IOTA COMMUNICATIONS, INC. - FORM 10-Q

Attached files

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EX-32.1 - EXECUTIVE OFFICER CERTIFICATION - IOTA COMMUNICATIONS, INC.	exh32-1_16995.htm
EX-31.2 - EXECUTIVE OFFICER CERTIFICATION - IOTA COMMUNICATIONS, INC.	exh31-2_16995.htm
EX-31.1 - EXECUTIVE OFFICER CERTIFICATION - IOTA COMMUNICATIONS, INC.	exh31-1_16995.htm
EX-32.2 - EXECUTIVE OFFICER CERTIFICATION - IOTA COMMUNICATIONS, INC.	exh32-2_16995.htm

UNITED STATES OF AMERICA

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q


(Mark One)
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: November 30, 2010
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________ .

Commission File Number: 0-27587

ARKADOS GROUP, INC.

(Exact name of Registrant as specified in its charter)


Delaware (State or Other Jurisdiction of Incorporation or Organization)		22-3586087 (I.R.S. Employer Identification No.)
220 Old New Brunswick Road, Piscataway, NJ 08854 (Address of principal executive offices) (Zip Code)
(732) 465-9300 (Registrant’s telephone number)
(Former Name, Former Address and Former Fiscal Year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No 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 (Do not check if a smaller reporting company)		Smaller reporting company ý

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

The number of the registrant’s shares of common stock outstanding was 45,176,671 as of December 31, 2010

Arkados Group, Inc.

Quarterly Report on Form 10-Q

Quarter Ended November 30, 2010

Table of Contents


PART I—FINANCIAL INFORMATION
	Item 1.	Financial Statements	4
		Consolidated Balance Sheets as of November 30, 2010 (unaudited) and May 31, 2010	4
		Consolidated Statements of Operations Cumulative During the Development Stage (March 24, 2004 to November 30, 2010) and for the Three and Six Months Ended November 30, 2010 and 2009 (UNAUDITED)	5
		Consolidated Statements of Cash Flows – Cumulative During the Development Stage (March 24, 2004 to November 30, 2010) and for the Six Months Ended November 30, 2010 (UNAUDITED)	6
		Notes to Consolidated Financial Statements (unaudited)	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
	Item 4T	Controls and Procedures	25
PART II—OTHER INFORMATION
	Item 1	Legal Proceedings	26
	Item 6.	Exhibits	26
Signatures			27

INTRODUCTORY NOTES

This Report on Form 10-Q for Arkados Group, Inc. (“Arkados” or the “Company”) may contain forward-looking statements. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate” and “continue” or similar words. Forward-looking statements include information concerning possible or assumed future business success or financial results. You should read statements that contain these words carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. We believe that it is important to communicate future expectations to investors. However, there may be events in the future that we are not able to accurately predict or control. Accordingly, we do not undertake any obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties set forth under “Risk Factors” in our Annual Report on Form 10-K for the year ended May 31, 2009 and other periodic reports filed with the SEC. Accordingly, to the extent that this Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that Arkados’ actual financial condition, operating results and business performance may differ materially from that projected or estimated in such forward-looking statements.

The Company filed a Form 8-K Report on December 29, 2010 reporting, among other things, the issuance of 10,250,000 shares of common stock to settle $401,000 of unsecured debt, the entry into a license agreement and asset purchase agreement (“APA) and the settlement of approximately $12.4 million of secured debt (including interest and penalties) for a payment of approximately $5.5 million from the licence fee received, the payment of a substantial portion of unpaid compensation due employees and the resignation and appointment a CEO and director. As, reported, the Company agreed to sell assets used in the Company’s semiconductor business to STMicroelectronics for aggregate consideration of $11 million, of which $7 million was paid on the execution of the APA pursuant to the License and the balance is due at closing. The Company will focus on development, manufacturing, and sales of consumer electronics and Smart Grid products based on power line communication semiconductors. The Company will also continue to provide consulting and development services to existing customers and users of powerline communication semiconductors. At the same time, ST hired most of the Company’s employees, each of whom were engaged in the Company’s semiconductor business. The information contained in this report, except as specifically dated, is as of November 30, 2010 and does not give effect to the changes to the Company’s business or prospects which occurred or may occur as a result of the forgoing.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

ARKADOS GROUP, INC. & SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(Unaudited)

	30-Nov-10			31-May-10
Assets
Current assets
Cash	$	11,111		$	16,345
Accounts receivable		—			7,709


Total current assets		11,111			24,054

Equipment, net		15,687			28,272

Deferred financing expenses, net		153,502			284,126

Intangible assets, net		101,431			139,921

Other assets		31,828			33,768

	$	313,559		$	510,141

Liabilities and Stockholders’ Deficiency

Current liabilities:
Accrued expenses and other liabilities	$	12,448,808		$	9,927,810
Related Party Borrowings		252,799			247,700
Note Payable		1,319,502			1,142,301
Current portion convertible debentures and penalties		16,143,552			16,127,388
Payroll taxes and related penalties and interest payable		936,906			936,906

Total current liabilities		31,101,567			28,382,105

Stockholders’ deficiency
Convertible preferred stock - $.0001 par value; 5,000,0000 shares authorized, zero shares outstanding
Common stock, $.0001 par value; 100,000,000 shares authorized 24,926,261and 34,926,261, respectively, issued and outstanding		3,493			3,493
Additional paid-in capital		22,991,975			22,890,547
Treasury stock		(16,000	)		(16,000	)
Accumulated Deficit during Development Stage		(53,767,476	)		(50,750,004	)
Total stockholder’s deficiency		(30,788,008	)		(27,871,964	)
	$	313,559		$	510,141

The accompanying notes are an integral part of these condensed consolidated financial statements

ARKADOS GROUP, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three			For the Three			For the Six			For the Six			Cumulative
	Months			Months			Months			Months			during the
	Ended			Ended			Ended			Ended			Development
	30-Nov-09			30-Nov-10			30-Nov-09			30-Nov-10			Stage
													(March 24, 2004
													to
													November 30,2010)
Net Sales	$	2,500		$	74,328		$	126,006		$	128,411		$	3,121,409

Cost of Goods Sold		2,500			84,328			126,900			138,411			2,153,208

Gross Profit		—			(10,000	)		(894	)		(10,000	)		968,201

Research and Development Expenses		919,637			316,060			1,358,979			739,350			12,061,256
General and Administrative Expenses		318,480			219,899			977,160			451,422			21,002,483

Net Loss From Operations		(1,238,118	)		(545,959	)		(2,337,033	)		(1,200,772	)		(32,095,538	)

Other Income (Expenses):
Secured Debt Default Penalty					—			(3,622,083	)		—			—
Interest Expense		(818,310	)		(883,905	)		(1,461,560	)		(1,817,602	)		(14,237,134	)
Net Loss Before Income Taxes		(2,056,428	)		(1,429,864	)		(7,420,676	)		(3,018,373	)		(46,332,671	)
Provision for Income Taxes		—			—			—			—			(841,562	)

Net Loss	$	(2,056,428	)	$	(1,429,864	)	$	(7,420,676	)	$	(3,018,373	)	$	(45,491,109	)

Net Loss per share - Basic and diluted	$	(0.06	)	$	(0.04	)	$	(0.23	)	$	(0.09	)

Weighted Average of Common Shares Outstanding - Basic and diluted		32,738,697			34,926,261			32,738,697			34,926,261

The accompanying notes are an integral part of these condensed consolidated financial statements

ARKADOS GROUP, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the Six Months Ended			For the Six Months Ended			Cumulative During the Development Stage
	November 30,			November 30,			(March 24, 2004 to
	2009			2010			November 30, 2010)
Cash Flows From Operating Activities
Net Loss	$	(7,420,676	)	$	(3,018,373	)	$	(45,491,109	)
Adjustments to reconcile net loss to net cash provided by (used) in operating activities
Depreciation and Amortization		305,013			51,075			1,628,797
Common stock and warrants issued for services		737,534			101,428			11,203,946
Warrants and beneficial conversion rights with debt		—						627,716
Debt and Interest penalty		3,981,482			16,164			4,699,286
Accounts Receivable		(131,385	)		7,709
Inventory		(29,819	)		—			630
Deferred Expenses		(118,579	)		130,624			804,870
Prepaid and Other assets		20,460			1,940			(79,041	)
Payroll Taxes and related penalties and interest payable								(22,916	)
Related Party Payable		—			65,099			65,099
Accounts Payable and accrued expenses		2,443,189			2,521,898			12,434,992
Net Cash Provided by (Used) in Operating Activities		(212,781	)		(122,436	)		(14,127,730	)
Cash Flows from Investing Activities
Purchases of capital expenditures and Patents		—			0			(140,671	)
Net Cash Used in Investing Activities		—			0			(140,671	)
Cash Provided by Financing Activities
Loan payable - related party		—						1,586,726
Note Payable		202,450			117,202			1,444,504
Contribution of capital		—						1,232,646
Exercise of stock options								23,635
Private Placement		—						810,038
Proceeds from Convertible Debt		—			—			1,066,550
Repayment of debt		—						(469,256	)
Issuance of Debentures		—						9,533,411
Repayment of related party debt		—						(949,027	)
Net Cash Provided by (Used) in Financing Activities		202,450			117,201			14,279,227
Net (Decrease) Increase in Cash		(10,331	)		(5,234	)		10,826
Cash, beginning of the period		10,371			16,345			285
Cash, end of the period	$	40		$	11,111		$	11,111
Supplemental cash flow information
Debt discount	$	35,492		$
Cash paid for interest	$	—		$	—
Cash paid for taxes	$	—		$	—

The accompanying notes are an integral part of these condensed consolidated financial statements

ARKADOS GROUP, INC. & SUBSIDIARIES

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

Six Months Ended November 30, 2010 and 2009

(Unaudited)

NOTE 1 - DESCRIPTION OF BUSINESS

Arkados Group, Inc. (the “Company”), a development stage enterprise, is a fabless semiconductor company providing integrated system-on-chip solutions that directly support networking, smart grid and multimedia applications. Arkados, “the HomePlug Applications Company,” delivers a universal platform that enables the effortless networking of home entertainment and computer devices using standard electricity lines. We also license some ingredient technologies for wireless multimedia solutions. The Company’s system-on-chip solutions are uniquely designed to drive a wide variety of powerline-communication solutions such as utility company applications, and powerline-enabled consumer electronics and home computing products, such as stereo components, radios, speakers, MP3 players, computers, televisions, gaming consoles, security cameras and cable and DSL modems. With Arkados’ solutions, customers can bring numerous sophisticated, full-featured products to market faster at a lower overall development cost using a single platform: the company’s versatile and programmable ArkTIC ® platform. Arkados solutions leverage the benefits of standard powerline communications technologies that are used worldwide for in-building and to-the-home Broadband Powerline (“BPL”) applications. The Company is a member of an industry alliance of several companies referred to as the HomePlug Powerline Alliance, “HomePlug”, for developing the standard of such technologies and is a member of the IEEE P1901 working group.

The attached summary consolidated financial information does not include all disclosures required to be included in a complete set of financial statements prepared in conformity with accounting principles generally accepted in the United States of America. Such disclosures were included with the financial statements of the Company at May 31, 2010, and included in its report on Form 10-K. Such statements should be read in conjunction with the data herein.

The summary consolidated financial information reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results for the interim period expected for the year.

As of May 31, 2010, $18,426,377 of secured debt principal plus interest, of which $5,205,617 is held by related parties is in default, as is $1,031,651 in principal and interest on unsecured notes due June 29, 2009. In addition, as of May 31, 2010, $4,167,522 of salary remains due to our employees and our accounts payable was approximately $1,959.636 of which $1,656,244 was over 90 days.

As of November 30, 2010, $20,041,076 of secured debt principal plus interest, of which $5,661,716 is held by related parties, is in default, as is $1,055,713 in principal and interest on unsecured notes due June 29, 2009. In addition, as of November 30, 2010, 5,049,903of salary remains due to our employees and our accounts payable was approximately $2,139,379 of which $2,044,929 was over 90 days.

We continue to negotiate with the holders of each class of debt to fashion a forbearance agreement, compromise or convert outstanding debt into equity and thereby facilitate raising additional investor capital and are exploring restructuring alternatives including selling assets and refocusing Arkados’ business in the powerline networking space. We have also received indications of interest from potential private and strategic investors concerning the terms and conditions upon which they would make an investment in Arkados, including the terms upon which the secured debt and other debt would have to be compromised and converted for them to make such investments, but there is no binding commitment on anyone’s part to complete the transactions.

Finally, without commitment on anyone’s part, we have discussed converting a substantial portion of past due compensation with our employees if the restructuring of our debt can be completed and financing can be obtained for the continuing business. Pending the completion of these transactions, we are financing operations by issuing bridge notes to investors that would participate in an equity financing if the debt can be restructured. If the debt can be restructured and the financing proceeds, these investors would be able to make the equity investment in Arkados at a discount of 33% from the price other investors are offered. In the event the financing is not completed, the bridge notes are due with interest at the annual rate of 8% on December 1, 2010, however it is unlikely that such note would be paid as the amount of our secured debt outstanding to which the bridge notes are subordinated, far exceeds the fair value of our assets.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation – The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred net losses of over $45 million since inception including a net loss in excess of $11.5 million for the year ended May 31, 2010 and $3.0 million for the six months ended November 30, 2010. Additionally, the Company had a net working capital deficiency and shareholders’ deficiencies at November 30, 2010 and May 31, 2010 and negative cash flow from operations since inception. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management expects to incur additional losses in the foreseeable future and recognizes the need to raise capital to remain viable. The accompanying consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

Principles of consolidation – The consolidated financial statements include the accounts of Arkados Group, Inc. and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

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

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

Reclassification – Certain amounts have been reclassified to conform to the current period’s presentation. The allocation of costs between Research & Development Expenses and General Administration Expenses has been changed to incorporate all costs of Research & Development including personnel costs, facility cost, and direct research costs for parts and services. Formerly, only direct research expenses for parts and services were included under the caption “Research and Development Expenses”. These reclassifications had no effect on previously reported net earnings.

Revenue Recognition – The Company derives revenues from two sources – sales of products and revenues from services in the form of custom development activities. For product sales, revenue is recognized when our products are shipped to our customers. For sales related to development, the Company has recorded revenues pursuant to a number of long term development contracts. The revenues are earned and recorded based on pre-determined milestones. When revenues within a pre-determined milestone have been partially earned, the Company records such progress billings as “Revenues earned not yet billed.” Such revenues are billable under the terms of the arrangement once the milestone has been fully completed. The Company also monitors estimated costs to complete its obligation to fulfill the terms of such long term contracts and compares such costs to the expected revenues to be earned to ensure that estimated losses are recorded on a timely basis.

Loss Per Share – Basic net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding. Vested stock options and warrants have not been included since there is a net loss and the effect of including these options and warrants would be anti-dilutive.

Tax Provision – No tax provision is required at this time since the company expects to be in a tax loss position at year-end May 31, 2010 and has net operating losses from previous years. The Company has established a 100% valuation allowance against the deferred tax asset.

In December 2007, the Company sold $4,967,706 of its State Net Operating Loss carryforwards under the State of New Jersey’s Technology Business Tax Certificate Transfer Program (the Program). The Program allows qualified technology and biotechnology businesses in New Jersey to sell unused amounts of net operating loss carryforwards and defined research and development tax credits for cash. The proceeds from the sale in 2007 were $400,149. This amount has been recorded as a tax benefit in the consolidated statements of operations in 2008. The State renews the Program annually and limits the aggregate proceeds to $10,000,000. We cannot be certain if we will be able to sell any of our remaining or future carryforwards under the Program.

On September 9, 2008, the Company was approved for the sale of its 2007 Net Operating Losses of approximately $4,200,000 under the Program in addition to the sale of its Research and Development Tax Credits. The actual sale and receipt of funds was received in the first half of December 2008

Accounting for Uncertainty of Income Taxes (“FIN 48”) – In June 2006, the Company adopted guidance for the Financial Accounting Standards Board issued Interpretation , Accounting for Uncertainty in Income Taxes (“FIN 48”). This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes a recognition threshold of more-likely-than-not to be sustained upon examination. Measurement of the tax uncertainty occurs if the recognition threshold has been met. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Arkados conducts business in the U.S. and, therefore, files U.S. and New Jersey income tax returns. In the normal course of business, the Company is subject to examination by taxing authorities. At present, there are no ongoing audits or unresolved disputes with the various tax authorities with whom the Company files. Given the Company’s substantial net operating loss carryforwards (“NOLs”, which are subject to a full valuation allowance) as well as the historical operating losses, the adoption of FIN 48 on June 1, 2007 did not have any effect on our financial position, results of operations or cash flows as of November 30, 2010.

Stock Options –. The Company adopted Guidance for , “Share Based Payments.” The guidance requires companies to expense the value of employee stock options and similar awards and applies to all outstanding and vested stock-based awards.

In computing the impact, the fair value of each option is estimated on the date of grant based on the Black-Scholes options-pricing model utilizing certain assumptions for a risk free interest rate; volatility; and expected remaining lives of the awards. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. In estimating the Company’s forfeiture rate, the Company analyzed its historical forfeiture rate, the remaining lives of unvested options, and the amount of vested options as a percentage of total options outstanding. If the Company’s actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based compensation expense could be significantly different from what we have recorded in the current period. The impact of applying such guidance approximated $101,428, respectively, in additional compensation expense during the six months ended November 30, 2010. Such amount is included general and administrative expenses on the statement of operations.

In accordance with the guidance for share based payments, the fair value of each option grant has been estimated as of the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	For Six Months Ended	For Six Months Ended
	November 30, 2010	November 30, 2009
Risk free interest rate	1.47-2.00%	2.57 - 2.71%
Expected life	3-5 years	3-5 years
Dividend rate	0.0%	0.00%
Expected volatility	223-294%	223-294%

Recently Issued Accounting Pronouncements

All new and not effective accounting pronouncements have been deemed not to be relevant.

Subsequent Events

The Company evaluates subsequent events for inclusion in the financial statements through the date that the financial statements are available to be issued.

NOTE 3 – REVENUE RECOGNITION

During the three and six month periods ended November 30, 2010 and the same periods of the prior fiscal year, the Company sold and delivered $0 and $0 of chips and $0 and $0, respectively, to customers. In addition, during the three and six month period ended November 30, 2010 and the same period of the prior fiscal year, the Company recognized revenues related to development contracts in the amounts of approximately $74,238 and $128,411 and

$2,500 and126,006, respectively. The revenue was recognized as was an amount for cost of goods sold amount that was calculated based upon the estimated costs the Company incurred to deliver the products. These costs were, for the most part, related to labor, outside fabrication services, and supplies and materials.

NOTE 4 – CONVERTIBLE DEBENTURES AND RELATED PARTY PAYABLES

2004 6% Convertible Notes - During the period from October to November 2005, the Company borrowed $500,000 from certain of its existing stockholders for working capital needs and such obligation is represented by notes. The notes, recorded as Related Party Payables, bore interest at 6% per annum and contained certain conversion features which would have been triggered if the Company had sold equity at or above $1.25 per share. No expense was recorded for the beneficial conversion feature, since conversion price was always at or above market. The notes’ maturity was initially October 15, 2005, which was extended from time to time by the holders. In February 2006, the Company and holders of $175,000 of the outstanding principal of the notes agreed to discharge the Company’s obligations for 160,765 shares of common stock and the payment of $81,018. The remaining $325,000 of principal outstanding was held by an affiliate of the Company’s Chairman of the Board. On June 30, 2006, the principal and interest on the remaining $325,000 due were forgiven in exchange for an equivalent amount of 6% secured convertible debentures and warrants.

2005 6% Convertible Notes - During the period from July 7, 2005 to September 23, 2005, the Company raised $912,500 and $154,000, respectively, of gross proceeds from the private placement of an aggregate of 10.665 units (the “Units”) each consisting of $100,000 principal amount 6% convertible subordinated promissory notes (the “6% Notes”) and 14,286 detached warrants (the “Warrants”) to purchase a like number of shares of the Company’s common stock, for $0.35 per share. The Company issued an aggregate of 152,359 Warrants to the purchasers of the Units, which have been valued at $74,802 and will be amortized as interest expense over the term of the 6% Notes. In addition, the Company issued 238,213 common stock warrants exercisable at $0.65 as part compensation to the placement agent, which have been valued at $111,668 and will be amortized as interest expense along with other expenses of the offering. Both the $0.35 and $0.65 Warrants have a “net exercise” provision that permits the holder to convert the Warrants into shares of the Company’s common stock. The 6% Notes (1), when issued were due July 7, 2007 with interest at the annual rate of 6% from the date of original issuance (increasing to 12% per annum from an event of default as defined in the 6% Notes); (2) are unsecured obligations of the Company and subordinated to senior secured loans to the Company (if any) from banks, finance companies and similar institutions that extend credit in the regular cause of such institution’s business; (3) are convertible, subject to certain conditions and at two different price levels ($1.125 and $1.575 for a period of twenty trading days following the bid price of common stock closing above $1.50 and $2.50, respectively, for a period of five consecutive trading days), into shares of common stock; and (4) may be redeemed by the Company in certain limited circumstances described below prior to maturity. Since the beneficial conversion feature of the 6% Notes is (at the lowest price) at a price greater than the market price of the stock upon issuance of the 6% Notes, no value has been estimated or recorded for the beneficial conversion feature.

On July 6, 2007, the Company reached an agreement with more than the requisite holders of 2/3 of the outstanding $1,066,500 principal amount of 6% Notes to extend the due date of the Notes to June 30, 2008. In exchange for the amendment, the Company agreed to issue approximately 188,200 three year warrants to purchase shares of the Company’s common stock for $0.85 per share and lowered conversion prices in the Notes to $0.85. In connection with the amendments, the Company retained entered into a Solicitation Agreement with Trident Partners, Ltd., who served as placement agent for the Notes in 2005, to solicit the consent of Note holders that were their customers. Under the Solicitation Agreement, the Company paid Trident $25,000 and issued Trident 137,656 Warrants for their successful efforts.

On July 9, 2008, the Company reached an agreement with the holders of more than the requisite of the outstanding $1,066,500 principal amount of 6% Notes (the “Notes”) due June 30, 2008 to extend the due date of the 6% Notes to June 30, 2009. In exchange for the amendment, the Company agreed to exchange approximately 876,100 shares of common stock, pro rata, for notes in the original principal amount of $313,214. The debt was converted at $0.35 versus $0.85 in the original agreement.

The Company did not pay the $999,733 principal and interest due on the 6% when due on June 30, 2009 and, accordingly the 6% Notes accrue interest at the penalty rate of 12% per annum from the date of default. The Company has discussed forbearance or conversion with Trident, who was the placement agent for the sales of the 6% Notes to investors and who has twice served as Solicitation Agent in obtaining an extension of the 6% and while neither Trident or any of the holders of the 6% have agreed to any extension or conversion, none of them have taken any judicial collection action.

During the first half of 2008, the Company borrowed $855,000 at the times set forth below, on an unsecured basis from affiliates of the Company’s Chairman and two non-employee directors, with the understanding that these advances would be exchanged for additional 6% Secured Debentures and related warrants. On December 15, 2007, this related

party debt was converted to additional principal of the 6% Secured Debentures on substantially the same terms as the 6% Secured Debentures previously issued by the Company.

From March 1, 2008 through November 30, 2009, the Company borrowed $197,700 from two directors. $187,700 of these advances were due on demand with interest at the annual rate of 6%. $10,000 is due on January 31, 2010 and is at an interest rate of 8% per annum.

6% Secured Debentures - On December 19, 2005, the Company borrowed $267,900 from one of the accredited investors that ultimately purchased 6% secured convertible debentures (the “6% Secured Debentures”) in the December 28, 2005 financing. The loan was made on an unsecured basis, was due on demand and was forgiven in exchange for $267,900 of 6% secured convertible debenture due December 28, 2008 (the “6% Secured Debentures”). On December 28, 2005, the Company issued $2.0 million aggregate principal amount authorized $3.5 million 6% secured convertible debenture due December 28, 2008 (the “6% Secured Debentures”) to three institutional investors. The 6% Secured Debentures had, at the time they were issued, a term of three years and were to mature on December 28, 2008, pay interest at the rate of 6% per annum, payable semi-annually on January 1 and July 1 of each year beginning July 1, 2006, and are secured by a grant of a security interest into substantially all of the Company’s assets.

The 6% Secured Debentures were, at the time they were issued convertible at any time at the option of the holder into shares of the Company’s common stock at a price of $0.85 per share, subject to adjustment as set forth therein. If after the effective date of the registration statement we agreed to file under the Securities Act (the “Registration”), the closing price for the Company’s common stock exceeds $1.70 for any 20 consecutive trading days, then the Company may, within one trading day after the end of such period, require the holders of the 6% Secured Debentures to immediately convert all or part of the then outstanding principal amount of their 6% Secured Debentures. As a result of later amendments to facilitate equity financing in July 2008, principal and accrued and unpaid interest on one third of the outstanding principal amount of 6% Secured Convertible Debentures ($2,845,815), and related warrants were exchanged for identical securities, except that the conversion and exercise prices of the newly issued securities is $0.25 rather than $0.85. The terms of the conversion rights also contain certain dilution provisions.

The Company reviewed the accounting for registration rights terms relating to the shares of common stock issuable upon the conversion and exercise, respectively, of the 6% Secured Convertible Debentures and related warrants under the FASB guidance. The Company granted demand registration rights to the purchasers of the 6% Secured Debentures which requires the Company to file an initial registration statement under the Securities Act 45 days following demand made by the holders of 60% of the securities eligible for registration under the agreement. Under the registration rights agreement, the Company incurs a penalty if it fails to file such a registration statement within 45 day following such a demand or if the SEC had not declared the registration effective 90 days after filing. The holders of the 6% Secured Debentures have not demanded registration. The Company believes it can comply with a demand for registration in a timely manner and therefore no accrual for possible penalties under the registration rights agreement has been made.

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

On March 31, 2006, the Company issued $500,000 additional principal of the 6% Secured Debentures to a limited liability company owned equally by the wife of our chairman and another director on substantially the same terms as the 6% Secured Debentures issued on December 28, 2005.

A debt discount was recorded of $47,504 and $161,640, respectively for such short and long term warrants issued with these 6% Secured Debentures. The amortization recorded attributed to the debt discounts amounted to $22,547 and has been recorded as interest expense for the year ended May 31, 2006.

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

The Company issued $1,773,471 aggregate principal amount of 6% Secured Debentures on June 30, 2006. The consideration received by the Company for the Secured Debentures consisted of $500,000 cash, forgiveness of repayment of the $500,000 advance received June 1, 2006, forgiveness of $773,470 related party debt due to Andreas Typaldos, the Company’s Chairman and principal shareholder and a limited partnership controlled by his wife. The debentures have a term of three years and mature on December 28, 2008. The 6% Secured Debentures pay interest at the rate of 6% per annum, initially payable semi-annually on January 1 and July 1 of each year beginning January 1, 2007. In January 2007, the 6% Secured Debentures were amended to provide that interest payable on January 1, 2007 and July 1, 2007 would be added to principal. These debentures are on substantially the same terms as, and rank pari passu to, an aggregate of $3,875,884 of 6% Secured Debentures outstanding as of May 31, 2006. The Company issued 834,575 short term and 834,574 long term warrants to the purchasers of the 6% Secured Debentures and entered into a security agreement granting the purchasers a security interest in its assets to secure the Company’s obligations under the debentures. Obligations under the debentures are guaranteed by the Company’s two wholly-owned operating subsidiaries. The debt discount for such short and long term warrants issued with these 6% Secured Debentures and the related amortization attributed to the debt discount amounts are reflected as interest expense for the three month period ending August 31, 2008.

A debt discount was recorded of $34,819 and $104,020, respectively for such short and long term warrants issued with these 6% Secured Debentures on June 30, 2006.

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

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

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

July 10, 2007	$	215,000
August 3, 2007		150,000
August 22, 2007		50,000
August 27, 2007		20,000
August 31, 2007		50,000
September 28, 2007		100,000
October 16, 2007		60,000
October 30, 2007		90,000
November 7, 2007		70,000
November 19, 2007		50,000
Total during the 1st half of 2008	$	855,000

On December 15, 2007, this related party debt was converted to additional principal of the 6% Secured Debentures on substantially the same terms as the 6% Secured Debentures previously issued by the Company. The Company issued 402,353 short-term and 402,353 long-term warrants to the purchasers of the 6% Secured Debentures. Based on the issuance date of the debentures, debt discounts were recorded in the third quarter of 2008 in the amount of $118,723, respectively for 402,353 short and 402,353 long term warrants issued with these 6% Secured Debentures.

The amortization recorded attributed to all the debt discounts amounted to $88,323 and has been recorded as interest expense for the quarter ended August 31, 2008.

The Company also agreed to amend the 10,065,210 warrants outstanding and issued with the then outstanding 6% Secured Debentures to be consistent with the 804,706 new warrants issued December 15, 2007 by extending the expiration date from an outside date of December 28, 2010 to December 28, 2012 and removing any restriction on exercising the warrants on a cashless basis or any provision which accelerates the expiration date if the shares issuable on exercise of the warrants are registered for resale under the Securities Act.

During the quarter ended February 28, 2008, a deferred expense was recorded in the amount of $774,789 for the extension of the expiration date of the warrants to December 28, 2012. The amortization recorded was $51,653 and has been recorded as interest expense for the quarter ended August 31, 2008.

On April 2, 2008, the Company entered into a Waiver and Amendment Agreement with the holders of $9,283,461 issued principal amount of 6% secured convertible debentures due December 28, 2008. Pursuant to the Waiver and Amendment, the Holders agreed to waive all potential defaults caused by our not making a scheduled interest payment of approximately $255,000 which became due under the terms of the Debentures, as previously amended on March 3, 2008. The Holders agreed to add the interest due to

principal and make such a waiver in exchange for the Company issuing additional Debentures equal to 10% of the principal amount of the Debentures held by the Holders (after adding the past due interest to principal).

As of August 31, 2009, there was a total of $16,893,526 in principal amount, including interest on the Secured Debentures converted to debt totaling $1,095,099, an interest penalty of $1,842,721, a default penalty of $3,622,083 and 9,328,494 warrants outstanding.

The Company failed to pay the interest and principal and interest due on the Secured Debentures on the extended due date of June 30, 2009. As a result, the principal obligation increased to 130% of the principal balance and the interest rate increased to 18%.

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

Included in accrued expenses and other liabilities as of November 30, 2010 is unpaid accrued payroll of $5,049,903 (which includes approximately 27 months of payroll for non-executive employees in the amount of $1,346,367 and approximately 35 months of unpaid executive payroll in the amount of $ 2,080,242 and an unpaid bonus of $65,333 due to the Company’s CEO since December 2005 and unpaid expense reimbursement of approximately $55,000 due to executive officers.

Related Party Activities - As of November 30, 2010, the Company has reported a related party payable in the amount of $252,799 which represents funds that were advanced to the Company by three of the Directors of the Company.

In aggregate, $ 5,661,716 of the $20,041,077 of the principal and interest due on the 18% Secured Debentures is due to related parties

Derivative Liabilities

Effective June 1, 2009, the Company adopted the provisions of EITF 07-05 “Determining Whether an Instrument (or Embedded Feature) is Indexed to a Company's Own Stock,” which was codified into ASC Topic 815 – Derivatives and Hedging. ASC 815 applies to any freestanding financial instruments or embedded features that have characteristics of a derivative and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. The Company has 11,018,576 of warrants with exercise reset provisions, which are considered freestanding derivative instruments. ASC 815 requires these warrants to be recorded as liabilities as they are no longer afforded equity treatment assumptions: risk free rates from 1.32% to 1.39%, expected life terms ranging from 0.5 years to 2.0 years, an expected volatility range of 206% to 251% depending on the term of such equity contracts and a dividend rate of 0.0%. The fair value of the warrants issued and outstanding at August 31, 2010 and November 30, 2010 attributed to this derivative liability has been determined to be immaterial due to the low stock price in comparison to the exercise price, hence there was no adjustment to make upon adoption of this accounting standard.

NOTE 5 – PAYROLL LIABILITIES

On January 17, 2006, the Company paid an aggregate of $873,993 of payroll liabilities of the company from which it acquired assets in 2004 at a public foreclosure sale, representing all of the fiduciary funds due. The Company had agreed to pay up to $1.2 million of such liabilities and accrued an additional $600,000 in the event there were any additional claims related to interest and penalties pursuant to its 2004 merger agreement. Currently, there is $937,000 still recorded on the Company’s books as due and outstanding for the federal and state tax authorities for penalties and interest under such agreement. The Company does not believe that it has a legal obligation to pay anything more to any taxing authority, but until such clearance is received from the appropriate agencies or the statute of limitation has expired, the Company has elected to keep the liability on its books.

NOTE 6 – DEFERRED FINANCING EXPENSES

The Company capitalizes financing expenses of legal fees, finders fees, value of warrants as extension fees in connection with the related convertible debt financing. These fees will be amortized over the related term of the convertible debt instruments issued in such financing, which approximates two years.

NOTE 7 – EQUITY BASED COMPENSATION

Effective June 1, 2005, the Company adopted Guidance for “Accounting for Stock-Based Compensation”. Compensation based stock option and warrant activity for warrants and qualified and unqualified stock options are summarized as follows:

	Shares		Weighted Average Exercise Price
Outstanding at May 31, 2010		17,150,236	$	0.30
Granted		—		—
Exercised		—		—
Expired or cancelled		—		—
Outstanding at November 30, 2010		17,150,236	$	0.30

Information, at date of issuance, regarding stock option grants during the period ended November 30, 2010 is summarized as follows:

Weighted-

Average

Exercise

Price

Weighted-

Average

Fair

Value

Period ended November 30,2010

Exercise price exceeds market price

—

Exercise price equals market price

—

Exercise price is less than market price

—

No stock option grants were made during the six months period ended November 30, 2010

The compensation expense attributed to the issuance of the options and warrants is recognized as they vest or are otherwise earned. The Company has recorded $ 101,428 of compensation for options vested / earned in the six month period ended November 30, 2010 for employees. No options were granted during the six month period ended November 30, 2010. Outstanding stock options and warrants are exercisable for three to ten years from the grant date.

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

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

	Shares		Weighted Average Exercise Price
Outstanding at May 31, 2010		11,735,004	$	0.63
Granted		—		—
Exercised		—		—
Expired or cancelled		716,428,		0.70
Outstanding at November 30, 2010		11,018,576	$	0.59

Information, at date of issuance, regarding warrant grants during the period ended November 30, 2010.

Weighted-

Average

Exercise

Weighted-

Average

Fair

Value

Period ended November 30, 2010

Exercise price exceeds market price

—

Exercise price equals market price

—

Exercise price is less than market price

—

No warrants were issued during the quarter ended November 30, 2010.

Interest expense attributed to the aforementioned warrants is being amortized over the ratable term of each respective debt arrangement. See “NOTE 4 – CONVERTIBLE DEBENTURES AND RELATED PARTY PAYABLES,” above.

Note 8.-SUBSEQUENT EVENTS

On December 22, 2010, certain creditors of the Company, including Andreas Typaldos, the Company’s Chairman, agreed to convert an aggregate $401,000 of unsecured debt into an aggregate 10,025,000 shares of common stock. The

debt due to Mr. Typaldos arose from cash advances previously made to the Company in the form of working capital loans and from unpaid fees under a consulting agreement between the Company and Mr. Typaldos entered into in 2004. The conversion of debt for equity triggers a ratchet adjustment in certain outstanding warrants and secured debentures. The Company is negotiating with the holders of these instruments for a waiver to avoid the unintended consequences of these adjustments.

On December 23, 2010, the Company entered into an Asset Purchase Agreement (the “APA”) with ST Microelectronics, Inc., a Delaware corporation (“ST”), a wholly owned subsidiary of STMicroelectronics N.V. The Company pursuant to the APA, also entered into a license agreement granting ST a license to use the Company’s intellectual property assets pending closing of the purchase (the “License”). Pursuant to the APA , the Sellers agreed to sell assets used in the Company’s semiconductor business to ST for aggregate consideration of $11 million, of which $7 million was paid on the execution of the APA pursuant to the License and the balance is due at closing. A portion of this payment was applied by the Company to settle approximately $12 million of $20 million of outstanding secured debt and the balance applied to past due salaries and other past due accounts payable. The Company will focus on development, manufacturing, and sales of consumer electronics and Smart Grid products based on power line communication semiconductors. The Company will also continue to provide consulting and development services to existing customers and users of powerline communication semiconductors. At the same time, ST hired most of the Company’s employees, each of whom were engaged in the Company’s semiconductor business.

Pursuant to and simultaneously with the execution of the APA, the Company entered into Settlement and Release agreements with holders of approximately $8 million of secured debt to standstill pending the closing of the transaction contemplated by the APA and to accept approximately $3.5 million in settlement of their claims at such closing. In addition, the Company entered into standstill agreements with the holders of approximately $2.1 million of unsecured debt. In connection with these releases and those of certain employees, the Company granted rights to the releasing parties that still hold unsecured obligations of the Company which protect such holder from dilution resulting from additional issuance of common stock or common stock equivalents at a price less than $0.04 per share in settlement of debt from the date of the APA to the earlier of closing or termination of the APA.

The transactions were approved on December 22, 2010 by the written consent of 10 holders of the Company’s common stock, whose holdings aggregated 22,173,381 shares and constitute more than a majority of the outstanding shares of the Company’s common stock. Notice of the action will be given to the non-consenting holders in an Information Statement the Company plans to prepare and file with the Securities and Exchange Commission to comply with the notice requirements of Delaware law as soon as reasonably possible.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the Company’s financial condition and results of operations. The MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes thereto. The information is as of November 30, 2010 and does not take into account the transactions or the effects of transactions disclosed in Note 8 to the Notes to Financial Statements included in Item 1 of this report.

As of November 30, 2010, 20,041,077 of secured debt principal plus interest, of which $5,661,716 is held by related parties, is in default, as is 1,055,713 in principal and interest on unsecured notes due June 29, 2009. In addition, as of November 30, 2010, $5,049,903 of salary remains due to our employees and our accounts payable was approximately $2,139,375 of which $ 2,044,929 was over 90 days.

We continue to negotiate with the holders of each class of unsecured debt to settle or convert such debt into equity and thereby facilitate raising additional investor capital. There is no binding commitment on anyone’s part.

Arkados Products

We have designed turnkey solutions to be used inside products for both consumers and industry. For example, consumer products can use Arkados solutions as part of a connected home entertainment and computing network, while industry can implement Arkados solutions as a part of a utility company’s “smart grid” and “green energy” solutions. We offer our customers complete hardware and software design solutions that allow them to build devices that will distribute audio, video, voice, and data content throughout the whole house, building, or “smart-grid” infrastructure.

Arkados solutions offer a completely different approach than our competitors. Our solutions incorporate a processor and multiple interfaces into the same chip that houses HomePlug communication technology, as well as provide application-level software that runs on the chip. Our platform solutions consist of an integrated package of hardware, firmware and software designed to enable our customers to develop differentiated products in a cost-effective manner with a short time-to-market.

Technology

In our view, today’s digital products are incomplete without an array of software components that enable both device-to-device communications and robust product features. We provide our customers with a host of software components that run directly on our chips, further reducing development time. These software components include application-level features (such as our Direct-to-Speaker™ multi-channel audio synchronization, networking and internet, online gaming, etc.) embedded application support software (audio compression/decompression, internet radio support, GUI support, video drivers, etc.), Quality of Service engine, traffic management, and TCP/IP components.

Market Opportunities

Arkados solutions are offered to the following markets:

● the retail consumer electronics market and the whole-home custom installation market

● the smart grid market

● the subscription services market.

The Growing Digital Home: Networked Consumer Electronics

As broadband access to the home is becoming ubiquitous, home networking and connectivity demands for digital home applications continues to grow – extending the internet, and the services that travel on it, to every corner of the house.

The promise of sending digital communications over common power lines is now being realized, and Arkados’ products serve several large and growing markets: retail consumer electronic products, whole-house audio installations, commercial lighting, background music, and intercom installations, smart-grid utility company applications, broadband-over-powerline internet access, and the distribution of internet-based services.

The whole-house audio market category has been particularly active. Arkados’ solutions offer a way to create both retail and custom audio systems combined with more energy efficient lighting with remote control and features and functionality heretofore available only in multi-thousand dollar custom audio installations. Arkados’ customers include Devolo AG, Channel Vision, IOGEAR, Gigafast, Tatung, and Zinwell.

Two customers in particular, Russound and Nuvo have been marketing their whole-house systems that use the Arkados chips and software. Russound’s Collage system and Nuvo’s Renovia system are selling in the custom installed market with very good reception on performance and reliability from their customers.

These high-end custom audio systems, which address the existing home market (expanding from their primary market target of newly constructed homes), can feature up to 12 separate audio zones and can process a wide range of sources of audio content which can be streamed from any digital or legacy analog music source.

Russound, a leading custom multi-room audio distribution system manufacturer, selected the AI-1100 for use in its iBridge Power Dock and its Collage system. Arkados’ chips can also power cameras, video endpoints, and sensors for other installed home systems, such as for surveillance systems.

Smart Energy and Utility Company Applications

Another large potential market for Arkados’ solutions relates to energy conservation, the “green” applications that help utility companies and their customers save both money and energy. For example, “Smart Grid” applications (Green Energy, demand response, energy efficiency and grid modernization – i.e., reduction of carbon emissions) and home/building automation (such as

controlling air conditioner thermostats remotely) represent large and attractive opportunities given today’s surging energy costs. Arkados has design wins at MainNet and Corporate Systems Engineering.

Services

An additional immediate potential market for the Arkados platform is for subscription music services. Arkados software and chips enable the distribution of Internet music services (e.g., Rhapsody, Yahoo! Music, AOL Music, Shoutcast services). The Company is actively working on reference designs and business strategies to address this rapidly developing market.

Corporate Background

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

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

Industry Background

Music, movies, the electrical “smart grid”, and a wide range of communication services are experiencing a fundamental shift. The distribution of content to products, and in some cases the products themselves, is transitioning from traditional methods. Digital content is requires a new digital distribution model.

Arkados’ solutions are designed to directly address this opportunity by enabling electrical power sockets to be turned into high-speed network ports, thereby providing a high-speed pathway through which digital information can travel inside a home, to the home, and on the smart grid. We believe that this shift creates demand for new products, and new products will require new types of products that incorporate digital technologies, supporting such functions as communication, application processing, and media rendering.

The HomePlug technology now dominates the marketplace. Market analyst In-Stat forecasted that by 2010, the technology based on HomePlug specifications will hold 85% of the worldwide market for powerline communications. The HomePlug Powerline Alliance has brought together both personal computer and consumer electronics companies on a global scale. Membership in the Alliance has grown to include nearly 70 industry-leading companies. HomePlug Sponsor companies include Atheros, Broadcom, Cisco, Comcast, Duek Energy, GE Energy, Renesas, Spidcom and ST Microelectronics.

Arkados has been an active member of the IEEE, P1901 group which became an approved standard on September 30, 2010 that focused on the development of powerline communication Physical Layer (PHY) and Media Access Control (MAC) specifications. Working with the HomePlug Powerline Alliance, the Arkados team has contributed to the development of a number of specifications that were contributed to the IEEE 1901 standard, and other standard organizations, such as the Telecommunications Industry Association.

Strategic Relationships

We have also entered into go-to-market strategies with a number of ODMs and other technology companies. Since many companies in this space target the same customer base as we do, we plan to collaborate to create solutions and offer even greater turnkey value for OEMs. We have announced relationships and strategies with several companies, including GigaFast and Tatung.

Arkados’ relationship with Tatung, the $7B global ODM, constitutes a one-stop shop for the industry’s technology and manufacturing needs for distributing digital content in homes. Together, the companies deliver complete product solutions to consumer product manufacturers.

Research and Development

We concentrate our research and development efforts on the design and development of new products for each of our principal markets. As of November 30, 2010, 12 of our 16 employees are dedicated to research and development, all of whom left our employ as part of the APA with ST. Research and development expenditures were $2,069,179, $1,987,313, and $1,920,898 in the years ended May 31, 2009, 2008 and 2007, respectively.

We also fund certain research activities focused on other emerging product opportunities. Our future success is highly dependent upon our ability to develop complex new products, to transfer new products to volume production in a timely fashion, to introduce them to the marketplace ahead of the competition, to maintain competitive features, and to have them selected for design into products of leading systems manufacturers, all of which are challenged by our lack of working capital and diversion of management’s time and attention from Arkados’ business to emergency financing and debt restructuring.

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

Competition

Arkados faces strong competition as a solution provider, a technology developer of standards-based powerline technologies, as well as from other technologies also focused on our target markets. We believe we have had success despite our lack of capital and therefore manpower because of our ability to develop SoC/software solutions that help our customers to create full-featured products that are cost-effective and can be brought to market quickly.

Differentiation of Arkados Solutions

Some manufacturers have attempted to add HomePlug-based chips to their existing products. This “bolt-on” approach often leads to products that are functional; however, the end product can be very expensive with decreased margins.

Arkados’ solutions offer a completely different approach. By incorporating a processor and multiple interfaces into the same chip that houses HomePlug communication technology, and by providing application level software that runs on the chip which was developed over the years to optimize streaming of music and video over power line, Arkados presents a more cost-effective and more flexible strategy to bring products to market.

Primary competition for “no new wires” multi-room distribution of audio and video content comes from use of Radio Frequency (RF) technology. In general, the costs using RF technology to distribute content is lower than power line. However, any type of RF technology have a limitation on range as well as potential for more interference compared to power line communication technology. Therefore, Arkados, as well as our customers like Russound and Nuvo Technologies, believe that power line communication is more reliable for whole house coverage of distributed multi-media content without rewiring the home with cables.

Business Environment

Markets for our products are highly competitive and we expect that competition will continue to increase. We compete with other solution providers of multi-room distribution of music, video, and data using wireless technologies.

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

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

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

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

Since Arkados will no longer be involved in design and selling of semiconductor chips and Arkados will not be selling basic commodity network routers or home Ethernet-to-powerline bridge networking products, we will not compete with large semiconductor or data networking companies. We face competition from smaller design companies or Original Design Manufacturers (ODMs) who design “connected home” products. Today, most of such companies are using Radio Frequency wireless technologies rather than power line communication products. It is possible that such established players will begin to focus on powerline networking technology, as well as recent or new entrants in the field.

Many of our potential competitors may have substantially greater financial, engineering, manufacturing, marketing, technical, distribution and other resources, broader product lines, greater intellectual property rights, and longer relationships with customers than we have.

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

Results of Operations

We have not had significant revenue from operations since inception and, as of November 30, 2010, we are still a development stage company. Furthermore, we have financed operating losses since September 2004 with the proceeds primarily from related party lending from our major stockholder and affiliated lenders, as well as other stockholders and lenders, and from a capital raise to qualified investors through a retail brokerage firm. From December 2005 to December 31, 2007, we sold an aggregate $9,283,461 of 6% secured convertible debentures due December 28, 2008 of which $6,145,884 was purchased by institutional investors, $3,092,577 by our directors and their relatives and $45,000 was issued to settle an equivalent amount of legal fees.. During the fiscal year 2006, we paid down a substantial portion of outstanding short term debt and other liabilities and have issued approximately 600,000 shares of our common stock in satisfaction of approximately $406,000 of short term liabilities. During the period from June 1, 2007 to August 31, 2008, we raised $855,000 in cash from advances that were satisfied by issuing 6% secured convertible debentures. Despite these milestones in improving our financial position, our business plan to aggressively market our chips remains constrained by our limited capital resources.

We require additional funding to finance inventory, support operations for the expansion of our research and development efforts, and the expansion of our management team and sales and marketing organization. In March, 2007, we acquired the assets of Aster Wireless, Inc., retained four of the engineering staff as employees and one person as a consultant, which significantly added to our engineering capability and skill sets. The acquisition has added approximately $45,000 of monthly operating expenses and no material revenue.

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

If we are unable to raise funds to finance our working capital needs, we will not have the capital necessary for ongoing operations and for development of product samples and software necessary to acquire customers and get the products ready for mass production. In addition, the lack of adequate funding could jeopardize our development and delivery schedule of our planned products. Such delays could in turn jeopardize relationships with our current customers, strategic partners and prospective suppliers.

Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended May 31, 2010 which could materially affect our business, financial condition or future results. There have been no other material changes during the quarter ended November 30, 2010 to the risk factors discussed in the periodic reports noted above that have not already been disclosed in the Company’s most recently filed 10-K.

In addition to the forgoing, as a result of the License Agreement with ST and related APA, we are developing a plan of financing and need to hire personnel to operate the remaining systems business. There are no commitments for financing and the remaining purchase price of $4 million under the APA may not be sufficient to complete the settlement of outstanding debt, nor will it fund operations going forward.

Results of Operations

For The Three Months Ended November 30, 2010

During the three month period ended November 30, 2010, we had total revenue of $74,328 compared to $2500 for the same period in 2009. $74,328 of revenue was related to development agreements with two customers. As of November 30, 2010, there was approximately $0 in backlog. Total operating expenses for the three month period ended November 30, 2010 were $535,959 compared to total operating expenses for the same period in fiscal 2009 of $1,238,118. In both periods, the most significant expenses were personnel, professional fees and research related expenses.

The Company failed to pay the interest and principal due on the Secured Debentures on the extended due date of June 30, 2009. As a result, the principal obligation increased to 130% of the principal balance resulting in a default penalty of $3,622,083 booked in the quarter ended August 31, 2009 and additional penalty interest at 18% per annum for the quarter ended August 31 and the six month period November 30, 2009 in the amounts of $359,399 and $818,310, respectively.

For The Six Months Ended November 30, 2010

During the six month period ended November 30, 2010, we had total revenue of $128,411, compared to $126,006 for the same period in fiscal 2009. $128,411 of the revenue in the six months ended November 30, 2010 was related to development agreements with three customers as compared with $126,006 of development revenue in the same period ended November 30, 2009 from three customers. Total operating expenses for the six month period ended November 30, 2010 were $1,200,772 compared to total operating expenses for the same period in fiscal 2009 totaling $2,337,033.

The Company failed to pay the interest and principal due on the Secured Debentures on the extended due date of June 30, 2009. As a result, the principal obligation increased to 130% of the principal balance resulting in a default penalty of $3,622,083 booked in the quarter ended August 31, 2009 and additional penalty interest at 18% per annum for the quarter ended August 31, 2009 and the six month period November 30, 2009 in the amounts of $359,399 and $818,310, respectively. Additional penalty interest for the three month and six month periods ended November 30, 2010 were $419,010 and $838,020, respectively.

Liquidity and Capital Resources

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

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

At November 30, 2010, we had $11,000 in cash and negative working capital of $31 million, compared to $6,000 in cash at May 31, 2010. Working capital reflects the short-term maturities of all of the secured 18% convertible debentures.

We began the transition from development stage company in fiscal year ended May 31, 2008 by generating revenue of $855,676 and generated $763,040 of revenue in the fiscal year ended May 31, 2009. During Fiscal 2009, we obtained a second extension of convertible subordinated notes which expired June 30, 2009, obtained a limited waiver of anti-dilution rights held the holders of secured convertible notes to facilitate equity financing, and added Harris Cohen to our board of directors. As of November 30, 2010, $20,041,077 of secured debt, of which $5,661,716 is held by related parties is in default, as is $1,055,713 principal and interest on unsecured notes. In addition, as of November 30, 2010, 2009, $5,049,903 of salary remains due to our employees and our accounts payable was approximately $2,139,375 of which $2,044,929 was over 90 days.

We continue to negotiate with the holders of each class of debt to fashion a forbearance agreement, compromise or convert outstanding debt into equity and thereby facilitate raising additional investor capital. We have reached a general understanding with the holders of approximately 83% of the outstanding amount of secured debt as to the terms and conditions upon which they would agree to accept partial payment of principal and convert the balance of secured debt to equity, however, there is no binding agreement on anyone’s part to do so and no assurance can be given that the terms will be acceptable to the holders of all of the secured debt.

We have also received indications of interest from potential private and strategic investors concerning the terms and conditions upon which they would make an investment in Arkados, including the terms upon which the secured debt and other debt would have to be compromised and converted for them to make such investments, but there is no binding commitment on anyone’s part to complete the transactions. Finally, without commitment on anyone’s part, we have discussed converting a substantial portion of past due compensation with our employees if the financing and restructuring of our debt can be completed. In the absence of financing and debt restructuring, our operations are severely constrained and we may have to suspend operations altogether. In addition, unless the terms of financing and restructuring are acceptable to our general trade creditors, we remain at the risk of creditors filing an involuntary petition pursuant to the U.S. Bankruptcy Code. Every aspect of our business remains constrained by our limited capital resources and the threat of having to cease operations as a result of our lack of capital. If we are unable to raise funds to finance our working capital needs, we will not have the capital necessary for ongoing operations and for making our chip ready for mass production and we could lose professional staff necessary to develop our products and the value of our technology could be impaired. In addition, the lack of adequate funding will jeopardize our development and delivery schedule of our planned products. Such delays could in turn jeopardize relationships with our current customers, strategic partners and prospective suppliers. Pending the completion of these transactions, we are financing operations by issuing bridge notes to investors that would participate in an equity financing if the debt can be restructured. If the financing proceeds, these investors would be able to make the equity investment in Arkados at a discount of 33% from the price other investors are offered. In the event the financing is not completed, the bridge notes are due with interest at the annual rate of 8% on January 31, 2010.

While a substantial portion of the net proceeds of these financing activities was initially used to repay pre-existing debt, all of the proceeds during the fiscal year 2008 were used to support Arkados’ operations. There is no assurance that the holders of the Secured Debentures will continue to provide additional funds to us, that future equity financing will be available or that future financing will not be impeded by the anti-dilution provisions of the documents. Our ability to continue our operations depends on our ability to obtain financing. If adequate funds are not available on acceptable terms, we may not be able to retain existing and/or attract new employees, support product development and fabrication, take advantage of market opportunities, develop or enhance new products, pursue acquisitions that would complement our existing product offerings or enhance our technical capabilities to develop new products or execute our business strategy.

We have been negotiating for an infusion of equity capital, restructuring of our secured and unsecured debt and the holders of the Debentures have indicated that they are inclined to work with the company in this regard. Although there can be no assurance that the forbearance, financing or restructuring of our debt can be achieved, we continue to work closely with representatives of the holders of the Debentures to maintain the company as an ongoing business, which includes preserving our current operations and relationships with existing customers, partners and suppliers.

As of July 6, 2009 the $1,066,500 principal amount of 6% Convertible Subordinated Notes (the “Notes”) due June 30, 2009 were also in default by reason on non-payment. Under the terms of the Notes, the interest rate increases to 12% during the period the Notes are in default and the holders are entitled to the costs of collection. We plan to discuss forbearance or extension of the due dates of the Notes, as well as conversion of the Notes into equity with the holders and their representatives, but there can be no assurance that any such agreement can be reached.

Our lack of working capital has constrained and can be expected to continue to constrain all aspects of our operations. As design solutions are completed for existing customers, our need to finance the purchase of samples and inventory will increase. If we are unable to finance the purchase of samples, we will not be able to acquire customers and fulfill sale commitments and will not be able to recognize revenue on firm orders; such failures will have an adverse impact on our important technical relationships and future marketing efforts.

We continue to seek financing to meet the commitments either in the form of the sale of equity, additional secured or unsecured debt and any combination of the foregoing. There is no assurance sufficient financing to meet these commitments will be available, and, if they are not met, our business could be suspended or, upon a material default in our obligations to the holders of our convertible secured debt, face the acceleration of our obligations and the seizure of our assets to satisfy the debt.

Commitments

We do not have any commitments which are required to be disclosed in tabular form as of August 31, 2009.

Critical Accounting Policies

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

Basis of Presentation

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

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

Accounting for Stock Based Compensation

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

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements.

Derivative Liabilities

Effective June 1, 2009, the Company adopted the provisions of EITF 07-05 “Determining Whether an Instrument (or Embedded Feature) is Indexed to a Company's Own Stock,” which was codified into ASC Topic 815 – Derivatives and Hedging. ASC 815 applies to any freestanding financial instruments or embedded features that have characteristics of a derivative and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. The Company has 11,018,576 of warrants with exercise reset provisions, which are considered freestanding derivative instruments. ASC 815 requires these warrants to be recorded as liabilities as they are no longer afforded equity treatment assumptions: risk free rates from 1.32% to 1.39%, expected life terms ranging from 0.5 years to 2.0 years, an expected volatility range of 206% to 251% depending on the term of such equity contracts and a dividend rate of 0.0%. The fair value of the warrants issued and outstanding at August 31, 2010 and November 30, 2010, attributed to this derivative liability has been determined to be immaterial due to the low stock price in comparison to the exercise price, hence there was no adjustment to make upon adoption of this accounting standard.

Item 3. Quantitative And Qualitative Disclosures About Market Risk

Item 4T. Controls and Procedures.

The Company’s management evaluated, with the participation of the Company’s principal executive and principal financial officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of November 30, 2010. Based on this evaluation, the Company’s principal executive and principal financial officer concluded that the Company’s disclosure controls and procedures were not effective as of November 30, 2010.

There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company’s fiscal quarter ended November 30, 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

In connection with the preparation of our annual financial statements, our management performed an assessment of the effectiveness of internal control over financial reporting as of November 30, 2010. Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls. Based on this evaluation, management determined that, as of November 30, 2010, there were material weaknesses in our internal control over financial reporting. The material weaknesses identified during management’s assessment were (i) a lack of sufficient internal accounting expertise to provide reasonable assurance that our financial statements and notes thereto, are prepared in accordance with generally accepted accounting principles (GAAP) and (ii) a lack of segregation of duties to ensure adequate review of financial statement preparation. In light of these material weaknesses, management concluded that, as of May 31, 2010, we did not maintain effective internal control over financial reporting. As defined by the Public Company Accounting Oversight Board Auditing Standard No. 5, a material weakness is a deficiency or a combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected.

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the relationship between the benefit of desired controls and procedures and the cost of implementing new controls and procedures.

The consolidated financial statements as of and for the period ended November 30, 2010 include all adjustments identified as a result of the evaluation performed.

Changes In Internal Control Over Financial Reporting

None

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

There has been no material change in any of the matter set forth in Item 3. of our Form 10-K report for the fiscal year ended May 31, 2010 and no new litigation commenced since the filing of our Form 10-K that would be required to be disclosed in response to this Item.

Item 6. Exhibits.

(a) Exhibits.

31.1

Certification of Chief Executive Officer of Periodic Report pursuant to Rule 13a-14a and Rule 15d-14(a).

31.2

Certification of Chief Financial Officer of Periodic Report pursuant to Rule 13a-14a and Rule 15d-14(a).

32.1

Certificate of Chief Executive Officer pursuant to 18 U.S.C. Section 1350

32.2

Certificate of Chief Financial Officer pursuant to 18 U.S.C. Section 1350

SIGNATURES

In accordance with the requirements of the Securities Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: January 12, 2010	ARKADOS GROUP, INC.



	By:	/s/ Grant Ogata
		Grant Ogata
		Acting President and Chief Executive Officer



	By:	/s/ Larry L Crawford
		Larry L Crawford, Chief Financial Officer
		(Principal Financial and Accounting Officer)

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