8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): January 29, 2010

ARKADOS GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware	0-27587	22-3586087
(State of Incorporation)	(Commission File Number)	(IRS Employer Identification No.)

220 Old New Brunswick Road, Suite 202

Piscataway, NJ  08854

(Address of Principal Executive Offices)

(732) 465-9300

(Registrant’s telephone number, including area code)

N/A

(former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.24d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.23e-4(c))I

INTRODUCTORY NOTE

This Report on Form 8-K filed by 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.

Item 1.01  Entry into a Material Definitive Agreement.

On July 6, 2009 we reported that we received notice from a law firm representing approximately 45% of our outstanding 6% secured convertible debentures due June 28, 2009 (the “Debentures”) that the Debentures were in default by reason of non-payment.  This event triggered an “Event of Default” under the terms of the Debentures on July 8, 2009.  The Event of Default entitles the holders of the Debentures to redemption at the rate of 130% of the principal and accrued interest outstanding, interest on unpaid interest and principal at the rate of 18% per annum commencing on July 8, 2009 and reimbursement for expenses incurred enforcing the obligations.

Since July 6, 2009, we have been negotiating for an infusion of equity capital and restructuring of our secured and unsecured debt.  During the period from January 29, 2010 to February 4, 2010, we entered into Fobearance Agreements with the holders of $ 14,119,288 of the $17,112,175 principal amount Debentures outstanding on January 31, 2010 (including Bushido Capital Master Fund L.P., BCMF Trustees, Pierce Diversified Strategy Master Fund, LLC – Series BUS, Andreas Typaldos, our Chairman, family and other limited partnerships and limited liability company’s affiliated with Mr. Typaldos, two directors and others).  The agreements give us until March 31, 2010 to resolve these issues without the threat of such holders taking action to enforce their rights under the Debentures, related transaction documents granting the holders of the Debentures a security interest in substantially all of our property and under law.  The holders’ agreement to forbear terminates on the occurrence of certain events including the filing of a bankruptcy petition by or against the company.  A copy of the form of this agreement is filed with this report as Exhibit 99.1.  We continue to seek similar agreements with the holders of the balance of the Debentures.

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We reported on September 26, 2009 that we entered into an agreement for bridge financing with Burton LaSalle Capital Corp..  Pursuant to the agreement, we may issue up to $1,000,000 8% Subordinated Notes due January 31, 2010 (“Subordinated Notes”) to Burton LaSalle Capital Corp. and other investors.  Pursuant to the notes, interest is due at the annual rate of 8% is due on the earlier of the exchange or conversion of the notes into shares of common stock of the company or the notes become due on January 31, 2010 or earlier upon acceleration because of a default.  We did not pay the Subordinated Notes on January 31, 2010, however such failure is not an “Event of Default” under the Subordinated Notes unless they remain unpaid for 30 days.  Nevertheless, we  entered into amendment agreements with Burton LaSalle Capital Corp. and other investors holding $138,950 of $298,950 of the Subordinated Notes which waive the default and extend the due date until March 31, 2010.  We continue to amend the balance of the Subordinated Notes to extend the due date to March 31, 2010.  The form of amendment agreement is filed with this report as Exhibit 99.2.  In addition, we continue to finance our limited operations through the issuance of Subordinated Notes due March 31, 2010 and have sold $25,000 principal amount of the new Subordinated Notes.  The form of new Subordinate Note is filed with this report as Exhibit 99.3.  The principal amount of the notes is exchangeable at the option of the holders into private equity financing we are able to place at a 33% discount to the price charged to other investors.  In the event we are able to effectuate a recapitalization and the price to new equity investors is less than $200,000 per 1% of the post recapitalized company, we may force such conversion.  There can be no assurance that additional investors will purchase more notes, that Burton LaSalle or other investors will purchase more notes or that any aspects of a recapitalization or equity financing can be obtained.

Although there can be no assurance that the financing or restructuring of our debt can be achieved, we continue to work closely with representatives of the holders of the Debentures and other creditors to maintain the company as an ongoing business, which includes preserving the company’s current operations and relationships with existing customers, partners and suppliers.

Item 9.01  Financial Statements and Exhibits.

(c) Exhibits.

Exhibit Number
99.1	Form of Forbearance Agreement among Arkados Group, Inc. and the holders of Arkados 6% secured convertible debentures due June 28, 2009.
99.2	Form of Amendment No. 1 To 8% Subordinated Notes due January 31, 2010.
99.3	Form of 8% Subordinated Notes due March 31, 2010.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	ARKADOS GROUP, INC.
Date: February 4, 2010	By:	/s/ Larry Crawford
		Larry Crawford
		Chief Financial Officer

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EX-99.1

EXHIBIT 99.1

FORBEARANCE AGREEMENT

THIS FORBEARANCE AGREEMENT (this “Agreement”) by and among Arkados Group, Inc. (formerly CDKNET.COM, Inc., a Delaware corporation, the “Company” or “Borrower”) and each of the other parties set forth on the signature pages herein (each a “Holder” and collectively, the “Holders”) is entered into and effective as of date it is executed by the Company.

RECITALS

WHEREAS, the Company previously entered into a Securities Purchase Agreement dated, December 28, 2005 (the “First Purchase Agreement”), as amended on February 1, 2006, February 24, 2006, March 31, 2006, September 26, 2006, October 28, 2006, November 30, 2006, June 8, 2007, February 28, 2007, March 6, 2007, May 2, 2007, May 30, 2007, May 31, 2007, December 6. 2007 and December 28, 2007 whereby the Company issued and sold to certain Holders the Company’s 6% Secured Convertible Debentures due December 28, 2008 (the “First Debentures”) as follows:

(a)  $2,000,000 principal amount of First Debentures on December 28, 2005,

(b)  $375,884.38 principal amount of First Debentures on February 1, 2006,

(c)  $500,000 principal amount of First Debentures on February 24, 2006 and

(d) $500,000 principal amount of First Debentures on March 31, 2006,

for an aggregate principal amount of all First Debentures issued equal to $3,375,884.38.

WHEREAS, the Company previously entered into a Securities Purchase Agreement dated, June 30, 2005 (the “Second Purchase Agreement” and together with the First Purchase Agreement, the “Purchase Agreements”), as amended on September 26, 2006, October 28, 2006, November 30, 2006, June 8, 2007, February 28, 2007, March 6, 2007, May 2, 2007, May 30, 2007, May 31, 2007, December 6, 2007 and December 28, 2007 whereby the Company issued and sold to certain Holders the Company’s 6% Secured Convertible Debentures due December 28, 2008 (the “Second Debentures” and together with the First Debentures, the “Debentures”) as follows:

(a)  $1,773,470.83 principal amount of Second Debentures on June 30, 2006,

(b)  $250,000 principal amount of Second Debentures on September 26, 2006,

(c)  $250,000 principal amount of Second Debentures on October 28, 2006,

(d) $400,000 principal amount of Second Debentures on November 30, 2006,

(e) $288,000 principal amount of Second Debentures on June 8, 2007,

(f) $327,000 principal amount of Second Debentures on February 28, 2007,

(g) $20,000 principal amount of Second Debentures on March 6, 2007,

(h) $150,000 principal amount of Second Debentures on May 7, 2007,

(i) $610,000 principal amount of Second Debentures on May 30, 2007,

(j) $500,000 principal amount of Second Debentures on May 31, 2007,

(k) $855,000 principal amount of Second Debentures on December 15, 2007, and

(l) $1,004,700.84 principal amount of Second Debentures on April 8, 2008 as an inducement for the Holders to enter into an Amendment Agreement at that time, for an aggregate principal amount of all Second Debentures issued equal to $6,239,171.67.

WHEREAS, the obligations of the Company which are due and owing to the Holders are secured by valid and enforceable first priority liens and security interests against all of the assets of the Company pursuant to that certain Security Agreement dated as of December 28, 2006, as may have been amended (the “Security Agreement”)

WHEREAS, Company previously proposed certain waivers and amendments to the First Purchase Agreements, the Second Purchase Agreements, the First Debentures and the Second Debentures, and the Warrants issued in connection with the Debentures in order to facilitate the Company raising capital by means of a sale of shares of common and, with the agreement of the Holders the parties entered into that certain Amendment Agreement dated as of July 30, 2008 (the “Amendment Agreement”);

WHEREAS, under the terms of the Amendment Agreement, the parties, inter alia, agreed to extend the Maturity Date of the Debentures to June 28, 2009 (the “Maturity Date”).  The Debentures have since matured by their terms and are now due and payable in full.  On or around June 30, 2009, the Agent delivered to the Company a demand for payment and a Notice of Event of Default.  A second demand for payment was sent by the Holders on January 14, 2010;

WHEREAS, the Company has requested that the Holders continue to refrain and forbear from exercising certain rights and remedies with respect to the indebtedness owing and has once again requested that the Holders forbear from exercising their rights and  remedies under the various Transaction Documents and under applicable law. The Company has requested additional time to pursue strategic alternatives to restructure the company and its finances, such a restructuring, recapitalization or a similar transaction (the “Transaction”) and the Holders are willing to do so on the terms and conditions set forth herein.

NOW THEREFORE, in consideration of the premises and the mutual agreement contained therein, and for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:

Section 1.                      Definitions and Recitals.  Capitalized terms used and not otherwise defined herein have the meanings ascribed to such terms in the Debentures.  The above recitals shall be incorporated and construed as part of this Agreement.

Section 2.                      Ratification and Incorporation of Purchase Agreement, Debentures, Security Agreement and Related Agreements.  Except as expressly modified by this Agreement, (a) the Company hereby acknowledges, confirms and ratifies all of the terms and conditions set forth in, and all of its obligations under, the First Purchase Agreement, Second Purchase Agreement, First Debentures, Second Debentures, Amendment Agreement, Security Agreement and related Transaction Documents, which documents are valid, binding and in full force and effect and (b) all of the terms and conditions set forth in the foregoing Transaction Documents are legal, valid and binding obligations and are incorporated herein by this reference as if set forth in full herein.

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Section 3.                      Acknowledgement of Indebtedness and Senior Secured Liens.

(a)The Company acknowledges and agrees that as of the date hereof, the aggregate indebtedness (the “Indebtedness”) due under the Debentures to the Holders, as of January 1, 2010, is as follows:

[LIST OF HOLDERS SIGNING AGREEMENT]

The Company represents and agrees that the Indebtedness due the Holders is secured by valid and enforceable first priority liens and security interests against the Collateral, and that it has no offset, defense, counterclaim, dispute or disagreement of any kind or nature whatsoever with respect to the liability or amount of such foregoing Indebtedness or the liens and security interests securing such Indebtedness.

(b)The Company hereby acknowledges and agrees that Debentures have fully matured and that Existing Defaults have occurred and are continuing, each of which constitutes an Event of Default and entitles Holders to accrue interest at the default rate of interest and to exercise its rights and remedies under the Transaction Documents, applicable law or otherwise.  Holders have not waived, presently do not intend to waive and may never waive such existing defaults and nothing contained herein or the transactions contemplated hereby shall be deemed to constitute any such waiver.  The Company hereby acknowledges and agrees that Holders have the right to declare the Indebtedness to be immediately due and payable.

Section 4.                      The Forbearance Period.  In reliance upon the representations, warranties and covenants of the Company contained in this Agreement, and subject to Section 5 below, each Holder agrees that until March 31, 2010, it will forbear from exercising its rights and remedies.

Section 5.                      Termination of Standstill Obligations.

(a)The obligation of any Holder under Section 4 hereof shall terminate (the “Termination”) on the earlier of (i) the date, if any, on which a petition for relief under the United States Bankruptcy Code or any similar state law is filed by or against the Company, (ii) the date that the Company defaults under any of the terms and conditions of this Agreement (iii) the date that any of the Holders determine, in their sole reasonable discretion, that the Company has abandoned seeking a Transaction  or (iv) the date this Agreement is otherwise terminated or expires.

(b)Upon Termination, the agreement of Holders to forbear shall automatically and without further notice or action terminate and be of no force and effect, it being understood and agreed that the effect of such Termination will be to permit Holders to exercise such rights and remedies hereunder, under the Transaction Documents, or applicable law, immediately without any further notice, passage of time or forbearance of any kind.

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(c)The Company agrees that all of the Indebtedness shall, if not sooner paid, be absolutely and unconditionally due and payable in full in cash or other immediately available funds by the Company and the Holders on the Termination.

Section 6.                      Representations and Warranties.  In order to induce the Holders to enter into this Agreement and to forbear with respect to the Existing Defaults in the manner provided in this Agreement, the Company represents and warrants to the Holders as follows:

(a)Power and Authority.  The Company has all requisite corporate power and authority to enter into this Agreement and to carry out the transactions contemplated by, and perform its obligations hereunder.

(b)Authorization of Agreements.  The execution and delivery of this Agreement by the Company and the performance hereunder have been duly authorized by all necessary action, and this Agreement has been duly executed and delivered by the Company.

(c)Enforceability.  This Agreement constitutes the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms.

(d)No Violation or Conflict.  The execution and delivery by the Company of this Agreement and the performance by the Company hereunder do not and will not (i) contravene, in any respect, any provision of any law, regulation, decree, ruling, judgment or order that is applicable to the Borrowers or their properties or other assets, or (ii) result in a breach of or constitute a default under the charter, bylaws or other organizational documents of the Company or any material agreement, indenture, lease or instrument binding upon the Company or its properties or other assets.

(e)Governmental Consents.  No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Company of this Agreement.

Section 7.                      Effect on Agreements.  Except as specifically provided herein, all of the Transaction Documents remain in full force and effect in accordance with their respective terms.  Nothing in this Forbearance Agreement shall extend to or affect in any way any of the rights or obligations of the Company arising under the First Purchase Agreement, Second Purchase Agreement, First Debentures, Second Debentures, Amendment Agreement Security Agreement and related Transaction Documents.

Section 8.                      Waiver of Jury Trial; Governing Law and Consent to Jurisdiction

(a)Jury Trial.  The Company makes the following waiver knowingly, voluntarily, and intentionally, and understands that each of the Holders, in entering into this Agreement, is relying thereon.  THE COMPANY HEREBY IRREVOCABLY WAIVES ANY PRESENT OR FUTURE RIGHT TO A JURY IN ANY TRIAL OF ANY CASE OR CONTROVERSY IN WHICH THE HOLDERS, OR EITHER OF THEM, ARE OR

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BECOME A PARTY (WHETHER SUCH CASE OR CONTROVERSY IS INITIATED BY OR AGAINST THE HOLDERS, OR EITHER OF THEM, OR IN WHICH THE HOLDERS, OR EITHER OF THEM, IS JOINED AS A PARTY LITIGANT), WHICH CASE OR CONTROVERSY ARISES OUT OF, OR IS IN RESPECT OF, ANY RELATIONSHIP BETWEEN THE COMPANY OR ANY SUCH PERSON, AND THE HOLDERS, OR EITHER OF THEM.

(b)Governing Law: Consent To Jurisdiction And Venue.  THIS AGREEMENT AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS AND DECISIONS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES THEREOF REGARDING CONFLICTS OF LAWS, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.  BORROWERS HEREBY CONSENT AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED WITHIN THE COUNTY OF NEW YORK, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWERS AND HOLDERS PERTAINING TO THIS AGREEMENT, THE DEBENTURES OR ANY OF THE OTHER AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT.

Section 9.                      Release and Waivers.

(a)Waiver of Claims by the Company.  The Company hereby acknowledges and agrees that it has no offsets, defenses, claims, or counterclaims against the Agent or Holders, or either of them, or any of the Holders’ respective officers, directors, employees, members, managers, affiliates, attorneys, representatives, predecessors, successors, or assigns with respect to the Indebtedness, or otherwise, and that if the Company now has, or ever did have, any such offsets, defenses, claims, or counterclaims against the Holders, or either of them, or any of the Holders’ respective officers, directors, employees, affiliates, attorneys, representatives, predecessors, successors, or assigns, whether known or unknown, at law or in equity, from the beginning of the world through this date and through the time of execution of this Standstill and Forbearance Agreement, all of them are hereby expressly WAIVED, and the Company hereby RELEASES the Holders and the Holders’ respective officers, directors, employees, affiliates, attorneys, representatives, predecessors, successors, and assigns from any liability therefor.

(b)Release.  In consideration of the agreements of the Holders contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company on behalf of itself and its successors, assigns, heirs, executor, administrator and other legal representatives, hereby, jointly and severally, absolutely, unconditionally and irrevocably releases, remises and forever discharges the Agent and Holders, successors and assigns, and their respective present and former shareholders, affiliates, subsidiaries, divisions, predecessors, directors, officers, attorneys, employees, members, managers, agents and other representatives (the Agent and Holders and all such other parties being hereinafter referred to collectively as the “Releasees” and individually as a “Releasee”), of and from all demands, actions, causes of action, suits,

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covenants, contracts, controversies, agreements, promises, sums of money, accounts, bills, reckonings, damages and any and all other claims, counterclaims, defenses, rights of set off, demands and liabilities whatsoever (individually, a “Claim” and collectively, “Claims”) of every name and nature, known or unknown, suspected or unsuspected, both at law and in equity, which the Company, or any of its officers, directors, employees, successors, assigns, heirs, executor, administrator or other legal representatives, as the case may be, may now or hereafter own, hold, have or claim to have against the Releasees or any of them for, upon, or by reason of any nature, cause or thing whatsoever which arises at any time on or prior to the day and date of this Agreement, for or on account of, or in relation to, or in any way in connection with the Agreements, as amended and supplemented through the date hereof.

(c)Covenant Not to Sue.  The Company, on behalf of itself and its successors, shareholders, assigns, heirs, executor, administrator and other legal representatives, hereby jointly and severally, absolutely, unconditionally and irrevocably, covenants and agrees with each Releasee that it will not sue (at law, in equity, in any regulatory proceeding or otherwise) any Releasee on the basis of any Claim released, remised and discharged by the Company.  If the Company or any party on its behalf violates the foregoing covenant, the Company agrees to pay, in addition to such other damages as any Releasee may sustain as a result of such violation, all attorneys’ fees and costs incurred by any Releasee as a result of such violation.

Section 10.                      Miscellaneous.

(a)This Agreement (i) contains the entire understanding of the parties with respect to the subject matter hereof, (ii) may not be amended except in writing signed by all of the parties hereto, (iii) shall inure to the benefit of the parties hereto and their respective successors and assigns, (iv) may be executed in multiple counterparts, each of which shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.

(b)Any determination that any provision of this Agreement or any application thereof is invalid, illegal, or unenforceable in any respect in any instance shall not affect the validity, legality, or enforceability of such provision in any other instance, or the validity, legality, or enforceability of any other provision of this Agreement.  Section headings used herein are for convenience of reference only, are not part of this Agreement, and are not to be taken into consideration in interpreting this Agreement.

(c)The Company represents and warrants that it (a) has engaged counsel and understands fully the terms of this Agreement and the consequences of the execution and delivery of this Agreement, (b) has been afforded an opportunity to have this Agreement reviewed by, and to discuss this Agreement with such attorneys and other persons as the Company may wish, and (c) has entered into this Agreement and executed and delivered all documents in connection herewith of its own free will and accord and without threat, duress or other coercion of any kind by any person.  The parties hereto acknowledge and agree that neither this Agreement nor the other documents executed pursuant hereto shall be construed more favorably in favor of one than the other based upon which party drafted the same, it being acknowledged that all parties hereto contributed substantially to the negotiation and preparation of this Agreement and the other documents executed pursuant hereto or in connection herewith.

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(d)In making proof of this Agreement, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties hereto.  Delivery of any executed counterpart of this Agreement by telefacsimile or electronic communication shall have the same force and effect as delivery of an original executed counterpart of this Agreement.  Any party delivering an executed counterpart of this Agreement by telefacsimile or electronic communication also shall deliver an original executed counterpart of this Agreement, but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement as to such party or any other party.

The remainder of this page is intentionally blank.  Signature page follows.

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IN WITNESS WHEREOF, the parties have executed this Standstill and Forbearance Agreement as of the date first above written.

ARKADOS GROUP, INC.

By: _____________________________                                                                                     Dated:

Name:

Title:

DEBENTURE HOLDERS SIGNATURE PAGES

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EX-99.2

EXHIBIT 99.2

ARKADOS GROUP, INC.

Amendment No. 1 To 8% Subordinated Note due January 31, 2010

REFERENCE is hereby made to the 8% Subordinated Note due January 31, 2010 (the “Original Note”) of Arkados Group, Inc., a Delaware corporation (the “Company”) in the name of the holder whose name appears below (the “Holder”) originally issued during the period from August 24, 2009 to January 31, 2010.

WHEREAS, the Holder has determined that it its best interest to modify the Original Note to extend the date of maturity.

NOW THEREFORE, in consideration of the agreements set forth in this agreement and those related to the original issuance of the Original Note:

1.           CERTAIN DEFINITIONS.

(a)           Except as otherwise provided in this agreement, all words and terms defined in the Original Note, have the same meanings in this agreement as such defined words and terms  are given in the Original Note.

(b)           “Note” means the Original Note originally issued during the period from August 24, 2009 to January 31, 2010, as previously supplemented and amended and as amended by this agreement and as from time to time further supplemented and amended.

(c)           “Amendment” means this agreement dated February 3, 2010.

2.           EXTENSION OF DUE DATES; WAVIER OF DEFAULT.

(a)           The Original Note is amended to replace each occurrence of the words

 “January 31, 2010” with “March 31, 2010.”

(b)           The Holder waives all past defaults on the Note.

3.           EFFECT OF ORIGINAL NOTE.

Except as supplemented and amended by this  Amendment  and such conforming changes as necessary to reflect the modification herein, all of the provisions of the Original Note shall remain in full force and effect from and after the effective date of this Agreement.

Print Name: ___________________

EX-99.3

EXHIBIT 99.3

THIS NOTE AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGIS­TERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR ANY STATE SECURITIES LAWS OR THE PROVISIONS OF THIS NOTE.

ARKADOS GROUP, INC.

8% SUBORDINATED NOTE

DUE March 31, 2010

Number:

Principal: $

Original Issue Date:                                            , 200

Registered Holder:

                   (name)

Arkados Group, Inc., a Delaware corporation (the “Company”) with principal offices at 220 Old New Brunswick Road, Suite 202, Piscataway, NJ  08854, for value received, hereby promises to pay the registered holder hereof (the “Holder”) the principal sum set forth above on March 31, 2010 (the “Maturity Date”), in such coin or currency of the United States of America as at the time of payment shall be the legal tender for the payment of public and private debts, and to pay interest, less any amounts required by law to be deducted or withheld, computed on the basis of a 365-day year, on the unpaid principal balance hereof from the date hereof (the “Original Issue Date”), at the rate of 8% per year, until such principal sum shall have become due and payable, or has been exchanged pursuant to Section 3 or converted pursuant to Section 4, below.  Interest shall be paid, on Maturity, or if the principal of the Note is earlier exchanged pursuant to Section 3 below or converted pursuant to Section 4 below, upon such exchange or conversion.  All references herein to dollar amounts refers to U.S. dollars.

By acceptance and purchase of this Note, the registered holder hereof agrees with the Company that the Note shall be subject to the following terms and conditions:

1.Authorization of Notes.  The Company has authorized the issue and sale of a 8% Subordinated Note due March 31, 2010 (the “Note,” such term includes any notes which may be issued in exchange or in replacement thereof, together with notes originally due January 31, 2010 which were extended to March 31, 2010) in the aggregate principal amount of not more than U.S. $1,000,000.

2.Transfer or Exchange.  Prior to due presentation to the Company for transfer of this Note, the Company and any agent of the Company may treat the person in whose name this

Note is duly registered on the Company’s Note Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes.

3.Option to Exchange Principal into Equity Securities.  The Company has disclosed to Holder, and Holder acknowledges, that the Company intends to offer securities of the Company (which may consist of voting stock or other securities convertible into Common Stock or warrants to obtain the Common Stock; hereafter, collectively, “Equity Securities”) for sale to one or more investors pursuant to a private offering.  Holder further acknowledges that such offering may be made simultaneously with the offering of preferred securities of the Company to strategic investors (the “Strategic Securities”).  The Company hereby agrees not to complete such an offering of Equity Securities or Strategic Securities without first offering to Holder the opportunity to convert all or a portion of principal due on this Note to the purchase of such Equity Securities upon the same terms offered to other investors, less a discount of 33%.  The Company shall give notice to Holder prior to any such sale, which notice shall fully disclose the material terms thereof, and Holder shall have a prior right and option for 5 days following receipt of such notice to convert all or any portion of the principal due on this Note the purchase of a portion of the Equity Securities.  At the time of closing on the purchase of such Equity Securities, the Company shall pay all accrued and unpaid interest due on this Note and exchange the Equity Securities for the original executed Note, conditioned upon the Holder executing requisite subscription documents for the purchase of the Equity Securities and other documents reasonably necessary to evidence the cancellation of this Note

4.Mandatory Conversion.  Subject to the provisions of this Section 4, the Company may, at its sole election, any time until principal and interest on this Note is paid in full, upon five (5) days written notice to the holders of the Notes, to require any or all Holders of the Notes to convert outstanding principal into Equity Securities by applying such principal to the purchase price of the Equity Securities and paying all accrued and unpaid interest on the date of such conversion.

4.1Notice.  The Company shall notify the holder of the Company's intent to effect such a conversion by giving written notice ("Notice of Mandatory Conversion") to the holders of the Notes by facsimile, original to follow by 2-day courier, before midnight, New York City time, on the business day immediately preceeding the date of such mandatory conversion.

4.2Effect of Mandatory Conversion.  If the Company so elects, all principal due on the Notes shall be automatically converted into Equity Securities, as of the date the Notice of Mandatory Conversion.  Each holder of Notes shall hereafter promptly surrender the original executed Note in exchange for the Equity Securities and the payment of all accrued and unpaid interest at the principal office of the Company and shall thereupon be entitled to receive certificates evidencing the Equity Securities into which the principal and interest on the Notes is converted. Each holder of Notes shall be deemed to be a holder of record of the Equity Securities issuable upon such conversion as of the effective date the conversion set forth in the Notice of Mandatory Conversion, notwithstanding that the Note shall not have been surrendered to the Company, the accrued and unpaid interest shall not have been paid or that certificates evidencing Equity Securities shall not then have been actually delivered to such holder, and from and after such date this Note shall only represent the right to receive interest and the Equity Securities.

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4.3Conditions to Mandatory Conversion.  The Company may only call a for Mandatory Conversion in the event:

4.3.1   the Company, on or before the effective date of the conversion, shall have eliminated all outstanding secured debt in exchange for Common Stock (or securities convertible into Common Stock upon the authorization of new shares of common stock, hereafter referred to as “Substitute Stock”) and payment if up to the sum of $2.5 million from the proceeds of the sale of Equity Securities and Strategic Securities (“Secured Restructuring”), and

4.3.2   the aggregate debt owed to employees and unsecured creditors holding Notes shall, after giving effect to the conversion of secured debt and the issuance of common stock or Substitute Stock for such unsecured debt, be equal to or less than $$2,000,000 (“Unsecured Restructuring”), and

4.3.3   the Equity Securities are being sold for cash to investors to at a gross price equal to or less than $200,000 per the number of shares of Common Stock (or Substitute Stock) which would represent (or, in the case of the Substitute Stock automatically converted into) 1% of the shares of Common Stock outstanding after giving effect to the Secured and Unsecured Restructuring.  For example, if $5 million is invested by strategic investors in preferred and $4 mil buys 20% of the common, after the Secured and Unsecured Restructuring, $1,000,000 of Principal amount of the Notes may be converted automatically into 7.5% of the Company’s Common Stock or that amount Substitute Stock which would represent 7.5% of the Company’s Common Stock after its conversion.

5.           Restrictions on Transferability.  The Note shall not be transferred, hypothecated or assigned before satisfaction of the conditions specified in this Section 5, which conditions are intended to ensure compliance with the provisions of the Securities Act with respect to the Transfer of any Note.  Holder, by acceptance of this Note, agrees to be bound by the provisions of this Section 5.

5.1           Restrictive Legend.  The Holder by accepting this Note agrees that this Note may not be assigned or otherwise transferred unless and until (i) the Company has received an opinion of counsel for the Holder that such securities may be sold pursuant to an exemption from registration under the Securities Act or (ii) a registration statement relating to such securities has been filed by the Company and declared effective by the Commission.

Except as otherwise provided in this Sec­tion 5, the Note shall be stamped or otherwise imprinted with a legend in substantially the following form:

“This Note and the securities represented hereby have not been regis­tered under the Securities Act of 1933, as amended, or any state securities laws and may not be transferred in violation of such Act, the rules and regulations thereunder or any state securities laws or the provisions of this Note.”

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5.2           Notice of Proposed Transfers.  Prior to any Transfer or attempted Transfer of any Note, the Holder shall give five (5) days’ prior written notice (a “Transfer Notice”) to the Company of Holder’s intention to effect such Transfer, describing the manner and circumstances of the proposed Transfer, and obtain from counsel to Holder an opinion that the proposed Transfer of such Note may be effected without registration under the Securities Act or state securities laws.  After the Company’s receipt of the Transfer Notice and opinion, such Holder shall thereupon be entitled to Transfer such Note, in accordance with the terms of the Transfer Notice.  Each Note issued upon such Transfer shall bear the restrictive legends set forth in Section 5.1, unless in the opinion of such counsel such legend is not required in order to ensure compliance with the Securities Act.

5.3           Termination of Restrictions.  Notwithstand­ing the foregoing provisions of Section 5, the restrictions imposed by this Section upon the transferability of the Notes, and the legend requirements of Section 5.1 shall terminate as to any particular Note (i) when and so long as such security shall have been effectively registered under the Securities Act and applicable state securities laws and disposed of pursuant thereto or (ii) when the Company shall have received an opinion of counsel that such shares may be transferred with­out registration thereof under the Securities Act and applicable state securities laws.  Whenever the restrictions imposed by Section 5 shall terminate as to this Note, as hereinabove provided, the Holder hereof shall be entitled to receive from the Company upon written request of the Holder, at the expense of the Company, a new Note bearing the following legend in place of the restrictive legend set forth above or the Note stamped with the following legend:

“THE RESTRICTIONS ON TRANSFERABIL­ITY OF THE WITHIN NOTE CONTAINED IN SECTION 5 HEREOF TERMINATED ON ___________, 20__, AND ARE OF NO FURTHER FORCE AND EFFECT.”

All Notes issued upon registration of transfer, division or combination of, or in substitution for, any Note or entitled to bear such legend shall have a similar legend endorsed thereon.  Whenever the restrictions imposed by this Section shall terminate as to any share of Restricted Common Stock, as hereinabove provided, the holder thereof shall be entitled to receive from the Company, at the Company’s expense, a new certificate representing such Common Stock not bearing the restrictive legends set forth in Section 5.1.

6.           Subordination. Any right of the Holder to payment of principal or interest from the Company shall be subordinated to the claims and rights of the holders of the  Senior Debt (“Senior Debt Holders”). “Senior Debt” means all Indebtedness of the Company to financial institutions or secured debt other than the Notes, whether outstanding on the date of execution of this Note or thereafter created, incurred or assumed, except (x) any such Indebtedness that by the terms of the instrument or instruments by which such Indebtedness was created, assumed or incurred expressly provides that it (i) is junior in right of payment to the Notes or (ii) ranks pari passu in right of payment with the Notes and (y) any amendments, modifications or supplements to, or any renewals, extensions, deferrals, refinancing and refunding of, any of the foregoing.  Any cash payment of principal or interest to the Holder shall be collected, enforced or received by the Holder as trustee for the Senior Debt Holders and paid over to the Senior Debt Holders. The Holder agrees that in the event of any payment of principal or interest by the Company to

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the Holder by reason of any receivership, insolvency or bankruptcy proceeding, or proceeding for reorganization or readjustment of the Company or its properties, or otherwise, then, in any such event, the Senior Debt Holders shall be preferred in the payment of their claims over the claim of the Holder to payment of principal or interest against the Company or its properties, and the claims of the Senior Debt Holders shall be first paid and satisfied in full before any payment or distribution of any kind or character, whether in cash or property, shall be made to the Holder. Provided, however, that this Section 8 shall not apply to any payment of principal or interest made to the Holder while the Company is solvent and not in default with respect to its Senior Debt.

7.           Replacement of Note Certificate. Upon receipt of evidence satisfactory to the Company of the certificate loss, theft, destruction or mutilation of the Note certificate and, in the case of any such loss, theft or destruction, upon delivery of a bond of indemnity satisfactory to the Company, or, in the case of any such mutilation, upon surrender and cancellation of the Note certificate, the Company will issue a new Note certificate, of like tenor, in lieu of such lost, stolen, destroyed or mutilated Note certificate.

8.           Default. If any of the following events (herein called “Events of Default”) shall occur:

(a) if the Company shall default in the payment or prepayment of any part of the principal of any of the Notes after the same shall become due and payable, whether at maturity or at a date fixed for prepayment or by acceleration or otherwise, and such default shall continue for more than 30 days; or

(b) if the Company shall default in the payment of any installment of interest on any of the Notes for more than 30 days after the same shall become due and payable; or

(c) if the Company shall make an assignment for the benefit of creditors; or

(d) if the Company shall dissolve; terminate its existence; become insolvent on a balance sheet basis; commence a voluntary case under the federal bankruptcy laws or under any other federal or state law relating to insolvency or debtor’s relief; permit the entry of a decree or order for relief against the Company in an involuntary case under the federal bankruptcy laws or under any other applicable federal or state law relating to insolvency or debtor’s relief; permit the appointment or consent to the appointment of a receiver, trustee, or custodian of the Company or of any of the Company’s property; make an assignment for the benefit of creditors; or

(e) if the Company shall default in the performance of or compliance with any agreement, condition or term contained in this Note or any of the other Notes and such default shall not have been cured within 30 days after such default; or

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(f) Any of the representations or warranties made by the Company herein, in the Subscription Agreement, or in any certificate or financial or other statements heretofore or hereafter furnished by or on behalf of the Company in connection with the execution and delivery of this Note or the Subscription Agreement shall be false or misleading in any material respect at the time made;

then and in any such event the Holder of this Note shall have the option (unless the default shall have theretofore been cured) by written notice to the Company to declare the Note to be due and payable, whereupon the Note shall forthwith mature and become due and payable, at the applicable prepayment price on the date of such notice, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived, anything contained in this Note to the contrary notwithstanding. Upon the occurrence of an Event of Default, the Company shall promptly notify the Holder of this Note in writing setting out the nature of the default in reasonable detail.

9.           Remedies on Default.

9.1           Acceleration of Maturity.  If any Event of Default shall have occurred and be continuing, the Holder or Holders of at least 50.1% in aggregate principal amount of outstanding Notes may, by notice to the Company, declare the entire outstanding principal balance of the Notes, premium, if any, and all accrued and unpaid interest thereon, to be due and payable immediately, and upon any such declaration the entire outstanding principal balance of the Notes, premium, if any, and said accrued and unpaid interest shall become and be immediately due and payable, without presentment, demand, protest or other notice whatsoever, all of which are hereby expressly waived, anything in the Notes (except as set forth in Section 11 hereof) to the contrary notwithstanding.

9.2           Conduct no Waiver, Collection Expenses.  No course of dealing on the part of any Holder, nor any delay or failure on the part of any Holder to exercise any of its rights, shall operate as a waiver of such right or otherwise prejudice such Holder's rights, powers and remedies. If the Company fails to pay, when due, the principal or the premium, if any, or the interest on any Note, the Company will pay to each Holder, to the extent permitted by law, on demand, all costs and expenses incurred by such Holder in the collection of any amount due in respect of any Note hereunder, including reasonable legal fees incurred by such Holder in enforcing its rights hereunder.

9.3           Annulment of Acceleration.  If a declaration is made in accordance with Section 9.1, then and in-every such case, the Holder or Holders of at least 50.1% in aggregate principal amount of outstanding Notes may, by an instrument delivered to the Company, annul such declaration and the consequences thereof, provided that at the time such declaration is annulled:

(i)           no judgment or decree has been entered for the payment of any monies due on the Notes or pursuant to this Agreement;

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(ii)           all arrears of interest on the Notes and all other sums payable on the Notes and pursuant to this Agreement (except any principal of or interest or premium on the Notes which has become due and payable by reason of such declaration) shall have been duly paid; and

(iii)           every other Event of Default shall have been duly waived or otherwise made good or cured.

10.           Amendments. With the consent of the Holders of more than 50.1% in aggregate principal amount of the Notes at the time outstanding, the Company, when authorized by a resolution of its Board of Directors, may enter into a supplementary agreement for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Note or of any supplemental agreement or modifying in any manner the rights and obligations of the holders of Notes or Common Stock issued upon conversion of the Notes, and of the Company, provided, however, that no such supplemental agreement shall (a) extend the fixed maturity of any Note, or reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest thereon, or alter or impair the right to convert the same into Common Stock at the rates and upon the terms provided in this Note, without the consent of the Holder of each of the Notes so affected, or (b) reduce the aforesaid percentage of Notes, the Holders of which are required to consent to any supplemental agreement, without the consent of the Holders of all Notes then outstanding.

11.           Changes, Waivers. etc.  Neither this Note nor any provisions hereof may be changed, waived, discharged or terminated orally, but only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought, except to the extent provided in Section 10 of this Note.

12.           Entire Agreement. This Note embodies the entire agreement and understanding between the Holder and the Company and supersedes all prior agreements and understandings relating to the subject matter hereof.

13.           Governing Law, Jurisdiction, etc.

(a) GOVERNING LAW. THIS AGREEMENT AND THE NOTES SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAW OF THE STATE OF NEW YORK EXCLUDING CHOICE-OF-LAW PRINCIPLES OF THE LAW OF SUCH STATE THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF A JURISDICTION OTHER THAN SUCH STATE.

(b) Submission to Jurisdiction. Each of the parties hereto hereby irrevocably and unconditionally consents to submit to the exclusive jurisdiction of the courts of the State of New York and of the United States of America, in each case located in the County of New York, for any action, proceeding or investigation in any court or before any governmental authority

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("Litigation") arising out of or relating to the Note and the transactions contemplated thereby (and agrees not to commence any Litigation relating thereto except in such courts), and further agrees that service of any process, summons, notice or document by U.S. registered mail to its respective address set forth in the Letter Subscription Agreement shall be effective service of process for any Litigation brought against it in any such court. Each of the parties hereto hereby irrevocably and unconditionally waives any objection to the laying of venue of any Litigation arising out of the Note or the transactions contemplated hereby in the courts of the State of New York or the United State of America, in each case located in the County of New York, and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such Litigation brought in any such court has been brought in an inconvenient forum.

(c) Service of Process.  Nothing herein shall affect the right of any holder of a Note to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Company in any other jurisdiction.

(d) WAIVER OF JURY TRIAL.  THE COMPANY HEREBY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY ACTION, PROCEEDING OR LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH ANY OF THE NOTES.

(e) In the event of any dispute, question, controversy or claim arising among the parties hereto which shall arise out of or in connection with this Note, the parties shall keep the proceeding related to such controversy in strict confidence and shall not disclose the nature of said dispute, the status of the proceeding or any testimony, documents or information obtained or exchanged in the course of said proceeding without the express written consent of all parties to such dispute.

ARKADOS GROUP, INC.

By:

Larry Crawford, CFO

Number:

Name of Holder:

Principal:    $

Original Issue Date:

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