As filed with the Securities and Exchange Commission on November 6, 2009

		Registration No.

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

Delaware		3646		23-2596710
(State or other jurisdiction of		(Primary Standard Industrial		(I.R.S. Employer
incorporation or organization)		Classification Code Number)		Identification No.)

1227 South Patrick Drive, Building 2A
Satellite Beach, Florida 32937
(321) 779-5520
(Address, including zip code, and telephone number, including area code, of principal executive offices)

Mr. Zachary S. Gibler, Chief Executive Officer
1227 South Patrick Drive, Building 2A
Satellite Beach, Florida 32937
(321) 779-5520
(Name, address, including zip code, and telephone number, including area code, of agent for service)

     Approximate date of proposed sale to public: As soon as practicable on or after the effective date of this registration statement.

     If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

     If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

     If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

     If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

CALCULATION OF REGISTRATION FEE

							Proposed			Proposed
				Amount to			Maximum			Maximum
	Title of Each Class of Securities to			be			Offering			Aggregate			Amount of
	be Registered			Registered			Price Per Unit			Offering Price (1)			Registration Fee
	Non-Transferable Subscription Rights (2)			—			—			—			$0.00 (3)
	Warrants to Purchase Common Stock Underlying the Non-Transferable Subscription Rights			—			—			—			$0.00 (4)
	Series D Preferred Stock Underlying the Non-Transferable Subscription Rights (5)			—			$1.006			$18,293,964			$1,020.80 (6)
	Shares of Common Stock issuable upon exercise of Warrants (5)			—			$6.00			$109,109,130			$6,088.29 (6)
	Total Registration Fee												$7,109.09 (6)

     The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said section 8(a), may determine.

 

 

SUBJECT TO COMPLETION, DATED NOVEMBER 6, 2009

PRELIMINARY PROSPECTUS

LIGHTING SCIENCE GROUP CORPORATION

[18,184,855+] Units
Each Unit Consisting of One Share of Series D Non-Convertible Preferred Stock and a Warrant
Representing the Right to Purchase One Share of Common Stock

     Except as provided in this prospectus, we are distributing at no charge to each holder, or Holder, of our common stock, 6% Convertible Preferred Stock, Series B Preferred Stock and warrants to purchase our common stock, which we refer to as Eligible Securities, rights to purchase up to an aggregate of [18,184,855+] Units consisting of an aggregate of [18,184,855+] shares of Series D Non-Convertible Preferred Stock, or Series D Preferred Stock, and Warrants representing the right to purchase up to an aggregate of [18,184,855+] shares of our common stock. Each Holder will receive one right for each share of common stock issued or issuable to such Holder as of                    , 2009, the record date. Each right will entitle a Holder to purchase 1.3 Units at $1.006 per Unit, each Unit to consist of one share of Series D Preferred Stock and a Warrant representing the right to purchase one share of common stock at an exercise price of $6.00 per share. The Series D Preferred Stock and Warrants issuable upon exercise of the rights will only be transferable in conjunction with the transfer of whole Units, and any such transfer must consist of a minimum of 25,000 Units.

     On August 27, 2009, we entered into a convertible note agreement with Pegasus Partners IV, L.P., or Pegasus IV, the beneficial owner of approximately 82.5% of our common stock, pursuant to which we have already offered approximately 33.5 million Units to Pegasus IV with the same terms as the Units offered in this prospectus. Pegasus IV has agreed to convert approximately $31.7 million, the original principal amount of the convertible note agreement, into the Units that it and its affiliate, LED Holdings, LLC, would otherwise be entitled to subscribe for in this rights offering. In accordance with the convertible note agreement, Pegasus IV has also agreed to convert the accrued interest on the original principal amount of the convertible note into Units, which will result in the receipt by Pegasus IV of more than its pro rata share of Units. These Units will be acquired in a private placement directly from us at the same price per Unit as in this rights offering. As a result, Pegasus IV and LED Holdings, LLC are not being offered rights to purchase Units in this rights offering. However, pursuant to the convertible note agreement, Pegasus IV will have the option to acquire any Units not otherwise subscribed for pursuant to the terms of this rights offering by the Holders and our employees, which Units will be offered to Pegasus IV at the subscription price of $1.006 per Unit. Any Units purchased pursuant to this standby purchase option will be purchased in a private placement directly from us.

     On August 27, 2009, we also entered into a convertible note agreement with Koninklijke Philips Electronics N.V., or Philips Electronics, pursuant to which we have already offered approximately 5.1 million Units to Philips Electronics with the same terms as the Units offered in this prospectus, except that any Warrants issuable to Philips Electronics will have an exercise price of $12.00 per share. Because Philips Electronics did not hold any Eligible Securities as of            , 2009, the record date, it is not being offered Units in this rights offering.

		Per Unit				Aggregate
Subscription Price		$	1.006			$	18,293,964	(1)
Estimated Expenses in Connection with the Offering (2)		$	*			$	*
Net Proceeds to Us (1)		$	*			$	*

     Holders who fully exercise their subscription rights will be entitled to subscribe for additional Units that remain unsubscribed as a result of any unexercised subscription rights, which we refer to as the over-subscription right. The over-subscription right allows a Holder to subscribe for an additional amount equal to up to 200% of the Units for which such Holder was otherwise entitled to subscribe. If any Units remain unsubscribed as a result of unexercised basic rights and, if applicable, unexercised over-subscription rights, each of our employees, in addition to any rights received in his or her capacity as a Holder, will be entitled to subscribe for the remaining Units, with each such subscription consisting of a minimum of 10,000 Units.

     The rights will expire if they are not exercised by 5:00 p.m., New York City time, on           , 2009, unless extended. We may cancel or terminate the rights offering at any time prior to its expiration upon determination by our board of directors. If we cancel or terminate this offering, we will return your subscription price, but without any payment of interest. The subscription rights may not be sold or transferred. No fractional Units will be issued in this offering.

     You should carefully consider whether to exercise your rights before the expiration of the rights offering. Unless our board of directors cancels or terminates the rights offering, all exercises of rights are irrevocable. Our board of directors is making no recommendations regarding your exercise of rights.

     The Units are being offered directly by us without the services of an underwriter or selling agent.

     Our common stock is quoted in the Pink Sheets under the symbol “LSCG.PK.” On October 30, 2009, the last reported sales price of our common stock was $1.40 per share. There is no public market for the Units, the shares of Series D Preferred Stock or the Warrants, and we do not plan to list the Units, the shares of Series D Preferred Stock or the Warrants on any public market.

     We will bear all expenses with respect to the offering of these rights, including the cost of registration incurred in connection with this rights offering.

     These securities are speculative securities and this offering involves substantial risks. Please carefully review and consider the risk factors described under the “RISK FACTORS” section in this prospectus beginning on page 14.

     Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is            , 2009.

TABLE OF CONTENTS

SUMMARY			1
RISK FACTORS			14
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS			27
USE OF PROCEEDS			27
THE RIGHTS OFFERING			27
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS			40
CONVERTIBLE NOTE AGREEMENTS WITH PEGASUS IV AND PHILIPS ELECTRONICS			46
DILUTION			48
DESCRIPTION OF BUSINESS			50
DESCRIPTION OF PROPERTY			59
LEGAL PROCEEDINGS			59
MANAGEMENT’S DISCUSSION AND ANALYSIS			60
DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS			76
EXECUTIVE COMPENSATION			79
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE			84
MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND RELATED STOCKHOLDER MATTERS			88
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT			89
PLAN OF DISTRIBUTION			97
LEGAL MATTERS			97
EXPERTS			97
WHERE YOU CAN FIND MORE INFORMATION			98
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS			F-1
EX-23.1
EX-23.2
EX-24.1

     You should rely only on the information contained in this prospectus. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus or other date stated in this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date, and we have an obligation to provide updates to this prospectus only to the extent that the information contained in this prospectus becomes materially deficient or misleading after the date on the front cover.

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Summary Consolidated Statements of Operations
(All amounts in US$000’s)

										Period January 1,
		Year ended				Period June 14, 2007				2007 through June
		December 31,				through December 31,				13, 2007 for LED
		2008				2007				Effects, Inc.
Revenues		$	20,759			$	4,616			$	3,675
Cost of goods sold			16,689				3,527				2,606
Gross margin			4,070				1,089				1,069
Total operating costs			42,859				6,234				566
Impairment of goodwill and intangible assets			53,110				—				—
Depreciation and amortization			4,354				670				7
Income (loss) from operations			(96,253	)			(5,815	)			496
Other income (expense)			(918	)			916				(34	)
Income tax benefit (expense)			2,208				—				(172	)
Minority interest in earnings of subsidiary			—				(4	)			(3	)
Net income (loss)		$	(94,963	)		$	(4,903	)		$	287

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
Revenues		$	5,923			$	5,285			$	14,269			$	7,429
Cost of goods sold			4,036				4,238				11,166				5,947
Gross margin			1,887				1,047				3,103				1,482
Total operating costs			11,768				8,913				25,735				15,056
Depreciation and amortization			1,475				866				2,873				1,326
Income (loss) from operations			(11,356	)			(8,732	)			(25,505	)			(14,900	)
Other income (expense)			(1,580	)			(156	)			(2,620	)			141
Income tax benefit (expense)			81				82				173				82
Net loss		$	(12,855	)		$	(8,806	)		$	(27,952	)		$	(14,677	)

Summary Consolidated Balance Sheet
(All amounts in US$000’s)

										December 31,
		June 30, 2009				December 31, 2008				2007
ASSETS
Cash		$	417			$	255			$	11,399
Other current assets			21,143				21,025				6,359
Total current assets			21,560				21,280				17,758
Property and equipment			3,513				3,631				1,149
Other assets			23,433				24,642				54,679
Total assets		$	48,506			$	49,553			$	73,586
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
LIABILITIES
Short-term debt		$	40,011			$	22,207			$	—
Current portion of long-term debt			1,847				2,363				—
Other current liabilities			18,010				11,583				6,025
Total current liabilities			59,868				36,153				6,025
Long-term debt, less current portion			223				96				—
Liability under derivative contracts			—				—				1,008
Deferred taxes			1,746				2,049				—
Total liabilities			61,837				38,298				7,033
6% Convertible Preferred Stock			522				460				365
Stockholders’ Equity			(13,853	)			10,795				66,188
Total liabilities and stockholders’ equity		$	48,506			$	49,553			$	73,586

RISK FACTORS

     An investment in our preferred stock, warrants and common stock is risky. You should carefully consider the following risks, as well as the other information contained in this prospectus. If any of the following risks occur, our business could be harmed, the trading price of our common stock and the value of our preferred stock and warrants could decline and you might lose all or part of your investment.

Risks Related to the Rights Offering

     Your relative ownership interest may be diluted as a result of this rights offering.

     This rights offering is designed to enable us to raise capital while allowing all Holders to maintain their relative ownership interest in the Company on a fully diluted basis. Pegasus IV, the beneficial owner of approximately 82.5%, has agreed to convert approximately $31.7 million, the original principal amount of a convertible note agreement, into the Units that it and its affiliate, LED Holdings, would otherwise be entitled to subscribe for in this rights offering in a private placement directly from us at the same price per Unit as in this rights offering. In accordance with the convertible note agreement, Pegasus IV has also agreed to convert the accrued interest on the original principal amount of the convertible note into Units, which will result in the receipt by Pegasus IV of more than its pro rata share of Units. Additionally, Pegasus IV will have the option to acquire any Units not otherwise subscribed for pursuant to the terms of this rights offering by the Holders and our employees, which Units will be offered to Pegasus IV at the subscription price of $1.006 per Unit. We are also party to a convertible note agreement with Philips Electronics that provides that all of the then outstanding principal and interest under the note will automatically convert into Units upon the consummation of this rights offering, except that any Warrants issuable to Philips Electronics will have an exercise price of $12.00 per share. The terms of the convertible note agreements are described below under “Convertible Note Agreements with Pegasus IV and Philips Electronics.” If you choose not to exercise your subscription rights in full, your relative ownership interest in the Company (on a fully-diluted basis) will be lower than it would have been in the absence of the rights offering.

     Assuming that the rights offering is fully subscribed and the conversion of the principal and interest balances (as of October 30, 2009) on the convertible note agreements with Pegasus IV and Philips Electronics, [56,743,693+] shares of Series D Preferred Stock and Warrants to purchase [56,743,693+] shares of common stock will be issued in conjunction with this rights offering. Therefore, on a fully-diluted basis (assuming the exercise of the Warrants issued pursuant to the rights offering and the convertible note agreements), we would have [105,300,874+] shares of common stock outstanding immediately after the closing of the rights offering.

     You may not revoke your subscription exercise and could be committed to buying shares above the prevailing market price.

     Once you exercise your rights, you may not revoke the exercise. Among other things, the public trading market price of our common stock may decline before the rights expire. If you exercise your rights and, afterwards, the public trading market price of our common stock decreases or if market conditions deteriorate, you may have committed to buying Units at a price that may not reflect the economic value of such securities.

     Further, if we elect to withdraw or terminate this rights offering, we will not have any obligation with respect to the rights except to return, without interest or deduction, any subscription payments received from you.

     We cannot guarantee that you will receive any or all of the amount of Units for which you over-subscribed.

     Holders who fully exercise their basic rights will be entitled to subscribe for an additional amount of Units equal to up to 200% of the Units for which such Holder was otherwise entitled to subscribe. Over-subscription rights will be allocated pro rata among Holders who over-subscribed, based on the number of over-subscription Units for which they subscribed. We cannot guarantee that you will receive any or all of the amount of Units for which you over-subscribed. If the pro rated amount of Units allocated to you in connection with your over-subscription right is less than your over-subscription request, then the excess funds held by us, as the subscription agent, on your behalf will be returned to you promptly without interest or deduction and we will have no further obligations to you.

     If you do not act promptly and follow the subscription instructions, your exercise of rights may be rejected.

     Holders who desire to purchase Units in this rights offering must act promptly to ensure that all required forms and payments are actually received by us prior to      , 2009, the expiration date of this rights offering. If you are a beneficial owner of our equity securities, you must act promptly to ensure that your broker, custodian bank or other nominee acts for you and that all required forms and payments are actually received by us prior to the expiration date of this rights offering. We will not be responsible if your broker, custodian or nominee fails to ensure that all required forms and payments are actually received by us prior to the expiration date of this rights offering. If you fail to complete and sign the required subscription forms, send an incorrect payment amount or otherwise fail to follow the subscription procedures that apply to your exercise in this rights offering, we may, depending on the circumstances, reject your subscription or accept it only to the extent of the payment received. We do not undertake to contact you concerning an incomplete or incorrect subscription form or payment, nor are we under any obligation to correct such forms or payment. We have the sole discretion to determine whether a subscription exercise properly follows the subscription procedures.

Risks Related to Our Common Stock

     Because our stock price is volatile, it can be difficult for stockholders to predict the value of our shares at any given time.

     The price of our common stock has been and may continue to be volatile, which makes it difficult for stockholders to assess or predict the value of their shares. In the last two completed fiscal years, the price of our common stock has ranged from $0.36 to $11.40. A variety of factors may affect the market price of our common stock including, but not limited to:

	•		changes in expectations as to our future financial performance;
	•		our involvement in litigation;
	•		announcements of technological innovations or new products by us or our competitors;
	•		announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
	•		changes in laws and government regulations;
	•		developments concerning our proprietary rights;
	•		public perception relating to the commercial value or reliability of any of our lighting products;
	•		future sales of our common stock or issues of other equity securities convertible into or exercisable for the purchase of common stock;
	•		the acquisition or divestiture by LED Holdings, Pegasus IV or their affiliates of part or all of their respective holdings; and
	•		general stock market conditions.

     Two stockholders and certain of their affiliates, collectively, beneficially own a significant portion of our outstanding capital stock and are able to influence our actions.

     As of October 30, 2009, LED Holdings, Pegasus IV and certain of their affiliates, collectively, beneficially owned 58,674,077 shares of our common stock, which represents approximately 82.5% of our fully-diluted capital stock. Due to the significant amount of voting power collectively held by LED Holdings, Pegasus IV and their affiliates, they have the ability to greatly influence the election of our board of directors and to approve or disapprove all other matters requiring the vote of stockholders.

     Trading in our common stock is sporadic and an established trading market may not be developed or sustained.

     Our shares do not at this time qualify for listing on any national securities exchange, and we cannot assure you that our shares will ever be listed on a national securities exchange. Prior to the close of trading on May 18, 2009, our shares were traded on the OTC Bulletin Board. After the close of trading on May 18, 2009, our common stock was removed from the OTC Bulletin Board because we had not filed our 2008 Form 10-K by that date. Our common stock is currently traded in the pink sheets, a centralized quotation service maintained by Pink OTC Markets Inc. that collects and publishes market maker quotes for over-the-counter securities. Although our common stock is quoted in the pink sheets, a regular trading market for the securities may not be sustained in the future. Quotes for stocks listed in the pink sheets generally are not listed in the financial sections of newspapers and newspapers often devote very little coverage to stocks quoted solely in the pink sheets. Accordingly, prices for, and coverage of, securities quoted solely in the pink sheets may be difficult to obtain. In addition, stocks quoted solely in the pink sheets tend to have a limited number of market makers and a larger spread between the bid and ask prices than those listed on the NYSE, NYSE Amex or The Nasdaq Stock Market. All of these factors may cause holders of our common stock to be unable to resell their securities at any price. This limited trading also could decrease or eliminate our ability to raise additional funds through issuances of our securities.

     The holders of certain of our outstanding warrants presently have, and the holders of the Warrants will have, anti-dilution protection which may have an adverse impact on the market value of our common stock and our ability to raise additional financing.

     The holders of certain of our outstanding warrants presently have, and the holders of the Warrants will have, anti dilution protection. For instance, the number of shares of common stock into which a Warrant is exercisable and the exercise price of the Warrants may be adjusted in certain cases if we issue shares of common stock at a price per share that is less than the $6.00 exercise price of the Warrants. This may prove a hindrance to our efforts to raise future equity and debt funding, and the exercise of such rights will dilute the percentage ownership interest of our stockholders and will dilute the value of their stock.

     At its current levels, our common stock is considered a “penny stock” and may be difficult to sell.

     Securities and Exchange Commission regulations generally define a “penny stock” to be an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock currently is less than $5.00 per share and, therefore, is designated as a “penny stock” according to Securities and Exchange Commission rules. This designation requires any broker or dealer selling these securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. These rules may restrict the ability of brokers or dealers to sell our common stock and may affect the ability of investors to buy or sell our shares.

     Because we have never paid dividends on our common stock and have no plans to do so, the only return on an investment in our common stock will come from any increase in the value of the common stock.

     Since beginning our current business, we have not paid cash dividends on our common stock and do not intend to pay cash dividends in the foreseeable future. Rather, we currently intend to retain future earnings, if any, to finance operations and expand our business. Therefore, any return on an investment in our common stock would come only from an increase in the value of our common stock.

     Because there is a potential for significant future dilution of our existing stockholders, their percentage ownership and control over company matters could be reduced.

     Currently, we are authorized to issue up to 400,000,000 shares of our common stock. As of October 30, 2009, 30,456,417 shares of our common stock were issued, and we may be obligated to issue up to an additional 18,100,764 shares of our common stock to the holders of our outstanding 6% Convertible Preferred Stock, Series B Preferred Stock, warrants for the purchase of common stock and stock options. The authorized but unissued shares of common stock may be issued by us in such transactions and at such times as our board of directors considers appropriate, whether in public or private offerings, as stock splits or dividends or in connection with mergers and acquisitions or otherwise. Any such issuance that is not made solely to all then-existing common stockholders proportionate to their interests (as in a stock dividend or stock split) will result in dilution to each stockholder by reducing his or her percentage ownership of the total outstanding shares.

     The subscription price, purchase price and exercise price determined for this rights offering are not indications of the fair value of our common stock.

     We did not seek or obtain an opinion of a financial advisor in establishing the subscription price of the Units, the purchase price of the shares of Series D Preferred Stock or the exercise price of the Warrants. The subscription price of the Units, the purchase price of the Series D Preferred Stock and the exercise price of the Warrants offered in this rights offering were set by our board of directors based on a number of factors, including but not limited to: our need for capital, the likely cost of capital from other sources, the price at which our principal stockholders would be willing to purchase our securities, the anti-dilution protections granted to security holders in our prior offerings, our business prospects, the need to offer securities at a price that would be attractive to our investors and encourage them to participate in the rights offering, the historic and current market price of our common stock, general conditions in the securities market and the difficult market conditions prevailing for the raising of equity capital, our operating history and the liquidity of our common stock. The subscription price of the Units, the purchase price of the Series D Preferred Stock and the exercise price of the Warrants do not necessarily bear any relationship to the book value of our assets, net worth, past operations, cash flows, losses, financial condition or any other established criteria for fair value. You should not consider the subscription price of the Units, the purchase price of the Series D Preferred Stock or the exercise price of the Warrants as any indications of the fair value of our common stock or the securities to be offered in this rights offering. After the date of this prospectus, our common stock may trade at prices above or below these prices.

     Anti-takeover provisions in our charter documents and under Delaware law could prevent or delay a change in control of our company.

     Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or change of control that a stockholder may consider favorable. These provisions include the ability to issue “blank check” preferred stock. The existence of these provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. Provisions of Delaware law may also discourage, delay or prevent someone from acquiring or merging with us or obtaining control of us. See “Description of Capital Stock.”

Risks Relating to the Units

     Active trading markets for the Units and the underlying shares of Series D Preferred Stock and Warrants do not exist and may not develop.

     There is no established trading market for the Units or the underlying shares of Series D Preferred Stock or Warrants and the shares of Series D Preferred Stock and the Warrants may only be sold or transferred as whole Units and in accordance with the terms thereof. Further, any such sale or transfer must consist of a minimum of 25,000 Units. See “The Rights Offering – Description of Securities Offered.” We do not intend to list the Units or the underlying shares of Series D Preferred Stock or Warrants on any stock exchange, automated quotation system or other market. We cannot guarantee that a trading market for the Units or the underlying shares of Series D Preferred Stock or Warrants will develop or, if a trading market for the securities does develop, the depth or liquidity of that market. If no active trading market develops, you may not be able to resell the Units or underlying shares of Series D Preferred Stock or Warrants at their fair market value or at all.

     The amount of the redemption payment on the Series D Preferred Stock is fixed and you will have no right to receive any greater payment regardless of the circumstances.

     The cash payment due upon the redemption (or deemed redemption) of the Series D Preferred Stock is fixed at $1.006 per share, subject to certain adjustments, plus accumulated dividends compounded at the rate of 8% per year, which represents the LV Accrual. If we have value remaining after payment of this amount, you will have no right to participate in that value. Further, in the event of a liquidation, dissolution, winding up or change of control of the Company prior to the eighth anniversary of the date of issuance (the mandatory redemption date), any unearned portions of the LV Accrual that would have otherwise been payable in cash will accelerate as if the Series D Preferred Stock were held for eight years, but such accelerated dividends will not be payable in cash and will be credited to the account of the holder solely for purposes of funding payment of the exercise price of all or a portion of the holders’ Warrants.

     If you do not exercise your Warrants prior to expiration, you may forfeit a significant portion of the dividend payable on your shares of Series D Preferred Stock.

     The shares of Series D Preferred Stock are entitled to a cumulative dividend of 25% of $1.006, which dividend will compound annually on the anniversary of the date of issuance. This dividend consists of two parts, such that 8% of $1.006, the LV Accrual, will be payable in cash upon the redemption (or deemed redemption) of the Series D Preferred Stock, and the remaining 17% of $1.006, the Exercise Price Accrual, will be credited to the account of the holder and may be used solely for purposes of funding payment of the exercise price payable upon exercise of the Warrants. Therefore, assuming the Series D Preferred Stock is redeemed on the eighth anniversary of the date of issuance, the total amount of the accumulated dividends you could realize in cash through the redemption of the Series D Preferred Stock is less than approximately 35% of the cumulative dividend payable on your shares of Series D Preferred Stock. The remaining accumulated dividend can only be realized from the exercise of the Warrants. If you do not exercise your Warrants prior to their expiration, this remaining accumulated dividend will be forfeited by you.

     In the event of a liquidation, dissolution, winding up or change of control of the Company prior to the eighth anniversary of the date of issuance, the unearned portion of the LV Accrual that would have otherwise been payable in cash will accelerate but will be credited to the account of the holder and only be available to fund payment of the exercise price payable upon exercise of the Warrants. In such case, unless you exercise your Warrants, you could realize a smaller portion of the total accumulated dividend in cash through the redemption of the Series D Preferred Stock.

     The liquidation rights of the Series D Preferred Stock will be subordinate to those of holders of our indebtedness and of any senior equity securities we have issued or may issue in the future and may be subject to the equal rights of other equity securities.

     There are no restrictions in the terms of the Series D Preferred stock on our ability to incur indebtedness. We can also, with the consent of one-half of the outstanding shares of Series D Preferred stock, issue preferred equity securities that are senior or on parity with respect to liquidation payments to the Series D Preferred Stock. If we were to liquidate our business, we would be required to repay all of our outstanding indebtedness and to satisfy the liquidation preferences of any outstanding senior equity securities before we could make any distributions to holders of our Series D Preferred Stock. We could have insufficient cash available to do so, in which case you would not receive any payment on the amounts due you. Moreover, any amounts remaining after the payment of senior securities would be split equally among all holders of Series D Preferred Stock and any other holders of securities that may be issued that rank on parity with the Series D Preferred Stock as to liquidation preferences, which might result in your receiving less than the full amount due you.

     We may not have sufficient cash to satisfy our redemption obligations with respect to the Series D Preferred Stock, which would have a material adverse effect on our financial condition and your investment in our shares of Series D Preferred Stock.

     Pursuant to the terms of the Series D Preferred Stock, we are required to redeem all outstanding shares of Series D Preferred Stock on the eighth anniversary of the date of issuance or upon an earlier liquidation, dissolution, winding up or change of control of the Company. Upon any such redemption, we will be required to make a cash payment of $1.006 per share, subject to certain adjustments, plus the accumulated dividends, which would include the payment or credit of all dividends through the eighth anniversary of the date of issuance. We have a limited amount of revenues and a history of losses, and we may not have sufficient cash or be able to obtain financing on acceptable terms to allow us to comply with our redemption obligations. If we are unable to redeem the outstanding shares of Series D Preferred Stock, our financial condition and your investment would be materially adversely affected.

     Holders of Series D Preferred Stock and Warrants will have limited or no voting rights.

     As a holder of our Series D Preferred Stock, you will have limited voting rights. Holders of our Series D Preferred Stock are entitled to vote these shares as may be required by law and, among other things, on matters relating to the terms of the Series D Preferred Stock, the number of authorized shares in the Series D Preferred Stock, and the issuance of other series that will be senior or equal to the Series D Preferred Stock. Holders of Series D Preferred Stock will not have the right to vote on actions customarily subject to stockholder vote or approval, including the election of directors, the approval of significant transactions, and amendments to our certificate of incorporation that would not adversely affect the rights and preferences of the Series D Preferred Stock. As a result, such holders’ ability to exercise influence over the Company is extremely limited. Further, prior to exercising the Warrants, you will not have any voting rights with respect to the shares of common stock underlying the Warrants. Upon exercise of any Warrants purchased in the rights offering, you will be entitled to exercise the same rights as a holder of common stock only as to matters for which the record date occurs on or after the exercise date.

     The exercise price and number of shares of common stock underlying the Warrants may not be adjusted for all dilutive events that may adversely affect the market price of the common stock issuable upon exercise of the Warrants.

     The exercise price and number of shares of our common stock that you are entitled to receive upon exercise of the Warrants are subject to adjustment only for share splits and combinations, share dividends and specified other transactions. See “The Rights Offering – Description of Securities Offered.” However, other events, such as securities issued to employees, officers, directors, consultants and other service providers pursuant to our Amended and Restated Equity-Based Compensation Plan or another plan or agreement approved by the board of directors, and securities issued in connection with acquisitions, which

may materially and adversely affect the market price of our common stock, may not result in any adjustment.

     The holders of a majority the unexercised Warrants issued pursuant to this rights offering and the convertible note agreements with Pegasus IV and Philips Electronics may elect to waive compliance by the Company with respect to certain anti-dilution provisions set forth in the Warrants.

     Other than in certain permitted transactions and so long as a Warrant remains outstanding, if we issue any shares of common stock (or securities convertible into or exercisable for common stock) at a price per share that is less than the exercise price of the Warrants, then the number of shares of common stock into which a Warrant is exercisable and the exercise price will be adjusted. Further, if the number of shares underlying, and/or exercise price or conversion price of, any of our derivative securities adjusts or would have adjusted and the terms, manner or method of such adjustment are more favorable than the adjustment provisions contained in the Warrants, then the exercise price of the Warrants and/or the number of shares into which the Warrants are convertible must also be adjusted to give the Warrant holders the benefit of the more favorable adjustment. However, at any time following the date that the Warrants are issued, the holders of a majority of the then unexercised and outstanding Warrants will have the right to waive compliance by the Company with respect to each of these anti-dilution clauses, in which case the Warrants specifically provide that the remaining holders will not receive the benefit of these clauses. On the closing date of this rights offering, each $1.006 of outstanding principal and interest on the convertible note agreements with Pegasus IV and Philips Electronics will automatically convert into one Unit. As a result and based solely on the amount of principal and interest under the convertible note agreement with Pegasus IV on October 30, 2009, we expect Pegasus IV to hold approximately 33.5 million of the [56,743,693+] outstanding Warrants immediately following this rights offering. Because Pegasus IV is expected to hold a majority of the outstanding Warrants immediately following the consummation of this rights offering, Pegasus IV and its affiliates will control this right until they no longer hold a majority of the unexercised and outstanding Warrants, and the minority Warrant holders may not be able to benefit from the anti-dilution provision. The Warrants are described in more detail in “Rights Offering – Description of Securities Offered” below.

Risks Related to Our Business

     The current economic downturn and uncertainty and turmoil in the equity and credit markets could continue to adversely impact our clients, diminish the demand for our products, and harm our operations and financial performance.

     The lighting markets in which we sell our LED lighting devices have experienced rapid evolution and growth in recent years, but have been negatively affected by the current recession and downturn in the general economy. The current economic downturn has harmed, and could continue to harm, the economic health of our clients and consequently decrease the demand for our products, particularly in the public and private infrastructure, retail and hospitality, consumer and commercial, and architecture and architainment markets. Further, certain of our present customers and potential future customers have informed us that they may not purchase our products unless or until they receive funds pursuant to the legislative initiatives promulgated under the American Recovery and Reinvestment Act of 2009. The persistence of the economic downturn also may cause reductions or elimination of utility and government energy efficiency incentive programs used to partially fund the costs of customer projects. In addition, increased competition during the current economic downturn may result in lower sales, reduced likelihood of profitability, and diminished cash flow to us.

     We have a limited amount of revenues and a history of losses and may be unable to continue operations unless we can generate sufficient operating income by completing the commercialization of, and the successful marketing of, our products.

     We have sustained operating losses since the inception of our lighting business. For the years ended December 31, 2008 and the six-month period ended June 30, 2009, we had revenues of approximately $20.8 million and $14.3 million, respectively, and as of December 31, 2008 and June 30,

2009, we had accumulated deficits of approximately $99.9 million and $127.8 million, respectively. We expect sales of our products to range from flat to a slight increase in 2009 as compared to the previous year. Our ability to generate revenue is, however, dependent on receiving purchase commitments from customers as well as the timing of any purchase commitments that we receive. Our ability to generate revenue is also dependent on our ability to preserve current customer relationships and to continue selling our products to this group of customers, as well as our ability to sell our products to potential customers in the markets that we presently serve. Further, our ability to generate revenue is dependent on the design and development of our products, the receipt of appropriate UL or other certifications on certain of our products and the ultimate production of our products, each of which must be done timely and in a manner that meets our customers’ specifications.

     Since inception we have not achieved profitability, and it is difficult to evaluate the likelihood that we will achieve or maintain profitability in the future. Therefore, if we are unable to obtain sufficient capital when needed, our business and future prospects will be adversely affected and we could be forced to suspend or discontinue operations.

     On an annual basis, our operations have not generated positive cash flow since our inception, and we have funded our operations primarily through the issuance of common and preferred stock and debt. We have recently made the transition from a development stage company to one that is focusing on sales and growth in the lighting industry marketplace. As we concentrate on commercializing our products, our limited operating history makes an evaluation of our future prospects difficult. The actual amount of funds that we will need to meet our operating needs during the next twelve months will be determined by a number of factors, many of which are beyond our control. These factors include the timing and volume of sales transactions, the success of our marketing strategy, market acceptance of our products, the success of our research and development efforts (including any unanticipated delays), the costs and timing of obtaining new patent rights, enforcing our existing patents, potential infringement claims, regulatory changes, competition, technological developments in the market, evolving industry standards and the amount of working capital investments we are required to make.

     Our ability to continue to operate until our cash flow from operations turns positive may depend on our ability to continue to raise funds through public or private sales of shares of our capital stock or through debt. We currently have a line of credit with the Bank of Montreal (“BMO”), short- and long-term debt facilities with ABN AMRO and a working capital facility with IFN Finance. Our line of credit with BMO matures on written demand by BMO, but in no event later than August 24, 2010. Our short- and long-term debt facilities with ABN AMRO mature on January 1, 2010 and January 1, 2014, respectively. The working capital facility with IFN Finance matures on November 14, 2009. Other than these facilities, we do not have any committed sources of outside capital at this time.

     The current worldwide economic downturn has significantly reduced access to capital and credit markets, and it is uncertain whether we will be able to obtain outside capital when we need it or on terms that would be acceptable to us. Further, we have recently been in default under the terms of our loan agreement with ABN AMRO due to our inability to satisfy certain covenants pertaining to the capitalization of LSGBV. However, we have taken action, and have agreed to take further action in the fourth quarter of 2009, that we believe will bring LSGBV back into compliance with the terms of the loan agreement with ABN AMRO. In the past we have primarily relied on, and currently rely on, financing or guaranties from related parties, principally Pegasus IV. There are no assurances that such related parties will continue to provide financing or financing on terms that are acceptable to us. If we raise funds by selling additional shares of our common stock or securities convertible or exercisable into our common stock, the 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.

     If we are unable to conduct a rights offering in accordance with the terms of our convertible note agreements with Pegasus IV and Philips Electronics, we may be required to repay up to approximately $42.8 million to such parties.

     Pursuant to our convertible note agreements with Pegasus IV and Philips Electronics, we are contractually obligated to use commercially reasonable efforts to conduct a rights offering as soon as is reasonably practical to all current common and preferred stockholders and all warrant holders. If the registration statement for the rights offering is declared effective by the Securities and Exchange Commission and the rights offering is consummated prior to July 31, 2010 (the scheduled maturity date of the convertible note agreements), all of the then outstanding principal and interest under such notes will be automatically converted into a number of units of our securities equal to one unit for each $1.006 of outstanding principal and interest under the notes. Additionally, each of the convertible note agreements provide Pegasus IV and Philips Electronics with the option to convert all or a portion of the outstanding principal and interest under the notes into units of our securities at any time. Further, if Pegasus IV exercises its optional conversion right, then Philips Electronics will also be required to convert the amounts outstanding under its convertible note agreement.

     In the event that the amounts outstanding under each of these convertible note agreements are not voluntarily converted into units of our securities and if we are unable to complete the rights offering in accordance with the terms of the convertible note agreements prior to July 31, 2010, then we may be required to repay up to approximately $42.8 million in the aggregate, to Pegasus IV and Philips Electronics. Our ability to repay these amounts will depend on our ability to obtain funds through public or private sales of shares of our capital stock or alternative methods of financing. It is uncertain whether we will be able to obtain outside capital when we need it or on terms that would be acceptable. If we raise funds by selling additional shares of our common stock or securities convertible or exercisable into our common stock, the ownership interest of our existing stockholders will be diluted. If we are unable to obtain sufficient outside capital at that time, our business and future prospects will be adversely affected and we could be forced to suspend or discontinue operations.

     If our developed technology does not achieve market acceptance, prospects for our growth and profitability would be limited.

     Our future success depends on market acceptance of our LED technology. Potential customers may be reluctant to adopt solid state lighting (“SSL”) as an alternative to traditional lighting technology because of its higher initial cost or perceived risks relating to its novelty, reliability, usefulness, light quality, and cost-effectiveness when compared to other established lighting sources available in the market. If acceptance of SSL in general, and of our LED lighting devices in particular, does not continue to grow within the high performance lighting markets that we serve, and in the markets that we intend to serve through future customers, then opportunities to increase our revenues and operate profitably may be limited. Our business strategy includes penetration of the general lighting market with our lighting products. Failure to obtain and incorporate into our products, on a timely basis, LEDs with satisfactory performance, quality and cost characteristics could delay our introduction of new products, or reduce the attractiveness to potential customers of our products in the general lighting market.

     Our products may contain defects that could reduce sales or result in claims against us.

     Despite testing by us and our customers, defects have been and could be found in the future in our existing or future products. This could result in, among other things, a delay in the recognition or loss of revenues, loss of market share or failure to achieve market acceptance. These defects may cause us to incur significant warranty, support and repair costs, divert the attention of our engineering personnel from our product development efforts and harm our relationships with customers and our reputation in the marketplace. These problems could result in the delay or loss of market acceptance of our products and would likely harm our business. Defects, integration issues or other performance problems in our products could also result in personal injury or financial or other damages to our customers for which they might seek legal recourse against us. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend.

     We rely upon key members of our management team and other key personnel and a loss of key personnel could prevent or significantly delay the achievement of our goals.

     Our success will depend to a large extent on the abilities and continued services of key members of our management team and other key personnel. The loss of key members of our management team or other key personnel could prevent or significantly delay the implementation of our business plan and marketing efforts. If we continue to grow, we may need to add additional management and other personnel. Competition for qualified personnel in our industry is intense, and our success will depend on our ability to attract and retain highly skilled personnel. Our efforts to obtain or retain such personnel may not be successful.

     If critical components and raw materials that we utilize in our products become unavailable, we may incur delays in shipment that could damage our business.

     We depend on our suppliers for certain standard electronic components as well as custom components critical to the manufacture of our lighting devices. We currently rely on a limited number of suppliers for LEDs used in the production of our products. We depend on our vendors to supply in a timely manner critical components in adequate quantities and consistent quality and at reasonable costs. Finding a suitable alternate supply of required components that meet our strict specifications and obtaining them in needed quantities may be a time-consuming process and we may not be able to find an adequate alternative source of supply at an acceptable cost.

     We are in the process of establishing long-term relationships with certain key suppliers. However, we currently rely on purchase orders with our suppliers rather than long-term contracts. To the extent that we do not have long term contracts, we may not be able to predict with certainty our ability to obtain components in adequate quantities and at acceptable prices when they may be needed. If we are unable to obtain components in adequate quantities, we may incur delays in shipment or be unable to meet demand for our products, which could damage our reputation with customers and prospective customers.

     The principal raw materials used in the manufacture of our products are LEDs, a variety of standard electrical components, printed circuit boards, wire, plastics for optics, metal for housings and heat sinks. From time to time, LEDs have been in short supply due to demand, binning restrictions and production constraints. Any significant interruption in the supply of these raw materials could have a material adverse effect upon us.

     The principal raw materials used in the manufacture of the LEDs used in our products are silicon wafers, gold wire, lead frames, and a variety of packages and substrates, including metal, printed circuit board, flex circuits, ceramic and plastic packages and phosphors. From time to time, particularly during periods of increased industry-wide demand, silicon wafers and other materials have been in short supply. Any significant interruption in the supply of these raw materials could have a material adverse effect upon us.

     We assemble and manufacture certain of our products and our sales, results of operation and reputation could be materially adversely affected if there is a disruption at our assembly and manufacturing facilities.

     We currently have one main assembly and manufacturing facility located in Satellite Beach, Florida and a custom product and project assembly and manufacturing facility located in Rancho Cordova, California. The operation of these facilities involves many risks, including equipment failures, natural disasters, industrial accidents, power outages and other business interruptions. Although we carry business interruption insurance and third-party liability insurance to cover claims in respect of personal injury or property or environmental damage arising from accidents on our properties or relating to our operations, our existing insurance coverage may not be sufficient to cover all risks associated with our business. As a result, we may be required to pay for financial and other losses, damages and liabilities, including those caused by natural disasters and other events beyond our control, out of our own funds, which could have a

material adverse effect on our business, financial condition and results of operations. Additionally, any interruption in our ability to effect the assembly, manufacture or distribution of our products could result in lost sales, limited revenue growth and damage to our reputation in the market, all of which would adversely affect our business.

     We utilize contract manufacturers to manufacture certain of our products and any disruption in these relationships may cause us to fail to meet our customers’ demands and may damage our customer relationships.

     Although we assemble and manufacture certain of our products, we currently depend on a small number of contract manufacturers to manufacture certain of our products at plants in various locations throughout the world. These manufacturers provide the necessary facilities and labor to manufacture our products. Our reliance on contract manufacturers involves certain risks, including the following:

	•		lack of direct control over production capacity and delivery schedules;
	•		lack of direct control over quality assurance, manufacturing yields and production costs; and
	•		risk of loss of inventory while in transit.

     If our contract manufacturers were to terminate their arrangements with us or fail to provide the required capacity and quality on a timely basis, we would experience delays in the manufacture and shipment of our products until alternative manufacturing services could be contracted or internal manufacturing processes could be implemented. To qualify a new contract manufacturer, familiarize it with our products, quality standards and other requirements, and commence volume production may be a costly and time-consuming process. If we are required or choose to change contract manufacturers for any reason, our revenue, gross margins and customer relationships could be adversely affected.

     If we are unable to increase production capacity for our products in a timely manner, we may incur delays in shipment and our revenues and reputation in the marketplace could be harmed.

     An important part of our business strategy is the expansion of production capacity for our products. We plan to increase production capacity by adding new contract manufacturers and by expanding capacity with our existing contract manufacturers. Our ability to successfully increase production capacity will depend on a number of factors, including the following:

	•		identification and availability of appropriate and affordable contract manufacturers;
	•		ability of our current contract manufacturers to allocate more of their existing capacity to us or their ability to add new capacity quickly;
	•		availability of critical components used in the manufacture of our products;
	•		establishment of adequate management information systems, financial controls and supply chain management and quality control procedures; and
	•		ability of our future contract manufacturers to implement our manufacturing processes.

     If we are unable to increase production capacity for our products in a timely manner while maintaining adequate quality, we may incur delays in shipment or be unable to meet increased demand for our products which could harm our revenues and damage our reputation and our relationships with current customers and prospective customers.

     If we are not able to compete effectively against larger lighting manufacturers with greater resources, our prospects for future success will be jeopardized.

     In the lighting markets in which we sell our lighting devices, we compete with lighting products utilizing traditional lighting technology provided by many vendors. In addition, we face competition from a number of manufacturers, including manufacturers of traditional lighting equipment that have developed one or more LED products. Some of our competitors, particularly those that offer traditional lighting

products, are larger companies with greater resources to devote to research and development, manufacturing and marketing.

     To the extent that we seek to introduce LED products such as retrofit bulbs and lamps for standard fixtures for use in general lighting applications, we expect to encounter competition from large, established companies in the general lighting industry such as General Electric, Matsushita, Osram Sylvania and Philips Lighting, each of which has, we believe, undertaken initiatives to develop LED technology as well as other energy efficient lighting products. These companies have global marketing capabilities and substantially greater resources to devote to research and development and other aspects of the development, manufacture and marketing of SSL systems than we have. We anticipate the possibility that larger LED manufacturers, including those that currently supply us with LEDs, may seek to compete with us by introducing more complete systems or fixtures that do not infringe upon our patents. We may be unable to compete successfully in such markets against these or future competitors.

     We are subject to legal, political and economic risks abroad.

     As a result of our acquisition of LSGBV and other international affiliates, our financial condition and operating results could be significantly affected by risks associated with international activities, including economic and labor conditions, political instability, laws (including U.S. taxes on foreign subsidiaries), changes in the value of the U.S. dollar versus local currencies, differing business cultures and foreign regulations that may conflict with domestic regulations.

     We believe that there are many barriers and risks to operating successfully in the international marketplace, including the following:

	•		intellectual property protection risks;
	•		employment law risks;
	•		differing contracting process including the ability to enforce agreements;
	•		foreign currency risks;
	•		increased dependence on foreign manufacturers, shippers and distributors;
	•		compliance with multiple, conflicting and changing governmental laws and regulations; and
	•		import and export restrictions and tariffs.

     If we are unable to manage any future growth effectively, our profitability and liquidity could be adversely affected.

     Our anticipated growth is expected to place significant strain on our limited research and development, sales and marketing, operational and administrative resources. To manage any future growth, we must continue to improve our operational and financial systems and expand, train and manage our employee base. For example, we need to implement new management information systems, hire and train new sales representatives and improve our supply chain management and quality control operations. Additionally, we need to make additions to our operations and administrative management teams. If we are unable to manage our growth effectively, we may be unable to operate profitability and we may not be able to effectively pursue our business plan.

     Failure to maintain effective internal controls could have a material adverse effect on our operations and our stock price.

     We are subject to Section 404 of the Sarbanes-Oxley Act, which requires an annual management assessment of the effectiveness of our internal control over financial reporting. Effective internal controls are necessary for us to produce reliable financial reports. If, as a result of deficiencies in our internal controls, we cannot provide reliable financial reports, our business decision process may be adversely affected, our business and operating results could be harmed, investors could lose confidence in our reported financial information and the price of our stock could decrease.

     During the evaluation of disclosure controls and procedures for the year ended December 31, 2008 and the six-month period ended June 30, 2009, we concluded that our disclosure controls and procedures were not effective in reaching a reasonable level of assurance of achieving management’s desired controls and procedures objectives in our internal control over financial reporting. There is no guarantee that we will be able to resolve these material weaknesses or avoid other material weaknesses in the future.

Risks Related to Intellectual Property

     If we are unable to respond effectively as new lighting technologies and market trends emerge, our competitive position and our ability to generate revenues and profits may be harmed.

     To be successful, we must keep pace with rapid changes in lighting technology, changing customer requirements, new product introductions by competitors and evolving industry standards, any of which could render our existing products obsolete if we fail to respond in a timely manner. For example, if new SSL devices are introduced that can be controlled by methods not covered by our proprietary technology, or if effective new sources of light other than solid-state devices are discovered, our current products and technology could become less competitive or obsolete. If others develop innovative proprietary lighting technology that is superior to ours, or if we fail to accurately anticipate technology and market trends and respond on a timely basis with our own innovations, our competitive position may be harmed and we may not achieve sufficient growth in our revenues to attain, or sustain, profitability.

     If we are unable to obtain and protect our intellectual property rights, our ability to commercialize our products could be substantially limited.

     As of October 23, 2009, we had filed 128 U.S. patent applications. From these applications, 73 U.S. patents had been issued and 36 were pending approval. When we believe it is appropriate and cost effective, we make corresponding international, regional or national filings to pursue patent protection in other parts of the world. Patent applications filed by us, or by others under which we have rights, may not result in patents being issued in the United States or foreign countries. Because our patent position involves complex legal, technical, and factual questions, the issuance, scope, validity and enforceability of our patents cannot be predicted with certainty. Competitors may develop products similar to our products that do not conflict with our patent rights. Others may challenge our patents and, as a result, our patents could be narrowed or invalidated.

     In some cases, we may rely on trade secrets to protect our innovations. There can be no assurance that trade secrets will be established, that secrecy obligations will be honored or that others will not independently develop similar or superior technology.

     In addition, our technology or products may inadvertently infringe on patents or rights owned by others and licenses might not be available to us on reasonable or acceptable terms or at all. Litigation of intellectual property rights can be complex, costly, protracted and highly disruptive to our business operations by diverting the attention and energies of our management and key technical personnel, which could severely harm our business. Plaintiffs in intellectual property cases often seek injunctive relief. Any intellectual property litigation could be harmful to our business and we may not be able to afford the legal costs associated with defending against a claim of infringement or enforcing any of our patents.

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

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

USE OF PROCEEDS

     Assuming full participation in the rights offering, but excluding the issuance of shares of common stock to holders of Warrants upon exercise of those Warrants, we estimate that the net proceeds from the rights offering will be approximately $17.4 million, after deducting estimated offering expenses. Because there is no minimum number of Units that must be sold in the rights offering, we can provide no assurance regarding the amount of capital we will actually raise in the rights offering. We intend to use the proceeds of the rights offering for working capital purposes, including, but not limited to, the payment in whole or in part of any outstanding indebtedness.

THE RIGHTS OFFERING

The Rights

     Each Holder is being granted at no cost one right for each share of common stock issued or issuable to such holder as of 5:00 p.m., New York City time, on            , 2009, the record date of the rights offering. One right represents the right to subscribe for 1.3 Units at $1.006 per Unit. Each Unit consists of: (i) one share of Series D Preferred Stock and (ii) a Warrant representing the right to purchase one share of common stock for $6.00 per share.

     For example, if on the record date you own 500 shares of our common stock and a warrant to purchase 500 shares of our common stock, you will receive 1,000 rights in this rights offering. You can exercise your rights and purchase up to 1,300 Units, which will consist of 1,300 shares of Series D Preferred Stock and a Warrant or Warrants representing the right to purchase 1,300 shares of common stock, in the aggregate. The aggregate purchase price of your 1,300 Units will be $1,307.80.

     If you exercise your rights, that means you have offered to purchase at least some of the Units that the rights entitle you to purchase. If you exercise your rights in full, that means you have offered to purchase all of the Units offered to you in this rights offering. There is no minimum number of rights that must be exercised in order for us to complete the rights offering.

     If you wish to exercise your rights, you must do so before 5:00 p.m., New York City time, on           , 2009, the expiration date of this rights offering unless extended by us in our sole discretion.

After that date, the rights will expire and will no longer be exercisable. Any rights not exercised at or before that time will expire without any payment to the Holders of those unexercised rights.

     A total of [13,988,350+] rights are being offered in this rights offering. The rights entitle the Holders to purchase up to [18,184,855+] Units consisting of an aggregate of [18,184,855+] shares of Series D Preferred Stock and Warrants to purchase up to an aggregate of [18,184,855+] shares of common stock.

Basic Right

     Each basic right entitles you to purchase 1.3 Units for $1.006 per Unit. You are not required to exercise any or all of your rights. We will deliver to the Holders who purchase Units in this rights offering: (i) certificate(s) representing the shares of Series D Preferred Stock purchased and (ii) certificate(s) representing the Warrants to purchase shares of common stock, as soon as practicable after this rights offering has expired. No fractional Units will be issued in this offering.

Over-Subscription Right

     Holders who fully exercise their basic rights will be entitled to subscribe for additional Units that remain unsubscribed as a result of any unexercised basic rights. This is referred to as the over-subscription right. The over-subscription right allows a Holder to subscribe for an additional amount equal to up to 200% of the Units for which such Holder was otherwise entitled to subscribe. If an insufficient number of Units are available to satisfy fully the over-subscription right requests, the available Units will be distributed proportionately among Holders who exercised their over-subscription right based on the number of unsubscribed rights each Holder subscribed for pursuant to the over-subscription right. We will return any excess payments by mail without interest or deduction promptly after the expiration of the rights offering.

Intended Purchases

     On August 27, 2009, we entered into a convertible note agreement with Pegasus IV, the beneficial owner of approximately 82.5% of our common stock, pursuant to which we have already offered approximately 33.5 million Units (based upon the outstanding principal and interest balance under this note as of October 30, 2009) to Pegasus IV with the same terms as the Units offered in this prospectus. Pegasus IV has agreed to convert approximately $31.7 million, the original principal amount of the convertible note agreement, into the Units that it and its affiliate, LED Holdings, would otherwise be entitled to subscribe for in this rights offering. In accordance with the convertible note agreement, Pegasus IV has also agreed to convert the accrued interest on the original principal amount of the convertible note into Units. These Units will be acquired in a private placement directly from us at the same price per Unit as in this rights offering. As a result, Pegasus IV and LED Holdings are not being offered rights to purchase Units in this rights offering. However, Pegasus IV will have the option to acquire any Units not otherwise subscribed for pursuant to the terms of this rights offering. See “The Rights Offering – Standby Purchase Option” below.

Employee Subscription Right

     If any Units remain unsubscribed as a result of unexercised basic rights and, if applicable, unexercised over-subscription rights, each of our employees, in addition to any rights received in his or her capacity as a Holder, will be entitled to subscribe for the remaining Units, with each such subscription consisting of a minimum of 10,000 Units. This is referred to as the employee subscription right. If an insufficient number of Units are available to satisfy fully the employee subscription requests, the available Units will be distributed proportionately among the employees who exercised their employee subscription rights.

Standby Purchase Option

     Pursuant to the convertible note agreement between us and Pegasus IV, we granted Pegasus IV the option to acquire any Units not otherwise subscribed for by the Holders and our employees pursuant to the

terms of the rights offering. These Units may be purchased by Pegasus, in its sole discretion, at the subscription price of $1.006 per Unit. Any Units purchased pursuant to this standby purchase option will not be covered by this registration statement and will be acquired in a private placement.

Participation by Officers and Directors

     Certain of our officers and directors are Holders and are eligible to participate in this rights offering. However, we cannot guarantee to you that any of them will exercise their basic or over-subscription rights to purchase any Units.

Transferability of Rights

     The subscription rights granted to you are non-transferable and, therefore, may not be assigned, gifted, purchased or sold to anyone else. The subsequent transfer after the record date of Eligible Securities for which rights were granted will not have any effect on the selling Holder’s subscription privilege in respect of any such rights.

Description of Securities Offered

     Series D Preferred Stock

     Each Unit issuable upon exercise of the rights will consist of one share of Series D Preferred Stock. Assuming full participation in the rights offering, we will issue [18,184,855+] shares of Series D Preferred Stock, in the aggregate. As previously discussed, pursuant to convertible note agreements and based upon the outstanding principal and interest balances under these notes as of October 30, 2009, we have already offered Pegasus IV and Philips Electronics approximately 38.6 million Units, which would consist of approximately 38.6 million shares of Series D Preferred Stock. See “Convertible Note Agreements with Pegasus IV and Philips Electronics.” As of October 30, 2009, no shares of Series D Preferred Stock were issued and outstanding. The following is a brief description of the terms of the Series D Preferred Stock that will be issued pursuant to the rights offering. This summary does not purport to be complete in all respects. This description is subject to and qualified in its entirety by reference to the Certificate of Designation of Series D Preferred Stock, a copy of which has been filed with the Securities and Exchange Commission and is also available upon request from us.

     Designation. Under the certificate of designation, 79,000,000 shares of preferred stock are designated as “Series D Preferred Stock” with a stated purchase price of $1.006 per share.

     Dividends. The shares of Series D Preferred Stock will be entitled to a cumulative dividend of 25% of $1.006, subject to adjustment, which will compound annually on the anniversary of the date of issuance. This dividend will consist of two parts, the “Exercise Price Accrual” and the “LV Accrual.”

     Exercise Price Accrual. The Exercise Price Accrual will be equal to 17% of $1.006 and will be a non-cash dividend credited to the account of the holder. At the holder’s election but subject to the limitations described below, the Exercise Price Accrual may only be used for purposes of funding payment of the exercise price payable upon exercise of all or a portion of such holder’s Warrants. Except in the case of the surrender by a holder of all or a portion of such holder’s Series D Preferred Stock in accordance with the terms of the Warrants, the Exercise Price Accrual may not be separately applied to fund payment of the exercise price of the Warrants until the redemption (or deemed redemption) of the Series D Preferred Stock. Upon the redemption (or deemed redemption) of the Series D Preferred Stock, the Exercise Price Accrual will remain credited to the account of the holder until all amounts are surrendered by the holder or until the Warrants expire. In no event will a holder of Series D Preferred Stock be entitled to accumulate an aggregate Exercise Price Accrual that is greater than 100% of the aggregate exercise price of the Warrants held by such holder. The Exercise Price Accrual must be transferred in conjunction with the sale or transfer of the associated Warrants.

     LV Accrual. The LV Accrual will be equal to 8% of $1.006 and will accrue to liquidation value and be payable in cash solely upon the redemption (or deemed redemption) of the Series D Preferred Stock. If on or prior to September 9, 2010, we issue shares of a new series of preferred stock with an annual dividend rate payable in cash, stock or property that is greater than 8%, then the LV Accrual applicable to the Series D Preferred Stock will automatically be increased to that of the new series, and the total annual dividend on the Series D Preferred Stock will be adjusted to reflect such increase.

     Assuming the Series D Preferred Stock is held until the scheduled redemption date and no adjustments are made to the dividend rate, the liquidation value, annual dividend, Exercise Price Accrual and LV Accrual with respect to one share of Series D Preferred Stock will accrue and be allocated as follows:

Anniversary of the
Date of Original
Issuance																		Exercise				Cumulative
(Dividend Payment		Liquidation				Annual								Cumulative				Price				Exercise Price
Date) (Year)		Value				Dividend				LV Accrual				LV Accrual				Accrual				Accrual
0		$	1.0060			$	—			$	—			$	—			$	—			$	—
1		$	1.2575			$	0.2515			$	0.0805			$	0.0805			$	0.1710			$	0.1710
2		$	1.5719			$	0.3144			$	0.1006			$	0.1811			$	0.2138			$	0.3848
3		$	1.9648			$	0.3930			$	0.1258			$	0.3069			$	0.2672			$	0.6520
4		$	2.4561			$	0.4912			$	0.1572			$	0.4641			$	0.3340			$	0.9860
5		$	3.0701			$	0.6140			$	0.1965			$	0.6606			$	0.4175			$	1.4036
6		$	3.8376			$	0.7675			$	0.2456			$	0.9062			$	0.5219			$	1.9255
7		$	4.7970			$	0.9594			$	0.3070			$	1.2132			$	0.6524			$	2.5779
8		$	6.00			$	1.1992			$	0.3837			$	1.5969			$	0.8155			$	3.3934

     Priority. In the event of a liquidation, dissolution or similar event, holders of Series D Preferred Stock will have preference over our common stock to the extent of $1.006 for each share of Series D Preferred Stock plus all accrued dividends (which, except as provided below, would include the payment or credit of all dividends through the eighth anniversary of the date of issuance). The Series D Preferred Stock will rank junior to the liquidation preferences of the holders of our outstanding 6% Convertible Preferred Stock, Series B Preferred Stock and Series C Preferred Stock.

     Conversion. In accordance with the terms of the Warrants discussed in “The Rights Offering – Description of Securities Offered – The Warrants,” holders of Series D Preferred Stock may surrender their shares in satisfaction of the exercise price of the Warrants. Otherwise, the holders of Series D Preferred Stock have no right to exchange or convert such shares into any other security of the Company.

     Redemption. We must redeem all outstanding shares of Series D Preferred Stock on the eighth anniversary of the date of issuance or upon an earlier liquidation, dissolution, winding up or change of control of the Company (each of which will be deemed to be a redemption). We do not otherwise have a right to redeem the outstanding shares of Series D Preferred Stock.

     Liquidation Value. The liquidation value per share of Series D Preferred Stock will be equal to the stated purchase price of the Series D Preferred Stock plus the accrued dividends. Upon the scheduled redemption of the Series D Preferred Stock, we will be required to pay or, in the case of the Exercise Price Accrual, credit, each holder of Series D Preferred Stock an amount equal to $1.006 plus the full amount of the Exercise Price Accrual and the LV Accrual through the eighth anniversary of the date of issuance. In the event of a deemed redemption, which includes a liquidation, dissolution, winding up or change of control of the Company, prior to the eighth anniversary of the date of issuance, we will be required to redeem the Series D Preferred Stock early and pay each holder an amount per share in cash equal to $1.006 plus the earned amount of the LV Accrual as of the date of the deemed redemption. Any unearned portion of the LV Accrual will accelerate as if each holder of Series D Preferred Stock had held the shares until the eighth anniversary of the date of issuance, but this accelerated portion of the LV Accrual will not be payable in cash but will accrue solely for purposes of funding payment of the exercise price of all or a portion of the Warrant(s) held by such holder and be deemed the Exercise Price Accrual for all purposes after such date. Each holder of Series D Preferred Stock will be credited with the earned amount of the Exercise Price

Accrual as of the date of the deemed redemption, and any unearned portion of the Exercise Price Accrual will accelerate as if each holder had held the shares until the eighth anniversary of the date of issuance.

     Voting Rights. Except as indicated below or otherwise required by law, the holders of Series D Preferred Stock will not have any voting rights.

     So long as any shares of Series D Preferred Stock remain outstanding, we may not, without the vote or written consent of the holders of at least a majority of the then outstanding shares thereof, take the following action:

	•		alter, modify or amend the terms of the Series D Preferred Stock;
	•		create or issue any new series or class of security that ranks senior to or on parity with the Series D Preferred Stock;
	•		increase the authorized number of shares of the Series D Preferred Stock;
	•		issue any shares of Series D Preferred Stock other than pursuant to the rights offering or the convertible note agreements with Pegasus IV and Philips Electronics; or
	•		enter into any agreement or commitment with respect to any of the foregoing.

     Transferability. Shares of Series D Preferred Stock will only be transferable in conjunction with the sale or transfer of whole Units (each Unit consisting of one share of Series D Preferred Stock and a Warrant to purchase one share of common stock), and any such sale or transfer must consist of a minimum of 25,000 Units.

     Warrants

     Each Unit issuable upon exercise of the rights will also consist of a Warrant representing the right to purchase one share of our common stock. Assuming full participation in the rights offering, we will issue [18,184,855+] Units consisting of Warrants to purchase [18,184,855+] shares of common stock, in the aggregate. As previously discussed, pursuant to convertible note agreements and based upon the outstanding principal and interest balances under these notes as of October 30, 2009, we have already offered Pegasus IV and Philips Electronics approximately 38.6 million Units, which would consist of Warrants to purchase approximately 38.6 million shares of common stock. See “Convertible Note Agreements with Pegasus IV and Philips Electronics.” The following is a brief description of the terms of the Warrants that will be issued pursuant to the rights offering. This summary does not purport to be complete in all respects. This description is subject to and qualified in its entirety by reference to the Form of Warrant, a copy of which has been filed with the Securities and Exchange Commission and is also available upon request from us.

     Exercise. Each Warrant will have an exercise price of $6.00 per share and expire on the twelfth anniversary of the date of issuance. The Warrants will be exercisable at any time following issuance by delivery of a written exercise notice to the Company and by payment of an amount equal to the exercise price multiplied by the number of shares of common stock being purchased. The exercise price will be payable in one of the following four ways, or any combination of the four:

	(1)		Payment in cash or by wire transfer of immediately available funds;
	(2)		By a net issuance or “cashless” exercise, which means the Warrant holder may exercise the Warrant without tendering the exercise price, in exchange for a reduced number of shares underlying the Warrant (the forfeited shares would have an aggregate fair market value equal to the aggregate exercise price);
	(3)		Surrender by the Warrant holder of a number of shares of Series D Preferred Stock having an aggregate Liquidation Value as of the date of exercise equal to the aggregate exercise price; or

(4)

Following the redemption (or deemed redemption) of the Series D Preferred Stock, in lieu of surrendering shares of Series D Preferred Stock in satisfaction of the exercise price in accordance with (3) above, surrender by the Warrant holder of the Exercise Price Accrual credited to the account of such holder.

     Upon exercise of the Warrants, certificates for the shares of common stock issuable upon exercise will be issued to each Warrant holder.

     Rights as a Stockholder. The Warrant holder will have no rights or privileges of the holders of our common stock, including any voting rights, until (and then only to the extent) the Warrant has been exercised.

     Transferability. The Warrants will only be transferable in conjunction with the transfer of whole Units (each Unit consisting of one share of Series D Preferred Stock and a Warrant to purchase one share of common stock), and any such transfer must consist of a minimum of 25,000 Units. Following the redemption (or deemed redemption) of the Series D Preferred Stock, the Warrants will be transferable only in conjunction with the transfer of the corresponding Exercise Price Accrual.

     Adjustments to the Warrants.

     Adjustments in Connection with Stock Splits, Subdivisions, Reclassifications and Combinations. The number of shares for which the Warrants may be exercised and the exercise price applicable to the Warrants will be proportionately adjusted in the event we pay dividends or make distributions of our common stock, subdivide, combine or reclassify outstanding shares of our common stock.

     Anti-dilution Adjustments. Other than in certain permitted transactions and so long as a Warrant remains outstanding, if we issue any shares of common stock (or securities convertible into or exercisable for common stock) at a price per share that is less than 90% of the volume weighted average price of our common stock in the applicable trading market for the 30 days preceding the issuance of such shares or derivative securities, then the number of shares of common stock into which a Warrant is exercisable and the exercise price will be adjusted.

     Additionally, other than in the permitted transactions discussed in the paragraph below and so long as a Warrant remains outstanding, if we issue any shares of common stock (or securities convertible into or exercisable for common stock) at a price per share that is less than the exercise price of the Warrants, then the number of shares of common stock into which a Warrant is exercisable and the exercise price will be adjusted so that the Warrants are exercisable for the same percentage of the outstanding common stock (on an “as converted” basis) following the issuance or sale of such other shares of common stock (or securities convertible into or exercisable for common stock) for the same aggregate consideration prior to such adjustment. However, the holders of a majority of the then unexercised and outstanding Warrants will have the right to waive compliance by the Company with respect to this anti-dilution clause, in which case the Warrants specifically provide that the remaining holders will also waive their right to an adjustment. Because Pegasus IV is expected to hold a majority of the outstanding Warrants immediately following the consummation of this rights offering, Pegasus IV and its affiliates will control this right until they no longer hold a majority of the unexercised and outstanding warrants.

     The anti-dilution adjustments discussed in the two preceding paragraphs will not apply to the following transactions:

	•		Issuances to employees, officers, directors, consultants or other service providers pursuant to a plan or agreement approved by the board of directors, including the Amended and Restated Equity-Based Compensation Plan;
	•		Issuances to settle the Company’s directors’ fees;
	•		Issuances pursuant to the exercise or conversion of currently issued derivative securities or restricted stock;
	•		Issuances as a dividend on preferred stock of the Company; and
	•		Issuances pursuant to an acquisition of shares or assets of a target company.

     Other Adjustments. So long as a Warrant remains outstanding, if the exercise price or number of shares underlying any security convertible into or exercisable for our common stock adjusts or would have adjusted for any reason and the terms, manner or method of such adjustment are more favorable than the adjustment provisions contained in the Warrants, then the exercise price and/or number of shares into which a Warrant is exercisable will also adjust so that the Warrant holder receives the benefit of the more favorable terms, manner or method. Similar to the anti-dilution clause discussed previously, the holders of a majority of the then unexercised and outstanding Warrants will have the right to waive compliance by the Company with respect to this anti-dilution clause, in which case the Warrants specifically provide that the remaining holders will also waive their right to an adjustment. Because Pegasus IV is expected to hold a majority of the outstanding Warrants immediately following the consummation of this rights offering, Pegasus IV and its affiliates will control this right until they no longer hold a majority of the unexercised and outstanding Warrants.

     Business Combinations. In the event of a merger, consolidation or similar transaction involving the Company and following which the Company will not be the surviving entity, we must make appropriate provision to insure that the Warrant holder’s right to receive shares of our common stock upon exercise of the Warrant is converted into the right to exercise the Warrant for the consideration that would have been payable to the Warrant holder with respect to the shares of common stock for which the Warrant may be exercised, as if the Warrant had been exercised prior to such merger, consolidation or similar transaction.

     Common Stock

     Each right will be accompanied by a Warrant to purchase one share of our common stock. Assuming the rights offering is fully subscribed, we may issue up to [18,184,855+] shares of common stock upon the exercise of the Warrants. As previously discussed, pursuant to convertible note agreements and based upon the outstanding principal and interest balances under these notes as of October 30, 2009, we have already offered Pegasus IV and Philips Electronics approximately 38.6 million Units, which would consist of Warrants to purchase approximately 38.6 million shares of common stock. See “Convertible Note Agreements with Pegasus IV and Philips Electronics.” For a more detailed discussion of the terms of our common stock see the section entitled “Description of Capital Stock – Common Stock.”

Method of Exercising Rights

     The exercise of rights is irrevocable and may not be cancelled or modified. You may exercise your rights as follows:

     Subscription By Registered Holder with U.S. or Canadian Address

     To exercise some or all of your rights, you must properly complete a subscription certificate and submit it with any required signature guarantees and forward it, together with payment in full of the subscription price for each Unit subscribed for, to us at the address set forth on the subscription certificate prior to 5:00 p.m., New York City time, on            , 2009, the expiration date of the rights offering. If the mail is used to forward subscription certificates and/or a certified or bank check, it is recommended that insured, registered mail be used. Once you exercise your rights, you cannot revoke your exercise. In addition, since we may terminate or withdraw the rights offering at our discretion, your participation in the rights offering is not assured.

     Subscription By DTC Participants

     Banks, trust companies, securities dealers and brokers that hold our equity securities or warrants therefor as nominee for more than one beneficial owner may, upon proper showing to us, exercise their subscription privilege on the same basis as if the beneficial owners were record holders on the record date through the Depository Trust Company, or DTC. The DTC will issue one right to purchase 1.3 Units to you for each share of our common stock that is issued or issuable to you at the record date. Each right can then

be used to purchase 1.3 Units for $1.006 per Unit. You may exercise these rights through DTC’s PSOP Function on the “agents subscription over PTS” procedure and instructing DTC to charge your applicable DTC account for the subscription payment for the Unit and deliver such amount to us. DTC must receive the subscription instructions and payment for the Unit by the expiration date of the rights offering. Except as described under the subsection titled “Notice of Guaranteed Delivery,” subscriptions accepted by us via a Notice of Guaranteed Delivery must be delivered to us with payment before the expiration of the subscription period.

     Subscription By Beneficial Owners

     If you are a beneficial owner of our equity securities or warrants therefor that are registered in the name of a broker, custodian bank or other nominee, or if you hold common stock certificates and would prefer to have an institution conduct the transaction relating to the rights on your behalf, you should instruct your broker, custodian bank or other nominee or institution to exercise your rights and deliver all documents and payment on your behalf prior to 5:00 p.m. New York City time on the expiration date of this rights offering. Your subscription rights will not be considered exercised unless we receive from you, your broker, custodian, nominee or institution, as the case may be, all of the required documents and your full subscription price payment prior to 5:00 p.m. New York City time, on the expiration date.

Payment Method

     Payments must be made in full in U.S. currency by:

	•		check or bank draft payable to           , drawn against a U.S. bank;
	•		postal, telegraphic or express money order payable to            ; or
	•		wire transfer of immediately available funds to the subscription account maintained by us at

     Any personal check used to pay for Units must clear the appropriate financial institutions prior to the expiration date of the rights offering. The clearing house may require five or more business days. Accordingly, Holders who wish to pay the subscription price by means of an uncertified personal check are urged to make payment sufficiently in advance of the expiration date to ensure such payment is received and clears by such date. Subscription certificates received after that time will not be honored, and we will return your payment to you, without interest or deduction.

     We will be deemed to receive payment upon:

	•		clearance of any uncertified check deposited by us;
	•		receipt by us of any certified check bank draft drawn upon a U.S. bank; or
	•		receipt by us of any postal, telegraphic or express money order.

     You should read the instruction letter accompanying the subscription certificate carefully and strictly follow it. Except as described below under “Notice of Guaranteed Delivery,” we will not consider your subscription received until we have received delivery of a properly completed and duly executed subscription certificate and payment of the full subscription amount. The risk of delivery of all documents and payments is on you or your nominee, not us.

     The method of delivery of subscription certificates and payment of the subscription amount to us will be at the risk of the holders of rights, but, if sent by mail, we recommend that you send those certificates and payments by overnight courier or by registered mail, properly insured, with return receipt requested, and that a sufficient number of days be allowed to ensure delivery to us and clearance of

payment before the expiration of the subscription period. Because uncertified personal checks may take at least five or more business days to clear, we strongly urge you to pay or arrange for payment by means of certified or cashier’s check or money order to avoid missing the opportunity to exercise your subscription rights should you decide to exercise your subscription rights.

     Unless a subscription certificate provides that the Units are to be delivered to the record holder of such rights or such certificate is submitted for the account of a bank or a broker, signatures on such subscription certificate must be guaranteed by an “Eligible Guarantor Institution,” as such term is defined in Rule 17Ad-15 of the Securities Exchange Act of 1934, as amended, subject to any standards and procedures adopted by us.

Calculation Of Subscription Rights Exercised

     If you do not indicate the number of subscription rights being exercised, or do not forward full payment of the total subscription price payment for the number of subscription rights that you indicate are being exercised, then you will be deemed to have exercised your basic subscription privilege with respect to the maximum number of subscription rights that may be exercised with the aggregate subscription price payment you delivered to us. If we do not apply your full subscription price payment to your purchase of Units, we will return the excess amount to you by mail, without interest or deduction, as soon as practicable after the expiration date of this rights offering.

Fractional Units, Fractional Shares of Series D Preferred Stock and Fractional Rights

     We will not issue fractional Units. If your rights will allow you to purchase a fractional Unit, you may exercise your rights only by rounding down to and paying for the nearest whole Unit or by paying for any lesser number of whole Units.

Expiration Date and Amendments

     The subscription period, during which you may exercise your subscription privilege, expires at 5:00 p.m., New York City time, on           , 2009, the expiration date. If you do not exercise your rights prior to that time, your rights will expire and will no longer be exercisable. We will not be required to issue Units to you if we receive your subscription certificate or your payment after that time, regardless of when you sent the subscription certificate and payment, unless you send the documents in compliance with the guaranteed delivery procedures described below. We may, in our sole discretion, extend the time for exercising the subscription rights. If the commencement of this rights offering is delayed for a period of time, the expiration date of this rights offering will be similarly extended. In addition, if we should make any fundamental changes to the terms set forth in this prospectus, we will file a post-effective amendment to this registration statement, offer potential purchasers who have subscribed for rights the opportunity to cancel such subscriptions and issue a refund of any money advanced by such stockholder and circulate an updated prospectus after the post-effective amendment is declared effective with the Securities and Exchange Commission. In addition, upon such event, we will extend the expiration date of this rights offering to allow Holders of rights ample time to make new investment decisions and for us to re-circulate updated documentation. Promptly following any such occurrence, we will issue a press release announcing any changes with respect to this offering and the new expiration date.

     We will extend the duration of the rights offering as required by applicable law and may choose to extend it if we decide that changes in the market price of our common stock warrant an extension or if we decide to give investors more time to exercise their subscription rights in this rights offering. We may extend the expiration date of this rights offering by giving oral or written notice on or before the scheduled expiration date. If we elect to extend the expiration of this rights offering, we will issue a press release announcing such extension no later than 9:00 a.m., New York City time, on the next business day after the most recently announced expiration date.

     We reserve the right, in our sole discretion, to amend or modify the terms of this rights offering.

Determination of Subscription, Purchase and Exercise Prices

     We did not seek or obtain an opinion of a financial advisor in establishing the subscription price of the Units, the purchase price of the shares of Series D Preferred Stock or the exercise price of the Warrants. The subscription price of $1.006 per Unit in the rights offering was set by our board of directors. Each Unit consists of one share of Series D Preferred Stock with a stated purchase price of $1.006 and a Warrant to purchase one share of our common stock at an exercise price equal to $6.00. In determining the subscription price per Unit, the purchase price per share of Series D Preferred Stock and the exercise price per Warrant, our board of directors considered a number of factors, including: our need for capital, the likely cost of capital from other sources, the price at which our principal stockholders would be willing to participate in the rights offering, the anti-dilution protections granted to security holders in our prior offerings, our business prospects, our need for and the need to provide an incentive to our investors and encourage them to participate in the rights offering on a pro rata basis, the historic and current market price of our common stock, general conditions in the securities market and the difficult market conditions prevailing for the raising of equity capital, our operating history, and the liquidity of our common stock. Neither the subscription price per Unit, the purchase price per share of Series D Preferred Stock, nor the exercise price per Warrant is necessarily related to our book value, net worth, past operations, cash flow, losses, financial condition or any other established criteria for value and may not be the fair value of the securities to be offered in this rights offering. We cannot assure you that the market price of our common stock will not decline during or after the rights offering. We urge you to consider all relevant factors before exercising your rights.

Conditions, Withdrawal and Termination

     We reserve the right to withdraw this rights offering on or prior to the expiration date for any reason. We may terminate this rights offering, in whole or in part, if at any time before completion of this rights offering there is any judgment, order, decree, injunction, statute, law or regulation entered, enacted, amended or held to be applicable to this rights offering that in the sole judgment of our board of directors would or might make this rights offering or its completion, whether in whole or in part, illegal or otherwise restrict or prohibit completion of this rights offering. We may waive any of these conditions and choose to proceed with this rights offering even if one or more of these events occur. If we terminate this rights offering, in whole or in part, all affected subscription rights will expire without value, and all subscription payments received by us will be returned without interest or deduction as soon as practicable.

Cancellation Rights

     Our board of directors may cancel this rights offering in its sole discretion at any time prior to the time this rights offering expires for any reason. If we cancel this rights offering, we will issue a press release notifying stockholders of the cancellation and any funds you paid to us will be returned without interest or deduction as soon as practicable.

Subscription Agent and Escrow Agent

     We will act as our own subscription agent and escrow agent for this rights offering. The address to which subscription documents, subscription certificates, notices of guaranteed delivery and payments other than wire transfers should be mailed or delivered is:

By Mail, Hand or Overnight Courier:

Lighting Science Group Corporation
Attn: Rights Offering Subscription Department
1227 South Patrick Drive, Building 2A
Satellite Beach, Florida 32937

     If you deliver subscription documents, subscription certificates or notices of guaranteed delivery in a manner different than that described in this prospectus, then we may not honor the exercise of your subscription privileges.

     You should direct any questions or requests for assistance concerning the method of subscribing for the Units or for additional copies of this prospectus to John Mitchell, by mail at 1227 South Patrick Drive, Building 2A, Satellite Beach, Florida 32937, email at ROSD@lsgc.com or telephone at (321) 779-5542.

Fees and Expenses

     You are responsible for paying any commissions, fees, taxes or other expenses incurred in connection with the exercise of the rights. We will not pay such expenses.

Medallion Guarantee May Be Required

     Your signature on each subscription certificate must be guaranteed by an eligible institution, such as a member firm of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States, subject to standards and procedures adopted by us, unless:

	•		your subscription certificate provides that shares are to be delivered to you as record holder of those subscription rights; or
	•		you are an eligible institution.

Notice To Beneficial Holders

     If you are a broker, a trustee or a depositary for securities who holds our equity securities or warrants therefor for the account of others on the rights offering record date, you should notify the respective beneficial owners of such equity securities of this rights offering as soon as possible to find out their intentions with respect to exercising their subscription rights. You should obtain instructions from the beneficial owner with respect to their subscription rights, as set forth in the instructions we have provided to you for your distribution to beneficial owners. If the beneficial owner so instructs, you should complete the appropriate subscription certificates and submit them to us with the proper payment. If you hold our equity securities or warrants therefor for the account(s) of more than one beneficial owner, you may exercise the number of subscription rights to which all such beneficial owners in the aggregate otherwise would have been entitled had they been direct record holders of Eligible Securities on the rights offering record date, provided that you, as a nominee record holder, make a proper showing to us by submitting the form entitled “Nominee Holder Certification” that we will provide to you with your rights offering materials. If you did not receive this form, you should contact us to request a copy.

Beneficial Owners

     If you are a beneficial owner of our equity securities or warrants therefor or will receive your subscription rights through a broker, custodian bank or other nominee, we will ask your broker, custodian bank or other nominee to notify you of this rights offering. If you wish to exercise your subscription rights, you will need to have your broker, custodian bank or other nominee act for you. If you hold our equity securities directly and would prefer to have your broker, custodian bank or other nominee act for you, you should contact your nominee and request it to effect the transactions for you. To indicate your decision with respect to your subscription rights, you should complete and return to your broker, custodian bank or other nominee the form entitled “Beneficial Owners Election Form.” You should receive this form from your broker, custodian bank or other nominee with the other rights offering materials. If you wish to obtain a separate subscription certificate, you should contact the nominee as soon as possible and request that a separate subscription certificate be issued to you. You should contact your broker, custodian bank or other nominee if you do not receive this form, but you believe you are entitled to participate in this rights

offering. We are not responsible if you do not receive the form from your broker, custodian bank or nominee or if you receive it without sufficient time to respond.

Notice of Guaranteed Delivery

     We will grant you three business days after the expiration date to deliver the subscription certificate if you follow the following instructions for providing us notice of guaranteed delivery. On or prior to the expiration date, we must receive payment in full for all Units subscribed for through the exercise of the subscription privilege, together with a properly completed and duly executed notice of guaranteed delivery substantially in the form accompanying this prospectus either by hand, mail, telegram or facsimile transmission, that specifies the name of the Holder of the rights and the number of Units subscribed for. If applicable, it must state separately the number of Units subscribed for through the exercise of the subscription privilege and a member firm of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc., or a commercial bank or trust company having an office or correspondent in the United States must guarantee that the properly completed and executed subscription certificate for all Units subscribed for will be delivered to us within three business days after the expiration date. We will then conditionally accept the exercise of the privileges and will withhold the certificates for shares Series D Preferred Stock and Warrants until it receives the properly completed and duly executed subscription certificate within that time period.

     In the case of holders of rights that are held of record through DTC, those rights may be exercised by instructing DTC to transfer rights from that holder’s DTC account to our DTC account, together with payment of the full subscription price. The notice of guaranteed delivery must be guaranteed by a commercial bank, trust company or credit union having an office, branch or agency in the United States or by a member of a Stock Transfer Association approved medallion program such as STAMP, SEMP or MSP. Notices of guaranteed delivery and payments should be mailed or delivered to the appropriate addresses set forth on the subscription certificate and under the section entitled “Subscription Agent and Escrow Agent.”

Validity of Subscriptions

     We will resolve all questions regarding the validity and form of the exercise of your subscription privilege, including time of receipt and eligibility to participate in this rights offering. Our determination will be final and binding. Once made, subscriptions and directions are irrevocable, and we will not accept any alternative, conditional or contingent subscriptions or directions. We reserve the absolute right to reject any subscriptions or directions not properly submitted or the acceptance of which would be unlawful. You must resolve any irregularities in connection with your subscriptions before the subscription period expires, unless waived by us in our sole discretion. We will not have any duty to notify you or your representative of defects in your subscriptions. A subscription will be considered accepted, subject to our right to withdraw or terminate this rights offering, only when a properly completed and duly executed subscription certificate and any other required documents and payment of the full subscription amount have been received by us. Our interpretations of the terms and conditions of this rights offering will be final and binding.

Escrow Arrangements; Return of Funds

     We will hold funds received in payment for Units in a segregated account pending completion of this rights offering. We will hold this money in escrow until this rights offering is completed or is withdrawn and canceled. If this rights offering is canceled for any reason, we will promptly return this money to subscribers without interest or deduction. If you exercise your rights and are allocated fewer Units than you subscribed for, the excess funds you paid will be returned to you without interest as soon as practicable after the subscription and additional marketing periods expires.

Rights of Subscribers

     You will have no rights as a stockholder until certificates representing shares of Series D Preferred Stock are issued to you or until you exercise the Warrants to purchase common stock and obtain certificates representing such shares of common stock. You will have no right to revoke your subscriptions after you deliver your completed subscription certificate, payment and any other required documents to us.

Foreign Stockholders

     We will not mail subscription certificates to stockholders whose addresses are outside the United States or who have an army post office or foreign post office address. We will hold these subscription certificates for their account. To exercise rights, our foreign stockholders must notify us prior to 11:00 a.m., New York City time, at least three business days prior to the expiration date by completing an international holder subscription form which will be delivered to those holders in lieu of a subscription certificate and sending it by mail or telecopy to us at the address and telecopy number set forth under the section entitled “Subscription Agent and Escrow Agent.”

No Revocation or Change

     Once you submit the form of subscription certificate to exercise any rights, you are not allowed to revoke or change the exercise or request a refund of monies paid. All exercises of rights are irrevocable, even if you learn information about us that you consider to be unfavorable. You should not exercise your rights unless you are certain that you wish to purchase Units at the subscription price.

Regulatory Limitation

     We will not be required to issue to you shares of our Series D Preferred Stock or Warrants pursuant to this rights offering if, in our opinion, you are required to obtain prior clearance or approval from any state or federal regulatory authorities to own or control such securities and if, at the time this rights offering expires, you have not obtained such clearance or approval.

No Recommendation to Rights Holders

     Our board of directors is not making any recommendations to you as to whether or not you should exercise your rights. You should make your decision based on your own assessment of your best interests after reading this prospectus.

Listing on a Public Market

     There is no public market for the Units, shares of Series D Preferred Stock or the Warrants, and we do not plan to list the Units, shares of Series D Preferred Stock or the Warrants on any public market. Furthermore, we have no way of knowing whether a market will develop or be maintained for the Units, shares of Series D Preferred Stock or the Warrants.

Other Matters

     We are not making this rights offering in any state or other jurisdiction in which it is unlawful to do so, nor are we distributing or accepting any offers to purchase any Units from subscription rights holders who are residents of those states or other jurisdictions or who are otherwise prohibited by federal or state laws or regulations to accept or exercise the subscription rights. We may delay the commencement of this rights offering in those states or other jurisdictions, or change the terms of this rights offering, in whole or in part, in order to comply with the securities laws or other legal requirements of those states or other jurisdictions. Subject to state securities laws and regulations, we also have the discretion to delay allocation and distribution of any securities you may elect to purchase by exercise of your privilege in order to comply with state securities laws. We may decline to make modifications to the terms of this rights offering requested by those states or other jurisdictions, in which case, if you are a resident in those states or

jurisdictions or if you are otherwise prohibited by federal or state laws or regulations from accepting or exercising the subscription rights you will not be eligible to participate in this rights offering. We are not currently aware, however, of any states or jurisdictions that would preclude participation in this rights offering.

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

     The following is a discussion of the anticipated material federal income tax consequences to Holders relating to the receipt, exercise and expiration of rights to purchase Units in this rights offering. Holders include each owner of our Eligible Securities. This discussion also addresses the anticipated material federal income tax consequences to Holders related to ownership of any Series D Preferred Stock received upon the exercise of the rights.

     Each Holder should consult its own tax advisor regarding the federal, state, local and foreign tax consequences of the receipt, exercise and expiration of rights and the ownership of the Series D Preferred Stock.

Scope of This Discussion

     This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), final and temporary Treasury Regulations promulgated thereunder, administrative pronouncements and practices, and judicial decisions, all as of the date hereof. Future legislative, judicial or administrative modifications, revocations or interpretations, which may or may not be retroactive, may result in federal income tax consequences significantly different from those discussed herein. This discussion is not binding on the Internal Revenue Service (“IRS”) or the U.S. courts, and no assurance can be given that the conclusions reached in this discussion will not be challenged by the IRS or will be sustained by a U.S. court if so challenged. In addition, we have not requested, nor do we intend to request, a ruling from the IRS regarding any of the federal income tax consequences associated with the receipt, exercise and expiration of rights or the ownership of the Series D Preferred Stock.

     This discussion does not address the federal income tax consequences to certain categories of Holders subject to special rules, including Holders that are (i) banks, financial institutions or insurance companies, (ii) regulated investment companies, real estate investment trusts or cooperatives, (iii) brokers or dealers in securities or currencies or traders in securities or currencies that elect to apply a mark-to-market accounting method, (iv) tax-exempt organizations, (v) holders that own our stock or warrants as part of a straddle, hedge, constructive sale, conversion transaction, or other integrated investment, (vi) holders that acquired our stock or warrants in connection with the exercise of stock options or otherwise as compensation for services, (vii) holders of shares of our 6% Convertible Preferred Stock or Series B Preferred Stock (the “Existing Preferred Shares”) that constitute “section 306 stock” (as defined in the Code), (viii) nonresidents of the United States that have been present in the United States for 183 days or more during the taxable year, and (ix) U.S. expatriates. In addition, this discussion does not address any U.S. federal alternative minimum tax, U.S. federal estate, gift or other non-income tax, or any state, local or foreign tax consequences associated with the receipt, exercise and expiration of rights or the ownership of the Series D Preferred Stock.

Consequences to U.S. Holders

     U.S. Holders

     The following discussion is limited to the material U.S. federal income tax consequences relevant to a U.S. Holder. As used herein, a “U.S. Holder” is a Holder that is for U.S. federal income tax purposes:

	•		An individual who is a citizen or resident (as defined in the Code) of the United States;
	•		A corporation or other entity taxable as a corporation created or organized in, or under the laws of, the United States, any state thereof or the District of Columbia;

	•		An estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
	•		A trust if (i) (A) a court within the United States is able to exercise primary supervision over the administration of the trust and (B) one or more U.S. persons have the authority to control all substantial decisions of the trust, or (ii) in general, it was in existence on August 20, 1996, was treated as a U.S. person under the Code on the previous day, and made a valid election to continue to be so treated.

     If a partnership or other entity taxable as a partnership for U.S. federal income tax purposes receives rights to purchase Units, the tax treatment of a partner in the partnership or such other entity generally will depend upon the status of the partner and the activities of the partnership or such other entity. Partners in a partnership or other entity taxable as a partnership for U.S. federal income tax purposes should consult their tax advisors regarding the tax consequences associated with the receipt, exercise and expiration of the rights and the ownership of the Series D Preferred Stock.

     Certain U.S. federal income tax consequences relevant to a person or entity that is neither a U.S. Holder nor a partnership or other entity taxable as a partnership for U.S. federal income tax purposes (a “non-U.S. Holder”) is discussed separately below.

     Receipt of Rights

     U.S. Holders of Common Stock or Existing Warrants

     A U.S. Holder of our common stock (or warrants to purchase our common stock, which for purposes of this paragraph will be treated as common stock) generally will not recognize income on the receipt of rights on such common stock. Assuming that the receipt of the rights is not taxable, the U.S. Holder’s tax basis in the rights will depend on the relative fair market value of the rights and the common stock at the time the rights are distributed. If the rights distributed to a U.S. Holder on its common stock have a fair market value equal to at least 15% of the fair market value of such common stock on the date of the distribution, such U.S. Holder must allocate the tax basis in its common stock between the common stock and the rights received in proportion to their respective fair market values on the date of distribution. If the rights distributed to a U.S. Holder on its common stock have a fair market value that is less than 15% of the fair market value of such common stock on the date of distribution, such U.S. Holder’s tax basis in the rights will be zero unless the Holder elects to allocate the tax basis in its common stock in the manner described above. A U.S. Holder makes this election by attaching a statement in its tax return for the year in which the rights are received. The election, once made, is irrevocable. A U.S. Holder making this election must retain a copy of the election and the tax return with which it was filed to substantiate the gain or loss recognized on any later sale of Series D Preferred Stock and Warrants. The holding period for the rights will include the U.S. Holder’s holding period for the common stock upon which the rights are distributed.

     U.S. Holders of Existing Preferred Shares

     Upon the receipt of rights, a U.S. Holder of Existing Preferred Shares will be treated as receiving a distribution in an amount equal to the fair market value of such rights. The determination of whether such distribution will result in dividend income will depend on whether we have current and accumulated earnings and profits (“E&P”) at the time of the distribution, as determined under federal income tax principles. Because we have never had E&P and based on our 2009 year-to-date operations, projections for the remainder of 2009, and current net operating losses, we do not expect to have current or accumulated E&P in 2009. Therefore, we do not expect that the receipt of rights by a U.S. Holder of Existing Preferred Shares will constitute dividend income. Instead, such amount should be treated as a tax-free return of capital to the extent of the U.S. Holder’s adjusted tax basis in its Existing Preferred Shares and then (if applicable) as capital gain, which will be treated as long-term capital gain if such U.S. Holder’s holding period in its Existing Preferred Shares exceeds one year as of the date of the distribution. A U.S. Holder of Existing Preferred Stock will have an adjusted tax basis in the rights it receives equal to the fair market value of such rights on the date of the distribution.

     Notwithstanding the foregoing, if it is determined that we do have current and accumulated E&P at the time the rights are distributed to a U.S. Holder of Existing Preferred Shares, such U.S. Holder will recognize dividend income to the extent the distribution is paid out of our current and accumulated E&P. Such distribution may qualify for the dividends-received deduction in an amount determined under the Code, if the U.S. Holder is a corporation and certain holding periods and other requirements are satisfied; provided, however, any dividend received by a U.S. Holder that is a corporation may be subject to the “extraordinary dividend” provisions of the Code. Dividend income recognized by non-corporate U.S. Holders may constitute “qualified dividend income,” which currently is subject to a maximum U.S. federal income tax rate of 15%. To the extent that the value of the rights distributed on the Existing Preferred Shares exceeds our current and accumulated E&P, such excess first will be treated as a tax-free return of capital to the extent of a U.S. Holder’s adjusted tax basis in its Existing Preferred Shares and then (if applicable) as capital gain, which will be treated as long-term capital gain if such U.S. Holder’s holding period in its Existing Preferred Shares exceeds one year as of the date of the distribution. If a U.S. Holder of Existing Preferred Shares recognizes dividend income related to the distribution, the holding period for the rights will begin on the date the rights are distributed to such U.S. Holder.

     Exercise of Rights

     A U.S. Holder will not recognize gain or loss on the exercise of the rights distributed to it in this rights offering. The U.S. Holder’s tax basis in the Series D Preferred Stock and Warrants received upon exercise of such rights will be equal to the amount paid by such U.S. Holder to exercise such rights and will be allocated in proportion to the fair market value of the Series D Preferred Stock and the Warrants as of the exercise date. The U.S. Holder’s holding period for the Series D Preferred Stock and the Warrants will begin on the exercise date.

     Expiration of Rights

     A U.S. Holder of common stock (or warrants to purchase our common stock, which for purposes of this paragraph will be treated as common stock) that allows its rights to expire will not recognize gain or loss, and the tax basis allocated to the expired rights, if any, will be re-allocated to such U.S. Holder’s common stock. A U.S. Holder of Existing Preferred Shares that allows its rights to expire generally should recognize a capital loss in an amount equal to the U.S. Holder’s tax basis in the rights, the deductibility of which would be subject to certain limitations.

     Distributions on Series D Preferred Stock

     The gross amount of any distribution of cash (not including the Exercise Price Accrual that will be credited to a U.S. Holder’s account pursuant to the terms hereof) made to a U.S. Holder with respect to the Series D Preferred Stock will constitute dividend income as of the date of the distribution to the U.S. Holder to the extent such distributions are paid out of our then current and accumulated E&P, as determined under federal income tax principles. Although not entirely free from doubt, the Exercise Price Accrual that is credited to a U.S. Holder’s account should be treated as a distribution and includible in income upon the earlier of: (i) the date the Series D Preferred Stock is redeemed; or (ii) the date the Exercise Price Accrual is used to acquire our common stock pursuant to the terms hereof (upon a U.S. Holder’s surrender of shares of Series D Preferred Stock upon exercise of the Warrants). At such time, the Exercise Price Accrual will be treated as a dividend to the extent of our then current and accumulated E&P. Subject to the “extraordinary dividend” rules, any distribution, including a deemed distribution resulting from the application of the Exercise Price Accrual toward the purchase of our common stock may qualify for the dividends-received deduction if such amount is distributed to a U.S. Holder that is a corporation and certain holding periods and other requirements are satisfied. In addition, under current law, any distribution, including a deemed distribution, received by non-corporate U.S. Holders before January 1, 2011 that constitutes dividend income may constitute “qualified dividend income,” which currently is subject to a maximum U.S. federal income tax rate of 15%.

     To the extent a distribution, including a deemed distribution, exceeds our then current and accumulated E&P, such excess first will be treated as a tax-free return of capital to the extent of a U.S.

Holder’s adjusted tax basis in its Series D Preferred Stock and then (if applicable) as capital gain, which will be treated as long-term capital gain if such U.S. Holder’s holding period in its Series D Preferred Stock exceeds one year as of the date of the distribution and otherwise will be short-term capital gain.

     Under section 305 of the Code, a U.S. Holder of Series D Preferred Stock could be treated as receiving constructive distributions over the term of the Series D Preferred Stock based on the excess, if any, of the stock’s redemption price over the stock’s “issue price” (subject to a de minimis exception)—sometimes referred to as “preferred OID.” Any such constructive distributions will be treated in the same manner as an ordinary distribution (discussed above).

     Sale, Exchange or Other Taxable Disposition of Series D Preferred Stock

     For federal income tax purposes, a U.S. Holder generally will recognize gain or loss on the sale, exchange, or other taxable disposition of the Series D Preferred Stock in an amount equal to the difference between (a) the amount realized for the Series D Preferred Stock and (b) the U.S. Holder’s adjusted tax basis in the Series D Preferred Stock. Such gain or loss generally will be a capital gain or loss, which will be long-term capital gain or loss if such U.S. Holder’s holding period in its Series D Preferred Stock exceeds one year as of the date of the distribution and otherwise will be short-term capital gain or loss. The deductibility of capital losses is subject to certain limitations.

     Information Reporting and Backup Withholding

     The receipt of rights by U.S. Holders of common stock or warrants to purchase our common stock generally should not be subject to information reporting or backup withholding. Except to the extent that the distribution of rights to a U.S. Holder of Existing Preferred Shares constitutes a tax-free return of capital, the receipt of rights by such U.S. Holder likely will be subject to information reporting and backup withholding tax (at the rate of 28%); provided, however, backup withholding tax will not apply if such U.S. Holder (a) furnishes such U.S. Holder’s correct U.S. taxpayer identification number (generally on Form W-9), (b) has not been notified by the IRS that such U.S. Holder has previously failed to properly report items subject to backup withholding tax and (c) certifies, under penalty or perjury, that such U.S. Holder has furnished its correct U.S. taxpayer identification number and the IRS has not notified such U.S. Holder that it is subject to backup withholding tax. Upon an exercise of rights by a U.S. Holder (including U.S. Holders of common stock or warrants to purchase our common stock), any amounts received as dividends on the Series D Preferred Stock, or proceeds arising from the sale or other taxable disposition of the Series D Preferred Stock will be subject to information reporting but generally will not be subject to backup withholding tax (at the rate of 28%) unless such U.S. Holder fails to meet any of the conditions in the previous sentence. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a credit against a U.S. Holder’s U.S. federal income tax liability, if any, or will be refunded if such U.S. Holder timely furnishes the required information to the IRS. Each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the information reporting and backup withholding tax rules.

Consequences to Non-U.S. Holders

     Non-U.S. Holders

     The following discussion is limited to the material U.S. federal income tax consequences relevant to a non-U.S. Holder. The rules governing the U.S. federal income taxation of a non-U.S. Holder with respect to these instruments are complex and no attempt will be made herein to provide more than a summary of certain material rules. Special rules may apply to certain non-U.S. Holders such as “controlled foreign corporations” and “passive foreign investment companies.” Non-U.S. Holders should consult with their own tax advisors to determine the effect of federal, state, local and foreign income tax laws associated with this rights offering.

     For purposes of the following discussion, any taxable dividend or gain on the sale, exchange or other disposition of the Series D Preferred Stock or Warrants will be considered “U.S. trade or business

income” if the income or gain either is (i) effectively connected with the conduct of a U.S. trade or business by a non-U.S. Holder, or (ii) attributable to a U.S. permanent establishment (or to a fixed base) of a non-U.S. Holder.

     Receipt of Rights

     Non-U.S. Holders of Common Stock or Warrants to Purchase Common Stock

     A non-U.S. Holder of common stock (or warrants to purchase our common stock, which for purposes of this paragraph will be treated as common stock) will not be subject to U.S. federal income tax withholding upon the receipt of rights. Such non-U.S. Holder’s basis in the rights generally will be calculated in a manner similar to U.S. Holders, as described in the section entitled, “U.S. Holders – Receipt of rights – U.S. Holders of Common Stock or Warrants to Purchase Common Stock.”

     Non-U.S. Holders of Existing Preferred Shares

     A non-U.S. Holder of Existing Preferred Shares will be treated as receiving a distribution in an amount equal to the fair market value of the rights that it receives. The determination of whether such distribution will be treated as dividend income will depend on whether we have current or accumulated E&P at the time of the distribution, as determined under federal income tax principles. As discussed above (see “Consequences to U.S. Holders—Receipt of rights—U.S. Holders of Existing Preferred Shares”), we do not believe we will have current or accumulated E&P, so the receipt of rights by a non-U.S. Holder of Existing Preferred Shares generally should not be subject to U.S. federal income tax withholding. A non-U.S. Holder’s adjusted tax basis in the rights it receives will equal the fair market value of such rights on the date of the distribution.

     Notwithstanding the foregoing, if it is determined that we do have current or accumulated E&P, the receipt of rights by a non-U.S. Holder of Existing Preferred Shares will be treated as a dividend to the extent attributable to our E&P. Any such dividend generally will be subject to U.S. federal income tax withholding at a rate of 30% or such lower rate as may be specified by an applicable income tax treaty. The value of any rights distributed on the Existing Preferred Shares in excess of our then current and accumulated E&P first will be treated as a tax-free return of capital to the extent of a non-U.S. Holder’s adjusted tax basis in its Existing Preferred Shares and then (if applicable) as capital gain, generally excludible from U.S. federal income taxes. Notwithstanding the foregoing, dividends that constitute U.S. trade or business income will not be subject to withholding, provided certain certification and disclosure requirements are satisfied. Instead, such dividends (as well as any capital gain recognized as part of the rights distribution) will be subject to U.S. federal income tax on a net income basis in the same manner as if the non-U.S. Holder were a U.S. Holder, and to the extent such dividend income is received (or capital gain is recognized) by a foreign corporation, may be subject to an additional “branch profits tax” at a rate of 30% or such lower rate as may be specified by an applicable income tax treaty.

     A non-U.S. Holder who desires to claim the benefit of an applicable treaty rate with respect to any amount treated as a dividend will be required to complete IRS Form W-8BEN (or other applicable form) and certify under penalty of perjury that such Holder is not a United States person as defined under the Code and is eligible for treaty benefits.

     Exercise of Rights

     A non-U.S. Holder will not be subject to U.S. federal income tax withholding upon the exercise of rights issued in this rights offering. The non-U.S. Holder’s tax basis in the Series D Preferred Stock and Warrants received upon exercise of its rights will be equal to the amount paid by such non-U.S. Holder to exercise such rights and will be allocated in proportion to the fair market value of the Series D Preferred Stock and the Warrant at the time of exercise.

     Expiration of Rights

     A non-U.S. Holder of common stock (or warrants to purchase our common stock, which for purposes of this paragraph will be treated as stock) that allows its rights to expire will not recognize gain or loss, and the tax basis allocated to the expired rights, if any, will be re-allocated to the Holder’s common stock. A non-U.S. Holder of Existing Preferred Shares that allows its rights to expire generally should recognize a capital loss in an amount equal to the non-U.S. Holder’s tax basis in the rights, the deductibility of which would be subject to applicable tax law limitations.

     Distributions on Series D Preferred Stock

     The gross amount of any distribution of cash (not including the Exercise Price Accrual that will be credited to a non-U.S. Holder’s account pursuant to the terms hereof) with respect to Series D Preferred Stock that is made to a non-U.S. Holder generally will constitute dividend income as of the date of the distribution to the non-U.S. Holder to the extent such distributions are paid out of our then current and accumulated E&P, and generally such amount will be subject to U.S. federal income tax withholding at a rate of 30% or such lower rate as may be specified by an applicable income tax treaty. Although not entirely free from doubt, the Exercise Price Accrual that is credited to a non-U.S. Holder’s account should be treated as a distribution and includible in income upon the earlier of: (i) the date the Series D Preferred Stock is redeemed; or (ii) the date the Exercise Price Accrual is used to acquire our common stock pursuant to the terms hereof (upon a non-U.S. Holder’s surrender of its Series D Preferred Stock upon exercise the Warrants). At such time, the Exercise Price Accrual will be included as dividend income to the extent of our then current and accumulated E&P. The amount of any distribution in excess of our then current and accumulated E&P first will be treated as a tax-free return of capital to the extent of a non-U.S. Holder’s adjusted tax basis in its Series D Preferred Stock and then (if applicable) as capital gain, generally excludible from U.S. federal income taxes. Notwithstanding the foregoing, dividends that constitute U.S. trade or business income will not be subject to withholding, provided certain certification and disclosure requirements are satisfied. Instead, such dividends (as well as any capital gain recognized as part of the distribution) will be subject to U.S. federal income tax on a net income basis in the same manner as if the non-U.S. Holder were a U.S. Holder, and to the extent such dividend income is received (or capital gain is recognized) by a foreign corporation, may be subject to an additional “branch profits tax” at a rate of 30% or such lower rate as may be specified by an applicable income tax treaty.

     A non-U.S. Holder that desires to claim the benefit of an applicable treaty rate with respect to any amount treated as a dividend will be required to complete IRS Form W-8BEN (or other applicable form) and certify under penalty of perjury that such Holder is not a United States person as defined under the Code and is eligible for treaty benefits.

     Similar to the rules discussed above relating to U.S. Holders (see “Consequences to U.S. Holders—Distributions on Series D Preferred Stock”), a non-U.S. Holder of Series D Preferred Stock may be treated as receiving constructive distributions over the term of the Series D Preferred Stock.

     Sale, Exchange or Other Taxable Disposition of Series D Preferred Stock

     Except as described below and subject to the discussion concerning backup withholding, any gain realized by a non-U.S. Holder on the sale, exchange or disposition of common shares generally will not be subject to U.S. federal income tax unless (i) the gain is U.S. trade or business income or (ii) we are or previously have been a “U.S. real property holding corporation” for U.S. federal income tax purposes. We do not believe that we are or at any relevant time previously have been a “U.S. real property holding corporation” or that we will become one in the future.

     Information Reporting and Backup Withholding

     Information reporting and possible backup withholding will apply to certain amounts paid (or treated as paid) to a non-U.S. Holder with respect to our common stock, Existing Preferred Shares, warrants to purchase our common stock, or the Series D Preferred Shares unless the non-U.S. Holder

provides the requisite certification to establish that it is not a U.S. person or otherwise establishes an exemption therefrom.

     Any amount withheld under the backup withholding rules may be credited against the non-U.S. Holder’s U.S. federal income tax liability and any excess may be refundable if the proper information is timely provided to the IRS.

     The preceding discussion of material U.S. federal income tax considerations is for general information only and is not tax advice. Each prospective investor should consult its own tax advisor regarding the particular U.S. federal, state, local and foreign tax consequences of the receipt, exercise and expiration of rights or the ownership of the Series D Preferred Stock, including the consequences of any proposed change in applicable laws.

     TO ENSURE COMPLIANCE WITH INTERNAL REVENUE SERVICE CIRCULAR 230, HOLDERS ARE HEREBY NOTIFIED THAT: (A) ANY DISCUSSION OF U.S. FEDERAL INCOME TAX ISSUES CONTAINED OR REFERRED TO HEREIN IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED BY YOU, FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON YOU UNDER THE CODE; (B) SUCH DISCUSSION IS WRITTEN IN CONNECTION WITH THE PROMOTION OR MARKETING BY US OF THE TRANSACTIONS OR MATTERS ADDRESSED HEREIN; AND (C) YOU SHOULD SEEK ADVICE BASED ON YOUR PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR. THIS SUMMARY OF MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. EACH HOLDER IS URGED TO CONSULT ITS TAX ADVISOR WITH RESPECT TO THE APPLICATION OF U.S. FEDERAL INCOME TAX LAWS WITH RESPECT TO ITS PARTICULAR SITUATION AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE U.S. FEDERAL ESTATE OR GIFT TAX RULES OR UNDER THE LAWS OF ANY FOREIGN, STATE OR LOCAL JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.

CONVERTIBLE NOTE AGREEMENTS WITH PEGASUS IV AND PHILIPS ELECTRONICS

     We have entered into convertible note agreements with Pegasus IV and Philips Electronics pursuant to which, as described below, all of the then outstanding principal and interest under the notes will automatically convert into Units upon the consummation of this rights offering.

Pegasus IV Convertible Note

     On May 15, 2009, we entered into a Convertible Note Agreement (the “Original Pegasus Convertible Note”) with Pegasus IV, which provided us with approximately $31.7 million. Specifically, pursuant to the Original Pegasus Convertible Note, we borrowed approximately $13.2 million on May 15, 2009 and approximately $18.5 million on May 26, 2009. The proceeds of the borrowings on the Original Pegasus Convertible Note were generally used to pay in full approximately $11.5 million worth of promissory notes previously granted to Pegasus IV, together with accrued interest thereon, and to pay outstanding principal amounts under our line of credit with BMO. Effective as of July 31, 2009, we entered into the First Amendment to the Convertible Note Agreement, pursuant to which the maturity date of the Original Pegasus Convertible Note was extended.

     On August 27, 2009, the Original Pegasus Convertible Note (as amended) was terminated, and we entered into a new Convertible Note Agreement (the “New Pegasus Convertible Note”) with Pegasus IV in the principal amount of approximately $32.8 million, which represented the outstanding principal and interest on the Original Pegasus Convertible Note as of August 27, 2009. As with the Original Pegasus Convertible Note, interest on the New Pegasus Convertible Note accrues at the rate of 14% per annum. The outstanding principal and interest matures upon the earlier of: (a) July 31, 2010 and (b) the date of the consummation of the rights offering (described below). The New Pegasus Convertible Note may not be prepaid and is immediately due and payable upon the Company’s failure to pay any of its material debts when due. As with the Original Pegasus Convertible Note, so long as any amounts remain outstanding

under the New Pegasus Convertible Note, we must obtain the prior written consent of Pegasus IV prior to borrowing more than $5.0 million in the aggregate pursuant to our line of credit with BMO.

     Pursuant to the New Pegasus Convertible Note, we agreed to use commercially reasonable efforts to conduct this rights offering as soon as is reasonably practical. As with the Original Pegasus Convertible Note, the New Pegasus Convertible Note grants Pegasus IV the option to acquire any Units not otherwise subscribed for pursuant to the terms of this rights offering by the Holders and our employees, which Units will be offered to Pegasus IV at the subscription price of $1.006 per Unit. Pegasus has agreed that any Units purchased pursuant to this standby purchase option will be purchased in a private placement directly from us. If the registration statement for this rights offering is declared effective by the Securities and Exchange Commission and the rights offering is consummated prior to July 31, 2010 (the scheduled maturity date), Pegasus IV will be deemed to have converted all of the then outstanding principal and interest under the New Pegasus Convertible Note into a number of Units equal to one Unit for each $1.006 of outstanding principal and interest under the New Pegasus Convertible Note. Additionally, the New Pegasus Convertible Note provides Pegasus IV with the option to convert all or a portion of the outstanding principal and interest under the New Pegasus Convertible Note at any time into a number of Units equal to one Unit for each $1.006 of outstanding principal and interest. Upon any conversion of the New Pegasus Convertible Note, Pegasus IV has agreed to release us from liability to the extent of the repayment of principal and interest being converted under the New Pegasus Convertible Note.

     Upon conversion of the original principal amount of the Original Pegasus Convertible Note (approximately $31.7 million), Pegasus IV will acquire the Units that it and its affiliate, LED Holdings, would otherwise be entitled to subscribe for in this rights offering. In accordance with the New Pegasus Convertible Note, Pegasus IV has also agreed to convert the accrued interest on the original principal amount of the convertible note into Units, which will result in the receipt by Pegasus IV of more than its pro rata share of Units. As of October 30, 2009, approximately $2.0 million of interest had accrued since the issuance of the Original Pegasus Convertible Note. Based solely on the principal and interest balance of the New Pegasus Convertible Note, we would be required to issue Pegasus IV approximately 33.5 million Units upon the automatic conversion of these outstanding borrowings on the closing of this rights offering. Any Units issued to Pegasus IV pursuant to the conversion of the outstanding principal and interest on the New Pegasus Convertible Note will be issued in a private placement directly from us. As a result of the rights granted to Pegasus IV pursuant to the New Pegasus Convertible Note, we are not offering Pegasus IV or LED Holdings rights to purchase Units in this rights offering.

Philips Electronics Convertible Note

     On August 27, 2009, in conjunction with the Governing Agreement and Complete Releases between, among other parties, us and Philips Electronics, we entered into a Convertible Note Agreement (the “Philips Convertible Note”) with Philips Electronics pursuant to which we borrowed $5.0 million from Philips Electronics. Interest on any outstanding principal balance under the Philips Convertible Note accrues at the rate of 14% per annum. All principal and interest on the Philips Convertible Note is due on the earliest of the following three dates (such date, the “Maturity Date”): (a) July 31, 2010, (b) the date of the consummation of the rights offering or (c) the first business day immediately following the date on which we notify Philips Electronics that Pegasus IV has voluntarily converted the outstanding principal and interest under the New Pegasus Convertible Note (the “Notification Date”). The Philips Convertible Note may not be prepaid and is immediately due and payable upon our failure to pay any of our material debts when due. Pursuant to the Philips Convertible Note, we agreed to conduct the rights offering on the same terms as those set forth in the New Pegasus Convertible Note with Pegasus IV.

     Similar to the New Pegasus Convertible Note, if the registration statement for this rights offering is declared effective by the Securities and Exchange Commission and the rights offering is consummated prior to the Maturity Date or if Pegasus IV voluntarily converts the outstanding principal and interest under the New Pegasus Convertible Note prior to the Maturity Date, Philips Electronics will be deemed to have converted all of the then outstanding principal and interest under the Philips Convertible Note into a number of Units equal to one Unit for each $1.006 of outstanding principal and interest under the Philips Convertible Note. However, any Warrant issued upon conversion of the Philips Convertible Note would

have an exercise price of $12.00 per share. Such automatic conversion would be deemed to occur on the earlier of (a) the date of the consummation of this rights offering or (b) the first business day immediately following the Notification Date. Additionally, the Philips Convertible Note provides Philips Electronics with the option to convert all or a portion of the outstanding principal and interest under the Philips Convertible Note at any time into a number of Units equal to one Unit for each $1.006 of outstanding principal and interest. Upon any conversion of the Philips Convertible Note, Philips Electronics has agreed to release us from liability to the extent of the repayment of principal and interest being converted under the Philips Convertible Note.

     As of October 30, 2009, approximately $5.1 million of principal and interest was outstanding under the Philips Convertible Note. Therefore, based solely on this amount, we would be required to issue Philips Electronics approximately 5.1 million Units upon the automatic conversion of these outstanding borrowings on the closing of this rights offering. Because Philips Electronics did not hold any Eligible Securities as of           , 2009, the record date, it is not being offered rights to purchase Units in this rights offering.

DILUTION

     Other than with respect to Pegasus IV and its affiliate, LED Holdings, we are distributing rights to each of the holders of our common stock, 6% Convertible Preferred Stock, Series B Preferred Stock and warrants to purchase our common stock (the “Eligible Securities”) as of           , 2009, the record date. The table below sets forth by class, the number of Eligible Securities outstanding as of October 30, 2009, and the number of Units that each class of Eligible Securities is entitled to in the rights offering.

						Common Stock
						Equivalents (on
		Number of				an as-
		Shares/Warrants				converted				Total Units				% of total
Eligible Security		Outstanding				basis)				Offered (1)				Units Offered
Common stock			30,456,417				30,456,417				16,177,655				89.0	%
6% Convertible Preferred stock			196,902				105,015				136,519				0.8	%
Series B Preferred stock			2,000,000				2,654,789				—				0.0	%
Warrants			5,981,460				5,981,460				1,870,681				10.3	%
							39,197,681				18,184,855				100.0	%

 

(1)

Each right will entitle a Holder to purchase 1.3 Units at $1.006 per Unit. We are not offering Units with respect to: (i) 18,012,067 shares of common stock held by LED Holdings, (ii) 2,654,789 shares of common stock issuable upon conversion of Series B Preferred Stock held by LED Holdings or (iii) 4,542,475 shares of common stock issuable upon exercise of warrants held by Pegasus IV.

     The following table shows for each class of our outstanding securities the percentage ownership of our common stock by such class, on a fully-diluted basis, before and after this rights offering and the conversions contemplated by the convertible note agreements with Pegasus IV and Philips Electronics:

																						Units to be				Pro-forma				% of Fully-
																						Issued Upon				Fully-Diluted				Diluted
																						Automatic				Common Stock				Common Stock
						% of Fully-								Pro-Forma Fully-								Conversion of				Outstanding				Subsequent to
						Diluted								Diluted Common				% of Fully-				Principal and				Subsequent to				the Offering
		Fully-Diluted				Common Stock								Stock				Diluted				Interest				the Offering				and the
		Common Stock				Outstanding				Units Offered				Outstanding				Common Stock				Amounts of				and the				Conversion of
		Outstanding Prior				Prior to the				Pursuant to the				Subsequent to the				After the				Convertible				Conversion of				the Convertible
Security		to the Offering (1)				Offering				Offering (2)				Offering (3)				Offering				Notes (4)				Convertible Notes				Notes
Common Stock — Pegasus/LED Holdings			18,012,067				37.1	%			—				18,012,067				27.0	%			—				18,012,067	(3)			17.1	%
Common Stock — All Other Holders			12,444,350				25.6	%			16,177,655				28,622,005				42.9	%			—				28,622,005				27.2	%
6% Convertible Preferred Stock			105,015				0.2	%			136,519				241,534				0.4	%			—				241,534				0.2	%
Series B Preferred Stock — Pegasus/LED Holdings			2,654,789				5.5	%			—				2,654,789				4.0	%			—				2,654,789				2.5	%
Warrants — Pegasus/LED Holdings			4,542,475				9.4	%			—				4,542,475				6.8	%			—				4,542,475				4.3	%
Warrants — All Other Holders			1,438,985				3.0	%			1,870,681				3,309,666				5.0	%			—				3,309,666				3.1	%
Pegasus IV Convertible Note — May 15, 2009			—				—	%			—				—				—	%			33,464,746				33,464,746				31.8	%
Philips Electronics Convertible Note — August 27, 2009			—				—	%			—				—				—	%			5,094,092				5,094,092				4.8	%
Stock Options			9,359,500				19.3	%			—				9,359,500				14.0	%			—				9,359,500				8.9	%
			48,557,181				100	%			18,184,855				66,742,036				100.0	%			38,558,838				105,300,874				100	%
Total Pegasus/LED Holdings			25,209,331				51.9	%																			58,674,077				55.7	%
All Other Holders (excluding Stock Options & Philips Electronics)			13,988,350				28.8	%																			32,173,205				30.6	%
Employee Stock Options			9,359,500				19.3	%																			9,359,500				8.9	%
Philips Electronics			—				—	%																			5,094,092				4.8	%

     Purchasers of Units in this rights offering will experience an immediate and substantial dilution of the net tangible book value per share of our common stock. Our net tangible book deficit as of June 30, 2009 was approximately $(57.5 million). This net tangible book deficit equates to a pro forma net tangible book value per common share of $(1.89) per share. Net tangible book value per share is equal to our total net tangible book value, which is our total tangible assets less our total liabilities, divided by the number of shares of our outstanding common stock. Dilution per share equals the difference between the exercise price of the Warrants and the net tangible book value per share of our common stock immediately after the rights offering.

     Assuming that the rights offering is fully subscribed and the conversion of the principal and interest balances (as of October 30, 2009) on the convertible note agreements with Pegasus IV and Philips Electronics, [56,743,693+] Units will be issued as a result of this rights offering and the conversion of the convertible note agreements. After deducting estimated offering expenses payable by us, our pro-forma net tangible book value as of June 30, 2009 would have been approximately $312.7 million, or $3.59 per share of common stock. The following table shows the calculation of the pro forma net tangible book value per common share subsequent to the rights offering and the conversion of the convertible note agreements and the dilution, on a per common share basis, as a result of the exercise of the Warrants that may be issued pursuant to this rights offering and the convertible note agreements with Pegasus IV and Philips Electronics.

Net tangible book value as of June 30, 2009 (1)														$	(57,457,363	)
Proceeds from warrant exercises:
i) Exercise of Warrants issued pursuant to the offering							18,184,855
Exercise price per share(2)						$	6.00				109,109,130
ii) Exercise of Warrants issued to Pegasus IV pursuant to New Pegasus Convertible Note(3)							33,464,746
Exercise price per share(2)						$	6.00				200,788,476
iii) Exercise of Warrants issued to Philips Electronics pursuant to Philips Convertible Note(3)							5,094,092
Exercise price per share(2)						$	12.00				61,129,104
Total proceeds from warrant exercises															371,026,710
Less: estimated offering costs															(822,000	)
Pro-forma tangible net book value available to common stockholders														$	312,747,347
Common stock outstanding as of June 30, 2009							29,286,089
Restricted stock grants outstanding (4)							772,500
Common stock issuances subsequent to June 30, 2009 (5)							397,828
Total adjusted common stock outstanding as June 30, 2009							30,456,417
Warrants exercised:
Warrants issued pursuant to the offering			18,184,855
Warrants issued to Pegasus IV pursuant to the New Pegasus Convertible Note(3)			33,464,746
Warrants issued to Philips Electronics pursuant to the Philips Convertible Note(3)			5,094,092				56,743,693
Total pro forma shares of common stock outstanding															87,200,110
Pro-forma net tangible net book value per common share														$	3.59
Proceeds per share of common stock from exercise of Warrants issued pursuant to the offering(2)														$	6.00
Pro forma net tangible book value deficiency per common share(6)										$	(1.89	)
Pro-forma increase in tangible book value per common share from exercise of the warrants										$	5.48
Pro-forma net tangible book value per common share														$	3.59
Dilution in net tangible book value per common share after exercise of warrants														$	2.41

DESCRIPTION OF BUSINESS

Overview

     We research, design, develop, manufacture and market a range of lighting devices and systems that use light emitting diodes (“LEDs”) as the light source. LEDs are semiconductor devices that emit light when electric currents are passed through them and present many advantages over traditional light sources.

LED technology has improved substantially over the past several years such that lighting products that use LEDs as the light source have become functionally viable, economically compelling, and applicable for many different types of uses.

     As compared to traditional lighting devices and systems, our LED lighting devices and systems, some of which are patented or patent-pending, are engineered to enhance lighting performance, reduce energy consumption, increase product life, lower maintenance costs, expand design flexibility and reduce the use of hazardous materials. We specialize in the integration of power supplies, thermal management technology, optics and controls around LED chips to produce at a competitive price lamps and luminaires that demonstrate strong performance in terms of light quality, light output and lamp lifetime.

     We source our LED chips from a number of major suppliers and have developed key strategic relationships with preferred vendors that provide us with advance access to new developments in chip technology and advantageous pricing. We believe that by being agnostic as to which LED chip we use in our products, we have developed a competitive advantage relative to vertically integrated LED lighting companies and those companies without strong relationships with major chip manufacturers. In addition, our management team has experience in the traditional lighting industry as well as the LED industry, which allows us to develop an LED-based, energy efficient product offering that is engineered according to traditional lighting specifications.

     Our product line is comprised of a growing range of LED lighting devices and systems including retrofit lamps for traditional lamps or bulbs, luminaires for infrastructure applications (such as parking garages, roadways, area lighting and warehouses), retail/shop lighting, architectural luminaires and light engines/modules, as well as custom solutions for artistic and architectural projects. We currently focus on four major market segments: (i) public and private infrastructure, (ii) retail and hospitality, (iii) commercial and industrial and (iv) architainment. We also maintain a research and development team that explores alternative uses for LED lighting beyond illumination.

     We were incorporated in Delaware in 1988 and our business today is the result of the combination of the products, patents, intellectual property, assets and businesses of four LED lighting companies: (i) Lighting Science Group Corporation, an early entrant and leader in the application of LEDs for general illumination with white lighting, (ii) LED Effects, Inc. (“LED Effects”), an established LED company specializing in custom and architectural lighting systems, (iii) Lighting Science Group, B.V. (“LSGBV”), formerly known as Lighting Partner B.V., a Netherlands-based manufacturer and marketer of LED shop lighting and other specialty LED lighting devices and (iv) Lamina Lighting, Inc. (“Lamina”), a supplier of LED light engines and LED modules.

     Following the completion of the Lamina acquisition in July 2008, we initiated a reorganization effort to integrate our acquisitions, streamline our product development capability, segment our product offering and enhance our supply chain performance. We also reorganized our corporate structure to eliminate unnecessary expenses given that each of the four companies we acquired had its own infrastructure, assembly facilities, and administrative personnel that increased our operational and administrative expenses.

     In order to achieve our restructuring goals, we consolidated operations and closed facilities, increased investment in research and development, increased investment in engineering resources and expanded our product pipeline. We also entered into strategic relationships to improve our supply chain functions. We expect to continue to refine our operational strategy but believe that our integration efforts have positioned us for significant growth under a lower cost and more efficient structure with a strong supply chain.

Significant Transactions

     LED Holdings, LLC, a Delaware limited liability company (“LED Holdings”) and an affiliate of Pegasus Capital Advisors, L.P. (“Pegasus Capital”) and Pegasus IV, was formed on or about June 5, 2007 for the purpose of acquiring on June 14, 2007 100% of the operations and net assets of LED Effects, a

California-based company engaged in the business of designing, developing and manufacturing LED lighting applications.

     Subsequently, we entered into an Exchange and Contribution Agreement on October 4, 2007 (the “Exchange Agreement”) with LED Holdings. Pursuant to the Exchange Agreement, we acquired substantially all of the assets of LED Holdings and issued in exchange for these assets 2,000,000 shares of our Series B Preferred Stock and 15,928,734 shares (adjusted to reflect the reverse stock split of our common stock in January 2008) of our common stock to LED Holdings (collectively, the “Acquisition”). As a result of the Acquisition, LED Holdings acquired approximately a 70% participating interest and an 80% voting interest in the Company.

     On April 22, 2008, we acquired all of the outstanding capital shares of LSGBV, formerly known as Lighting Partner B.V., a manufacturer providing a broad range of LED lighting devices for residential, commercial, and retail applications based in The Netherlands.

     On July 29, 2008, we acquired the net assets of Lamina Lighting, Inc., a New Jersey-based company engaged in the business of developing and manufacturing light engines for use in LED lighting fixtures and applications.

Light Emitting Diodes

     LEDs are solid state semiconductor devices that were developed in the 1970s and have advanced from use in simple numeric displays and indicator lights to a range of new and sophisticated applications, including general illumination lighting, infrastructure lighting, custom color lighting, exit signs, traffic lights and signage, among others. There are a number of manufacturers of LEDs including, but not limited to, Philips Lumileds, Osram Opto Semiconductor, Nichia, and Cree. Currently, LEDs are most effective where the integration of light sources and architectural elements is critical. We have successfully installed our LED lighting products in the following applications: down-lighting, street lamps, post-top lamps, parking garages, warehouses, custom architectural facades, accent lighting and retail displays. As LED performance improves and LED manufacturing costs decrease, we expect LED lighting to become more economically viable in the general illumination lighting market, as well as other advanced markets such as biological and healthcare applications. In addition, increases in electricity costs will improve the economics of adopting LED lighting.

     An LED produces light differently than traditional light sources. In a traditional incandescent lamp, a tungsten filament is heated by an electric current until it glows and emits light. In a traditional fluorescent lamp, an electric arc excites mercury atoms, causing them to emit ultraviolet (UV) radiation. After striking the phosphor coating on the inside of glass tubes, the UV radiation is converted and emitted as visible light. In contrast, an LED is a semiconductor diode that consists of a chip of specially formed and treated semiconducting material. When connected to an electrical power source and electric current flows through the LED, light is emitted by the LED.

     The color composition of the light emitted by the LED is based on the chemical composition of the material being excited: red light emitting LEDs are based on aluminum gallium arsenide (AlGaAs); blue light emitting LEDs are made from indium gallium nitride (InGaN); and, green light emitting LEDs are made from aluminum gallium phosphide (AlGaP). “White” light is created by combining the light from red, green, and blue (RGB) LEDs or by using a phosphor in combination with a blue light emitting LED to convert the blue light to white light. The phosphor may be deposited directly on the LED or may be interposed between the LED and area to be illuminated, for example integrated in an optical element associated with the LED.

     LEDs are small, usually less than one millimeter square in surface area. The LEDs typically used in lighting applications are typically mounted in a package or on a circuit board, electrically connected to the circuit board, and a plastic or silicone element provides protection and, in some cases, acts as a lens and/or carrier for phosphor. LEDs generate heat when an electric current is passed through them, although significantly less heat than an incandescent lamp, and to maintain the light output and life of LEDs, the heat

produced must be dissipated by thermal management means such as heat sinks. Optical elements are typically used to manage the light produced by one or a group of LEDs

     LEDs offer several advantages over traditional light sources including lower energy consumption, longer lifetime, environmental friendliness, configurability, smaller size, low heat output and durability. They also allow extraordinary design flexibility in color changing, dimming and light distribution by combining small LED units into desired shapes, colors, sizes and lumen packages. LED lighting devices are up to 400% more energy efficient than incandescent lighting devices and approximately 20% more energy efficient than fluorescent lighting devices. Further, LED lighting devices, unlike fluorescent lamps, do not use mercury, a highly toxic “heavy metal.” Traditional lighting devices use lamps or bulbs that require regular and sometimes frequent changing with the attendant replacement costs and service costs. A typical incandescent lamp lasts approximately 1,000 hours and typical fluorescent lamps last approximately 10,000 hours. In contrast, an LED lighting device is expected to last approximately 50,000 hours. LEDs produce no ultraviolet, or UV, radiation and little heat, making them ideal for illuminating objects, such as clothing, cosmetics, and works of art, that are sensitive to UV light. In addition, unlike traditional lighting sources, LEDs do not have filaments that can be damaged due to shock or vibrations and LED lighting devices tend to be robust.

Our Products

     Our product line is comprised of a growing range of lighting devices that utilize LEDs as the light source including, but not limited to, the following:

     LED Retrofit Lamps. We offer a comprehensive range of high performance and reasonably priced LED retrofit lamps, or bulbs, that we believe are economically compelling replacements for traditional reflector and globe incandescent and incandescent halogen lamps such as PAR38, PAR30, PAR20, MR16, A19 and G25 types. Our range of dimmable LED retrofit lamps exhibit consistent color and deliver excellent light distribution and brightness and are suitable for commercial and residential lighting applications. We sell LED retrofit lamps directly to end users under the Lighting Science brand and also to original equipment manufacturers (“OEMs”) for resale under their respective brands.

     We recently announced our next generation of LED retrofit lamps that were designed to increase light output by up to 50% over the current generation of LED retrofit lamps and will be available to end users for approximately half the price of the current generation of LED retrofit lamps. Further, these lamps are expected to use approximately 80% less energy than the traditional lighting technology lamps that they replace. Our new LED retrofit lamp line will include MR16, GU5.3 and GU10, A19, PAR20, PAR30, and PAR38 types. We anticipate releasing this line of LED retrofit lamps in the first quarter of 2010.

     Infrastructure. We also offer a line of LED luminaires, or fixtures, that combine energy efficiency, long life and excellent light distribution, which makes them ideal for use in parking garages, warehouses and manufacturing areas. Our product range includes the PROLIFIC Series Roadway Luminaire for use in certain street lighting applications, and the Pyramid Low Bay, Flat Low Bay and BAYLUME luminaires for use in parking garages and other area lighting. The ShoeBox and WallPack LED luminaires are designed for area and pathway and security lighting, respectively. The PROLIFIC Series Roadway Luminaires produce between 80 to almost 90 lumens per watt depending on the model. This performance was validated by an independent testing laboratory that is approved for LM-79 Testing for ENERGY STAR for solid state lighting by the United States Department of Energy CALiPER program. At over 80 lumens per watt, we believe that the PROLIFIC Series Roadway Luminaires deliver industry leading performance over currently available LED-based street lights offering only 50 to 60 lumens per watt efficacy.

     We were selected from among more than ten global lighting companies by the New York City Department of Design and Construction (DDC) to engineer, produce, and test the winning LED-based design for the City Lights 21st Century Streetlight Design Competition to enhance existing pedestrian surroundings, bringing unparalleled uniformity to roadway illumination, while preserving the diverse history and character of the area.

     Our products in the infrastructure market category are designed to reduce operating costs and generate a simple payback to the customer within two to three years. Some of our most notable installations in 2009 include the installation of our low bay luminaires in six parking garages at Arizona State University, Tempe Campus and a parking garage for a major U.S. based airline.

     We also recently entered into a development agreement with a space agency to help develop, prototype and test the next generation of solid state lighting platforms for space craft, which is a two year program, and we are a participant in a space agency grant for the study of UV led systems in water purification, which is a one year program.

     Retail/Shop Lighting. We design, develop, manufacture and market the SYMETRIE line of LED luminaires for retail display applications in various profiles and lengths and in select color temperatures ranging from cool to warm. These products include our Flat, Slim, Round and Corner profile luminaires and we believe they are an economically compelling alternative to traditional incandescent, incandescent halogen and fluorescent lighting technology. A major retail equipment company has integrated our linear LED luminaires in their shelving-systems and sells the complete integrated system to its customers, which include a large national perfume and cosmetics retailer. We also manufacture and market a range of LED-based spot, accent, recessed, pendant and track lighting such as the CYCLOS, NISSI, and FRAGMA luminaires for retail store applications offering uniform illumination and an alternative to incandescent halogen lighting.

     Architectural Accent. We offer architectural and architainment LED lighting devices including, but not limited to, the Color Tile, FLEXILUME, XTREMETUBE, High Power Linear, DOTZ, COOLGRID and Flat RGB luminaires. These products help architects, lighting designers, and builders enhance building structures with light, color, movement and video in both interior and exterior applications. Our architectural accent luminaires have been used in flagship stores for several luxury brands and can be combined with lighting systems from our custom solutions group to produce one-of-a-kind lighting systems that transform buildings or landscapes into works of art.

     LED Light Engines and Modules. We offer white light and RGB LED modules under the ATLAS and TITAN trademarks. These LED modules are used by original equipment manufacturers and lighting companies in their LED lighting systems. We also sell custom designed light engines for integration into existing light fixtures and newly designed LED luminaires. One such light engine is sold to a major lamp company for resale in the public lighting infrastructure market and another such light engine is sold to a major lighting fixture company for integration in a designer lighting fixture.

     Custom Solutions. We offer customized LED lighting systems or solutions for a range of customers. Our custom design capabilities combine project management, system integration, and advanced control systems and software to create desired lighting effects for architects and light designers. By taking the designer’s lighting vision and translating it into a practical application, our engineers are able to design and develop a complete system that meets a specific design need and that delivers a desired lighting effect. Our design and development expertise covers a broad range of custom lighting systems, including LED light engines for existing applications to completely new LED lighting applications that exploit the characteristics of LEDs. We believe that our custom solutions business generates brand awareness and provides a recurring source of new product development through the research, design, development, and engineering efforts that are typically involved in these special projects.

     One of our LED custom projects, the New York City Times Square New Year’s Eve Ball, currently rests on top of 1 Times Square year round and changes colors/sequence through programmable control panels and without the need to change light fixtures, lenses or other devices. Additional notable projects that we have completed include: (i) 7 World Trade Center in New York, New York; (ii) the Saks Fifth Avenue snowflake display in New York, New York; (iii) the Chanel retail store in Ginza, Japan; (iv) the Macy’s holiday façade in San Francisco, California; (v) a casino project for the City of Dreams in Macau, China; (vi) the Texas State Fair’s “Big Tex” in Dallas, Texas; (vii) the Shri Swaminarayan Mandir

in Liburn, Georgia; (viii) the U.S. Bank Tower in Sacramento, California; and (ix) the Orange County Center for Performing Arts in Orange County, California.

Our Target Markets and Customers

     We target strategic market segments where we believe the performance and cost advantages of LED lighting devices and systems are most applicable. We have coupled our product offering with what we believe are compelling financing solutions that are designed to overcome reluctance to make capital expenditures to adopt LED lighting. Our objective is to provide customers with the highest performing LED lighting products at the lowest cost in the market.

     We work through our internal sales force and a network of lighting sales representatives to reach our target markets. In addition, we have developed a “Rain Maker” program to expand our selling network and to create a referral base of potential projects and customers. We have also developed strong working relationships with leading lamp and light fixture manufacturing companies and other key influencers in the value chain such as energy service companies (ESCOs), public utilities and city and state governments.

     We currently target four major market segments:

     Public and Private Infrastructure. The public and private infrastructure market is comprised of facilities and spaces that are managed by government and private entities. Primary lighting applications in this market are streets and highways, airports, ports, rail infrastructure, water infrastructure and energy supply infrastructure. We believe that the North American public and private infrastructure market for lighting is large and ready to adopt LED lighting. Within the infrastructure market, we believe that street and highway lighting represents the largest segment within the public infrastructure market. Although LED lighting sales currently represent only a small part of this market, we expect a substantial increase in LED lighting sales within this market in 2010 due to customer acceptance of the benefits of LED technology, U.S. stimulus initiatives, and the improved performance and lower cost of LED lighting products.

     Retail and Hospitality. The market for lighting in the retail and hospitality environment is both large and varied. The retail and hospitality market includes malls, retail shops, hotels and resorts, cruise ships, and restaurant owners and operators. Our product offerings for this target market focus on task lighting, down lighting, bay lighting, cove and display lighting, accent, track and spot lighting. Retail lighting applications also include product-specific display lighting that enhances the appearance of particular merchandise in addition to general illumination. In certain cases, certain products such as clothing, cosmetics, food and jewelry require very specific lighting requirements and our products are able to meet those requirements. The early adopters of LED white lighting in the retail and hospitality market were high end luxury retail stores that sought a high quality lighting environment (i.e., design flexibility, color, and form factor). More recently, LED display lighting has penetrated the middle-market and department stores have utilized such lighting for the display of items such as cosmetics, shoes, crystal, china and jewelry.

     The LED lighting products we offer to the retail and hospitality market often have less than a two year payback, which means the customer will see a financial return in the form of lower energy costs within two years. We are currently supplying approximately 100,000 LED retrofit lamps to replace incandescent halogen lamps for over 230 retail kiosks in 30 malls in the northeastern United States that are owned by a leading nationwide mall owner and operator.

     Commercial and Industrial. We have developed a line of LED lamps targeted to compete with and ultimately replace traditional incandescent and incandescent halogen lamps. We offer a comprehensive range of high performance LED retrofit lamps for traditional reflector and globe incandescent lamps such as PAR38, PAR30, PAR20, MR16 and G25 types for commercial and residential lighting applications. Our LED retrofit lamps are currently sold through multiple channels. Specifically, we offer our LED retrofit lamps to leading lighting companies that then resell under their own brands in commercial markets and into retail markets such as home centers. In addition, our products are also sold under the Lighting Science

brand through electrical wholesalers serving the commercial markets, ESCOs, and direct to retail customers.

     According to a U.S. Department of Energy lamp characterization study, there are approximately 7 billion installed lamps (or bulbs) based on traditional incandescent, fluorescent and high intensity discharge lighting technology in commercial, residential, industrial and outdoor applications in the United States. As the total cost of LEDs declines and performance improves, we expect LED retrofit lamps to replace a significant number of those traditional technology lamps.

     Architectural and Architainment. We define architectural lighting as all lighting used for illuminating built-up environments, where the integration of light sources and architectural elements is critical. Architectural lighting is used in both indoor (i.e., retail and hospitality) and outdoor (i.e., building facades, bridges, and historic monuments) applications, and it can be both functional and decorative. In outdoor architectural applications where fixtures are exposed to temperature variations, our experience is that LED lighting devices perform better than traditional technologies, especially in cold temperatures. LED lighting is ideal for architectural applications that require design flexibility, dynamic color, and in places that are difficult to reach and maintain. We believe that the LED lighting market for architectural and art project applications is substantial and that we can expand our current business in this market.

     Future Applications. Through our internal research and development efforts and our relationships with channel partners, universities and other entities, we continuously explore additional applications for LED lighting. For instance, we are currently working with others to explore the development of prototypes for space craft lighting applications through a national space agency, healthcare applications through a major university and its associated hospital, and water purification applications through another university. While these markets are in preliminary stages of development, we believe they could be substantial market opportunities for LED lighting that are not at all or fully addressed by traditional lighting technology.

Competition

     In the lighting markets in which we sell our LED lighting devices, we compete with products utilizing both traditional lighting technology provided by many vendors as well as LED-based lighting devices provided by a limited number of vendors. There are a number of relatively new companies offering LED lighting products and, in addition, we face competition from a number of manufacturers of traditional lighting equipment that have developed one or more LED lighting products. Some of our competitors, particularly those that offer traditional lighting products, are larger companies with substantial resources to devote to research and development, manufacturing and marketing.

     To the extent that we continue to seek to introduce LED products such as retrofit lamps for standard fixtures for use in general lighting applications and LED based luminaires, we expect to encounter competition from large, established companies in the general lighting industry such as General Electric, Matsushita, Osram and Philips Lighting, among others. We believe that many of such large companies have undertaken initiatives to develop LED technology as well as other energy efficient lighting products and that they will leverage their brand and channel access to sell such products. These companies have global marketing capabilities and substantially greater resources to devote to research and development and other aspects of the development, manufacture and marketing of solid-state lighting. However, we believe that we are able to compete effectively against these companies by offering compelling, innovative and state of the art products across each of our product lines that are high performance and low cost. We currently sell LED lighting devices to a number of these companies.

Our Financing Solutions

     In order to increase the adoption of LED lighting by our customers and to illustrate the benefits of using our products, we have introduced the Cash Flow Positive Lighting Program (the “Financing Program”), which is a unique marketing tool that allows customers to install our systems under a financially affordable structure.

     The Financing Program allows our customers to purchase our products for an upfront cost that is significantly lower than the total product cost and to pay for the remaining costs of the product over time. These payments are effectively financed through the cash flow improvement expected to be realized from the reduced electricity and maintenance costs associated with using, maintaining, and replacing traditional light fixtures with our more energy efficient, longer lasting LED-based lighting. We estimate that this program provides our customers with an immediate positive cash flow impact because the remaining payments are structured to be less than the expected total operational savings. In addition, we believe that the long-term improvement to energy and operating costs is likely to encourage customers to explore additional usages for LED-based products.

     For customers that prefer lease-based programs, we have also developed a leasing program that we offer to qualified customers through a nationally recognized bank. With this program, customers can enter into a lease program (similar to other traditional commercial equipment leases) with no money down, and a series of lease payments, with an option for a technology refresh (at the appropriate cost adjustment) several years into their lease. At the end of the lease, the customer can either return their equipment or purchase it at a pre-determined residual value.

Distribution

     We deliver our products directly to certain customers and to other customers through a network of electrical wholesalers with strategically located warehouses in the United States, Europe and Asia using common carriers. For other international customers, we adapt our distribution methods to meet individual customer or country requirements.

Our Suppliers and Raw Materials

     LEDs are the single most important component of our LED lighting devices and are also the most expensive component. We are not committed to and do not favor a single source for LEDs, and are therefore free to select LEDs based on availability, price and performance. We presently use LEDs produced by Nichia, Citizen, Philips Lumileds, Osram Opto Semiconductor and various other companies. We believe we have good relationships with our LED suppliers and, in general, receive a high level of cooperation and support from them. In addition, we have entered into strategic relationships with certain key suppliers that give us access to next generation LED chip technology at an early stage and at a competitive price.

     The principal materials used in the manufacture of our LED lighting devices are: LEDs; circuit boards; standard electrical components such as capacitors, resistors and diodes; aluminum for heat sinks and structural elements; and plastics for optical elements. We obtain these materials from several suppliers and in some cases have special supply arrangements. In some cases, we buy completed sub-assemblies, especially in the case of electronics for power supplies, that may be designed by us or by a third party. We continuously monitor and evaluate alternative suppliers and materials based on numerous attributes including quality, service, and price.

Our Assembly and Manufacturing

     We assemble and manufacture our LED products both internally and through select contract manufacturers who provide scalability, best-in-class manufacturing and quality processes. Our manufacturing operations for our standard products are currently based in Satellite Beach, Florida and our manufacturing operations for our custom products unit are currently based in Rancho Cordova, California. Our contract manufacturers are located both in and outside the United States, and they provide the necessary facilities and labor to manufacture some of our products or sub-assemblies of our products. In the future, we may rely more heavily on contract manufacturers to manufacture our products and provide sub-assembly services, and we believe we have the flexibility to shift production among our facilities and our contract manufacturers.

Intellectual Property

     As of October 23, 2009, we had filed 128 U.S. patent applications. From these applications, 73 U.S. patents had been issued and 36 were pending approval. When we believe it is appropriate and cost effective, we make corresponding international, regional or national filings to pursue patent protection in other parts of the world.

     When we believe it is appropriate and cost effective, we make corresponding international, regional or national filings to pursue patent protection in other parts of the world. In some cases, we rely on confidentiality and trade secrets to protect our innovations.

     We also have a portfolio of registered and unregistered trademarks including: LIGHTING SCIENCE, PROLIFIC, LAMINA, EYELEDS, SPOTLED, SOL, TITAN, TITAN TURBO, ATLAS, BAYLUME; FLEXILUME, DOTZ, COOLGRID, POWEREYE, SYMETRIE, CYCLOS, NISSI, XTREME TUBE, DISCEYE and COLOREYE.

Regulations, Standards & Conventions

     Our products are generally required to meet the electrical codes of the jurisdictions where they are sold. Meeting the codes established in the United States and Europe usually allows our products to meet the codes in other geographic regions.

     Many of our customers and end users require our products to be listed by Underwriters’ Laboratories, Inc. (“UL”), or “UL Listed.” UL is a United States independent, nationally recognized testing laboratory, third-party product safety testing and certification organization. UL develops standards and test procedures for products, materials, components, assemblies, tools and equipment, chiefly dealing with product safety. UL evaluates products, components, materials and systems for compliance to specific requirements, and permits acceptable products to carry a UL certification mark, as long as they remain compliant with the standards. UL offers several categories of certification. Products under its listing service are said to be “UL Listed,” identified by the distinctive UL mark. We have undertaken to have all of our products meet UL standards and be UL listed. There are alternatives to UL certifications, but customers and end users tend to favor UL listing. Because LED lighting devices are relatively new in the market, UL’s specifications and standards for LED lighting devices such as ours are not well established and the prior established specifications and standards for traditional lighting devices are sometimes difficult to achieve for LED lighting devices.

     Certain of our products must meet industry standards, such as those set by the Illuminating Engineering Society of North America, or IES, and government regulations for the application. For example, street lights must meet certain structural standards and must also deliver a certain amount of light in certain positions relative to the installed luminaire. In the United States, wallpack luminaires must meet standards and regulations established in the Americans With Disabilities Act. We specifically develop and engineer our products to meet the standards and regulations applicable to the lighting applications addressed by our products.

     Many of our customers and end users will also expect our products to meet the applicable ENERGY STAR requirements. ENERGY STAR is an international standard for energy efficient consumer products. To qualify for ENERGY STAR certification, LED lighting products must pass a variety of tests to prove that the products have certain characteristics. We are striving for our products to meet the ENERGY STAR requirements and as LED efficiency improves, most of our products will likely meet the current requirements.

Research and Development

     We are dedicated to constantly improving our LED lighting devices and to developing new LED lighting devices. Our research and development team focuses on increasing performance efficiency of all system elements (including power supplies, drivers and thermal management), better optics, and improving

and innovating control systems. We work with LED chip and LED package makers to promote and drive advances in LED package structure and phosphor application for white light devices.

     We have established relationships with a space agency and a major university and its affiliated hospital to research the effects of light on biological systems. Other areas of research include LED lighting applications to accelerate or modify plant growth and the effects of spectral distribution on human functions including sleep patterns, visual acuity, alertness and seasonal and clinical depression.

     During the fiscal year ended December 31, 2008, we spent approximately $1.1 million on research and development.

Employees

     As of October 23, 2009, we had 85 employees in the United States and 27 employees outside the United States, primarily in our office in Goes in The Netherlands.

     A number of our employees were previously employed by leading companies in the lighting industry, such as Acuity Brands, Inc., Philips Lighting, Osram Sylvania, Inc., and General Electric Company We believe that their industry knowledge, lighting application knowledge, and contacts in the lighting industry are important assets supporting our business.

Locations

     Our principal executive office, finance and accounting, research, design and development operations, and certain of our assembly and manufacturing operations are located at 1227 South Patrick Drive, Building 2A, Satellite Beach, Florida 32937. Our telephone number at our principal executive offices is (321) 779-5543. Our Custom Solutions business unit is based in Rancho Cordova, California. Our European operations are based in Goes, The Netherlands, and we also maintain sales offices in Japan, the United Kingdom, and Australia.

DESCRIPTION OF PROPERTY

     We currently occupy leased office and industrial space in the following locations:

Location		Estimated Monthly Rental Cost		Expiration date
Satellite Beach, Florida		$36,500		September 2012
Rancho Cordova, California		$15,000		August 2012
Goes, The Netherlands		$11,000		November 2010
Tokyo, Japan		$  7,000		December 2009
Dallas, Texas		$  3,400		October, 2010
Castle Hill, Australia		$  3,000		October 2011

LEGAL PROCEEDINGS

     From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse effect on our business, financial condition or operating results.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with those statements. You should read the following discussion in conjunction with our audited and unaudited financial statements and the notes to our audited and unaudited financial statements included elsewhere in this prospectus. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those in “Risk Factors” and included in other portions of this prospectus.

Overview

     We research, design, develop, manufacture and market a range of lighting devices and systems that use light emitting diodes (“LEDs”) as the light source. As compared to traditional lighting devices and systems, our LED lighting devices and systems, some of which are patented and patent-pending, are engineered to enhance lighting performance, reduce energy consumption, increase product life, lower maintenance costs, expand design flexibility and reduce the use of hazardous materials. We specialize in the integration of power supplies, thermal management technology, optics and controls around LED chips to produce lamps and fixtures that demonstrate strong performance, in terms of light quality, light output and lamp lifetime, and at a competitive price.

     We source our LED chips from a number of major suppliers and have developed key strategic relationships with preferred vendors that provide us with advance access to new developments in chip technology and advantageous pricing. We believe that by being agnostic as to which LED chip we use in our products, we have developed a competitive advantage relative to vertically integrated LED lighting companies and those companies without strong relationships with major chip manufacturers.

     Our revenues are primarily derived from sales of the LED devices and systems described above. Although our financial results are mainly dependent on the level of selling, general and administrative, compensation and other operating expenses, our financial results have also been dependent on the level of market adoption of LED technology as well as general economic conditions.

     Lighting products remained relatively static for 50 years until recently, when lighting became one of the last major markets to be transformed substantially by new technology. Because LED technology remains an emerging and expensive technology that has only recently become more economically viable, market adoption been slow. Given the current economic downturn, liquidity has been constrained forcing institutions and individuals to substantially reduce capital spending to focus only on critical path expenditures. LED lighting products have been a discretionary rather than mandatory investment, and as a result, sales of our devices and systems have been negatively impacted. We believe that as the global economy grows and provides institutions and individuals with greater liquidity, sales of our devices and systems will increase.

     Increased market awareness of the benefits of LED lighting, increasing energy prices and the social movement influencing individuals and institutions towards greater investment in energy-efficient products and services will have, we believe, an increasingly positive impact on our sales in the future. Additionally, we intend to utilize our strategic partnerships to help us reduce the component and production costs of our devices and systems in order to offer them at competitive prices. Further, we believe our ability to provide attractive financing options to our clients with respect to the purchase of our devices and systems will positively affect our sales. Similar to many manufacturing companies, we expect to benefit from economies of scale, meaning that as unit sales increase, our cost of production per unit should decrease, which would positively impact our financial results.

     As a result of the acquisition of three companies over a two year period and the combination of four separate entities, our financial results have been adversely impacted. In order to reduce our general

operating expenses, management has recently undertaken a restructuring initiative throughout the Company to consolidate operations in our Florida and California locations. As a result, we closed our New Jersey facility and office in Dallas in August 2009, significantly reducing the number of employees as well as our overhead costs. We also substantially reduced the number of employees in our Netherlands location in order to reduce duplication in engineering efforts and focus the organization on sales and distribution across Europe. Although this initiative has a short-term negative impact on financial results, we believe the Company will achieve a positive long-term benefit on financial results from the consolidation of operations.

     We entered into an Exchange and Contribution Agreement on October 4, 2007 (the “Exchange Agreement”) with LED Holdings. LED Holdings was formed on or about June 5, 2007 for the purpose of acquiring, and on June 14, 2007 LED Holdings acquired, 100% of the operations and net assets of LED Effects, Inc. (“LED Effects”), a California-based company engaged in the business of designing, developing and manufacturing LED lighting applications. Pursuant to the Exchange Agreement, we acquired substantially all of the assets of LED Holdings and issued in exchange for these assets 2,000,000 shares of our Series B Preferred Stock and 15,928,734 shares (adjusted to reflect the reverse stock split of our common stock in January 2008) of our common stock to LED Holdings (collectively, the “Acquisition”). As a result of the Acquisition and, specifically, LED Holdings’ acquisition of approximately a 70% participating interest and an 80% voting interest in the Company, we became a majority-owned subsidiary of LED Holdings as of October 4, 2007.

     We accounted for the Acquisition as a reverse merger. Accordingly, for accounting and financial reporting purposes, Lighting Science Group was treated as the acquired company, and LED Holdings was treated as the acquiring company. Therefore, the historical financial statements presented in this prospectus for the period beginning on June 14, 2007 and ending on December 31, 2007 and the amounts used in management’s discussion and analysis included in this prospectus as they relate to this period are those of LED Holdings, presented in accordance with FAS 154. Because LED Holdings had no operations prior to its acquisition of the net assets of LED Effects, the historical financial statements included in this prospectus for periods prior to June 14, 2007 are those of LED Effects. Therefore, the historical financial statements presented in this prospectus for the period beginning on June 14, 2007 and ending on December 31, 2007 include the operations of LED Holdings from June 14, 2007 through October 4, 2007 and the consolidated operations of LED Holdings and Lighting Science Group from October 4, 2007 through December 31, 2007. See Note 1 to the Consolidated Financial Statements.

Recent Events

     In February 2009, we executed a promissory note in favor of Pegasus IV that would allow us to borrow up to $7.0 million in aggregate. The February promissory note was scheduled to mature on June 30, 2009 and had an interest rate of 8% per annum. As a condition to entering into the February promissory note, we entered into a letter agreement with Pegasus IV, dated February 13, 2009 (the “Letter Agreement”), pursuant to which we agreed to use our best efforts to conduct a rights offering during the second fiscal quarter of 2009 for preferred or common stock, the net proceeds of which would raise at least $30 million. The February promissory note and the Letter Agreement required that any net cash proceeds of an offering generally be applied to the payment of: (i) the unpaid principal amount of the February promissory note, together with accrued interest thereon, (ii) the unpaid principal amount of our outstanding unsecured bridge loans, together with accrued interest thereon, (iii) our anticipated cash needs during 2009, net of other available financings and (iv) our outstanding borrowings that were guaranteed by Pegasus IV or an affiliate of Pegasus IV.

     In April 2009, we executed an additional promissory note in favor of Pegasus IV that allowed us to borrow up to $2.0 million in the aggregate. The note was scheduled to mature on May 15, 2009, had an interest rate of 8% per annum and was also subject to the Letter Agreement.

     As discussed under “Convertible Note Agreements with Pegasus IV and Philips Electronics,” we entered into the Original Pegasus Convertible Note with Pegasus IV on May 15, 2009 and the New Pegasus

Convertible Note on August 27, 2009. For a complete description of these notes, see “Convertible Note Agreements with Pegasus IV and Philips Electronics.”

     On August 24, 2009, the Company and BMO amended the Loan Authorization Agreement, dated July 25, 2008 (the “Loan Agreement”) to extend the maturity date of the Loan Agreement until August 24, 2010 in the event that BMO does not make prior written demand. On the same date and in conjunction with the amendment to the Loan Agreement, the Company and Pegasus IV entered into the Guaranty Extension, pursuant to which Pegasus IV agreed to extend its Guaranty of the amounts outstanding under the Loan Agreement through August 24, 2010. As consideration for the Guaranty Extension, we agreed to pay Pegasus IV a fee, payable upon the earliest to occur of (a) August 24, 2010, (b) the date of termination of the Loan Agreement or the Guaranty and (c) a change of control of the Company (each of (a), (b) and (c), a “Fee Payment Date”). If the Fee Payment Date is August 24, 2010 or the date of termination of the Loan Agreement or the Guaranty, we must pay a fee (the “Average Daily Balance Fee”) equal to (i) 15% of our average daily loan balance with BMO, multiplied by (ii) the quotient obtained by dividing the number of days from the date of the Guaranty Extension to the Fee Payment Date by 365 days (the “Usage Percentage”). If the Fee Payment Date is the date of a change of control of the Company, we must pay a fee equal to the greater of (1) Average Daily Balance Fee and (2) 1.0% of the total transaction consideration received by the Company upon such change of control, multiplied by the Usage Percentage.

     On August 27, 2009, the Company, LED Holdings, LED Effects, Pegasus Capital and Pegasus IV (together with Pegasus Capital, the “Pegasus Group”), on the one hand, entered into that certain Governing Agreement and Complete Releases (the “Release Agreement”) with Philips Electronics, Philips Electronics North America Corporation (“PENAC”) and Philips Solid-State Lighting Solutions, Inc. (“PSSLS”, and, together with Philips Electronics and PENAC, the “Philips Group”), on the other hand. As previously disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2008, we have been involved in patent infringement litigation with the Philips Group since February 19, 2008 (the “Patent Litigation”).

     Pursuant to the Release Agreement, the parties agreed to dismiss all pending litigation among and between them. Specifically, the Company, LED Holdings, LED Effects and the Pegasus Group, on the one hand, and the Philips Group, on the other hand, agreed to terminate all claims and disputes among them relating to any matter or occurrence, including, but not limited to, all claims and disputes arising out of or related to the Patent Litigation and arising out of or related to any agreements or contracts entered into among the parties prior to the date of the Release Agreement (the “Prior Agreements”). Pursuant to the Release Agreement, the parties agreed that certain of the Prior Agreements will remain in full force and effect and that others will be terminated or will expire in accordance with their terms. The Philips Group released the Company, LED Holdings, LED Effects and the Pegasus Group from any liability stemming from the Patent Litigation and the Prior Agreements, and the Company, LED Holdings, LED Effects and the Pegasus Group each released the Philips Group from any liability relating to the Patent Litigation and the Prior Agreements.

     In connection with the Release Agreement, on August 27, 2009, the Company and Philips Lighting B.V. (“Philips Lighting”), an affiliate of the entities in the Philips Group, entered into a Commercial Framework Agreement pursuant to which the Company and Philips Lighting agreed to buy and sell LED lighting products to each other. Also in connection with the Release Agreement, the Company and Philips Electronics entered into a Patent License Agreement pursuant to which Philips Electronics granted the Company a royalty-bearing license to the patents in the Philips LED-based Luminaires and Retrofit Bulbs licensing program. Further, in connection with the Release Agreement, Philips Electronics has made a limited equity investment in the Company pursuant to the convertible note agreement discussed under “Convertible Note Agreements with Pegasus IV and Philips Electronics.” For a complete description of this note, see “Convertible Note Agreements with Pegasus IV and Philips Electronics.”

Critical Accounting Policies and Estimates

     Our discussion and analysis of our financial condition and consolidated results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of our condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based upon historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates.

     We believe that our critical accounting policies affect our more significant estimates and judgments used in the preparation of our consolidated financial statements. See Note 2 to our consolidated financial statements for the year ended December 31, 2008 included elsewhere in this prospectus for a more complete discussion of these critical accounting policies. There have been no significant changes in our critical accounting policies since December 31, 2008. See also Note 1 to our unaudited condensed consolidated financial statements for the three and six month periods ended June 30, 2009 included elsewhere in this prospectus.

Results of Operations

     Results of Operations for the Three- and Six-Month Periods Ended June 30, 2009 and 2008

     The following table sets forth statement of operations data expressed as a percentage of total revenue for the periods indicated (some items may not add due to rounding):

		Three Months Ended June 30,								Six Months Ended June 30,
		2009				2008				2009				2008
Revenue			100.00	%			100.00	%			100.00	%			100.00	%
Cost of goods sold			68.14	%			80.19	%			78.25	%			80.05	%
Gross margin			31.86	%			19.81	%			21.75	%			19.95	%
Operating expenses:
Sales and marketing			28.89	%			25.66	%			24.71	%			34.44	%
Operations			74.46	%			37.68	%			60.09	%			43.19	%
General and administrative			95.33	%			105.29	%			95.55	%			125.02	%
Depreciation and amortization			24.91	%			16.39	%			20.14	%			17.85	%
Total operating expenses			223.59	%			185.02	%			200.49	%			220.51	%
Loss from operations			(191.73	%)			(165.21	%)			(178.74	%)			(200.56	%)
Other income (expense)
Interest income			0.02	%			0.86	%			0.01	%			1.70	%
Interest expense			(23.98	%)			(1.27	%)			(16.40	%)			(1.06	%)
Other, net			(2.71	%)			(2.56	%)			(1.96	%)			1.25	%
Total other income (expense)			(26.67	%)			(2.96	%)			(18.36	%)			1.89	%
Loss before income tax benefit			(218.40	%)			(168.17	%)			(197.10	%)			(198.66	%)
Income tax benefit			(1.37	%)			(1.56	%)			(1.21	%)			(1.11	%)
Net loss attributable to common stock			(217.03	%)			(166.61	%)			(195.89	%)			(197.55	%)
Items included in comprehensive income (loss)
Foreign currency translation gain (loss)			33.22	%			0.85	%			8.44	%			0.74	%
Net comprehensive loss			(183.81	%)			(165.76	%)			(187.45	%)			(196.82	%)

     Results of Operations for the Three-Month Period Ended June 30, 2009 compared to the Three-Month Period Ended June 30, 2008.

		Three Months Ended June 30,								% of Revenue								Variance
		2009				2008				2009				2008				$				%
Revenues		$	5,922,866			$	5,285,186				100.0	%			100.0	%		$	637,680				12.1	%
Cost of goods sold			4,035,796				4,238,063				68.1	%			80.2	%			(202,267	)			(4.8	%)
Sales and marketing			1,711,040				1,356,050				28.9	%			25.7	%			354,990				26.2	%
Operations			4,410,437				1,991,662				74.5	%			37.7	%			2,418,775				121.4	%
General and administrative			5,646,117				5,564,739				95.3	%			105.3	%			81,378				1.5	%
Depreciation and amortization			1,475,443				866,202				24.9	%			16.4	%			609,241				70.3	%
Interest expense, net			(1,420,269	)			(66,934	)			(24.0	%)			(1.3	%)			(1,353,335	)			2021.9	%
Other, net			(160,447	)			(135,041	)			(2.7	%)			(2.6	%)			(25,406	)			18.8	%