SECURITIES AND EXCHANGE COMMISSION

**Washington, D.C. 20549**

FORM 10-KSB

(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

**For the fiscal year ended December 31,
2004**

**or**

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

**For the transition period from __****to
__**

**Commission file number 0-20354**

**LIGHTING SCIENCE GROUP CORPORATION**
(Exact name of registrant as specified in its charter)




Delaware
    23-2596710(State or other jurisdiction of incorporation or
      organization)
    (I.R.S. Employer Identification No.)2100 McKinney Ave., Suite 1555Dallas,
      TX
    75201(Address of principal executive offices)
    (Zip Code)

214-382-3630
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the
Act:
****
**NONE**
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, par value $.001 per share
(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.   XYES  ___ NO

As of January 31, 2005, the aggregate market value of the
Registrant’s Common Stock held by non-affiliates was $92.3
million****based upon the closing price of
$1.80****on January 31, 2005. As of January 31, 2005, there
were 51,297,256 shares of common stock issued and outstanding and 533,333 shares
of Series A Senior Convertible Preferred Stock issued and outstanding.

****


**FORWARD LOOKING STATEMENTS**THIS FORM 10-KSB
INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT TO THE FINANCIAL
CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY. WHEN USED HEREIN,
THE WORDS “ANTICIPATE,” “BELIEVE,” “ESTIMATE” AND “EXPECT” AND SIMILAR
EXPRESSIONS, AS THEY RELATE TO THE COMPANY’S MANAGEMENT, ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT SIGNIFICANT
ASSUMPTIONS, RISKS AND SUBJECTIVE THESE ASSUMPTIONS AND JUDGEMENTS MAY OR MAY
NOT PROVE TO BE CORRECT. MOREOVER SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO
RISKS AND UNCERTAINTIES THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE CONTEMPLATED IN SUCH FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING
STATEMENTS SPEAK ONLY AS TO THE DATE HEREOF.




**TABLE OF CONTENTS**


**PART I**

ITEM 1. DESCRIPTION OF BUSINESS
General Overview
Business Overview
Corporate Developments / Significant
Transactions
Sources of Revenue
Human Resources
ITEM 2. DESCRIPTION OF PROPERTY
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS

**PART II**

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
Dividends
ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
ITEM 7. FINANCIAL STATEMENTS
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING
AND FINANCIAL DISCLOSURE
ITEM 8A. CONTROLS AND PROCEDURES+

**PART III**

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
AND RELATED STOCHOLDER MATTERS
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

CONSOLIDATED FINANCIAL
STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM  CONSOLIDATED BALANCE SHEET CONSOLIDATED STATEMENTS OF OPERATIONS CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DEFICIT) CONSOLIDATED STATEMENTS OF CASH FLOWS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


**PART I**

**ITEM 1. DESCRIPTION OF BUSINESS**

**General Overview**

**Business
Background**

On
December 23, 2004, The Phoenix Group Corporation announced its decision to
change its name to Lighting Science Group Corporation (the “Company” or
“Lighting Science”) by means of a parent/subsidiary merger with its wholly owned
subsidiary, Lighting Science, Inc. Pursuant to a resolution approved by the
board of directors, The Phoenix Group Corporation filed a certificate of merger
with the office of the Secretary of State of Delaware on December 23, 2004 to
complete the merger of Lighting Science with and into The Phoenix Group
Corporation and to change the name. The Company began conducting its operations
under the name Lighting Science Group Corporation on January 1, 2005.

Lighting
Science is a Delaware corporation organized in June 1988. The Company’s
wholly owned subsidiaries during the period or for portions of the period were
Lighting Science, Inc. and Americare Management, Inc. Americare Management, Inc.
had no significant operations during the periods covered by these financial
statements. All intercompany accounts and transactions have been eliminated in
the accompanying consolidated financial statements.

On or
about August 20, 2002, the Company filed a voluntary petition seeking
debtor-in-possession status for relief under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware. The case was subsequently transferred to the U.S. Bankruptcy Court for
the Northern District of Texas - Ft. Worth Division (“the Court”). The Court
granted the requested status.

During
the summer of 2003, the Company filed a Disclosure Statement and Plan of
Reorganization (collectively “the Plan”) that was confirmed by the Court on
September 16, 2003 with an effective date of September 26, 2003. Under the terms
of the Plan, the creditors of the Company received an aggregate of approximately
51% of the common stock of the restructured entity in exchange for notes,
accounts payable, and other forms of debt held at the time of the filing of the
petition. This feature of the Plan - the exchange of debt for greater than 50%
of the equity in the restructured entity - qualified the Company to utilize the
reporting guidelines of the “Fresh Start” accounting rules contained in
Statement of Position (“SOP”) 90-7.

On June
1, 2004 the Company acquired 100% of the outstanding common stock of Lighting
Science, Inc., a Las Vegas, Nevada-based corporation that owned certain
intellectual property related to the design and development of a light bulb
utilizing light emitting diodes as a source of light. Following the date of
acquisition, the Company raised capital through a private placement and provided
Lighting Science, Inc. with resources to develop and manufacture prototype light
bulbs. Staff has been added to support the development process.

As of the
date of this report, the Company continues with its plans to develop and sell
products based upon the technology acquired in the acquisition of Lighting
Science.
**Business Overview**

Information
contained in this report, other than historical information, should be
considered forward-looking and is subject to various risk factors and
uncertainties. For instance, the Company’s strategies and operations involve
risks of competition, changing market conditions, changes in laws and
regulations affecting it and the lighting industry and numerous other factors
discussed in this report and in the Company’s filings with the Securities and
Exchange Commission. Accordingly, actual results may differ materially from
those in any forward-looking statements.

*Market
Overview*

The
global lighting market has annual sales exceeding $40 billion, with the U.S.
market alone contributing $12 billion to $15 billion annually.1More
importantly, the lighting market consumes over 20% of the world’s energy on an
annual basis.2This is
the target market that management believes will ultimately evolve to solid state
lighting.

With its
acquisition of Lighting Science, Inc. on June 1, 2004, the Company entered the
field of solid state lighting. Light emitting diode (“LED”) technology has been
in use since 1962, but until recently was used only in small electronic devices.
Unlike incandescent bulbs, which produce the full spectrum of light in a
spherical pattern, LEDs emit a monochromatic focused beam that is highly
directional. For many applications, such as indicators or switch illuminators,
this is not a problem. But it took development of multi-chip arrays, high-flux
LED chips, and specialized phosphors to achieve the effect of an incandescent
bulb.

As a
result of these recent innovations, many designers have begun to focus their
attention on LEDs as a new source of product for traditional lighting needs. LED
bulbs are now available in a variety of light bases and sizes, most of which are
suitable only for specialty lighting. LED bulbs are rugged, durable, and visible
in daylight. Their life span, which far exceeds that of incandescent bulbs, is
an advantage for high volume users of light bulbs who are faced with high energy
consumption and recurring maintenance obligations. These maintenance obligations
can have legal ramifications as well as aesthetic implications.

Industry
studies have predicted that LED-based lighting will replace over 40% of
incandescent lighting applications by 2025.3It is
estimated that by the same year solid state lighting could reduce the global
amount of electricity used for lighting by 50%.4The
Company believes that no other use of electricity can offer such a large
energy-savings potential.

Through
market analysis and research, management has identified 11 benefits of LED
lighting compared to incandescent and fluorescent lighting.

1.
    Lowest
      total cost of ownership of all bulbs
- Bulbs +
electricity:
--
>85% lower energy cost than incandescent bulbs,
--
>50% lower energy cost than fluorescent bulbs,
- Also
save on labor, air conditioning costs, and insurance;

2.
    Greatly
      extended life up to 50,000 hours
- 25-50
times longer than incandescent bulbs,
- 4-16
times longer than fluorescent bulbs;

3.
    Very
      low energy consumption
-
Approximately 8-10 times more energy efficient than incandescent
bulbs,
-
Approximately 2 to 4 times more energy efficient than fluorescent
bulbs;

4.
    Better
      quality light output
- Minimum
ultraviolet (UV) and infrared (IR) radiation;

5.
    “On”
      is on
- LED
bulbs instantly reach 100% of their light output, unlike fluorescent bulbs that
take up to eight second to reach their full light output;

6.
    Dimmable
- LED
bulbs can be made to work with dimmer switches, unlike most fluorescent
bulbs;

7.
    Intrinsically
      safe
- Very
limited heat generation and cool to the touch,
- Very
hot halogen and incandescent bulbs start a large number of fires each
year;

8.
    Smaller,
      more flexible light fixtures
- Useful
for lighting tight spaces, such as cabinets and closets;

9.
    Durable
-
Vibration and shock resistant because there are no filaments to
break;

10.
    Easy
      disposal
- No
hazardous materials, unlike fluorescent bulbs which have recycling
rules;

11.
    Cleaner
      for the environment. One 100-watt bulb over 50,000 hours will:
- Reduce
carbon dioxide emissions by 5,000 pounds,
- Reduce
sulphur dioxide emissions by 20 pounds,
- Reduce
nitrous oxide emissions by 15 pounds.

Increased
investment by the manufacturers of LEDs over the past decade has resulted in
performance enhancements and cost reductions that have exceeded expectations.
Since their introduction, LED prices have fallen while performance has grown.
This pattern caused retired Agilent scientist Roland Haitz to measure the change
and to develop “Haitz’s Law” (similar to Moore’s Law in the computer chip
industry) which holds that each decade since the first LED appeared in 1962,
prices have fallen by a factor of 10 while performance has grown by a factor of
20.5

While
manufacturers of LEDs have made great strides, the enabling technologies such as
power conversion and thermal management have not kept pace. These technologies
in the LED industry can be equated to software applications in the computer chip
industry. But while software development takes advantage of each hardware
enhancement, the technologies necessary to derive the greatest performance from
LEDs have lagged. Consequently, the existing gap between the advancements in LED
technology and their incorporation into general illumination systems has widened
over the past five years.

*Competitive
Advantages*

Through
the development of its Optimized Digital LightingTM (“ODL”) technology, the
Company believes that it has begun to close the gap between the theoretical
performance capability of today’s LEDs and the level of their performance in the
current generation of general illumination products. With its enabling
technologies, the Company believes that it has positioned itself at the
forefront of the emerging solid state lighting industry and established a
competitive advantage for the reasons outlined below.

·
    Digital
      lighting expertise is the Company’s core competency. The Company has and
      will continue to generate important intellectual
    properties:

-
    Patent
      pending digital lighting engineering design
-
    Patent
      pending bulb design appearance
-
    Patent
      pending manufacturing process

·
    The
      Company’s ODL products costs up to 80% less than other LED bulbs while
      producing up to 30% greater light with comparable or lower energy
      consumption.

·
    Compared
      with 65-watt incandescent bulbs, ODL bulbs reduce energy use by up to 85%,
      with a useful life up to 50 times longer (50,000 hours).

·
    Several
      factors contribute to the benefits produced by the Company’s ODL
      technology:

-
    The
      patent pending manufacturing processes reduce production costs to allow
      retail pricing that is both affordable and provides a fast payback through
      reduced energy consumption in most
applications.

-
    ODL
      bulbs have added functionality - they are dimmable and reach their full
      operating level instantly unlike most fluorescent
bulbs.

-
    Development
      of additional ODL products is ongoing. The product development team is
      bolstered by a scientific advisory board with expertise in many
      disciplines of the lighting industry.


*Strategy*

Lighting
Science is positioned to introduce its ODL products through traditional
commercial and retail distribution channels and on a direct basis through its
sales force, as well as through shared savings plans with larger commercial and
municipal customers.

The
Company has developed the Shared Savings ProgramSM. This
program allows customers to partner with the Company to deploy its ODL products
without any upfront capital expenditures while benefiting from the significant
energy savings provided by the Company’s LED products. The Company’s lighting
products pay for themselves in energy savings, which are shared between the
Company and the customer. The Shared Savings Program is focused on
municipalities and companies with significant outdoor lighting requirements. The
program requires an investment by the Company in product and labor to install
the lights in a city or a municipality. The Company believes that it will be
able to secure the financing for such installations through traditional
commercial lending institutions.

Lighting
Science will also focus on the wholesale and retail distribution of the
Company’s ODL technology and its general illumination products. These products
include existing and planned product lines of floodlights, spotlights, and
additional general illumination products that are under development. The Company
is exploring opportunities to sell its ODL products through traditional mass
market retailers as well as domestic and international lighting
distributors.

The
Company plans to pursue the following near-term markets in 2005:

·
    **Flashlights**-
      The Company has developed a flashlight which provides a high candlepower
      output across a broader beam angle than is typical of existing LED based
      flashlights and can be made available at a lower price point due to the
      manufacturing efficiencies created by the Company's proprietary design.
      The flashlight is currently under evaluation by a big-box retailer.

·
    **Cabinet
      Lighting**-
      The Company has a developed a small lamp, called the*Puck
      Light*which
      has been purchased by a major Las Vegas hotel to replace existing halogen
      incandescent lamps. Aside from energy savings and much longer life, the
      Puck Light is safer for usage inside furniture because it operates at a
      much lower temperature. The Puck Light is currently under evaluation by a
      furniture manufacturer for possible inclusion in some of its products.

·
    **Floodlights**-
      The Company has developed a second generation floodlight prototype that
      equals or exceeds existing BR30 65-watt floodlights sold by incumbent
      lighting manufacturers in terms of the amount of illumination (foot
      candles) measured at the surface to be illuminated across a beam angle of
      50o. The Company plans initial shipments of the floodlight in “Daylight
      White” in the second quarter of 2005. The Company intends to market this
      light through big-box retailers, lighting
      distributors, under shared savings programs and on a direct
      basis in certain industries. The Company intends to prototype a
      “Warm White” version of the floodlight in the third quarter of 2005, and
      plans to sell it via the same channels as the Daylight White version of
      the bulb in addition to marketing it directly to the hospitality
      industry.

·
    **Outdoor
      Lighting**-
      The Company is currently prototyping a shoebox and cobra head
      form factor street light which it believes will be competitive with 150
      watt - 250 watt conventional street lights on poles 30 feet or less in
      height. Other forms, such as cobra head, in higher wattage
      equivalents (e.g. 400 watts) areplanned. The Company expects to make streetlights available under its
      Shared Savings Program either directly or via Energy Service Company
      (ESCO) partners.

In order
to minimize its investment in plant and equipment and enable Lighting Science to
focus on research and development, the Company entered into an agreement with an
LED manufacturer in China to fabricate the Company’s ODL products. The products
are assembled in a 20,000 square meter manufacturing facility and then
transported to various points of distribution. While Lighting Science is focused
on the near-term opportunities discussed above, management believes that the
Company’s ODL technology has a number of other applications including
health-care related utilizations and consumer electronics, among others.

The
Company currently has four sources of supply for LEDs used in the assembly of if
its lighting products. The Company buys LEDs from two domestic manufacturers and
two foreign manufacturers. All suppliers have adequate capacity to provide
sufficient quantities of LEDs to meet the Company’s forecasted needs. The
Company’s lighting products incorporate a proprietary power supply chip. These
chips are fabricated by two domestic manufacturers, each of which has adequate
capacity to produce estimated quantities of chips to meet the Company’s
forecasted needs. One domestic supplier and one foreign supplier provide
microelectronic components for the various lighting products. The Company has no
sole source supply for any of the components required for the manufacture of its
lighting products.

The
Company’s budget for research and development for calendar year 2005 is expected
to be $1.2 million.

The
Company expects to increase its personnel base during 2005.
_____________________

1.
    Projected
      estimates in 2002 by United States Department of
Energy
2.
    Estimate
      from article published by Sandia National Labs
3.
    “LED
      Lighting Technologies and Potential for Near Term Market Applications” by
      Ecos Consulting 2003
4.
    “The
      Promise of Solid State Lighting for General Illumination” 2002
      Optoelectronics Industry Development Association , Co-sponsored by
      Department of Energy
5.
    “LEDs
      are seeing the light more and more”, January 5, 2005,
      MENAFN.com

**Corporate Developments / Significant
Transactions**


Acquisition
of Lighting Science, Inc.

On June
1, 2004, the Company acquired 100% of the outstanding common stock of Lighting
Science, Inc., a Las Vegas, Nevada-based corporation, which owned certain
intellectual property related to the design and development of an ODL (optimized
digital lighting) light bulb. The Company’s consolidated financial statements
include the results of operations of Lighting Science, Inc. since June 1,
2004.

The
Company acquired all of the issued and outstanding capital stock of Lighting
Science, Inc. from Phibian S Trust, Edward I. Lanier, and John Collingwood in
exchange for 4,796,274 shares of the Company’s common stock and the Company’s
obligation to issue up to an additional 4,499,965 shares of the Company’s common
stock upon the satisfaction of certain conditions under the stock purchase
agreement.

The
Company accounted for the acquisition as a purchase using the accounting
standards established in Statements of Financial Accounting Standards No. 141,*Business
Combinations*, and No.
142,*Goodwill
and Other Intangible Assets.*

The
estimated fair values, as determined by an independent valuation firm, of assets
acquired and liabilities assumed at June 1, 2004 are set out in the schedule
below:

Cash
    
    $
    10,000Intellectual
      property
    
    
    1,204,000Property
      rights agreement
    
    
    1,063,000Goodwill
    
    
    154,097Total
      assets acquired
    
    
    
    
    $
    2,431,097Note
      payable assumed
    
    
    
    
    
    (200,000
    )Net
      assets acquired
    
    
    
    
    $
    2,231,097

Lighting
Science, Inc. was formed on or about May 31, 2004 for the purpose of acquiring
intellectual property from Phibian S Trust. There were no predecessor operations
with respect to this entity.

As of the
date of acquisition, four provisional patents on the ODL technology had been
submitted to the United States Patent Office (“USPTO”) and were acquired by
Lighting Science. Provisional patents are equivalent to a filing date
placeholder in the USPTO. They provide a one-year period following submittal in
which to finalize the utility patent application with respect to the particular
idea, process, concept or method contained in a provisional patent. Subsequent
to its acquisition by the Company, Lighting Science has filed four utility
patent applications based on the initial four provisional patents within the
one-year period. In addition, a fifth utility patent application has also been
filed to provide further protection to the ODL technology, and therefore there
are currently five utility patents pending with respect to the ODL technology.
It is further anticipated that two design patents will be filed on the
appearance of the light bulb. In addition, other appropriate intellectual
property protection, such as copyright, trademark and trade secret, is being
applied to the ODL technology and the light bulb that embodies it. It is also
the policy of Lighting Science to develop an intellectual property portfolio
that attempts to protect and enhances the ODL technology ideas, concepts,
methods and processes.

Retention
of Financial Consulting Firm

The
Company has retained the services of a financial consulting firm located in
Dallas, Texas to assist with the strategic review of the Company’s capital
structure and to formulate proposed plans and actions for consideration by the
board of directors of the Company. The Company paid the consulting firm $150,000
during the fourth quarter of 2004. This amount will be amortized over the
twelve-month period the services are estimated to be provided commencing January
1, 2005. The agreement also provides for monthly payments of $10,000 during the
one-year term of the agreement.

**Sources of Revenue**

Sales of
product commenced during the fourth quarter of 2004 via the Company’s web site.
Sales were nominal during the fourth quarter as the result of product
modifications made after the initial introduction of the product.

**Human Resources**

As of
January 31, 2005, the Company employs 17 individuals representing its executive
management, administrative staff, design and manufacturing staff, and its sales
and marketing staff. There are no collective bargaining agreements existing
within the Company.

As of
January 31, 2005, the Company was obligated under the terms of employment
contracts for seven of its executive officers. The terms of the contracts
generally range between one and three years, and provide for annual salaries
ranging between $80,000 and $250,000 per year.

On
October 12, 2004, the Company announced the appointments of Mr. Stan Waldrop as
president and Mr. Philip Lacerte as executive vice president of sales and
marketing. The three-year employment contracts for both individuals provide for
annual salaries of one dollar in the first year and $225,000 in the second and
third years of the contracts. The contracts provide that Mr. Waldrop and Mr.
Lacerte will receive as additional compensation an amount equal to two percent
of the gross sales revenue of all street lighting contracts over the entire life
of each contract. The contracts also provide that if the employment contracts
are terminated by either the Company or the officers as a result of the
disability of either officer, the Company will pay that officer’s compensation
under the terms of the contract for twelve consecutive months after the
effective date of the termination.


**ITEM
2. DESCRIPTION OF PROPERT****Y**

The
Company’s property and equipment is located in Dallas, Texas and Fort
Lauderdale, Florida. It consists primarily of molds (used in the fabrication of
light bulbs), office furniture, computer equipment, telephone equipment, and
electronic testing equipment. Substantially all of the assets were acquired new
during 2004. The Company owns no real property.


**ITEM 3. LEGAL PROCEEDINGS**

As of the
date of this report, no litigation or threatened litigation exists against the
Company. Management has no reason to believe that any other cause of action
against the Company could, in good faith, be brought against it.


**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS**

No matter
was submitted during the fourth quarter of the fiscal year covered by this
report to a vote of security holders through the solicitation of proxies or
otherwise.


**PART II**

**ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS**

**Market Information**
The
Company's stock is now quoted in the NASDAQ pink sheets under the symbol
"PXGC.PK".

The
following table sets forth the high and low sales price for the Common Stock for
the periods indicated.

MANAGEMENT
BELIEVES THAT THE PRICES SHOWN IN THE SCHEDULE BELOW SHOULD NOT BE RELIED UPON
FOR PURPOSES OF DETERMINING POSSIBLE MARKET VALUE OF THE COMPANY’S STOCK FOR THE
FOLLOWING REASONS: (1) THE NUMBER OF SHARES OUTSTANDING INCREASED DRAMATICALLY
UNDER THE TERMS OF THE PLAN OF REORGANIZATION, THE PRIVATE PLACEMENT AND SHARES
ISSUED TO MANAGEMENT, AND (2) THE COMPANY CURRENTLY HAS HAD NO SIGNIFICANT SALES
OF ITS PRODUCTS WITH WHICH TO GENERATE VALUE FOR THE STOCK OF THE COMPANY.

**Common
      Stock****2004**
    
    
    **HIGH**
    
    
    **LOW**Fourth
      Quarter
    
    
    2.28
    
    
    0.55Third
      Quarter
    
    
    0.80
    
    
    0.16Second
      Quarter
    
    
    0.80
    
    
    0.16First
      Quarter
    
    
    0.32
    
    
    0.16**2003**Fourth
      Quarter
    
    
    0.64
    
    
    0.16Third
      Quarter
    
    
    1.44
    
    
    0.64Second
      Quarter
    
    
    1.44
    
    
    0.48First
      Quarter
    
    
    0.64
    
    
    0.16**2002**Fourth
      Quarter
    
    
    1.12
    
    
    0.16Third
      Quarter
    
    
    1.60
    
    
    0.48Second
      Quarter
    
    
    1.92
    
    
    0.96First
      Quarter
    
    
    0.48
    
    
    0.32
The high
and low prices (based on the average bid and ask price) for the Company's Common
Stock as reported by the Bulletin Board OTC and rounded to the nearest penny are
indicated above. These are inter-dealer prices without retail mark-ups,
markdowns, or commissions and may not represent actual transactions.

According
to the Company's stock transfer agent as of January 26, 2005, there were
approximately 644 holders of record of the Company's common stock not including
holders of shares held in brokerage accounts.

**Dividends**
The
payment by the Company of dividends, if any, rests within the discretion of the
board of directors and among other things, will depend upon the Company's
earnings, capital requirements and financial condition, as well as other
relevant factors. The Company has not paid cash dividends on its common stock to
date and does not anticipate doing so in the foreseeable future. It is the
present intention of management to utilize all available funds for working
capital of the Company. The holders of Series A Senior Convertible
Preferred Stock (“the Preferred Stock”) are entitled to receive out of funds
legally available therefore, when and if declared by the Company, dividends at
the rate per annum of $.30 for each outstanding share of the Preferred Stock.
Dividends cumulate and accrue ratably from and after the date of issuance of the
Preferred Stock, for each day that shares of the Preferred Stock are
outstanding. No such preferred dividends have been declared. At
December 31, 2004, dividends on the Preferred Stock totaling $1,640,000
were in arrears. The size of the board may be increased by one director, up to a
maximum of 13 directors, each time the cumulative dividends payable on the
Series A Senior Convertible Preferred Stock are in arrears in an amount
equal to two (2) full quarterly dividend payments. The holders of the
Preferred Stock, voting separately as a single class, are entitled to elect
these additional directors. The voting rights of the holders of the Preferred
Stock for these directors continue until all cumulative dividends have been paid
in full. Currently, the holders of the Preferred Stock, voting separately as a
single class, are entitled to increase the number of directors comprising the
Company's board by four members.

**Private
Placement**
In
connection with the acquisition of Lighting Science, Inc., the Company undertook
a private placement (“Lighting Science Private Placement”) of the Company’s
common stock under the exemption of Section 505 of Regulation D of the
Securities Act of 1933. This exemption allows the Company to raise no more than
$5,000,000 during a twelve-month period. As of the date of this report, a total
of $3,864,890 had been raised through the sale of 18,341,906 shares of the
Company’s common stock. The Company does not plan to issue any additional common
stock under the terms of the Lighting Science Private Placement.

**ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS**

**Year
Ended December 31, 2004 Compared with Year Ended December 31,
2003**
[Note:
Management believes that the Fresh-start financial statements prepared for the
Company will not be comparable with those prepared before the Plan of
Reorganization was confirmed because they are, in effect, the financial
statements of a new entity. As a result, Management’s discussion and analysis
will be limited to the period beginning with effective date of the confirmation
of the Plan of Reorganization (September 26, 2003) and ending with December 31,
2004.]

**Results
of Operations**

For the
year ended December 31, 2004, the Company reported a net loss of $3,771,021. For
the period beginning September 26, 2003 and ending December 31, 2003, the
Company reported a net loss of $409,171. The reported loss for 2004 is
attributable to several factors: (1) the lack of any revenue for the first three
quarters of the year and only nominal revenue in the fourth quarter from sales
activities associated with the soft launch of the first of several planned
product lines; (2) the necessity of maintaining a viable corporate overhead
throughout the due diligence process of searching for investment opportunities
during the first five months of the year and for the remainder of the year; and
(3) a ramp-up in staff needed to support the research and development activities
as well as the sales and marketing efforts in conjunction the acquired
technology.

**Liquidity
and Capital Resources**

At
December 31, 2004 the Company reports a working capital deficit of $1.085
million. However, 96% (approximately $2.2 million) of the Company’s current
liabilities are comprised of a note and the accumulated interest thereon payable
to Match, Inc., an entity controlled by Ronald E. Lusk, the Company’s chairman.
Mr. Lusk has expressed his intention to forebear with respect to the collection
of these obligations. Thus, management of the Company effectively views the
working capital position of the Company to be a surplus of approximately $1.082
million at December 31, 2004.

The
Company has embarked upon an aggressive design and development program to bring
product to market during the second quarter of 2005. If, as management believes,
the Company is successful in developing viable products, additional capital will
be needed to fund the manufacturing process to generate finished goods. In the
event orders are received from established retailers and distributors of
lighting products, management believes that traditional lending sources will be
available to provide a portion of the capital needed to cover the manufacturing
and receivables cycles. However, the Company will still be required to raise
additional capital to meet its obligations.

The
Company has retained the services of a financial consulting firm to assist with
strategic review and to formulate proposed plans and actions for consideration
by the board of directors of the Company. Based upon its current cash on hand
generated from a private placement, its anticipated product releases, and its
discussions with investment bankers, management believes that it will be able to
obtain the capital necessary to deliver finished products to market during the
second quarter of 2005. Preliminary discussions have been held with potential
investment banking firms that have expressed interest in the Company’s business
model. Despite these activities, there can be no assurance that management’s
efforts to sufficiently capitalize the Company will be successful.


**ITEM 7. FINANCIAL STATEMENTS**

The
consolidated financial statements required to be filed pursuant to this Item 7
begin on Page F-1 of this report. Such consolidated financial statements are
hereby incorporated by reference into this Item 7. The Supplementary Data
requirement as set forth in Item 302 of Regulation S-K is inapplicable to
the Company.


**ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE**

None


**ITEM 8A. CONTROLS AND PROCEDURES**

The
principal executive officer and the principal financial officer of the Company
have reviewed the Company’s disclosure controls and procedures and have
concluded that adequate internal controls and systems are in place to alert
management to matters that require disclosure to appropriate reporting
authorities.


**ITEM 8B. OTHER INFORMATION**

None


**Part III**

**ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT**

The
Directors and executive officers of the Company at December 31, 2004, their
ages, their titles, their years of employment with the Company, and their
principal occupation for the last five years are as follows:

Ronald
E. Lusk, 48, has
served as the chairman of the board of directors and CEO of the Company since
November 1998. Mr. Lusk is also the president of Match, Inc., a private
investment and holding company. Mr. Lusk has over 22 years of diverse business
and management expertise contributing to his direct ownership and control of
various companies, predominately in the healthcare industry. Mr. Lusk currently
serves as a director on the boards of several private companies.

Stan
T. Waldrop, 54, has
served as president of the Company since October 2004. Mr. Waldrop was the
founder, chairman of the board, and CEO of Telcom Global Solutions, a joint
venture with Bear Stearns Merchant Banking Group. The firm was an international
radio frequency engineering company that specialized in designing mobile phone
networks. In 2001, the firm was sold to Flextronics International, the leading
global provider of electronic manufacturing services. Prior to founding Telcom
Global Solutions, Mr. Waldrop was the cofounder of TrinTel Communications, Inc.
in partnership with Austin Ventures. The firm is a leading developer, owner, and
operator of wireless communications towers, and it is one of the largest
privately held companies in this sector in the United States. Before launching
TrinTel, Mr. Waldrop was one of six founders of JPI, a fully integrated real
estate firm that specializes in the acquisition, development, construction, and
management of residential communities, which operates in markets throughout the
United States. It is one of the country’s top developers of residential real
estate.

Philip
R. Lacerte, 59, has
served as executive vice president of the Company since October 2004. Mr.
Lacerte was a cofounder of Lacerte Software Corporation,a
Dallas-based developer of professional tax preparation software used by tax
preparers. The company was acquired by Intuit, Inc. in 1998 at which time Mr.
Lacerte retired from the day-to-day management of the company.

Fredric
S. Maxik, 44, has
served as chief technology officer of the Company since June 2004. After
graduating from Bard College with a bachelor’s degree in physics and philosophy,
Mr. Maxik began his career with Sansui Electronics in 1983 in Tokyo, Japan where
he became vice president of product development. In 1990, he was recruited to
the position of vice president of product development for Onkyo Electronics in
Osaka, Japan. In 1993, Mr. Maxik formed a product development consulting firm.
In 2002, Mr. Maxik formed an environmental products company, which developed the
intellectual property that eventually became the principal asset of Lighting
Science, Inc. which was acquired by the Company in June 2004. Mr. Maxik received
his honorary PhD in physics from the University of Hong Kong in 1993. Mr. Maxik
has served as a director of the Company since August 2004.

K.
Shane Hartman, 49, was
named chief information officer and executive vice president of the Company
effective November 15, 2000. Prior to joining the Company, Mr. Hartman
accumulated 20 years of business experience in the information technology
industry, having served with Perot Systems where he held several senior
management positions, most recently as Chief Technologist. Previously, Mr.
Hartman served as Chief Architect for Programmability at Lotus Development
Corporation. He is an alumnus of the Massachusetts Institute of Technology.

J.
Michael Poss, 53, has
served as chief financial officer of the Company since May 2002. Prior to his
association with Phoenix, Mr. Poss served as executive vice president of Zix
Corporation from April 2000 through February 2002 where he was involved in
sales, marketing, investor relations, and the negotiation of strategic alliance
agreements with industry-leading partners. Prior to moving to Zix Corporation,
Mr. Poss held the position of chief financial officer of The Perot Group, the
family office operation of Ross Perot. Before joining Mr. Perot in 1979, Mr.
Poss worked for Arthur Young & Company. He was awarded his Certified Public
Accountant designation in 1978, and he received a Bachelor of Business
Administration degree from the University of Texas at Austin in 1973. Mr. Poss
is also a licensed attorney, having graduated from the University of Texas Law
School in 1976. Mr. Poss has served as director of the Company since September
2003.

Robert
L. Woodson, III, 56, has
been a director of the company since 1998 and previously served as president and
chief operating officer of Phoenix from January 1999 to November 2000. Mr.
Woodson was president and chief executive officer from November 1998 to January
1999. Prior to joining the Company, Mr. Woodson was president of HFI Home Care
Management LP, a company that acquires and manages home health agencies, from
1994 through 1997, and executive vice president and secretary of HealthFirst,
Inc., a company that manages home health agencies, from 1992 through 1994. In
March 2000, Mr. Woodson resigned as an executive officer of the Company and
continues to serve in the capacity as a director.

Robert
E. Bachman, 63, has
served as a director of the Company since September 2003. He is the president
and a director of USGT Investors Management Company, Inc., a Dallas-based
investment/merchant bank that is the general partner of USGT Investors, LP., a
private venture capital/equity fund. Mr. Bachman serves as the chairman of the
audit committee of the board of directors of the company.

Daryl
N. Snadon, 59, has
served as a director of the Company since September 2003. He is the owner of
Beltway Development Company, a Dallas-based real estate development company with
a 30-year operating history. Mr. Snadon is the principal owner of 25 separate
commercial properties in Texas and other states. He serves as an officer and
director of numerous privately held corporations, as managing partner of
numerous joint ventures, and as a member or partner of numerous limited
liability companies and partnerships.

Donald
R. Harkleroad, 61, has
served as a director of the Company since September 2003. He is president of The
Bristol Company, an Atlanta-based holding company with interests in the food,
technology, and merchant banking industries. Mr. Harkleroad serves as the
chairman of the compensation committee of the board of directors of the company.

John
A. Collingwood, 66, has
served as a director of the Company since August 2004. He is a private investor
and serves as an officer and/or director of several privately held companies and
was previously a major shareholder of Lighting Science, Inc. prior to its
acquisitions on June 1, 2004. Mr. Collingwood is an alumnus of the University of
Kansas, and he graduated from the University of the Americas in Chouloa, Mexico
with a degree in International Business Administration.

Robert
McMonigle, 60, has
served as a director of the Company since August 2004. He is a sales and
marketing consultant to Aristocrat Technologies, Inc., the second largest
manufacturer of slot machines in the world. Mr. McMonigle served as executive
vice president of International Gaming Technologies, Inc. (IGT) where he was
responsible for worldwide sales. During his eighteen-year tenure with the
company, Mr. McMonigle also directed IGT’s gaming development in the United
States, Canada, South America, Europe and South Africa. Mr. McMonigle retired
from IGT in October 2001. Shortly thereafter, he joined American Gaming &
Electronics, Inc. where he served as president until July 2003 at which time he
began his present relationship with Aristocrat.

Kathryn
D. Fuller, 36, has
served as the company’s corporate secretary since June 1999. Ms. Fuller has over
16 years of business administration experience with both public and private
companies. In addition to serving as corporate secretary, Ms. Fuller has served
as the company’s director of administration since December 1998.

*Members
of Audit Committee and Audit Committee Financial Expert*

The
members of the Audit Committee are:

·
    Robert
      E. Bachman, Chairman
·
    Donald
      R. Harkleroad
·
    Daryl
      N. Snadon

Robert E.
Bachman is designated as the “audit committee financial expert.” Mr. Bachman is
independent of the management of the Company, and he meets the criteria set
forth in the regulations with respect to the qualifications of an “audit
committee financial expert.”

*Code
of Ethics*

The
Company has adopted a code of ethics that is applicable to all employees of the
Company and, in particular, to its senior officers.

A copy of
the code of ethics may be obtained from the Company without charge by writing to
the company at the following address:

Lighting
Science Group Corporation
2100
McKinney Avenue, Suite 1555
Dallas,
Texas 75201

****
**ITEM 10. EXECUTIVE COMPENSATION**

*Management
Compensation*

For the
year ended December 31, 2004, executive compensation expense for the Company
totaled approximately $1,158,000.

Ronald E.
Lusk serves as chairman and Chief Executive Officer of the Company. The terms of
his employment agreement provide that Mr. Lusk may elect to accept part or all
of his salary in the form of common stock of the Company. During the year, Mr.
Lusk converted $94,839 of compensation into 431,715 shares of the Company’s
common stock.

Stan T.
Waldrop serves as president of the Company. The terms of his employment
agreement, which commenced October 12, 2004, provide for annual compensation of
$225,000. However, Mr. Waldrop elected to defer the first year of his salary so
that additional funds could be committed to product development.

Philip R.
Lacerte serves as executive vice president of sales and marketing of the
Company. The terms of his employment agreement, which commenced October 12,
2004, provide for annual compensation of $225,000. However, Mr. Lacerte elected
to defer the first year of his salary so that additional funds could be
committed to product development.

Fredric
S. Maxik serves as chief technology officer of the Company. The terms of his
employment agreement provide that Mr. Maxik may elect to accept part or all of
his salary in the form of common stock of the Company. During the year, Mr.
Maxik converted $33,333 of compensation into 69,684 shares of the Company’s
common stock.

K. Shane
Hartman serves as chief information officer of the Company. The terms of his
employment agreement provide that Mr. Hartman may elect to accept part or all of
his salary in the form of common stock of the Company. During the year, Mr.
Hartman converted $76,741 of compensation into 349,226 shares of the Company’s
common stock.

J.
Michael Poss serves as chief financial officer of the Company. The terms of his
employment agreement provide that Mr. Poss may elect to accept part or all of
his salary in the form of common stock of the Company. During the year, Mr. Poss
converted $95,608 of compensation into 434,483 shares of the Company’s common
stock.

Kathryn
D. Fuller serves as corporate secretary of the Company. The terms of her
employment agreement provide that Ms. Fuller may elect to accept part or all of
his salary in the form of common stock of the Company. During the year, Ms.
Fuller converted $37,171 of compensation into 169,955 shares of the Company’s
common stock.

The table
below sets out the information with respect to the compensation of the executive
officers for the year 2004.

**SUMMARY
      OF COMPENSATION TABLE**
      ****Annual
      Compensation
    Long
      Term CompensationAwards
    
    Payouts(a)
    
    
    (b)
    
    
    (c)
    
    
    (d)
    
    
    (e)
    
    
    (f)
    
    
    (g)
    
    
    (h)
    
    
    (i)Name
      and Principal Position
    
    
    Year
    
    
    Salary
      ($)
    
    
    Bonus
      ($)*
    
    
    Other
      Annual Compensation($)
    
    
    Restricted
      Stock Award(s)
      ($)
      **
    
    
    Securities
      Underlying Options/
      SARs
      (#)
    
    
    LTIP
      Payouts
      ($)
    
    
    All
      Other
      Compensation
      ($)Ronald
      E. Lusk
    
    
    2004
    
    
    117,308
    
    
    88,880
    
    
    --
    
    
    94,839
    
    
    --
    
    
    --
    
    
    --CEO
    
    
    2003
    
    
    65,971
    
    
    --
    
    
    --
    
    
    65,971
    
    
    --
    
    
    --
    
    
    --2002
    
    
    43,727
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --J.
      Michael Poss
    
    
    2004
    
    
    58,846
    
    
    108,443
    
    
    --
    
    
    95,608
    
    
    --
    
    
    --
    
    
    --CFO
    
    
    2003
    
    
    153,786
    
    
    --
    
    
    --
    
    
    64,238
    
    
    --
    
    
    --
    
    
    --2002
    
    
    28,421
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --K.
      Shane Hartman
    
    
    2004
    
    
    77,308
    
    
    64,046
    
    
    --
    
    
    76,741
    
    
    --
    
    
    --
    
    
    --CIO
    
    
    2003
    
    
    145,559
    
    
    --
    
    
    --
    
    
    52,363
    
    
    --
    
    
    --
    
    
    --2002
    
    
    50,452
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --Kathryn
      D. Fuller
    
    
    2004
    
    
    43,077
    
    
    99,117
    
    
    --
    
    
    37,171
    
    
    --
    
    
    --
    
    
    --Corp
      Secretary
    
    
    2003
    
    
    70,473
    
    
    --
    
    
    --
    
    
    25,488
    
    
    --
    
    
    --
    
    
    --2002
    
    
    17,156
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --Frederick
      S. Maxik
    
    
    2004
    
    
    124,117
    
    
    37,500
    
    
    1,200
    
    
    33,333
    
    
    --
    
    
    --
    
    
    --CTO
    
    
    2003
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/A2002
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/AStan
      T. Waldrop
    
    
    2004
    
    
    1
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --President
    
    
    2003
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/A2002
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/APhillip
      R. Lacerte
    
    
    2004
    
    
    1
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --
    
    
    --Exec
      VP
    
    
    2003
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/A2002
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/A
    
    
    N/A

* Paid in
the form of restricted stock of the Company
** See
explanation preceding table

*Compensation
of Directors*

The
directors of the Company receive compensation in the amount of $50,000 per year
payable in the form of the Company’s common stock. During the year, the
directors received stock in the amount of $50,000 (or a lesser amount for less
than a full year of service). The amount of stock to be issued each month is
computed by averaging the daily closing prices of the Company’s stock each
trading day of the calendar month. The table below sets forth the value of the
stock received by each director during the year ended December 31,
2004.

**Director**
    
    **Amount**Robert
      E. Bachman
    
    $
    50,000John
      Collingwood
    
    
    20,833Donald
      Harkelroad
    
    
    50,000Ron
      E. Lusk
    
    
    50,000Fred
      S. Maxik
    
    
    20,833Robert
      McMongile
    
    
    17,742J.
      Michael Poss
    
    
    50,000Daryl
      Snadon
    
    
    50,000Robert
      L. Woodson, III
    
    
    50,000Frank
      Yetter
    
    
    29,167Total
    
    $
    388,575


**ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT**

The
following table sets forth as of December 31, 2004, certain information with
respect to the beneficial ownership of voting stock by all directors and
executive officers of the Company, individually and collectively as a group. At
December 31, 2004, there were 51,297,256 shares of common stock and 533,333
shares of Series A Senior Convertible Preferred Stock
outstanding.

********
    
    **Common
      Stock**
    ******Preferred Stock****Current
      Directors and Executive Officers**
    
    
    **Shares****Owned**
    
    
    **Percent****of
      Class**
    
    
    **Shares****Owned**
    
    
    **Percent****of
      Class**Robert
      E. Bachman
    
    
    354,338
    
    
    0.68
    %John
      Collingwood
    
    
    3,549,301
    
    
    6.84
    %Kathryn
      D. Fuller
    
    
    919,453
    
    
    1.77
    %Donald
      R. Harkleroad
    
    
    667,308
    
    
    1.29
    %K.
      Shane Hartman
    
    
    1,239,939
    
    
    2.39
    %Phil
      Lacerte
    
    
    3,614,584
    
    
    6.96
    %Ronald
      E. Lusk
    
    
    5,235,888
    
    
    10.09
    %
    
    533,333
    
    
    100.00
    %Fredric
      S. Maxik
    
    
    2,673,260
    
    
    5.15
    %Robert
      McMonigle
    
    
    123,317
    
    
    0.24
    %J.
      Michael Poss
    
    
    1,549,016
    
    
    2.98
    %Daryl
      Snadon
    
    
    1,077,528
    
    
    2.08
    %Stan
      Waldrop
    
    
    2,825,834
    
    
    5.44
    %Robert
      L. Woodson, III
    
    
    465,186
    
    
    0.90
    %Directors
      and officers as a group
    
    
    24,240,696
    
    
    46.70
    %
    
    533,333
    
    
    100.00
    %

The
shares attributable to Mr. Lusk include 614,223 shares of common stock into
which the Preferred Stock (owned by the Ronald E. Lusk Revocable Trust,
controlled by Trustee, Ronald E. Lusk, chairman and chief executive officer of
the Company) was convertible on December 31, 2004. Total shares of common stock
for purposes of this calculation include 51,297,256 shares of common stock
outstanding on December 31, 2004 plus the 614,223 shares into which the
Preferred Stock is convertible for a total of 51,911,479 shares.


**ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS**

The
Company is obligated under the terms of a line of credit agreement to Match,
Inc. (“Match”) outstanding in the amount of $2,166,853 at December 31, 2004.
Ronald E. Lusk, chairman and chief executive officer of the Company controls
Match as president and trustee of the Ronald E. Lusk Revocable Trust (“the
Trust”), the sole shareholder of Match. The line of credit agreement with Match
is available up to a limit of $2 million; bears interest at prime plus 1% on the
note balance and prime plus 2% on any unpaid interest amounts; is due on demand
and is secured by all assets of the Company. This note obligation includes
accrued interest of approximately $315,554 at December 31, 2004.

On
October 20, 2004, the Company made a payment of $30,000 to Match in partial
payment of the outstanding balance of accrued but unpaid interest on the
note.On
November 17, 2004, the Company reduced by $500,000 the amount that it owed to
Match with respect to accrued but unpaid interest on the note. In lieu of
disbursing cash in payment of the interest expense, the Company issued stock to
the Trust, which had contemporaneously subscribed to purchase $500,000 of stock
under the terms of the private placement transaction discussed in Note 9 to the
financial statements.

Match,
Inc. is the sole holder of all of the issued and outstanding Series A Preferred
Stock of the Company at December 31, 2004.

**ITEM 13. EXHIBITS**

(a)
    Exhibits required by Item 601 of Regulation S – BExhibit No.
    Document31.1*
    Rule 13a-14 Certification dated February 4,
      2005, by Ronald E. Lusk, Chief Executive Officer31.2*
    Rule 13a-14 Certification dated February 4,
      2005, by J. Michael Poss, Chief Financial Officer.32.1**
    Section 1350 Certification dated February 4,
      2005, by Ronald E. Lusk, Chief Executive Officer.32.2**
    Section 1350 Certification dated February 4,
      2005, by J. Michael Poss, Chief Financial Officer.(b)
    Reports
      on Form 8-KOn
      October 8, 2004, Lighting Science filed a Current Report on Form 8-K to
      report that the Company had published a press release dated October 6,
      2004 announcing the introduction of Optimized Digital
      Lighting.On
      October 19, 2004, Lighting Science filed a Current Report on Form 8-K to
      report that the Company published a press release dated October 12, 2004
      announcing that (i) Stan Waldrop was appointed as president, (ii) Philip
      Lacerte was appointed as executive vice president of sales and marketing,
      and (iii) certain existing executives were appointed to additional
      positions.On
      November 16, 2004, Lighting Science filed a Current Report on Form 8-K to
      report that the Company published a press release dated November 8, 2004
      announcing that the company would distribute a new LED
      technology.On
      November 22, 2004, Lighting Science filed a Current Report on Form 8-K to
      report that the Company published a press release dated November 18, 2004
      announcing that Ed Hammer has been named as an advisor to the board of
      directors.On
      December 7, 2004, Lighting Science filed a Current Report on Form 8-K to
      report that the Company published a press release dated November 30, 2004
      announcing that David Reed has been named as an advisor to the board of
      directors.On
      December 23, 2004, Lighting Science filed a Current Report on Form 8-K to
      report that the Company published a press release dated December 23, 2004
      announcing that the company’s subsidiary, Lighting Science, Inc., would be
      merged into the parent company and that the name of the parent company
      will be changed from The Phoenix Group Corporation to Lighting Science
      Group Corporation on or about January 1,
2005.
**ITEM 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES**

**Audit
Fees**

Audit
fees billed by the Company’s principal accountant total $36,927 as of the date
of this report.

**Audit-Related
Fees**

No
audit-related fees have been billed by the Company’s principal accountant for
any period.

**Tax
Fees**

No tax
fees have been paid to the Company’s principal accountant for any
period.

**All
Other Fees**

No other
fees other than those set out above have been paid to the Company’s principal
accountant.

**Pre-approval
of Policies and Procedures**

The audit
committee adopted procedures in early 2004 for the pre-approval of all audit and
non-audit services provided by the Company’s independent auditors. All services
provided by Turner, Stone & Company, L.L.P. in 2004 were approved in
accordance with the adopted procedures. Under the procedures, the Audit
Committee has pre-approved specific audit-related and tax services, provided no
individual engagement exceeds $30,000. The pre-approval requirement for all
other services is waived if (*i*) the
aggregate amount of the services constitutes no more than 5% of the total amount
of revenues paid by the Company to the auditor during the fiscal year the
services are provided; (*ii*) the
services were not recognized by management to be non-audit services at the time
of the engagement; and (*iii*) the
services are promptly brought to the attention of the audit committee. The were
no fees in 2004 for which the pre-approval requirement was waived.

No other
fees other than those set out above have been paid to the Company’s Principal
Accountant.

**SIGNATURES**


In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report tot be signed on its behalf by the undersigned, thereunto duly
authorized.

**LIGHTING
      SCIENCE GROUP CORPORATION**By:
    
    /s/
      Ronald E. LuskRonald
      E. Lusk, Chairman, Chief Executive Officer and DirectorDate:
    
    February
      9, 2005

In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By:
    
    /s/
      Ronald E. LuskRonald
      E. Lusk, Chairman, Chief Executive Officer and DirectorDate:
    
    February
      9, 2005By:
    
    /s/
      J. Michael PossJ.
      Michael Poss, Chief Financial Officer and DirectorDate:
    
    February
      9, 2005By:
    
    /s/
      Robert E. BachmanRobert
      E. Bachman, DirectorDate:
    
    February
      9, 2005By:
    
    /s/
      John CollingwoodJohn
      Collingwood, DirectorDate:
    
    February
      9, 2005By:
    
    /s/
      Donald R. HarkleroadDonald
      R. Harkleroad, DirectorDate:
    
    February
      9, 2005By:
    
    /s/
      Fred S. MaxikFred
      S. Maxik, DirectorDate:
    
    February
      9, 2005By:
    
    /s/
      Robert McMonigleRobert
      McMonigle, DirectorDate:
    
    February
      9, 2005By:
    
    /s/
      Daryl SnadonDaryl
      Snadon, DirectorDate:
    
    February
      9, 2005By:
    
    /s/
      Robert L. Woodson, IIIRobert
      L. Woodson, DirectorDate:
    
    February
      9, 2005


**LIGHTING
SCIENCE GROUP CORPORATION**
 **AND
SUBSIDIARIES**
 
 
 **INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **Page**Report
      of Independent Registered Public Accounting Firm
    F-2Consolidated
      Balance Sheet
    F-3Consolidated
      Statements of Operations
    F-4Consolidated
      Statements of Stockholders' Deficiency
    F-5Consolidated
      Statements of Cash Flows
    F-6Notes
      to the Consolidated Financial Statements
    F-7
 
 
 
 
 
 
 F-1
  
 
 
 
 
 
 **Report of Independent Registered Public Accounting
Firm**
 
 
 
 To the
Board of Directors and Stockholders of
 Lighting
Science Group Corporation
 
 We have
audited the accompanying consolidated balance sheet of Lighting Science Group
Corporation and subsidiaries (a development stage company) (formerly The Phoenix
Group Corporation) (the Company) as of December 31, 2004, and the related
consolidated statements of operations, stockholders’ equity and cash flows for
the year ended December 31, 2004 and for the period from September 26, 2003
through December 31, 2003. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Lighting
Science Group Corporation and subsidiaries as of December 31, 2004, and the
consolidated results of their operations and cash flows for the year ended
December 31, 2004 and for the period from September 26, 2003 through December
31, 2003, in conformity with United States generally accepted accounting
principles.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 4 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has a working capital deficiency that raise substantial
doubt about its ability to continue as a going concern. Management’s plans in
regard to these matters are also described in Note 4. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
 
 
 
 
 Turner
Stone & Company, L.L.P.
 Certified
Public Accountants
 Dallas,
Texas
 February
1, 2005
 
 F-2
  **LIGHTING
      SCIENCE GROUP CORPORATION**
      **AND
      SUBSIDIARIES**
      **(A
      DEVELOPMENT STAGE COMPANY)**
      **CONSOLIDATED BALANCE SHEET**
      **DECEMBER
      31, 2004**CURRENT
      ASSETSCURRENT
      ASSETSCash
      and cash equivalents
    
    $
      987,023Accounts
      receivable
    
    1,141Inventory
    
    13,770Prepaid
      expenses
    
    163,539Total
      current assets
    
    1,165,473PROPERTY
      AND EQUIPMENT, net (Note 6)
    
    310,475OTHER
      ASSETSReorganized
      value in excess of amounts allocable to identifiable assets (Note
      3)
    
    
    2,793,224Intellectual
      property, net (Notes 2 and 6)
    
    
    1,168,883Property rights
      agreement, net (Notes 2 and 6)
    
    
    856,306Goodwill (Note
      2)
    
    
    154,097Security
      deposits
    
    
    27,215Total
      other assets
    
    
    4,999,725TOTAL
      ASSETS
    
    $
    6,475,673LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIESAccounts
      payable
    
    $
    40,636Accrued
      compensation
    
    
    17,899Accrued
      interest payable to related party
    
    
    315,554Note
      payable - related party
    
    
    1,851,299Current
      portion of note payable - related party
    
    
    25,000Total
      current liabilities
    
    
    2,250,388LONG-TERM
      DEBTNote
      payable - related party
    
    
    150,000TOTAL
      LIABILITIES
    
    
    2,400,388STOCKHOLDERS’
      EQUITYSeries
      A Preferred Stock, $.001 par value, 5,000,000 sharesauthorized;
      533,333 shares issued and outstanding (Note 9)
    
    
    533Common Stock, $.001
      par value, 500,000,000 shares authorized,51,297,256
      shares issued and outstanding
    
    
    51,297Stock
      subscriptions receivable
    
    
    (26,000
    )Additional
      paid-in-capital
    
    
    8,229,648Accumulated
      deficit during the development stage
    
    
    (4,180,193
    )TOTAL
      STOCKHOLDERS’ EQUITY
    
    
    4,075,285TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
    
    $
    6,475,673The
      accompanying notes are an integral part of the consolidated financial
      statements.
  F-3
 
 **LIGHTING
      SCIENCE GROUP CORPORATION**
      **AND
      SUBSIDIARIES**
      **(A
      DEVELOPMENT STAGE COMPANY)**
      **CONSOLIDATED STATEMENTS OF
OPERATIONS**Year
      Ended December 31, 2004
    
    
    September
      26, 2003 through December 31, 2003
    
    
    Cumulative
      from September 26, 2003 through December 31, 2004Revenue
    
    $
    3,404
    
    $
    -
    
    $
    3,404Cost
      of goods sold
    
    
    (2,076
    )
    
    -
    
    
    (2,076
    )Gross
      margin
    
    
    1,328
    
    
    -
    
    
    1,328Operating
      expenses:Selling,
      general and administrative
    
    
    1,483,264
    
    
    79,451
    
    
    1,562,715Compensation
      and related expenses
    
    
    1,148,426
    
    
    208,061
    
    
    1,356,487Consulting
      fees
    
    
    624,934
    
    
    -
    
    
    624,934Directors
      fees
    
    
    388,575
    
    
    87,500
    
    
    476,075Total
      operating expenses
    
    
    3,645,199
    
    
    375,012
    
    
    4,020,211Operating
      income (loss)
    
    
    (3,643,871
    )
    
    (375,012
    )
    
    (4,018,883
    )Interest
      income, other income and interest expense, net
    
    
    (127,150
    )
    
    (34,160
    )
    
    (161,310
    )Net
      loss
    
    $
    (3,771,021
    )
    $
    (409,172
    )
    $
    (4,180,193
    )Basic
      net loss per weighted average common share
    
    $
    (0.119
    )
    $
    (0.025
    )
    $
    (0.147
    )Weighted
      average number of common shares outstanding
    
    
    31,668,957
    
    
    16,685,446
    
    
    28,529,863The
      accompanying notes are an integral part of the consolidated financial
      statements.
 F-4
 
 
 
 
  **LIGHTING
      SCIENCE GROUP CORPORATION**
      **AND
      SUBSIDIARIES**
      **(A
      DEVELOPMENT STAGE COMPANY)**
      **CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
      (DEFICIT)**
      **FOR
      THE PERIOD BEGINNING SEPTEMBER 26, 2003 AND ENDED DECEMBER 31,
      2004**Preferred
      Stock
    Common
      Stock
    
    Subscriptions
    
    
    Additional
      Paid
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Receivable
    
    
    in
      Capital
    
    
    Deficit
    
    
    TotalBalance
      at September 26, 2003
    
    
    533,333
    
    $
    533
    
    
    16,685,446
    
    $
    16,685
    
    $
    -
    
    $
    250,282
    
    $
    -
    
    $
    267,500Net
      loss
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (409,172
    )
    
    (409,172
    )Balance
      at December 31, 2003
    
    
    533,333
    
    
    533
    
    
    16,685,446
    
    
    16,685
    
    
    -
    
    
    250,282
    
    
    (409,172
    )
    
    (141,672
    )Issuance
      of common stock in private placement (Note 10)
    
    
    -
    
    
    -
    
    
    18,341,906
    
    
    18,343
    
    
    (26,000
    )
    
    3,846,547
    
    
    -
    
    
    3,838,890Issuance
      of common stock to acquire subsidiary (Note 2)
    
    
    -
    
    
    -
    
    
    9,452,491
    
    
    9,452
    
    
    -
    
    
    2,221,645
    
    
    -
    
    
    2,231,097Issuance
      of common stock in payment of operating expenses
    
    
    -
    
    
    -
    
    
    6,817,413
    
    
    6,817
    
    
    -
    
    
    1,911,174
    
    
    -
    
    
    1,917,991Net
      loss
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (3,771,021
    )
    
    (3,771,021
    )Balance
      at December 31, 2004
    
    
    533,333
    
    $
    533
    
    
    51,297,256
    
    $
    51,297
    
    $
    (26,000
    )
    $
    8,229,648
    
    $
    (4,180,193
    )
    $
    4,075,285The
      accompanying notes are an integral part of the consolidated financial
      statements.
 
 F-5
  **LIGHTING SCIENCE GROUP CORPORATIONAND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY)CONSOLIDATED STATEMENTS OF CASH FLOWS**Year
      ended
      December
      31, 2004
    
    
    September
      26, 2003 through
      December
      31, 2003
    
    
    Cumulative
      from September 26, 2003 through
      December
      31, 2004OPERATING
      ACTIVITIESNet
      loss
    
    $
    (3,771,021
    )
    $
    (409,172
    )
    $
    (4,180,193
    )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Expenses
      paid by issuance of common stock
    
    
    1,551,700
    
    
    -
    
    
    1,551,700Depreciation
      and amortization
    
    
    259,251
    
    
    -
    
    
    259,251Changes
      in:Accounts
      receivable
    
    
    (1,141
    )
    
    -
    
    
    (1,141
    )Prepaids
    
    
    (157,956
    )
    
    -
    
    
    (157,956
    )Inventory
    
    
    (13,770
    )
    
    -
    
    
    (13,770
    )Accounts
      payable
    
    
    40,636
    
    
    -
    
    
    40,636Accrued
      expenses and other liabilities
    
    
    124,590
    
    
    394,868
    
    
    519,458Security
      deposits
    
    
    (27,215
    )
    
    -
    
    
    (27,215
    )Net
      cash used by operating activities
    
    
    (1,994,926
    )
    
    (14,304
    )
    
    (2,009,230
    )INVESTING
      ACTIVITIESCash
      in bank of subsidiary at date of acquisition
    
    
    10,000
    
    
    -
    
    
    10,000Purchase
      of property and equipment
    
    
    (327,915
    )
    
    -
    
    
    (327,915
    )Net
      cash used by investing activities
    
    
    (317,915
    )
    
    -
    
    
    (317,915
    )FINANCING
      ACTIVITIESLoan
      from stockholder
    
    
    29,541
    
    
    50,000
    
    
    79,541Repayment
      of loan to stockholder
    
    
    (78,041
    )
    
    (1,500
    )
    
    (79,541
    )Notes
      payable
    
    
    (25,000
    )
    
    -
    
    
    (25,000
    )Proceeds
      of private placement
    
    
    3,338,890
    
    
    -
    
    
    3,338,890Net
      cash provided by financing activities
    
    
    3,265,390
    
    
    48,500
    
    
    3,313,890Net
      increase in cash
    
    
    952,549
    
    
    34,196
    
    
    986,745Cash
      at beginning of period
    
    
    34,474
    
    
    278
    
    
    278Cash
      at end of period
    
    $
    987,023
    
    $
    34,474
    
    $
    987,023Interest
      paid
    
    $
    30,152
    
    $
    -
    
    $
    30,152SUPPLEMENTAL
      DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIESReduction
      of accrued interest on note to related party(Note 8)
    
    $
    500,000
    
    $
    -
    
    $
    500,000Stock
      issued to pay accrued liabilities
    
    $
    360,707
    
    $
    -
    
    $
    360,707The
      accompanying notes are an integral part of the consolidated financial
      statements.
   F-6
 
 **LIGHTING
SCIENCE GROUP CORPORATION**
 **AND
SUBSIDIARIES**
 **(A
DEVELOPMENT STAGE COMPANY)**
 **NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS**
 
 
 **NOTE
1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES**
 
 *Nature
of Business*
 
 On
December 23, 2004, The Phoenix Group Corporation announced its decision to
change its name to Lighting Science Group Corporation (the “Company” or
“Lighting Science”) by means of a parent/subsidiary merger with its wholly owned
subsidiary, Lighting Science, Inc. Pursuant to a resolution approved by the
board of directors, The Phoenix Group Corporation filed a certificate of merger
with the office of the Secretary of State of Delaware on December 23, 2004 to
complete the merger of Lighting Science with and into The Phoenix Group
Corporation and to change the name. The Company began conducting its operations
under the name Lighting Science Group Corporation on January 1, 2005.
 
 Lighting
Science is a Delaware corporation organized in June 1988. The Company’s
wholly owned subsidiaries during the period or for portions of the period were
Lighting Science, Inc. and Americare Management, Inc. Americare Management, Inc.
had no significant operations during the periods covered by these financial
statements. All intercompany accounts and transactions have been eliminated in
the accompanying consolidated financial statements.
 
 On or
about August 20, 2002, the Company filed a voluntary petition seeking
debtor-in-possession status for relief under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware. The case was subsequently transferred to the U.S. Bankruptcy Court for
the Northern District of Texas - Ft. Worth Division (“the Court”). The Court
granted the requested status.
 
 During
the summer of 2003, the Company filed a Disclosure Statement and Plan of
Reorganization (collectively “the Plan”) that was confirmed by the Court on
September 16, 2003 with an effective date of September 26, 2003. Under the terms
of the Plan, the creditors of the Company received an aggregate of approximately
51% of the common stock of the restructured entity in exchange for notes,
accounts payable, and other forms of debt held at the time of the filing of the
petition. This feature of the Plan - the exchange of debt for greater than 50%
of the equity in the restructured entity - qualified the Company to utilize the
reporting guidelines of the “Fresh Start” accounting rules contained in
Statement of Position (“SOP”) 90-7.
 
 On June
1, 2004 the Company acquired 100% of the outstanding common stock of Lighting
Science, Inc., a Las Vegas, Nevada-based corporation that owned certain
intellectual property related to the design and development of a light bulb
utilizing light emitting diodes as a source of light. Following the date of
acquisition, the Company raised capital through a private placement and provided
Lighting Science, Inc. with resources to develop and manufacture prototype light
bulbs. Staff has been added to support the development process.
 
 As of the
date of this report, the Company continues with its plans to develop and sell
products based upon the technology acquired in the acquisition of Lighting
Science.
 
 *Reverse
Stock Split*
 
 On August
20, 2004, the shareholders of the Company approved a proposal by management to
undertake a reverse split of the shares of the Company’s common stock in the
ratio of one share of new common stock for every 16 shares of old common stock.
All per-share amounts in the accompanying consolidated financial statements have
been retroactively adjusted for the reverse split of the Company’s shares. All
other references to shares of the Company’s stock in the accompanying
consolidated financial statements have been retroactively adjusted to a post
reverse-split basis unless otherwise noted.
 
 
 *Summary
of Significant Accounting Policies*
 
 Since the
Chapter 11 bankruptcy filing, the Company has applied the provisions in SOP 90-7
“Financial Reporting by Entities in Reorganization Under the Bankruptcy Code.”
SOP 90-7 does not change the application of generally accepted accounting
principles in the preparation of financial statements. However, it does require
that the financial statements for periods including and subsequent to filing the
Chapter 11 petition distinguish between transactions and events that are
directly associated with the reorganization from the ongoing operations of the
business.
 
 *Use
of Estimates*
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from these estimates.
 
 *Cash
and cash equivalents*
 
 All
highly liquid investments with original maturities of three months or less at
date of purchase are carried at cost, which approximates fair value, and are
considered to be cash equivalents.
 
 The
Company maintains cash accounts, which could exceed federally insured limits.
The Company has not experienced any losses from maintaining cash accounts in
excess of federally insured limits. Management believes that the Company does
not have significant credit risk related to its cash accounts.
 
 *Inventories*
 
 Inventories,
which consist of light bulbs designed by the Company and assembled by a
third-party manufacturer, are stated at the lower of cost or market with cost
being determined on a first-in, first-out basis.
 
 *Prepaid
expenses*
 
 Prepaid
expenses consist primarily of consulting fees of $150,000 paid to a financial
consulting firm (Note 4) during the fourth quarter of 2004. Prepaid expenses
will be amortized over the twelve-month period the services are estimated to be
provided commencing January 1, 2005.
 
 *Property
and equipment*
 
 Property
and equipment are carried at depreciated cost. Depreciation is provided using
the straight-line method over the estimated economic lives of the assets, which
range from two to five years.
 
 Depreciation
expense was $17,440, $-0-, and $17,440 for the year ended December 31, 2004, the
period beginning September 26, 2003 and ended December 31, 2003, and
cumulatively for the period beginning September 26, 2003 and ended December 31,
2004, respectively.
 
 *Other
assets*
 
 Other
assets consist of acquisition-related intangible assets and an intangible asset
arising upon the Company’s emergence from bankruptcy.
 
 Acquisition-related
intangible assets
  The
acquisition of the stock of Lighting Science, Inc. on June 1, 2004 necessitated
an allocation of the purchase price among the assets of the acquired company. An
independent valuation firm was engaged by the Company to perform this
allocation. At the date of acquisition, Lighting Science owned no tangible
assets. As a result, the net purchase price of $2,231,097 was allocated to
current assets, three classes of intangible assets, and liabilities as follows:
Cash - $10,000; Intellectual Property - $1,204,000; Proprietary Rights Agreement
- $1,063,000; Goodwill - $154,097, and Notes Payable - $200,000. The acquisition
of Lighting Science is described in greater detail in Note 2.
 
 Intellectual
property, which includes but is not limited to provisional patents, copyrights,
intellectual assets and proprietary know-how, was recorded effective June 1,
2004 as a part of the allocation of the purchase price of Lighting Science, Inc.
The intellectual property is being amortized over twenty years beginning June 1,
2004.
 
 Amortization
expense was $35,117, $-0-, and $35,117 for the year ended December 31, 2004, the
period beginning September 26, 2003 and ended December 31, 2003, and
cumulatively for the period beginning September 26, 2003 and ended December 31,
2004, respectively.
 
 The
proprietary rights agreement between the Company and Fredric Maxik (the
Company’s chief technology officer and the developer of the technology acquired
by the Company), ensures that all Intellectual Property created and/or
developed by Maxik during his employment and for some period thereafter shall be
assigned to the Company as well as precluding Maxik from competing with or
providing services for entities in competition with Lighting Science or that
have technology similar to Lighting Science for a period of time following his
employment termination with Lighting Science. This Agreement was recorded
effective June 1, 2004, as part of the purchase price of Lighting Science. This
asset is being amortized over three years, which is the period covered by the
agreement.
 
 Amortization
expense was $206,694, $-0-, and $206,694 for the year ended December 31, 2004,
the period beginning September 26, 2003 and ended December 31, 2003, and
cumulatively for the period beginning September 26, 2003 and ended December 31,
2004, respectively.
 
 Reorganization
Value
  As a
result of the terms of the Plan, $2,793,224 is reflected as reorganization value
in excess of amounts allocable to identifiable assets on the consolidated
balance sheet. The circumstances giving rise to this presentation were created
by a provision in the Plan that preserved the secured claim of Match, Inc. (see
Note 8). Match, Inc. (“Match”), an entity controlled by Ronald E. Lusk, the
Company’s chairman, agreed to the reaffirmation of its debt. As a result of this
reaffirmation, which is part of the confirmation of the Plan, an offsetting
entry to the reorganization value was recorded. In accordance with the
provisions of Financial Accounting Standard No. 142, the reorganization value is
treated the same as goodwill and is not amortized.
 
 Impairment
  The
Company evaluates the carrying value of its long-lived assets and identifiable
intangibles when events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable. The review includes an assessment
of industry factors, contract retentions, cash flow projections and other
factors the Company believes are relevant.
 
 Based
upon a review by an independent valuation firm as of December 1, 2004, the
Company has determined that no impairment to the Company’s intangible assets has
occurred since the date of the previous evaluation.
 
 *Revenue*
 
 Sales of
product commenced during the fourth quarter of 2004 through the Company’s web
site. Product sales are recorded when the products are shipped and title passes
to customers. Sales to customers are made pursuant to a sales contract that
provides for transfer of both title and risk of loss upon delivery to the
carrier. As of December 31, 2004, no allowance for returns had been estimated.
Outbound shipping charges to customers are included in “Revenue” and amounted to
$374.
 
 *Income
taxes*
 
 The
Company employs the asset and liability method in accounting for income taxes
pursuant to Statement of Financial Accounting Standards (SFAS) No. 109
“Accounting for Income Taxes.” Under this method, deferred tax assets and
liabilities are determined based on temporary differences between the financial
reporting and tax bases of assets and liabilities and net operating loss
carryforwards, and are measured using enacted tax rates and laws that are
expected to be in effect when the differences are reversed.
 
 *Earnings
per share*
 
 Basic
earnings per share are computed based upon the weighted average number of common
shares outstanding during the periods. Diluted earnings per share is based upon
the weighted average number of common shares outstanding during the periods plus
the number of incremental shares of common stock contingently issuable upon the
conversion of the Series A Preferred Stock.
 
 No effect
has been given to the assumed conversion of the preferred stock (Note 9) because
the effect would be antidilutive.
 
 **NOTE
2: ACQUISITION OF LIGHTING SCIENCE, INC.**
 
 On June
1, 2004, the Company acquired 100% of the outstanding common stock of Lighting
Science, Inc., a Las Vegas, Nevada-based corporation, which owns certain
intellectual property related to the design and development of an
ODL TM (Optimized Digital Lighting TM ) light
bulb. Subsequent to its acquisition by the Company, Lighting Science, Inc.
relocated its headquarters to Ft. Lauderdale, Florida. The Company’s
consolidated financial statements include the results of operations of Lighting
Science, Inc. since June 1, 2004.
 
 The
Company acquired all of the issued and outstanding capital stock of Lighting
Science, Inc. from Phibian S Trust, Edward I. Lanier, and John Collingwood in
exchange for 4,796,274 shares of the Company’s common stock and the Company’s
obligation to issue up to an additional 4,499,965 shares of the Company’s common
stock upon the satisfaction of certain conditions under the stock purchase
agreement. Those conditions were satisfied during the third quarter of 2004, and
the additional shares of common stock were issued on or about September 3,
2004.
 
 The
Company accounted for the acquisition as a purchase using the accounting
standards established in Statements of Financial Accounting Standards No. 141, *Business
Combinations* , and No.
142, *Goodwill
and Other Intangible Assets.*
 
 The
estimated fair values, as determined by an independent valuation firm, of assets
acquired and liabilities assumed at June 1, 2004 are set out in the schedule
below:
 
 Cash
    
    $
    10,000Intellectual
      property
    
    
    1,204,000Property
      rights agreement
    
    
    1,063,000Goodwill
    
    
    154,097Total
      assets acquired
    
    
    
    
    $
    2,431,097Note
      payable assumed
    
    
    
    
    
    (200,000
    )Net
      assets acquired
    
    
    
    
    $
    2,231,097
 
 Lighting
Science, Inc. was formed on or about May 31, 2004 for the purpose of acquiring
intellectual property from Phibian S Trust. There were no predecessor operations
with respect to this entity, therefore, no pro forma results of operations are
presented.
 
 Intellectual
Property
  As of the
date of acquisition, four provisional patents on the ODL technology had been
submitted to the United States Patent and Trademark Office and were acquired by
Lighting Science, Inc. Provisional patents are equivalent to a filing date
placeholder in the United States Patent Office (“USPTO”). They provide a
one-year period following submittal in which to finalize the utility patent
application with respect to the particular idea, process, concept or method
contained in a provisional patent.
 
 Subsequent
to its acquisition by the Company, Lighting Science, Inc. has filed four utility
patent applications (thereby complying with the one-year time period mentioned
above) based on the initial four provisional patents. In addition, a fifth
utility patent application has also been filed to provide further protection to
the ODL technology, and therefore there are currently five utility patents
pending with respect to the ODL technology before the USPTO. It is
anticipated that it will be about 18 months to two years from the date of filing
of the utility applications before the USPTO will issue a response to
the filing.  Two design patents have been filed on the
appearance of the light bulb, thereby bringing the total to seven utility and
design patents pending before the USPTO. Additionally, with respect to
proprietary branding of Lighting Science products and services, Lighting
Science has filed for federal trademark/service registrations on four marks
and anticipates filing additional registrations on other marks and logos, and,
as appropriate, Lighting Science has also established common
law trademark protection on several marks and logos. Further, other
appropriate intellectual property protection, such as copyright and trade
secret, is being applied to the ODL technology and the light bulb that embodies
it. It is also the policy of Lighting Science to develop an intellectual
property portfolio that protects and enhances the ODL technology ideas,
concepts, methods and processes. Lighting Science has also adopted intellectual
property policies, procedures and practices into its business operations to
facilitate its proprietary positioning with respect to its product development
and commercialization.
 
 
 **NOTE
3: FRESH-START ACCOUNTING**
 
 The Court
confirmed the Company’s Plan (Note 1) on September 16, 2003, and the Plan became
effective as of September 26, 2003. It was determined that the Company’s
reorganization value, computed immediately before the effective date, was
$2,793,502, which consisted of the following:
 
 Cash
    
    $
    278Reorganized
      value in excess of amounts allocable to identifiable
assets
    
    
    2,793,224Deferred
      tax assets comprised of $57,000,000 of net operating loss
      carry-forwards
    
    
    19,400,000Valuation
      allowance against above deferred tax assets
    
    
    (19,400,000
    )Reorganization
      value
    
    $
    2,793,502
 
 The
Company adopted fresh-start reporting because holders of existing voting shares
immediately before filing and confirmation of the Plan retained less than 50% of
the voting shares of the emerging entity, and its reorganization value was less
than its post-petition liabilities and allowed claims.
 
 
 **NOTE
4: GOING CONCERN**
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As shown in the consolidated
financial statements, the Company has experienced substantial net losses for the
year ended December 31, 2004 and the period beginning September 26, 2003 and
ended December 31, 2003 of $3.8 million and $400 thousand, respectively, as well
as negative cash flows from operations during those periods. In addition, the
Company has a negative working capital deficit of $1.085 million. However, 96%
(approximately $2.2 million) of the Company’s current liabilities are comprised
of a note and the accumulated interest thereon payable to Match, Inc., an entity
controlled by Ronald E. Lusk, the Company’s chairman (see Note 8). Mr. Lusk has
expressed his intention to forebear with respect to the collection of these
obligations. Thus, management of the Company effectively views the working
capital position of the Company to be a surplus of approximately $1.082 million
at December 31, 2004.
 
 The
Company has embarked upon an aggressive design and development program to bring
product to market during the second quarter of 2005. If, as management believes,
the Company is successful in developing viable products, additional capital will
be needed to fund the manufacturing process to generate finished goods. In the
event orders are received from established retailers and distributors of
lighting products, management believes that traditional lending sources will be
available to provide a portion of the capital needed to cover the manufacturing
and receivables cycles. However, the Company will still be required to raise
additional capital to meet its obligations.
 
 The
Company has retained the services of a financial consulting firm (Note 1) to
assist with strategic review and to formulate proposed plans and actions for
consideration by the board of directors of the Company. Based upon its current
cash on hand generated from a private placement, its anticipated product
releases, and its discussions with investment bankers, management believes that
it will be able to obtain the capital necessary to deliver finished products to
market during the second quarter of 2005. Preliminary discussions have been held
with potential investment banking firms that have expressed interest in the
Company’s business model. Despite these activities, there can be no assurance
that management’s efforts to sufficiently capitalize the Company will be
successful.
 
 
 **NOTE
5: FAIR VALUE OF FINANCIAL INSTRUMENTS**
 
 Statement
of Financial Accounting Standards No. 107, *Disclosures
About Fair Value of Financial Instruments* ,
requires that the Company disclose estimated fair values of financial
instruments.
 
 Cash and
cash equivalents, notes and accounts payable, accrued expenses and other current
liabilities are carried at amounts that approximate their fair values because of
the short-term maturity of these instruments.
 
 
 **NOTE
6: PROPERTY, EQUIPMENT AND OTHER ASSETS**
 
 Property
and equipment consists of the following:
  Furniture
    
    $
    58,208Computer
      equipment
    
    
    70,158Telephone
      equipment
    
    
    33,861Test
      equipment
    
    
    22,959Molds
    
    
    142,729Total
      property and equipment
    
    
    327,915Accumulated
      depreciation
    
    
    (17,440
    )$
    310,475
 Intellectual
property consists of the following:
  Intellectual
      property
    
    $
    1,204,000Accumulated
      amortization
    
    
    (35,117
    )$
    1,168,883
 
 Property
rights agreement consists of the following:
  Property
      rights agreement
    
    $
    1,063,000Accumulated
      amortization
    
    
    (206,694
    )$
    856,306
 
 The
estimated amortization expense for the next five years for the intangible assets
listed above is as follows:
 
 Amortization
      ExpenseIntellectualProperty
    
    
    Property
      Rights
      Agreement2005
    
    $
    60,200
    
    $
    354,3332006
    
    $
    60,200
    
    $
    354,3332007
    
    $
    60,200
    
    $
    147,6402008
    
    $
    60,200
    
    
    —2009
    
    $
    60,200
    
    
    —
 
 
 **NOTE
7: INCOME TAXES**
 
 The
Company accounts for corporate income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109. Under SFAS No. 109, deferred tax
assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. In addition,
future tax benefits, such as those from net operating loss carry forwards, are
recognized to the extent that realization of such benefits is more likely than
not. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as set forth below
in the period that includes the enactment date.
 
 Other
than the deferred tax asset relating to the Company’s net operating losses,
which totals approximately $20,900,000 and which has been fully offset by a
valuation reserve, the Company does not have any other significant deferred tax
assets or liabilities. The net
operating loss carryforwards are available to offset future taxable income of
the Company. These net operating losses expire from 2008 through 2018.
 
 Any
benefits realized in future periods from pre-confirmation net operating loss
carryforwards will first reduce reorganization value in excess of amounts
allocable to identifiable assets until exhausted and thereafter be credited to
additional paid-in capital.
 
 
 **NOTE
8: NOTES PAYABLE - RELATED PARTIES**
 
 Match
Loan
  The
$1,851,299 note payable at December 31, 2004 is due to Match, Inc., a company
owned by a revocable trust controlled by the Company’s chairman and chief
executive officer. The note consists of a line-of-credit up to a maximum of
$2,000,000, bears interest at prime rate plus 1% (5.25% at December 31, 2004) is
due on demand and is secured by all of the assets of the Company. The accrued
interest of $315,554 reflected on the accompanying consolidated balance sheet is
owed to Match.
 
 On
October 20, 2004, the Company made a payment of $30,000 to Match in partial
payment of the outstanding balance of accrued but unpaid interest on the
note. On
November 17, 2004, the Company reduced by $500,000 the amount that it owed to
Match with respect to accrued but unpaid interest on the note. In lieu of
disbursing cash in payment of the interest expense, the Company issued stock to
the Ronald E. Lusk Revocable Trust (“the Trust”) the owner of Match, Inc. Mr.
Lusk is the chairman of the Company and the grantor of the Trust. The Trust had
contemporaneously subscribed to purchase $500,000 of stock under the terms of
the private placement transaction discussed in Note 10.
 
 Note
to Phibian S Trust
  The
remaining balance of $175,000 in Notes Payable - Related Party is due to Phibian
S Trust, a revocable trust for the benefit of the children of Fredric Maxik, the
chief technology officer of the Company. Maxik is the co-trustee of the trust.
The note was issued by Lighting Science, Inc. to the trust in exchange for the
assignment of certain provisional patents and intellectual property that formed
the basis for the acquisition of Lighting Science by the Company. Lighting
Science is obligated to pay the principal by making 36 equal monthly
installments beginning on the fifteenth day of the month following the first
full month that the Company begins generating revenue in the amount of $10,000
or more, as determined in accordance with generally accepted accounting
principles.
 
 As an
accommodation to Maxik and in anticipation of near-term sales in excess of
$10,000 per month, the Company made an advance payment to Maxik on this note in
the amount of $25,000 in October 2004. Based upon anticipated note payments
beginning May 15, 2005, $25,000 of the note has been classified as a current
liability. This note provides for no interest. However, under generally accepted
accounting principles, an imputed amount of interest should be allocated. Such
amount is not material.
 
 Stockholder
Loans
  On
November 25, 2003 Ronald E. Lusk, the chairman of the Company, advanced $50,000
to the Company for purposes of meeting general and administrative expenses. The
loan bears interest at a rate of prime plus 1%. Mr. Lusk elected to forego any
interest that was otherwise due with respect to the loan. No interest on the
loan had previously been recorded by the Company. Any such interest would not
have been material. During 2004, Mr. Lusk advanced the Company an additional
$29,541 for general corporate purposes. During the third quarter of 2004, the
Company repaid the outstanding balances on these advances.
 
 **NOTE
9: PREFERRED STOCK**
 
 On
July 25, 1994, the Company sold 533,333 shares of 8% cumulative
Series A Senior Convertible Preferred Stock including voting rights,
cumulative dividends at $.30 per annum for each share and conversion rights to
common stock at the conversion price of $3.75 per share before reduction by an
anti-dilution provision for certain shares of common stock issued by the
Company. At December 31, 2004, the 533,333 shares of Series A Senior
Convertible Preferred Stock were convertible into 614,233 shares of common
stock. At December 31, 2004, dividends in arrears but not declared by the
Company on the 8% Cumulative Series A Senior Convertible Preferred Stock totaled
$1,640,000. The liquidation preference of each Senior Preferred Convertible
share is $3.75 per share plus the undeclared dividends, which totals to
$3,640,000 at December 31, 2004.
 
 At the
date of acquisition of Lighting Science, Inc. by the Company (June 1, 2004),
Lighting Science, Inc. had 100,000 shares of preferred stock authorized with no
shares issued or outstanding. As of December 31, 2004, this issue of preferred
stock was still authorized, however no shares had been issued. Effective January
1, 2005, this stock was cancelled under the merger agreement between Lighting
Science, Inc. and its parent company, Lighting Science Group Corporation..
 
 
 **NOTE
10: COMMON STOCK - PRIVATE PLACEMENT**
 
 In
connection with the acquisition of Lighting Science, Inc., the Company undertook
a private placement (“Lighting Science Private Placement”) of the Company’s
common stock under the exemption of Section 505 of Regulation D of the
Securities Act of 1933. This exemption allows the Company to raise no more than
$5,000,000 during a twelve-month period. As of the date of this report, a total
of $3,864,890 had been raised through the sale of 18,341,906 shares of the
Company’s common stock. The Company does not plan to issue any additional common
stock under the terms of the Lighting Science Private Placement.
 
 
 **NOTE
11: COMMITMENTS AND CONTINGENCIES**
 
 *Leased
office space*
  During
the periods covered by this report, the Company leased office space in
Richardson, Texas for its headquarters operation. For the year ended December
31, 2004, the Company accrued rental expense on the premises in
Richardson, Texas under an agreement with the owner of the building who is also
a member of the Company’s board of directors. Under the agreement, the landlord
agreed to accept common stock of the Company in lieu of cash payments for rent.
As of December 31, 2004, the Company had issued the required amount of stock for
the period of time it occupied the premises during the year 2004. No further
commitment remains under this agreement, and no additional stock is required to
be issued.
 
 On
November 13, 2004 the Company moved its offices from Richardson, Texas to
Dallas, Texas where it occupies excess office space that is leased by an
institutional shareholder of the Company. The shareholder allows the Company to
occupy the space on a rent-free basis. Such free rent was not material. The
shareholder also serves as a financial advisor to the Company as discussed in
the following paragraph. The Company has leased office space in Ft. Lauderdale,
Florida for its research and development activities for a period of one year
commencing February 1, 2005 at a rate of approximately $4,200 per month. The
Company also leases space in Hong Kong on a month-to-month basis at a rate of
approximately $250 per month.
 
 Rent
expense was $181,287, $56,748, and $238,035 for the year ended December 31,
2004, the period beginning September 26, 2003 and ended December 31, 2003, and
cumulatively for the period beginning September 26, 2003 and ended December 31,
2004, respectively.
 
 *Financial
advisory services*
  The
Company has entered into an agreement with a financial consulting firm located
in Dallas, Texas to provide financial advisory services in connection with the
Company’s capital structure. Under the terms of the agreement, the Company paid
the advisor a retainer of $150,000 during the fourth quarter of 2004 for
services anticipated to be rendered during calendar year 2005. The agreement
also provides for monthly payments of $10,000 during the one-year term of the
agreement.
 
 *Executive
Compensation*
  As of
December 31, 2004, the Company was obligated under the terms of employment
contracts for seven of its executive officers. The terms of the contracts
generally range between one and three years, and provide for annual salaries
ranging between $80,000 and $250,000 per year.
 
 On
October 12, 2004, the Company announced the appointments of Mr. Stan Waldrop as
president and Mr. Philip Lacerte as executive vice president of sales and
marketing. The three-year employment contracts for both individuals provide for
annual salaries of one dollar in the first year and $225,000 in the second and
third years of the contracts. The contracts provide that Mr. Waldrop and Mr.
Lacerte will receive as additional compensation an amount equal to two percent
of the gross sales revenue of all street lighting contracts over the entire life
of each contract. The contracts also provide that if the employment contracts
are terminated by either the Company or the officers as a result of the
disability of either officer, the Company will pay that officer’s compensation
under the terms of the contract for twelve consecutive months after the
effective date of the termination.
 
 During
the fourth quarter of 2004, the compensation committee of the board of directors
and the board of directors approved amendments to the employment agreements of
Ron Lusk, chairman and chief executive officer of the Company, and Fred Maxik,
chief technology officer of the Company, providing additional compensation in an
amount equal to two percent of the gross sales revenue of all street lighting
contracts over the entire life of each contract.
 
 The
stated annual compensation for the Company’s executive officers is approximately
$1,270,000 per year. However, the elections of Mr. Waldrop and Mr. Lacerte to
forego their salaries for the first year of their contracts will reduce the
amount from $1,270,000 to $933,000 for calendar year 2005. No deferred
compensation was owed to any of the officers as of December 31,
2004.