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ARKADOS GROUP, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
[September 19, 2013]

ARKADOS GROUP, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

(Edgar Glimpses Via Acquire Media NewsEdge) Readers are urged to carefully review and consider the various disclosures made by us in this Form 10-K for the fiscal year ended May 31, 2013, and our other filings with the U.S. Securities and Exchange Commission. These reports and filings attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this Form 10-K speak only as of the date hereof and we disclaim any obligation to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.

Plan of Operation Ongoing Negotiations with Certain Creditors With respect to the classes of remaining creditors, the total debt that remains to be settled includes $3,621,768 due to former employees as stated above in Item 1, under the heading "Employees", and approximately $502,000 to Convertible Note Holders, approximately $478,800 to Bridge Note Holders, and approximately $1,504,000, to General Unsecured Creditors.

The current CEO of the Company is working diligently to obtain those releases.


We anticipate that substantially all of these claims will be settled in exchange for the issuance of common stock of the Company at a price of $0.04 (of the debt settled) per one (1) share of common stock, which is consistent with the offers made to all creditors who have already completed settlements.

Software and Platform Solutions Development As of the date of this report, we have not had significant revenue from operations since inception and, as of May 31, 2013, we were still a development stage company. Furthermore, we have financed operations with the proceeds primarily from related party lending from our major stockholder and affiliated lenders, as well as other stockholders and lenders. We continue to seek to restructure our operations following the Asset Sale and to complete the settlement of material obligations as a result of the Asset Sale. Despite selling our patents and other intellectual property to STMicroelectronics, we retained, through a license back from STMicroelectronics, the ability to pursue key elements of our anticipated software and platform solutions.

9 Arkados intends to continue to expand its relationship with Tatung by agreeing to partner on business and product development initiatives for smart grid applications. We anticipate that our relationships will position us to be able to commercially exploit opportunities in the various smart grid-related industries.

Electric meters with enhanced communication capabilities-an essential component of the smart grid-are becoming more prevalent. These meters use two-way communication to connect utilities and their customers. They support demand response and distributed generation, can improve reliability, and also provide information that consumers can use to save money by managing their use of electricity. The growth in the smart grid core and enabled technology market is driven primarily by the first wave of smart grid implementation: advanced metering infrastructure (the "AMI"). Utilities throughout the world have aggressively implemented smart meters to residential and industrial customers mainly because it is the required first step to achieve a true smart grid and, secondarily, in response to significant government incentives to do so. AMI lays the foundation as a hub for networking and communication and is the gateway to the home area network. From the perspective of the end user (residential or industrial), in-home (or in-building) devices are not only capable of communicating with the other devices within the local network, but are also capable of communicating outward to larger interconnected networks and implementing demand response protocols.

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.

Critical Accounting Policies The discussion and analysis of the Company's financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure on contingent assets and liabilities at the date of the financial statements.

Actual results may differ from these estimates under different assumptionsand conditions.

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and may potentially result in materially different results under different assumptions and conditions. As of May 31, 2012, management believes the critical accounting policies applicable to the Company that are reflective of significant judgments and or uncertainties are limited to equity based transactions or convertible debt instruments.

Stock-Based Compensation The computation of the expense associated with stock-based compensation requires the use of a valuation model. ASC 718 is a 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 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. ASC 718 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.

Impact of Debt with Conversion Features The Company at times enters into financing transactions whereby such debt instruments contain conversion features into common stock and or may contain detachable equity rights. These debt inducement features may be considered freestanding and or beneficial conversion features in our financial statements pursuant to the accounting guidance under ASC 470-20. These features would be fair valued and recorded as a discount to the debt instrument and amortized over the life of the instrument. Additional valuation features of warrants, conversion features in debt, and similar terms that include "full-ratchet" or reset provisions, which mean that the exercise or conversion price adjusts to pricing in subsequent sales or issuances, no longer meet the definition of indexed to a company's own stock and are not exempt from equity classification provided in ASC Topic 815-15. This means that instruments that were previously classified in equity are reclassified to liabilities and ongoing measurement under ASC Topic 815. The amount of quarterly non-cash gains or losses we will record in future periods will be based upon the fair market value of our common stock on the measurement date.

10 The Year ended May 31, 2013 During the year ended May 31, 2013, we had revenues of $0 compared to $0 for the same period in 2012. We did not have any revenue during the current period, since as a result of the Asset Sale that occurred December 23, 2010, the efforts of management have been devoted solely to obtaining settlement and releases of our creditors. Total operating expenses for the year ended May 31, 2012 were $394,953 compared to $300,250 in the same period of fiscal year 2012. In both periods, the most significant expenses were personnel, professional fees and related expenses. We had no research and development expenses during the year.

Given our reliance on outside sources of capital, we expect significant additional charges relating to stock compensation. We also incurred approximately $124,002 in interest expense on our outstanding bridge and other promissory notes as compared to $47,472 for the year ended May 31, 2012. We have not, as yet, filed our tax returns for this period, and may still owe income tax to either state or federal government.

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.

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

As of May 31, 2013, we had cash of approximately $345,126 (from borrowing) and negative working capital of ($9,209,314) compared to cash of $4,913 and negative working capital of ($9,292,384) at May 31, 2012.

Commitments We do not have any commitments which are required to be disclosed in tabular form as of May 31, 2013.

Off Balance Sheet Arrangements We do not have any off balance sheet arrangements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 8. FINANCIAL STATEMENTS.

Our financial statements are filed under this Item 8, beginning on page F-1 of this report.

11 Arkados Group, Inc. and Subsidiaries Development Stage Enterprise CONTENTS Page REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets F - 1 Consolidated Statement of Operations F - 2 Consolidated Statement of Changes in Stockholders' Deficiency F - 3 to F- 4 Consolidated Statement of Cash Flows F - 5 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS F - 6 to F -19 Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders Arkados Group, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Arkados Group, Inc. and subsidiaries (A Development Stage Enterprise) as of May 31, 2013 and 2012, and the related consolidated statements of operations, stockholders' deficiency, and cash flows for each of the years ended May 31, 2013 and 2012. We have also audited the amounts presented for the period June 1, 2010 to May 31, 2013, included in the consolidated statements of stockholders' deficiency and in the total amounts presented in the consolidated statements of operations and cash flows for the period March 24, 2004 to May 31, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements basedon our audit.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of May 31, 2013 and 2012, and the results of its operations and cash flows for each of the years ended May 31, 2013 and 2012 and the amounts presented for the period June 1, 2010 to May 31, 2013 included in the consolidated statements of stockholders' deficiency and in the total amounts presented in the consolidated statements of operations and cash flows for the period from March 24, 2004 to May 31, 2013 in conformity with generally accepted accounting principles inthe United States.

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

/s/ Liggett, Vogt & Webb, P.A.

Certified Public Accountants New York, New York September 17, 2013 ARKADOS GROUP, INC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (A Development Stage Enterprise) May 31, 2013 May 31, 2012 ASSETS Current assets: Cash and cash equivalents $ 345,126 $ 4,913 Total current assets 345,126 4,913 Total assets $ 345,126 $ 4,913 LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Accounts payable and accrued expenses $ 1,441,163 $ 2,181,697 Payroll taxes and related penalties and interest payable 936,906 936,906 Accrued income tax 100,000 100,000 Due to related party 130,000 130,000Debt subject to equity being issued 6,204,926 5,259,926 Notes payable 678,768 688,768 Total current liabilities 9,491,763 9,297,297 Long Term Liabilities: Notes Payable, net of discount of $537,323 and -0-, at May 31, 2013 and May 31, 2012 respectively 62,677 - Total liabilities 9,554,440 9,297,297 Stockholders' deficiency: Convertible preferred stock - $.0001 par value; 5,000,000 shares authorized, zero shares outstanding - - Common stock, $.0001 par value; 100,000,000 shares authorized and 48,898,474 issued and outstanding at May 31, 2013 and May 31, 2012, respectively 4,889 4,889 Additional paid-in capital 24,552,807 23,952,807 Accumulated deficit during development stage (33,767,010 ) (33,250,080 ) Total stockholders' deficiency (9,209,314) (9,292,384 ) Total liabilities and stockholders' deficiency $ 345,126 $ 4,913 ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

F-1 ARKADOS GROUP, INC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (A Development Stage Enterprise) Cumulative during the Development Stage (March 24, 2004 through For the year ended May 31, May 31, 2012 2013 2013 Net sales $ - $ - $ 3,127,478 Cost of sales - - 2,145,042 Gross Profit - - 982,436 Operating expenses: Selling, general and administrative 300,250 357,498 23,433,252 Research and development - 37,455 11,359,361 Total operating expenses 300,250 394,953 34,792,613 Income (loss) from operations (300,250 ) (394,953 ) (33,810,177 ) Other income (expenses): Interest expense (47,472 ) (124,002 ) (15,240,632 ) Settlement of debt 482,784 2,025 11,819,506 Sale of license and IP agreements 4,000,000 - 11,000,000 Net income (loss) before provision for income taxes 4,135,062 (516,930 ) (26,231,303 ) Provision for income taxes - - (741,562 ) Net income (loss) $ 4,135,062 $ (516,930 ) $ (25,489,741 ) Income (loss) per common share - basic: $ 0.09 $ (0.01 ) Weighted average of common shares outstanding - basic 47,579,132 48,898,474 Income (loss) per common share - fully diluted $ 0.09 $ (0.01 ) Weighted average shares of common stock outstanding - fully diluted 47,579,132 48,898,474 ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

F-2 ARKADOS GROUP, INC. and Subsidiaries Consolidated Statements of Stockholders' Deficiency (A Development Stage Enterprise) Inception March 24, 2004 to May 31, 2004 through May 31, 2013 Accumulated Deficit Additional During Total Preferred Stock Common Stock Paid in Development Treasury Stockholders's Shares Amount Shares Amount Capital Stage Stock Deficiency Balance as of March 24, 2004 (Unaudited) Post foreclosure sale - $ - 5,569 $ 5,569 $ 1,988,185 $ (8,277,267 ) $ - $ (6,283,513 ) Effect of Reorganization and Merger-May 24, 2004 - - 21,473,364 (3,422 ) 4,105,180 - (16,000 ) 4,085,758 Sale of shares pursuant to PPM - - 841,666 84 950,116 - - 950,200 Issuance of shares for settlement of debts - - 181,068 18 168,185 - - 168,203 Amortization of stock compensation - - - - 359,537 - - 359,537 Net loss (March 24,2004 to May 31, 2004) - - - - - (693,833 ) - (693,833 ) Balance as of May 31, 2004 (Unaudited) - - 22,501,667 2,250 7,571,202 (8,971,100 ) (16,000 ) (1,413,648 ) Shares issued for services - - 575,000 58 724,753 - - 724,811 Debt converted to equity - - 125,000 13 75,483 - - 75,496 Issuance of options for services - - - - 198,169 - - 198,169 Valuation of equity rights and beneficial conversion features of debt raise - - - - 234,353 - - 234,353 Amortization of stock compensation - - - - 3,617,681 - - 3,617,681 Net Loss - - - - - (7,001,365 ) - (7,001,365 ) Balance as of May 31, 2005 (Unaudited) - - 23,201,667 2,321 12,421,641 (15,972,465 ) (16,000 ) (3,564,503 ) Shares issued for services - - 75,000 8 22,492 - - 22,500 Debt converted to equity - - 609,786 61 405,683 - - 405,744 Shares issued for debt accommodations and penalties - - 466,600 47 267,253 - - 267,300 Options issued for services - - - - 69,170 - - 69,170 Valuation of equity rights and beneficial conversion features of debt raise - - - - 404,555 - - 404,555 Amortization of stock compensation - - - - 497,347 - - 497,347 Net Loss - - - - - (4,025,016 ) - (4,025,016 ) Balance as of May 31, 2006 (Unaudited) - - 24,353,053 2,437 14,088,141 (19,997,481 ) (16,000 ) (5,922,903 ) Shares issued for services - - 475,000 47 341,953 - - 342,000 Options issued for services - - - - 197,923 - - 197,923 Valuation of equity rights - - - - 424,247 - - 424,247 Amortization of stock compensation - - - - 418,997 - - 418,997 Exercise of options - - 175,604 17 1,739 - - 1,756 Issuance of common stock for Aster Acquisition - - 1,078,564 107 461,712 - - 461,819 Net loss - - - - - (6,033,075 ) - (6,033,075 ) Balance as of May 31, 2007 (Unaudited) - - 26,082,221 2,608 15,934,712 (26,030,556 ) (16,000 ) (10,109,236 ) Shares issued for services - - 196,667 20 63,480 - - 63,500 Options issued for services - - - - 105,448 - - 105,448 Valuation of equity rights - - - - 1,064,495 - - 1,064,495 Amortization of stock compensation - - - - 697,687 - - 697,687 Net Loss - - - - - (6,478,999 ) - (6,478,999 ) Balance as of May 31, 2008 (Unaudited) - $ - 26,278,888 $ 2,628 $ 17,865,822 $ (32,509,555 ) $ (16,000 ) $ (14,657,104 ) ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

F-3 ARKADOS GROUP, INC. and Subsidiaries Consolidated Statements of Stockholders' Deficiency (A Development Stage Enterprise) Inception March 24, 2004 to May 31, 2004 through May 31, 2013 Accumulated Deficit Additional During Total Preferred Stock Common Stock Paid in Development Treasury Stockholders's Shares Amount Shares Amount Capital Stage Stock Deficiency Balance as of May 31, 2008 (Unaudited) - $ - 26,278,888 $ 2,628 $ 17,865,822 $ (32,509,556 ) $ (16,000 ) $ (14,657,104 ) Shares issued for services - - 2,134,469 213 422,542 - - 422,755 Private Placement - - 3,380,159 338 809,700 - - 810,038 Conversion of Debt - - 944,881 95 409,018 - - 409,113 Options issued for services - - - - 90,246 - - 90,246 Valuation of equity rights - - - - 264,111 - - 264,111 Amortization of stock compensation - - - - 1,776,683 - - 1,776,683 Net Loss - - - - - (6,762,218 ) - (6,762,218 ) Balance as of May 31, 2009 (Unaudited) - - 32,738,397 3,274 21,638,124 (39,271,774 ) (16,000 ) (17,646,375 ) Valuation of equity rights - - - - 54,000 - - 54,000 Amortization of stock compensation - - - - 1,176,762 - - 1,176,762 Exercise of options - - 2,187,864 219 21,660 - - 21,879 Net Loss - - - - - (11,478,230 ) - (11,478,230 ) Balance as of May 31, 2010 (Unaudited) - - 34,926,261 3,493 22,890,547 (50,750,004 ) (16,000 ) (27,871,964 ) Amortization of stock compensation - - - - 603,974 - - 603,974 Conversion of Debt - - 10,025,000 1,002 399,998 - - 401,000Retire treasury stock - - - - (16,000 ) - 16,000 - Net Income - - - - - 13,364,862 - 13,365,862 Balance as of May 31, 2011 - - 44,951,261 4,495 23,878,519 (37,385,142 ) - (13,502,128 ) Conversion of Debt - - 3,947,213 394 51,188 - - 51,582 Warrants issued to Trident - - - - 23,100 - - 23,100 Net Income - - - - - 4,135,062 - 4,135,062 Balance as of May 31, 2012 - - 48,898,474 4,889 23,952,807 (33,250,080 ) - (9,292,384 ) Valuation of equity rights and beneficial conversion features of debt raise - - - - 600,000 - - 600,000 Net Loss - - - - - (516,930 ) - (516,930 ) Balance as of May 31, 2013 - $ - 48,898,474 $ 4,889 $ 24,552,807 $ (33,767,010 ) $ - $ (9,209,314 ) ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

F-4 ARKADOS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (A Development Stage Enterprise) Cumulative During the Development For the Year For the Year Stage (March Ended May Ended May 24, 2004 to May 31, 2012 31, 2013 31, 2013) Cash flows from operating activities: Net income (loss) $ 4,135,062 $ (516,930 ) $ (25,489,741 ) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization - - 1,621,848 Amortization of debt discount - 62,677 62,677 Stock based compensation - - 11,706,492 Warrants and beneficial conversion rights with debt 23,100 - 650,816 Debt and interest penalty - - 4,683,122 Amortization of deferred expenses - - 130,625 Gain on settlement of debt (482,784 ) (2,025 ) (11,819,506 ) Changes in operating assets and liabilities: Inventory - - 630 Deferred expenses - - 674,246 Prepaid expenses - - (47,213 ) Payroll taxes and related penalties and interest payable - - (22,916 ) Accounts payable and accrued expenses (276,528 ) 206,491 12,005,480 Net cash (used in) provided by operating activities 3,398,850 (249,787 ) (5,843,440 ) Cash flows from investing activities: Purchase of fixed assets - - (140,671 ) Sale of assets - - 124,066 Net cash used in investing activities - - (16,605 ) Cash flows from financing activities: Related party payables 130,000 - 1,716,726 Proceeds from debt - - 1,746,745 Contribution of capital - - 1,232,646 Exercise of stock options - - 23,635 Repayment of debt (106,355 ) (10,000 ) (6,155,670 ) Private placement - - 810,038 Proceeds from convertible debt - 600,000 1,666,500 Issuance of debentures - - 9,533,461 Repayment of related party payables (3,420,168 ) - (4,369,195 ) Net cash (used in) provided by financing activities (3,396,523 ) 590,000 6,204,886 Net increase in cash 2,327 340,213 344,841 Cash and cash equivalents beginning of period 2,586 4,913 285 Cash and cash equivalents at end of period $ 4,913 $ 345,126 $ 345,126 Supplemental disclosure of cash flow information: Interest paid $ - $ - Income taxes paid $ - $ - Non-cash investing and financing activities: Debt converted into common stock $ 51,582 $ - ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

F-5 Arkados Group, Inc. & Subsidiaries (A Development Stage Enterprise) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2013 and 2012 1. DESCRIPTION OF BUSINESS Arkados Group, Inc. (the "Company") conducts business activities principally through Arkados, Inc., which is a wholly owned subsidiary. Pursuant to an "Agreement and Plan of Merger", ("the Merger Agreement") dated May 7, 2004 and consummated on May 24, 2004, merged a wholly owned subsidiary, CDK Merger Corp., with Miletos, Inc. (the "Merger"). CDK Merger Corp. was renamed "Arkados, Inc." On August 30, 2006, the Company changed its name from CDKNET.COM, Inc. to Arkados Group, Inc. All references to CDKNET.COM, Inc. have been changed accordingly. Since Arkados Group, Inc. and subsidiaries prior to May 7, 2004 had no meaningful operations, this merger has been recorded as a reorganization of Arkados, Inc. via a reverse merger with Arkados Group, Inc.

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

The Company underwent a significant restructuring between December 23, 2010 and continuing beyond May 31, 2013 (the period ending for this report) during which substantially all of its assets were acquired by STMicroelectronics (sometimes referred to hereinafter as the "Asset Sale"), as disclosed in the 8-K filed December 29, 2010 and further described (as to the closing) in the 8-K filed July 12, 2011. Following December 23, 2010, the Company had minimal operations but also attempted to develop a plan to pursue a different course of operations.

During the period covered by this report through December 23, 2010 (i.e. the date of the Asset Sale), the Company, a development stage enterprise, was a fabless semiconductor company providing integrated system-on-chip solutions that directly support networking, smart grid and multimedia applications. Most recently (i.e. following January, 2013), Arkados has shifted its focus towards development of a universal platform that provides software solutions for smart grid and smart home applications primarily in the areas of energy management, home health care, smart appliances and home security and entertainment.

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Basis of Presentation - The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

The Company has incurred net losses of approximately $25 million since inception, including a net loss of $516,930 and net income of $4,135,062 for the years ended May 31, 2013, and 2012, respectively. Additionally, though the Company had a net working capital increase recently, the Company still had both working capital and shareholders' deficiencies at May 31, 2013 and May 31, 2012 and negative cash flow from operations since inception. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management expects to incur additional losses in the foreseeable future and recognizes the need to raise capital to remain viable.

The accompanying consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

b. Principles of consolidation - The consolidated financial statements include the accounts of Arkados Group, Inc. (the "Parent"), and its wholly owned subsidiaries, which include: CDKnet, LLC, Creative Technology, LLC, CDK Financial Corp. Diversified Capital Holdings, LLC, Arkados, Inc. and Arkados Wireless Technologies, Inc. Currently, Arkados, Inc., however, is the only active entity with operations. Intercompany accounts and transactions have been eliminated in consolidation.

F-6 c. Business combinations - We account for acquired businesses using the purchase method of accounting which requires that the assets and liabilities assumed be recorded at the date of acquisition at their respective fair values. Because of the expertise required to value intangible assets and 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.

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

e. Allowance for doubtful accounts - The Company records a bad debt expense / allowance based on management's estimate of uncollectible accounts. The Company has not recorded any bad debt expense in any of the years ended May 31, 2013 and 2012.

f. Equipment - Equipment is recorded at cost. Depreciation is provided on the straight-line method based upon the estimated useful lives of the respective assets. Equipment is being depreciated over a period of seven years.

Maintenance, repairs and minor renewals are charged to operations as incurred, whereas the cost of significant betterments is capitalized. Upon the sale or retirement of property and equipment, the related costs and accumulated depreciation are eliminated from the accounts and gains or losses are reflected in operations.

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

h. Fair Value of Financial Instruments - The carrying value of cash, accounts receivable, other receivables, accounts payable and accrued expenses approximate their fair values based on the short-term maturity of these instruments. The carrying amounts of debt were also estimated to approximate fair value. The Company cannot estimate the fair value of the remaining outstanding payroll tax penalties and interest recorded in connection with the 2004 merger and legacy payables. As defined in Accounting Standards Codification ("ASC") Topic No. 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).

The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.

The three levels of the fair value hierarchy defined by ASC Topic No. 820 are as follows: Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

F-7 Level 2 - Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.

Level 3 - Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management's best estimate of fair value.

i. Revenue Recognition - The Company derives revenues from two sources - sales of products and revenues related to service and custom development activities.

For product sales, revenue is recognized when our products are shipped to our customers. Shipping documents and the completion of any customer acceptance requirements, when applicable, are used to verify product delivery or that services have been rendered. Shipping costs are charged to cost of sales as incurred. For sales related to development, the Company recorded revenues pursuant to a number of 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 such long term contract to the revenues to be earned to ensure that if there is an estimated loss to record to complete their obligation to fulfill the terms of such development contract, such loss existed. As of each of May 31, 2013 and May 31, 2012, there were no long term contracts for which revenues were yet to be earned outstanding.

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

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

l. Income (Loss) Per Share - Basic net income (loss) per common share is computed by dividing net loss by the weighted average number of shares of common stock outstanding. For the year ended May 31, 2013, there was a net loss, as a result, there are no dilutive securities presented since it would have an anti-dilutive effect. Potentially dilutive securities as of May 31, 2013 were comprised of 2,350,080 of warrants, 2,960,000 of options, and 40,000,000 shares of common stock issuable as a result of convertible debt instruments.

For the year ended May 31, 2012 the diluted loss per share is the same as basic loss per share since the exercise price of the 5,895,545 warrants and 3,610,000 options exceeded the market on such day.

m. Equity Based Compensation - 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.

F-8 The Company has recorded compensation expense for the years ended May 31, 2013 and 2012, in the amounts of $-0- and $-0-, respectively.

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

o. Research and Development -All research and development costs are expensed as incurred.

p. New Accounting Pronouncements - In July 2013, the FASB issued Accounting Standards Update "ASU" 2013-11 on "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists". The amendments in this ASU are to improve the current U.S. GAAP because they are expected to reduce diversity in practice by providing guidance on the presentation of unrecognized tax benefits and will better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist.

Current U.S. GAAP does not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This Update applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date.

Retrospective application is permitted.

All newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company.

3. SALE OF LICENSE AND IP AGREEMENTS In December 2010, the Company entered into an agreement to sell substantially all of the assets used in the Company's business of designing, developing and selling semiconductor products that incorporate power line communications and networking services and offering services related thereto (the "Asset Sale") to STMicroelectronics, Inc. ("ST US"), a subsidiary of STMicroelectronics N.V.

("ST"), pursuant to an Asset Purchase Agreement, by and among the Company, the Companies Arkados, Inc., and Arkados Wireless Technologies, Inc. subsidiaries (collectively, "Arkados") and ST US, dated as of December 23, 2010 (the "Purchase Agreement"). At the same time, the Company granted a license (the "License") to ST US to use the Company's intellectual property assets included in the Asset Sale pending the closing of such sale. In exchange for granting the License, the Company received gross proceeds of $7 million. The Asset Sale was predicated on the Company settling its secured debt and closed in June, 2011, whereupon the Company received $4 million. At the time the Asset Sale was completed, ST US has agreed to license back certain intellectual property on a non-exclusive basis to Arkados to facilitate the continuation and expansion of the Company's home automation business, support the Company's existing customers and, with adequate financing (of which there is no assurance), permit the Company to continue the development and marketing of Smart Grid products based on power line communications. The Company will also continue to provide consulting and development services to existing customers and users of power line communication semiconductors. ST US hired substantially all of the Company's engineering and semiconductor employees (including Oleg Logvinov, the Company's former CEO and director), who was engaged in and directed the semiconductor business.

Substantially all of the proceeds received pursuant to the License and the Asset Sale, after payment of expenses related to the transactions, have been used to settle approximately $20 million of the Company's outstanding secured debt issued during the period from December 2004 to August 31, 2008 (which was in default) and pay employees $1.4 million of $5.2 million due them. The remainder of the proceeds received by the Company has been used to pay other creditors and expenses incurred in connection with the Asset Sale to the extent funds were available to do so.

F-9 As a condition to entering into the Purchase Agreement and the License, ST US required that the Company have written settlement agreements and releases with all of our secured creditors as well as all of our employees. Under the settlement agreements with creditors, the creditors agreed to settle the amounts owed (approximately $30,000,000), for an aggregate amount of $10,862,241 in cash, notes payable of $818,768 and another $5,259,926 in common stock of the Company which has yet to be issued. Of the cash settlements, $7,000,000 was paid in December 2010 out of proceeds from the $7,000,000 license fee received pursuant to the License (received in December, 2010), and $3,862,241 was paid at the closing out of proceeds from the Asset Sale (received in June, 2011). In exchange for the settlement amount, the secured creditors agreed to release their security interest in Arkados's assets and most secured creditors released Arkados from any and all additional claims, if any, that the secured creditors may have against Arkados. The secured creditors also agreed that ST and its affiliates are third party beneficiaries to the settlement agreements. Under the settlement agreements with the Company's employees, the employees agreed to accept an aggregate of $1,429,949 and an amount of the Company's equity rights to be negotiated after the closing as payment for back wages and unreimbursed expenses. The cash payment was paid to employees in December 2010 out of the license fee paid to the Company by ST US. Also, as a condition to entering into the Purchase Agreement and the License, the Company entered into standstill agreements with holders of approximately $2,100,000 of unsecured debt pursuant to which those unsecured creditors agreed, among other things, not to exercise remedies that they may have as creditors of Arkados, not to sell or transfer their debt, to release ST and its affiliates from any and all claims that they may have against ST, if any, and not to sue ST for any dealings that the creditors had with Arkados.

The Company is negotiating with its outstanding unsecured debt holders to compromise, extend the due date or convert outstanding debt into equity and thereby facilitate raising additional investor capital for the portion of the Company's business that may continue. The amounts that the debt holders have agreed to settle through the receipt of the Company's equity are labeled as "Debt Subject to Equity Being Issued" on the balance sheet. Except as set forth above, there is no binding commitment on anyone's part to complete the transactions.

4. PAYROLL TAX LIABILITIES Enikia was in arrears for several years in its payment of federal and state payroll taxes. Pursuant to the Merger Agreement, the Parent assumed up to $1.2 million of the delinquent payroll taxes due and outstanding with the remaining difference an assumed liability of the major shareholder of the Company. During the year ended May 31, 2006, the Company made payments to both Federal and State of NJ taxing authorities in the amount of $874,000. The payments represented payroll taxes withheld by Miletos from its employees but not remitted to the taxing authorities. During the year ended May 31, 2008, an additional $64,106 payment was made to the State of NJ for payment of payroll taxes. Currently, there is $936,906 still recorded on the Company's books as reserved against amounts possibly due and outstanding to both the federal and state tax authorities for penalties and interest incurred by Enikia related to its payroll liabilities. The Company does not believe that it has a legal obligation to pay anything more to any taxing authority, but until such clearance is received from the appropriate agencies, the Company has elected to keep the liability onits books.

5. ACCRUED EXPENSES AND OTHER LIABILITIES As of May 31, 2013 and 2012, accrued expenses and other liabilities consist of the following approximate amounts: May 31, 2013 May 31, 2012 Accounts payable $ 642,612 $ 1,442,634 Accrued interest and penalties payable 181,710 122,410Accrued income taxes 100,000 100,000 Accrued other 616,841 616,653 $ 1,541,163 $ 2,281,697 6. NOTES PAYABLE, RELATED PARTY PAYABLES, DEBT SUBJECT TO EQUITY BEING ISSUED AND SETTLEMENT OF DEBT As a result of the sale of the Company's Asset Sale to STUS the notes payable and convertible debentures of $17,269,689 and the related accrued interest of $3,671,137 as of May 31, 2010, have been settled in part with the December 2010 closing in the amount of $5,570,059 and the balance in June 2011 closing with cash of $3,526,523, an undetermined amount of equity yet to be issued and $688,768 of remaining notes payable as of May 31, 2012. As of May 31, 2013 there was $741,455 of notes payable, net of debt discount of $537,323, largely the result of additional debt investments during this year.

F-10 In November 2012, the Company received a loan in the form of a Convertible Note in the principal amount of $180,000. The note bears interest at 6% per year and matures on November 15, 2014. At any time during the length of the loan, the holder of the note has the right to convert any unpaid portion of the note into shares of common stock. The conversion price shall equal $0.01 per share. The beneficial conversion feature has been fair valued at $180,000 and will be amortized over the life the debt instrument.

In December 2012, the Company received a loan in the form of a Convertible Note in the principal amount of $20,000. The note bears interest at 6% per year and matures on November 15, 2014. If not paid upon maturity, the interest rate will increase to 12% per year. At any time during the length of the loan, the holder of the note has the right to convert any unpaid portion of the note into shares of common stock. The conversion price shall equal $0.01 per share. The beneficial conversion feature has been fair valued at $20,000 and will be amortized over the life the debt instrument.

On January 6, 2013, the Company and Andreas Typaldos, former officer and director, entered into a Separation and Release Agreement. Under the Separation Agreement all prior Typaldos Agreements will be terminated and certain debts and obligations to Typaldos will be released in exchange for (1) $15,920 and (2) 14,073,966 shares of common stock. In addition, $19,000 will be paid to Typaldos' son for an existing loan with the Company. The Company has yet to issue such shares under this Separation Agreement. As of May 31, 2013, there was $945,000 of payables due to Andreas Typaldos, included in the balance sheet category "Debt subject to equity being issued." On April 22, 2013, the Company executed two Convertible Notes for loans in principal amount of $40,000 each. Each note bears interest at 6% per year and matures on April 30, 2015. At any time during the length of the loan, the holder of the note has the right to convert any unpaid portion of the note into shares of common stock. The conversion price shall equal $.02 per share for both notes.

The beneficial conversion feature has been fair valued at $40,000 each and will be amortized over the life the debt instrument.

On April 22, 2013, the Company executed a Convertible Note for a loan in the principal amount of $120,000. The note bears interest at 6% per year and matures on April 30, 2015. At any time during the length of the loan, the holder of the note has the right to convert any unpaid portion of the note into shares of common stock. The conversion price shall equal $0.02 per share. The beneficial conversion feature has been fair valued at $120.000 and will be amortized over the life the debt instrument.

On May 2, 2013, the Company executed a Convertible Note for a loan in the principal amount of $200,000. The note bears interest at 6% per year and matures on April 30, 2015. At any time during the length of the loan, the holder of the note has the right to convert any unpaid portion of the note into shares of common stock. The conversion price shall equal $0.02 per share. The beneficial conversion feature has been fair valued at $200,000 and will be amortized over the life the debt instrument.

Related Party Activities - The Company received an aggregate of $130,000 from several of its then directors during the 1st quarter of 2012. This obligation remains outstanding, therefore, the Company has reported a related party payable in the amount of $130,000 as of each of May 31, 2013 and 2012, respectively.

The five year maturity of debt is as follows: Year ended May 31, 2014 $ 0 Year ended May 31, 2015 600,000 Total long term debt 600,000 Less debt discount (537,323 ) Long term debt, net of debt discount $ 62,677 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 11,735,004 of warrants with exercise reset provisions, with its debt issuances over the years, 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 May 31, 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. As of May 31, 2013, 10,044,922 of these warrants expired. The stock price remains low and the fair value of the derivative liability remains immaterial.

F-11 SETTLEMENT OF DEBT As a direct result of the Sale of the License and IP Agreements to STUS and the mandate to obtain debt releases, the Company has been able to settle its debts with its secured creditors and employees, with cash payments made as of the December 2010 and June 2011 closings.

The continuing settlements with unsecured and related parties have resulted in gain being recorded in the amount of $482,784 in fiscal 2012. As of May 31, 2012, there remained $5,259,926 of debts to be settled via the issuance of equity on as yet to be determined or negotiated terms. The majority of debt holders who have settled have agreed to accept equity for their remaining debt.

As of May 31, 2013, and as a result of additional financing of operations throughout the fiscal year, the balance is $6,204,926.

During the quarter ended August 31, 2012 the Company negotiated the settlement of additional debts resulting in $10,000 being paid for the settlement of $12,025 of recorded liabilities, resulting in a gain on the settlement of such debts being recorded in the amount of $2,025.

7. INCOME TAXES At May 31, 2013, the Company has available unused net operating loss carryovers approximately $17,484,000 that may be applied against future taxable income and expire at various dates through 2033. The Company has a deferred tax asset arising from such net operating loss deductions and has recorded an increase to the full valuation allowance in the amount of $6,908,000 for the year ended May 31, 2013 since the likelihood of realization of the tax benefits cannot bedetermined.

Year Ended May 31, 2013 2012 Deferred tax asset: Net operating loss carry forward $ 6,908,000 $ 6,729,000 Accrued Compensation 1,420,000 1,420,000 Valuation allowance (8,328,000 ) (8,149,000 ) Net deferred tax asset $ - $ - A reconciliation of the statutory federal income tax benefit to actual tax benefit is as follows: Year Ended May 31, 2013 2012 Statutory federal income tax benefit (35 )% 35 % Permanent timing differences - equity rights 4 % (0 )% Operating loss carry-forwards utilized (31 )% (35 )% State income taxes 0 % 0 % The Company may have had greater than 50% change in ownership of certain stock holdings by shareholders of the Company pursuant to Section 382 of the Internal Revenue Code, the net operating losses may be limited as to its utilization on an annual basis. Currently no such evaluation has been performed.

Tax returns for the years 2010 through 2013 remain subject to examination by relevant tax authorities.

F-12 8. STOCKHOLDERS' DEFICIENCY 2004 transactions-(Unaudited) a. On May 7, 2004, CDKNET.com, Inc. and Miletos entered into an "Agreement and Plan of Merger" ("the Merger Agreement"). On May 24, 2004, the merger was consummated between a wholly owned subsidiary of CDKNET.com, Inc (CDK Merger Corp) and Miletos, Inc. The successor subsidiary was renamed Arkados, Inc.

Because CDKNET.com, Inc and its subsidiaries had no meaningful operations prior to May 7, 2004 and equity ownership in CDKNET.com, Inc. in an amount greater than 50% was issued to the shareholders of Miletos, Inc., this transaction has been recorded as a reorganization of Arkados, Inc. via a reverse merger with CDKNET.com, Inc.

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

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

d. The 883,334 shares issued, pursuant to the terms of the Purchase Agreement relating to the aforementioned equity raise, have certain registration rights.

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

e. The major shareholder of the Company allocated 2,345,410 shares of his shares in the Company to satisfy assumed obligations of Enikia for services previously rendered to the predecessor entities. Pursuant to Topic 5T of the Staff Accounting Bulletins, such contribution of the common shares of the Company have been recorded as a contribution by the shareholder to the Company in satisfaction of such liabilities recorded of $1,288,185.

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

F-13 g. During fiscal 2005, the Company issued 610,000 options at an exercise price of $1.20 per share which was above fair market value to its employees and directors and 1,725,000 options to third parties for services rendered at exercise prices ranging from $.01 to $1.20 per share. No compensation has been recorded for the options issued to employees and directors. The options to third parties have been valued at $900,461, which $582,292 has yet to be expensed due to the term of such services being performed.

h. The Company recorded $234,353 of interest expense related to the valuation of the detachable warrants and the beneficial conversion feature of $750,000 in debt raised from March to May 2005. This debt matured on June 8, 2005, hence predominately all of such interest expense was recorded in fiscal 2005.

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

2006 transactions - (Unaudited) j. During the year ended May 31, 2006, the Company issued 750,000 stock options with an exercise price of $.45 per share to management and its employees, which vest over four years. Another 125,000 fully vested stock options with an exercise price of $.45 were issued to consultants, an expense of $69,170 was recorded for these stock options.

k. On March 20, 2006, the Company issued warrants to purchase up to 180,000 shares of our common stock for $0.85 per share to Emerging Capital Markets LLC as part compensation for investor relations consulting services for a three month period. The warrants vest in equal thirds on the first day of April, May and June 2006, provided there is no material breach of the related consulting agreement. Such investor relations consulting services agreement also provides for cash compensation in the amount of $20,000 per month for three months.

These investor relations consulting agreement also provides for the requirement to obtain approval form this individual for any potential reverse stock splits greater than 1 for 5 and has the option to renew such agreement for another three months on the same terms.

l. On February 1, 2006, as part of the sale of an additional $375,884 of the 6% Secured Debentures described above, the Company and the holders of all outstanding 6% Debentures agreed to modify the covenant to permit the Company to issue 609,786 shares of common stock and pay $405,744 in full satisfaction of such outstanding principal and interest concurrently with the additional investment and waived prior defaults.

m. During the year May 31, 2006, the Company issued 75,000 shares for services valued at $22,500.

n. There was $404,555 recorded during the year for the valuation of equity rights and beneficial conversion features attributed to debt issuances during the year.

o. During the year May 31, 2006, the Company issued 466,600 shares of stock for debt penalties and extensions for consideration valued at $267,300.

2007 transactions - (Unaudited) p. In June 2006, the Company approved the issuance of 475,000 shares of Arkados stock, or $342,000, to Mr. Andreas Typaldos in recognition of his efforts to obtain financing for Arkados.

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

r. During the third quarter of 2007, the Company issued 100,000 shares with an exercise price of $.40 per share to the incoming CFO as a component of her employment contract. Another 240,000 stock options with an exercise price of $.50, vesting over 6 months, were issued to a consultant; an expense of $80,919 was recorded for these stock options.

F-14 s. On March 3, 2007, Arkados Wireless Technologies, Inc., our wholly owned subsidiary, filed a merger certificate completing the acquisition of Aster Wireless, Inc., a previously unaffiliated Delaware corporation. The consideration for the Merger was 1,000,000 restricted shares of our common stock. In addition, the Company issued an aggregate of 259,000 seven-year options to four employees through the acquisition exercisable at $0.405 per share which vest over 4 years aggregate of 78,564 shares of restricted stock to such employees. We also issued 300,000 seven-year options to a consultant, which options vested on March 1, 2008 and are exercisable at $0.405 per share; an expense of $100,146 was recognized.

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

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

v. There was $424,247 recorded during the year for the valuation of equity rights and beneficial conversion features attributed to debt issuances during the year.

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

2008 transactions - (Unaudited ) x. During the first quarter of 2008, the Company issued 30,000 shares to a vendor at a cost of $13,500 for the settlement of an outstanding balance. During the fourth quarter of 2008, the Company issued 166,667 shares to a consultant at a cost of $50,000.

y. During the first quarter of 2008, the Company issued 190,000 options to three service providers; an expense in the amount of $50,274 was recognized for these options. During the fourth quarter, the Company extended the expiration period of 263,333 options for an employee whose contract was not renewed; an expense in the amount of $30,244 was recognized for this extension. In addition, in the same period, the Company issued 150,000 fully vested options with an exercise price of $.32 to a consultant; an expense in the amount of $24,930 was recognized for these options.

z. During the third quarter of 2008, the Company issued 2,494,000 stock options with exercise prices of $.30 per share to management and its employees, which vest over four years.

aa. During the fourth quarter of 2008, the Company extended the expiration for two years of 2,227,864 $.01 options due to expire on May 24, 2008 issued to employees at the time of the reorganization. The value determined by Black Scholes of $714,076 will be amortized over the next two years for this extension.

bb. 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.

cc. The Company as part of a debt restructuring, 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. The change in the terms of these warrants required a charge of $945,772 to be recorded.

dd. For the year ended May 31, 2008, the Company incurred a non-cash charge of $697,687 for the amortization of stock options.

F-15 2009 transactions - (Unaudited) ee. 500,000 options were awarded to two service providers; an expense in the amount of $90,246 was recognized in the year ended May 31, 2009 for these options. These stock options and warrants are exercisable for three to ten years from the grant date.

ff. 2,134,469 shares of stock were granted to service providers and a former employee during the year ended May 31, 2009; $422,755 of consulting, compensation expense or reduction of accrued compensation.

gg. A refinancing and the closing on new monies received occurred in July 2008, whereby certain debts were extended in conjunction with conversion of some indebtedness in the amount of $409,113 for 944,881 shares of common stock, 2,332,131 warrants were issued to certain debt holders exercisable at $.25 per share expiring on December 1, 2008 were valued at $264,111 and expensed, accordingly, and $810,038 of monies received net of $35,000 in legal fees from May 2008 to July 2008 resulting in 3,380,159 shares of common stock being issued.

hh. In February 2009 the Company's Compensation Committee and Board of Director's elected to cancel certain underwater options that had been granted to employees. A total of 8,438,184 options with exercise prices ranging from $0.25 to $1.20 were cancelled and new options totaling 75% of the total of the cancelled options (6,328,638 options) were issued to employees with an exercise price of $0.15 , the closing price on February 6, 2009, the date of grant. As a result of this measurement, no additional stock compensation expense was required to be recorded on the new options. The unamortized value of the cancelled options, $888,384, will be amortized over the two year vesting period of the newly issued options. As 50 % of the options were vested on the date of grant, a compensation expense was recorded in the amount of $444,192 on the grant date.

ii. As a result of the past option awards and the awards made in fiscal 2009, the Company has recorded equity based amortization expense in the amount of $1,776,683.

2010 transactions - (Unaudited ) jj. There was $54,000 recorded during the year for the valuation of equity rights and beneficial conversion features attributed to debt issuances during the year.

kk. 2,187,864 shares of stock were issued for the exercise of stock options resulting in $21,879 of gross proceeds to the Company.

ll. As a result of the past option awards and the awards made in the prior years, the Company has recorded equity based amortization expense in the amount of $1,176,762.

2011 transactions mm. As a result of the past option awards and the awards made in the prior years, the Company has recorded equity based amortization expense in the amount of $603,974.

nn. In December 2010, certain creditors converted $401,000 of their indebtedness for the issuance of 10,025,000 shares of common stock.

2012 transactions oo. Certain creditors received 660,000 warrants as a condition of their debt settlement with the Company. The warrants expire in May 2014 and have an exercise price of $.035 a share. There was a debt inducement settlement expense recorded for these warrants in the amount of $23,100.

pp. In September 2011, certain creditors converted $51,582 of their indebtedness for the issuance of 3,947,213 shares of common stock, inclusive of past outstanding matters.

2013 transactions qq. The Company raised $600,000 of debt with conversion features, converting such debt into equity at the option of the holders at exercise prices ranging from $.01 to $.02 a share. The beneficial conversion rights have been valued at $600,000 and will be amortized over the life of the related debt.

F-16 9. STOCK-BASED COMPENSATION The Company accounted for its stock based compensation in accordance with the fair value recognition provisions of FASB ASC Topic 718, Compensation - Stock Compensation ("ASC 718").

A. Options Compensation based stock option and warrant activity for warrants and qualified and unqualified stock options are summarized as follows: Weighted Average Shares Exercise Price Outstanding at May 31, 2006 6,886,652 $ 0.64 Granted 5,824,000 0.49 Exercised (175,604 ) 0.01 Expired or cancelled - - Outstanding at May 31, 2007 12,535,048 0.58 Granted 5,365,197 0.21 Exercised - Expired or cancelled (2,927,864 ) 0.22 Outstanding at May 31, 2008 14,972,381 0.51 Granted 14,427,600 0.15 - 0.25 Exercised - Expired or cancelled (9,438,184 ) 0.25 -1.20 Outstanding at May 31, 2009 19,961,797 0.27 Granted - Exercised (2,228,364 ) 0.01 Expired or cancelled (583,197 ) 0.25 Outstanding at May 31, 2010 17,150,236 0.3 Granted - Exercised (2,227,864 ) 0.01 Expired or cancelled (11,072,372 ) 0.30 Outstanding at May 31, 2011 3,850,000 0.65 Granted - Exercised - Expired or cancelled (240,000 ) 0.83 Outstanding at May 31, 2012 3,610,000 0.55 Granted - Exercised - Expired or cancelled (650,000 ) 0.75 Outstanding at May 31, 2013 2,960,000 $ 0.29 F-17 The following table summarizes information about options outstanding and exercisable at May 31, 2013: Options Outstanding and exercisable Weighted- Weighted- Average Average Number Remaining Life Exercise Number Outstanding In Years Price Exercisable Range of exercise prices: $0.00 - $0.25 1,800,000 2.34 0.24 1,800,000 $0.26 - $1.00 1,160,000 1.32 $ 0.36 1,160,000 2,960,000 1.94 $ 0.29 2,960,000 The compensation expense attributed to the issuance of the options and warrants will be recognized as they vest / earned. These stock options and warrants are exercisable for three to ten years from the grant date.

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

B. Warrants The issuance of warrants attributed to debt issuances are summarized as follows: Weighted Average Shares Exercise Price Outstanding at May 31, 2006 4,392,874 $ 0.84 Granted 4,655,366 0.93 Exercised 0 - Expired or cancelled 0 - Outstanding at May 31, 2007 9,048,240 0.88 Granted 1,821,676 0.85 Exercised 0 - Expired or cancelled -825,000 0.67 Outstanding at May 31, 2008 10,044,916 0.84 Granted 4,022,225 0.25 Exercised 0 - Expired or cancelled -2,332,137 0.85 Outstanding at May 31, 2009 11,735,004 0.63 Granted 0 - Exercised 0 - Expired or cancelled 0 - Outstanding at May 31, 2010 11,735,004 0.63 Granted 0 - Exercised 0 - Expired or cancelled -6,499,057 0.70 Outstanding at May 31, 2011 5,235,945 0.50 Granted 660,000 0.035 Exercised 0 - Expired or cancelled 0 - Outstanding at May 31, 2012 5,895,945 0.50 Granted 0 - Exercised 0 - Expired or cancelled -3,545,865 0.70 Outstanding at May 31, 2013 2,350,080 $ 0.19 F-18 The following table summarizes information about warrants outstanding and exercisable at May 31, 2013: Outstanding and exercisable Weighted- Weighted- average Average Number remaining life Exercise Number Outstanding in years Price Exercisable Range of exercise prices: $.01 to $.25 1,690,080 0.33 $ 0.250 1,690,080 $.26 - $.99 660,000 1.00 $ 0.035 660,000 2,350,080 2,350,080 Interest expense attributed to the aforementioned warrants is being amortized over the ratable term of each respective debt arrangement.

The intrinsic value of the aforementioned options and warrants as of May 31, 2013 and 2012 was $9,900 and $0, respectively.

9. COMMITMENTS AND CONTINGENCIES The Company utilized premises on a month to month basis of one its shareholders during fiscal 2012 and from June, 2012 through December, 2012. Beginning January 1, 2013 through the current date, the Company has been subletting office space on a month-to-month basis from a company owned by its chief executive officer at the rate of $1,668 per month.

Rent expense for the years ended May 31, 2013 and 2012 was $7,392 and $0, respectively.

10. SUBSEQUENT EVENTS On June 14, 2013 (the "Effective Date"), the Company executed a worldwide perpetual non-exclusive, irrevocable, quantity limited, royalty-free license agreement from Exegin for use of its proprietary software for a one-time license fee in the amount of $25,000 payable in five (5) installments on 1stof each month following the Effective Date.

Effective as of June 28, 2013, the Company entered into an agreement with Tatung Co. to provide Tatung with software for various in-home automated devices that are manufactured by Tatung. Payment by Tatung is based on a monthly invoice for software deliverables in accordance with individual project-based statements of work.

F-19

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