to adjust the exercise price of the warrants to $0.35 per share. None of the warrants issued to the placement agent and financial advisor were outstanding at September 30, 2007.

NOTE 11: STOCKHOLDERS’ EQUITY

March 2007 Private Placement

On March 9, 2007, the Company completed a private placement with a group of accredited investors for net proceeds of $3.6 million. The Company issued 13.3 million shares of common stock at a price of $0.30 per share. The Company also issued 10.0 million A Warrants for the purchase of common stock to the investor group. The warrants have an exercise price of $0.35 per share and have a term of five years. The Company also issued 13.3 million B Warrants for the purchase of additional shares of common stock. Each B Warrant is comprised of one share of common stock and 0.75 warrants for the purchase of common stock. The exercise price of each B Warrant is $0.30 per unit. These B Warrants can be exercised by the holder at any time up to the 90^th trading day after the effective date of a registration statement that was filed by the Company to register the common stock issued to the investors on March 9, 2007. The Registration statement was declared effective by the SEC on June 28, 2007. Therefore, all B Warrants must be exercised by the holder on or before November 5, 2007. Any B Warrants not exercised by November 5, 2007 will expire.

During the three-month period ended September 30, 2007, the holders of 11,369,666 B Warrants exercised such warrants. During the three-month period ended September 30, 2007, the holders of 5,399,899 A Warrants exercised such warrants. At September 30, 2007, 1,797,000 B Warrants and 13,252,249 A Warrants were outstanding.

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Equity Based Compensation Plan

Effective September 1, 2005, the Company implemented the Lighting Science Group Corporation 2005 Equity Based Incentive Compensation Plan. Awards granted under the 2005 Plan may include incentive stock options, which are qualified under Section 422 of the Internal Revenue Code (the “Code”), stock options other than incentive stock options, which are not qualified under Section 422 of the Code, stock appreciation rights, restricted stock, phantom stock, bonus stock and awards in lieu of obligations, dividend equivalents and other stock-based awards. Awards may be granted to employees, members of the Board of Directors, and consultants. The 2005 Plan is administered by the Compensation Committee of the Board of Directors. Vesting periods and terms for awards are determined by the plan administrator. The exercise price of each stock option or stock appreciation right is equal to or greater than the market price of the Company’s stock on the date of grant and no stock option or stock appreciation right granted shall have a term in excess of ten years.

The Company issued 4,555,000 and 730,000 Incentive Stock Options (“ISO’s”) to employees and directors during the years ended December 31, 2006 and 2005, respectively, and 50,000 Non-Qualified Stock Options to a consultant under the 2005 Plan during the year ended December 31, 2005. The Company issued 570,000 ISO’s to employees in the first quarter of 2007. and an additional 1,160,000 ISO’s to employees and directors in the third quarter of 2007. A portion of such options vest on the date of issuance, with the balance vesting over a period of two to three years.

The fair value of the options is determined by using a Black-Scholes pricing model that includes the following variables: 1) exercise price of the instrument, 2) fair market value of the underlying stock on date of grant, 3) expected life, 4) estimated volatility, 5) expected dividend yield and 6) the risk-free interest rate. The Company utilized the following assumptions in estimating the fair value of the options granted during 2007, 2006 and 2005:


Exercise price		$0.87 - $0.30
Fair market value of the underlying stock on date of grant		$0.87 - $0.28
Option term		3.0 years - 7.0 years
Estimated volatility		75%
Expected dividend yield		0.0%
Risk free rate		5.25% - 3.75%

Calculated fair value per share		$0.41 - $0.15

As noted previously, the Black-Scholes model was not developed for use in valuing employee stock options, but was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because changes in the subjective assumptions can materially affect the fair value estimate, and because employee stock options have characteristics significantly different from those of traded options, the use of the Black-Scholes option pricing model may not provide a reliable estimate of the fair value of employee stock options. For purposes of this calculation, the Company has utilized the simplified method specified in Staff Accounting Bulletin No. 107 for estimating the expected life in years of the options. Under this approach, the expected term is presumed to be the mid-point between the vesting date and the end of the contractual term. The Company has estimated volatility of its stock based on the historical volatility of the Company’s common stock. The Company has estimated the future volatility of its common stock based on the actual volatility of its common stock over the past year.

The fair value of the options issued during the three-month periods ended September 30, 2007 and 2006 were $329,800 and $0. The fair value of the options issued during the nine-month periods ended September 30, 2007 and 2006 totaled $414,053 and $897,870, respectively. The amount recorded in operating expense in the consolidated statements of operations based on service conditions and vesting were $170,839 and $118,310 for the three-month periods ended September 30, 2007 and 2006 and $323,799 and $680,110 for the nine-month periods ended September 30, 2007 and 2006, respectively.

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A summary of the option awards under the Company’s 2005 Plan as of September 30, 2007 and changes during the three-month period then ended is presented below:


				Weighted
				Average
				Exercise
Stock Options	Shares			Price
Outstanding and exercisable, beginning of period		4,206,666		$	0.36
Granted		1,160,000		$	0.49
Exercised		—			—
Forfeited		(13,333	)		($0.37	)


Outstanding and exercisable, end of period		5,353,333		$	0.39


Options vested at end of period		3,483,333		$	0.37


Weighted average fair value of options granted during the three-month period ended September 30, 2007	$	0.28

At September 30, 2007, the average remaining term for outstanding stock options is 3.4 years.

A summary of the status of non-vested shares under the Company’s 2005 Plan as of June 30, 2007, and changes during the year then ended is presented below:


				Weighted
				Average
				Grant Date
Non-vested Stock Options	Shares			Fair Value
Non-vested at beginning of period		1,096,667		$	0.39
Granted		1,160,000		$	0.49
Vested		(386,667	)		($0.49	)
Forfeited		—			—


Non-vested at end of period		1,870,000		$	0.43

As of September 30, 2007, there was a total of $316,665 of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2005 Plan. That cost is expected to be recognized over a weighted-average period of 2.5 years. The total fair value of shares vested during the three-month period ended September 30, 2007, was $109,933. Note that this disclosure is provided in the aggregate for all awards that vest based on service conditions. There were no grants to officers, employees or directors during the periods of awards subject to performance vesting.

During the three month period ended March 31, 2006, the Company granted 500,000 common stock options to a consultant, subject to the consultant meeting certain performance measures over the two year term of its contract. If the performance criteria under the option grant are not met, no options will be issued to the consultant. In accordance with SFAS 123(R), no compensation expense has been included related to this stock option grant as the measurement date cannot be determined and no disincentive for non-performance exists in the contract.

Restricted Stock Agreement

In August 2007, the Company entered into a restricted stock agreement with one of its executives under which it may be required to issue up to 5,000,000 shares of common stock. The restricted stock vests as follows: (i) 25% on award date and (ii) 25% on each anniversary date of the issue of the grant. The Company has valued the restricted stock grant at $2,650,000, being the value of the shares on the day the agreement was completed. The total cost of the restricted stock grant will be recognized in the

F-17

consolidated statement of operations over an estimated period of 2.5 years. In the three-month period ended September 30, 2007, $772,991 has been recognized as compensation expense.

The Company recorded the remaining unamortized balance as a Prepaid Expense and has recorded the unamortized balance of the compensation expense related to the restricted stock award as follows:


	September 30,
	2007
Prepaid expenses and other current assets	$	662,421
Prepaid expenses – long-term portion		1,214,588

	$	1,877,009

As the common stock was not issued to the executive at September 30, 2007, the obligation for the issuances has been recorded in accrued expenses.

Warrants for the Purchase of Common Stock

At September 30, 2007, the Company has issued the following warrants for the purchase of common stock:

Reason for

No. of common

Exercise

Warrant Holder

Issuance

shares

Price

Expiry date

Investors in March 2007 Private Placement (Note 11)

March 2007 Private Placement A Warrants

13,252,249

$0.35

March 9, 2012 to June 29, 2012

Investors in March 2007 Private Placement (Note 11)

March 2007 Private Placement B Warrants

3,144,750

$0.30 - $0.35

November 5, 2007

Line of Credit Guarantors (Note 7)

Financing guarantees

2,525,000

$0.30

September 22, 2011 through March 31, 2012

6% Convertible Preferred
stockholders (Note 10)

Private Placement

6,525,076

$0.30

May 10, 2010

The Equity Group

Consulting services

750,000

$0.80

February 10, 2010

ICurie

Marketing Agreement

125,000

$0.32

September 13, 2011

Officers and Directors (Note 9)

Bridge Financing

160,000

$1.50

April 20, 2010

ABM Industries Inc.

Marketing services

1,150,000

$0.40 - $0.52

March 2, 2008

through July 31, 2009

Total

27,632,075

At September 30, 2007, all warrants are fully vested.

In accordance with the Marketing Agreement with ICurie, the Company has received from ICurie options to purchase 375,000 shares of common stock of ICurie. The strike price of the options is $0.32 per share and the term of the options is five years. At September 30, 2007, the Company has recorded a valuation allowance against the full value of the stock options recorded in its accounts.

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NOTE 12: COMMITMENTS AND CONTINGENCIES

Leased office space

At September 30, 2007, Company occupied office space that is leased by an institutional shareholder of the Company for approximately $10,000 per month under a month to month agreement. Beginning in October 2007, the Company has leased space for with a cost of approximately $17,000 per month. The Company has leased space in Sunrise, Florida for its research and development and product assembly activities through March 2009 for approximately $4,000 per month. The Company also leases space in Hong Kong and storage space in Dallas, Texas on a month-to-month basis at a total rate of approximately $650 per month.

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

Executive Compensation

As of September 30, 2007, the Company was obligated under the terms of employment contracts for four of its executives. The terms of the contracts generally range between one and three years, and provide for annual salaries ranging between $200,000 and $275,000 per year. The annual compensation for the Company’s executives under these agreements is expected to be approximately $820,000 for 2007.

Commission Agreements with Directors

Pursuant to a resolution passed by the Board of Directors on February 7, 2005, the Company is obligated to pay outside directors a commission of 3% of the proceeds for any Shared Savings Program contracts which a director is responsible for closing. During the second quarter or 2005, the Company entered into a sales commission agreement with J. Michael Poss, the chief financial officer of the Company at the time and a member of the board of directors, to pay Mr. Poss a commission of 6% of the contract proceeds for any Shared Savings Program and 3% of revenue for other product sales which he is responsible for closing.

Registration Rights Agreement

In connection with the March 2007 Private Placement (Note 11), the Company has agreed to provide certain registration rights to the investors that participated in the Private Placement. Under the agreement, the Company agreed to register the common shares issued to the investors as well the common shares underlying the common stock warrants and the A and B Warrants issued. The registration rights clause provides for liquidated damages and for the issue of common shares under a cashless exercise formula in the event a registration statement was not declared effective by the SEC within 120 days of the March 12, 2007, closing date or if the registration statement is not maintained effective for a period of two years following the closing date. The liquidated damages total an amount equal to one percent of the purchase price of the common stock issued for each thirty (30) day period effectiveness of a registration statement is not maintained. The Company will be granted relief from these penalties in certain circumstances if the Securities and Exchange Commission does not allow the Company to register the total number of shares of common stock issued and all the common stock underlying the A Warrants and the B Warrants pursuant to a limitation to the registration under Section 415 (a) (1) of the Securities Act.

In connection therewith, on April 11, 2007, the Company filed on Form SB-2, a preliminary Registration Statement under the Securities Act of 1933, related to the resale of all common stock that is issued or issuable by the Company in connection with the March 2007 Private Placement. The Registration Statement was declared effective by the SEC on June 26, 2007.

In accordance with EITF 00-19-02, the Company does not believe that it is probable that it it will incur any liquidated damages in respect of the registration rights agreement, and as such has recorded no liability in

F-19

accordance with FAS 5. The Company’s maximum potential liability for such liquidated damages shall not exceed 10% of the total proceeds received from the initial offering or $400,000.

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.

Other Contingencies

NOTE 13: SUBSEQUENT EVENTS

On October 4, 2007, the Company, entered into an Exchange and Contribution Agreement (the “Exchange Agreement”) with LED Holdings, LLC, a Delaware limited liability company (“LED Holdings”), 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 the Company in exchange for 2,000,000 shares of the Company’s newly designated Series B Preferred Stock, par value $.001 per share (“Series B Stock”) and 318,574,665 shares of the Company’s Common Stock, par value $.001 per share (“Common Stock” and collectively with the Series B Stock, the “Exchange Consideration”) representing 70% of the fully-diluted capital stock of the Company and 80% of the voting power of all outstanding shares of capital stock of the Company as of October 4, 2007. In conjunction with the transactions contemplated by the Exchange Agreement, the Board of Directors of the Company authorized a 1 for 20 reverse stock split, which will be submitted to the Company’s stockholders for approval. Because LED Holdings holds approximately 80% of voting power of the Company, the Company anticipates that the reverse stock split will be approved.

Prior to the closing of the Exchange Agreement transaction, the Company also terminated its line of credit agreement with its bank and instructed the bank to release all guarantees that had been provided by the Guarantors. The Company also repaid all amounts outstanding under the note payable to the Phibian Trust and all accrued interest thereon prior to the closing of the Exchange Agreement transaction.

F-20

Item 2. Management’s Discussion and Analysis

CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, in the consolidated financial statements and notes thereto included in this report and the discussions under the caption “Management’s Discussion and Analysis” and elsewhere in this report. Any and all statements contained in this report that are not statements of historical fact may be deemed forward-looking statements. Terms such as “may,” “might,”, “would,” “should,” “could,” “project,” “estimate,” “pro forma,” “predict,” “potential,” “strategy,” “anticipate,” “attempt,” “develop,” “plan,” “help,” “believe,” “continue,” “intend,” “expect,” “future,” and similar terms and terms of similar import (including the negative of any of the foregoing) identify forward-looking statements. However, not all forward-looking statements may contain one or more of these identifying terms. Forward-looking statements in this report may include, without limitation, statements regarding (i) a projection of revenues, income (including income loss), earnings (including earnings loss) per share, capital expenditures, dividends, capital structure, or other financial items, (ii) the plans and objectives of management for future operations, including plans or objectives relating to our products or services, (iii) our future economic performance, including any such statement contained in a discussion and analysis of financial condition by management or in the results of operations included pursuant to the rules and regulations of the Securities and Exchange Commission, and (iv) the assumptions underlying or relating to any statement(s) described in the foregoing subparagraphs (i), (ii), or (iii).

The forward-looking statements are not meant to predict or guarantee actual results, performance, events, or circumstances and may not be realized because they are based upon our current projections, plans, objectives, beliefs, expectations, estimates, and assumptions and are subject to a number of risks and uncertainties and other influences, many of which we have no control over. Actual results and the timing of certain events and circumstances may differ materially from those described by the forward-looking statements as a result of these risks and uncertainties. Factors that may influence or contribute to the inaccuracy of the forward-looking statements or cause actual results to differ materially from expected or desired results may include, without limitation, inability to obtain adequate financing, insufficient cash flows and resulting illiquidity, changes in interest rates, inability to identify suitable acquisition candidates, successfully consummate acquisitions, and expand our business, risks relating to acquired businesses and integrating acquired businesses, lack of diversification, sales volatility or seasonality, increased competition, changing customer preferences, results of arbitration and litigation, stock volatility and illiquidity, failure to successfully comply with government regulations, failure to implement our business plans or strategies, failure to attract or maintain key employees or customers, or ineffectiveness of our marketing programs. A description of some of the risks and uncertainties that could cause our actual results to differ materially from those described by the forward-looking statements in this report appears under the caption “Risk Factors” in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006 and elsewhere in this report. Because of the risks and uncertainties related to these factors and the forward-looking statements, readers of this report are cautioned not to place undue reliance on the forward-looking statements. We disclaim any obligation to update these forward-looking statements or to announce publicly the results of any revisions to any of the forward-looking statements contained in this report to reflect any new information or future events or circumstances or otherwise.

Readers should read this report and the following discussion and analysis in conjunction with the discussion under the caption “Risk Factors” in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006, the consolidated financial statements and notes thereto included in this report, and other documents filed by us from time to time with the Commission.

Recent Transaction with LED Holdings

On October 4, 2007, we entered into the Exchange Agreement with LED Holdings, whereby LED Holdings contributed all of its assets including, among other things, $15,000,000 in cash and cash equivalents, 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 us, in exchange for a combination of preferred and common stock representing, on a fully-diluted basis, 70% of our common stock and 80% of our voting power.

After consummation of the transaction with LED Holdings, we made several changes to our management team. Mr. Govi Rao now serves as our Chairman and Chief Executive Officer. Mr. Rao formally served as the Chief Executive Officer of LED Holdings. Mr. Ken Honeycutt continues to serve as our President and Chief Operating Officer. Other members of the senior management team include:

	•		Kevin Furry — Chief Technology Officer

	•		Fred Maxik — Chief Scientific Officer

	•		Dean Seniff — Chief Financial Officer

	•		Zach Gibler — Chief Business Development Officer

	•		Lynn Vera — Chief Human Resources Officer

	•		Paul Kallmes — IP Strategist

Overview

We are a producer of lighting products utilizing Optimized Digital Lighting technology, a refinement of LED technology. We have recently made the transition to an operating company, focusing on sales and growth in the lighting industry marketplace. We anticipate that the acquisition of the assets of LED Holdings will complement our business and put us in a position to market a complete spectrum of digitally-controlled lighting solutions from color-changing to white light. We intend to concentrate our product development and sales efforts on meeting the evolving needs of end-users, channel partners, and influencers in areas of gaming, retail display, architainment, commercial/industrial, and public infrastructure. We are in the process of establishing and building a stronger market presence in the United States, Europe, Japan, and the Middle East.

Results of Operations

Revenues

For the three- and nine-month periods ended September 30, 2007, revenues totaled $452,000 and $845,000, respectively, representing increases of $326,000 and $582,000 compared to revenue levels for the same periods in 2006. For the three- and the nine-month periods ended September 30, 2007 and 2006, our revenues consisted of sales of lighting products. Revenues increased in 2007 as we began filling orders under a number of orders it had received in the fourth quarter of 2006 and first quarter of 2007. We also began selling new products such as the R-series lamps, linear display lights and pyramid version low bay fixtures, which were introduced in late 2006 and early 2007.

Cost of Goods Sold

For the three- and nine-month periods ended September 30, 2007, cost of goods sold were $325,000 and $651,000, respectively, as compared to $107,000 and $218,000, respectively, for the comparable periods in 2006. The increase in cost of goods sold over this period was primarily due to our increased sales volume.

Selling, General and Administrative Expenses

Summarized in the table below are our selling general and administrative (“SG&A”) expenses comparing the three- and nine-month periods ended September 30, 2007 with the three- and nine-month periods ended September 30, 2006:


	For the Three-Month				For the Nine-Month
	Period Ended:				Period Ended:
	September		September		September		September
	30, 2007		30, 2006		30, 2007		30, 2006
SG&A expenses	$	1,375,000	$	345,000	$	2,452,000	$	1,429,000

SG&A expenses for the three- and nine-month periods ended September 30, 2007 increased by $1,030,000 and $1,023,000, respectively, from the comparable periods in 2006. The increase in SG&A expenses for the three-month and nine-month periods ended September 30, 2007 was primarily due to (i) the issue of shares of common stock and warrants for the purchase of common stock under certain marketing agreements, (ii) the recording of a provision against raw materials inventory for components the company has assessed as slow moving and (iii) sales and marketing costs related to the implementation of certain new contracts that the Company entered into earlier in 2007.

Compensation and Related Expenses

Summarized in the table below are compensation and related expenses comparing the three- and nine-month periods ended September 30, 2007 with the three- and nine-month periods ended September 30, 2006:


	For the Three-Month				For the Nine-Month
	Period Ended:				Period Ended:
	September		September		September		September
	30, 2007		30, 2006		30, 2007		30, 2006
Compensation and related expenses	$	1,443,000	$	624,000	$	2,439,000	$	2,129,000

Compensation and related expenses increased by approximately $819,000 for the three-month period ended September 30, 2007 and by approximately $310,000 for the nine-month period ended September 30, 2007 compared to the comparable periods in 2006. The principal reason for the increase in the three-month period ended September 30, 2007 was the recording of compensation expense related to restricted stock granted to one of our executive officers in the third quarter of 2007. The total amount of the compensation expense recorded by us related to the restricted stock grant was $773,000 in the third quarter of 2007. The compensation and related expenses for the nine-month period ended September 30, 2007 increased by $310,000 from the level in the comparable period in 2006, as $773,000 was recorded for the restricted stock grant in 2007, while $562,000 related to the grant of 4,555,000 stock options was recorded in the first quarter of 2006.

Professional Fees

Summarized in the table below are professional fees comparing the three- and nine-month periods ended September 30, 2007 with the three- and nine-month periods ended September 30, 2006:


	For the Three-Month				For the Nine-Month
	Period Ended:				Period Ended:
	September		September		September		September
	30, 2007		30, 2006		30, 2007		30, 2006
Professional fees	$	560,000	$	97,000	$	1,245,000	$	423,000

Professional fees increased by approximately $463,000 and $822,000 in the three-month and nine-month periods ended September 30, 2007, respectively, compared to the three-month and nine-month periods ended September 30, 2006. The principal reasons for this increase were (i) we had recorded expenses during the three-month period ended September 30, 2007 related to contracts entered into with certain consultants during the fourth quarter of 2006 and the first quarter of 2007, (ii) costs related to a consulting project to improve capacity utilization and quality control in our Florida operation, and (iii) increased expenses related to filing and maintaining our patents.

Directors’ Fees

Summarized in the table below are directors’ fees comparing the three- and nine-month periods ended September 30, 2007 with the three- and nine-month periods ended September 30, 2006:


	For the Three-Month				For the Nine-Month
	Period Ended:				Period Ended:
	September		September		September		September
	30, 2007		30, 2006		30, 2007		30, 2006
Directors’ fees	$	70,000	$	261,000	$	179,000	$	385,000

Directors’ fees decreased approximately $191,000 in the three-month period ended September 30, 2007 from the three-month period ended June 30, 2006. The decrease is primarily related to our paying fees to board members in the three-month period ended September 30, 2006 for participating on board committees and one director resigning from the our board of directors in March 2007. Total directors fees decreased to $179,000 in the nine-month period ended September 30, 2007 from $385,000 for the nine-month period ended September 30, 2006. The decrease is due primarily to the payment of additional fees to board members for their participation on board committees and to the resignation of one of our director’s in March 2007.

Depreciation and Amortization Expenses

Summarized in the table below are depreciation and amortization expenses comparing the three- and nine-month periods ended September 30, 2007 with the three- and nine-month periods ended September 30, 2006:


	For the Three-Month				For the Nine-Month
	Period Ended:				Period Ended:
	September		September		September		September
	30, 2007		30, 2006		30, 2007		30, 2006
Depreciation and amortization	$	54,000	$	127,000	$	280,000	$	377,000

Depreciation and amortization expense decreased in each of the three-month and nine-month periods ended September 30, 2007 as compared to the similar periods in 2006, as the reduction in the amortization of intangible assets related to our proprietary rights agreement more than offset a small increase in depreciation expense related to capital assets acquired subsequent to June 2006. Through May 31, 2007, the value assigned to the proprietary rights agreement was being amortized over a three-year period. The underlying agreement that gave rise to this intangible asset expired in May 2007, and the asset was fully amortized at the expiration date.

Interest Expense (Net)

Summarized in the table below is interest expense, net of interest income, comparing the three- and nine-month periods ended September 30, 2007 with the three- and nine-month periods ended September 30, 2006:


	For the Three-Month				For the Nine-Month
	Period Ended:				Period Ended:
	September		September		September		September
	30, 2007		30, 2006		30, 2007		30, 2006
Interest expense (net)	$	101,000	$	172,000	$	925,000	$	160,000

Interest expense, net of interest income, decreased by approximately $71,000 in the three-month period ended September 30, 2007 as the average cash balances held by the Company during this period were substantially higher than in the same period in 2006 due mainly to the exercise of common stock warrants in the third quarter of 2007. Interest expense, net, increased substantially in the nine-month period

ended September 30, 2007 compared to the respective comparable period in 2006. In the nine-month period ended September 30, 2007, approximately $854,000 of the interest expense recorded related to the amortization of the guarantee fees that were paid to a group of directors and stockholders (the “Guarantors”) to provide guarantees of the line of credit negotiated with a lender in June 2006 and for guarantees related to certain equipment deposits placed by us in March 2007. The increase in interest expense relates primarily to the interest expense paid on the balance of the line of credit that was drawn upon by us.

Other Income (Net)

Summarized in the table below are other income, net of other expenses, comparing the three- and nine-month periods ended September 30, 2007 with the three- and nine-month periods ended September 30, 2006:


	For the Three-Month					For the Nine-Month
	Period Ended:					Period Ended:
	September			September		September			September
	30, 2007			30, 2006		30, 2007			30, 2006
Other income (expense), net	$	(1,282,000	)	$	314,000	$	(820,000	)	$	3,154,000

Other income (expense), decreased from an income of $314,000 in the three-month period ended September 30, 2006 to an expense of $(1,282,000) in the three-month period ended September 30, 2007. The majority of this decrease is related to an increase in the value of the derivative instruments (preferred stock conversion rights and common stock purchase warrants) related to the 6% Convertible Preferred Stock and warrants issued pursuant to bridge loans provided to us by certain of our current and former directors (the “Director Bridge Loan Warrants”). In accordance with generally accepted accounting principles, these derivatives are valued on a quarterly basis taking into account a number of variables including current market price for our common stock and current interest rates. For the nine-month period ended September 30, 2007, other income (expense) decreased from an income of $3,154,000 to an expense of $(820,000) for the nine months ended September 30, 2007. The expense in the nine-month period ended September 30, 2007 is mainly due to adjustments in the value of the derivative instruments related to the 6% Convertible Preferred Stock and the Directors Bridge Loan Warrants.

Dividends and Accretion of Preferred Stock Redemption Value

Summarized in the table below are dividends on 6% Convertible Preferred Stock and accretion of preferred stock redemption value comparing the three- and nine-month periods ended September 30, 2007 with the three- and nine-month periods ended September 30, 2006:


	For the Three-Month					For the Nine-Month
	Period Ended:					Period Ended:
	September			September		September			September
	30, 2007			30, 2006		30, 2007			30, 2006
Dividends on 6% Convertible Preferred Stock and accretion of preferred stock redemption value	$	(873,000	)	$	432,000	$	(1,147,000	)	$	1,217,000

The total dividends on the 6% Convertible Preferred Stock and the accretion of the redemption value of the 6% Convertible Preferred Stock decreased significantly in the three-month and nine-month periods ended September 30, 2007 compared to the same periods in 2006. This decrease primarily resulted from the fact that holders of 737,500 and 1,550,000 shares of 6% Convertible Preferred Stock elected to convert their 6% Convertible Preferred Stock to common stock in the three- and nine month periods ended September 30, 2007, respectively. We accrete the redemption value of the 6% Convertible Preferred Stock on a straight-line basis over the five-year term of the 6% Convertible Preferred Stock. Upon conversion to common stock, any accrued redemption value for the 6% Convertible Preferred Stock is reversed and a credit to the expense is recorded. During the three-month period ended September 30, 2007, a credit of approximately $925,000 was recorded

related to the shares of 6% Convertible Preferred Stock that were converted to common stock. As the shares of 6% Convertible Preferred Stock were converted by the holders, the conversion also reduced the total amount of dividends payable on the 6% Convertible Preferred Stock compared to the periods in the previous year.

Liquidity and Capital Resources

Our primary sources of liquidity are our cash reserves and cash flows from operating activities. Cash outflows are primarily tied to procurement of inventory and payment of salaries, benefits and other operating costs. As previously discussed, on October 4, 2007, we entered into the Exchange Agreement with LED Holdings, whereby LED Holdings contributed all of its assets including, among other things, $15,000,000 in cash and cash equivalents, 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 us, in exchange for a combination of preferred and common stock representing, on a fully-diluted basis, 70% of our common stock and 80% of our voting power.

In March 2007, we entered into a Securities Purchase Agreement with a group of accredited investors for a private placement of common stock and A and B Warrants. The private placement resulted in gross proceeds of $4.0 million in March 2007 from the issuance of common stock. Through the date of this report, the Company has received gross proceeds of $5,829,000 from the exercise of A and B Warrants by certain investors. All B Warrants not exercised by the holders on or prior to November 5, 2007 expired pursuant to their terms. B Warrants with a total exercise value of $61,000 expired at the close of business on November 5, 2007 unexercised. The remaining A Warrants have a five year term and may be exercised by the holders at any time prior to expiration.

In June 2006, we negotiated a $2.0 million line of credit with one of our banks, which was subsequently amended to increase the amount available thereunder to up to $2.5 million commensurate with the aggregate dollar value of the guarantees provided to the bank by Guarantors. In conjunction with the acquisition of the assets of LED Holdings, we terminated the $2.5 million line of credit. There were no prepayment penalties associated with terminating the line of credit. Also on October 4, 2007, we paid the remaining balance of $87,500, along with all accrued interest, which was due on the Note Payable to the Phibian S Trust.

On January 4, 2007, we entered into a one year factoring agreement, also referred to as the working capital facility, with Allied Capital Partners, L.P. Pursuant to the working capital facility, we may borrow up to $10.0 million against customer invoices sold or otherwise transferred to Allied Capital. Thus, our ability to borrow under this working capital facility will be limited by the extent of our customer invoices. The working capital facility is anticipated to be secured by our accounts receivables and other credit-related documents received from our customers.

Currently, our strategy includes the outsourcing of manufacturing operations. Accordingly, except for any expenditures required to produce production tooling and molds for use by our contract manufacturers, we have made minimal investments in plant and equipment. If we increase sales and product deliveries, we may be required to make additions to our operations, administrative and management teams. Further, if we were to undertake the manufacture of certain or all of our products, capital expenditures would increase.

We pay dividends on our 6% Convertible Preferred Stock four times annually: February 10, May 10, August 10 and November 10. Prior to entering into the Exchange Agreement with LED Holdings, we had the right to settle any dividend payment with the issuance of common stock, assuming certain criteria are met and notice is given to the 6% Convertible Preferred stockholders. We settled our February 2007, May 2007 and August 2007 6% Convertible Preferred Stock dividend obligations by issuing a total of 803,000 common shares. We also paid $91,000 to satisfy our obligation to pay accrued dividends on certain shares of 6% Convertible Preferred Stock that were converted to common stock during 2007.

The issuance of common stock and Series B Stock to LED Holdings constituted a “Change of Control” pursuant to the terms of the Amended and Restated Certificate of Designation of the 6% Convertible Preferred Stock. As a result, we may no longer settle dividend payments with the issuance of common stock. Therefore, we are required to settle all remaining dividend obligations with the payment of cash. Based on the 6% Convertible Preferred Stock currently outstanding, we expect to pay up to $100,000 annually to satisfy the dividend obligation.

While we believe that our current balances along with the cash received from the sale of our products will be sufficient to meet our cash needs for the next twelve month period, other potential sources of outside capital include entering strategic business relationships, bank borrowings, and public or private sales of shares of our capital stock or debt or similar arrangements. If we raise funds by selling additional shares of our common stock or securities convertible into our common stock, the effective ownership interest of our existing stockholders will be diluted. If we are unable to obtain sufficient outside capital when needed, our business and future prospects will be adversely affected and we could be forced to suspend or discontinue operations.

We have embarked upon an aggressive design and development program in conjunction with bringing our products to market. If, as management believes, we are successful marketing our current products and developing additional new products, additional capital may be needed to fund the manufacturing process to produce finished goods and support the required investment in working capital. In the event orders are received from established retailers and distributors of lighting products and other end user customers, management believes that traditional lending sources would be available to provide a portion of the capital needed to cover the manufacturing and receivables cycles. However, we may still be required to raise additional capital to meet our obligations and to complete the commercialization of certain of our products currently being developed and to increase our marketing efforts.

ITEM 3: Controls and Procedures

We maintain a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding disclosure, and is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The management of the Company, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based on that evaluation, the chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Common Stock and Other Securities Issued During the Quarter

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

	•		On July 5, 2007, we issued to two holders of B Warrants 3,333,333 shares of common stock, in a private placement, upon exercise of such B Warrants. Upon exercise of the B Warrants, the Company also issued to the holder of such B Warrants, in a private placement, additional A Warrants for the purchase of 2,499,999 shares of common stock. The additional A Warrants have an exercise price of $0.35 per common share and have a term of five years from the date of issue.

	•		On July 7, 2007, the Company issued to two stockholders 2,499,999 shares of common stock in a private placement upon the exercise of the A Warrants.

	•		On July 10, 2007, we issued to two holders of 6% Convertible Preferred Stock, 1,993,600 shares of common stock, in a private placement, upon conversion of 186,900 shares of 6% Convertible Preferred Stock.

	•		On July 12, 2007, we issued to two holders of B Warrants 1,666,666 shares of common stock, in a private placement, upon exercise of such B Warrants. Upon exercise of the B Warrants, the Company also issued to the holder of such B Warrants, in a private placement, additional A Warrants for the purchase of 1,250,000 shares of common stock. The additional A Warrants have an exercise price of $0.35 per common share and have a term of five years from the date of issue.

	•		On July 20, 2007, we issued to two holders of 6% Convertible Preferred Stock, 1,600,000 shares of common stock, in a private placement, upon conversion of 150,000 shares of 6% Convertible Preferred Stock.

	•		On July 20, 2007, the Company issued to two stockholders 1,400,000 shares of common stock in a private placement upon the exercise of the A Warrants.

	•		On July 23, 2007, we issued to three holders of B Warrants 266,600 shares of common stock, in a private placement, upon exercise of such B Warrants. Upon exercise of the B Warrants, the Company also issued to the holder of such B Warrants, in a private placement, additional A Warrants for the purchase of 199,950 shares of common stock. The additional A Warrants have an exercise price of $0.35 per common share and have a term of five years from the date of issue.

	•		On July 26, 2007, we issued to a holder of B Warrants 833,333 shares of common stock, in a private placement, upon exercise of such B Warrants. Upon exercise of the B Warrants, the Company also issued to the holder of such B Warrants, in a private placement, additional A Warrants for the purchase of 625,000 shares of common stock. The additional A Warrants have an exercise price of $0.35 per common share and have a term of five years from the date of issue.

	•		On July 27, 2007, we issued to a holder of B Warrants 333,333 shares of common stock, in a private placement, upon exercise of such B Warrants. Upon exercise of the B Warrants, the Company also issued to the holder of such B Warrants, in a private placement, additional A Warrants for the purchase of 250,000 shares of common stock. The additional A Warrants have an exercise price of $0.35 per common share and have a term of five years from the date of issue.

	•		On July 31, 2007, we issued to four holders of B Warrants 3,269,666 shares of common stock, in a private placement, upon exercise of such B Warrants. Upon exercise of the B Warrants, the Company also issued to the holders of such B Warrants, in a private placement, additional A Warrants for the purchase of 2,452,250 shares of common stock. The additional A Warrants have an exercise price of $0.35 per common share and have a term of five years from the date of issue.

	•		On July 31, 2007, the Company issued in a private placement warrants to purchase 750,000 shares of common stock to a supplier in settlement of the suppliers account. The warrants have an exercise price $0.52 per share and expire July 31, 2009.

	•		On August 2, 2007, the Company issued to two stockholders 825,000 shares of common stock in a private placement upon the exercise of warrants.

	•		On August 2, 2007, the Company granted to three employees, in a private placement, 410,000 options for the purchase of common stock. The strike price of each option is $0.54 per common share and the options have a term of three years.

	•		On August 2, 2007, the Company granted to two directors, in a private placement, options for the purchase of 250,000 shares of common stock. The strike price of each option is $0.54 per common share and the options have a term of seven years.

	•		On August 7, 2007, we issued to a holder of 6% Convertible Preferred Stock, 533,333 shares of common stock, in a private placement, upon conversion of 50,000 shares of 6% Convertible Preferred Stock.

	•		On August 7, 2007, the Company issued to two stockholders 1,100,000 shares of common stock in a private placement upon the exercise of A Warrants.

	•		On August 7, 2007, we issued to a holder of B Warrants 1,666,667 shares of common stock, in a private placement, upon exercise of such B Warrants. Upon exercise of the B Warrants, the Company also issued to the holder of such B Warrants, in a private placement, additional A Warrants for the purchase of 1,250,000 shares of common stock. The additional A Warrants have an exercise price of $0.35 per common share and have a term of five years from the date of issue.

	•		On August 10, 2007, the Company issued in a private placement warrants for the purchase of 350,000 shares of common stock to two Guarantors.

	•		On August 13, 2007, the Company issued 61,374 shares of common stock to three suppliers in a private placement , to settle the accounts with the individual suppliers.

	•		On August 22, 2007, we issued to a holder of 6% Convertible Preferred Stock, 533,333 shares of common stock, in a private placement, upon conversion of 50,000 shares of 6% Convertible Preferred Stock.

	•		On September 11, 2007, we issued to a holder of 6% Convertible Preferred Stock, 1,066,667 shares of common stock, in a private placement, upon conversion of 100,000 shares of 6% Convertible Preferred Stock.

	•		On September 12, 2007, the Company issued 35,886 shares of common stock to three suppliers in a private placement , to settle the accounts with the individual suppliers.

	•		On September 19, 2007, the Company issued 500,000 shares of common stock to a supplier in a private placement , to settle the accounts with the individual supplier.

	•		On September 24, 2007, the Company issued 30,613 shares of common stock to a supplier in a private placement , to settle the accounts with the individual supplier.

	•		On September 25, 2007, we issued to a holder of 6% Convertible Preferred Stock, 2,133,334 shares of common stock, in a private placement, upon conversion of 200,000 shares of 6% Convertible Preferred Stock.

	•		On September 28, 2007, the Company issued 399,900 shares of common stock upon the exercise of A Warrants by three warrant holders.

	•		On September 25, 2007, the Company issued 30,613 shares of common stock to a supplier in a private placement , to settle the accounts with the individual supplier.

	•		On October 4, 2007, the Company issued in a private placement 318,574,665 shares of common stock and 2,000,000 shares of Series B Stock to LED Holdings pursuant to the Exchange Agreement with LED Holdings.

	•		On October 17, 2007, the Company issued in a private placement 234,375 shares of common stock upon the exercise of common stock warrants.

	•		On October 26, 2007, we issued to two holders of B Warrants 110,000 shares of common stock, in a private placement, upon exercise of such B Warrants. Upon exercise of the B Warrants, the Company also issued to the holder of such B Warrants, in a private placement, additional A Warrants for the purchase of 82,500 shares of common stock. The additional A Warrants have an exercise price of $0.35 per common share and have a term of five years from the date of issue.

	•		On November 2, 2007, we issued to the holder of B Warrants 1,333,333 shares of common stock, in a private placement, upon exercise of such B Warrants. Upon exercise of the B Warrants, the Company also issued to the holder of such B Warrants, in a private placement, additional A Warrants for the purchase of 1,000,000 shares of common stock. The additional A Warrants have an exercise price of $0.35 per common share and have a term of five years from the date of issue.

•

On November 2, 2007, we issued to a holder of 6% Convertible Preferred Stock, 50,006 shares of common stock, in a private placement, upon conversion of 4,688 shares of 6% Convertible Preferred Stock.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5 Other Information

None.

Item 6: Exhibits

(a) Exhibits required by Item 601 of Regulation S-K


Exhibit
Number		Description

3.1		Amended and Restated Certificate of Incorporation, as amended, of Lighting Science Group Corporation (1)

3.2		Amended and Restated By-laws of Lighting Science Group Corporation (2)

4.1		Stock Purchase Agreement dated as of June 1, 2004, by and among The Phoenix Group Corporation, Lighting Science, Inc., certain stockholders of The Phoenix Group Corporation and Frederic Maxik (3)

4.2		Securities Purchase Agreement dated as of May 12, 2005, by and among Lighting Science Group Corporation and the purchasers set forth on Exhibit A thereto (4)

4.3		Form of Warrant granted pursuant to the Securities Purchase Agreement dated as of May 12, 2005 (4)

4.4		Registration Rights Agreement dated as of May 12, 2005, by and among Lighting Science Group Corporation and the persons and entities listed on Exhibit A thereto (4)

4.5		Warrant dated as of February 15, 2005, by and between Lighting Science Group Corporation and Giuliani Capital Advisors LLC (5)

4.6		Form of Warrant issued to certain directors, officers and security holders as consideration for providing guarantees pursuant to the Line of Credit (6)

4.7		Amended and Restated Certificate of Designation of 6% Convertible Preferred Stock (7)

4.8		Securities Purchase Agreement, dated as of March 9, 2007 among Lighting Science Group Corporation and the purchasers identified on the signature pages thereto (8)

4.9		Form of Warrant A, dated March 9, 2007 (8)

4.10		Form of Warrant B, dated March 9, 2007 (8)

4.11		Form of Warrant, dated ________, 2007 (8)

4.12		Exchange and Contribution Agreement, dated as of October 4, 2007 between the Company and LED Holdings LLC (2)

4.13		Certificate of Designation of Series B Stock (2)

4.14		Registration Rights Agreement dated October 4, 2007 between the Company and LED Holdings LLC (2)

4.15		Stockholder Voting Agreement dated October 4, 2007 among the Company, LED Holdings LLC, Ronald Lusk, Robert Bachman, Daryl Snadon and Donald Harkleroad (2)

4.16		Trademark Assignment Agreement dated October 4, 2007 between the Company and LED Holdings, LLC (2)

4.17		Indemnification Letter Agreement dated October 4, 2007 between the Company and LED Holdings, LLC (2)


Exhibit
Number		Description

10.1		Employment Agreement dated as of October 4, 2007 by and between Lighting Science Group Corporation and Ronald E. Lusk (2)

10.2		Employment Agreement, dated as of October 4, 2007, by and between Lighting Science Group Corporation and Fredric Maxik (2)

10.3		Employment Agreement dated as of October 4, 2007 by and between Lighting Science Group Corporation and Kevin Furry (2)

10.4		Employment Agreement dated October 4, 2007 between Lighting Science Group Corporation and Kenneth Honeycutt (2)

10.5		Employment Agreement dated as of October 4, 2007 between Lighting Science Group Corporation and Govi Rao (2)

10.6		Consulting Agreement dated as of October 6, 2006 between Lighting Science Group Corporation and Philip R. Lacerte (9)

10.7		Factoring Agreement dated as of January 4, 2007 between Lighting Science Group Corporation and Allied Capital Partners, L.P. (7)

31.1		Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer (filed herewith)

31.2		Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer (filed herewith)

32.1		Section 1350 Certification of Principal Executive Officer (furnished herewith)

32.2		Section 1350 Certification of Principal Financial Officer (furnished herewith)

99.1		Risk Factors (10)


1.		Incorporated by reference to the Registrant’s Registration Statement on Form SB2 filed with the Securities and Exchange Commission on July 12, 2005.

2.		Incorporated by reference to the Registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on October 11, 2007.

3.		Incorporated by reference to the Registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on June 15, 2004.

4.		Incorporated by reference to the Registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on May 16, 2005.

5.		Incorporated by reference to the Registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on February 22, 2005.

6.		Incorporated by reference to the Registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on September 22, 2006.

7.		Incorporated by reference to Registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on January 9, 2007.

8.		Incorporated by reference to the Registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on March 12, 2007.

9.		Incorporated by reference to the Registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on October 12, 2006.

10.		Incorporated by reference to the section entitled “Risk Factors” in the Registrant’s annual report on Form 10-KSB filed with the Securities and Exchange Commission on April 2, 2007.


Part I. FINANCIAL INFORMATION

Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 2007
Consolidated Statements of Operations for the three months ended September 30, 2007 and September 30, 2006
Consolidated Statements of Operations for the nine months ended September 30, 2007 and September 30, 2006
Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and September 30, 2006
Notes to Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis
Item 3. Controls and Procedures

Part II. OTHER INFORMATION

Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
Section 1350 Certification of Principal Executive Officer
Section 1350 Certification of Principal Financial Officer


	LIGHTING SCIENCE GROUP CORPORATION (Registrant)

Date: November 14, 2007	By	/s/ Govi Rao

	Govi Rao
	Chief Executive Officer

Date: November 14, 2007	By	/s/ Dean Seniff

	Dean Seniff
	Chief Financial Officer and Principal Accounting Officer

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