SECURITIES
AND EXCHANGE COMMISSION
 
 **Washington,
D.C. 20549**
 
 FORM
10-KSB/A
 
 (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 Avenue,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. X_ YES
__  ___
NO
 
 As of
April 21, 2005, the aggregate market value of the Registrant’s Common Stock held
by non-affiliates was $41.1 million **** based
upon the closing price of $1.55 **** on April
21, 2005.
 
 **EXPLANATORY
NOTE**
 
 Lighting
Science Group Corporation (“the Company”) hereby amends its Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2004, which was originally
filed on February 9, 2005. Included in the comparative financial statements for
prior periods were the financial statements of the Company for the period
beginning September 26, 2003 through December 31, 2003. The beginning date for
this period (September 26, 2003) coincided with the effective date of the
confirmation of the Amended Plan of Reorganization approved by the creditors of
the Company and confirmed by the U.S. Bankruptcy Court for the Northern District
of Texas on September 16, 2003. The material features of the Amended Plan of
Reorganization were outlined in Item 3 of Form 8-K filed on September 30, 2003.
 
 It was
the opinion of the Company at the time the 2004 financial statements were
prepared and filed with Form 10-KSB that the inclusion of the activity from
January 1 through September 26, 2003 (“the 2003 Pre-Confirmation period”) in the
comparative financial statements would not enhance the overall disclosure in the
filing. In fact, it was the opinion of the Company that to include the financial
information for the 2003 Pre-Confirmation period might be confusing and possibly
misleading. In omitting the information for the period January 1, 2003 through
September 26, 2003, the Company relied upon *Statement
of Position (SOP) 90-7, Financial Reporting Entities in Reorganization Under the
Bankruptcy Code* published by the American Institute of Certified Public Accountants. The last
sentence of footnote 2 of paragraph 40 thereof states, “Attempts to disclose and
explain exceptions that affect comparability would likely result in reporting
that is so unwieldy it would not be useful.”
 
 On March
18, 2005, the Company received a letter (“the Letter”) from the Securities and
Exchange Commission (“the SEC”) noting that, “...it is the staff’s position to
require the presentation of predecessor financial statements.” As a result, the
financial statements of the Company have been amended to reflect the activity
that occurred between the dates of January 1, 2003 and September 26, 2003. The
financial statements for this period have been audited by the independent
registered public accounting firm of Turner, Stone & Company,
LLP.
 
 The
Letter also noted that the conclusion of the certifying officer with respect to
the effectiveness of the disclosure
controls and procedures was not contained in Form 10-KSB. This Form
10-KSB/A amends Item 8A “Controls and Procedures” to disclose the conclusion of
the certifying officers of the Company regarding the effectiveness of the
Company’s disclosure controls and procedures as of the end of the period covered
by the report, based upon the evaluation of these controls and procedures. This
conclusion was inadvertently omitted from Form 10-KSB as originally
filed.
 
 The
Letter also contained inquiries about two items (the reorganization value of the
Company and amortization of intellectual property) contained in the financial
statements. These items were discussed in a letter dated March 31, 2005 from the
Company to the SEC. The explanations contained in the letter resolved the
questions to the satisfaction of the SEC, and no changes were required with
respect to these two inquiries. A copy of the letter dated March 31, 2005 is
attached hereto.
 
 Other
sections of this Form 10-KSB/A have been updated to reflect events that have
occurred between the date the original report was filed (February 9, 2005) and
the date of  this form 10-KSB/A.
 
 
 **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 SHEETS
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
 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, Inc. 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 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. 1 More
importantly, the lighting market consumes over 20% of the world’s energy on an
annual basis. 2 This 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. 3 It is
estimated that by the same year solid state lighting could reduce the global
amount of electricity used for lighting by 50%. 4 The
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 and infrared radiation
 
 5.
    “On”
      is on
 - LED
bulbs instantly reach 100% of their light output, unlike fluorescent bulbs that
take up to eight seconds 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
sulfur 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 designs
 -
    Patent
      pending manufacturing processes
  ·
    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 Program SM . 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
Company expects to make streetlights available under its Shared Savings Program
either directly or through a to-be-formed joint venture (the “Joint Venture **”** ) with Giuliani
Capital Advisors LLC (“GCA”). The intent of the Joint Venture is to own
streetlights and related lighting infrastructure targeting municipalities,
public utility corporations, universities, large mall owners, parking lot
owners, and other organizations as partners/customers. (For additional
information with respect to the Joint Venture, see Agreement
with Giuliani Capital Advisors below.)
 
 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 ordered 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 mass-market 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 streetlight that it believes will be competitive with 150-watt
      to 250-watt conventional streetlights 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 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.
 
 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 of 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 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. 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. In
addition, four design patents will be filed on the appearance of the light bulb.
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.
 
 Agreement
with Giuliani Capital Advisors
  On
February 15, 2005, Lighting Science Group Corporation entered into a letter
agreement with Giuliani Capital Advisors LLC (“GCA”) to engage GCA to provide
financial advisory services to the Company and a to-be-formed entity (the “Joint
Venture **”** ). The
intent of the Joint Venture is to own streetlights and related lighting
infrastructure targeting municipalities, public utility corporations,
universities, large mall owners, parking lot owners, and other organizations as
partners/customers. As part of its services GCA has agreed to provide the
following services:
 ·
    Assist
      the company on an exclusive basis to raise capital for the Joint
      Venture;
 ·
    Evaluate
      financial and organization structures on a non-exclusive basis relating to
      the Company’s different market
opportunities;
 ·
    Advise
      the Company on sources of debt and equity capital available to fund the
      Joint Venture;
 ·
    Assist
      management in coordination between advisors and debt/equity
      underwriters;
 ·
    Assist
      the Company to arrange meetings with various governmental entities and
      utilities, both domestic and international to acquire light poles and
      related infrastructure; and
 ·
    If
      requested, assist the Company to raise equity or debt financing for other
      Company projects.
 
 As
consideration for the services to be provided by GCA, the Company agreed to pay
GCA the following:
  ·
    A
      non-refundable deposit of $150,000 (paid on March 31, 2005);
 ·
    A
      market rate fee for all debt and/or equity capital raised for the Joint
      Venture; and
 ·
    Reasonable
      expenses of GCA incurred in performing its
services.
 
 In
addition, GCA will receive the following:
 ·
    A
      financial advisory role in the Joint Venture on capital raising
      transactions on a case by case basis; and
 ·
    A
      20% ownership interest in the Joint Venture.
 
 The
Company also issued a warrant to GCA that is exercisable by GCA to purchase up
to 1,650,000 shares of the Company’s common stock, subject to adjustment in
certain circumstances as provided in the warrant. The 1,650,000 shares
represented 3.2% of outstanding shares of common stock at February 15, 2005. The
warrant has a five-year term and GCA may exercise the warrant in whole or in
part at any time during the five-year term. The exercise price for each share of
common stock is $.60 per share or $990,000 if GCA were to exercise all 1,650,000
shares under the warrant.
 
 This
transaction is further described in Form 8-K filed on February 23, 2005 along
with a copy of the letter agreement between the parties.
 
 Consulting
Contract with Equity Group, Inc.
  On
February 10, 2005, the Company entered into a consulting contract with Equity
Group, Inc. (“Equity”) to provide financial public relations and investor
relations on behalf of the Company. In connection therewith, the Company agreed
to issue Equity two warrants to purchase an aggregate of $600,000 worth of
shares of the Company’s common stock with each warrant having an exercise price
to be determined in the future. Each warrant will provide for the purchase of
$300,000 worth of common stock of the Company. One of the warrants became fully
vested upon the signing of the contract. The other warrant will become
exercisable upon the first anniversary date of the consulting contact unless
terminated earlier. Equity will receive $5,000 per month during the term of the
contract.
 
 Loans
from Certain Directors and Members of Senior Management
  Certain
members of the board of directors and senior management (“Lender”) of the
Company agreed to loan the Company an aggregate of $340,000 on a short-term
basis. Proceeds from each of the loans will fund the Company’s continuing
operating expenses, ongoing expenses for salaries, legal and accounting fees, as
well as for working capital and other contingencies. Under the terms of the
notes issued by the Company to each Lender, the Company will: (i) pay interest
to each Lender at a rate of 9.50% per annum; (ii) pay a 10% commitment fee to
each Lender and (iii) issue warrants to the lenders for a total of 340,000
shares of common stock to be purchased at an exercise price of $1.50 per share.
The principal and interest on the Notes are due on May 30, 2005. The notes will
be repaid from proceeds of any subsequent financing arrangement to which the
Company becomes a party.
 
 This
transaction is further described in Form 8-K filed on April 21, 2005 along with
a copy of the letter agreement between the parties.
 
 **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
April 15, 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
April 15, 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 the Company.
 
 
 **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 currently quoted in the NASDAQ pink sheets under the symbol
“LSGP.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****HIGH**
    **LOW****2005**First
      Quarter
    1.85
    1.68**2004**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 April 18, 2005, there were
approximately 235 holders of record of the Company’s common stock, not
including: (1) holders of shares held in brokerage accounts; and (2) holders of
pre reverse-split certificates who have not yet submitted their certificates for
conversion.
 
 **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 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. Additional information with respect to the
Preferred Stock is presented in the “Liquidity and Capital Resources” section of
Item 6, herein.
 
 **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 Regulation D of the Securities Act of 1933. 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.
 
 On March
4, 2005 the Company amended its filing of Form D (Notice of Sale of Securities
Pursuant to Regulation D, Section 4(6), and/or Uniform Limited Offering
Exemption) to elect the exemption under Rule 506 rather than Rule 505 for the
sale of the Company’s common stock. Under Rule 506, the Company can raise an
unlimited amount of money from any number of “accredited” investors and up to 35
“non-accredited” investors.
 
 
 **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**
  [As noted
in Form 10-KSB as originally filed with the Securities and Exchange Commission
on February 9, 2005, it was the opinion of management that the Fresh-start
financial statements prepared for the Company would not be comparable with those
prepared before the Plan of Reorganization was confirmed because they were, in
effect, the financial statements of a new entity. As a result, management
limited its discussion and analysis to the period beginning with effective date
of the confirmation of the Plan of Reorganization (September 26, 2003) and
ending with December 31, 2004. On March 18, 2005, the Company received a letter
from the Securities and Exchange Commission noting that, “...it is the staff’s
position to require the presentation of predecessor financial statements.” As a
result, the financial statements of the Company have been amended to reflect the
activity that occurred between the dates of January 1, 2003 and September 26,
2003. To conform this Item 6 - Management’s Discussion and Analysis of Financial
Condition and Results of Operation - to the amended financial statements, the
Company hereby includes a discussion of the Company’s operations for the period
commencing January 1, 2003 and ended December 31, 2003.]
 
 **Results
of Operations**
  For the
years December 31, 2004 and December 31, 2003, the Company reported consolidated
net losses of $3,771,000 and $1,700,000, respectively.
 
 Calendar
Year 2004
 For the
year ended December 31, 2004, the Company reported a net loss of $3,771,000. The
reported loss for 2004 is attributable to several factors: (1) the lack of
significant 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.
 
 Calendar
Year 2003
 For the
year ended December 31, 2003, the Company incurred losses totaling $1,700,000.
In management’s opinion, these losses were incurred in two distinct periods
during the calendar year — the 2003 Pre-Confirmation period and the period from
September 26, 200 through December 31, 2003 (the “2003 Post-Confirmation
period”).
 
 *The
2003 Pre-Confirmation Period*
  During
the period January 1 through September 26, 2003 the Company oversaw the
activities of its two operating subsidiaries, Lifeline Home Health Services,
Inc. (“LHHS”) and Lifeline Managed Home Care, Inc. (“LMHC”). During this time
period, the Company and the two subsidiaries were operating as
debtors-in-possession under Chapter 11 of the federal bankruptcy
law.
 
 As the
result of actions by certain competitors, LHHS suffered considerable attrition
in its professional nursing staff and its administrative staff during the latter
part of the summer of 2003. On September 15, 2003, LHHS made the decision that
it was in the best interest of its patients to cease operations and to discharge
its patients to other home healthcare agencies. LHHS subsequently requested that
the Chapter 11 bankruptcy case be converted to a proceeding under Chapter 7. The
remaining assets of LHHS were liquidated by a United States Trustee under the
supervision of the Court.
 
 Concurrent
with the closing of the operations of LHHS, LHMC was also forced to cease its
operations because the two companies shared office space, employees, and other
resources. On or about September 15, 2003, LMHC withdrew its Chapter 11
petition. The primary creditor of Lifeline Management Group, Inc. (the parent of
LHHS and LMHC) was Match, Inc. (“Match”), which is an entity controlled by
Ronald E. Lusk, the Company’s chairman. Match foreclosed upon the stock of
Lifeline Management Group, Inc. on or about September 15, 2003.
 
 Thus, as
of the effective date of the plan of reorganization for The Phoenix Group
Corporation (September 26, 2003), the Company had one subsidiary, Americare
Management, Inc., which had no assets and no operations. As a result of having
no operations at the subsidiary level or within the parent itself, as of
September 26, 2003, the Company essentially reentered the development stage.
 
 During
the 2003 Pre-Confirmation period, the Company incurred a consolidated net
operating loss of $1,291.000. This loss was comprised of $3,525,000 in revenue
less $3,974,000 in operating expenses for an operating loss of $449,000. This
activity was almost completely attributable to the home healthcare business of
the two operating subsidiaries. An additional $842,000 of accrued interest
expense that was primarily attributable to the parent corporation brought the
consolidated net loss to $1,291,000 for the 2003 Pre-Confirmation
period.
 
 *The
2003 Post-Confirmation Period*
  For the
period beginning September 26, 2003 and ending December 31, 2003, the Company
reported a net loss of $409,000. The loss was largely comprised of accrued
expenses for salaries, directors’ fees, and rent. During this period, Management
was evaluating various investment opportunities that were presented to
it.
 
 *Aggregate
Loss for 2003*
  The loss
during the 2003 Pre-Confirmation Period of $1,291,000 combined with the loss of
$409,000 for the Post-Confirmation period yielded a consolidated net loss of
$1,700,000 for the year ended December 31, 2003. The operating loss was
primarily incurred in the home healthcare business, with accrued interest
expense on the debt of the parent corporation (prior to the confirmation of the
Plan) having contributed significantly to increasing the loss.
 
 **Liquidity
and Capital Resources**
  Conversion
of Debt and Equity held by Match
  As
originally noted in the Form 10-KSB as filed on February 9, 2005, at December
31, 2004 the Company reported a working capital deficit of $1.085 million.
However, at that time 96% (approximately $2.2 million) of the Company’s current
liabilities were comprised of a note and the accumulated interest thereon
payable to Match. After reviewing a report from its outside financial advisors,
the board of directors concluded that the nature of the Company’s outstanding
debt was inconsistent with its future best interests and that a proposal to
convert the debt into common stock of the Company should be explored. Mr. Lusk
proposed a conversion price of $1.725 per share, the average of the closing
price of the common stock over the five-day period ended March 15, 2005. Upon
noting that the average trading price of the stock was $1.50 per share at the
time the proposal was reviewed and that Mr. Lusk was willing to reduce the
accrued interest payable on the note by $250,000, the board decided that it was
in the best interest of the Company to accept the proposal from Mr. Lusk. As a
result, the board of directors of the Company voted on April 11, 2005 to accept
the offer and convert the debt of $1,851,299 plus the remaining accrued interest
of $91,226 into 1,126,101 shares of common stock of the Company.
 
 Mr. Lusk
also proposed a similar plan to convert the preferred stock and the accumulated
unpaid dividend thereon to common stock of the Company. On July 25, 1994,
the Company sold 533,333 shares of 8% cumulative Series A Senior
Convertible Preferred Stock at a price of $3.75 per share, or a total of $2
million. The preferred stock, owned by Match at the date of the conversion,
carried cumulative dividends of $0.30 per annum for each share and conversion
rights to common stock. The cumulative unpaid dividend with respect to the
preferred stock was $1,670,685, producing a total liquidation preference of
$3,670,685. Mr. Lusk proposed the same conversion price of $1.725 per share. The
board also voted to convert the preferred stock and cumulative dividend to
2,127,933 shares of common stock.
 
 Capital
Requirements
  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. Upon the recommendation of the
financial consulting firm, the Company employed the services of an investment
banking firm to raise capital to fund the ongoing operations of the Company and
to finance the design and manufacturing of the Company’s products. Despite these
activities, there can be no assurance that management’s efforts to sufficiently
capitalize the Company will be successful.
 
 Certain
members of the board of directors and senior management (“Lender”) of the
Company agreed to loan the Company an aggregate of $340,000 on a short-term
basis. Proceeds from each of the loans will fund the Company’s continuing
operating expenses, ongoing expenses for salaries, legal and accounting fees, as
well as for working capital and other contingencies. Under the terms of the
notes issued by the Company to each Lender, the Company will: (i) pay interest
to each Lender at a rate of 9.50% per annum; (ii) pay a 10% Commitment fee to
each Lender and (iii) issue a warrant to each Lender for the purchase of 340,000
shares of Company common stock, par value $.001 at an exercise price of $1.50
per share. The principal and interest on the notes are due on May 30, 2005. The
notes will be repaid from proceeds of any subsequent financing arrangement to
which the Company becomes a party.
 
 
 **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**
 
 Disclosure
Controls and Procedures . The
Company’s management, with the participation of the principal executive officer
and principal financial officer, has evaluated the effectiveness of the
Company’s disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”) as of the end of the period covered by this report. Based
upon such evaluation, the principal executive officer and principal financial
officer of the Company have concluded that, as of the end of such period, the
Company’s disclosure controls and procedures are effective in timely alerting
the Company’s management to material information relating to the Company to be
included in the reports that the Company files or submits pursuant to the
Exchange Act.
 
 Internal
Control Over Financial Reporting . There
have been no changes in the Company’s internal controls over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fourth quarter of 2004 or the first quarter of 2005 that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
 
 
 **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 a 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 TABLELong
      Term CompensationAnnual
      Compensation
    Awards
    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
      Harkleroad
    
    
    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
 
 Effective
January 1, 2005, the three directors of the Company who are also employees of
the Company (Mr. Lusk, Mr. Maxik, and Mr. Poss) will no longer receive
compensation for their service as members of the board of
directors.
 
 
 **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.
 
 The
ownership, as of April 15, 2005, of voting stock by all directors and executive
officers of the Company subsequent to: (1) the conversion of the Preferred Stock
and certain debt into shares of the Company’s common stock (as described in Item
6 herein); and (2) the issuance of additional shares to outside directors is set
out in the table below.
 
 ******Common Stock**
    
    ******Preferred Stock****Current
      Directors and Executive Officers**
    **Shares****Owned**
    
    **Percent****of
      Class**
    
    **Shares****Owned**
    
    **Percent****of
      Class**Robert
      E. Bachman
    360,057
    
    0.66%John
      Collingwood
    3,555,020
    
    6.50%Kathryn
      D. Fuller
    919,453
    
    1.68%Donald
      R. Harkleroad
    673,027
    
    1.23%K.
      Shane Hartman
    1,239,939
    
    2.27%Phil
      Lacerte
    6,614,584
    
    6.61%Ronald
      E. Lusk
    7,875,699
    
    14.41%
    
    -
    
    -Fredric
      S. Maxik
    2,673,260
    
    4.89%Robert
      McMonigle
    129,036
    
    0.24%J.
      Michael Poss
    1,549,016
    
    2.83%Daryl
      Snadon
    1,083,247
    
    1.98%Stan
      Waldrop
    2,825,834
    
    5.17%Robert
      L. Woodson, III
    470,905
    
    0.86%Directors
      and officers as a group
    26,969,077
    
    49.33%
    
    -
    
    -
 
 
 **ITEM
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**
 
 As of
December 31, 2004, the Company is obligated under the terms of a line of credit
agreement to Match 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.
 
 As
described in “Liquidity and Capital Resources” in Item 6 herein, Match converted
the debt to shares of common stock on April 11, 2005.
 
 
 **ITEM
13. EXHIBITS**
 ****
 (a)
    
    Exhibits
      required by Item 601 of Regulation S -
B
 
 Exhibit
      No.
    
    Document31.1*
    
    Rule 13a-14
      Certification dated May 2, 2005, by Ronald E. Lusk, Chief Executive
      Officer31.2*
    
    Rule 13a-14
      Certification dated May 2, 2005, by J. Michael Poss, Chief Financial
      Officer.32.1**
    
    Section 1350
      Certification dated May 2, 2005, by Ronald E. Lusk, Chief Executive
      Officer.32.2**
    
    Section 1350
      Certification dated May , 2005, by J. Michael Poss, Chief Financial
      Officer.99.1*
    
    Letter
      March 31, 2005 from Lighting Science Group Corporation to the Securities
      and Exchange Commission
 
 
 (b)
    
    Reports
      on Form 8-K
 On
      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.*
      Filed herewith.**
      Furnished herewith.
  
 
 **ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**
 
 **Audit
Fees**
  Audit
fees billed by the Company’s principal accountant total $65,837 as of the date
of this report.
 
 **Non-Audit-Related
Fees**
  No
non-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 to 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:
    
    May
      2, 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:
    
    May
      2, 2005By:
    
    /s/
      J. Michael PossJ.
      Michael Poss, Chief Financial Officer and DirectorDate:
    
    May
      2, 2005By:
    
    /s/
      Robert E. BachmanRobert
      E. Bachman, DirectorDate:
    
    May
      2, 2005By:
    
    /s/
      John CollingwoodJohn
      Collingwood, DirectorDate:
    
    May
      2, 2005By:
    
    /s/
      Donald R. HarkleroadDonald
      R. Harkleroad, DirectorDate:
    
    May
      2, 2005By:
    
    /s/
      Fred S. MaxikFred
      S. Maxik, DirectorDate:
    
    May
      2, 2005By:
    
    /s/
      Robert McMonigleRobert
      McMonigle, DirectorDate:
    
    May
      2, 2005By:
    
    /s/
      Daryl SnadonDaryl
      Snadon, DirectorDate:
    
    May
      2, 2005By:
    
    /s/
      Robert L. Woodson, IIIRobert
      L. Woodson, DirectorDate:
    
    May
      2, 2005
  
 **LIGHTING
SCIENCE GROUP CORPORATION**
 **AND
SUBSIDIARIES**
 
 
 **INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **Page**Report
      of Independent Registered Public Accounting Firm
    F-2Consolidated Balance Sheets
    F-3Consolidated
      Statements of Operations
    F-4Consolidated
      Statements of Stockholders’ Equity
    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 sheets of Lighting Science Group
Corporation and subsidiaries (a development stage company) (formerly The Phoenix
Group Corporation) (the Company) as of December 31, 2004 and September 26, 2003
(pre-confirmation period), and the related consolidated statements of
operations, stockholders’ equity and cash flows for the year ended December 31,
2004, the period from September 26, 2003 through December 31, 2003, the period
from September 26, 2003 through December 31, 2004 and the period from January 1,
2003 through September 26, 2003 (pre-confirmation period). 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 September
26, 2003, and the consolidated results of their operations and cash flows for
the periods indicated above, in conformity with United States generally accepted
accounting principles.

As
discussed in the “Explanatory Note to Amended Consolidated Financial
Statements,” the Company emerged from bankruptcy on September 16, 2003
(effective September 26, 2003), hereafter referred to as the “post-confirmation”
period, and the Company accounted for the reorganization using fresh-start
accounting and reporting in accordance with Statement of Position (SOP) 90-7,
“*Financial
Reporting Entities in Reorganization Under the Bankruptcy Code*.”
Accordingly, the post-confirmation financial statements are not comparable to
the pre-confirmation financial statements.

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
9, 2005 (except for the pre-confirmation period and Note 12, which is dated as
of April 15, 2005)**
 F-2
 
 **LIGHTING
      SCIENCE GROUP CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE
      COMPANY)**
      **CONSOLIDATED
      BALANCE SHEETS**
      ****December
      31, 2004
    
    
    September
      26, 2003**ASSETS**CURRENT
      ASSETSCash
      and cash equivalents
    
    $
    987,023
    
    **$**
    **278**Accounts
      receivable
    
    
    1,141
    
    
    -Inventory
    
    
    13,770
    
    
    -Prepaid
      expenses
    
    
    163,539
    
    
    -Total
      current assets
    
    
    1,165,473
    
    
    **278**PROPERTY
      AND EQUIPMENT, net (Note 6)
    
    
    310,475
    
    
    -OTHER
      ASSETSReorganized
      value in excess of amounts allocable to identifiable assets (Note
      3)
    
    
    2,793,224
    
    
    **2,793,224**Intellectual
      property, net (Notes 2 and 6)
    
    
    1,168,883
    
    
    -Property
      rights agreement, net (Notes 2 and 6)
    
    
    856,306
    
    
    -Goodwill
      (Note 2)
    
    
    154,097
    
    
    -Security
      deposits
    
    
    27,215
    
    
    -Total
      other assets
    
    
    4,999,725
    
    
    **2,793,224**TOTAL
      ASSETS
    
    $
    6,475,673
    
    **$**
    **2,793,502****LIABILITIES
      AND STOCKHOLDERS’ EQUITY**CURRENT
      LIABILITIESAccounts
      payable
    
    $
    40,636
    
    **$**
    -Accrued
      compensation
    
    
    17,899
    
    
    -Accrued
      interest payable to related party
    
    
    315,554
    
    
    **674,703**Note
      payable - related party
    
    
    1,851,299
    
    
    **1,851,299**Current
      portion of note payable - related party
    
    
    25,000
    
    
    -Total
      current liabilities
    
    
    2,250,388
    
    
    **2,526,002**LONG-TERM
      DEBTNote
      payable - related party
    
    
    150,000
    
    
    -TOTAL
      LIABILITIES
    
    
    2,400,388
    
    
    **2,526,002**STOCKHOLDERS’
      EQUITYSeries
      A Preferred Stock, $.001 par value, 5,000,000 sharesauthorized;
      533,333 shares issued and outstanding (Note 9)
    
    
    533
    
    
    **533**Common
      Stock, $.001 par value, 500,000,000 shares authorized,51,297,256
      shares and 16,685,446 shares issued and outstandingat
      December 31, 2004 and September 26, 2003, respectively
    
    
    51,297
    
    
    **16,685**Stock
      subscriptions receivable
    
    
    (26,000
    )
    
    -Additional
      paid-in-capital
    
    
    8,229,648
    
    
    **250,282**Accumulated
      deficit during the development stage
    
    
    (4,180,193
    )
    
    -TOTAL
      STOCKHOLDERS’ EQUITY
    
    
    4,075,285
    
    
    **267,500**TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
    
    $
    6,475,673
    
    **$**
    **2,793,502**
 
 
 The 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
      EndedDecember 31, 2004
    
    September
      26, 2003 through December 31, 2003
    
    Cumulative
      from September 26, 2003 through December 31, 2004
    
    January
      1, 2003 through September 26, 2003Revenue
    
    $
    3,404
    
    $
    -
    
    $
    3,404
    
    **$**
    **3,524,732**Cost
      of goods sold
    
    
    (2,076
    )
    
    -
    
    
    (2,076
    )
    
    -Gross
      margin
    
    
    1,328
    
    
    -
    
    
    1,328
    
    
    **3,524,732**Operating
      expenses:Selling,
      general and administrative
    
    
    1,483,264
    
    
    79,451
    
    
    1,562,715
    
    
    **925,306**Compensation
      and related expenses
    
    
    1,148,426
    
    
    208,061
    
    
    1,356,487
    
    
    **3,048,070**Consulting
      fees
    
    
    624,934
    
    
    -
    
    
    624,934
    
    
    -Directors
      fees
    
    
    388,575
    
    
    87,500
    
    
    476,075
    
    
    -Total
      operating expenses
    
    
    3,645,199
    
    
    375,012
    
    
    4,020,211
    
    
    **3,973,376**Operating
      income (loss)
    
    
    (3,643,871
    )
    
    (375,012
    )
    
    (4,018,883
    )
    
    **(448,644**
    **)**Interest
      income, other income and interest expense, net
    
    
    (127,150
    )
    
    (34,160
    )
    
    (161,310
    )
    
    **(842,613**
    **)**Net
      loss
    
    $
    (3,771,021
    )
    $
    (409,172
    )
    $
    (4,180,193
    )
    **$**
    **(1,291,257**
    **)**Basic
      net loss per weighted average common share
    
    $
    (0.119
    )
    $
    (0.025
    )
    $
    (0.147
    )
    **$**
    **(0.155**
    **)**Weighted
      average number of common shares outstanding
    
    
    31,668,957
    
    
    16,685,446
    
    
    28,529,863
    
    
    **8,335,961**
  
 The 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**
      **FOR THE PERIOD BEGINNING JANUARY 1, 2003 AND ENDED
      DECEMBER 31, 2004**Preferred
      Stock
    
    Common
      StockShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    StockSubscriptionsReceivable
    
    
    Additional
      Paid in Capital
    
    
    AccumulatedDeficit
    
    
    Total**Balance
      at January 1, 2003**
    ****
    ****
    **533,333**
    ****
    **$**
    **533**
    ****
    ****
    **8,301,217**
    ****
    **$**
    **8,301**
    ****
    **$**
    **-**
    ****
    **$**
    **51,670,187**
    ****
    **$**
    **(78,495,394**
    **)**
    **$**
    **(26,816,373**
    **)******
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ******Net
      loss**
    ****
    ****
    **-**
    ****
    ****
    **-**
    ****
    ****
    **-**
    ****
    ****
    **-**
    ****
    ****
    **-**
    ****
    ****
    **-**
    ****
    ****
    **(1,291,257**
    **)**
    ****
    **(1,291,257**
    **)******
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ******Adjustments
      to conform to provisions of "Fresh Start" accounting (Note
      3)**
    ****
    ****
    **-**
    ****
    ****
    **-**
    ****
    ****
    **-**
    ****
    ****
    **-**
    ****
    ****
    **-**
    ****
    ****
    **(51,670,187**
    **)**
    ****
    **79,786,651**
    ****
    ****
    **28,116,464**
    ********
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ******Issuance
      of common stock to creditors pursuant to plan of reorganization (Notes 3
      and 12)**
    ****
    ****
    **-**
    ****
    ****
    **-**
    ****
    ****
    **8,384,229**
    ****
    ****
    **8,384**
    ****
    ****
    **-**
    ****
    ****
    **250,282**
    ****
    ****
    **-**
    ****
    ****
    **258,666**Balance
      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
    )
    $
    4,075,285
   The
accompanying notes are an integral part of the consolidated financial
statements.
   F-5
 
 ****
      **LIGHTING
      SCIENCE GROUP CORPORATION AND SUBSIDIARIES (A DEVELOPMENT STAGE
      COMPANY)**
      **CONSOLIDATED
      STATEMENTS OF CASH FLOWS**Year endedDecember
      31, 2004
    
    
    September
      26, 2003throughDecember 31, 2003
    
    
    Cumulative
      fromSeptember 26, 2003throughDecember 31,
    2004
    
    
    January
      1, 2003throughSeptember 26, 2003OPERATING
      ACTIVITIESNet
      loss
    
    $
    (3,771,021
    )
    $
    (409,172
    )
    $
    (4,180,193
    )
    **$**
    **(1,291,257**
    **)**Adjustments
      to reconcile net loss to net cash provided by (used by) operating
      activities:Expenses
      paid by issuance of common stock
    
    
    1,551,700
    
    
    -
    
    
    1,551,700
    
    
    -Depreciation
      and amortization
    
    
    259,251
    
    
    -
    
    
    259,251
    
    
    **8,335**Changes
      in:Accounts
      receivable
    
    
    (1,141
    )
    
    -
    
    
    (1,141
    )
    
    **454,912**Prepaids
    
    
    (157,956
    )
    
    -
    
    
    (157,956
    )
    
    **(3,393**
    **)**Inventory
    
    
    (13,770
    )
    
    -
    
    
    (13,770
    )
    
    **6,693**Accounts
      payable
    
    
    40,636
    
    
    -
    
    
    40,636
    
    
    **132,578**Accrued
      expenses and other liabilities
    
    
    124,590
    
    
    394,868
    
    
    519,458
    
    
    **1,015,810**Security
      deposits
    
    
    (27,215
    )
    
    -
    
    
    (27,215
    )
    
    **(3,159**
    )Net
      cash provided by (used by) operating activities
    
    
    (1,994,926
    )
    
    (14,304
    )
    
    (2,009,230
    )
    
    **320,519**INVESTING
      ACTIVITIESCash
      on hand in subsidiaries at foreclosure
    
    
    -
    
    
    -
    
    
    -
    
    
    **(130,171**
    **)**Cash
      in bank of subsidiary at date of acquisition
    
    
    10,000
    
    
    -
    
    
    10,000
    
    
    -Purchase
      of property and equipment
    
    
    (327,915
    )
    
    -
    
    
    (327,915
    )
    
    **(19,433**
    **)**Net
      cash used by investing activities
    
    
    (317,915
    )
    
    -
    
    
    (317,915
    )
    
    **(149,604**
    **)**FINANCING
      ACTIVITIESLoan
      from stockholder
    
    
    29,541
    
    
    50,000
    
    
    79,541
    
    
    -Repayment
      of loan to stockholder
    
    
    (78,041
    )
    
    (1,500
    )
    
    (79,541
    )
    
    -Notes
      payable
    
    
    (25,000
    )
    
    -
    
    
    (25,000
    )
    
    **(122,338**
    **)**Proceeds
      of private placement
    
    
    3,338,890
    
    
    -
    
    
    3,338,890
    
    
    -Net
      cash provided by financing activities
    
    
    3,265,390
    
    
    48,500
    
    
    3,313,890
    
    
    **(122,338**
    **)**Net
      increase in cash
    
    
    952,549
    
    
    34,196
    
    
    986,745
    
    
    **48,577**Cash
      at beginning of period
    
    
    34,474
    
    
    278
    
    
    278
    
    
    **(48,299**
    **)**Cash
      at end of period
    
    $
    987,023
    
    $
    34,474
    
    $
    987,023
    
    **$**
    **278**Interest
      paid
    
    $
    30,152
    
    $
    -
    
    $
    30,152
    
    **$**
    -SUPPLEMENTAL
      DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIESReduction
      of accrued interest on note to related party
    
    $
    500,000
    
    $
    -
    
    $
    500,000
    
    **$**
    **-**Stock
      issued to pay accrued liabilities
    
    $
    360,707
    
    $
    -
    
    $
    360,707
    
    **$**
    -


**LIGHTING
SCIENCE GROUP CORPORATION**


**AND
SUBSIDIARIES**


**(A
DEVELOPMENT STAGE COMPANY)**


**NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS**








**Explanatory
Note to Amended Consolidated Financial Statements**





On
February 9, 2005, Lighting Science Group Corporation (“the Company”) filed Form
10-KSB for the year ended December 31, 2004 with the Securities and Exchange
Commission. Included
in the comparative financial statements for prior periods were the financial
statements of the Company for the period beginning September 26, 2003 through
December 31, 2003. The beginning date for this period (September 26, 2003)
coincided with the effective date of the confirmation of the plan of
reorganization approved by the creditors of the Company and confirmed by the
U.S. Bankruptcy Court for the Northern District of Texas on September 16, 2003.





It was
the opinion of the Company at the time the 2004 financial statements were
prepared and filed with Form 10-KSB that the inclusion of the activity from
January 1 through September 25, 2003 (“the Pre-Confirmation period”) in the
comparative financial statements would not enhance the overall disclosure in the
filing. In fact, it was the opinion of the Company that to include the financial
information for the Pre-Confirmation period might be confusing and possibly
misleading. In omitting the information for the period January 1, 2003 through
September 25, 2003, the Company relied upon *Statement
of Position (SOP) 90-7, Financial Reporting Entities in Reorganization Under the
Bankruptcy Code* published by the American Institute of Certified Public Accountants. The last
sentence of footnote 2 of paragraph 40 thereof states, “Attempts to disclose and
explain exceptions that affect comparability would likely result in reporting
that is so unwieldy it would not be useful.”





On March
18, 2005, the Company received a letter from the Securities and Exchange
Commission noting that, “...it is the staff’s position to require the presentation
of predecessor financial statements.” As a result, the financial statements of
the Company have been amended to reflect the activity that occurred between the
dates of January 1, 2003 and September 25, 2003. The financial statements for
this period have been audited by the independent registered public accounting
firm of Turner, Stone & Company, LLP.





In an
effort to mitigate any confusion that may be caused by the inclusion of the
information for the Pre-Confirmation period, the Company will employ the
following conventions, visual indicators, and procedures for presenting the
consolidated financial statements and the notes to the consolidated financial
statements. In each of the four financial statements (Consolidated Balance
Sheets, Consolidated Statements of Operations, and Consolidated Statements of
Cash Flows), the information for the Pre-Confirmation period has been added to
the original financial statement in bold face type.


With
respect to the *Notes
to the Financial Statements* , a
bifurcated approach has been employed. The *Notes
to the Financial Statements* for the
period ended December 31, 2004 are presented without change (unless otherwise
noted) in their original, numbered format at the beginning of each note. A label
above each note identifies it as “Post-Confirmation” (meaning that the note
relates to a time period commencing after September 25, 2003). The *Notes
to the Financial Statements* for the
period beginning January 1, 2003 and ended September 25, 2003, are presented
below the Post-Confirmation note to which each Pre-Confirmation note most
closely relates. The notes for the time period beginning January 1, 2003 and
ended September 25, 2003 are labeled “Pre-Confirmation.” For those footnotes
that provide essentially the same disclosure in both the Post-Confirmation and
Pre-Confirmation periods, these labels are not used, and the disclosures are
presented only once.





To
further differentiate the discussion in the *Notes
to the Financial Statements* , the
following distinction has been adopted. In the notes for the Post-Confirmation
period, the registrant is referred to as “Lighting Science Group Corporation” or
“the Company.” In the notes for the Pre-Confirmation period, the registrant is
referred to as “The Phoenix Group Corporation,” “the Corporation,” or “Phoenix.”
The reason for employing this distinction is that until December 23, 2004, the
name of the corporation was The Phoenix Group Corporation. On that date the
Company published a press release announcing its decision to change its name to
Lighting Science Group Corporation by means of a parent/subsidiary merger with
its wholly owned subsidiary, Lighting Science, Inc. The Company began conducting
its operations under the name Lighting Science Group Corporation on January 1,
2005. Consequently, Form 10-KSB for the year 2004 was filed with the name of the
registrant shown as Lighting Science Group Corporation. The Form 10-KSB for the
preceding year (the period from September 26, 2003 through December 31, 2003)
was filed in the name of The Phoenix Group Corporation. Therefore, there is
consistency in referring to the Company as The Phoenix Group Corporation in the
notes to the financial statements for the period beginning January 1, 2003 and
ended September 25, 2003.





**NOTE
1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES**





Post-Confirmation





*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.





Pre-Confirmation





*Nature
of Business*





The
Phoenix Group Corporation (“Phoenix” or “the Corporation”) is a Delaware
corporation organized in June 1988. The Corporation’s wholly owned
subsidiaries during the period or for portions of the period were Lifeline
Management Group, Inc., Lifeline Home Health Services, Inc. (“LHHS”), Lifeline
Managed Home Care, Inc. (“LMHC”), and Americare Management, Inc. All
intercompany accounts and transactions have been eliminated in the accompanying
consolidated financial statements.





Except
for a period spanning the years 2000 and 2001, Phoenix had been predominately
engaged in providing healthcare management and ancillary services to the
long-term care industry. On or about August 20, 2002, the Corporation filed a
voluntary petition 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 filing was made
necessary by the actions of a creditor of the Corporation seeking to foreclose
on a judgment obtained several years earlier. The Corporation lacked sufficient
liquidity to satisfy the judgment and sought protection as a
debtor-in-possession. The Court granted the requested status.





On or
about October 15, 2002, three creditors of LHHS filed with the Court an
involuntary petition under Chapter 7 of the United States Bankruptcy Code. LHHS
requested the Court to convert the case to a Chapter 11 debtor-in-possession
proceeding. The Court granted this request on December 2, 2002.





On or
about March 7, 2003, LMHC filed for protection from creditors under Chapter 11
of the United States Bankruptcy Code. This action was necessitated by the
actions of a creditor of LHHS that was claiming a security interest in the
assets of LMHC. After hearing arguments by the creditor and LMHC, the Court
ruled that the assets of LMHC were not subject to the security interest that the
creditor held with respect to the LHHS assets.





During
the summer of 2003, the Corporation 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 Corporation received or eventually received
(see Note 12 “Subsequent Events”) 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 ownership
in the restructured entity - qualifies the Corporation to utilize the reporting
guidelines of the “Fresh Start” accounting rules contained in Statement of
Position (“SOP”) 90-7 as discussed in Note 3.





As the
result of actions by certain competitors, LHHS suffered considerable attrition
in its professional nursing staff and its administrative staff during the latter
part of the summer of 2003. On September 15, 2003, LHHS made the decision that
it was in the best interest of its patients to cease operations and to discharge
its patients to other home healthcare agencies. LHHS subsequently requested that
the Chapter 11 bankruptcy case be converted to a proceeding under Chapter 7. The
remaining assets of LHHS were liquidated by a United States Trustee under the
supervision of the Court.





Concurrent
with the closing of the operations of LHHS, LHMC was also forced to cease its
operations because the two companies shared office space, employees, and other
resources. On or about September 15, 2003, LMHC withdrew its Chapter 11
petition. The primary creditor of Lifeline Management Group, Inc. (the parent of
LHHS and LMHC) was Match, Inc. (“Match”), which is a related party to the
chairman of Phoenix, Ron Lusk. Match foreclosed upon the stock of Lifeline
Management Group, Inc. on or about September 15, 2003.





Thus, as
of the effective date of the plan of reorganization for The Phoenix Group
Corporation (September 26, 2003), the Corporation had one subsidiary, Americare
Management, Inc., which had no assets and no operations. As a result of having
no operations at the subsidiary level or within the parent (Phoenix) itself, as
of September 25, 2003, the Corporation essentially reentered the development
stage.





*Summary
of Significant Accounting Policies*




*Use
of Estimates*




The most
critical estimate in the Pre-Confirmation period relates to revenue
recognition.





*Revenue
Recognition*




Under
fee-for-service agreements with patients and commercial and certain government
payors, net revenues are recorded based on net realizable amounts to be received
in the period in which the services and products are provided or delivered.
Fee-for-service contracts with commercial payors are traditionally one year in
term and renewable automatically on an annual basis, unless terminated by either
party.





Under the
Prospective Payment System (“PPS”) for Medicare reimbursement, net revenues are
recorded based on a reimbursement rate which varies based on the severity of the
patient's condition, service needs and certain other factors; revenue is
recognized ratably over the period in which services are provided. Revenue is
subject to adjustment during this period if there are significant changes in the
patient's condition during the treatment period or if the patient is discharged
but readmitted to another agency within the same 60-day episodic period.
Medicare billings under PPS are initially recognized as deferred revenue and are
subsequently amortized into revenue over an average patient treatment period on
a daily basis. The process for recognizing revenue under the Medicare program is
based on certain assumptions and judgments, including the average length of time
of each treatment as compared to a standard 60-day episode, the appropriateness
of the clinical assessment of each patient at the time of certification, and the
level of adjustments to the fixed reimbursement rate relating to patients who
receive a limited number of visits, have significant changes in condition or are
subject to certain other factors during the episode. Revenue adjustments result
from differences between estimated and actual reimbursement amounts, an
inability to obtain appropriate billing documentation or authorizations
acceptable to the payor and other reasons unrelated to credit risk. Revenue
adjustments are deducted from gross accounts receivable. These revenue
adjustments are based on significant assumptions and judgments, which are
determined by Corporation management based on historical trends. Third party
settlements resulting in recoveries are recognized as net revenues in the period
in which the funds are received.





*Status
of Accounting Policies*




As a
result of: (1) the conversion of the Chapter 11 bankruptcy case of LHHS to a
proceeding under Chapter 7 and the subsequent liquidation of the assets of LHHS;
and (2) the foreclosure upon the stock of Lifeline Management Group, Inc. (the
parent of LMHC), the Corporation effectively ceased its operations in the home
healthcare business on or about September 15, 2003. Therefore, the accounting
policies described above were no longer applicable as of September 26, 2003.








**NOTE
2: ACQUISITION OF LIGHTING SCIENCE, INC.**





Post-Confirmation





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.





Pre-Confirmation





[Not
applicable. The acquisition of Lighting Science, Inc. did not occur until June
1, 2004, which was subsequent to the end of the Pre-Confirmation
period.]








**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**





Post-Confirmation





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
      ExpenseIntellectual
      Property
    Property
      Rights
      Agreement2005
    $60,200
    $354,3332006
    $60,200
    $354,3332007
    $60,200
    $147,6402008
    $60,200
    —2009
    $60,200
    —





Pre-Confirmation





[Not
applicable. As of September 25, 2003, the last day of the Pre-Confirmation
period, the Corporation owned no property, equipment or other assets of a
tangible and depreciable nature.]








**NOTE
7: INCOME TAXES**





The
Corporation 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 totaled approximately $20,900,000 at December 31, 2004 and $19,400,000 at
September 26, 2003 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**





Post-Confirmation





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. See Note
12.





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 (“the Trust”), a revocable trust for the benefit of the children of
Fredric Maxik, the chief technology officer of the Company. At the
date (June 1, 2004) the Company acquired Lighting Science, Inc., Maxik was a
co-trustee of the Trust. Subsequent to the acquisition, Maxik resigned his
position as co-trustee. Maxik exercises no control over the Trust, nor is he a
beneficiary 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 the Trust and in anticipation of near-term sales in excess of
$10,000 per month, the Company made an advance payment to the Trust 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.





Pre-Confirmation





The note
payable in the amount of $1,851,299 at September 25, 2003 is due to Match, Inc.,
a related party. Match, Inc. is owned by a revocable trust controlled by the
Corporation’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% at September 25, 2003) on the note balance and prime plus 2% on any
unpaid interest amounts, is due on demand and is unsecured. No interest payments
were made on the note since its inception on November 17, 1998 through September
26, 2003. The accrued interest of $674,703 reflected on the accompanying
consolidated balance sheet is owed to Match, Inc. During the period beginning
January 1, 2003 and ended September 26, 2003, a total of $93,100 of interest
expense was accrued on the note. This amount is included in the accrued interest
balance at September 26, 2003. See Note 12.








**NOTE
9: PREFERRED STOCK**





Post-Confirmation





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. See Note 12.





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.





Pre-Confirmation





At
September 26, 2003, the 533,333 shares of Series A Senior Convertible
Preferred Stock were convertible into 121,723 shares of common stock. At
September 26, 2003, dividends in arrears but not declared by the Corporation on
the 8% Cumulative Series A Senior Convertible Preferred Stock totaled
$1,438,000. The liquidation preference of each Senior Preferred Convertible
share is $3.75 per share plus the undeclared dividends, which totals to
$3,438,000 at September 26, 2003. See Note 12.








**NOTE
10: COMMON STOCK - PRIVATE PLACEMENT**





Post-Confirmation





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. See Note 12.





Pre-Confirmation





[Not
applicable. The Corporation commenced the private placement described in the
preceding section subsequent to the end of the Pre-Confirmation
period.]








**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.








**NOTE
12: SUBSEQUENT EVENTS**





*Conversion
of Preferred Stock and Debt held by Match*




On April
12, 2005 the Company announced that Match had converted the 533,333 shares of
Series A preferred stock and debt (See Notes 8 and 9) into common stock of the
Company at a conversion price of $1.725 per share that was approximately 15% in
excess of the market price of the stock at the date the conversion was proposed,
resulting in fewer shares being issued to Match than would have been issued had
the then current market price of the stock been used.





The
preferred stock, owned by Match at the date of the conversion, carried
cumulative dividends of $0.30 per annum for each share and conversion rights to
common stock. The cumulative unpaid dividend with respect to the preferred stock
was $1,670,685, producing a total liquidation preference of $3,670,685. Thus,
the preferred stock owned by Match was converted into 2,127,933 shares of common
stock.





The debt
to Match of $1,851,299 plus $341,226 of accrued interest was also converted to
common stock. Match offered to reduce the accrued interest by $250,000 and to
convert the debt at the same conversion price of $1.725. As a result, the total
of $1,942,525 due on the line of credit was converted into 1,126,101 shares of
common stock of the Company.





*Agreement
with Giuliani Capital Advisors*




On
February 15, 2005, the Company entered into a letter agreement with Giuliani
Capital Advisors LLC (“GCA”) to engage GCA to provide financial advisory
services to the Company and a to-be-formed entity (the “Joint
Venture”).




As
consideration for the services to be provided by GCA, the Company agreed to pay
GCA the following:




·
    A
      non-refundable deposit of $150,000 (paid on March 31, 2005); and


·
    A
      market rate fee for all debt and/or equity capital raised for the Joint
      Venture; and


·
    Reasonable
      expenses of GCA incurred in performing its
services.





In
addition, GCA will receive the following:


·
    A
      financial advisory role in the Joint Venture on capital raising
      transactions on a case by case basis; and


·
    A
      20% ownership interest in the Joint Venture.





The
Company also issued a warrant to GCA that is exercisable by GCA to purchase up
to 1,650,000 shares of the Company’s common stock, subject to adjustment in
certain circumstances as provided in the warrant. The 1,650,000 shares
represented 3.2% of outstanding shares of common stock at February 15, 2005. The
warrant has a five-year term and GCA may exercise the warrant in whole or in
part at any time during the five-year term. The exercise price for each share of
common stock is $.60 per share or $990,000 if GCA were to exercise all 1,650,000
shares under the warrant.





*Consulting
Contract with Equity Group, Inc.*




On
February 10, 2005, the Company entered into a consulting contract with Equity
Group, Inc. (“Equity”) to provide financial public relations and investor
relations on behalf of the Company. In connection therewith, the Company agreed
to issue Equity two warrants to purchase an aggregate of $600,000 worth of
shares of the Company’s common stock with each warrant having an exercise price
to be determined in the future. Each warrant will provide for the purchase of
$300,000 worth of common stock of the Company. One of the warrants became fully
vested upon the signing of the contract. The other warrant will become
exercisable upon the first anniversary date of the consulting contact unless
terminated earlier. Equity will receive $5,000 per month during the term of the
contract.





*Loans
from Certain Directors and Members of Senior Management*




Certain
members of the board of directors and senior management (“Lender”) of the
Company agreed to loan the Company an aggregate of $340,000 on a short-term
basis. Proceeds from each of the loans will fund the Company’s continuing
operating expenses, ongoing expenses for salaries, legal and accounting fees, as
well as for working capital and other contingencies. Under the terms of the
notes issued by the Company to each Lender, the Company will: (i) pay interest
to each Lender at a rate of 9.50% per annum; (ii) pay a 10% commitment fee to
each Lender and (iii) issue warrants to the lenders for a total of 340,000
shares of common stock to be purchased at an exercise price of $1.50 per share.
The principal and interest on the Notes are due on May 30, 2005. The notes will
be repaid from proceeds of any subsequent financing arrangement to which the
Company becomes a party.





*Private
Placement*




On March
4, 2005 the Company amended its filing of Form D (Notice of Sale of Securities
Pursuant to Regulation D, Section 4(6), and/or Uniform Limited Offering
Exemption) to elect the exemption under Rule 506 rather than Rule 505 for the
sale of the Company’s common stock. Under Rule 506, the Company can raise an
unlimited amount of money from any number of “accredited” investors and up to 35
“non-accredited” investors.





*Gross
Sales Revenue from Street Lighting Contracts*




The
Company’s board of directors approved additional compensation to the outside
directors, as a group, in an amount equal to three percent of the gross sales
revenue of all street lighting contracts over the entire life of each
contract.