UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DCD.C. 20549

FORM 10-Q

(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended June 30, 2004
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from: ____________ to ____________

(Mark One)


þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2007


o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 000-50798

Color Kinetics Incorporated ~~(Exact name of registrant as specified in its charter)~~

Delaware		04-3391805
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

(Exact name of registrant as specified in its charter)

10 Milk Street, Suite 1100 Boston, Massachusetts 02108 (Address of principal executive offices) (617) 423-9999 (Registrant’s telephone number, including area code)


Delaware		04-3391805
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

~~Indicate~~10 byMilk ~~check~~Street, ~~mark whether registrant (1)~~Suite ~~has filed all reports required to~~1100 beBoston, ~~filed~~Massachusetts ~~by Section 13 or 15~~02108 (d)Address of ~~the~~principal ~~Securities~~executive ~~Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports~~offices)~~, and (2) has been subject to such filing requirements for the past 90 days. Yes o No x~~

~~Indicate~~Telephone byNumber: ~~check mark whether the registrant is an accelerated filer~~ (~~as defined in Rule~~617) ~~12b~~423-29999 (Registrant’s oftelephone ~~the~~number, ~~Act): Yes~~including oarea ~~No x~~ code)

AsIndicate ofby ~~August~~check mark whether the registrant (1) 6,has ~~2004,~~filed ~~Color~~all ~~Kinetics~~reports ~~Incorporated~~required ~~had~~to ~~17,880,306~~be ~~shares~~filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or ~~common~~for ~~stock,~~such ~~par~~shorter ~~value~~period ~~$0.001~~that ~~per~~the ~~share~~registrant was required to file such reports), ~~outstanding.~~and (2) has been subject to such filing requirements for the past 90 days: Yes þ No o

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

~~COLOR~~Large ~~KINETICS~~accelerated ~~INCORPORATED~~ filer o Accelerated filer þ Non-accelerated filer o

~~FORM~~Indicate 10by check mark whether the registrant is a shell company (as defined in Rule 12b-Q2 of the Exchange Act).

~~INDEX~~ Yes o No þ

	Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003		3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2004 and June 30, 2003 (unaudited)		4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and June 30, 2003 (unaudited)		5
Notes to Unaudited Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		9
Item 3. Quantitative and Qualitative Disclosures About Market Risk		13
Item 4. Controls and Procedures		14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		14
Item 2. Changes in Securities and Use of Proceeds		14
Item 3. Defaults Upon Senior Securities		14
Item 4. Submission of Matters to a Vote of Security Holders		14
Item 5. Other Information		15
Item 6. Exhibits and Reports on Form 8-K		15
Signatures		15
Exhibit Index		16
EX-31.1 SECTION 302 CERTIFICATION OF C.E.O.
EX-31.2 SECTION 302 CERTIFICATION OF C.F.O.
EX-32.1 SECTION 906 CERTIFICATION OF C.E.O.
EX-32.2 SECTION 906 CERTIFICATION OF C.F.O.

As of April 30, 2007, there were 21,325,586 shares of the registrant’s Common Stock, $.001 par value per share, outstanding.

COLOR KINETICS INCORPORATED
FORM 10-Q
FOR THE THREE MONTHS ENDED March 31, 2007
INDEX


		Page No.
	PART I. FINANCIAL INFORMATION

Item 1.	Unaudited Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006		3

	Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2007 and 2006		4

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006		5

	Notes to Unaudited Condensed Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		16

Item 4.	Controls and Procedures		16

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		16

Item 1A.	Risk Factors		17

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		17

Item 3.	Defaults Upon Senior Securities		17

Item 4.	Submission of Matters to a Vote of Security Holders		17

Item 5.	Other Information		17

Item 6.	Exhibits		17

Signatures			18
EX-10.2 EMPLOYEE STOCK PURCHASE PLAN
EX-10.33 2007 SENIOR MANAGEMENT BONUS PLAN
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-32.1 SECTION 906 CERTIFICATION OF CEO AND CFO

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

Color Kinetics Incorporated ~~Condensed Consolidated Balance Sheets~~ ~~(In thousands)~~

	June 30,			December 31,
	2004			2003
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents	$	54,675		$	5,686
Restricted cash		486			479
Accounts receivable, net of allowance for doubtful accounts of approximately $300 and $270 in 2004 and 2003, respectively		4,641			4,015
Accounts receivable from related parties		109			30
Inventory		5,799			5,024
Prepaid expenses and other current assets		1,168			429
Total current assets		66,878			15,663
PROPERTY AND EQUIPMENT — net		1,058			1,065
INVESTMENT IN JOINT VENTURE		448			289
RESTRICTED CASH—Long-term portion		1,100			1,100
TOTAL ASSETS	$	69,484		$	18,117
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable	$	3,052		$	1,483
Accounts payable to related party		—			21
Accrued expenses		1,481			812
Accrued compensation		1,025			1,471
Accrued restructuring		416			426
Accrued warranty		701			404
Deferred revenue		446			387
Total current liabilities		7,121			5,004
ACCRUED RESTRUCTURING		831			1,034
COMMITMENTS AND CONTINGENCIES
REDEEMABLE CONVERTIBLE PREFERRED STOCK, at liquidation value		—			47,999
STOCKHOLDERS’ EQUITY (DEFICIENCY):
Common stock, authorized, 100,000 shares; issued and outstanding 17,880 and 2,804 shares in 2004 and 2003, respectively		18			3
Additional paid-in capital		96,953			304
Accumulated other comprehensive income (loss)		(22	)		14
Accumulated deficit		(35,417	)		(36,241	)
Total stockholders’ equity (deficiency)		61,532			(35,920	)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)	$	69,484		$	18,117

Condensed Consolidated Balance Sheets
(In thousands, except per share data)

See accompanying notes to unaudited condensed consolidated financial statements.


	March 31,			December 31,
	2007			2006
ASSETS
CURRENT ASSETS:
Cash and equivalents	$	44,522		$	60,997
Investments		56,882			38,985
Restricted cash		500			500
Accounts receivable, net		12,755			11,480
Accounts receivable from related party		—			82
Inventory		8,963			6,805
Prepaid expenses and other current assets		2,003			3,159

Total current assets		125,625			122,008
PROPERTY AND EQUIPMENT—net		2,592			2,199
INTANGIBLE ASSETS—net		278			282
RESTRICTED CASH—Non-current portion		464			—

TOTAL ASSETS	$	128,959		$	124,489


LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable	$	5,354		$	3,690
Accrued expenses		2,347			2,238
Accrued compensation		1,999			3,073
Accrued warranty		986			1,007
Accrued restructuring		152			243
Deferred revenue		1,464			195

Total current liabilities		12,302			10,446

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common stock, $0.001 par value		21			21
Additional paid-in capital		141,609			140,498
Accumulated other comprehensive loss		(107	)		(112	)
Accumulated deficit		(24,866	)		(26,364	)

Total stockholders’ equity		116,657			114,043

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	128,959		$	124,489

3See accompanying notes to unaudited condensed consolidated financial statements.

~~Table of Contents~~3

ColorTable Kinetics Incorporated Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except per share data) Contents

	Three Months Ended June 30,					Six Months Ended June 30,
	2004		2003			2004		2003
REVENUES (1):
Lighting systems	$	8,734	$	6,711		$	15,492	$	12,435
OEM and licensing		1,424		584			2,884		941
Total revenues		10,158		7,295			18,376		13,376
COST OF REVENUES:
Lighting systems		4,279		3,200			7,646		6,189
OEM and licensing		771		309			1,453		521
Total cost of revenues		5,050		3,509			9,099		6,710
GROSS PROFIT		5,108		3,786			9,277		6,666
OPERATING EXPENSES:
Selling and marketing		2,065		2,086			3,893		4,040
Research and development		804		612			1,605		1,255
General and administrative (2)		1,729		1,032			3,104		2,213
Restructuring		—		—			—		161
Total operating expenses		4,598		3,730			8,602		7,669
INCOME (LOSS) FROM OPERATIONS		510		56			675		(1,003	)
INTEREST INCOME (EXPENSE):
Interest income		46		18			77		36
Interest expense		—		(1	)		—		(3	)
Total interest income, net		46		17			77		33
EQUITY IN EARNINGS OF JOINT VENTURE		19		11			152		185
NET INCOME (LOSS)	$	575	$	84		$	904	$	(785	)
EARNINGS (LOSS) PER SHARE:
Basic	$	0.13	$	0.03		$	0.25	$	(0.28	)
Diluted	$	0.04	$	0.01		$	0.06	$	(0.28	)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic		4,295		2,786			3,549		2,784
Diluted		15,772		12,411			15,416		2,784
	Three Months Ended June 30,					Six Months Ended June 30,
	2004		2003			2004		2003
(1) Includes revenues from related parties as follows:
Lighting systems	$	1,039	$	1,344		$	1,919	$	2,581
OEM and licensing		30		43			60		90
Total related party revenues	$	1,069	$	1,387		$	1,979	$	2,671
(2) Includes stock-based compensation as follows:	$	269	$	18		$	331	$	37

Color Kinetics Incorporated

~~See~~Condensed ~~accompanying~~Consolidated ~~notes~~Statements toof ~~unaudited~~Income (In ~~condensed~~thousands, ~~consolidated~~except ~~financial~~per ~~statements.~~ share data)


	Three Months Ended March 31,
	2007		2006
REVENUES (1):
Lighting systems	$	16,966	$	13,098
OEM and licensing		1,818		1,560

Total revenues		18,784		14,658
COST OF REVENUES:
Lighting systems		7,885		6,099
OEM and licensing		553		540

Total cost of revenues		8,438		6,639

GROSS PROFIT		10,346		8,019

OPERATING EXPENSES:
Selling and marketing		4,561		3,755
Research and development		2,286		1,604
General and administrative		3,264		3,091

Total operating expenses		10,111		8,450

INCOME (LOSS) FROM OPERATIONS		235		(431	)
INTEREST INCOME		1,263		562
EQUITY IN EARNINGS OF JOINT VENTURE		—		57

NET INCOME	$	1,498	$	188


EARNINGS PER SHARE:
Basic	$	0.07	$	0.01
Diluted	$	0.07	$	0.01
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic		21,312		18,410
Diluted		22,209		19,946


	Three Months Ended March 31,
	2007		2006
(1) Includes revenues from related parties as follows:
Lighting systems	$	—	$	778
OEM and licensing		—		43

Total related party revenues	$	—	$	821

~~Color~~See ~~Kinetics Incorporated Condensed~~accompanying ~~Consolidated~~notes ~~Statements~~to ofunaudited ~~Cash~~condensed ~~Flows~~consolidated ~~(Unaudited) (In~~financial ~~thousands)~~statements.

	Six Months Ended June 30,
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	904		$	(785	)
Adjustments to reconcile net income (loss) to cash from operating activities:
Depreciation and amortization		381			458
Stock-based compensation		331			37
Equity in earnings of joint venture		(152	)		(185	)
Changes in current assets and liabilities:
Accounts receivable		(705	)		(1,379	)
Inventory		(775	)		(72	)
Prepaid expenses and other current assets		(739	)		45
Restricted cash		(7	)		250
Accounts payable		1,548			(396	)
Accrued expenses		520			4
Deferred revenue		59			136
Accrued restructuring		(213	)		(273	)
Cash flows from operating activities		1,152			(2,160	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(374	)		(184	)
Cash flows from investing activities		(374	)		(184	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under equipment note payable and line of credit		—			(60	)
Proceeds from the exercise of stock options		24			7
Proceeds from issuance of redeemable convertible preferred stock — net of issuance costs		13,003			—
Proceeds from issuance of common stock—net of issuance costs		35,227			—
Cash flows from financing activities		48,254			(53	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH		(43	)		2
INCREASE (DECREASE) IN CASH AND EQUIVALENTS		48,989			(2,395	)
CASH AND EQUIVALENTS—Beginning of period		5,686			7,689
CASH AND EQUIVALENTS—End of period	$	54,675		$	5,294
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	—		$	2
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Conversion of redeemable convertible preferred stock	$	61,082		$	—

SeeTable accompanyingof notes to unaudited condensed consolidated financial statements. Contents

5Color Kinetics Incorporated

~~Table~~Condensed Consolidated Statements of ~~Contents~~Cash Flows (In thousands)

Color Kinetics Incorporated Notes to Unaudited Condensed Consolidated Financial Statements


	Three Months Ended March 31,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,498		$	188
Adjustments to reconcile net income to cash from operating activities:
Depreciation and amortization		354			247
Stock-based compensation		821			547
Equity in earnings of joint venture		—			(57	)
Common stock issued for services		13			23
Changes in assets and liabilities:
Accounts receivable		(1,193	)		(761	)
Inventory		(2,158	)		380
Prepaid expenses and other current assets		1,156			(1,233	)
Accounts payable		1,664			688
Accrued expenses		(986	)		(787	)
Deferred revenue		1,269			24
Accrued restructuring		(91	)		(95	)

Cash flows from operating activities		2,347			(836	)


CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments		(35,057	)		(6,768	)
Maturities of investments		17,164			—
Purchases of property and equipment		(742	)		(444	)
Purchase of patent		—			(300	)
Restricted cash		(464	)		500

Cash flows from investing activities		(19,099	)		(7,012	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options		139			179
Proceeds from issuance of common stock under the employee stock purchase plan		137			132

Cash flows from financing activities		276			311


EFFECT OF EXCHANGE RATE CHANGES ON CASH		1			(2	)

DECREASE IN CASH AND EQUIVALENTS		(16,475	)		(7,539	)
CASH AND EQUIVALENTS—Beginning of period		60,997			43,032

CASH AND EQUIVALENTS—End of period	$	44,522		$	35,493

1.See ~~Nature~~accompanying ofnotes ~~Business~~to ~~and~~unaudited ~~Basis~~condensed ofconsolidated ~~Presentation~~financial statements.

~~Nature of Business – Color Kinetics Incorporated, incorporated on September 15,~~5 1997, is a pioneer in the design, marketing and licensing of intelligent solid-state lighting systems. We sell our products through our direct sales force and network of manufacturer’s representatives and distributors.

BasisTable of Presentation –The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted in accordance with such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2003 included in our Registration Statement on Form S-1 (File No. 333-114386) (the “Registration Statement on Form S-1”) filed with the Securities and Exchange Commission. Contents

InColor ~~the~~Kinetics ~~opinion of management, the accompanying unaudited condensed consolidated~~Incorporated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for their fair presentation in conformity with GAAP. Our operating results for interim periods presented are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2004 or future quarters.

2.Notes ~~Initial~~to ~~Public~~Unaudited ~~Offering~~ Condensed Consolidated Financial Statements

On June 22, 2004, we completed the initial public offering of 4,000,000 shares of our common stock at a price to the public of $10.00 per share. We received net proceeds from the offering of $35,227,311, after deducting the underwriting discount of $2,800,000 and other direct costs of $1~~,972,689~~. WeNature ~~have invested the net proceeds in cash equivalents. In connection with the initial public offering, all 20,381,610 shares~~ of ~~our~~Business ~~preferred stock then issued~~ and ~~outstanding~~ ~~were~~Basis ~~converted into 11,069,031 shares~~ of ~~common stock. Included in~~Presentation ~~the conversion of preferred stock to common stock were 3,484,849 shares of Series F Preferred Stock issued in January and February 2004 for net proceeds of $13,002,687.~~

InNature ~~addition~~of Business – Color Kinetics Incorporated, ~~during~~incorporated ~~the~~in ~~quarter~~Delaware ~~ended~~on ~~June~~September 3015, ~~2004~~1997, designs, ~~we:~~sells and markets LED lighting systems and related OEM components and licenses its intellectual property. We sell our products through our direct sales force and network of manufacturer’s representatives and distributors.

•Basis ~~Completed~~of aPresentation ~~1-for-2~~–The ~~reverse~~accompanying ~~stock~~unaudited ~~split~~condensed ofconsolidated ~~our~~financial ~~common~~statements ~~stock~~have been prepared in ~~May~~accordance ~~2004.~~with ~~All~~the ~~share~~rules and ~~per~~regulations ~~share~~of the Securities and Exchange Commission regarding interim financial reporting. Certain information ~~presented~~and ~~herein~~footnote ~~has~~disclosures normally ~~been~~included ~~adjusted~~in toconsolidated ~~reflect~~financial ~~this~~statements ~~split;~~prepared •in ~~Increased~~accordance ~~the~~with ~~number~~accounting principles ofgenerally ~~authorized~~accepted ~~shares~~in ofthe ~~our~~United ~~common~~States ~~stock~~of ~~from~~America ~~41,000,000~~have tobeen ~~100,000,000~~condensed ~~shares~~or omitted in accordance ~~May~~with ~~2004;~~such rules and •regulations. ~~Adopted~~These condensed consolidated financial statements should be read in ~~April~~conjunction ~~2004~~with the ~~2004~~annual ~~employee~~audited ~~stock~~consolidated ~~purchase~~financial ~~plan~~statements and ~~2004~~notes thereto ~~employee~~as ~~stock~~of ~~incentive~~and ~~plan~~for ~~under~~the ~~which~~year weended ~~are~~December 31, ~~authorized~~2006 toincluded ~~issue~~in upour toAnnual aReport ~~maximum~~on ofForm ~~400,~~10-K (File No. 000-50798) ~~and~~filed ~~1,750,000~~with ~~shares,~~the ~~respectively,~~Securities ofand ~~common~~Exchange ~~stock~~Commission.

3In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for their fair presentation in conformity with GAAP. ~~Revenue~~Our ~~Recognition~~operating results for the interim period presented are not necessarily indicative of the results that may be expected for the full year ending December 31, 2007 or any future periods.

We recognize revenues in connection with sales of our lighting systems and OEM products when all of the following conditions have been met: (1) evidence exists of an arrangement with the customer, typically consisting of a purchase order or contract; (2) our products have been delivered and risk of loss has passed to the customer, which typically occurs when a product is shipped under our customary terms, generally FOB shipping point; (3) the amount of revenue to which we are entitled is fixed or determinable; and (4) we believe it is probable that we will be able to collect the amount due to us from our customer. ToRevenue ~~the extent that one or more of these conditions is not present, we~~Recognition delay recognition of revenue until all the conditions are present. We classify the amount of freight that is invoiced to our customers as revenue, with the corresponding cost classified as cost of revenues.

We ~~offer~~recognize revenues in connection with sales of our lighting systems ~~customers~~and ~~limited~~OEM ~~rights~~products ofwhen ~~return,~~all ~~which~~of ~~typically~~the ~~provide~~following ~~that~~conditions ~~within~~have 30been met: (1) ~~days~~evidence exists of ~~shipment~~an arrangement with the customer, typically consisting of a purchase order or contract; (2) our products inhave ~~unopened~~been delivered and ~~saleable~~title ~~condition~~and ~~may,~~risk atof ~~our~~loss ~~discretion~~has passed to the customer, bewhich ~~returned~~typically tooccurs uswhen ~~for~~a ~~refund,~~product ~~net~~is ofshipped aunder ~~15%~~our ~~restocking~~customary ~~fee.~~terms, Wegenerally ~~also~~FOB ~~provide~~shipping ~~certain~~point; ~~distributors~~(3) the ~~with~~amount ~~limited~~of ~~stock~~revenue to which we are ~~rotation~~entitled ~~rights.~~is ~~Based~~fixed onor ~~historical~~determinable; ~~experience,~~and (4) we ~~provide~~believe ~~for~~it ~~potential~~is probable that we will be able to ~~returns~~collect ~~from~~the ~~customers~~amount ~~through~~due ato ~~sales~~us ~~return~~from ~~reserve~~our customer. ~~The~~To ~~reserve~~the isextent ~~evaluated~~that one or more of these conditions ~~and~~is ~~adjusted~~not aspresent, we defer recognition of revenue until all the conditions ~~warrant~~are present. AnWe ~~allowance~~classify the ~~for~~amount ~~doubtful~~of ~~accounts~~freight that is ~~provided~~ invoiced to ~~reserve~~our ~~for~~customers ~~credit~~as ~~losses~~revenue, aswith athe ~~result~~corresponding ofcost classified ~~customers’~~as ~~inability~~cost ~~to pay~~of revenues.

4We offer our lighting systems customers limited rights of return, which typically provide that within 30 days of shipment products in unopened and saleable condition may, at our discretion, be returned to us for refund, on terms which may include a 15% restocking fee. ~~Stock~~We also provide certain distributors with limited stock rotation rights. Based ~~Compensation~~on historical experience, we provide for potential returns from customers through a sales return reserve, included in accrued expenses. The reserve is evaluated and adjusted as conditions warrant. An allowance for doubtful accounts is also provided to reserve for credit losses as a result of customers’ inability to pay.

We ~~apply~~recognize ~~the~~licensing ~~intrinsic~~revenues ~~value~~based ~~method~~on ofroyalty ~~accounting~~reporting ~~for~~from ~~stock~~licensees. ~~options~~We ~~granted~~typically toreceive ~~employees~~these ~~and~~reports ~~apply~~on ~~the~~a ~~fair~~quarterly ~~value~~basis ~~method~~in ~~for stock options and awards granted to non-employees~~arrears.

In accordance with the intrinsic value method, we determine the compensation associated with stock awards to employees as the difference, if any, between the fair value of the underlying common stock on the date compensation is measured and the price an employee must pay to exercise the award3. ~~The measurement date for employee awards is generally the date of grant. Under the fair value method, we determine the compensation associated with stock awards to non~~Stock-~~employees~~Based ~~based on the estimated fair value of the award, measured using~~Compensation ~~either current market data or an established option pricing model. The measurement date for non-employee awards is generally the date the performance of services is complete.~~

6We account for stock-based compensation expense in accordance with Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (SFAS No. 123R). Under SFAS No. 123R, stock-based compensation expense reflects the fair value of stock-based awards measured at the grant date, is recognized over the relevant service period, and is adjusted each period for anticipated forfeitures. We estimate the fair value of each stock-based award on the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model incorporates assumptions as to stock price volatility, the expected life of options, a risk-free interest rate and dividend yield.

~~Table~~The following table provides the classification of ~~Contents~~total stock-based compensation as reflected in our condensed consolidated statements of income (in thousands):

~~Had we used the fair value method to measure compensation related to stock~~6 ~~awards to employees, pro forma net income and pro forma earnings per share would have been as follows (in thousands, except per share data):~~

	Three Months Ended June						Six,Months Ended June 30,
	2004			2003			2004			2003
Net income (loss), as reported	$	575		$	84		$	904		$	(785	)
Less: stock-based compensation expense determined under fair value method for all awards, net of tax		(105	)		(43	)		(176	)		(86	)
Pro forma net income (loss)	$	470		$	41		$	728		$	(871	)
Basic earnings (loss) per share
As reported	$	0.13		$	0.03		$	0.25		$	(0.28	)
Pro forma	$	0.11		$	0.01		$	0.21		$	(0.31	)
Diluted earnings (loss) per share
As reported	$	0.04		$	0.01		$	0.06		$	(0.28	)
Pro forma	$	0.03		$	0.00		$	0.05		$	(0.31	)

The fair value of options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:


	Three Months Ended March 31,
	2007		2006
Cost of revenues	$	30	$	19
Selling and marketing		207		116
Research and development		149		124
General and administrative		435		288

Total stock-based compensation expense	$	821	$	547

	2004			2003
Risk-free interest rate		3.6	%		2.7	%
Volatility		50	%		50	%
Dividend yield		0	%		0	%
Expected life in years		4			4

4. Inventory

~~The~~Inventory ~~weighted~~is ~~average~~stated ~~fair~~at ~~value of options granted during~~ the ~~three~~lower ~~months ended~~of ~~June 30~~cost (first-in, ~~2004~~first-out ~~and~~method) ~~2003~~or ~~was~~market ~~$3.99~~ and ~~$0.34,~~consists ~~respectively. The weighted average fair value~~ of ~~options granted during~~ the ~~six months ended June 30~~ following, ~~2004 and~~net ~~2003~~of ~~was~~reserves ~~$3.44~~(in ~~and $0.38, respectively.~~thousands):

Stock-based compensation charges in the second quarter of 2004 included $147,000 resulting from acceleration of the remaining unvested portion of stock options granted to advisory board members.


	March 31,		December 31,
	2007		2006
Finished goods	$	8,447	$	6,587
Raw material components		516		218

Total	$	8,963	$	6,805

5. ~~Inventory~~Intangible Assets

~~Inventory~~Intangible isassets ~~stated~~consist atof ~~the~~a ~~lower~~patent ofwe ~~cost~~purchased ~~(first-~~in, ~~first-out~~February 2006 ~~method)~~for or$300,000. ~~market~~Amortization is ~~and~~being ~~consists~~provided ofover the ~~following~~approximate ~~(in~~16-year ~~thousands):~~estimated useful life of the patent.

	June 30,		December 31,
	2004		2003
Finished goods	$	3,369	$	2,973
Raw material components		2,430		2,051
Total	$	5,799	$	5,024

6. Warranty Reserve

6For purchases made prior to June 1, 2006, our products are generally warranted against defects for 12 months following ultimate delivery to the end user. ~~Warranty~~For ~~Reserve~~purchases made on or after June 1, 2006, our products are generally warranted against defects for 24 months following purchase. Reserves for potential warranty claims are provided at the time of revenue recognition based on historical claims experience, repair costs and current sales levels. Activity within the reserve was as follows (in thousands):

Our products are generally warranted against defects for 12 months following purchase. Reserves for potential warranty claims are provided at the time of revenue recognition based on historical claims experience, repair costs and current sales levels. Activity within the reserve was as follows in the six months ended June 30, 2004 and 2003 (in thousands):


	Three Months Ended March 31,
	2007			2006
Balance, beginning of period	$	1,007		$	876
Provisions in cost of revenues		31			169
Expenditures		(52	)		(164	)

Balance, end of period	$	986		$	881

	2004			2003
Balance, December 31,	$	404		$	549
Provisions included in cost of revenues		311			84
Expenditures		(14	)		(161	)
Balance, June 30,	$	701		$	472

7. Income Taxes

7In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes”, which clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes” and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has a less than 50% likelihood of being sustained. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. There was no material effect on our financial statements as a result of adoption of FIN 48 on January 1, 2007.

~~Table~~We ofare ~~Contents~~subject to taxation in the United States and various state and foreign jurisdictions. The tax years 2003-2006 remain open to examination for all taxing jurisdictions to which we are subject.

7~~. Earnings Per Share~~

BasicTable earnings per share is calculated using the weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of outstanding stock options, stock warrants, and preferred stock using the treasury stock method. When such shares would be dilutive to the periods presented, preferred shares converted to common shares in connection with our initial public offering on June 22, 2004 (Note 2) were included in the weighted average computations of diluted earnings per share until the date of actual conversion on an if-converted basis and in the weighted average computations of basic earnings per share from the date of such conversion. Contents

~~For~~As ~~the three and six months ended June~~of January 301, ~~2004~~2007 and ~~2003~~March 31, ~~outstanding stock options to purchase approximately 9~~2007,~~000,~~ ~~154,000,~~we ~~1,545,000~~had ~~and~~no ~~1,469,000~~material ~~shares~~unrecognized oftax ~~common stock, respectively, were excluded from the calculation of diluted earnings per share, because these options were anti-dilutive~~benefits. A ~~reconciliation of shares used in the computation of basic earnings (loss) per share and diluted earnings (loss) per share is as follows (in thousands):~~

	Three Months Ended June 30,				Six Months Ended June 30,
	2004		2003		2004		2003
Weighted average shares for basic computation		4,295		2,786		3,549		2,784
Potential common shares from:
Options		983		145		893		—
Warrants		409		153		394		—
Preferred stock		10,085		9,327		10,580		—
Weighted average shares for diluted computation		15,772		12,411		15,416		2,784

Upon adoption of FIN 48, we elected to recognize interest on unrecognized tax benefits in interest expense and penalties in operating expenses. We had no accrued interest or penalties related to uncertain tax positions as of March 31, 2007.

~~On a pro forma basis, earnings (loss) per basic share for the three and six months periods ended June 30, 2004 and 2003 would have been $0~~8.~~04,~~ ~~$0.06,~~Earnings ~~$0.01 and ($0.28)~~ per ~~share, respectively, if the conversion of preferred stock to~~Share ~~common stock in connection with our initial public offering had occurred at the beginning of all periods in which such preferred shares were outstanding.~~

8Basic earnings per share is calculated using the weighted average number of common shares outstanding. ~~Segment~~Diluted ~~Information~~earnings per share is calculated using the weighted average number of common shares outstanding giving effect to outstanding dilutive stock options and stock warrants using the treasury stock method.

WeFor ~~operate~~the inthree ~~two~~months ~~distinct~~ended ~~segments.~~March 31, ~~These~~2007 ~~segments~~and ~~are~~2006, ~~identified~~outstanding bystock ~~reference~~ options to ~~the~~purchase approximately ~~manner~~951,000 inand ~~which~~863,000 ~~the~~shares ~~chief~~of ~~operating~~common ~~decision~~stock, ~~maker views the business~~respectively, ~~which~~ iswere ~~generally~~excluded byfrom the ~~type of customer each segment serves. The first~~ ~~segment~~calculation ~~is “Lighting Systems,” which consists primarily~~ of ~~completed~~diluted ~~products that~~earnings weper ~~have~~share ~~developed~~because ~~and~~including ~~sourced.~~these ~~The~~options ~~second~~would ~~segment~~be ~~is “OEM and Licensing,”~~anti-dilutive. ~~which~~A ~~consists~~reconciliation ~~primarily~~ of ~~subassemblies~~shares ~~sold~~used toin ~~original~~the ~~equipment manufacturers~~computation ~~for~~of ~~combination~~basic ~~with~~earnings ~~their~~per ~~own~~share ~~developed products~~ and ~~licenses~~diluted toearnings ~~utilize~~per ~~our~~share ~~technology~~is ~~sold~~as tofollows ~~the~~(in ~~same class of customer.~~thousands):

Direct contribution margin includes direct costs normally associated with costs of good sold determined using GAAP and additional direct costs, such as direct selling expenses, included in other expense categories contained in the accompanying statements of operations. We do not generate information regarding indirect costs by segment or assets or cash flows by segment, and hence, such information is not provided below. The information set forth below is prepared in accordance with the accounting principles referred to in Note 1, with the exception that direct costs includes some expenses normally allocated to different expense categories on our consolidated statement of operations. There are no inter-segment transactions.


	Three Months Ended
	March 31,
	2007		2006
Weighted average shares for basic computation		21,312		18,410
Potential common shares from:
Options		810		1,061
Warrants		87		475

Weighted average shares for diluted computation		22,209		19,946

~~The~~9. ~~following~~Segment ~~tables set forth revenue and contribution margin from our~~Information ~~reportable segments on an interim basis (in thousands):~~

Three Months Ended June 30,	2004						2003
	Lighting		OEM and				Lighting		OEM and
	Systems		Licensing		Total		Systems		Licensing			Total
Revenues	$	8,734	$	1,424	$	10,158	$	6,711	$	584		$	7,295
Cost of revenues		4,279		771		5,050		3,200		309			3,509
Gross profit		4,455		653		5,108		3,511		275			3,786
Other direct costs		1,984		169		2,153		1,875		357			2,232
Direct contribution margin	$	2,471	$	484		2,955	$	1,636	$	(82	)		1,554
Reconciling items to income from operations:
Unallocated selling and marketing						334							230
Unallocated research and development						382							236
Unallocated general and administrative						1,729							1,032
Income from operations					$	510						$	56

We operate in two distinct segments. These segments are identified by reference to the manner in which our management allocates resources and assesses the business, which is generally by the type of customer each segment serves. The first segment is “Lighting Systems,” through which we offer LED lighting systems under the Color Kinetics brand for installation in lighting projects where use has typically been specified by a designer or architect. The second segment is “OEM and Licensing,” through which we offer a standard line of LED lighting modules, custom components and other products that can be incorporated by manufacturers in products sold under their own brands. Included also in the OEM and Licensing segment is the licensing of our intellectual property.

Six Months Ended June 30,	2004						2003
	Lighting		OEM and				Lighting		OEM and
	Systems		Licensing		Total		Systems		Licensing			Total
Revenues	$	15,492	$	2,884	$	18,376	$	12,435	$	941		$	13,376
Cost of revenues		7,646		1,453		9,099		6,189		521			6,710
Gross profit		7,846		1,431		9,277		6,246		420			6,666
Other direct costs		3,744		386		4,130		3,639		741			4,380
Direct contribution margin	$	4,102	$	1,045		5,147	$	2,607	$	(321	)		2,286
Reconciling items to income (loss) from operations:
Unallocated selling and marketing						626							447
Unallocated research and development						742							468
Unallocated general and administrative						3,104							2,213
Unallocated restructuring						—							161
Income (loss) from operations					$	675						$	(1,003	)

Direct contribution margin includes direct costs normally associated with cost of revenues and additional direct costs, such as direct selling expenses, included in other expense categories contained in the accompanying consolidated statements of income. Based on available information, we do not generate information regarding indirect costs by segment or assets or cash flows by segment, and hence, such information is not provided below.

8The information set forth below is prepared in accordance with the accounting principles referred to in Note 1, with the exception that direct costs include some expenses normally allocated to different expense categories in our consolidated statements of income. There are no inter-segment transactions.

~~Table~~The offollowing ~~Contents~~tables set forth our segment information on an interim basis (in thousands):

~~9. Comprehensive Income (Loss)~~8

ComprehensiveTable income (loss) includes foreign currency translation gains and losses and other items of comprehensive income (loss) that have been excluded from net income (loss) and reflected instead in shareholders’ equity. The following table sets forth the calculation of comprehensive income (loss) on an interim basis (in thousands): Contents

	Three Months Ended June 30,					Six Months Ended June 30,
	2004			2003		2004		2003
Net income (loss), as reported	$	575		$	84	$	904	$	(785	)
Foreign currency translation adjustments and other items of comprehensive income (loss)		(17	)		—		1		—
Total comprehensive income (loss)	$	558		$	84	$	905	$	(785	)

Three Months Ended March 31,

10. Contingencies


	2007						2006
	Lighting		OEM and				Lighting		OEM and
	Systems		Licensing		Total		Systems		Licensing		Total
Revenues	$	16,966	$	1,818	$	18,784	$	13,098	$	1,560	$	14,658
Cost of revenues		7,885		553		8,438		6,099		540		6,639

Gross profit		9,081		1,265		10,346		6,999		1,020		8,019
Other direct costs		5,049		394		5,443		4,029		388		4,417

Direct contribution margin	$	4,032	$	871		4,903	$	2,970	$	632		3,602

Reconciling items to income (loss) from operations:
Unallocated selling and marketing						647						648
Unallocated research and development						757						294
Unallocated general and administrative						3,264						3,091

Income (loss) from operations					$	235					$	(431	)

~~In March 2002, Super Vision International, Inc~~10., orComprehensive ~~Super Vision, filed a~~Income lawsuit in the United States District Court for the Middle District of Florida seeking a declaratory judgment that certain of our patents are invalid, that Super Vision’s products do not infringe the patents in question, and that the patents are unenforceable. Super Vision subsequently amended the complaint to add claims for interference with prospective business relationships, unfair competition, trade disparagement and defamation.

InComprehensive ~~June 2002,~~income weincludes ~~filed~~all achanges ~~lawsuit~~in ~~against~~equity ~~Super~~during ~~Vision~~a inperiod ~~the~~except ~~United~~those ~~States~~resulting from ~~District~~investing ~~Court~~by ~~for~~owners ~~the~~and ~~District~~distributions ofto ~~Massachusetts~~owners. InFor ~~this~~the ~~litigation,~~three ~~we alleged~~months ~~that~~ended ~~certain products of Super Vision~~March 31, ~~including~~2007 ~~solid-state~~and ~~architectural lighting fixtures~~2006, ~~pool~~comprehensive ~~lights~~income ~~and~~is ~~spa~~composed ~~lights, infringe five~~ of ~~the~~ ~~patents~~our atnet ~~issue~~income, incurrency ~~Super~~translation ~~Vision’s~~adjustments, ~~declaratory~~and unrealized ~~judgment~~holding ~~action.~~gains ~~Proceedings in~~and ~~our~~losses ~~lawsuit~~on ~~against~~investments. ~~Super~~The ~~Vision~~following ~~were~~table ~~temporarily~~sets ~~stayed~~forth ~~for~~ the ~~purpose of~~calculation ~~pursuing~~of ~~settlement~~comprehensive ~~negotiations,~~income ~~but~~on ~~these~~an ~~negotiations~~interim ~~were~~basis ~~not~~(in ~~fruitful.~~thousands):

Upon renewal of the proceedings, Super Vision’s lawsuit in Florida was removed by the court to the United States District Court for the District of Massachusetts, where our motion to consolidate the two cases is pending. The cases are in the discovery phase, with a so-called “Markman” hearing on patent claim interpretation scheduled for October 2004 and trial scheduled for January 2005. We believe that Super Vision’s claims of invalidity, unenforceability and non-infringement of the patents at issue in our infringement suit against Super Vision, and its claims against us of interference with prospective business relationships, unfair competition, trade disparagement and defamation, are without merit.


	Three Months Ended March 31,
	2007		2006
Net income	$	1,498	$	188
Foreign currency translation adjustments		1		(2	)
Unrealized holding gains (losses) on investments		4		(6	)

Total comprehensive income	$	1,503	$	180

~~On March 4, 2004, Super Vision announced that it had acquired from High End Systems a patent relating to variable color lighting systems~~11. OnInvestment ~~March 5, 2004, Super Vision filed a lawsuit~~ in ~~the~~Joint ~~United States District Court for the Middle~~Venture District of Florida alleging that we have infringed the High End patent and seeking damages of $10.5 million. We had previously investigated the High End patent and concluded that our products and technology do not infringe any valid claim of the patent. Accordingly, we believe that Super Vision’s High End patent lawsuit is without merit and intend to defend against it vigorously.

~~With~~Effective ~~the~~December 31, ~~permission of the court~~2006, we ~~amended~~terminated ~~the~~our ~~complaint~~joint ~~that~~venture weagreement ~~filed against~~with ~~Super~~Yamagiwa ~~Vision in The United States District Court for the District of~~Corporation ~~Massachusetts~~(Yamagiwa) toand ~~include~~sold ~~requests~~our ~~for~~50% ~~declarations~~ownership ~~that~~in ~~the~~our ~~High~~joint ~~End~~venture ~~patent is not infringed by~~ Color Kinetics, isJapan ~~invalid~~Incorporated ~~and~~(CK Japan) isto ~~not enforceable~~Yamagiwa. WeThrough ~~are~~the ~~now seeking~~date toof ~~transfer~~sale, ~~Super~~we ~~Vision’s~~accounted ~~High~~for ~~End~~our ~~patent~~investment ~~lawsuit~~in toCK ~~federal~~Japan ~~court~~using inthe ~~Massachusetts~~equity asmethod ~~well.~~of ~~Since~~accounting, ~~all~~whereby ofwe ~~the~~recorded ~~claims~~our ~~are~~proportionate ~~now~~share ~~before~~of the ~~court~~income inor loss ~~Massachusetts,~~earned weby ~~may request that~~ the ~~court~~joint ~~adjust the discovery and trial schedule~~venture.

~~Item 2~~12. ~~Management’s~~Commitments ~~Discussion~~ and ~~Analysis of Financial Condition and Results of Operations~~Contingencies

~~Cautionary~~Commitment ~~Statements~~– In January 2007, we entered into a ten-year lease for our new corporate headquarters to be located in Burlington, Massachusetts commencing September 1, 2007. Annual fixed lease payments beginning September 1, 2007 are approximately $1.4 million for each of the first five years of the lease and $1.5 million for each of the last five years of the lease. The lease also contains two five-year renewal options.

~~The~~Contingencies ~~Private Securities Litigation Reform Act of 1995 contains certain safe~~– harbor provisions regarding forward-looking statements. This Form 10-Q contains, and other information provided by Color Kinetics Incorporated or statements made by our directors, officers or employees from time to time may contain, forward-looking statements and information, which involve risks and uncertainties. Actual future results may differ materially. Forward-looking statements include statements concerning plans, objectives, goals, strategies, expectations, intentions, projections, developments, future events, performance or products, underlying assumptions and other statements which are other than statements of historical facts. In some cases, forward-looking statements are identified by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “estimates,” “believes,” “contemplates,” “predicts,” “projects,” “continue” and other similar terminology or the negative of these terms. All such forward-looking statements, whether written or oral, are expressly qualified by the cautionary statements contained in this Form 10-Q, including those set forth below under the heading “Factors That May Affect Future Results,” and any other cautionary statements which may accompany the forward-looking statements. Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized, nor can there be any assurance that we have identified all possible issues which we might face. We undertake no obligation to update any forward-looking statements we make.

~~Overview~~TIR Systems, Ltd.

WeIn ~~design~~December 2003, ~~market~~we ~~and~~filed ~~license~~a ~~intelligent~~lawsuit ~~solid-state~~against ~~lighting~~TIR ~~systems.~~Systems WeLtd, a Canadian corporation, in the ~~outsource~~United States District Court for the ~~manufacture~~District of Massachusetts. In this litigation, we allege that certain products of TIR infringe three of our ~~systems~~patents. Our complaint was later amended to ~~contract~~add ~~manufacturers,~~a fourth ~~primarily~~patent. TIR has filed counterclaims seeking declarations that its products do not infringe inand ~~Asia~~that the patents are invalid. We ~~operate~~believe inthat ~~two~~these ~~lines~~claims by TIR are without merit. We have since added four more patents to the suit and added breach of ~~business:~~contract and theft of trade secret claims to our complaint.

•In ~~Lighting~~January 2006, ~~systems:~~ we ~~offer~~filed ~~intelligent~~a ~~solid-state~~lawsuit ~~lighting~~against ~~systems~~TIR ~~under~~in the ~~Color~~Federal ~~Kinetics~~Court ~~brand~~of ~~for~~Canada. ~~installation~~In inthis litigation, ~~lighting~~we ~~projects~~allege ~~where~~that ~~their~~several ~~use~~TIR ~~has~~Destiny ~~typically~~products ~~been~~and ~~specified~~TIR’s byLEXEL atechnology ~~designer~~infringe orour Canadian ~~architect~~patent. •TIR ~~OEM~~has ~~and~~filed ~~licensing:~~counterclaims weseeking ~~offer~~declarations athat ~~standard~~its ~~line~~products ofdo ~~intelligent~~not ~~solid-state~~infringe and ~~lighting modules~~ that ~~are~~the ~~incorporated~~patent byis ~~manufacturers in products sold under their own brands~~invalid. We ~~also~~believe ~~license~~that ~~our~~these ~~technology~~claims onby aTIR ~~royalty-bearing~~are ~~basis~~without merit.

WeOn ~~sell~~March 13, ~~our~~2007 ~~lighting~~TIR ~~systems~~announced ~~and~~that ~~OEM~~they ~~products~~entered ~~through~~into ~~our~~an ~~direct~~agreement ~~sales~~with ~~force and~~Royal ~~through~~Philips ~~distributors and manufacturer’s representatives in North America,~~Electronics ~~Asia,~~whereby ~~Europe,~~Philips ~~Latin~~will ~~America~~acquire ~~and~~100% ~~the~~of ~~Middle East. Licensing arrangements are handled through our direct sales force, often with~~ the ~~involvement~~outstanding shares of ~~our senior management~~TIR.

~~In a typical lighting systems sale, our direct sales force, in cooperation with~~9 a distributor or manufacturer’s representative (or, outside North America, a dealer/ distributor or VAR), works with a lighting designer, architect or other specifier to have our system “designed in” to a particular new construction or renovation project. Typically, this is followed by a bid process in which pricing and other terms are negotiated with the project owner or owner’s representative. When construction on the project has reached the appropriate stage, our product is shipped, typically to an electrical equipment or lighting equipment distributor, which purchases the system from us and, in turn, sells it to the project owner or its electrical contractor for installation.

WeTable sell our OEM products primarily through our direct sales force and, in certain cases, manufacturer’s representatives or distributors with strong industry relationships and expertise in a particular vertical market. In a typical OEM sales cycle, our direct sales personnel first work with a manufacturer to qualify our systems for incorporation into one or more of its products. Initially, the manufacturer may purchase only small quantities of our system. Once a product incorporating our system is introduced and successfully marketed by our OEM customer, purchases of our OEM products in larger volumes may occur. Contents

~~Our~~Boca ~~products~~Flasher ~~are distributed in Japan by Color Kinetics Japan, a joint venture~~Incorporated in which we hold a 50% equity interest. An unrelated third party holds the other 50% interest. The terms of our distribution agreement with Color Kinetics Japan are substantially similar to those that we employ with unaffiliated distributors. We account for our investment in Color Kinetics Japan using the equity method of accounting, whereby we record our proportionate share of the income or loss earned by the joint venture. We record revenue from sales to Color Kinetics Japan as revenue from a related party. We eliminate our profit associated with inventory we have sold to Color Kinetics Japan that is held by it at the end of the period. Because Color Kinetics Japan uses the Japanese yen as its functional currency, we translate the results of operations of Color Kinetics Japan into United States dollars using the average rates of exchange during the reporting periods. We also record on our balance sheet translation adjustments reflecting the changes in Color Kinetics Japan’s equity measured in dollars resulting from changes in exchange rates.

~~Description~~On March 19, 2007, we filed a patent infringement complaint against Boca Flasher Incorporated in the U.S. District Court for the District of ~~Our~~Massachusetts. ~~Revenues~~In this suit we allege that certain products of Boca Flasher infringe eight of our patents. We are seeking injunction, ~~Costs~~damages, and ~~Expenses~~ fees.

~~Our~~Item 2. ~~lighting~~Management’s ~~systems~~Discussion ~~revenues~~and ~~include~~Analysis ~~amounts from the sale~~ of ~~our~~Financial ~~intelligent solid-state~~Condition ~~lighting systems as well as any fees from our customers for applications engineering, integration or technical support services we provide to assist them in specifying, designing, installing~~ and ~~operating~~Results ~~our~~of ~~systems.~~Operations

9Cautionary Statements

~~Table~~The Private Securities Litigation Reform Act of ~~Contents~~1995 contains certain safe harbor provisions regarding forward-looking statements. This Form 10-Q contains, and other information provided by Color Kinetics Incorporated or statements made by our directors, officers or employees from time to time may contain, forward-looking statements and information, which involve risks and uncertainties. Actual future results may differ materially. Forward-looking statements include statements concerning plans, objectives, goals, strategies, expectations, intentions, projections, developments, future events, performance or products, underlying assumptions and other statements which are other than statements of historical facts. In some cases, forward-looking statements are identified by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “estimates,” “believes,” “contemplates,” “predicts,” “projects,” “continue” and other similar terminology or the negative of these terms. All such forward-looking statements, whether written or oral, are expressly qualified by the cautionary statements contained in this Form 10-Q, including those set forth below under the heading “Risk Factors,” and any other cautionary statements which may accompany the forward-looking statements. Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized, nor can there be any assurance that we have identified all possible issues which we might face. We undertake no obligation to update any forward-looking statements we make.

~~Our OEM and licensing revenues include amounts from the sale of our OEM~~Overview products, license fees and related fees attributable to the licensing of our proprietary technology, and fees for any engineering support services that are requested by our OEM and licensing customers.

~~Our~~We ~~cost~~design, ofsell and market LED lighting systems ~~revenues~~ and ~~cost~~related of OEM components and license ~~revenues~~our ~~consist~~intellectual ~~primarily~~property. ofOur ~~the~~LED ~~cost~~lighting ofsystems ~~the~~use ~~lighting~~semiconductor ~~products~~devices ~~sold,~~known ~~including~~as ~~amounts~~light emitting ~~paid~~diodes, toor ~~our~~LEDs, ~~contract~~as ~~manufacturers~~the light source. The performance, ~~the~~efficiency ~~costs~~and cost of ~~any~~LEDs ~~components~~have ~~that we~~been ~~provide~~improving rapidly, ~~other~~enabling ~~direct~~them ~~and~~to ~~indirect~~displace ~~manufacturing~~traditional ~~support~~light ~~costs~~sources, ~~shipping~~such as incandescent and ~~handling,~~halogen ~~tooling~~lamps and ~~provisions~~neon ~~for~~lighting, ~~product~~in ~~warranty~~many applications. Using proprietary digital control methods (including our patented Chromacore, ~~scrap~~Chromasic and ~~inventory~~Powercore technologies) our intelligent LED ~~obsolescence~~lighting systems enable customers to create dramatic lighting effects, asprovide ~~well~~cost savings and achieve other practical benefits such as ~~overhead~~color ~~cost~~temperature ~~allocated~~control tonot ~~these~~attainable ~~activities~~with traditional lighting technology. ItWe ~~may~~ also ~~include~~provide ansimplified ~~allocation~~LED oflighting ~~salaries~~systems, ~~and~~such ~~related~~as ~~benefits~~dimmable ofcolor ~~engineering~~and ~~personnel~~white ~~when~~light ~~they~~systems, ~~provide~~that ~~engineering~~do ~~support~~not ~~services~~use ~~for~~our ~~which~~Chromacore weor ~~charge~~Chromasic technologies, but that use other ~~fees~~elements of our proprietary technologies.

~~Our~~Since ~~selling~~our ~~and~~founding ~~marketing~~in ~~expenses~~September 1997, ~~consist~~we ~~primarily~~have invested substantially in research and development in a number of ~~salaries,~~disciplines ~~commissions~~related to LED lighting, including thermal and optical ~~travel~~engineering, ~~expense~~analog and ~~related~~digital ~~benefits~~circuit ofdesign, ~~personnel~~power ~~engaged~~conversion, innetwork ~~sales~~architectures, ~~product~~control ~~management~~software and ~~marketing~~user ~~activities~~interfaces. As a result of this process of continuous innovation, ~~commissions~~we ~~paid~~have developed toa ~~our~~broad ~~manufacturers’~~range of products, services and technologies and have a patent portfolio with 65 ~~representatives~~issued U.S. and foreign patents and approximately 180 patent applications pending worldwide at March 31, ~~costs~~2007. We also have an extensive pipeline of ~~marketing~~new ~~programs~~technologies under development. Our patents and ~~promotional~~patent ~~materials~~applications apply to many aspects of LED lighting technology, ~~trade~~and also apply to ~~show~~many ~~expenses~~methods ~~and~~of ~~overhead~~implementing ~~cost~~LED ~~related~~lighting toin ~~these~~a ~~activities~~wide variety of markets and applications.

~~Our~~We ~~research~~incorporate ~~and~~our ~~development~~proprietary ~~expenses~~technologies ~~consist~~in ~~primarily~~a wide range of ~~salaries~~products, ~~bonuses~~including LED lighting modules and ~~related~~fixtures, ~~benefits~~digital ofcontrollers, ~~personnel~~and ~~engaged~~software infor ~~research~~creating and ~~development~~controlling lighting effects, supported by related hardware and accessories. We offer our products for sale as ~~product~~individual ~~quality~~components, ~~activities~~or as complete, ~~out-~~integrated lighting systems that include all the elements necessary to create and operate LED lighting installations for many types of~~-pocket~~ ~~product~~interior ~~development~~and ~~costs,~~exterior applications. ~~travel~~We sell LED lighting modules and systems incorporating our proprietary technologies ~~expenses~~to lighting manufacturers and ~~overhead~~others ~~cost~~on ~~related~~an OEM basis, enabling them to ~~these~~bring ~~activities~~the benefits of our technologies rapidly to market. ~~Research~~We ~~and~~also license ~~development~~our ~~expenses~~intellectual ~~are~~property ~~expensed~~on asa ~~incurred~~royalty-bearing basis.

~~Our~~We ~~general~~draw ~~and~~upon ~~administrative~~our ~~expenses~~domain ~~consist~~expertise ~~primarily~~in ~~of salaries~~LEDs, ~~bonuses and~~LED ~~related benefits of personnel engaged in corporate administration~~binning, ~~finance~~electrical, ~~human~~ ~~resources~~optical, ~~information~~ systems, mechanical and ~~legal~~thermal ~~functions~~engineering, ~~outside~~power ~~legal expenses~~conversion, ~~related~~LED ~~to patent prosecution~~control, ~~patent~~and ~~litigation,~~application ~~trademarks~~software ~~and~~to ~~general~~provide ~~corporate~~applications ~~matters~~engineering, ~~other~~integration ~~professional~~and ~~fees,~~technical ~~bad~~support ~~debt~~services ~~expense,~~to ~~other~~assist our ~~general~~customers ~~corporate~~in ~~expenditures~~specifying, installing and ~~overhead~~operating ~~cost~~our ~~related to these activities~~systems.

~~Critical Accounting Estimates~~10

WeTable make estimates and assumptions in the preparation of our consolidated financial statements that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. However, actual results may differ from these estimates. Contents

We ~~have~~currently ~~identified~~operate ~~the following critical accounting policies that require the use of significant judgments and estimates~~ in ~~the~~two ~~preparation~~principal oflines ~~our consolidated financial statements. This listing is not a comprehensive list~~ of ~~all~~ ~~of our accounting policies. For further information regarding the~~business: application of these and other accounting policies, see Note 1 in the Notes to Consolidated Financial Statements for the year ended December 31, 2003 included in our Registration Statement on Form S-1 filed with the Securities and Exchange Commission.

~~Revenue~~• ~~Recognition.~~Lighting systems: We ~~recognize~~offer ~~revenues~~intelligent LED lighting systems sold under the Color Kinetics brand for installation in ~~connection~~lighting ~~with~~projects ~~sales~~where oftheir ~~our~~ use has typically been specified by a designer or architect. We also sell simplified LED lighting systems ~~and~~for broader categories of the lighting market. • OEM ~~products~~and ~~when~~licensing: ~~all~~We offer a standard line of ~~the~~LED ~~following~~lighting ~~conditions~~modules, ~~have been~~custom ~~met:~~ and basic components and other products that can be incorporated by manufacturers in products sold under their own brands. We also license our intellectual property. We believe that our proprietary technologies not only provide a competitive advantage in many markets where we compete directly, but also offer increasing opportunities, through our OEM or licensing programs, to reach markets and applications that cannot be served efficiently by our own direct sales force.

•To ~~evidence~~date, ~~exists~~we ofhave antargeted ~~arrangement~~our ~~with~~sales ~~the~~and ~~customer,~~marketing ~~typically~~primarily ~~consisting~~in ofhigh aperformance ~~purchase~~color ~~order;~~lighting markets, •such ~~our~~as ~~products~~architectural, ~~have~~retail, ~~been~~hospitality, ~~delivered~~ and ~~risk~~entertainment oflighting. ~~loss~~In ~~has~~these ~~passed~~markets, our tocustomers value the ~~customer~~flexibility, ~~which~~performance ~~typically~~and ~~occurs~~control ~~when~~that aour ~~product~~intelligent isLED ~~shipped~~lighting systems ~~under~~offer. ~~our~~As ~~customary~~the ~~terms,~~performance ~~generally~~and ~~FOB~~cost-effectiveness ~~shipping~~of ~~point;~~LEDs, •particularly ~~the~~white ~~amount~~light ofLEDs, continue ~~revenue~~ to ~~which~~improve, we ~~are~~believe ~~entitled~~that isLED ~~fixed~~lighting orwill ~~determinable;~~increasingly ~~and~~displace •traditional welighting technology ~~believe~~in itapplications isbeyond ~~probable~~high ~~that~~performance welighting ~~will~~markets, beincluding ~~able~~the tospecialty ~~collect~~white light market and the ~~amount~~large ~~due~~white uslight ~~from~~general ~~our~~illumination ~~customer~~market.

ToWe ~~the~~currently ~~extent~~offer ~~that~~two ~~one~~families orof ~~more~~white light products: essentialWhite and intelliWhite. Our essentialWhite line of ~~these~~products ~~conditions~~is a relatively inexpensive offering providing a dimmable white light output at a fixed color temperature using our proprietary technology. Our intelliWhite line of products is ~~not~~a ~~present~~higher-end offering that, in addition to providing dimmability, provides variable color temperature of white light using our proprietary Chromacore and Chromasic technology. To date, we ~~delay~~have not derived substantial revenues from sales of our white light products. However, in ~~recognition~~2007 we will continue to devote substantial resources to the development of ~~revenue~~new ~~until~~and ~~all~~enhanced white light products, including adding a new business unit to focus exclusively on the ~~conditions~~white ~~are~~light specialty ~~present~~and general lighting market. WeAlthough ~~classify~~we ~~the~~believe these initiatives will increase our 2007 ~~amount~~white oflight ~~freight~~product ~~invoiced~~revenues from 2006 levels, we do not expect (and have not experienced to date) our 2007 white light product revenues to be a significant portion of our total 2007 revenues. In the ~~customer~~long run we believe that as ~~revenue,~~LED ~~with~~manufacturers overcome many of the ~~corresponding~~technical obstacles to improving the initial cost ~~classified~~and performance of white light LEDs and as ~~cost~~consumers become comfortable with LED lighting systems, they will ultimately value white light LED lighting systems that incorporate many of ~~revenues~~our core “intelligent control” technologies.

We ~~offer~~do ~~our~~not ~~lighting~~manufacture ~~systems~~LEDs. ~~customers~~We ~~limited~~purchase ~~rights~~LEDs ofand ~~return,~~other ~~which typically~~critical ~~provide~~components that ~~within~~are ~~30 days~~used ofin our ~~shipment~~systems ~~products~~from inmajor ~~unopened~~semiconductor manufacturers, and ~~saleable~~ ~~condition~~we ~~may,~~outsource atthe ~~our~~manufacture ~~discretion,~~of beour products ~~returned~~ to uscontract ~~for refund~~manufacturers, ~~net~~primarily ~~of a~~in ~~15% restocking fee~~Asia. We also ~~provide~~have ~~certain~~substantial ~~distributors~~expertise ~~with limited stock~~relating ~~rotation~~to ~~rights.~~supply ~~Based~~chain onmanagement ~~historical~~and ~~experience,~~the wemanufacture ~~provide~~of ~~for~~our ~~potential returns~~products, ~~from~~including ~~customers~~proprietary ~~through~~manufacturing processes athat ~~sales~~we ~~return~~license ~~reserve.~~to ~~The~~our ~~reserve is evaluated and adjusted as conditions warrant~~suppliers.

~~Allowance~~Description ~~for Doubtful Accounts. We estimate the uncollectibility~~ of ~~our accounts~~Our receivable and we maintain allowances for estimated losses. This allowance is established using estimates that management makes based on factors such as the composition of the accounts receivable agingRevenues, ~~historical~~Costs ~~bad debts, changes in payment patterns, customer creditworthiness~~ and ~~current economic~~Expenses trends. If we used different estimates, or if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional provisions for doubtful accounts would be required and would increase bad debt expense.

~~Product~~Our ~~Warranty.~~lighting Wesystems ~~generally~~revenues ~~warrant~~include ~~our~~amounts ~~products~~from ~~against~~the ~~defects in materials and workmanship for one year after~~ sale ~~and~~of ~~provide~~our ~~for~~LED ~~estimated future~~lighting ~~warranty~~systems ~~costs~~as atwell ~~the time revenues are recognized. Warranty expense is~~as ~~based~~any onfees ~~historical~~from ~~claims~~our ~~experience,~~customers ~~repair~~for ~~costs,~~applications ~~and current sales levels~~engineering, as ~~well~~integration asor ~~various~~technical ~~other~~support ~~assumptions that~~ services we ~~believe~~provide to beassist ~~reasonable~~them ~~under~~in ~~the circumstances.~~specifying, ~~Should~~designing, ~~actual~~installing ~~product~~and ~~failure~~operating ~~rates differ from~~ our ~~estimates, revisions to the estimated warranty liability would be required~~systems.

~~Inventory~~Our ~~Reserves.~~OEM Weand ~~state~~licensing ~~our~~revenues ~~inventories~~include atamounts from the ~~lower~~sale of ~~cost~~our orOEM ~~market~~products, ~~computed~~ onlicense ~~a standard cost basis, which approximates actual cost on a~~fees ~~first-in,~~and ~~first-out~~related ~~basis,~~fees ~~with~~attributable ~~market being determined as the lower of replacement cost or net realizable value. We provide reserves equal~~ to the ~~difference~~ ~~between~~licensing ~~the cost~~ of ~~the inventory and the estimated market value of~~ our ~~inventory~~proprietary ~~using~~technology, ~~estimates~~and offees ~~their~~for ~~net realizable value that are based upon~~any ~~our~~engineering ~~assumptions~~design ~~about future demand~~ and ~~market~~support ~~conditions.~~services Ifthat ~~actual market conditions~~ are ~~less~~requested ~~favorable than those expected~~ by ~~management,~~our ~~additional inventory~~OEM ~~reserves~~and ~~may~~licensing ~~be required~~customers.

~~Accounting~~Our ~~for~~cost ~~Income~~of ~~Taxes.~~lighting Wesystems ~~account~~revenues ~~for~~and ~~income~~cost ~~taxes~~of ~~using~~OEM aand ~~liability approach.~~license ~~Our~~revenues ~~deferred tax assets~~ consist primarily of ~~net operating loss and~~the ~~credit~~cost ~~carryforwards,~~of ~~for~~the ~~which~~lighting weproducts ~~have~~sold, ~~provided~~including aamounts ~~full~~paid ~~valuation allowance, due~~ to our ~~limited~~contract ~~operating~~manufacturers, ~~history~~the ~~and~~costs of ~~the~~any ~~unlikelihood~~components that we ~~would~~provide, ~~realize those~~other ~~assets~~direct ~~based~~and onindirect ~~that~~manufacturing ~~history.~~support Tocosts, ~~the~~shipping and ~~extent~~handling, ~~that~~tooling weand ~~begin~~provisions tofor ~~generate significant~~product ~~taxable income~~warranty, ~~such~~scrap ~~that~~and inventory itobsolescence, ~~becomes~~as ~~more~~well ~~likely~~as ~~than~~overhead ~~not~~cost ~~that these~~allocated ~~assets~~to ~~will~~these beactivities. ~~recoverable,~~It wemay ~~will~~also ~~reverse those valuation allowances,~~include ~~generally~~an ~~through~~allocation ~~income.~~of Tosalaries ~~the~~and ~~extent~~related ~~that~~benefits we(including ~~are~~stock-based ~~unable~~compensation tocharges) ~~operate~~of ~~profitably,~~engineering ~~our~~personnel ~~tax~~when ~~assets~~they ~~could~~provide ~~expire~~engineering ~~unutilized.~~design ~~The~~and ~~occurrence~~support ~~of certain events~~services, ~~such~~ as ~~significant~~well ~~changes~~as outsourced inengineering ~~ownership~~design ~~interests~~and insupport ~~Color~~services ~~Kinetics, could~~fees ~~result~~paid into ~~limitations~~third onparties, ~~the~~for ~~amount~~which ofwe ~~those assets that could be~~charge ~~utilized~~fees into ~~any~~our ~~given year~~customers.

~~Stock-Based~~Our ~~Compensation.~~selling ~~We use the intrinsic value method to account for stock-based compensation provided to employees~~ and ~~the~~marketing ~~fair~~expenses ~~value~~consist ~~method~~primarily ~~to account~~of ~~for stock-based compensation to non-employees~~salaries, ~~such as consultants and members of our advisory board. Under the intrinsic value method~~commissions, ~~compensation associated~~travel ~~with awards of stock or stock options is measured as the difference~~expense ~~between the price the employee must pay to exercise the award~~ and ~~the~~related ~~fair value~~benefits of(including ~~our common~~ stock-based ~~on the date~~ compensation is measured, which is generally the date of the award. To date, most awards to employees have had exercise prices equal to the fair value of the common stock on the date of award, and as a result no material compensation charges) ~~have been recorded for awards to employees. Under the fair value method, compensation is measured using the estimated fair value~~ of anpersonnel ~~award,~~engaged ~~established either through the estimated value of the share of stock or,~~ in ~~the~~sales case of options, through the use of an option pricing model, such as the Black-Scholes option pricing model. We disclose the difference between the two methods in our notes to our consolidated financial statements, and ~~those differences have been significant.~~ Inmarketing ~~addition~~activities, ~~use~~commissions ofpaid ~~an option pricing model invariably involves assumptions about future events, such as the volatility of the underlying stock and the estimated life of an award. These assumptions are difficult~~ to ~~predict and could generally result in changing levels of compensation expense for these awards in~~ our ~~financial statements. We do not currently have any intentions to~~ change our accounting for employee awards from the intrinsic value method to the fair value method. However, the Financial Accounting Standards Board has approved for public comment an exposure draft on stock-based compensation which, if adopted, would have the effect of requiring us to adopt the fair value method in the future.

1011

~~Results~~manufacturers’ representatives, costs of ~~Operations~~marketing programs and promotional materials, product samples, trade show expenses and overhead cost related to these activities.

~~The~~Our ~~following~~research ~~table~~and ~~sets~~development ~~forth~~expenses ~~certain~~consist ~~income~~primarily ~~and~~of ~~expense~~salaries, ~~items~~bonuses asand ~~a percentage~~related ofbenefits ~~total revenues~~ (~~or,~~including instock-based ~~the~~compensation ~~case~~charges) of ~~our~~personnel ~~cost~~engaged ofin ~~lighting~~research ~~systems revenues~~ and ~~cost~~development ~~of OEM~~ and ~~licensing~~product ~~revenues~~quality activities, ~~as a percentage~~ out-of-pocket ~~the~~product ~~related~~development ~~revenues)~~costs, travel expenses and ~~the~~overhead ~~percentage~~cost ~~change~~related into ~~dollar~~these ~~amounts~~activities. ofResearch ~~such~~and ~~items~~development ~~compared~~expenses ~~with the~~are ~~corresponding~~expensed ~~periods~~as ~~in the previous fiscal year:~~incurred.

	Percentage of Total Revenues
	Three Months Ended						Six Months Ended						Period to Period Change
	June 30,						June 30,						ThreeMonth			SixMonth
	2004			2003			2004			2003			Period			Period
Revenues:
Lighting systems		86	%		92	%		84	%		93	%		30	%		25	%
OEM and licensing		14			8			16			7			144			207
Total revenues		100			100			100			100			39			37
Cost of Revenues:
Cost of lighting systems, as a percentage of lighting systems revenues		49			48			49			50			34			24
Cost of OEM and licensing, as a percentage of OEM and licensing revenues		54			53			50			55			150			179
Total cost of revenues		50			48			50			50			44			36
Gross Profit		50			52			50			50			35			39
Operating Expenses:
Selling and marketing		20			29			21			30			(1	)		(4	)
Research and development		8			8			8			9			31			28
General and administrative		17			14			17			17			68			40
Restructuring		—			—			—			1			—			(100	)
Total operating expenses		45			51			46			57			23			12
Income (loss) from operations		5			1			4			(7	)		817			(167	)
Interest income (expense), net		1			—			—			—			168			133
Equity in earnings of joint venture		—			—			1			1			74			(17	)
Net income (loss)		6	%		1	%		5	%		(6	%)		586	%		(215	%)

Our general and administrative expenses consist primarily of salaries, bonuses and related benefits (including stock-based compensation charges) of personnel engaged in corporate administration, finance, human resources, information systems and legal functions, outside legal, audit, and tax services, professional fees in connection with complying with the Sarbanes-Oxley Act of 2002, costs associated with being a public company, bad debt expense, other general corporate expenditures, and overhead cost related to these activities.

~~Revenues.~~Critical ~~Total~~Accounting ~~revenues increased 39%, from $7.3 million in the second quarter~~Estimates ~~of 2003 to $10.2 million in the first quarter of 2004 and increased 37%, from $13.4 million in the first half of 2003 to $18.4 million in the first half of 2004.~~

~~Lighting~~We ~~systems~~make ~~revenues~~estimates ~~increased~~and ~~30%,~~assumptions ~~from $6.7 million~~ in the ~~second quarter~~preparation of ~~2003~~our tocondensed ~~$8.7 million~~consolidated ~~in the second quarter of 2004 and increased~~financial ~~25%,~~statements ~~from~~that ~~$12.4 million~~affect in the ~~first~~reported ~~half~~amounts of ~~2003~~assets toand ~~$15.5 million~~liabilities, ~~in the first half of 2004. Lighting systems~~ revenues inand ~~North America increased 43%~~expenses, ~~from~~and ~~$4.1 million~~related indisclosures ~~the second quarter~~ of ~~2003~~contingent toassets ~~$5.8 million in the second quarter of 2004~~ and ~~increased 36%, from $7~~liabilities.~~4 million~~ inWe ~~the~~base ~~first~~our ~~half~~estimates ofon ~~2003~~historical toexperience ~~$10.1 million~~and invarious ~~the~~other ~~first~~assumptions ~~half~~that ofwe ~~2004.~~believe ~~Lighting~~to ~~systems~~be ~~revenues~~reasonable ~~in markets~~under ~~outside North America increased 10%, from $2.6 million in~~ the ~~second~~circumstances. ~~quarter~~However, ofactual ~~2003~~results tomay ~~$2.9 million~~differ ~~in the second quarter of 2004 and increased 7%,~~ from ~~$5.0 million~~these ~~in the first half of 2003 to $5~~estimates.~~4 million in the first half~~ ~~of 2004.~~

~~The~~We ~~increases~~have inidentified ~~lighting systems revenues for~~ the ~~second~~following ~~quarter~~critical ~~and~~accounting ~~first half~~policies ofthat ~~2004~~require ~~were~~the ~~primarily~~use ~~attributable to increased market acceptance~~ of ~~our~~significant ~~intelligent~~judgments ~~solid-state~~and ~~lighting~~estimates ~~systems~~in ~~and~~ the ~~addition~~preparation of ~~new products to~~ our ~~product~~condensed ~~line~~consolidated infinancial ~~prior periods~~statements. ~~Growth~~This listing inis ~~sales~~not ina ~~North~~comprehensive ~~America~~list ~~was~~of ~~also attributable~~all toof our ~~ongoing~~accounting ~~efforts~~policies. toFor ~~expand~~further ~~our North American manufacturer’s~~information ~~representative~~regarding ~~network. These factors more than offset declines in sales in~~ the ~~Japanese~~ ~~market~~application ~~to our joint venture partner, Color Kinetics Japan,~~ of ~~$306,000 and~~these ~~$668,000 during the second quarter~~ and ~~first~~other ~~half~~accounting ~~of 2004~~policies, ~~respectively, compared~~see toNote ~~the~~2 ~~same periods~~ in the ~~prior~~Notes ~~year. In addition, sales of branded~~to ~~consumer~~Consolidated ~~products~~Financial ~~declined~~Statements toincluded ~~zero~~ in ~~the~~Item 8 ~~second quarter~~ of ~~2004,~~our ~~representing a~~Annual ~~decline~~Report ofon ~~$22,000~~Form ~~and~~10-K ~~$420,000~~for ~~in revenues compared to~~ the ~~second quarter~~year ~~and~~ended ~~first half of 2003~~December 31, ~~respectively, resulting from our decision in 2003 to discontinue selling these as branded Color Kinetics products and to distribute them instead through our OEM and licensing program~~2006.

~~Our~~Revenue ~~OEM~~Recognition. ~~and~~We ~~licensing~~recognize revenues ~~increased 144%, from $584,000~~ in ~~the~~connection ~~second quarter~~with ofsales ~~2003 to $1.4 million in the second quarter~~ of ~~2004~~our ~~and~~lighting ~~increased 207%,~~systems ~~from $941,000 in the first half of 2003 to $2.9 million in the first half of 2004. The increases in the three~~ and ~~six month periods were primarily~~ ~~attributable to increases of $458,000 and $970,000, respectively, in sales of our~~ OEM ~~pool~~ products, ~~due~~when toall ~~a product launch by an OEM customer in late 2003 and the commencement~~ of ~~related volume purchases of our OEM products, and a $353,000 increase in our licensing revenues in~~ the ~~first~~following ~~half~~conditions ofhave ~~2004,~~been ~~due~~met: primarily to a large upfront license payment received in connection with a new licensing agreement signed in the first quarter of 2004. At June 30, 2004, we had agreements with 27 OEM and licensing customers that we believe were actively engaged in developing or marketing products incorporating our technology compared with 24 such customers at March 31, 2004 and 17 such customers at December 31, 2003.

~~Revenues~~• ~~derived~~evidence ~~from~~exists ~~sales~~ of ~~lighting~~an ~~systems~~arrangement ~~and~~with ~~OEM~~the ~~products~~customer, totypically ~~Color Kinetics~~consisting ~~Japan,~~of ~~the~~a ~~joint~~purchase ~~venture~~order; ~~that~~• ~~distributes~~ our products inhave ~~Japan, decreased~~been ~~from~~delivered ~~19%~~and risk of ~~total~~loss ~~revenues~~has passed to ~~10%~~the ofcustomer, ~~total~~which ~~revenues~~typically inoccurs ~~both~~when ~~the second~~a ~~quarter~~product ~~and~~is ~~first~~shipped ~~half~~under ofour ~~June 30~~customary terms, ~~2003~~generally ~~and~~FOB ~~2004,~~shipping ~~respectively.~~point; ~~We expect~~• ~~revenues~~the ~~from~~amount ~~sales~~of revenue to ~~Color~~which ~~Kinetics~~we ~~Japan~~are toentitled ~~increase~~is infixed ~~the~~or ~~second half~~determinable; ofand ~~2004,~~• inwe ~~comparison~~believe toit ~~those~~is ~~recorded~~probable inthat we will be able to collect the ~~first~~amount ~~half~~due ofus ~~2004~~from our customer.

~~Revenues~~To ~~derived~~the ~~from~~extent ~~sales~~that ofone ~~lighting~~or ~~systems~~more ~~products~~of tothese ~~Color~~conditions ~~Kinetics Distribution,~~is ~~Inc.,~~not ~~or CKDI~~present, awe ~~distributor~~defer ~~unaffiliated~~recognition ~~with~~of ~~us that fulfills~~revenue ~~smaller~~until ~~orders~~all ~~(generally~~the ~~those~~conditions ~~having~~are apresent. ~~value~~We ~~less~~classify ~~than~~the ~~$10,000),~~amount asof ~~well~~freight ~~as all~~invoiced ~~orders~~to ~~for specifically defined regions of~~ the ~~Canadian~~customer ~~marketplace~~as revenue, ~~were 13%~~with ~~of total revenues in both~~ the ~~second~~corresponding ~~quarter~~cost ~~and~~classified ~~first~~as ~~half~~cost of ~~2004~~revenues.

11We offer our lighting systems customers limited rights of return, which typically provide that within 30 days of shipment, products in unopened and saleable condition may, at our discretion, be returned to us for refund, on terms which may include a 15% restocking fee. We also provide certain distributors with limited stock rotation rights. Based on historical experience, we provide for potential returns from customers through a sales return reserve. The reserve is evaluated and adjusted as conditions warrant.

~~Table~~We ofrecognize ~~Contents~~licensing revenues based on royalty reporting from licensees. We typically receive these reports on a quarterly basis in arrears.

~~Gross~~Allowance ~~Profit.~~for ~~Total~~Doubtful ~~gross profit increased from $3~~Accounts.~~8 million~~ inWe ~~the~~estimate ~~second quarter of 2003 to $5.1 million in~~ the ~~second~~uncollectibility ~~quarter~~ of ~~2004~~our ~~and~~accounts ~~from $6.7~~receivable ~~million~~and inwe ~~the~~maintain ~~first~~allowances ~~half~~for ofestimated ~~2003 to $9~~losses.~~3 million~~ inThis ~~the~~allowance ~~first~~is ~~half~~established ofusing ~~2004.~~estimates that ~~The~~management ~~dollar~~makes ~~increase~~based ~~was~~on ~~attributable~~factors ~~primarily~~such toas ~~increased~~the ~~sales,~~composition ~~to improved profit margins on certain~~ of ~~our~~the ~~lighting~~accounts ~~systems~~receivable ~~products and to increased~~aging, ~~licensing~~historical ~~revenues~~bad ~~that~~debts, ~~more~~changes ~~than~~in ~~offset~~payment ~~lower~~patterns, ~~margins~~customer oncreditworthiness ~~our OEM pool~~ and ~~spa products~~current ~~and sales to CKDI~~economic trends. ~~Gross~~If ~~profit~~we asused adifferent ~~percentage of revenues~~estimates, or ~~gross margin,~~if ~~decreased from 52% in~~ the ~~second~~financial ~~quarter~~condition of ~~2003~~our tocustomers ~~50%~~were ~~in the second quarter of 2004 and amounted~~ to ~~50% in both the first half of 2003 and the~~ ~~first half of 2004. Gross margin may vary from period to period depending on~~deteriorate, ~~relative product mix.~~

~~Gross margin from lighting systems decreased from 52% in the second quarter of~~12 2003 to 51% in the second quarter of 2004 and increased from 50% in the first half of 2003 to 51% in the first half of 2004. The decrease in the second quarter of 2004 compared to the second quarter of 2003 is primarily attributable to variation in product mix. The increase for the first half of 2004 compared to the first half of 2003 was attributable primarily to reduced raw materials and product costs and to an overall more favorable product mix, in part reflecting our decision to discontinue direct distribution of our lower-margin consumer products. Gross margin from lighting systems may vary from period to period depending on relative product mix.

GrossTable margin from our OEM and licensing business decreased from 47% in the second quarter of 2003 to 46% in the second quarter of 2004 and increased from 45% in the first half of 2003 to 50% in the first half of 2004. The decrease in the second quarter of 2004 was primarily attributable to increased sales of lower-margin OEM pool products compared to the second quarter of 2003. The increase in the first half of 2004 compared to the first half of 2003was primarily attributable to an increased percentage of licensing revenues in the first half of 2004, which more than offset the lower margin associated with increased sales of our OEM pool products. Gross margin for our OEM and licensing business may vary in future periods depending on the mix of higher and lower-margin OEM product revenues and the relative percentage of higher-margin licensing revenues. Contents

~~Selling~~resulting ~~and Marketing Expenses. Selling and marketing expenses remained constant at $2.1 million for each of the second quarters of 2004 and 2003 and decreased 4%, from $4.0 million~~ in ~~the~~an ~~first~~impairment ~~half~~ of ~~2003~~their toability ~~$3.9 million in the first half of 2004. The decrease in dollar amount for the first half of 2004 compared~~ to ~~the~~make ~~same period in 2003 was primarily attributable to unfilled vacancies for sales positions and elimination of direct sales costs associated with our branded consumer products business~~payments, offset partially by an increase in commissions to our manufacturer’s representatives as a result of our revenue growth and increased marketing spending on trade shows and other related marketing programs. Certain vacant sales positions were filled in the second quarter of 2004. As a percentage of total revenues, sales and marketing expenses decreased from 29% in the second quarter of 2003 to 20% in the second quarter of 2004 and from 30% in the first half of 2003 to 21% in the first half of 2004. The declines in selling and marketing expense as a percentage of revenues were attributable primarily to our revenue growth. We plan to expand our sales force with the hiring of additional ~~sales personnel in the second~~provisions ~~half~~for ofdoubtful ~~2004.~~accounts Aswould abe ~~result,~~required ~~we expect our selling~~ and ~~marketing~~would ~~expenses to~~ increase inbad ~~dollar~~debt ~~amount during the balance of 2004~~expense.

~~Research~~Product ~~and Development Expenses~~Warranty. ~~Research~~For ~~and~~purchases ~~development~~made ~~expenses~~prior ~~increased 31%,~~to ~~from $612~~June 1,~~000~~ ~~in the second quarter of 2003 to $804~~2006,~~000~~ inour ~~the~~products ~~second~~are generally ~~quarter~~warranted ofagainst ~~2004~~defects ~~and~~for ~~28%, from $1.3~~12 ~~million~~months infollowing ~~the~~ultimate ~~first~~delivery ~~half of 2003~~ to ~~$1.6 million~~end ~~in the first half of 2004~~user. ~~These~~For ~~increases~~purchases ~~were~~made on ~~primarily~~or ~~attributable to~~after ~~increases~~June 1, in2006, our ~~research~~products ~~and~~are ~~development~~generally ~~headcount~~warranted ~~based~~against ~~both~~defects infor ~~our Boston~~24 months ~~and~~following ~~China offices~~purchase. AsWarranty aexpense ~~percentage~~is ofbased ~~total~~on ~~revenues,~~historical ~~research~~claims ~~and~~experience, ~~development expenses~~repair ~~remained~~costs, ~~constant at 8% for each of the periods presented. The~~and ~~decreases~~current insales ~~research~~levels, ~~and~~as ~~development~~well ~~expenses~~ as avarious ~~percentage~~other ofassumptions ~~revenues~~that ~~were attributable~~we ~~primarily~~believe to ~~our~~be ~~revenue~~reasonable ~~growth~~under the circumstances. WeShould ~~expect~~actual ~~our~~product ~~research~~failure ~~and development~~rates ~~expenses~~differ tofrom ~~increase~~our ~~in dollar amount during 2004~~estimates, asrevisions ~~we devote additional resources~~ to ~~developing new products and technologies and supporting~~the ~~scheduled~~estimated ~~new~~warranty ~~product~~liability ~~introductions~~would inbe ~~2004~~required.

~~General~~Inventory ~~and Administrative Expenses~~Reserves. ~~General~~We ~~and~~state ~~administrative~~our ~~expenses increased~~inventories ~~68%,~~at ~~from $1.0 million in~~ the ~~second~~lower ~~quarter~~ of ~~2003~~cost toor ~~$1.7 million in~~market, ~~the second quarter of 2004 and from $2.2 million in the first half of 2003~~computed toon ~~$3.1 million~~a instandard ~~the~~cost ~~first half of 2004. Payroll-related expenses increased by $125~~basis,~~000~~ ~~and~~which ~~$206,000~~approximates ~~for~~actual ~~the~~cost ~~second~~on ~~quarter~~a ~~and~~ first ~~half of 2004, respectively, compared to the same periods~~ -in ~~the prior year~~, ~~primarily~~first-out ~~due to increased headcount and executive bonus accruals. In 2003~~basis, ~~executive bonuses~~with ~~were~~market ~~heavily~~being ~~weighted~~determined ~~toward~~as the ~~second~~lower ~~half~~ of ~~the~~replacement ~~year,~~cost ~~consistent~~or ~~with~~net ~~our business~~realizable ~~plan~~value. ~~Stock-based~~We ~~compensation charges, primarily associated with~~provide ~~options~~reserves ~~granted~~equal to ~~members~~the ofdifference ~~our~~between ~~advisory board, increased by $264,000 and $326,000 for~~ the ~~second~~cost ~~quarter and first half~~ of ~~2004, respectively, compared to~~ the ~~same~~inventory ~~periods~~and in the ~~prior~~estimated ~~year.~~market ~~Stock-based compensation charges in the~~value ~~second quarter~~ of ~~2004~~our ~~included~~inventory ~~$147,000~~using ~~resulting~~estimates ~~from acceleration~~ of ~~the remaining~~their ~~unvested~~net ~~portion~~realizable ofvalue ~~stock~~that ~~options~~are ~~granted~~based toupon ~~advisory board members. Under~~ our ~~current accounting policy for stock-based compensation, we expect~~assumptions about future ~~stock-based~~demand ~~compensation charges to decline to a fixed amount of $8,000 per quarter through the second quarter of 2008. Outside legal expenses increased by $123,000~~ and ~~$141,000~~market for the second quarter and first half of 2004, respectively, compared to the same periods in the prior year, primarily as a result of increased patent application activity and other general legal mattersconditions. WeIf ~~expect~~actual ~~our~~market ~~general~~conditions ~~and~~are ~~administrative~~less ~~expenses~~favorable ~~to increase in~~than ~~future~~those ~~periods~~expected toby ~~support our expanding operations~~management, ~~the~~ additional ~~reporting and~~inventory ~~other~~reserves ~~obligations~~may ~~associated~~be ~~with our being a public company, and protection of our intellectual property~~required.

~~Restructuring~~Accounting ~~Expenses~~for Income Taxes. NoWe ~~restructuring~~account ~~expenses~~for ~~were~~income ~~recorded~~taxes inusing ~~2004~~a liability approach. Our ~~The~~deferred tax assets consist primarily of net operating loss and credit carryforwards, for which ~~$161~~we have provided a full valuation allowance,~~000~~ ofdue ~~restructuring~~to ~~expenses~~our inlimited operating history and the unlikelihood ~~first~~that ~~half~~we ofwould ~~2003~~realize ~~was~~those ~~attributable to~~assets anbased ~~adjustment~~on ~~made~~that tohistory. To the ~~restructuring~~extent ~~reserve~~that ~~established~~we inbegin to ~~2001~~generate significant taxable income, tosuch that it becomes more likely than not that these assets ~~reflect~~will abe ~~change~~recoverable, inwe ~~estimate~~will ~~related~~reverse tothose ~~the~~valuation ~~amount~~allowances ofthrough income. To the extent that we ~~expect~~are unable to operate profitably, our tax assets could expire unutilized. The occurrence of ~~receive~~certain ~~from~~events, such as significant changes in ownership interests in Color Kinetics, could result in limitations on the ~~sublease~~amount of ~~our~~those ~~vacated~~assets ~~space~~that could be utilized in any given year.

~~Interest~~In ~~Income~~June 2006, the Financial Accounting Standards Board (~~Expense~~FASB), issued ~~Net~~FASB Interpretation No. 48 (FIN ~~Interest~~48), ~~income~~“Accounting ~~increased~~for ~~from~~Uncertainty ~~$18~~in Income Taxes”,~~000~~ inwhich clarifies the accounting for ~~second~~uncertainty ~~quarter~~in ofincome ~~2003~~taxes torecognized ~~$46,000~~in an entity’s financial statements in ~~the~~accordance ~~second~~with ~~quarter~~FASB Statement ofNo. 109, ~~2004~~“Accounting for Income Taxes” and ~~from~~prescribes a recognition threshold and ~~$36,000~~measurement inattributes ~~the~~for ~~first~~financial ~~half~~statement disclosure of ~~2003~~tax positions taken or expected to ~~$77~~be taken on a tax return. Under FIN 48,~~000~~ inthe impact of an uncertain income tax position on the ~~first~~income tax ~~half~~return ofmust ~~2004,~~be ~~due~~recognized at the largest amount that is more-likely-than-not to ~~higher~~ ~~average~~be ~~cash~~sustained upon ~~and~~audit ~~cash~~by ~~equivalent~~the ~~balances~~relevant intaxing ~~2004~~authority. WeAn ~~incurred~~uncertain ~~$3,000~~income oftax position will not be ~~interest~~recognized ~~expense~~if init ~~the~~has ~~first~~a ~~half~~less than 50% likelihood of ~~2003~~being sustained. Additionally, FIN 48 provides guidance on derecognition, classification, interest and ~~none~~penalties, accounting in ~~2004~~interim periods, disclosure asand atransition. ~~result~~We ofadopted ~~our repayment~~FIN 48 as of ~~all~~January 1, ~~bank~~2007 ~~debt~~with inno ~~2003~~cumulative effect adjustment recorded at adoption.

~~Equity~~Stock-Based inCompensation. ~~Earnings~~We ofaccount ~~Joint~~for ~~Venture.~~stock-based ~~Equity~~compensation expense in ~~earnings~~accordance with Statement of ~~joint~~Financial ~~venture~~Accounting Standards No. 123(R), “Share-Based Payment” (SFAS No. 123R). ~~increased~~Under ~~from~~SFAS ~~$11~~No. 123R,~~000~~ instock-based compensation expense reflects the ~~second~~fair ~~quarter~~value of ~~2003~~stock-based toawards measured ~~$19~~at the grant date,~~000~~ inis recognized over the ~~second quarter~~relevant ofservice ~~2004~~period, and ~~decreased~~is ~~from~~adjusted ~~$185,000~~each period infor anticipated forfeitures. We estimate the ~~first~~fair ~~half~~value of ~~2003~~each tostock-based award on the ~~$152,000~~date inof grant using the ~~first~~Black-Scholes ~~half~~option ofvaluation ~~2004,~~model. The Black-Scholes option valuation model incorporates assumptions as to stock price volatility, the expected life of options, a risk-free ~~result~~interest rate and dividend yield. Many of ~~fluctuation~~these inassumptions ~~net~~are ~~earnings~~highly subjective and require the exercise of ~~Color~~management ~~Kinetics~~judgment. ~~Japan~~Our ~~caused~~management ~~primarily~~must byalso ~~fluctuation~~apply judgment in ~~its~~developing an ~~revenues~~estimate ~~during these~~of ~~periods.~~awards Wethat ~~expect~~may ~~net~~be ~~earnings~~forfeited. ofIf ~~Color~~our ~~Kinetics~~actual ~~Japan~~experience todiffers ~~increase,~~significantly ~~and~~from our ~~equity~~estimates inand ~~earnings~~we ofchoose ~~joint~~to ~~venture~~employ todifferent ~~increase,~~assumptions in the ~~second~~future, ~~half~~the ~~of 2004~~stock-based ~~compared~~compensation toexpense ~~the~~that ~~first~~we ~~half~~record ofin ~~2004~~future periods may differ materially from that recorded in the current period.

~~Provision~~Results for Income Taxes. We recorded no provision for income tax in either 2003 or 2004 due to our net loss carryforward position. At December 31, 2003, we had net loss carryforwards available to offset future taxable income of ~~$31.2 million~~ ~~and tax credit carryforwards available to reduce future taxes~~Operations payable of $526,000. Should it become more likely than not that these assets will be recovered, we would remove the allowances provided, which would have the effect of reducing or eliminating our provision for income tax.

~~Liquidity~~The following table sets forth certain income and ~~Capital~~expense ~~Resources~~items as a percentage of total revenues (or, in the case of our cost of lighting systems revenues and cost of OEM and licensing revenues, as a percentage of the related revenues):

~~At June 30, 2004, we had $54.7 million in cash and equivalents, representing an~~13 ~~increase of $49.0 million compared to our $5.7 million balance of cash and equivalents at December 31, 2003.~~

DuringTable the first half of 2004, we generated $1.2 million of cash from operating activities. During the first half of 2004, the improvement in our cash flows from operating activities resulted primarily from our net income of $904,000, offset partially by an increase in inventory levels to support more rapid fulfillment of increasing order volumes, and higher accounts receivable that resulted from increased sales. Contents

Net cash used in investing activities was $374,000 during the first half of 2004, reflecting purchases of property and equipment, primarily computers, a trade show booth for marketing purposes, and tooling and test equipment related to our product development efforts.


	Percentage of Total Revenues
	Three Months Ended March 31,
	2007			2006
Revenues:
Lighting systems		90	%		89	%
OEM and licensing		10			11

Total revenues		100			100
Cost of revenues:
Cost of lighting systems, as a percentage of lighting systems revenues		46			47
Cost of OEM and licensing, as a percentage of OEM and licensing revenues		30			35

Total cost of revenues		45			45

Gross profit		55			55

Operating expenses:
Selling and marketing		24			26
Research and development		12			11
General and administrative		18			21

Total operating expenses		54			58

Income (loss) from operations		1			(3	)
Interest income		7			4
Equity in earnings of joint venture		—			—

Net income		8	%		1	%

12Revenues. Total revenues increased 28% from $14.7 million in the first quarter of 2006 to $18.8 million in the first quarter of 2007.

~~Table~~Lighting systems revenues increased 30% from $13.1 million in the first quarter of ~~Contents~~2006 to $17.0 million in the first quarter of 2007. Lighting systems revenues in the United States of America (U.S.) and Canada increased 36%, from $8.4 million in the first quarter of 2006 to $11.5 million in the first quarter of 2007, and in markets outside the U.S. and Canada increased 17%, from $4.7 million in the first quarter of 2006 to $5.5 million in the first quarter of 2007.

~~Net~~The ~~cash~~increase ~~provided~~in bylighting ~~financing~~systems ~~activities~~revenues ~~was $48.3 million~~ for the first ~~half~~ quarter of ~~2004,~~2007 ~~primarily~~as ~~attributable~~compared to ~~$13.0 million~~the ~~from issuance of preferred~~same ~~stock~~period in ~~January~~2006 ~~and~~was ~~February~~primarily ofattributable ~~2004~~to ~~and~~increased ~~$35.2 million~~sales of ~~proceeds from~~ our ~~initial~~ ~~public~~intelligent ~~offering~~LED ~~of 4~~lighting systems,~~000,000 million~~ ~~shares~~the addition of ~~common~~new ~~stock~~products into ~~June 2004.~~our Inproduct ~~connection~~line ~~with~~in ~~the~~prior ~~initial public offering~~periods, ~~all~~growth ~~20.4 million~~in ~~shares~~our direct ofsales ~~then~~force, ~~outstanding~~and ~~preferred~~our ~~stock~~ongoing ~~with~~efforts ato ~~carrying~~expand ~~value~~and ofsupport ~~$61.1 million~~our ~~were converted~~network ~~into 11.1 million shares~~ of ~~common stock~~U. ~~No borrowings are outstanding against our $3~~S.~~0 million~~ ~~bank~~and ~~line of credit scheduled to expire in~~Canadian ~~September 2004.~~manufacturer’s Werepresentatives ~~presently~~and dointernational ~~not intend to renew the bank line of credit~~distributors.

WeEffective ~~anticipate~~December 31, ~~that~~2006, we terminated our ~~cash~~joint venture agreement with Yamagiwa Corporation (Yamigiwa) and ~~equivalents~~sold atour ~~June 30,~~50% ~~2004~~ownership ~~will~~interest bein ~~sufficient~~Color Kinetics Japan (CK Japan) to Yamagiwa, at which time CK Japan ceased to ~~fund~~be ~~our~~a ~~foreseeable~~related ~~cash~~party. ~~requirements~~Sales ~~for~~in atthe ~~least~~Japanese market to CK Japan in the first ~~next~~quarter ~~twelve~~of ~~months~~2006 amounted to $821,000.

~~Factors~~Our ~~That~~OEM ~~May~~and ~~Affect~~licensing ~~Future~~revenues ~~Results~~increased 17%, from $1.6 million in the first quarter of 2006 to $1.8 million in the first quarter of 2007. Licensing revenues increased from $457,000 in the first quarter of 2006 to $859,000 in the first quarter of 2007 due primarily to an increase in our existing base of licensees. OEM revenues decreased from $1.1 million in the first quarter of 2006 to $959,000 in the first quarter of 2007 due primarily to variability in the timing of customer orders for OEM components.

WeNo ~~have~~customer ~~experienced,~~accounted and may in the future experience, significant quarter-to-quarter fluctuations in our revenue, gross profit and operating results. Because our sales cycles are long and our customers generally do not enter into long-term purchase commitments, forecasting our revenues is difficult. Even after our lighting systems have been specified for amore ~~particular project~~than or10% ~~installation, the timing~~ of ~~our~~total ~~receipt of revenue may be difficult to predict, as shipment of our systems can be postponed or cancelled due to construction delays, design changes or cost overruns. Similarly, receipt of substantial~~ revenues ~~from an OEM or licensing customer depends on the success of the OEM or licensing customer~~ in ~~developing,~~either ~~introducing and marketing a product including our OEM product or technology, a process that is beyond our control. As is the case for many technology companies, a substantial portion~~ of ~~our~~ ~~revenue in each quarter is attributable to purchase orders issued and shipments made near~~ the ~~end~~first ofquarters ~~the quarter. A delay in shipment near the end~~ of ~~the~~ ~~quarter, due, for example, to an unanticipated construction delay or~~2006 ~~project~~or ~~cancellation, may cause our revenues to fall significantly below our expectations~~2007. ~~Because a substantial portion of our expenses is relatively fixed~~ and cannot rapidly be reduced, a shortfall in quarterly revenue may materially adversely affect our operating results for the quarter. Other factors that may contribute to fluctuations in our quarterly operating results include:

•Gross ~~changes~~Profit. inTotal ~~product~~gross ~~mix;~~profit •increased ~~changes~~from $8.0 million in ~~our~~the ~~distribution~~first ~~and~~quarter ~~sales channels; • seasonal patterns in purchases~~ of ~~our~~2006 ~~products;~~to •$10.3 million ~~changes~~ in ~~gross~~the ~~margin~~first ~~associated~~quarter ~~with~~of ~~inventory~~2007. ~~and~~The ~~supply~~dollar ~~chain~~increase ~~management~~was ~~issues;~~attributable •primarily ~~increases~~to orincreased sales, ~~decreases~~as ingross ~~legal~~profit ~~expenses~~as ~~associated~~a ~~with~~percentage ~~intellectual~~of ~~property~~revenues, ~~litigation initiated by~~ or ~~against~~gross ~~us;~~margin, •remained ~~changes~~relatively inconstant at ~~the~~approximately ~~results~~55% offor ~~operations~~each of ~~Color~~the ~~Kinetics~~first ~~Japan,~~quarters ~~our joint venture in Japan; • introduction by us and our competitors~~ of ~~new~~2006 ~~products;~~ and ~~• competitive factors, including pricing and availability of, and demand for, products that compete with ours~~2007.

InGross ~~addition,~~margin wefrom ~~face~~lighting asystems ~~number~~increased offrom ~~risks~~53% ~~and~~in ~~challenges,~~the ~~many~~first quarter of ~~which~~2006 ~~we describe~~to 54% in the ~~our~~first ~~Registration~~quarter ~~Statement~~of on2007. ~~Form~~The ~~S-1.~~increase ~~Among~~was ~~the~~primarily ~~challenges~~attributable ~~which~~to a more favorable product mix, wea ~~think~~more ~~are~~favorable ~~most~~regional ~~significant~~sales mix, and ~~which~~reduced ~~have~~materials incosts. ~~the~~Gross ~~past,~~margin ~~and~~from ~~will~~lighting systems may vary in ~~the~~ future periods depending on a number of factors, ~~affect~~most ~~our~~notably ~~financial~~product ~~performance~~mix, changes ~~are~~in material costs, and the ~~following:~~timing of larger deals which, on average, tend to have lower gross margins.

•Gross ~~Market~~margin ~~acceptance~~from ofour ~~intelligent~~OEM ~~solid-state~~and ~~lighting:~~licensing ~~The success of our~~ business ~~depends~~increased onfrom ~~growing~~65% ~~acceptance of intelligent solid-state lighting, both as a replacement for traditional lighting solutions and~~ in ~~new~~the ~~applications.~~first ~~Our~~quarter ~~senior management team spends a significant amount~~ of 2006 ~~time, and we expend significant resources, on efforts~~ to ~~promote~~70% ~~the adoption of solid-state lighting~~ in ~~general,~~the ~~and~~first ~~our~~quarter ~~intelligent~~of ~~solid-state lighting systems in particular~~2007. ~~• Ability to meet demand and maintain quality:~~ The ~~success~~increase ofwas ~~our~~primarily ~~business~~attributable ~~also depends on our ability~~ to ~~supply~~increased percentages ~~our~~of ~~products~~higher inmargin ~~quantities~~licensing ~~adequate to meet demand~~revenues, ~~and~~partially tooffset ~~maintain~~by the ~~high~~impact ~~standards~~ of ~~quality that our customers require. Our senior management spends~~ a ~~significant~~lower ~~amount~~margin OEM ~~of its time, and we devote substantial resources, to efforts to ensure our sources of supply and to improve our supply chain management and quality control processes. • Need for continued~~ product ~~and~~development ~~technology~~revenue ~~innovation: Our competitive position depends on our ability to innovate~~contract, ~~and~~in ~~to anticipate~~ the ~~rapid~~first ~~changes~~quarter ~~in lighting technology, changing customer requirements and evolving standards which characterize our industry. Driving and supporting this process~~ of ~~continuous innovation is a key priority of our senior management team and will require continuing expenditures by us~~2007. •Gross ~~Defending~~margin ~~our~~for ~~intellectual property: We believe that~~ our ~~proprietary intellectual property is an important source of competitive advantage and is critical to our growing~~ OEM and licensing business. Wemay ~~will~~vary ~~continue~~in tofuture ~~devote~~periods ~~substantial~~depending ~~resources to extending our intellectual property portfolio and, where necessary, we will take appropriate steps to defend it. This could involve substantial expenditures~~ on ~~our~~the ~~part.~~mix ~~• Management~~ of ~~growth:~~OEM Weproducts ~~recognize that if our business plans are successful, we may be required to manage a larger~~ and ~~rapidly growing enterprise. We will also be required to meet~~ the relative ~~reporting,~~percentage ~~regulatory and other obligations~~ of alicensing ~~public company~~revenues. ~~This will impose new burdens on management and involve additional costs that we have not historically borne.~~

~~Item 3. Quantitative and Qualitative Disclosures About Market Risk~~14

MarketTable risk to which we are subject consists of the risk of loss arising from adverse changes in market rates and foreign exchange rates. Contents

~~Our~~Selling and ~~joint~~Marketing ~~venture,~~Expenses. ~~Color~~Selling ~~Kinetics~~and ~~Japan,~~marketing ~~has~~expenses ~~entered~~increased ~~into~~21% ~~forward~~from ~~currency~~$3.8 million in ~~contracts~~the first quarter of 2006 to ~~hedge~~$4.6 million ~~anticipated~~in ~~dollar~~the ~~denominated~~first ~~purchases~~quarter of ~~product~~2007. ~~from~~As ~~us.~~a percentage of total ~~These~~revenues, ~~contracts~~selling ~~consist~~and ~~solely~~marketing ofexpenses ~~forward~~decreased ~~contracts~~from to26% ~~acquire~~in ~~dollars~~the atfirst aquarter of 2006 to 24% in ~~fixed~~the ~~yen~~first ~~rate~~quarter of 2007. ~~These~~The ~~contracts~~increase ~~are~~in ~~reflected~~dollar onamount ~~the~~was ~~balance~~primarily ~~sheet~~attributable ofto ~~Color~~a $592,000 ~~Kinetics~~increase ~~Japan~~in atpersonnel-related ~~current~~costs ~~fair~~due ~~value~~to the expansion of our worldwide sales force and ~~cover~~other personnel, a ~~notional~~$336,000 ~~amount~~increase ofin $7commissions to our U.5S. and Canadian manufacturer’s ~~million,~~representatives ~~settling~~as ata ~~various~~result ~~dates~~of ~~through~~our ~~2010.~~revenue ~~Our~~growth, ~~exposure~~a to$131,000 ~~these contracts~~increase isin ~~limited~~marketing toand ~~the~~channel support ~~impact~~programs, onand ~~our~~a ~~proportional~~$91,000 ~~share~~increase ofin ~~the~~stock-based ~~income~~compensation orcharges. The decrease in ~~loss~~selling and marketing expenses as a percentage of ~~Color~~revenues ~~Kinetics~~was ~~Japan~~due primarily to the relative increase in revenues. We ~~have~~expect ~~provided~~our noselling ~~guarantees~~and ~~with~~marketing ~~respect~~expenses to ~~Color~~ ~~Kinetics~~increase ~~Japan,~~in ~~and~~dollar amount in subsequent periods as a result ~~the~~of ~~maximum~~(1) increased ~~loss~~commissions weto ~~would~~our ~~record~~manufacturer’s ~~with~~representatives, ~~respect~~commensurate towith our ~~investment~~expected ~~would~~revenue begrowth; ~~the~~(2) increased ~~carrying~~payroll-related ~~value~~expenses ofas ~~that~~we ~~investment at any~~add ~~point~~personnel primarily in ~~time.~~the Atarea ~~June 30,~~of ~~2004,~~direct ~~our~~sales ~~investment~~and insales ~~Color~~support; ~~Kinetics~~and ~~Japan~~(3) increased ~~was~~spending as a ~~carried~~result atof ~~$448~~planned product releases,~~000~~ as well as increases in various variable marketing programs.

13Research and Development Expenses. Research and development expenses increased 43%, from $1.6 million in the first quarter of 2006 to $2.3 million in the first quarter of 2007. As a percentage of total revenues, research and development expenses increased from 11% in 2006 to 12% in 2007. The increase in both dollar amount and as a percentage of revenues was primarily attributable to a 16% increase in our research and development headcount based both in our Boston and China offices and increased spending related to product development, testing and environmental regulatory compliance. We expect our research and development expenses to increase in dollar amount in subsequent periods, as we add more engineering personnel and devote additional resources to developing new products and technologies and supporting scheduled new product introductions.

~~Table~~General and Administrative Expenses. General and administrative expenses increased 6%, from $3.1 million in the first quarter of ~~Contents~~2006 to $3.3 million in the first quarter of 2007. Total outside legal expenses decreased from $955,000 in the first quarter of 2006 to $792,000 in the first quarter of 2007 due primarily to lower patent prosecution costs and a first quarter 2006 corporate project. As a percentage of total revenues, general and administrative expenses decreased from 21% in the first quarter of 2006 to 18% in the first quarter of 2007. The increase in dollar amount was primarily attributable to a $149,000 increase due to increased personnel-related costs to support overall growth in the business and a $147,000 increase in stock-based compensation charges. The decrease in general and administrative expenses as a percentage of revenues was due primarily to the relative increase in revenues. We expect general and administrative expenses in the second quarter of 2007 to remain relatively consistent in dollar amount with the first quarter of 2007. The timing and extent of patent and litigation activity related to building or defending our intellectual property rights is uncertain, and we therefore expect quarter to quarter variability.

~~Item~~Interest 4Income. ~~Controls~~Interest income increased from $562,000 in the first quarter of 2006 to $1.3 million in 2007, due to higher average cash, cash equivalent, and ~~Procedures~~investment balances, as well as higher average yields on these investments in 2007.

~~(a)~~Equity ~~Evaluation~~in Earnings of ~~disclosure~~Joint ~~controls and procedures~~Venture. ~~Our~~Effective ~~management~~December 31, ~~including our Chief Executive Officer and our Chief Financial Officer~~2006, ~~carried~~we ~~out~~terminated ~~an evaluation of the effectiveness of~~ our ~~disclosure~~joint ~~controls~~venture agreement ~~and~~with ~~procedures~~Yamigiwa ~~as of the end the period covered by this quarterly report. Based on this evaluation, our Chief Executive Officer~~ and ~~Chief~~sold ~~Financial Officer concluded that~~ our ~~disclosure~~50% ~~controls~~ownership ~~and~~interest ~~procedures~~in ~~were~~CK ~~effective~~Japan to ~~provide~~Yamagiwa. aEquity ~~reasonable~~in earnings ~~level~~ of ~~assurance~~joint ~~that~~venture ~~the~~amounted ~~information required~~ to be$57,000 ~~disclosed~~ in the ~~reports~~first ~~filed~~quarter ~~or submitted by us under the Securities Exchange Act~~ of ~~1934 is recorded, processed, summarized and reported within the requisite time periods~~2006.

~~(b)~~Provision ~~Changes~~for Income Taxes. We recorded no provision for income tax in ~~internal~~either ~~control~~the ~~over~~first ~~financial~~quarter ~~reporting~~of 2006 or 2007 due to our historical net losses. ~~There~~At ~~were~~December 31, no2006, ~~changes~~we inhad ~~our~~net ~~internal~~loss ~~control~~carryforwards available ~~over~~to ~~financial~~offset ~~reporting~~future ~~that~~taxable ~~occurred~~income ~~during~~of ~~the~~$30.0 million ~~last~~and ~~fiscal~~federal ~~quarter~~research and development tax credit carryforwards available to reduce future taxes payable of $1.1 million. Should it become more likely than not that ~~have~~these ~~materially~~assets ~~affected~~will be recovered, we would remove all or ~~are~~a ~~reasonably~~portion ~~likely~~of the allowances provided, which would have the effect of reducing or eliminating our provision for income tax and possibly creating a tax benefit to ~~materially~~earnings. ~~affect~~For 2007, ~~our~~the ~~internal~~realization ~~control~~of ~~over~~tax benefits ~~financial~~remains ~~reporting~~uncertain and as such will only be recognized to the extent utilization of such carryforwards are allowable as an offset against any income taxes that would otherwise be owed for 2007.

~~PART~~Liquidity ~~II.~~and ~~OTHER~~Capital ~~INFORMATION~~Resources

~~Item~~At March 31, 2007, we had $101.4 million in cash and equivalents and investments, representing an increase of $1.4 million ~~Legal~~compared ~~Proceedings~~to our $100.0 million balance of cash and equivalents and investments at December 31, 2006.

~~Super~~During ~~Vision~~the ~~International~~first three months of 2007, ~~Inc~~we generated $2.3 million of cash from operating activities, as compared to using $836,000 in the first three months of 2006. The increase in cash generated from operating activities during the first three months of 2007 as compared to cash used in the first three months of 2006 was primarily due to higher net income (excluding the impact of non-cash stock-based compensation charges), increased accounts payable due primarily to the timing of expenses

~~In March 2002, Super Vision International, Inc., or Super Vision, filed a~~15 lawsuit in the United States District Court for the Middle District of Florida seeking a declaratory judgment that certain of our patents are invalid, that Super Vision’s products do not infringe the patents in question, and that the patents are unenforceable. Super Vision subsequently amended the complaint to add claims for interference with prospective business relationships, unfair competition, trade disparagement and defamation.

InTable June 2002, we filed a lawsuit against Super Vision in the United States District Court for the District of Massachusetts. In this litigation, we alleged that certain products of Super Vision, including solid-state architectural lighting fixtures, pool lights and spa lights, infringe five of the patents at issue in Super Vision’s declaratory judgment action. Proceedings in our lawsuit against Super Vision were temporarily stayed for the purpose of pursuing settlement negotiations, but these negotiations were not fruitful. Contents

~~Upon~~and ~~renewal of the proceedings~~payments, ~~Super~~increased ~~Vision’s~~deferred ~~lawsuit~~revenue inassociated ~~Florida~~with ~~was~~a ~~removed~~$1.3 million customer bydeposit ~~the~~received ~~court~~for toa ~~the~~product ~~United~~sale ~~States~~not ~~District~~shipped ~~Court~~at ~~for~~ the ~~District~~end of ~~Massachusetts,~~ ~~where our motion to consolidate~~ the ~~two~~first ~~cases~~quarter isof ~~pending.~~2007, ~~The~~and ~~cases~~changes ~~are~~ in ~~the~~our ~~discovery~~other ~~phase,~~operating ~~with~~assets aand ~~so-called~~liabilities, ~~“Markman”~~offset ~~hearing~~partially onby ~~patent claim~~increased ~~interpretation scheduled for October 2004 and trial scheduled for January~~inventory ~~2005.~~purchases Weto ~~believe~~meet ~~that~~expected ~~Super~~demand ~~Vision’s claims~~ of ~~invalidity,~~certain ~~unenforceability~~products and ~~non-infringement~~ ofhigher ~~the~~accounts ~~patents~~receivable atbalances ~~issue~~as ~~in our infringement suit against Super~~a ~~Vision,~~result ~~and its claims against us~~ of ~~interference~~revenue ~~with prospective business relationships, unfair competition, trade disparagement and defamation, are without merit~~growth.

OnNet ~~March 4,~~cash ~~2004,~~used ~~Super~~in ~~Vision~~investing ~~announced~~activities ~~that~~was it$19.1 million ~~had~~in ~~acquired~~the ~~from~~first ~~High~~three ~~End~~months of 2007, ~~Systems~~reflecting a$17.9 million ~~patent~~of ~~relating~~net topurchases ~~variable~~of ~~color~~investments, ~~lighting~~$742,000 ~~systems.~~of Onpurchases ~~March 5,~~of ~~2004,~~property and ~~Super~~equipment ~~Vision~~(primarily ~~filed~~leasehold aimprovements ~~lawsuit~~related into ~~the~~our ~~United~~showroom ~~States~~in ~~District~~New ~~Court~~York ~~for~~City ~~the~~as ~~Middle~~well as ~~District~~tooling ofand ~~Florida~~test ~~alleging~~equipment ~~that~~related weto ~~have~~our ~~infringed~~product ~~the~~development ~~High~~efforts) ~~End patent~~ and ~~seeking~~$464,000 ~~damages~~for ofa ~~$10.5 million.~~letter Weof credit ~~had~~required ~~previously~~pursuant ~~investigated~~to the ~~High End~~lease ~~patent~~for ~~and~~our ~~concluded~~new ~~that~~corporate ~~our~~headquarters ~~products~~in ~~and~~Burlington, Massachusetts. ~~technology~~Investments doare ~~not~~composed ~~infringe~~of ~~any valid~~state ~~claim~~and ofmunicipal ~~the~~obligations, ~~patent~~U.S. ~~Accordingly~~Treasury obligations, weand ~~believe~~investment-grade ~~that~~commercial ~~Super~~paper. ~~Vision’s~~We ~~High~~expect ~~End~~capital expenditures to increase in ~~patent~~subsequent ~~lawsuit~~periods, isprimarily ~~without~~due ~~merit~~to ~~and~~anticipated ~~intend~~spending related to ~~defend~~leasehold ~~against~~improvements itfor ~~vigorously~~our new corporate headquarters in Burlington, Massachusetts.

~~With~~Net ~~the~~cash ~~permission~~provided ofby ~~the~~financing ~~court,~~activities wewas ~~amended~~$276,000 during the ~~complaint~~first ~~that~~three wemonths ~~filed~~of 2007, ~~against~~attributable ~~Super~~to ~~Vision~~$139,000 in ~~The~~proceeds ~~United~~from ~~States District Court for~~ the ~~District~~exercise of ~~Massachusetts~~ tostock ~~include~~options ~~requests~~and ~~for declarations that the High End patent is not infringed by Color Kinetics~~$137,000 isof ~~invalid and is not enforceable. We are now~~proceeds ~~seeking~~from tothe ~~transfer~~issuance ~~Super~~of ~~Vision’s~~common ~~High~~stock ~~End~~pursuant ~~patent lawsuit~~ to ~~federal~~our ~~court~~Employee ~~in Massachusetts~~Stock asPurchase ~~well~~Plan. ~~Since all of the claims are now before the court in~~ ~~Massachusetts, we may request that the court adjust the discovery and trial schedule.~~

~~TIR~~We anticipate ~~Systems~~that our cash and equivalents and investments at March 31, ~~Ltd~~2007 will be sufficient to fund our foreseeable cash requirements for at least the next twelve months.

~~In April~~Item ~~2004, we commenced an action in the United States District Court for the District of Massachusetts against TIR Systems, Ltd~~3., aQuantitative ~~supplier of traditional lighting products used primarily in corporate identity, commercial~~ and ~~industrial~~Qualitative ~~applications~~Disclosures ~~that~~About ~~has~~Market ~~recently begun to market solid-state~~Risk lighting products. In our complaint, we allege that solid-state lighting products sold by the defendant infringe multiple patents owned by us, and we seek injunctive relief, damages, and attorney’s fees. TIR Systems has responded to our complaint denying all liability and has asserted counterclaims seeking declaratory judgment that certain of our patents are not infringed, are invalid and are not enforceable.

~~Item~~Market 2risk to which we are subject consists of the risk of loss arising from adverse changes in market interest rates and foreign exchange rates. ~~Changes~~Exposure to market rate risk for changes in interest ~~Securities~~rates relates to our investment portfolio. We have not used derivative financial instruments in our investment portfolio. We seek to place our investments with high-quality issuers and ~~Use~~we have policies limiting, among other things, the amount of ~~Proceeds~~credit exposure to any one issuer. We seek to limit default risk by purchasing only investment-grade securities. In addition, we have classified all of our debt securities as available for sale. This classification reduces the income statement exposure to interest rate risk if such investments are held until their maturity date. Based on a hypothetical 10% adverse movement in interest rates, the potential losses in future earnings, fair value of risk-sensitive instruments, and cash flows are immaterial.

~~In connection with our initial public offering, we effected a 1-for-2 reverse stock split of our common stock on May~~Item ~~28, 2004~~4. InControls ~~June 2004, in connection with our initial public offering, our Seventh Amended~~ and ~~Restated Certificate~~Procedures ~~of Incorporation and our Second Amended and Restated By-Laws became effective.~~

~~During the three months ended June~~(a) ~~30,~~Evaluation ~~2004, we granted options to purchase an aggregate~~ of ~~168,000~~disclosure ~~shares~~controls ~~of our common stock to employees~~ and ~~directors under our 1998 Incentive and Non-Statutory Stock Plan at exercise prices ranging from $9~~procedures.~~00 to $10.80 per share. During this period, 6,950 shares of~~ common stock were purchased pursuant to exercises of stock options. The securities issued in the foregoing transactions were offered and sold in reliance on exemptions from registration set forth in Section 4(2) of the Securities Act of 1933, as amended, or regulations promulgated thereunder, relating to sales by an issuer not involving a public offering, or an exemption from registration under Rule 701 promulgated under the Securities Act. No underwriters or placement agents were involved in the foregoing transactions.

Our ~~initial~~management, ~~public~~with ~~offering~~the participation of ~~common~~our ~~stock~~Chief ~~was~~Executive ~~completed~~Officer ~~through~~and ~~our~~Chief Financial Officer, ~~Registration~~evaluated ~~Statement~~the oneffectiveness ~~Form~~of ~~S-1~~our ~~that~~disclosure ~~was~~controls ~~declared~~and ~~effective~~procedures by(as ~~the~~defined in Rules ~~Securities~~13a-15(e) and 15d-15(e) under the Exchange ~~Commission~~Act) onas ~~June~~of March 2231, ~~2004~~2007. InDisclosure ~~connection~~controls ~~with~~and procedures ~~the~~means controls and other procedures that are designed to ensure that information ~~offering,~~required to be disclosed by us in reports that we ~~sold~~file 4or submit under the Exchange Act is (a) recorded,~~000~~ processed,~~000~~ ~~shares~~summarized ofand ~~common~~reported, ~~stock~~within atthe antime ~~initial~~periods ~~public~~specified in the Commission’s ~~offering~~rules ~~price~~and offorms ~~$10.00~~and ~~per~~(b) accumulated ~~share,~~and ~~for~~communicated anto ~~aggregate~~our ~~offering~~management, ~~price~~including ofour principal ~~$40~~executive and principal financial officers,~~000~~ or persons performing similar functions,~~000~~ as appropriate to allow timely decisions regarding required disclosure.

WeBased ~~received~~on ~~net proceeds from~~ the ~~offering~~evaluation of ~~approximately~~our ~~$35.2 million, after~~disclosure ~~deducting~~controls ~~the underwriting discount~~ and ~~other~~procedures ~~offering~~as ~~costs.~~of ~~In connection with the initial public offering~~March 31, ~~all outstanding shares of our preferred stock were converted into 11~~2007,~~069,031~~ ~~shares of common stock. No offering expenses were paid directly or indirectly to any of~~ our ~~directors or~~ ~~officers~~Chief ~~(or~~Executive ~~their~~Officer ~~associates)~~and orChief ~~persons~~Financial ~~owning~~Officer ~~ten~~concluded ~~percent~~that, oras ~~more~~ of ~~any class~~such ofdate, our ~~equity~~disclosure controls ~~securities~~and orprocedures towere ~~any other affiliates~~effective.

We(b) Changes intend to use our net proceeds for working capital and other general corporate purposes, which will include expansion of our sales and marketing organizations and acceleration of our research and development efforts to develop new technologies and products and enter new markets, and may also include acquisitions of businesses, products and technologies that are complementary to our business. Although we have from time to time evaluated possible acquisitions, we currently have no commitments or agreements to make any acquisitions and we cannot assure you that we will make any acquisitions in ~~the~~ ~~future.~~internal ~~Until~~control weover ~~use~~financial ~~the net proceeds of the offering, we have invested the net proceeds cash equivalents~~reporting.

~~Items~~No 3.changes ~~Defaults~~in ~~Upon~~our ~~Senior~~internal ~~Securities~~control over financial reporting occurred during the quarter ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

~~None~~PART II. OTHER INFORMATION

Item 4 1. ~~Submission~~Legal ~~of Matters to a Vote of Security Holders~~Proceedings

~~During~~TIR ~~the three months ended June 30~~Systems, ~~2004, we solicited the written consent~~Ltd. ~~of our stockholders pursuant to Section 228 of the General Corporation Law of~~ ~~the State of Delaware in connection with the following proposals:~~

1416

~~(a)~~In ToDecember 2003, ~~approve~~we filed a ~~one-for-two~~lawsuit ~~reverse~~against ~~stock~~TIR ~~split~~Systems ofLtd, ~~our~~a ~~common~~Canadian ~~stock;~~corporation, ~~(b)~~in Tothe United ~~approve~~States anDistrict ~~amendment~~Court tofor ~~Certificate~~the District of ~~Incorporation~~Massachusetts. toIn ~~(i)~~this ~~authorize 100~~litigation,~~000,000~~ ~~shares~~we ofallege ~~our~~that certain ~~common~~products ~~stock,~~of ~~(ii)~~TIR ~~authorize~~infringe ~~5,000,000~~three ~~shares~~ of our ~~preferred~~patents. ~~stock,~~Our ~~(iii)~~complaint ~~delete~~was ~~all~~later ~~references~~amended to ~~our~~add ~~Series~~a fourth Apatent. ~~through~~TIR ~~Series~~has Ffiled ~~Convertible~~counterclaims ~~Preferred~~seeking ~~Stock,~~declarations ~~and~~that ~~(iv)~~its ~~effect~~products ~~certain~~do ~~other~~not ~~changes~~infringe and ~~relating~~that tothe ~~corporate~~patents ~~governance,~~are ~~liability~~invalid. ofWe ~~our~~believe ~~directors,~~that ~~indemnification~~these ofclaims ~~our~~by ~~directors,~~TIR ~~officers~~are ~~and~~without ~~others,~~merit. ~~and~~We ~~other~~have since ~~matters;~~added ~~(c)~~four Tomore ~~approve~~patents ~~our~~to ~~2004~~the ~~Stock~~suit ~~Incentive~~and ~~Plan;~~added ~~and~~breach ~~(d)~~of Tocontract ~~approve~~and ~~our~~theft ~~2004~~of ~~Employee~~trade ~~Stock~~secret claims ~~Purchase~~to ~~Plan~~our complaint.

~~The~~In ~~written~~January 2006, ~~consent~~we ~~was~~filed ~~given~~a bylawsuit ~~holders~~against ofTIR ~~12,573,797~~in ~~shares~~the Federal Court of ~~our~~Canada. ~~common~~In this ~~stock~~litigation, onwe anallege asthat ~~converted~~several ~~basis,~~TIR ~~representing~~Destiny ~~approximately~~products ~~90.6%~~and ofTIR’s ~~the~~LEXEL ~~shares~~technology infringe our ~~outstanding~~Canadian patent. TIR has filed counterclaims seeking declarations that its products do not infringe and ~~entitled~~that tothe ~~vote~~patent onis ~~such~~invalid. ~~matters~~We believe that these claims by TIR are without merit.

~~Item~~On 5.March 13, ~~Other~~2007 ~~Information~~TIR announced that they entered into an agreement with Royal Philips Electronics whereby Philips will acquire 100% of the outstanding shares of TIR.

~~None.~~Boca Flasher Incorporated

~~Item~~On 6March 19, 2007, we filed a patent infringement complaint against Boca Flasher Incorporated in the U.S. ~~Exhibits~~District ~~and~~Court ~~Reports~~for onthe ~~Form~~District ~~8-K~~of Massachusetts. In this suit we allege that certain products of Boca Flasher infringe eight of our patents. We are seeking injunction, damages, and fees.

~~(a)~~Item ~~Exhibits~~1A. Risk Factors

Exhibit
Number		Description
31.1		Certification by George G. Mueller pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, relating to Color Kinetics Incorporated
31.2		Certification by David K. Johnson pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, relating to Color Kinetics Incorporated
32.1		Certification by George G. Mueller pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, relating to Color Kinetics Incorporated
32.2		Certification by David K. Johnson pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, relating to Color Kinetics Incorporated

There are no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2006 under Item 1A “Risk Factors” except as follows.

With respect to the risk factor captioned “We may incur substantial costs or lose important rights as a result of litigation or other proceedings relating to patent and other intellectual property rights” (bi) ~~Reports~~we onare ~~Form~~currently involved in three patent infringement lawsuits as described above under the heading “Legal Proceedings” in Part ~~8-K~~II, Item 1.

~~None~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~SIGNATURES~~No change.

~~Pursuant~~Items to3. ~~the~~Defaults ~~requirements~~Upon ofSenior ~~the~~ Securities ~~Exchange Act of 1934, the~~ ~~Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.~~

Date: August 16, 2004	COLOR KINETICS INCORPORATED (Registrant)
	By:	/s/ George G. Mueller George G. Mueller Chief Executive Officer
	By:	/s/ David K. Johnson David K. Johnson Chief Financial Officer

None.

15Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

As we disclosed on our Form 8-K filed on May 1, 2007 under “Compensatory arrangements of certain officers” we entered into severance agreements with each of our chief executive officer, chief operating officer, chief financial officer, chief technical officer and chief scientist on May 1, 2007. Furthermore, we stated that “The existing agreements with each of our chief executive officer, chief financial officer, chief scientist and chief technical officer (“Prior Agreements”), providing for four months severance in the event of a termination other than for death, Disability, Cause (as such terms are defined in such Prior Agreements) or resignation, remain in full force and effect, except that in the event of a termination which would cause severance payments to such individuals under both their Prior Agreements and the agreements dated May 1, 2007, then payments under the agreements dated May 1, 2007 will be reduced by payments already made under the Prior Agreements.” In fact, however, our existing agreement with our chief executive officer (filed as Exhibit 10.13 to our Form 10-K for year ended December 31, 2006) provides for one year severance in the event of a termination other than for death, Disability, Cause (as such terms are defined in his prior agreement) or resignation.

Item 6. Exhibits


Exhibit No.		Description

3.2		Seventh Amended and Restated Certificate of Incorporation of Color Kinetics Incorporated (1)

3.4		Third Amended and Restated By-Laws of Color Kinetics Incorporated (2)

*10.2		Employee Stock Purchase Plan

10.31		Lease Agreement with Three Burlington Woods LLC dated January 8, 2007(3)

10.32		Expansion Option Agreement with Burlington Woods Office Trust No. 2, dated January 8, 2007(3)

*10.33		2007 Senior Management Bonus Plans

*10.34		Letter Agreement by and between Color Kinetics Incorporated and William J. Sims, dated May 1, 2007 (4)

*10.35		Letter Agreement by and between Color Kinetics Incorporated and David K. Johnson, dated May 1, 2007 (4)

*10.36		Letter Agreement by and between Color Kinetics Incorporated and Jeffrey Cassis, dated May 1, 2007 (4)

*10.37		Letter Agreement by and between Color Kinetics Incorporated and Frederick M. Morgan, dated May 1, 2007 (4)

*10.38		Letter Agreement by and between Color Kinetics Incorporated and Ihor Lys, dated May 1, 2007 (4)

31.1		Certification Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 – William J. Sims.

31.2		Certification Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 – David K. Johnson

32.1		Certification Pursuant to Section 906 of Sarbanes-Oxley Act of 2002


*		Management contract or compensatory plan or arrangement

(1)		Incorporated by reference to the similarly numbered exhibit to our Registration Statement on Form S-1, File No. 333-114386.

(2)		Incorporated by reference to Exhibit 99.1 on Form 8-K filed May 1, 2007

(3)		Incorporated by reference to Exhibit 99.1 on Form 8-K filed January 10, 2007

(4)		Incorporated by reference to Exhibit 99.1 on Form 8-K filed May 1, 2007

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 10th day of May 2007.


	COLOR KINETICS INCORPORATED (Registrant)
	By:	/s/ William J. Sims
		William J. Sims
		Chief Executive Officer



	By:	/s/ David K. Johnson
		David K. Johnson
		Chief Financial Officer

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