SECURITIES
        AND EXCHANGE COMMISSION
  **Washington,
        D.C. 20549**
  FORM
        10-KSB
   (X)
        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 THE
        SECURITIES EXCHANGE ACT OF 1934
  **For
        the fiscal year ended December 31, 2005**
  **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 1555
                Dallas,
                  Texas
              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, $0.001 par value 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 January 31, 2006, the aggregate market value of the Registrant’s Common
        Stock held by non-affiliates was $19.9 million **** based
        upon the closing price of $0.50 **** on
        January 31, 2006.
  Total
        revenue for the year ended December 31, 2005 was $72,564.
 
 Check
        whether the issuer has filed all documents and reports required to be filed
        by
        Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
        under a plan confirmed by a court. X_ YES
        __  ___
        NO
 
 The
        number of shares outstanding of each of the issuer’s classes of common equity,
        as of the latest practicable date was 55,374,591 at January 31,
        2006.
 
   
    **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 LIGHTING SCIENCE GROUP.
        WHEN
        USED HEREIN, THE WORDS “ANTICIPATE,” “BELIEVE,” “ESTIMATE” AND “EXPECT” AND
        SIMILAR EXPRESSIONS, AS THEY RELATE TO LIGHTING SCIENCE GROUP’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.
        PLAN OF OPERATION
 ITEM
        7.
        FINANCIAL STATEMENTS
 ITEM
        8.
        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE
 ITEM
        8A.
        CONTROLS AND PROCEDURES+
 ITEM
        8B.
        OTHER INFORMATION
  **PART
        III**
  ITEM
        9.
        DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
 ITEM
        10.
        EXECUTIVE COMPENSATION
 ITEM
        11.
        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 ITEM
        12.
        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 ITEM
        13.
        EXHIBITS
 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**
  Lighting
        Science Group is a Delaware corporation incorporated on June 16, 1988. On
        December 23, 2004, The Phoenix Group Corporation, our predecessor entity,
        announced 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. 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. We began conducting its operations under the name
        Lighting Science Group Corporation on January 1, 2005.
  On
        or
        about August 20, 2002, we 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 bankruptcy court. The
        bankruptcy court granted the requested status. During the summer of 2003,
        we
        filed a Disclosure Statement and Plan of Reorganization that was confirmed
        by
        the bankruptcy court on September 16, 2003 with an effective date of September
        26, 2003. Under the terms of the plan of reorganization, the holder of the
        Series A Preferred Stock, Match, Inc., a company controlled by our Chief
        Executive Officer, Ronald E. Lusk, agreed to waive its rights, including
        its
        voting and conversion rights, and the creditors of Lighting Science Group
        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 of
        reorganization - the exchange of debt for greater than 50% of the equity
        in the
        restructured entity - qualified us to utilize the reporting guidelines of
        the
“Fresh Start” accounting rules contained in Statement of Position
        90-7.
  On
        June
        1, 2004, we acquired 100% of the outstanding common stock of Lighting Science,
        Inc., a corporation that developed and owned certain intellectual property
        related to the design, development and power management of lighting products
        utilizing light emitting diodes as a source of light. As of the date of this
        annual report, we continue with our plans to develop and sell products based
        upon the intellectual property acquired in this acquisition.
 
  **Business
        Overview**
  Our
        wholly owned subsidiaries during the period or for portions of the period
        were
        Americare Management, Inc. and LSGC LLC., a joint venture with Giuliani Capital
        Advisors LLC. Neither Americare Management, Inc. nor LSGC LLC had significant
        operations during the periods covered by these financial statements. All
        intercompany accounts and transactions have been eliminated in the accompanying
        consolidated financial statements. 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, our 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 our 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 evolve to solid state lighting. ****
  With
        our
        acquisition of Lighting Science, Inc., we entered the field of solid state
        lighting. Light emitting diode 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-based lighting is now available in a variety of light bases and sizes,
        most
        of which are suitable only for specialty lighting. LED-based lighting is
        rugged,
        durable, and visible in daylight. Its 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. It is estimated that by the same
        year solid state lighting could reduce the global amount of electricity used
        for
        lighting by 50%. ( 4) Lighting
        Science Group believes that no other use of electricity can offer such a
        large
        energy-savings potential.
  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.
  ( 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
  ***Competitive
        Advantages***
  Through
        the development of its Optimized Digital Lighting technology, we believe
        that we
        have 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 our enabling technologies, we believe
        that
        we have positioned ourselves at the forefront of the emerging solid state
        lighting industry and will be able to compete in the marketplace, for the
        following reasons:
  ·
              Digital
                  lighting expertise is our core competency. We have and will continue
                  to
                  generate important intellectual
                  properties:
  ·
              Patent
                  pending digital lighting engineering
                  design
 ·
              Patent
                  pending bulb design appearance
 ·
              Patent
                  pending manufacturing process
  ·
              Compared
                  with 65-watt incandescent bulbs, Optimized Digital Lighting bulbs
                  currently reduce energy use by up to 85% and have a useful life
                  that is up
                  to 50 times longer (approximately 50,000 hours).
  ·
              Several
                  factors contribute to the benefits produced by our ODL technology:
  ·
              Our
                  patented and patent pending technology allows retail pricing that
                  is both
                  affordable and provides a fast payback through reduced energy consumption
                  maintenance costs in most
                  applications.
 ·
              Optimized
                  Digital Lighting products have added functionality - they are dimmable
                  and
                  reach their full operating level instantly unlike most fluorescent
                  bulbs.
 ·
              Development
                  of additional Optimized Digital Lighting products is ongoing. The
                  product
                  development team is bolstered by a scientific advisory board with
                  expertise in many disciplines of the lighting
                  industry.
  ***Products/Distribution***
  We
        have
        begun to introduce our Optimized Digital Lighting products through traditional
        commercial and retail distribution channels and on a direct basis through
        our
        sales force, as well as through shared savings plans with larger commercial
        and
        municipal customers. Our near-term product portfolio consists of the
        following:
  ·
              **Flashlights**-
                  We have developed a flashlight that 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 Lighting Science Group’s proprietary
                  design.
  ·
              **Cabinet
                  Lighting**-
                  We have a developed a small lamp, called the*Puck
                  Light,*that
                  replaces 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.
  ·
              **Floodlights**-
                  We are developing a second generation floodlight prototype that
                  equals or
                  exceeds existing PAR 30 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. We
                  plan initial shipments of the floodlight in the first half of 2006.
  ·
              **Parking
                  Garage Lighting -**We
                  have developed a low bay form factor light that we believe is competitive
                  with conventional lights used in parking garages.
  ·
              **Outdoor
                  Lighting**-
                  We are currently prototyping a form factor street light which we
                  believe
                  will be competitive with 150 watt - 250 watt conventional street
                  lights on
                  poles 30 feet or less in height. Other forms, in higher wattage
                  equivalents (e.g. 400 watts) are planned.****
  ***Operations***
  Following
        the acquisition of Lighting Science, Inc., we have continued with our plans
        to
        develop and sell products based upon the acquired intellectual property.
        Staff
        has been added to support the development process. Additionally, we have
        begun
        to work with major international design, engineering and manufacturing companies
        to support the development of our products and the transition of such products
        into the manufacturing process.
  In
        order
        to minimize our investment in plant and equipment and enable us to focus
        on
        research and development, our manufacturing strategy is to outsource the
        manufacture of our Optimized Digital Lighting products, and, therefore, we
        do
        not own or operate a manufacturing facility. We currently partner with a
        small
        number of contract manufacturers to manufacture our products at plants in
        various locations throughout the world. These manufacturers supply all necessary
        raw materials (other than certain critical components such as LEDs, which
        we
        procure directly), provide all necessary facilities and labor to manufacture
        our
        products, and stock and arrange for transport of our finished goods, generally
        by ship, to our distributors and customers.
  We
        currently have multiple sources of supply for the LEDs used in the assembly
        of
        our lighting products. We currently buy LEDs from two domestic manufacturers
        and
        two foreign manufacturers. All suppliers currently have adequate capacity
        to
        provide sufficient quantities of LEDs to meet our forecasted needs. Our lighting
        products incorporate a proprietary power supply module. These modules are
        fabricated by two manufacturers, each of which has adequate capacity to produce
        estimated quantities of power modules to meet our forecasted needs. One domestic
        supplier and several foreign suppliers provide microelectronic components
        for
        the various lighting products. We have no sole source supply for any of the
        assemblies required for the manufacture of our lighting products
  **Corporate
        Developments / Significant Transactions**
  Acquisition
        of Lighting Science, Inc.
  On
        June
        1, 2004, Lighting Science Group acquired 100% of the outstanding common stock
        of
        Lighting Science, Inc., a Delaware corporation, which owned certain intellectual
        property related to the design and development of an ODL light bulb. Lighting
        Science Group’s consolidated financial statements include the results of
        operations of Lighting Science, Inc. since June 1, 2004.
  We
        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 Lighting Science Group’s common stock and Lighting
        Science Group’s obligation to issue up to an additional 4,499,965 shares of
        Lighting Science Group’s common stock upon the satisfaction of certain
        conditions under the stock purchase agreement.
  Lighting
        Science Group 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 and Trademark 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. To date, we have applied for twenty-one (21) patents and two (2)
        patents
        have been allowed. Patents that we have applied for or patents which have
        been
        issued to us may be rejected or invalidated or their enforceability challenged,
        and they may not provide us with competitive advantages against others with
        similar products and technology. Furthermore, others may independently develop
        similar products or technology or duplicate or design around any technology
        that
        we have developed. 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.
  Private
        Placement
  On
        May
        12, 2005, Lighting Science Group entered into a definitive Securities Purchase
        Agreement with Western Reserve Hedged Equity, LP, AG Domestic Convertibles,
        L.P., A.G. Offshore Convertibles, Ltd., the Gryphon Master Fund, L.P., the
        GSSF
        Master Fund, L.P., Xerion Partners I LLC, Xerion Partners II Master Fund
        Limited, Telemark Asset Management, LLC and certain other accredited investors
        including certain officers and directors of Lighting Science Group, collectively
        referred to as the Purchasers, for the private placement of 6% convertible
        preferred stock of Lighting Science Group, $.001 par value per share, pursuant
        to which the Purchasers bought 2,260,966 shares of the preferred stock at
        $3.20
        per share for an aggregate purchase price of $7,235,086. Additionally, warrants,
        a registration rights agreement and lock-up agreements with affiliates and
        certain unaffiliated stockholders of Lighting Science Group were also entered
        into and executed. A certificate of designation that sets forth the rights,
        preferences, terms and conditions of the preferred stock was filed with the
        Secretary of State of the State of Delaware on May 10, 2005.
  The
        6%
        Convertible Preferred Stock ranks ahead of the common stock of Lighting
        Science Group upon
        liquidation of Lighting
        Science Group .
        The 6%
        Convertible Preferred Stock also ranks ahead of the common stock with respect
        to
        the payment of dividends. The dividend rate on the 6% Convertible Preferred
        Stock is $0.192 per share per annum (6% effective yield) and such dividends
        are
        fully cumulative, accruing, without interest, from the date of original issuance
        of the 6% Convertible Preferred Stock through the date of redemption or
        conversion thereof. The Corporation must redeem any outstanding 6% Convertible
        Preferred Stock on May 10, 2010. In connection with the transaction, Lighting
        Science Group filed a
        certificate of designation for the 6% Convertible Preferred Stock with the
        Delaware Secretary of State on May 10, 2005. This filing constituted an
        amendment to Lighting
        Science Group 's
        certificate of incorporation, designating the terms, rights and preferences
        of a
        new series of preferred stock of Lighting
        Science Group .
  The
        warrants are exercisable at the election of the holder into a total of 6,782,889
        shares of common stock at an initial exercise price of $0.96 per share (also
        subject to adjustment pursuant to anti-dilution provisions) on either a cash
        or
        cashless exercise basis. The warrants expire five years from the date of
        issuance.
  The
        lock-up agreements provide that all affiliated stockholders of Lighting Science
        Group will not offer sell, contract to sell, pledge or otherwise dispose
        of
        common stock or securities convertible into, or exchangeable or exercisable
        for,
        common stock, subject to certain exceptions for a period of 180 days following
        the date that a registration statement is declared effective with regard
        to such
        common stock. The lock-up agreements will expire on February 19, 2006. Shares
        of
        common stock that affiliates held prior to the private placement will not
        be
        included in this registration statement.
 
 Lock-up
        agreements were also entered into with certain unaffiliated stockholders
        covering a total of 14,260,823 shares of our common stock. Such lock-up
        agreements provide that such unaffiliated stockholders will not offer to
        sell,
        contract to sell, pledge or otherwise dispose of common stock or securities
        convertible into, or exchangeable or exercisable for, our common stock, subject
        to certain exceptions, for 180 days following the effective date of a
        registration statement regarding the common stock. Shares of common stock
        held
        by unaffiliated stockholders who have executed a lock-up agreement will be
        included in this registration statement. Such lock-up agreements will also
        expire on February 19, 2006.
  Registration
        Rights Agreement
  In
        connection with the issuance of 6% Convertible Preferred Stock (Note 9),
        Lighting Science Group executed a Registration Rights Agreement with the
        purchasers thereof under which Lighting Science Group agreed to register
        the
        common shares underlying the 6% Convertible Preferred Stock and related
        warrants. The Registration Rights Agreement provides for liquidated damages
        in
        the event a registration statement is not declared effective by the SEC within
        150 days of the May 12, 2005 closing date or if the registration statement
        is
        not maintained effective for a period of two years following the closing
        date.
        The liquidated damages total an amount equal to two percent of the purchase
        price of the 6% Convertible Preferred Stock for each thirty (30) day period
        effectiveness of a registration statement is not maintained.
  In
        connection therewith, on July 12, 2005, Lighting Science Group filed on Form
        SB-2, a Registration Statement under the Securities Act of 1933, related
        to the
        sale of up to 30,727,420 shares of Lighting Science Group Corporation common
        stock, par value $.001 by the selling stockholders named therein. Of the
        common
        stock offered thereby, (i) 9,043,864 shares of the common stock are issuable
        upon conversion of $7,235,086 aggregate principal amount of our 6% Convertible
        Preferred Stock, (ii) 7,422,733 shares of common stock are issuable upon
        exercise of warrants issued in connection with the sale of the 6% Convertible
        Preferred Stock, and (iii) 14,260,823 shares of common stock were acquired
        prior
        to May 12, 2005 by certain selling stockholders who agreed to the terms of
        a
        lock-up agreement dated as of May 12, 2005 and which may not be sold by the
        selling stockholders except pursuant to the lock-up agreement. Lighting
        Science Group will not
        receive any proceeds from any sales made by the selling stockholders but
        will
        pay the expenses of the offering. We will, however, receive the proceeds
        from
        the exercise of the warrants issued to the selling stockholders if and when
        they
        are exercised. This registration was declared effective by the SEC on August
        23,
        2005, and remains effective as of the date of this filing.
  ****Conversion
        of Preferred Shares and Notes Payable to Common Stock
  At
        March
        1, 2005, Lighting
        Science Group was
        obligated under the terms of a line of credit agreement to Match, Inc.
        outstanding in the amount of $1,851,299 principal balance and $341,226 in
        accrued interest. Ronald E. Lusk, Chairman of Lighting Science Group, controls
        Match, Inc. as Trustee of the Ronald E. Lusk Revocable Trust. The line of
        credit
        agreement with Match, Inc. was available up to a limit of $2 million, bore
        interest at prime plus 1% on the note balance and prime plus 2% on any unpaid
        interest amounts, was due on demand and was unsecured.
  On
        July
        25, 1994, Lighting Science Group sold, for proceeds of $2 million, 533,333
        shares of Series A Preferred Stock with cumulative dividends of $0.30 per
        annum
        for each share and conversion rights to common stock at a price of $3.75
        per
        share. Under the terms of the Disclosure Statement and Plan of Reorganization
        under which Lighting
        Science Group emerged
        from bankruptcy, Match, Inc., the holder of the Series A Preferred Stock,
        waived
        such rights, including voting and conversion rights. No dividends had been
        paid
        with respect to this class of stock. At March 31, 2005, the cumulative unpaid
        dividend with respect to the preferred stock was $1,670,685. Thus, the total
        liquidation preference of the preferred stock was $3,670,685 as of March
        31,
        2005.
  In
        contemplation of Lighting
        Science Group ’s
        private placement of 6% Convertible Preferred Stock that was completed in
        May
        2005, our financial advisor and its investment-banking representative had
        both
        advised that the outstanding debt and preferred stock would preclude Lighting
        Science Group from
        successfully completing the financing transaction and should be eliminated
        through conversion into common stock. The board of directors concurred with
        this
        assessment, and accordingly, a special committee of independent directors
        consisting of Directors Robert E. Bachman, Donald R. Harkleroad, and Robert
        L.
        Woodson, III was formed on March 14, 2005 to negotiate with Mr. Lusk to exchange
        the preferred stock and the amount owed on the debt for shares of common
        stock.
  The
        special committee took note of the fact that for the month of March 2005,
        the
        closing prices for the common stock had ranged between $1.48 and $1.90 per
        share. The proposal submitted by Mr. Lusk offered to set the exchange ratio
        at
        $1.725 per share, which represented the five-day average closing price as
        of
        March 15, 2005. Mr. Lusk also proposed to reduce the amount of the accrued
        interest on the line of credit with Match, Inc. by $250,000. Thus, the number
        of
        shares for which the preferred stock and the cumulative dividend would be
        exchanged was equal to 2,127,933 ($3,670,685 / $1.725) under the proposal
        presented by Mr. Lusk. Using the same conversion price of $1.725 proposed
        by Mr.
        Lusk, the total of $1,942,525 ($2,192,525 - $250,000) due on the line of
        credit
        would be convertible into 1,126,101 shares of common stock of Lighting Science
        Group. The committee also noted that the trading range for the stock at the
        end
        of the month of March was closer to the lower end of the range ($1.48) at
        the
        time that the analysis was being completed. The special committee reported
        the
        results of its analysis to the board.
  The
        board
        of directors (with Mr. Lusk abstaining and one director absent) reviewed
        the
        analysis prepared by the special committee. Based upon the exchange ratio
        of
        $1.725 per share offered by Mr. Lusk with respect to both the exchange of
        the
        preferred stock and the debt, as well as the proposal by Mr. Lusk to reduce
        the
        accrued interest on the line of credit by $250,000, the board concluded that
        the
        offer was fair to Lighting Science Group and voted to approve the transactions
        contained in the proposal from Mr. Lusk. A total of 3,254,034 shares of common
        stock were issued in exchange for the Series A Preferred Stock and the amount
        due under the line of credit agreement on May 5, 2005.
  Loans
        from Certain Directors and Members of Senior Management
  During
        the first and second quarters of 2005, members of the board of directors
        and
        certain officers of Lighting Science Group (the “Lender” or “Lenders”) agreed to
        loan Lighting Science Group an aggregate of $476,000 on a short-term basis,
        of
        which $220,000 was received as of March 31, 2005 and the remaining $256,000
        was
        received in the quarter ended June 30, 2005. Proceeds from the loans funded
        Lighting Science Group’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 Lighting Science Group
        to
        each Lender, Lighting Science Group: (i) paid interest to each Lender at
        a rate
        of 9.50% per annum; (ii) paid a 10% commitment fee to each Lender and (iii)
        issued warrants to the Lenders for a total of 476,000 shares of common stock
        to
        be purchased at an exercise price of $1.50 per share. The principal and interest
        on the notes were due on May 30, 2005. A total of $300,086 of such loans,
        including accrued interest and commitment fees of $24,086, were converted
        to
        Preferred Stock in the private placement of preferred stock and the remaining
        $200,000 of such loans and accrued interest and commitment fees thereon were
        repaid from proceeds of the private placement.
  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.
  Agreement
        with Amtech Lighting Services
  On
        September 8, 2005, we announced that we entered into an alliance with Amtech
        Lighting Services, a subsidiary of ABM Industries Incorporated, a multi-national
        facilities services leader, to install our ODL low bay lights and fixtures
        in
        facilities that ABM services. The low bay product is designed for widespread,
        high volume use in parking garages and other applications that require high
        efficiency, long lasting light.
  Under
        the
        alliance, Amtech Lighting Services is marketing our ODL products to its
        customers through Lighting Science Group’s Shared Savings Program. As part of
        the Amtech Lighting Services/Lighting Science Group alliance, Amtech will
        undertake installation and maintenance of the ODL parking garage lights on
        behalf of its customers.
  More
        specifically, Amtech Lighting Services is in the initial phase of introducing
        our ODL products to some of its energy-conscious customers who operate 35,000
        locations nationwide, and is beginning to test and install ODL fixtures at
        some
        of the 1,700 garages it leases or manages through Ampco System Parking, a
        subsidiary of ABM Industries.
  Retention
        of Financial Advisor
 In
        2004,
        Lighting Science Group entered into an agreement with a financial consulting
        firm located in Dallas, Texas to provide financial advisory services in
        connection with Lighting Science Group’s capital structure. Under the terms of
        the agreement, Lighting Science Group paid the advisor a retainer of $150,000
        during the fourth quarter of 2004 for services anticipated to be rendered
        during
        calendar year 2005, which was recorded in prepaid expenses. The agreement
        also
        provided for monthly payments of $10,000 during the one-year term of the
        agreement. This financial advisory agreement was terminated as of September
        30,
        2005.
  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 Lighting Science Group 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
                  Lighting Science Group on an exclusive basis to raise capital for
                  the
                  Joint Venture;
 ·
              Evaluate
                  financial and organization structures on a non-exclusive basis
                  relating to
                  Lighting Science Group’s different market
                  opportunities;
 ·
              Advise
                  Lighting Science Group on sources of debt and equity capital available
                  to
                  fund the Joint Venture;
 ·
              Assist
                  management in coordination between advisors and debt/equity
                  underwriters;
 ·
              Assist
                  Lighting Science Group to arrange meetings with various governmental
                  entities and utilities, both domestic and international to acquire
                  light
                  poles and related infrastructure;
                  and
 ·
              If
                  requested, assist Lighting Science Group to raise equity or debt
                  financing
                  for other Lighting Science Group
                  projects
 
 
 As
        consideration for the services to be provided by GCA, Lighting Science Group
        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.
 
 Lighting
        Science Group also issued a warrant to GCA that is exercisable by GCA to
        purchase up to 1,650,000 shares of Lighting Science Group’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, Lighting Science Group entered into a consulting contract
        with Equity Group, Inc. (“Equity”) to provide financial public relations and
        investor relations on behalf of Lighting Science Group. In connection therewith,
        Lighting Science Group agreed to issue Equity two warrants to purchase an
        aggregate of $600,000 worth of shares of Lighting Science Group’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
        Lighting Science Group. 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.
  **Sources
        of Revenue**
  During
        2005, Lighting Science Group recorded net sales of $72,564 from the sales
        of
        products. Sales occurred both through Lighting Science Group’s website and
        through other customer orders. The revenue was generated mainly from sales
        of
        puck lights, candles and flashlights.
  Lighting
        Science Group did not complete the sale of any low bay garage lights in 2005
        but
        entered into its first agreement to supply low bay lights to a Dallas area
        garage. The lights will be supplied to the garage under a shared-savings
        program.
  **Human
        Resources**
  As
        of
        January 31, 2006, Lighting Science Group employs 15 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 Lighting Science Group.
  As
        of
        January 31, 2006, Lighting Science Group was obligated under the terms of
        employment contracts for five of its executive officers. The terms of the
        contracts generally range between one and three years, and provide for annual
        salaries ranging between $90,000 and $250,000 per year.
   **ITEM
        2. DESCRIPTION OF PROPERTY**
  Our
        corporate headquarters are located in Dallas, Texas. We occupy excess office
        space that is leased by an institutional stockholder of Lighting Science
        Group.
        The shareholder previously served as a financial advisor to Lighting Science
        Group. The stockholder allowed us to occupy the office space during the term
        of
        the financial services agreement on a rent free basis. Upon termination of
        the
        financial services agreement on September 29, 2005, we began to pay the
        stockholder rent on a month to month basis at the rate of $10,000 per month.
        We
        also have leased facilities in the Ft. Lauderdale, Florida area for our research
        and development activities for a period of 15 months beginning on November
        1,
        2005. The agreement provides rental payments averaging approximately $2,400
        per
        month. We also lease space in Hong Kong and storage space in Dallas, Texas
        on a
        month-to-month basis at a total rate of approximately $650 per month.
  
 **ITEM
        3. LEGAL PROCEEDINGS**
  As
        of the
        date of this report, no litigation or threatened litigation exists against
        Lighting Science Group. Management has no reason to believe that any other
        cause
        of action against Lighting Science Group could, in good faith, be brought
        against Lighting Science Group.
 
 **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.
   35
  **PART
        II**
  **ITEM
        5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS**
  **Market
        Information**
  Lighting
        Science Group’s stock is currently quoted in the Bulletin Board OTC under the
        symbol “LSGP.”
  The
        following table sets forth the high and low sales price for the Common Stock
        for
        the periods indicated.
   **Common
                  Stock****HIGH**
              
              
              **LOW****2006**First
                  Quarter
              
              
              0.67
              
              
              0.45**2005**Fourth
                  Quarter
              
              
              0.90
              
              
              0.24Third
                  Quarter
              
              
              1.65
              
              
              0.73Second
                  Quarter
              
              
              1.65
              
              
              0.73First
                  Quarter
              
              
              2.08
              
              
              1.45**2004**Fourth
                  Quarter
              
              
              2.25
              
              
              0.56Third
                  Quarter
              
              
              0.72
              
              
              0.24Second
                  Quarter
              
              
              0.64
              
              
              0.21First
                  Quarter
              
              
              0.40
              
              
              0.16
   The
        high
        and low prices (based on the average bid and ask price) for Lighting Science
        Group’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 Lighting Science Group’s stock transfer agent as of January 31, 2006, there
        were approximately 622 holders of record of Lighting Science Group’s common
        stock.
  **Dividends**
  The
        payment by Lighting Science Group of dividends on its common stock, if any,
        rests within the discretion of the board of directors and, among other things,
        will depend upon Lighting Science Group’s earnings, capital requirements and
        financial condition, as well as other relevant factors. Lighting Science
        Group
        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 Lighting Science Group.
  At
        March
        31, 2005, the Series A Preferred Stock carried a cumulative unpaid dividend
        of
        $1,680,000. Pursuant to the negotiation between Lighting Science Group and
        Match
        Inc., the holder of the Series A Preferred Stock, the outstanding Series
        A
        Preferred Stock, the unpaid cumulative dividends on the Series A Preferred
        Stock
        and the total amount due under a line of credit payable to Match Inc. (including
        accrued interest thereon) were exchanged for common stock of Lighting Science
        Group.
  During
        2005, Lighting Science Group paid total dividends on the 6% Convertible
        Preferred Stock of $215,269. Dividends are payable quarterly on the 6%
        Convertible Preferred Stock. Lighting Science Group can elect to pay the
        dividends on the 6% Convertible Preferred Stock by issuing common shares
        of
        Lighting Science Group provided that: (i) a registration statement covering
        the
        underlying common stock must be effective on such dividend payment date and
        be
        available for use by investors, and (ii) the number of shares issued will
        be
        based on a 15% discount to the daily volume weighted average price of the
        common
        stock for the ten trading days immediately proceeding (but not including)
        the
        applicable dividend payment date.
  **Private
        Placement**
  In
        connection with the acquisition of Lighting Science, Inc., Lighting Science
        Group undertook a private placement (“Lighting Science Private Placement”) of
        Lighting Science Group’s common stock under Regulation D of the Securities Act
        of 1933. As of the date of this report, a total of $3,874,890 had been raised
        through the sale of 18,383,573 shares of Lighting Science Group’s common stock.
        Lighting Science Group does not plan to issue any additional common stock
        under
        the terms of the Lighting Science Private Placement.
  On
        March
        4, 2005 Lighting Science Group 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 Lighting Science Group’s common stock. Under Rule 506, Lighting
        Science Group can raise an unlimited amount of money from any number of
“accredited” investors and up to 35 “non-accredited” investors.
  As
        described in Item 1 above, on May 12, 2005, Lighting Science Group entered
        into
        a definitive Securities Purchase Agreement with Western Reserve Hedged Equity,
        LP, AG Domestic Convertibles, L.P., A.G. Offshore Convertibles, Ltd., the
        Gryphon Master Fund, L.P., the GSSF Master Fund, L.P., Xerion Partners I
        LLC,
        Xerion Partners II Master Fund Limited, Telemark Asset Management, LLC and
        certain other accredited investors including certain officers and directors
        of
        Lighting Science Group, collectively referred to as the Purchasers, for the
        private placement of 6% convertible preferred stock of Lighting Science Group,
        $.001 par value per share, pursuant to which the Purchasers bought 2,260,966
        shares of the preferred stock at $3.20 per share for an aggregate purchase
        price
        of $7,235,086. Additionally, warrants, a registration rights agreement and
        lock-up agreements with affiliates and certain unaffiliated stockholders
        of
        Lighting Science Group were also entered into and executed. A certificate
        of
        designation that sets forth the rights, preferences, terms and conditions
        of the
        preferred stock was filed with the Secretary of State of the State of Delaware
        on May 10, 2005.
 
 **ITEM
        6. Plan of Operation**
  As
        of the
        date of this report, we continue to operate as a development stage company,
        not
        having had appreciable revenue during our last fiscal year or the first month
        of
        2006. Accordingly, our plan of operation for the next twelve months is set
        forth
        below.
  **Business
        Overview**
  With
        our
        acquisition of certain intellectual property rights on June 1, 2004, we have
        entered the field of solid-state lighting. Light emitting diode 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.
  Through
        the development of Optimized Digital Lighting technology, we believe that
        we
        have 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 our enabling technologies, Lighting Science
        Group believes that it has positioned itself at the forefront of the emerging
        solid state lighting industry and will be able to compete in the marketplace.
  ***Strateg*** *y*
  We
        are
        beginning to introduce our Optimized Digital Lighting products through
        traditional commercial and retail distribution channels and on a direct basis
        through our sales force, as well as through shared savings plans with larger
        commercial and municipal customers.
  We
        have
        developed the Shared Savings Program SM which
        allows customers to partner with us to deploy our ODL products without any
        upfront capital expenditures while benefiting from the significant energy
        savings provided by our ODL products. Our lighting products pay for themselves
        in energy savings, which are shared between us and the customer. The Shared
        Savings Program is focused on municipalities and companies with significant
        outdoor lighting requirements. The program requires an investment by us in
        product and labor to install the lights in a city or a municipality. We believe
        that we will be able to secure the financing for such installations through
        traditional commercial lending institutions.
  We
        will
        also focus on the wholesale and retail distribution of our 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. We are exploring opportunities to sell
        our
        ODL products through traditional mass market retailers as well as domestic
        and
        international lighting distributors.
  Our
        distribution strategy with respect to our near term products is as follows:
  ·
              **Flashlights**-
                  Our flashlight is currently available on the website of the Home
                  Depot, a
                  big box retailer, and is currently under evaluation by Home Depot
                  for sale
                  in its stores. We are aggressively marketing this product to other
                  retailers as well as through
                  distributors.
  ·
              **Cabinet
                  Lighting**-
                  We have delivered an initial order of puck lights to a major Las
                  Vegas
                  casino and we intend to aggressively market this product to furniture
                  manufacturers and to potential users in the hotel and recreation
                  industries.
  ·
              **Floodlights**-
                  We intend to market this light through warehouse-style and other
                  big-box
                  retailers, lighting distributors, under our Shared Savings Program
                  and on
                  a direct basis in certain industries. We began to prototype an
                  industry
                  standard form factor PAR 30 floodlight in the third quarter of
                  2005, and
                  we plan to sell this product via big-box retailers in addition
                  to
                  marketing it directly to the hospitality and facility management
                  industries.
  ·
              **Parking
                  Garage Lighting -**We
                  have established direct contact with major parking garage operators
                  across
                  the country and these parking garage lights will be made available
                  for
                  outright sales, as well as under the Shared Savings Program. In
                  conjunction therewith, we have formed an alliance with Amtech Lighting
                  Services (see below) to install our parking garage lights and fixtures
                  in
                  facilities that Amtech services. On December 14, 2005, we announced
                  our
                  first contract to supply ODL low bay lighting to an existing parking
                  lot
                  in the Dallas, Texas area under the Shared Savings
                  Program.
  ·
              **Outdoor
                  Lighting**-
                  We expect to make streetlights available under our Shared Savings
                  Program
                  either directly or via Energy Service Company (ESCO)
                  partners.
  ***Strategic
        Alliances***
  ***Agreement
        with Amtech Lighting Services***
  On
        September 8, 2005, we announced that we entered into an alliance with Amtech
        Lighting Services, a subsidiary of ABM Industries Incorporated, a multi-national
        facilities services leader, to install our ODL low bay lights and fixtures
        in
        facilities that ABM services. The low bay product is designed for widespread,
        high volume use in parking garages and other applications that require high
        efficiency, long lasting light.
  Under
        the
        alliance, Amtech Lighting Services is marketing our ODL products to its
        customers through Lighting Science Group’s Shared Savings Program. As part of
        the Amtech Lighting Services/Lighting Science alliance, Amtech will undertake
        installation and maintenance of the ODL parking garage lights on behalf of
        its
        customers.
  More
        specifically, Amtech Lighting Services is in the initial phase of introducing
        our ODL products to some of its energy-conscious customers who operate 35,000
        locations nationwide, and is beginning to test and install ODL fixtures at
        some
        of the 1,700 garages it leases or manages through Ampco System Parking, a
        subsidiary of ABM Industries.
  ***Agreement
        with Giuliani Capital Advisors***
  On
        February 15, 2005, we entered into a letter agreement with Giuliani Capital
        Advisors LLC, or GCA, to engage GCA to provide financial advisory services
        to us
        and a yet to be formed entity. On May 4, 2005, we entered into an agreement
        with
        GCA to form the joint venture. The intent of the joint venture is to own
        parking
        garage lights and streetlights and related lighting infrastructure targeting
        municipalities, public utility corporations, universities, large mall owners,
        parking lot owners, and other organizations as partners/customers. The services
        GCA has agreed to provide include the following:
  ·
              Assist
                  us on an exclusive basis to raise capital for the joint
                  venture;
 ·
              Evaluate
                  financial and organization structures on a non-exclusive basis
                  relating to
                  different market opportunities that may be presented to
                  us;
 ·
              Advise
                  us on sources of debt and equity capital available to fund the
                  joint
                  venture;
 ·
              Assist
                  management in coordination between advisors and debt/equity
                  underwriters;
 ·
              Assist
                  us in arranging meetings with various governmental entities and
                  utilities,
                  both domestic and international to acquire light poles and related
                  infrastructure; and
 ·
              If
                  requested, assist us in raising equity or debt financing for other
                  Company
                  projects.
   **Liquidity
        and Capital Resources**
  Conversion
        of Debt and Equity held by Match, Inc.
  As
        noted
        in the Form 10-KSB/A as filed on May 24, 2005, at December 31, 2004 Lighting
        Science Group reported a working capital deficit of $1.085 million. However,
        at
        that time 96% (approximately $2.2 million) of Lighting Science Group’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 Lighting Science Group’s
        outstanding debt was inconsistent with its future best interests and that
        a
        proposal to convert the debt into common stock of Lighting Science Group
        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 Lighting Science Group
        to
        accept the proposal from Mr. Lusk. As a result, the board of directors of
        Lighting Science Group 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 Lighting Science Group.
  Mr.
        Lusk
        also proposed a similar plan to convert the preferred stock and the accumulated
        unpaid dividend thereon to common stock of Lighting Science Group. On
        July 25, 1994, Lighting Science Group 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.
  On
        May
        12, 2005, Lighting Science Group entered into a Securities Purchase Agreement
        with investors for
        the
        private placement of its preferred stock pursuant to which the investors
        purchased 2,260,966 shares of the preferred stock at $3.20 per share for
        an
        aggregate purchase price of approximately $7.2 million. The net proceeds
        to
        Lighting Science Group were approximately $6.5 million, including $276,000
        of
        certain officer and director loans outstanding at the time, which were also
        converted to preferred stock. These funds are being used for working capital
        purposes.
  Our
        strategy includes the outsourcing of manufacturing operations. Accordingly,
        there are no significant investments in plant or equipment expected in the
        next
        12 months except for any funds required to produce production tooling and
        molds
        for use by our contract manufacturers. Additionally, the startup of product
        deliveries will require us to make additions to our operations and
        administrative management teams. However, such personnel additions are not
        expected to result in substantial increases in employee headcount .
  We
        have
        embarked upon an aggressive design and development program bringing our product
        to market during 2005. If, as management believes, we are successful in
        developing viable products, additional capital may 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
        and
        other end user customers, 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, we may still be required to
        raise
        additional capital to meet our obligations. Through
        a
        combination of these traditional lending sources, revenue from the sale of
        products and the use of its December 31, 2005 cash balance, Lighting Science
        Group believes that it will have sufficient capital to complete the
        commercialization of its products and reach a level of cash flow break-even
        in
        2006.
   **ITEM
        7. FINANCIAL STATEMENTS**
  The
        consolidated financial statements required to be filed pursuant to this Item
        7
        begin on Page F-2 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
        Lighting Science Group.
   **ITEM
        8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE**
  None.
   **ITEM
        8A. CONTROLS AND PROCEDURES**
  Disclosure
        Controls and Procedures .
        Lighting Science Group’s management, with the participation of the principal
        executive officer and principal financial officer, has evaluated the
        effectiveness of Lighting Science Group’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 Lighting Science Group
        have
        concluded that, as of the end of such period, Lighting Science Group’s
        disclosure controls and procedures are effective in timely alerting Lighting
        Science Group’s management to material information relating to Lighting Science
        Group to be included in the reports that Lighting Science Group files or
        submits
        pursuant to the Exchange Act.
  Internal
        Control Over Financial Reporting .
        There
        have been no changes in Lighting Science Group’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 2005 or the first quarter
        of 2006 that have materially affected, or are reasonably likely to materially
        affect, Lighting Science Group’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 Lighting Science Group at December 31,
        2004,
        their ages, their titles, their years of employment with Lighting Science
        Group,
        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 Lighting Science
        Group since November 1998. Mr. Lusk was appointed as President of Lighting
        Science Group in October 2005. Mr. Lusk is also the president of Match, Inc.,
        a
        private investment 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.
  J.
        Michael Poss, 53 ,
        has
        served as Executive Vice President - Legal of Lighting Science Group since
        May
        2005. Mr. Poss served as chief financial officer of Lighting Science Group
        from
        May 2002 to May 2005. Prior to his association with Lighting Science Group,
        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 also served as a director of Lighting Science Group from
        September 2003 through August 2005.
  Stephen
        A. Hamilton, 41 ,
        joined
        us as Chief Financial Officer in November 2005. From September 2004 until
        joining Lighting Science, Mr. Hamilton served as a Senior Consultant at Grant
        Knauth LLP, a consulting firm specializing in technical outsourcing and acted
        as
        project manager on major client assignments. From June 2000 - September 2004,
        Mr. Hamilton was with Quadrem International Holdings Limited, a private company
        operating an international electronic marketplace. He served as CFO of Quadrem
        from January 2001 - September 2004, during which time he was responsible
        for all
        financial functions. From May 1995 - May 2000, Mr. Hamilton served as Controller
        and then Group Controller at Noranda Inc., a publicly traded, multi-national
        mining and metals producer with revenues of $6 billion where he was responsible
        for negotiating, performing due diligence and assessing financing for
        acquisitions, preparing regulatory documents and achieving cost savings through
        the restructuring of administrative and support processes. Mr. Hamilton received
        is Bachelor of Commerce from the University of Toronto, and is a Chartered
        Accountant.
  Fredric
        S. Maxik, 45 ,
        has
        served as Chief Technology Officer of Lighting Science Group 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. that was acquired by Lighting Science Group
        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 Lighting Science
        Group
        since August 2004.
  K.
        Shane Hartman, 50 ,
        was
        named Chief Information Officer and executive vice president of Lighting
        Science
        Group effective November 15, 2000. Prior to joining us, 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.
  Robert
        E. Bachman, 63 ,
        has
        served as a director of Lighting Science Group 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, L.P., a private venture capital/equity fund. Mr. Bachman serves
        as
        the chairman of the audit committee of the board of directors of Lighting
        Science Group.
  John
        A. Collingwood, 66 ,
        has
        served as a director of Lighting Science Group 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.
  Donald
        R. Harkleroad, 61 ,
        has
        served as a director of Lighting Science Group 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 Lighting Science Group.
  Daryl
        N. Snadon, 59 ,
        has
        served as a director of Lighting Science Group 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.
  Robert
        L. Woodson, III, 56 ,
        has
        been a director of Lighting Science Group since 1998 and previously served
        as
        president and chief operating officer of Lighting Science Group from January
        1999 to November 2000. Mr. Woodson was president and chief executive officer
        from November 1998 to January 1999. Prior to joining Lighting Science Group,
        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 Lighting Science Group but continues to serve as a
        director.
  *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 Lighting Science Group, and he meets the
        criteria set forth in the regulations with respect to the qualifications
        of an
“audit committee financial expert.”
  *Code
        of Ethics*
  Lighting
        Science Group has adopted a code of ethics that is applicable to all employees
        of Lighting Science Group and, in particular, to its senior
        officers.
  A
        copy of
        the code of ethics may be obtained from Lighting Science Group without charge
        by
        writing to Lighting Science Group 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, 2005, executive compensation expense for Lighting
        Science Group totaled approximately $784,000.
    35
  The
        table
        below sets out the information with respect to the compensation of the executive
        officers for the years 2005, 2004 and 2003.
 **SUMMARY
                    OF COMPENSATION TABLE****Annual
                      Compensation**
                
                
                **Long-Term
                      Compensation****Awards**
                
                
                **Payouts****(a)**
                
                **(b)**
                
                
                **(c)**
                
                
                
                **(d)**
                
                
                
                
                **(e)**
                
                
                **(f)**
                
                
                **(g)**
                
                
                **(h)**
                
                
                **(i)****Name
                    and Principal Position**
                
                **Year**
                
                
                **Salary
                    ($)**
                
                
                
                **Bonus
                    ($)**
                
                
                
                
                **Other
                    Annual Compensation ($) (1)**
                
                
                **Restricted
                    Stock Awards ($)**
                
                
                **Securities
                    Underlying Options / SAR's (#)**
                
                
                **LTIPPayouts
                    ($)**
                
                
                **All
                    Other Compensation ($)**Ronald
                    E. Lusk
                
                2005
                
                
                253,846
                
                
                
                -
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Chief
                    Executive Officer
                
                2004
                
                
                212,147
                
                (3)
                
                88,880
                
                (3)(1)
                
                
                -
                
                
                94,839
                
                
                -
                
                
                -
                
                
                -2003
                
                
                131,942
                
                (3)
                
                -
                
                
                
                
                -
                
                
                65,971
                
                
                -
                
                
                -
                
                
                -J.
                    Michael Poss (8)
                
                2005
                
                
                91,384
                
                
                
                -
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Executive
                    VP - Legal
                
                2004
                
                
                154,452
                
                (4)
                
                108,443
                
                (4)(1)
                
                
                -
                
                
                95,606
                
                
                -
                
                
                -
                
                
                -2003
                
                
                218,024
                
                (4)
                
                -
                
                
                
                
                -
                
                
                64,238
                
                
                -
                
                
                -
                
                
                -Stephen
                    A. Hamilton (9)
                
                2005
                
                
                16,095
                
                
                
                20,000
                
                
                
                
                -
                
                
                -
                
                
                60,000
                
                
                -
                
                
                -Chief
                    Financial OfficerK.
                    Shane Hartman
                
                2005
                
                
                152,307
                
                
                
                -
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Chief
                    Information Officer
                
                2004
                
                
                154,049
                
                (5)
                
                64,046
                
                (5)(1)
                
                
                -
                
                
                76,741
                
                
                -
                
                
                -
                
                
                -2003
                
                
                197,922
                
                (5)
                
                -
                
                
                
                
                -
                
                
                52,363
                
                
                -
                
                
                -
                
                
                -Kathryn
                    D. Fuller (2)
                
                2005
                
                
                27,692
                
                
                
                -
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Corporate
                    Secretary
                
                2004
                
                
                80,250
                
                (6)
                
                99,117
                
                (6)(1)
                
                
                -
                
                
                37,173
                
                
                -
                
                
                -
                
                
                -2003
                
                
                95,961
                
                (6)
                
                -
                
                
                
                
                -
                
                
                25,488
                
                
                -
                
                
                -
                
                
                -Fredric
                    S. Maxik
                
                2005
                
                
                250,000
                
                
                
                -
                
                
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Chief
                    Technology Officer
                
                2004
                
                
                158,650
                
                (7)
                
                37,500
                
                (7)(1)
                
                
                -
                
                
                34,533
                
                
                -
                
                
                -
                
                
                -
  (1)
              Paid
                  in the form of unregistered common stock of Lighting Science Group
                  Corporation.
 (2)
              Ms.
                  Fuller resigned in May of 2005.
 (3)
              Includes
                  431,715 common shares issued at $0.22 and 555,502 common shares
                  issued at
                  $0.16 related to 2004 salary and bonus, respectively. Includes
                  157,333
                  common shares issued at $0.42 related to 2003
                  salary.
 (4)
              Includes
                  434,464 common shares issued at $0.22 and 677,769 common shares
                  issued at
                  $0.16 related to 2004 salary and bonus, respectively. Includes
                  154,627
                  common shares issued at $0.42 related to 2003
                  salary.
 (5)
              Includes
                  349,226 common shares issued at $0.22 and 400,289 common shares
                  issued at
                  $0.16 related to 2004 salary and bonus, respectively. Includes
                  126,307
                  common shares issued at $0.41 related to 2003
                  salary.
 (6)
              Includes
                  169,955 common shares issued at $0.22 and 619,479 common shares
                  issued at
                  $0.16 related to 2004 salary and bonus, respectively. Includes
                  61,528
                  common shares issued at $0.41 related to 2003
                  salary.
 (7)
              Includes
                  67,628 common shares issued at $0.49 and 156,250 common shares
                  issued at
                  $0.24 related to 2004 salary and bonus,
                  respectively.
 (8)
              Mr.
                  Poss served as Chief Financial Officer of the Company from May
                  2002
                  through May 2005.
 (9)
              Mr.
                  Hamilton’s employment with the Company began November 11, 2005. Included
                  in his total compensation in 2005 was a signing bonus of
                  $20,000.
 
   *Compensation
        of Directors*
  The
        directors of Lighting Science Group receive compensation in the amount of
        $50,000 per year payable in the form of Lighting Science Group’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 Lighting
        Science Group’s stock each trading day of the calendar month. The table below
        sets forth the value of the stock and the number of shares received by each
        director during the year ended December 31, 2005. the table also shows the
        number of stock options granted to each director during 2005.
  **Total
                    Directors Fees**
                
                
                **Options
                    Granted****Director**
                
                
                
                
                
                **#
                    shares**
                
                
                **#
                    shares**Robert
                    E. Bachman
                
                $
                50,000
                
                
                53,216
                
                
                100,000John
                    A. Collingwood
                
                
                50,000
                
                
                53,216
                
                
                50,000Don
                    R. Harkleroad
                
                
                50,000
                
                
                53,216
                
                
                200,000Daryl
                    N. Snadon
                
                
                50,000
                
                
                53,216
                
                
                50,000Robert
                    L. Woodson III
                
                
                50,000
                
                
                53,216
                
                
                50,000Robert
                    M. McMonigle
                
                
                44,445
                
                
                39,721
                
                
                50,000$
                294,445
                
                
                305,801
                
                
                500,000
  Effective
        September 1, 2005, Lighting Science Group implemented the Lighting Science
        Group
        Corporation 2005 Equity Based Incentive Compensation Plan. Awards granted
        under
        the 2005 Plan may include incentive stock options, which are qualified under
        Section 422 of the Internal Revenue Code (the "Code"), stock options other
        than
        incentive stock options, which are not qualified under Section 422 of the
        Code,
        stock appreciation rights, restricted stock, phantom stock, bonus stock and
        awards in lieu of obligations, dividend equivalents and other stock-based
        awards. Awards may be granted to employees, members of the Board of Directors,
        and consultants. All of the stock options granted to directors of Lighting
        Science Group during 2005 were incentive stock options. Such options have
        a term
        of four years and are vested one-third on the date of issuance and the
        subsequent two-thirds in equal parts on the first and second anniversaries
        thereof. The exercise price of the outstanding stock options is $0.53 to
        $0.87
        per share
  Mr.
        McMonigle resigned from the Board of Directors on November 21, 2005. Upon
        his
        resignation, 33,333 of the options granted to him that had not vested were
        terminated. The 16,667 options that had vested are available for exercise
        their
        specified strike prices for 90 days after the date of his
        resignation.
   The
        two
        directors of Lighting Science Group who are also employees of Lighting Science
        Group (Mr. Lusk and Mr. Maxik) receive no additional 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 January 31, 2005, certain information with
        respect to the beneficial ownership of voting stock by all directors and
        executive officers of Lighting Science Group, individually and collectively
        as a
        group as well as any other shareholders who own in excess of 5% of the total
        fully-diluted shares that have been issued by Lighting Science Group. The
        beneficial ownership interest is calculated assuming all outstanding warrants
        for shares of common stock of Lighting Science Group have been exercised,
        all 6%
        Convertible Preferred stock has been converted to common stock of Lighting
        Science Group and all .outstanding stock options have been exercised:
  **Shares
                    Beneficially Owned(1)(2)****Name
                    and Address of Beneficial Owner**
                
                
                **Number**
                
                
                **Percent*****Directors
                    and Officers***Robert
                    E. Bachman (3)
                
                
                610,445
                
                
                0.8
                %John
                    A. Collingwood (4)
                
                
                3,885,332
                
                
                5.1
                %Stephen
                    A. Hamilton (13)
                
                
                65,200
                
                
                0.1
                %Don
                    R. Harkleroad (5)
                
                
                1,030,901
                
                
                1.4
                %K.
                    Shane Hartman (14)
                
                
                1,239,942
                
                
                1.6
                %Ron
                    E. Lusk (7)(14)
                
                
                6,303,404
                
                
                8.4
                %Fredric
                    S. Maxik (8)(14)
                
                
                162,250
                
                
                0.2
                %J.
                    Michael Poss (14)
                
                
                1,549,017
                
                
                2.1
                %Daryl
                    N. Snadon (8)
                
                
                1,515,411
                
                
                2.0
                %Robert
                    L. Woodson III (10)
                
                
                598,384
                
                
                0.8
                %Directors
                    and Officers as a Group
                
                
                16,960,286
                
                
                22.5
                %***Certain
                    Persons***AG
                    Offshore Convertibles Ltd.(11)
                
                
                6,562,500
                
                
                8.7
                %Edward
                    I Lanier (13)
                
                
                3,556,798
                
                
                4.7
                %Philip
                    R. Lacerte (6)
                
                
                3,587,202
                
                
                4.8
                %Stan
                    T. Waldrop (9)
                
                
                2,875,834
                
                
                3.8
                %
  (1)
                Beneficial ownership as reported in the above
                  table has
                  been determined in accordance with Rule 13d-3 under the Securities
                  Exchange Act of 1934, as amended. The persons and entities named
                  in the
                  table have sole voting and investment power with respect to all
                  shares
                  shown as beneficially owned by them, except as noted
                  below.
 (2)
                Unless
                    otherwise indicated, the address of each person in the above
                    table is
                    Lighting Science Group Corporation, 2100 McKinney Avenue, Suite
                    1555,
                    Dallas, TX 75201.
 (3)
              Includes
                  41,652 shares of common stock issuable upon conversion of 10,413
                  shares of
                  6% Preferred Stock, 61,239 shares of common stock issuable upon
                  exercise
                  of warrants and 100,000 shares issuable upon exercise of incentive
                  stock
                  options issued under the Lighting Science Group Corporation 2005
                  Equity
                  Based Incentive Compensation Plan. Includes 560,445 shares of common
                  stock
                  held by USGT Investors L.P. Mr. Bachman is controlling shareholder
                  in the
                  sole corporate general partner of USGT Investors, L.P. and may
                  be deemed
                  to have voting and/or investment power with respect to the shares
                  owned by
                  USGT Investors, L.P.
 (4)
              Includes
                  18,752 shares of common stock issuable upon conversion of 4,688
                  shares of
                  6% Preferred Stock, 14,063 shares of common stock issuable upon
                  exercise
                  of warrants and 50,000 shares issuable upon exercise of incentive
                  stock
                  options issued under the Lighting Science Group Corporation 2005
                  Equity
                  Based Incentive Compensation Plan.
 (5)
              Includes
                  62,500 shares of common stock issuable upon conversion of 15,625
                  shares of
                  6% Preferred Stock, 92,876 shares of common stock issuable upon
                  exercise
                  of warrants and 200,000 shares issuable upon exercise of incentive
                  stock
                  options issued under the Lighting Science Group Corporation 2005
                  Equity
                  Based Incentive Compensation Plan. Includes 880,901 shares of common
                  stock
                  held by the Bristol Company. Mr. Harkleroad is sole shareholder
                  of the
                  Bristol Company and may be deemed to have sole voting and/or investment
                  power with respect to the shares owned by the Bristol Company.
 (6)
              Includes
                  41,496 shares of common stock issuable upon conversion of 10,374
                  shares of
                  6% Preferred Stock and 61,122 shares of common stock issuable upon
                  exercise of warrants. Mr. Lacerte served as Lighting Science Group’s
                  Executive Vice President of Sales and Marketing from October 12,
                  2004
                  until his resignation on October 4,
                  2005.
 (7)
              Includes
                  50,000 shares of common stock issuable upon exercise of warrants.
                  Includes
                  5,591,097 shares of common stock held by the Ronald E. Lusk Revocable
                  Trust. Mr. Lusk is the trustee of the Ronald E. Lusk Revocable
                  Trust and
                  may be deemed to have voting and/or investment power with respect
                  to the
                  shares owned by the Ronald E. Lusk Revocable
                  Trust.
 (8)
              Includes
                  116,952 shares of common stock issuable upon conversion of 29,238
                  shares
                  of 6% Preferred Stock, 217,715 shares of common stock issuable
                  upon
                  exercise of warrants and 50,000 shares issuable upon exercise of
                  incentive
                  stock options issued under the Lighting Science Group Corporation
                  2005
                  Equity Based Incentive Compensation
                  Plan.
 (9)
              Includes
                  30,000 shares of common stock issuable upon exercise of warrants.
                  Includes
                  1,504,167 shares of common stock held by Greenfield Capital V L.P.
                  Mr.
                  Waldrop is the sole partner in Greenfield Capital V L.P. and may
                  be deemed
                  to have voting and/or investment power with respect to the shares
                  owned by
                  Greenfield Capital V L.P. Also includes 196,667 shares of common
                  stock
                  held by SDW Investments Ltd. Mr. Waldrop is trustee of SDW Investments
                  Ltd. and may be deemed to have sole voting and/or investment power
                  with
                  respect to the shares owned by SDW Investments Ltd. Mr. Waldrop
                  served as
                  Lighting Science Group’s President from October 12, 2004 until his
                  resignation on October 17, 2005.
 (10)
              Includes
                  30,000 shares of common stock issuable upon exercise of warrants
                  and
                  50,000 shares issuable upon exercise of incentive stock options
                  issued
                  under the Lighting Science Group Corporation 2005 Equity Based
                  Incentive
                  Compensation Plan.
 (11)
              Includes
                  2,625,000 shares of common stock issuable upon conversion of 656,250
                  shares of 6% Preferred Stock and 1,968,750 shares of common stock
                  issuable
                  upon exercise of warrants. Also includes 1,125,000 shares of common
                  stock
                  issuable upon conversion of 281,250 shares of 6% Preferred Stock
                  and
                  843,750 shares of common stock issuable upon exercise of warrants
                  that
                  were originally issued to AG Domestic Convertibles, L.P. in the
                  May 12,
                  2005 private placement of 6% Convertible Preferred Stock. Such
                  preferred
                  shares and warrants were transferred to AG Offshore in August
                  2005.
 (12)
              Includes
                  31,252 shares of common stock issuable upon conversion of 7,813
                  shares of
                  6% Preferred Stock and 23,437 shares of common stock issuable upon
                  exercise of warrants.
 (13)
                Includes
                    60,000 shares of common stock issuable upon exercise of incentive
                    stock
                    options issued on the 2005 Equity Based Incentive Compensation
                    Plan.
 (14)
                Pursuant to the terms of their employment agreement,
                  individual had (or has, in the case of Mr. Maxik) the ability to
                  elect to
                  receive salary and other forms of cash compensation in the form
                  of equity
                  securities of Lighting Science
                  Group.
   **ITEM
        12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**
  *Director
        Loans to Lighting Science Group; Issuance of Warrants to
        Directors*
  At
        a
        meeting of the Board of Directors of Lighting Science Group held on March
        30,
        2005, certain individual members of our board of directors and members of
        senior
        management agreed to loan Lighting Science Group an aggregate of $340,000
        on a
        short-term basis pursuant to the terms of promissory notes from Lighting
        Science
        Group and in favor of each of the individual lenders. The members of the
        board
        and senior management who agreed to loan us funds and the amounts loaned
        by each
        individual are as follows: John A. Collingwood - $100,000, Ronald E. Lusk
        -
        $30,000, Stan T. Waldrop - $30,000, Philip R. Lacerte - $30,000, Robert E.
        Bachman (through USGT Investors L.P.) - $30,000, Donald R. Harkleroad (through
        the Bristol Company) - $30,000, Robert L. Woodson, III - $30,000, Daryl N.
        Snadon - $30,000, and Fredric S. Maxik (through the Phibian S Trust) - $30,000.
        Mr. Lusk loaned Lighting Science Group an additional $15,000 on April 29,
        2005
        and $5,000 on May 2, 2005. Mr. Snadon loaned us an additional $100,000 on
        May 3,
        2005 and Mr. Harkleroad loaned us an additional $16,000 on May 6, 2005.
 
 The
        board
        members and officers who loaned Lighting Science Group funds in this transaction
        are collectively referred to as the Lenders. Proceeds from each of the loans
        were used to fund our continuing operating expenses, including salaries,
        legal
        and accounting fees, and for working capital purposes and other contingencies.
        Pursuant to the terms of the notes issued by us to each Lender, we have:
        (i)
        paid interest to each Lender at a rate of 9.50% per annum; (ii) paid a 10%
        commitment fee to each Lender and (iii) issued a warrant to each Lender for
        the
        purchase of 30,000 shares of our common stock (or 100,000 shares in the case
        of
        Mr. Collingwood, 130,000 shares in the case of Mr. Snadon, 46,000 shares
        in the
        case of Mr. Harkleroad and 50,000 shares in the case of Mr. Lusk) for a total
        of
        476,000 shares. The principal and interest due on the notes were due on May
        30,
        2005. A total of $300,086 of such loans, including accrued interest and
        commitment fees of $24,086, were converted to Preferred Stock in the private
        placement described in “Corporate Developments / Significant Transactions” under
        Item I. of this annual report and the remaining $200,000 of such loans were
        repaid from proceeds of the private placement.
  The
        warrants issued to the Lenders for the purchase of 476,000 shares of our
        common
        stock are exercisable at $1.50 per share. Eight warrants for 30,000 shares
        of
        common stock and one warrant for 100,000 shares of common stock vested on
        the
        date of issuance, April 20, 2005. On April 29, 2005 and May 2, 2005, we issued
        warrants for 15,000 and 5,000 shares of common stock, respectively, to Mr.
        Lusk.
        On May 3, 2005, we issued a warrant for 100,000 shares of common stock to
        Mr.
        Snadon and on May 6, 2005, we issued a warrant for 16,000 shares to Mr.
        Harkleroad. All such warrants vested on the date of issuance. The warrants
        have
        anti-dilution and exercise price adjustment provisions for dividends and
        stock
        splits. Each warrant expires five years from the date of issuance.
  *Reverse
        Stock Split*
  On
        August
        20, 2004, our shareholders approved a proposal by management to undertake
        a
        reverse split of the shares of our 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 Lighting Science Group’s shares. All other
        references to shares of our common stock in this annual report and in the
        accompanying consolidated financial statements have been retroactively adjusted
        to a post reverse-split basis unless otherwise noted.
  *Acquisition
        of Lighting Science, Inc.*
  On
        June
        1, 2004, we acquired Lighting Science, Inc. by purchasing all of that
        corporation’s outstanding stock in exchange for 4,796,276 shares of common stock
        and Lighting Science Group’s obligation to issue up to an additional 4,499,965
        shares of common stock upon the satisfaction of certain conditions under
        the
        stock purchase agreement. Two of our directors, Fredric S. Maxik and John
        A.
        Collingwood, had significant relationships with Lighting Science, Inc. Mr.
        Maxik
        was the chief executive officer of Lighting Science, Inc. and the co-trustee
        of
        a trust that was a major stockholder of Lighting Science, Inc. Mr. Collingwood
        was also a major stockholder of Lighting Science, Inc. As part of the
        acquisition of Lighting Science, Inc., Lighting Science Group agreed to use
        its
        best efforts to cause the election of Mr. Maxik and Mr. Collingwood to Lighting
        Science Group’s board of directors. The acquisition of Lighting Science, Inc.
        was previously disclosed on Lighting Science Group’s Form 8-K filed with the
        Securities and Exchange Commission on June 15, 2004. As part of the acquisition
        Mr. Maxik entered into an employment agreement with Lighting Science Group.
  *Note
        to Phibian S Trust*
  As
        part
        of the acquisition Lighting Science, Inc., Lighting Science Group executed
        a
        promissory note in favor of the Phibian S. Trust, a trust for the benefit
        of the
        children of Fredric S. Maxik. At such time, the trust was controlled by Mr.
        Maxik who was co-trustee of the trust. On July 2, 2004, Mr. Maxik resigned
        his
        position as co-trustee. Currently, Mr. Maxik exercises no control over the
        trust, and has informed us that he disclaims all beneficial ownership in
        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, Inc. by Lighting Science Group.
        The
        note is in the principal amount of $200,000, does not bear interest and is
        payable in 36 equal monthly installments beginning on the fifteenth day of
        the
        month following the first full month that we begin generating revenue in
        the
        amount of $10,000 or more, as determined in accordance with generally accepted
        accounting principles.
  We
        made
        advance payments to the trust on this note in the amounts of $25,000 in October
        2004 and $25,000 in May 2005. This note provides for no interest. However,
        under
        generally accepted accounting principles, an amount of interest should have
        been
        imputed. Such amount was not material.
  Lighting
        Science Group Corporation generated revenue in excess of $10,000 in August
        of
        2005. Accordingly, we are now obligated and will begin making regular
        installment payments on the note commencing in June of 2006 after giving
        effect
        to the $50,000 in prepayments made in 2004 and 2005.
  *Note
        Payable to Trust of Stockholder and Chairman Ronald E. Lusk / Exchange of
        Note
        and Series A Preferred Stock for Common Stock*
  We
        were
        previously obligated under the terms of a line of credit agreement to Match,
        Inc. outstanding in the amount of $1,851,299 principal balance and $341,226
        in
        accrued interest at March 31, 2005. Ronald E. Lusk, Chairman of Lighting
        Science
        Group, controls Match, Inc. as Trustee of the Ronald E. Lusk Revocable Trust.
        The line of credit agreement with Match, Inc. was available up to a limit
        of $2
        million, bore interest at prime plus 1% on the note balance and prime plus
        2% on
        any unpaid interest amounts, was due on demand and was unsecured.
  On
        July
        25, 1994, Lighting Science Group sold, for proceeds of $2 million, 533,333
        shares of Series A Preferred Stock with cumulative dividends of $0.30 per
        annum
        for each share and conversion rights to common stock at a price of $3.75
        per
        share. Under the terms of the Plan under which Lighting Science Group emerged
        from bankruptcy, Match, Inc., the holder of the Series A Preferred Stock,
        waived
        such rights, including voting and conversion rights. No dividends had been
        paid
        with respect to this class of stock. At March 31, 2005, the cumulative unpaid
        dividend with respect to the preferred stock was $1,670,685. Thus, the total
        liquidation preference of the preferred stock was $3,670,685 as of March
        31,
        2005.
  In
        contemplation of Lighting Science Group’s private placement of 6% Convertible
        Preferred Stock that was completed in May 2005, our financial advisor and
        its
        investment-banking representative had both advised that the outstanding debt
        and
        preferred stock would preclude Lighting Science Group from successfully
        completing the financing transaction and should be eliminated through conversion
        into common stock. The board of directors concurred with this assessment,
        and
        accordingly, a special committee of independent directors consisting of
        Directors Robert E. Bachman, Donald R. Harkleroad, and Robert L. Woodson,
        III
        was formed on March 14, 2005 to negotiate with Mr. Lusk to exchange the
        preferred stock and the amount owed on the debt for shares of common
        stock.
  The
        special committee took note of the fact that for the month of March 2005,
        the
        closing prices for the common stock had ranged between $1.48 and $1.90 per
        share. The proposal submitted by Mr. Lusk offered to set the exchange ratio
        at
        $1.725 per share, which represented the five-day average closing price as
        of
        March 15, 2005. Mr. Lusk also proposed to reduce the amount of the accrued
        interest on the line of credit with Match, Inc. by $250,000. Thus, the number
        of
        shares for which the preferred stock and the cumulative dividend would be
        exchanged was equal to 2,127,933 ($3,670,685 / $1.725) under the proposal
        presented by Mr. Lusk. Using the same conversion price of $1.725 proposed
        by Mr.
        Lusk, the total of $1,942,525 ($2,192,525 - $250,000) due on the line of
        credit
        would be convertible into 1,126,101 shares of common stock of Lighting Science
        Group. The committee also noted that the trading range for the stock at the
        end
        of the month of March was closer to the lower end of the range ($1.48) at
        the
        time that the analysis was being completed. The special committee reported
        the
        results of its analysis to the board.
  The
        board
        of directors (with Mr. Lusk abstaining and one director absent) reviewed
        the
        analysis prepared by the special committee. Based upon the exchange ratio
        of
        $1.725 per share offered by Mr. Lusk with respect to both the exchange of
        the
        preferred stock and the debt, as well as the proposal by Mr. Lusk to reduce
        the
        accrued interest on the line of credit by $250,000, the board concluded that
        the
        offer was fair to Lighting Science Group and voted to approve the transactions
        contained in the proposal from Mr. Lusk. A total of 3,254,034 shares of common
        stock were issued in exchange for the Series A Preferred Stock and the amount
        due under the line of credit agreement on May 5, 2005.
  *Loan
        from Stockholder and Chairman Ronald E. Lusk*
  On
        November 25, 2003 Ronald E. Lusk, the chairman of Lighting Science Group,
        advanced $50,000 to Lighting Science Group for purposes of meeting general
        and
        administrative expenses. The loan provided for 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 Lighting
        Science Group. Any such interest would not have been material. During 2004,
        Mr.
        Lusk advanced Lighting Science Group an additional $29,541 for general corporate
        purposes. During the third quarter of 2004, Lighting Science Group repaid
        the
        outstanding balances on these advances.
  *Office
        Lease with Stockholder and Director Daryl N. Snadon*
  Until
        November 2004, we leased our executive offices from a partnership consisting
        of
        Daryl N. Snadon, a member of our board of directors, and two other individuals.
        Our former, long-term lease with this partnership was terminated in connection
        with our bankruptcy. When we emerged from bankruptcy, we entered into an
        oral
        lease agreement with Mr. Snadon’s partnership to lease our executive offices on
        a month-to-month basis. Under the agreement, the landlord agreed to accept
        shares of our common stock in lieu of cash payments for rent. To date, all
        amounts owed by us under our lease have been paid by issuing shares of common
        stock to the members of the partnership, including 682,684 shares to Mr.
        Snadon.
        No further commitment remains under this agreement, and no additional stock
        is
        required to be issued.
  *Service
        Agreement with Shareholder*
  On
        November 13, 2004, we moved our executive offices from Richardson, Texas
        to
        Dallas, Texas where we occupy excess office space that is leased by an
        institutional shareholder of Lighting Science Group who previously served
        as a
        financial adviser. The stockholder allowed us to occupy the space on a rent-free
        basis during the terms of the financial services agreement. Such free rent
        was
        not material in 2004. Upon termination of the financial services agreement
        on
        September 29, 2005, we began to pay the stockholder rent at the rate of $10,000
        per month. For services rendered as financial advisor, we issued a warrant
        to
        purchase 63,984 shares of our common stock in conjunction with our private
        placement of preferred shares on May 12, 2005.
  *Employment
        Agreements*
  We
        entered into three-year employment agreements with each of Messrs. Lusk,
        Poss
        and Hartman, and Ms. Fuller during fiscal years 1999, 2000, 2002 and 2002,
        respectively. Ms. Fuller resigned from Lighting Science Group in May 2005
        and is
        no longer an employee. On June 1, 2004, we entered into a similar agreement
        with
        Mr. Maxik upon the acquisition of Lighting Science, Inc. Upon completion
        of the
        initial three-year terms, each agreement is automatically renewed for successive
        one-year periods. We may terminate any agreement as of the renewal date of
        such
        agreement upon 90 days advance written notice to the subject employee. In
        addition, we may terminate an agreement upon the death or disability of the
        employee or upon just cause. In the event an agreement is terminated by us
        without cause or by the employee upon a change in control of Lighting Science
        Group, we are obligated to pay the compensation that the employee would
        otherwise be entitled to receive had the agreement not been terminated.
  Under
        their agreements, Messrs. Lusk, Maxik and Poss were entitled to receive a
        base
        annual salary of $250,000. In addition, upon execution of the agreements,
        Mr.
        Lusk was issued 31,250 shares of common stock in March 2000, Mr. Poss was
        issued
        312,500 shares of common stock in May 2004 and Mr. Maxik was issued 156,250
        shares of common stock in August 2004. Under Mr. Hartman’s agreement, he was
        entitled to receive a base annual salary of $200,000. Upon execution of his
        agreement, Mr. Hartman was issued 31,250 shares of common stock in December
        2000. Under Ms. Fuller’s agreement, she was entitled to receive a base annual
        salary of $100,000. Upon execution of her agreement, Ms. Fuller was issued
        37,500 shares of common stock in March 2002. Previously, under all of the
        employment agreements, certain of the compensation owed to the employees
        was
        payable by us through the issuance of shares of Lighting Science Group’s common
        stock. Such compensation was not paid in the amounts set forth in the employment
        agreements and is no longer due or payable. We did pay stay bonuses in
        recognition of the work performed to allow us to emerge from bankruptcy,
        pursuant to which Mr. Lusk was issued 555,502 shares of common stock, Mr.
        Poss
        was issued 365,269 shares of common stock, Mr. Hartman was issued 400,289
        shares
        of common stock, and Ms. Fuller was issued 619,479 shares of common stock.
        The
        employment agreements of Messrs. Lusk, Poss and Hartman were amended effective
        May 29, 2004, to remove the provision regarding the payment of compensation
        through the issuance of shares of our common stock and the base salaries
        of
        certain of these officers as set forth in their employment agreements were
        amended, as follows: Mr. Poss, $90,000, and Mr. Hartman, $150,000. Pursuant
        to
        the terms of his employment agreement, Mr. Maxik is still entitled to elect
        to
        receive his compensation in shares of our common stock.
  On
        October 12, 2004, we hired and entered into 3 year employment and change
        in
        control agreements with Mr. Stan T. Waldrop and Mr. Philip R. Lacerte to
        serve
        as Lighting Science Group’s President and Executive Vice President,
        respectively. The terms of the employment agreements provided for annual
        compensation of $225,000. However, Mr. Waldrop and Mr. Lacerte elected to
        defer
        the first year of salary so that additional funds could be committed to our
        product development. The terms of the change in control agreements provided
        that
        in the event of a change in control, as defined in the agreement, a single
        sum
        cash payment equal to two and one-half (2-1/2) times the executive's average
        annual compensation (including base salary and bonuses) paid to him in cash
        during the thirty-six (36) month period immediately preceding the date on
        which
        the change in control occurred shall be paid to each of Mr. Waldrop and Mr.
        Lacerte. Each executive was also granted the right to sell to Lighting Science
        Group all or any portion of the shares of Company stock granted to him under
        his
        employment agreement or obtained through the exercise of Company-granted
        stock
        options which he owned (or to which he was entitled under an outstanding
        stock
        option or other agreement) as of the date of the change in control at a price
        equal to 105% of the per share price (or the equivalent thereof) paid in
        the
        transaction causing the change in control. A similar change in control agreement
        was executed with Mr. Lusk on the same date.
  On
        October 4, 2005 Mr. Lacerte resigned as Lighting Science Group’s Executive Vice
        President effective as of that date. In connection with his resignation and
        in
        consideration for Lighting Science Group agreeing to release him from his
        obligations under his employment and change in control agreements, except
        for
        certain sections within each agreement, Mr. Lacerte agreed to transfer and
        deliver to Lighting Science Group 100,000 shares of Lighting Science Group’s
        common stock, $.001 par value per share. The stock was returned to Lighting
        Science Group and cancelled by Lighting Science Group in January 2006. Effective
        October 17, 2005, the employment and change in control agreement with Mr.
        Waldrop was terminated as a result of Mr. Waldrop’s resignation as Lighting
        Science Group’s President, except for certain sections thereof, which remain in
        full force and effect. Mr. Waldrop has agreed to provide consulting services
        to
        Lighting Science Group for six months following his resignation on an as-needed
        basis in exchange for 50,000 shares of Lighting Science Group’s common stock,
        $.001 par value per share, which were issued as of October 18,
        2005.
    35
  **ITEM
        13. EXHIBITS**
  (a)
              
              Exhibits
                  required by Item 601 of
                  Regulation S-B
  Exhibit
                  No.
              
              Document31.1*
              
              Rule 13a-14
                  Certification dated February 9, 2006 by Ronald E. Lusk,
                Chief
                  Executive Officer31.2*
              
              Rule 13a-14
                  Certification dated February 9, 2006, by Stephen A. Hamilton, Chief
                  Financial Officer.32.1**
              
              Section 1350
                  Certification dated February 9, 2006, by Ronald E. Lusk, Chief
                  Executive
                  Officer.32.2**
              
              Section 1350
                  Certification dated February 9, 2006, by Stephen A. Hamilton, Chief
                  Financial Officer.
  **ITEM
        14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**
  **Audit
        Fees**
  Audit
        fees billed by Lighting Science Group’s principal accountant total $32,069 as of
        the date of this report.
  **Non-Audit-Related
        Fees**
  No
        non-audit-related fees have been billed by Lighting Science Group’s principal
        accountant for any period.
  **Tax
        Fees**
  No
        tax
        fees have been paid to Lighting Science Group’s principal accountant for any
        period.
  **All
        Other Fees**
  No
        other
        fees other than those set out above have been paid to Lighting Science Group’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 Lighting Science Group’s independent auditors.
        All services provided by Turner, Stone & Company, L.L.P. in 2005 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 Lighting Science Group 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. There
        were no fees in 2005 for which the pre-approval requirement was
        waived.
  No
        other
        fees other than those set out above have been paid to Lighting Science Group’s
        Principal Accountant.
   35
   **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:
              
              February
                  8, 2006
   In
        accordance with the Exchange Act, this report has been signed below by the
        following persons on behalf of the registrant and in the capacities and on
        the
        dates indicated.
   By:
              
              /s/
                  RONALD E. LUSKRonald
                  E. Lusk, Chairman, Chief Executive Officer and DirectorDate:
              
              February
                  8, 2006By:
              
              /s/
                  J. MICHAEL POSSJ.
                  Michael Poss, EVP LegalDate:
              
              February
                  9, 2006By:
              
              /s/
                  STEPHEN A. HAMILTONStephen
                  A. Hamilton, Chief Financial OfficerDate
              
              February
                  8, 2006
  35
  
 By:
              
              /s/
                  ROBERT E. BACHMANRobert
                  E. Bachman, DirectorDate:
              
              February
                  8, 2006By:
              
              /s/
                  JOHN COLLINGWOODJohn
                  Collingwood, DirectorDate:
              
              February
                  8, 2006By:
              
              /s/
                  DONALD R. HARKLEROADDonald
                  R. Harkleroad, DirectorDate:
              
              February
                  8, 2006By:
              
              /s/
                  FREDS. MAXIKFred
                  S. Maxik, DirectorDate:
              
              February
                  8, 2006By:
              
              /s/
                  DARYL SNADONDaryl
                  Snadon, DirectorDate:
              
              February
                  8, 2006By:
              
              /s/
                  ROBERT L. WOODSON, IIIRobert
                  L. Woodson, DirectorDate:
              
              February
                  8, 2006
   
  **LIGHTING
        SCIENCE GROUP CORPORATION**
 **AND
        SUBSIDIARIES**
   **INDEX
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  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
         
    
 **Report
        of Independent Registered Public Accounting Firm**
 
 To
        the
        Board of Directors and Stockholders of
 Lighting
        Science Group Corporation
 
 
 We
                have audited the accompanying consolidated balance sheet of Lighting
                Science Group Corporation and subsidiaries (a development stage company)
                (the company) as of December 31, 2005 and the related consolidated
                statements of operations, stockholders’ equity and cash flows for the
                years ended December 31, 2005 and 2004, and the period from September
                26,
                2003 (see Note 1) through December 31, 2005. 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, evidences 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, 2005, and the consolidated results of their operations
                  and
                  cash flows for the periods indicated above, in conformity with
                  United
                  States generally accepted accounting principles.
                
                The
                  accompanying consolidated financial statements have been prepared
                  assuming
                  that the Company will continue as a going concern. As discussed
                  in Note 4
                  to the consolidated financial statements, the Company has experienced
                  substantial net losses as well as negative cash flows from operations
                  since September 26, 2003, 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.
  /s/
        Turner, Stone & Company, L.L.P.
 
 Turner
        Stone & Company, L.L.P.
 Certified
        Public Accountants
 Dallas,
        Texas
 January
        31, 2006




F-2









**LIGHTING
      SCIENCE GROUP CORPORATION**


**AND
      SUBSIDIARIES**


**(A
      DEVELOPMENT STAGE COMPANY)**


**CONSOLIDATED
      BALANCE SHEET**


December
                  31, 2005**ASSETS**CURRENT
                  ASSETSCash
                  and cash equivalents
              
              $
              1,984,477Accounts
                  receivable
              
              
              9,775Inventory,
                  net of allowances (Note 6)
              
              
              617,518Prepaid
                  expenses and other current assets
              
              
              130,479Total
                  current assets
              
              
              2,742,249PROPERTY
                  AND EQUIPMENT, net (Note 7)
              
              
              295,336OTHER
                  ASSETSReorganized
                  value in excess of amounts allocable to identifiable assets (Note
                  3)
              
              
              2,793,224Intellectual
                  property, net (Notes 2 and 7)
              
              
              1,108,683Proprietary
                  rights agreement, net (Notes 2 and 7)
              
              
              501,972Goodwill
                  (Note 2)
              
              
              154,097Total
                  other assets
              
              
              4,557,976TOTAL
                  ASSETS
              
              $
              7,595,561**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**CURRENT
                  LIABILITIESAccounts
                  payable
              
              $
              247,969Accrued
                  expenses
              
              
              155,329Accrued
                  dividend on 6% Convertible Preferred Stock
              
              
              59,957Note
                  payable - related party - current portion (Note 9)
              
              
              38,889Total
                  current liabilities
              
              
              502,144OTHER
                  LIABILITIESNote
                  payable - related party - long-term portion (Note 9)
              
              
              111,111Liability
                  under derivative contracts (Note 10)
              
              
              3,327,437Total
                  other liabilities
              
              
              3,438,548TOTAL
                  LIABILITIES
              
              
              3,940,692COMMITMENTS
                  AND CONTINGENCIES (Note 13)6%
                  CONVERTIBLE PREFERRED STOCK, $.001 par value, 2,656,250 shares
                  authorized,
                  2,260,966 shares issued and outstanding, liquidation value of $7,235,086
                  (Note 10)
              
              
              927,677STOCKHOLDERS’
                  EQUITYCommon
                  Stock, $.001 par value, 495,000,000 shares authorized,55,474,591
                  shares issued and outstanding
              
              
              55,475Additional
                  paid-in-capital (Note 10)
              
              
              12,830,833Deficit
                  accumulated during the development stage
              
              
              (10,159,116
              )TOTAL
                  STOCKHOLDERS’ EQUITY
              
              
              2,727,192TOTAL
                  LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              $
              7,595,561The
                  accompanying notes are an integral part of the consolidated financial
                  statements.






F-3







**LIGHTING
        SCIENCE GROUP CORPORATION**
 **AND
        SUBSIDIARIES**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **CONSOLIDATED
        STATEMENT OF OPERATIONS**
  Year
                    Ended December 31, 2005
                
                
                Year
                    Ended December 31, 2004
                
                
                Cumulative
                    from September 26, 2003 through December 31, 2005Revenue
                
                $
                72,564
                
                $
                3,404
                
                $
                75,968Cost
                    of goods sold
                
                
                (33,110
                )
                
                (2,076
                )
                
                (35,186
                )Gross
                    margin
                
                
                39,454
                
                
                1,328
                
                
                40,782Operating
                    expensesSelling,
                    general and administrative
                
                
                1,823,020
                
                
                1,224,013
                
                
                3,126,484Compensation
                    and related expenses
                
                
                1,976,549
                
                
                1,148,426
                
                
                3,333,036Professional
                    fees
                
                
                1,627,684
                
                
                624,934
                
                
                2,252,618Directors
                    fees
                
                
                294,445
                
                
                388,575
                
                
                770,520Depreciation
                    and amortization
                
                
                487,766
                
                
                259,251
                
                
                747,017Total
                    operating expenses
                
                
                6,209,464
                
                
                3,645,199
                
                
                10,229,675Operating
                    loss
                
                
                (6,170,010
                )
                
                (3,643,871
                )
                
                (10,188,893
                )Other
                    income (expense)Interest
                    income
                
                
                72,732
                
                
                3,388
                
                
                76,120Interest
                    expense
                
                
                (77,697
                )
                
                (136,843
                )
                
                (248,700
                )Other,
                    net (Notes 9 and 10)
                
                
                3,069,638
                
                
                6,305
                
                
                3,075,943Total
                    other income (expense)
                
                
                3,064,673
                
                
                (127,150
                )
                
                2,903,363Net
                    loss
                
                
                (3,105,337
                )
                
                (3,771,021
                )
                
                (7,285,530
                )Dividend
                    on 6% Convertible Preferred Stock andaccretion
                    of preferred stock redemption value (Note 10)
                
                
                1,202,901
                
                
                -
                
                
                1,202,901Net
                    loss applicable to common stock
                
                $
                (4,308,238
                )
                $
                (3,771,021
                )
                $
                (8,488,431
                )Basic
                    net loss per weighted average common share
                
                $
                (0.08
                )
                $
                (0.12
                )
                $
                (0.22
                )Weighted
                    average number of common shares outstanding
                
                
                53,807,907
                
                
                31,668,957
                
                
                38,870,415The
                    accompanying notes are an integral part of the consolidated financial
                    statements.


**LIGHTING
        SCIENCE GROUP CORPORATION**
 **AND
        SUBSIDIARIES**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**


Year
                    Ended December 31, 2005
                
                
                Year
                    Ended December 31, 2004
                
                
                Cumulative
                    fromSeptember 26, 2003through December 31,
                    2005OPERATING
                    ACTIVITIESNet
                    loss
                
                $
                (4,308,238
                )
                $
                (3,771,021
                )
                $
                (8,488,431
                )Adjustments
                    to reconcile net loss to net cash used by operating
                    activities:Depreciation
                    and amortization
                
                
                487,766
                
                
                259,251
                
                
                747,017Loss
                    on disposal of assets
                
                
                97,155
                
                
                -
                
                
                97,155Non-cash
                    stock option compensation expense
                
                
                111,109
                
                
                -
                
                
                111,109Expenses
                    paid by issuance of common stock
                
                
                580,511
                
                
                1,551,700
                
                
                2,132,211Non-cash
                    accrual of interest to related party
                
                
                25,670
                
                
                -
                
                
                25,670Forgiveness
                    of accrued interest due to related party
                
                
                (250,000
                )
                
                -
                
                
                (250,000
                )Fair
                    value adjustment to liabilities under derivative
                    contracts
                
                
                (3,907,649
                )
                
                -
                
                
                (3,907,649
                )Accretion
                    of 6% convertible preferred stock redemption value
                
                
                927,677
                
                
                -
                
                
                927,677Preferred
                    stock issuance expenses paid by issuance of warrants
                
                
                290,000
                
                
                -
                
                
                290,000Conversion
                    of interest accrued to preferred stock
                
                
                24,086
                
                
                -
                
                
                24,086Changes
                    in:
                
                
                
                
                
                
                
                
                -Accounts
                    receivable
                
                
                (8,634
                )
                
                (1,141
                )
                
                (9,775
                )Inventory
                
                
                (603,748
                )
                
                (13,770
                )
                
                (617,518
                )Prepaid
                    expenses
                
                
                33,060
                
                
                (157,956
                )
                
                (124,896
                )Accounts
                    payable
                
                
                207,333
                
                
                40,636
                
                
                247,969Accrued
                    expenses and other liabilities
                
                
                197,387
                
                
                124,590
                
                
                716,845Security
                    deposits
                
                
                27,215
                
                
                (27,215
                )
                
                -Net
                    cash used by operating activities
                
                
                (6,069,300
                )
                
                (1,994,926
                )
                
                (8,078,530
                )INVESTING
                    ACTIVITIESPurchase
                    of property and equipment
                
                
                (155,246
                )
                
                (327,915
                )
                
                (483,161
                )Cash
                    in bank of subsidiary at date of acquisition
                
                
                -
                
                
                10,000
                
                
                10,000Net
                    cash used by investing activities
                
                
                (155,246
                )
                
                (317,915
                )
                
                (473,161
                )FINANCING
                    ACTIVITIESLoans
                    from directors and officers
                
                
                476,000
                
                
                -
                
                
                476,000Repayment
                    of loans from directors and officers
                
                
                (200,000
                )
                
                -
                
                
                (200,000
                )Principal
                    payment on note payable to related parties
                
                
                (25,000
                )
                
                (25,000
                )
                
                (50,000
                )Loan
                    from stockholder
                
                
                -
                
                
                29,541
                
                
                79,541Repayment
                    of loan from stockholder
                
                
                -
                
                
                (78,041
                )
                
                (79,541
                )Proceeds
                    from issuance of 6% Convertible Preferred Stock, net of issuance
                    costs
                
                
                6,935,000
                
                
                -
                
                
                6,935,000Proceeds
                    from private placement, net of issuance costs
                
                
                36,000
                
                
                3,338,890
                
                
                3,374,890Net
                    cash provided by financing activities
                
                
                7,222,000
                
                
                3,265,390
                
                
                10,535,890Net
                    increase in cash
                
                
                997,454
                
                
                952,549
                
                
                1,984,199Cash
                    at beginning of period
                
                
                987,023
                
                
                34,474
                
                
                278Cash
                    at end of period
                
                $
                1,984,477
                
                $
                987,023
                
                $
                1,984,477Interest
                    paid
                
                $
                3,011
                
                $
                30,152
                
                $
                33,163SUPPLEMENTAL
                    DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIESCommon
                    Stock issued in settlement of note payable and accrued interest
                    to related
                    party
                
                $
                1,942,525
                
                $
                -
                
                $
                1,942,525Common
                    Stock issued to pay accrued liabilities
                
                $
                -
                
                $
                360,707
                
                $
                360,707Reduction
                    of accrued interest on note to related party
                
                $
                (250,000
                )
                $
                500,000
                
                $
                750,000Conversion
                    of loans from directors and officers to 6% Convertible Preferred
                    Stock
                
                $
                276,000
                
                $
                -
                
                $
                276,000Exchange
                    of Series A Preferred Stock for Common Stock
                
                $
                3,670,685
                
                $
                -
                
                $
                3,670,685Proceeds
                    from issuance of 6% Convertible Preferred Stock to Liability
                    under
                    Derivative Contracts
                
                $
                6,935,000
                
                $
                -
                
                $
                6,935,000Preferred
                    stock dividends paid and deducted in arriving at Net Loss
                
                $
                215,269
                
                $
                -
                
                $
                -The
                    accompanying notes are an integral part of the consolidated financial
                    statements.


**LIGHTING
            SCIENCE GROUP CORPORATION**
 **AND
            SUBSIDIARIES**
 **(A
            DEVELOPMENT STAGE COMPANY)**
 **CONSOLIDATED
            STATEMENTS OF STOCKHOLDERS' EQUITY**


**Preferred
                    Stock**
                
                
                **Common
                    Stock****Shares**
                
                
                **Amount**
                
                
                **Shares**
                
                
                **Amount**
                
                
                **Stock
                    Subscriptions Receivable**
                
                
                **Additional
                    Paid In Capital**
                
                
                **Deficit
                    Accumulated During Development Stage**
                
                
                **Total****Balance
                    at September 26, 2003**
                
                
                **533,333**
                
                
                **533**
                
                
                **16,685,446**
                
                
                **16,685**
                
                
                **-**
                
                
                **250,282**
                
                
                **-**
                
                
                **267,500**Net
                    Loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (409,172
                )
                
                (409,172
                )**Balance
                    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 11)
                
                
                -
                
                
                -
                
                
                18,341,906
                
                
                18,343
                
                
                (26,000
                )
                
                3,846,547
                
                
                -
                
                
                3,838,890Issue
                    of common stock to acquire subsidiary (Note 2)
                
                
                -
                
                
                -
                
                
                9,452,491
                
                
                9,452
                
                
                -
                
                
                2,221,645
                
                
                -
                
                
                2,231,097Issue
                    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
                    December 31, 2004**
                
                
                **533,333**
                
                
                **533**
                
                
                **51,297,256**
                
                
                **51,297**
                
                
                **(26,000**
                **)**
                
                **8,229,648**
                
                
                **(4,180,193**
                **)**
                
                **4,075,285**Issuance
                    of common stock in private placement
                
                
                -
                
                
                -
                
                
                83,333
                
                
                83
                
                
                -
                
                
                9,917
                
                
                -
                
                
                10,000Issue
                    of common stock in payment of operating expenses
                
                
                -
                
                
                -
                
                
                839,968
                
                
                840
                
                
                -
                
                
                579,671
                
                
                -
                
                
                580,511Issue
                    of common stock pursuant to conversion of outstanding preferred
                    stock,
                    cumulative dividends on preferred stock and certain notes payable
                    (Note
                    10)
                
                
                (533,333
                )
                
                (533
                )
                
                3,254,034
                
                
                3,255
                
                
                -
                
                
                3,610,488
                
                
                (1,670,685
                )
                
                1,942,525Fair
                    value of a warrant issued for payment of operating
                    expenses
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                290,000
                
                
                -
                
                
                290,000Recording
                    of expense for stock options issued during the year (Note
                    12)
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                111,109
                
                
                -
                
                
                111,109Receipt
                    of amounts due under share subscription agreements
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                26,000
                
                
                -
                
                
                -
                
                
                26,000Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (4,308,238
                )
                
                (4,308,238
                )**Balance
                    December 31, 2005**
                
                
                **-**
                
                **$**
                **-**
                
                
                **55,474,591**
                
                **$**
                **55,475**
                
                **$**
                **-**
                
                **$**
                **12,830,833**
                
                **$**
                **(10,159,116**
                **)**
                **$**
                **2,727,192**The
                    accompanying notes are an integral part of the consolidated financial
                    statements.
  F-6


**LIGHTING
        SCIENCE GROUP CORPORATION**
 **AND
        SUBSIDIARIES**
 **(A
        DEVELOPMENT STAGE COMPANY)**
 **NOTES
        TO THE CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 
 **NOTE
        1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
        POLICIES**
 
 **Nature
        of Business**
 
 Lighting
        Science Group Corporation (the “Company”) is a Delaware corporation organized in
        June 1988. The Company’s wholly owned subsidiaries during the periods were
        Americare Management, Inc. and LSGC LLC, a joint venture with Giuliani Capital
        Advisors LLC (Note 13). Americare Management, Inc. and LSGC LLC 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.
 
 As
        of
        December 31, 2005, the Company continues to operate as a development stage
        company, having not had appreciable revenue during 2005 or 2004. With its
        acquisition of certain intellectual property rights on June 1, 2004 (see
        Note
        2), 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. Manufacturers of LED’s have made substantial
        progress in the past few years, but the enabling technologies such as power
        conversion and thermal management have not kept pace. Consequently, the existing
        gap between the advancements in LED technology and their incorporation into
        general illumination systems has widened over the past five years.
 
 Through
        the development of its Optimized Digital LightingTM (“ODLTM”) technology, the
        Company believes that it has begun to close the gap between the theoretical
        performance capability of today’s LED’s and the level of their performance in
        the current generation of general illumination products. The Company has
        developed several enabling technologies that form the basis of the intellectual
        property for which it has filed for patent protection.
 
 The
        Company is currently designing several products for the consumer lighting
        market
        as well as commercial products for the streetlight and parking lot lighting
        sector. The Company has formed strategic alliances with a major parking
        facilities operator and a financial advisory services firm to target
        municipalities, public utility corporations, universities, large mall owners,
        parking lot owners, and other organizations as customers and partners for
        the
        Company’s products.
 
 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. During the summer of 2003, the Company filed a Disclosure
        Statement and Plan of Reorganization (collectively, the “Plan”) that was
        confirmed by the U.S. Bankruptcy Court for the Northern District of Texas
        - Ft.
        Worth Division (the “Court”) on September 16, 2003 with an effective date of
        September 26, 2003. Under the terms of the Plan, the holder of the Series
        A
        Preferred Stock agreed to waive its rights, including its voting and conversion
        rights, and 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 - *Financial
        Reporting by Entities in Reorganization Under the Bankruptcy
        Code* .
 
 **Reverse
        Stock Split**
 
 
 On
        August
        20, 2004, the stockholders of the Company approved a proposal by management
        to
        undertake a reverse stock 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 and in these notes to consolidated financial statements have been
        retroactively adjusted for the reverse split of the Company’s
        shares.
 
 **Summary
        of Significant Accounting Policies**
 
 Since
        the
        Chapter 11 bankruptcy filing, the Company has applied the provisions in SOP
        90-7
        which 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 balances in cash accounts which could exceed federally
        insured
        limits of $100,000. The Company has not experienced any losses from maintaining
        balances in such 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 raw materials and components and lighting products 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.
        Deposits paid to contract manufacturers and raw material and components
        suppliers related to future purchases are also classified in inventory in
        the
        consolidated balance sheet.
 
 **Prepaid
        expenses and other current assets**
 
 Prepaid
        expenses and other current assets consist primarily of consulting fees paid
        to
        financial consulting firms and prepaid insurance policy premiums. Prepaid
        expenses are amortized over the period during which the service is provided
        or
        the length of the specific contract.
 
 **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 $73,233, $17,440 and $90,673 for the years ended December 31,
        2005
        and 2004 and cumulatively for the period beginning September 26, 2003 and
        ending
        December 31, 2005, 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, Inc. 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, Inc. 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 related to intellectual property was $60,200, $35,117 and $95,317
        for
        the years ended December 31, 2005 and 2004 and cumulatively for the period
        beginning September 26, 2003 and ending December 31, 2005,
        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 the Company or that have
        technology similar to the Company for a period of time following his employment
        termination with the Company. This Agreement was recorded effective June
        1,
        2004, as part of the purchase price of Lighting Science, Inc. This asset
        is
        being amortized over three years, which is the period covered by the
        agreement.
 
 Amortization
        expense related to the proprietary rights agreement was $354,333, $206,694
        and
        $561,027 for the years ended December 31, 2005 and 2004 and cumulatively
        for the
        period beginning September 26, 2003 and ending December 31, 2005.
 
 *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 9). 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 Statement of Financial Accounting Standards (“SFAS”) No. 142 - *Goodwill
        and Other Intangible Assets* ,
        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 its internal review as of September 30, 2005, the Company has determined
        that no impairment to the Company’s intangible assets has occurred since the
        date of the previous evaluation.
 
 **Financial** **Instruments**
 
 The
        Company has issued certain preferred stock and warrants, the terms of which
        qualify these financial instruments under SFAS 133 - *Accounting
        for Derivative Instruments and Hedging Activities* ,
        as
        derivatives. Such derivatives have not been designated as hedging instruments.
        Accordingly, all derivatives are recorded at fair value on the consolidated
        balance sheet and changes in the fair value of such derivatives are recorded
        in
        operations each period and are reported in Other Income (Expense).
 
 **Revenue**
 
 Product
        sales are recorded when the products are shipped and title passes to customers.
        Where sales of product are subject to certain customer acceptance terms,
        revenue
        from the sale is recognized once these terms have been met. Sales to date
        have
        not been significant.
 
 As
        of the
        date of this report, the Company has no reason to believe that an allowance
        for
        material product returns is necessary.
 
 **Stock
        Based Compensation**
 
 On
        July
        6, 2005, the Board of Directors of the Company adopted the Lighting Science
        Group Corporation 2005 Equity Based Incentive Compensation Plan (the "2005
        Plan") and a proposal to implement this plan was approved at the annual
        shareholders’ meeting in August 2005. Effective with adoption of the plan, the
        Company adopted the fair value method of accounting for employee stock
        compensation cost pursuant to SFAS
        No.
        123 (R)-*Share-Based
        Payment*.
        Accordingly, compensation cost is based on the fair value of options or other
        equity instruments measured at the date of grant and compensation cost is
        charged to operations over the expected service period.
 
 **Income
        taxes**
 
 The
        Company employs the asset and liability method in accounting for income taxes
        pursuant to 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 are 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 preferred stock and the exercise of warrants and stock
        options. No effect has been given to the assumed conversion of the preferred
        stock or the exercise of warrants or stock options because the effect would
        be
        anti-dilutive. See Notes 10 through 13.
 
 **Comparative
        Consolidated Financial Statements**
 
 Certain
        amounts in the comparative consolidated financial statements have been
        reclassified from financial statements previously presented to conform to
        the
        presentation of the 2005 consolidated financial statements.
 
 
 **NOTE
        2: ACQUISITION OF LIGHTING SCIENCE, INC.**
 
 On
        June
        1, 2004, the Company acquired 100% of the outstanding common stock of Lighting
        Science, Inc., a Delaware corporation based in Las Vegas, Nevada, which owned
        certain intellectual property related to the design and development of an
        ODL
        light bulb. 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 4,796,276 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 SFAS 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
              
              
              1,204,000Proprietary
                  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 the acquisition of Lighting Science, Inc., the Company filed four utility
        patent applications (thereby complying with the one-year time period mentioned
        above) based on the initial four provisional patents. Eleven additional patent
        applications have also been filed to provide further protection to the ODL
        technology. Two of such fifteen patent applications have been granted.
        Accordingly, there are currently thirteen 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. Additionally, with
        respect
        to proprietary branding of its products and services, the Company has filed
        for
        federal trademark/service registrations on certain marks and anticipates
        filing
        additional registrations on other marks and logos, and, as appropriate, the
        Company 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
        lighting products which embody it. It is also the policy of the Company to
        develop an intellectual property portfolio that protects and enhances the
        ODL
        technology ideas, concepts, methods and processes. The Company has also adopted
        intellectual property policies, procedures and practices into its business
        operations to facilitate its proprietary positioning with respect to its
        product
        development and commercialization.
 
 
 **NOTE
        3: FRESH-START ACCOUNTING**
 
 The
        Court
        confirmed the Company’s Plan (Note 1) on September 16, 2003, and the Plan became
        effective as of September 26, 2003. It was determined that the Company’s
        reorganization value, computed immediately before the effective date, was
        $2,793,502, which consisted of the following:
 
 Cash
              
              $
              278Reorganized
                  value in excess of amounts allocable to identifiable
                  assets
              
              
              2,793,224Deferred
                  tax assets comprised of $57,000,000 of net operating loss
                  carry-forwards
              
              
              19,400,000Valuation
                  allowance against above deferred tax assets
              
              
              (19,400,000
              )Reorganization
                  value
              
              $
              2,793,502
 
 The
        Company adopted fresh-start reporting because holders of existing voting
        shares
        immediately before filing and confirmation of the Plan retained less than
        50% of
        the voting shares of the emerging entity, and its reorganization value was
        less
        than its post-petition liabilities and allowed claims.
 
 
 **NOTE
        4: GOING CONCERN**
 
 The
        accompanying consolidated financial statements have been prepared assuming
        that
        the Company will continue as a going concern. As shown in the consolidated
        financial statements, the Company has experienced substantial net losses
        as well
        as negative cash flows from operations since September 26, 2003.
 
 The
        Company has embarked upon an aggressive design and development program to
        bring
        product to market during the current year. To provide the Company with adequate
        working capital for the design and the initial manufacture of these products,
        the Company completed a transaction with a group of institutional and accredited
        investors in May 2005 whereby the Company issued 2,260,966 shares of the
        Company’s 6% Convertible Preferred Stock for proceeds totaling $7,235,086 in a
        private placement transaction (Note 10).
 
 Based
        upon the receipt of proceeds from the private placement of the Company’s 6%
        Convertible Preferred Stock and revenue from anticipated product releases,
        management believes that the Company will have sufficient capital necessary
        to
        enable it to deliver finished products to market during 2006. Despite these
        activities, there can be no assurance that management’s efforts to sufficiently
        capitalize the Company beyond the initial rollout of the Company’s product line
        will be successful.
 
 
 **NOTE
        5: FAIR VALUE OF FINANCIAL INSTRUMENTS**
 
 SFAS
        No.
        107 - *Disclosures
        About Fair Value of Financial Instruments* ,
        requires that the Company disclose estimated fair values of financial
        instruments.
 
 Cash
        and
        cash equivalents, accounts receivable, notes and accounts payable, accrued
        expenses and other current liabilities are carried at book value amounts
        which
        approximate fair value due to the short-term maturity of these instruments.
        As
        discussed in Note 10, the embedded conversion feature associated with the
        6%
        Convertible Preferred Stock and the warrants issued to the 6% Convertible
        Preferred Stock purchasers have been determined to be derivative instruments
        and
        are recorded at market.
 
 
 **NOTE
        6: INVENTORY**
 
 At
        December 31, 2005, inventory is comprised of the following:
 
 
 
 
 **December
                  31,**
                **2005**Deposits
                  paid to contract manufacturers
              $
              156,140Raw
                  materials and components
              
              213,057Finished
                  goods
              
              248,321$
              617,518
 
 At
        December 31, 2005 the Company provided an allowance for the decline in market
        value of certain raw materials and components of approximately $87,000, which
        is
        netted against the balance of raw materials and components in the table
        above.
 
 **NOTE
        7: PROPERTY, EQUIPMENT AND OTHER ASSETS**
 
 Property
        and equipment consists of the following:
 
 **December
                  31, 2005**Leasehold
                  Improvements
              $
              5,526Office
                  furniture, fixtures and telephone equipment
              
              97,152Computer
                  equipment
              
              103,008Test
                  Equipment
              
              94,988Tooling
                  and molds
              
              52,609Total
                  property and equipment
              
              353,283Accumulated
                  depreciation
              
              (57,947
              )$
              295,336
 
 During
        2005, the Company incurred a loss on the disposal of property and equipment
        of
        $97,155. Of this amount, $77,304 related to the write-off of prototype tools
        and
        molds that were no longer being used by the Company for the manufacture of
        parts
        due to the development of production tooling and more advanced prototypes.
        The
        Company does not use these prototype tools and molds for any other
        purpose.
 
 Intellectual
        property consists of the following:
 
 ****
              **December
                  31, 2005**Intellectual
                  property
              $
              1,204,000Accumulated
                  amortization
              
              (95,317
              )$
              1,108,683
 
 Proprietary
        rights agreement consists of the following:
 
 **December
                  31,**
                **2005**Property
                  rights agreement
              $
              1,063,000Accumulated
                  amortization
              
              (561,028
              )$
              501,972
 
 The
        estimated amortization expense for the next five years for the intangible
        assets
        listed above is as follows:
 
 Amortization
                  ExpenseYear
                  ended
              
              IntellectualProperty
              
              
              Proprietary
                  RightsAgreement2006
              $
              60,200
              
              $
              354,3332007
              $
              60,200
              
              $
              147,6392008
              $
              60,200
              
              
              -2009
              $
              60,200
              
              
              -2010
              $
              60,200
              
              
              -
 
 
 **NOTE
        8: INCOME TAXES**
 
 The
        Company accounts for corporate income taxes in accordance with SFAS No. 109
        - *Accounting
        for Income Taxes* .
        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 $23,200,000 at December 31, 2005, and which has
        been
        fully offset by a valuation reserve, the Company does not have any other
        significant deferred tax assets or liabilities. The Company has recorded
        a
        change in the valuation allowance of $2,300,000, $1,500,000 and $3,800,000
        for
        the years ended December, 31, 2005 and 2004 and cumulatively for the period
        beginning September 26, 2003 and ending December 31, 2005, respectively. The
        net
        operating loss carryforwards are available to offset future taxable income
        of
        the Company. These net operating losses expire from 2008 through 2020. The
        change in the fair value under derivative contracts of $3,907,649 (Note 10)
        has
        been treated as a permanent difference to calculate the total net operating
        losses available for carryforward to offset future periods’ taxable
        income.
 
 Benefits
        realized in future periods from the application of net operating losses incurred
        prior to September 26, 2003 of $19,400,000 will first reduce reorganization
        value in excess of amounts allocable to identifiable assets until exhausted
        and,
        thereafter, will be credited to additional paid in capital. Any benefits
        realized in future periods from net operating loss carryforwards generated
        after
        September 26, 2003 ($3,800,000 at December 31, 2005) will be recorded as
        a tax
        benefit in the statement of operations.
 
 **NOTE
        9: NOTES PAYABLE - RELATED PARTIES**
 
 
 **Match
        Loan**
 
 We
        were
        obligated under the terms of a line of credit agreement to Match outstanding
        in
        the amount of $1,851,299 in principal and $341,226 in accrued interest at
        March
        31, 2005. The line of credit agreement with Match, Inc. was available up
        to a
        limit of $2 million; bearing interest at prime plus 1% on the note balance
        and
        prime plus 2% on any unpaid interest amounts; was due on demand and was
        unsecured.
 
 We
        entered into an agreement with Match on April 12, 2005, under which Match
        agreed
        to reduce the accrued interest by $250,000 and exchange the debt for common
        stock at the exchange ratio of $1.725 per share. On May 5, 2005, the debt
        to
        Match of $1,851,299 plus $91,226 of accrued interest was exchanged for common
        stock. The reduction in accrued interest was recorded in Other income/(expense)
        during the year ended December 31, 2005. As a result of these transactions,
        the
        total of $1,942,525 due on the line of credit was exchanged for 1,126,101
        shares
        of common stock of the Company on May 5, 2005.
 **Note
        to Phibian S Trust**
 
 Upon
        the
        acquisition of Lighting Science, Inc. we owed a balance of $200,000 to Phibian
        S
        Trust of which the remaining balance of $150,000 and is recorded as
        follows:
 
 December
                  31, 2005Notes
                  payable - related party - current portion
              
              $
              38,889Notes
                  payable - related party - long-term portion
              
              
              111,111$
              150,000
 
 
 The
        Phibian S Trust is a trust for the benefit of the children of Fredric Maxik,
        the
        chief technology officer of the Company. At the time of the acquisition,
        the
        trust was controlled by Mr. Maxik who was co-trustee of the trust. On July
        2,
        2004, Maxik resigned his position as co-trustee. Currently, Maxik exercises
        no
        control over the trust, and has informed us that he disclaims all beneficial
        ownership in 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, Inc. by the Company. The Company 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. The Company will begin paying regular monthly
        installments on the note beginning in June 2006, after giving effect to the
        $50,000 in prepayments noted above. Accordingly, payments relating to the
        period
        from June 2006 through December 2006 have been classified as current
        liabilities.
 
 As
        an
        accommodation to the trust and in anticipation of near-term sales in excess
        of
        $10,000 per month, the Company made advance payments to the trust on this
        note
        in the amount of $25,000 in October 2004 and $25,000 in May 2005. This note
        provides for no interest. However, under generally accepted accounting
        principles, an amount of interest should have been imputed. Such amount was
        not
        material.
 
 **Loans
        from Directors and Officers**
 
 During
        the first and second quarters of 2005, members of the board of directors
        and
        certain officers of the Company (the “Lender” or “Lenders”) agreed to loan the
        Company an aggregate of $476,000 on a short-term basis, of which $220,000
        was
        received as of March 31, 2005 and the remaining $256,000 was received in
        the
        quarter ended June 30, 2005. Proceeds from the loans funded 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:
        (i)
        paid interest to each Lender at a rate of 9.50% per annum; (ii) paid a 10%
        commitment fee to each Lender and (iii) issued warrants to the Lenders for
        a
        total of 476,000 shares of common stock to be purchased at an exercise price
        of
        $1.50 per share. The principal and interest on the notes were due on May
        30,
        2005. A total of $300,086 of such loans, including accrued interest and
        commitment fees of $24,086, were converted to Preferred Stock in the private
        placement of preferred stock (Note 10) and the remaining $200,000 of such
        loans
        and accrued interest and commitment fees thereon were repaid from proceeds
        of
        the private placement.
 
 
 **NOTE** **10:
        PREFERRED STOCK**
 
 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.
 
 **Exchange
        of Series A Preferred Stock held by Match for Common Stock**
 
 On
        July
        25, 1994, Lighting Science Group sold, for proceeds of $2 million, 533,333
        shares of Series A Preferred Stock with cumulative dividends of $0.30 per
        annum
        per share and conversion rights to common stock at a price of $3.75 per share.
        Under the terms of the Plan under which the Company emerged from bankruptcy,
        such rights were waived, including voting and conversion rights.
 
 On
        April
        12, 2005 the Company announced that the Company and Match had negotiated
        the
        exchange of the 533,333 shares of Series A Preferred Stock held by Match
        and the
        Match debt (See Note 9) into common stock of the Company at a exchange ratio
        of
        $1.725 per share that was approximately 15% in excess of the market price
        of the
        stock at the date the exchange 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
        Series A Preferred Stock, owned by Match at the date of the exchange, carried
        cumulative dividends of $0.30 per annum per share. The cumulative unpaid
        dividend with respect to the Series A Preferred Stock was $1,680,000 as of
        March
        31, 2005, resulting in a total liquidation preference of $3,680,000 as of
        that
        date. However, for purposes of the exchange calculation, the amount of
        $1,670,685 was used to reflect the unpaid dividend on the date the exchange
        ratio of $1.725 per share was determined. This adjustment produced the slightly
        smaller liquidation value of $3,670,685 and this amount was used to record
        the
        dividend as a charge to Deficit accumulated during the development stage
        on the
        balance sheet. Thus, the Series A Preferred Stock owned by Match and the
        accumulated dividend thereon was exchanged for 2,127,933 shares of common
        stock
        on May 5, 2005. The accumulated dividend was recorded as a reduction of retained
        earnings.
 
 **Private
        Placement with Institutional and Accredited Investors**
 
 On
        May
        12, 2005, the Company closed on a private placement with a group of
        institutional and accredited investors, including certain officers and directors
        of the Company, for the sale of 2,260,966 shares of the Company’s 6% Convertible
        Preferred Stock (the “6% Convertible Preferred Stock”) along with warrants to
        purchase additional shares of the Company’s common stock. The 6% Convertible
        Preferred Stock was priced at $3.20 per share, and the Company received proceeds
        of $7,235,086 of which $276,000 represented conversion of officer and board
        member loans and $24,086 represented accrued interest and commitment fees
        thereon. Each share of 6% Convertible Preferred Stock is convertible at any
        time
        at the election of the holder at $0.80 per share into four shares of common
        stock, subject to full ratchet anti-dilution adjustments. Thus, if all of
        the
        shares of the 6% Convertible Preferred Stock were converted to common stock,
        an
        additional 9,043,864 shares of common stock would be issued.
 
 The
        6%
        Convertible Preferred Stock ranks ahead of the common stock of the Company
        upon
        liquidation of the Company. The 6% Convertible Preferred Stock also ranks
        ahead
        of the common stock with respect to the payment of dividends. The dividend
        rate
        on the 6% Convertible Preferred Stock is $0.192 per share per annum (6%
        effective yield) and such dividends are fully cumulative, accruing, without
        interest, from the date of original issuance of the 6% Convertible Preferred
        Stock through the date of redemption or conversion thereof. The Corporation
        must
        redeem any outstanding 6% Convertible Preferred Stock on May 10, 2010. In
        connection with the transaction, the Company filed a certificate of designation
        for the 6% Convertible Preferred Stock with the Delaware Secretary of State
        on
        May 10, 2005. This filing constituted an amendment to the Company's certificate
        of incorporation, designating the terms, rights and preferences of a new
        series
        of preferred stock of the Company.
 
 The
        warrants are exercisable at the election of the holder into a total of 6,782,889
        shares of common stock at an initial exercise price of $0.96 per share (also
        subject to adjustment pursuant to anti-dilution provisions) on either a cash
        or
        cashless exercise basis. The warrants expire five years from the date of
        issuance.
 
 Pursuant
        to SFAS 133 and EITF Abstract No. 00-19, the embedded conversion feature
        associated with the 6% Convertible Preferred Stock and the warrants issued
        to
        the 6% Convertible Preferred Stock purchasers have been determined to be
        derivative instruments. Accordingly, the fair value of these derivative
        instruments has been recorded as a liability on the consolidated balance
        sheet
        with the corresponding amount recorded as a discount to the 6% Convertible
        Preferred Stock. Such discount is being accreted from the date of issuance
        to
        the redemption date of the 6% Convertible Preferred Stock and totaled $927,677
        for the period from the date of issuance (May 12, 2005) to December 31, 2005.
        The change in the fair value of the liability for derivative contracts totaled
        $(3,907,649) in 2005 and has been credited to Other income/(expense) in the
        consolidated statements of operations.
 
 The
        Company computes fair value of these derivatives using the Black-Scholes
        valuation model. The Black-Scholes model was developed for use in estimating
        the
        fair value of traded options that have no vesting restrictions and are fully
        transferable. In addition, option valuation models require the input of highly
        subjective assumptions, including the expected stock price volatility. The
        Company’s derivative instruments have characteristics significantly different
        from traded options, and the input assumptions used in the model can materially
        affect the fair value estimate. The assumptions used in this model to estimate
        fair value of each derivative instrument and the resulting value of the
        derivative liability as of December 31, 2005 are as follows:
 
 Warrants
              
              
              Embedded
                  conversion feature associated with the 6% Convertible Preferred
                  StockExercise/Conversion
                  Price
              
              $
              0.96
              
              $
              0.80Fair
                  Value of the Company’s Common Stock
              
              $
              0.58
              
              $
              0.58Expected
                  life in years
              
              
              4.4
              
              
              4.4Expected
                  volatility
              
              
              75
              %
              
              75
              %Expected
                  dividend yield
              
              
              0.0
              %
              
              0.0
              %Risk
                  free rate
              
              
              4.09
              %
              
              4.09
              %Calculated
                  fair value per share
              
              $
              0.29
              
              $
              0.31
 
 The
        6%
        Convertible Preferred Stock is Mandatorily Redeemable Preferred Stock as
        defined
        by SFAS 150 - *Accounting
        for Certain Financial Instruments with Characteristics of both Liabilities
        and
        Equity* ,
        and
        would also qualify as “Preferred Stocks Subject to Mandatory Redemption
        Requirements or Whose Redemption is Outside the Control of the Issuer” as
        defined by Accounting Series Release (“ASR”) No. 268 - *Redeemable
        Preferred Stocks* .
        The
        conversion feature associated with the 6% Convertible Preferred Stock is
        not a
        nonsubstantive or minimal feature and therefore the provisions of ASR No.
        268
        have been applied in classifying the 6% Convertible Preferred Stock separate
        from Stockholders’ Equity (Deficit).
 
 The
        Company incurred cash expenses totaling $700,859 related to this transaction
        which have been charged to Other income/(expense) in the statements of
        operations during the three months ended June 30, 2005. Additionally, the
        Company issued warrants to purchase a total of 639,844 shares of the Company’s
        common stock at an initial exercise price of $1.50 per share (also subject
        to
        adjustment pursuant to anti-dilution provisions) to the firms which acted
        as the
        placement agent and as financial advisor for this transaction. The warrants
        expire five years from the date of issuance. The fair value of these warrants
        totaled $290,000 and such amount was charged to Other income/(expense) and
        credited to Additional Paid-In Capital during the three months ended June
        30,
        2005.
 
 **NOTE
        1** **1:
        STOCKHOLDERS’ EQUITY**
 
 **Lighting
        Science Private Placement**
 In
        connection with the acquisition of Lighting Science, Inc., the Company undertook
        a private placement (“Lighting Science Private Placement”) of the Company’s
        common stock under the exemption of Section 505 of Regulation D of the
        Securities Act of 1933. 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. A total
        of $3,874,890 had been raised through the sale of 18,383,573 shares of the
        Company’s common stock. There have been no such sales of the Company’s stock
        subsequent to that date. The total of $3,874,890 includes $500,000 of accrued
        but unpaid interest on a note payable to Match. 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. The Trust had
        contemporaneously subscribed to purchase $500,000 of stock under the terms
        of
        the Lighting Science Private Placement.
  **NOTE
        12: EQUITY BASED COMPENSATION PLAN**
 
 Effective
        September 1, 2005, the Company implemented the
        Lighting Science Group Corporation 2005 Equity Based Incentive Compensation
        Plan. Awards granted under the 2005 Plan may include incentive stock options,
        which are qualified under Section 422 of the Internal Revenue Code (the "Code"),
        stock options other than incentive stock options, which are not qualified
        under
        Section 422 of the Code, stock appreciation rights, restricted stock, phantom
        stock, bonus stock and awards in lieu of obligations, dividend equivalents
        and
        other stock-based awards. Awards may be granted to employees, members of
        the
        Board of Directors, and consultants. The maximum number of shares reserved
        for
        the 2005 Plan is 5,000,000 shares. The 2005 Plan is administered by the
        Compensation Committee of the Board of Directors. Vesting periods and terms
        for
        awards are determined by the plan administrator. The exercise price of each
        stock option or stock appreciation right is equal to or greater than the
        market
        price of the Company's stock on the date of grant and no stock option or
        stock
        appreciation right granted shall have a term in excess of ten years.
 
 During
        2005, the Company issued 730,000 Incentive Stock Options to employees and
        directors and 50,000 Non-Qualified Stock Options to a consultant under the
        2005
        Plan. Such options have a term of four years and are vested one-third on
        the
        date of issuance and the subsequent two-thirds in equal parts on the first
        and
        second anniversaries thereof.
 
 The
        fair
        value of the options is determined by using a Black-Scholes pricing model
        that
        includes the following variables: 1) exercise price of the instrument, 2)
        fair
        market value of the underlying stock on date of grant, 3) expected life,
        4)
        estimated volatility, 5) expected dividend yield and 6) the risk-free interest
        rate. The Company utilized the following assumptions in estimating the fair
        value of the options granted during 2005:
 
 Exercise
                  price
              $0.87
                  - $0.45Fairmarket value of the underlying stock on date of grant
              $0.87
                  - $0.45Expected
                  life in years
              2.5Estimated
                  volatility
              75
              %Expected
                  dividend yield
              0.0
              %Risk
                  free rate
              4.09%
                  - 3.75
              %Calculatedfair
                  value per share
              $0.41
                  - $0.21
 
 As
        noted
        previously, the Black-Scholes model was not developed for use in valuing
        employee stock options, but was developed for use in estimating the fair
        value
        of traded options that have no vesting restrictions and are fully transferable.
        Because changes in the subjective assumptions can materially affect the fair
        value estimate, and because employee stock options have characteristics
        significantly different from those of traded options, the use of the
        Black-Scholes option pricing model may not provide a reliable estimate of
        the
        fair value of employee stock options. For purposes of this calculation, the
        Company has utilized the simplified method specified in Staff Accounting
        Bulletin No. 107 for estimating the expected life in years of the options.
        Under
        this approach, the expected term is presumed to be the mid-point between
        the
        vesting date and the end of the contractual term. The Company has estimated
        volatility of its stock based on the historical volatility of the Company’s
        common stock. The Company has estimated the future volatility of its common
        stock based on the actual volatility of its common stock over the past
        year.
 
 The
        fair
        value of the options issued 2005 totaled $266,700 of which $111,109 was recorded
        in operating expense in the consolidated statements of operations based on
        service conditions and vesting.
 
 A
        summary
        of the option awards under the Company’s 2005 Plan as of December 31, 2005 and
        changes during the year then ended is presented below:
 
 **Stock
                  Options**
              
              
              **Shares**
              
              
              **Weighted
                  Average Exercise Price**Outstanding
                  and exercisable, beginning ofperiod
              
              
              -
              
              
              -Granted
              
              
              780,000
              
              $
              0.71Exercised
              
              
              -
              
              
              -Forfeited
              
              
              (100,000
              )
              
              ($0.76
              )Outstanding
                  and exercisable, end ofperiod
              
              
              680,000
              
              $
              0.70Options
                  vested at endof
                  period
              
              
              140,000
              
              $
              0.71Weighted
                  average fair value of options granted during 2005
              
              $
              0.34
 
 At
        December 31, 2005, the average remaining term for outstanding stock options
        is
        3.8 years.
 A
        summary
        of the status of non-vested shares under the Company’s 2005 Plan as of December
        31, 2005, and changes during the year then ended is presented
        below:
 
 **Non-vested
                  Stock Options**
              
              
              **Shares**
              
              
              **Weighted
                  Average Grant Date Fair Value**Non-vested
                  atbeginning of period
              
              
              -
              
              
              -Granted
              
              
              780,000
              
              $
              0.34Vested
              
              
              (260,000
              )
              
              ($0.34
              )Forfeited
              
              
              (100,000
              )
              
              ($0.36
              )Non-vested
                  atend of period
              
              
              420,000
              
              $
              0.34
 
 As
        of
        December 31, 2005, there was a total of $155,591 of unrecognized compensation
        cost related to non-vested share-based compensation arrangements granted
        under
        the 2005 Plan. That cost is expected to be recognized over a weighted-average
        period of 2.5 years. The total fair value of shares vested during the year
        ended
        December 31, 2005, was $88,600. Note that this disclosure is provided in
        the
        aggregate for all awards that vest based on service conditions. There were
        no
        grants during the periods of awards subject to performance vesting.
 
 
 **NOTE
        13: COMMITMENTS AND CONTINGENCIES**
 
 **Leased
        office space**
 
 The
        Company occupies office space that is leased by an institutional shareholder
        of
        the Company who also provided financial advisory services to the company
        during
        2005. Effective with the termination of the financial advisory agreement
        as of
        September 30, 2005, the Company pays the shareholder $10,000 per month under
        a
        month to month agreement. Prior to that time, the Company was using the office
        space rent free. Such rent was not material. The Company has leased space
        in
        Sunrise, Florida for its research and development activities for a period
        of
        fifteen months commencing November 1, 2005. The space is being leased from
        a
        company that is also a contract manufacturer for the Company. For the period
        from November 1, 2005 through January 31, 2005 the company will pay rent
        of
        approximately $2,300 per month and for the period from February 1, 2005 through
        the end of the lease term, it will pay approximately $2,500 per month. The
        Company also leases space in Hong Kong and storage space in Dallas, TX on
        a
        month-to-month basis at a total rate of approximately $650 per month.
 
 From
        time
        to time, the Company may become involved in lawsuits or other legal proceedings
        through the ordinary course of operating its business. The Company does not
        believe these actions will have a material effect on its consolidated financial
        statements.
 
 **Financial
        advisory services**
 
 In
        2004,
        the Company 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, which was
        recorded in prepaid expenses. The agreement also provided for monthly payments
        of $10,000 during the one-year term of the agreement. This financial advisory
        agreement was terminated as of September 30, 2005.
 
 **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”). The
        joint venture agreement was subsequently executed on May 4, 2005.
 
 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
                  recorded in
                  prepaid expenses);
 ·
              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
        of $0.80 per share. 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.
 
 **Executive
        Compensation**
 
 As
        of
        December 31, 2005, the Company was obligated under the terms of employment
        contracts for five of its executives. The terms of the contracts generally
        range
        between one and three years, and provide for annual salaries ranging between
        $90,000 and $250,000 per year. The annual compensation for the Company’s
        executives under these agreements is expected to be approximately $910,000
        for
        2006.
 
 **Commission
        Agreements with Directors**
 
 Pursuant
        to a resolution passed by the Board of Directors on February 7, 2005, the
        Company is obligated to pay outside directors a commission of 3% of the proceeds
        for any Shared Savings Program contracts which a director is responsible
        for
        closing. During the second quarter or 2005, the Company entered into a sales
        commission agreement with J. Michael Poss, the chief financial officer of
        the
        Company at the time and a member of the board of directors, to pay Mr. Poss
        a
        commission of 6% of the contract proceeds for any Shared Savings Program
        and 3%
        of revenue for other product sales which he is responsible for closing.
 
 **Registration
        Rights Agreement**
 
 In
        connection with the issuance of 6% Convertible Preferred Stock (Note 10),
        the
        Company executed a Registration Rights Agreement with the purchasers thereof
        under which the Company agreed to register the common shares underlying the
        6%
        Convertible Preferred Stock and related warrants. The Registration Rights
        Agreement provides for liquidated damages in the event a registration statement
        is not declared effective by the SEC within 150 days of the May 12, 2005
        closing
        date or if the registration statement is not maintained effective for a period
        of two years following the closing date. The liquidated damages total an
        amount
        equal to two percent of the purchase price of the 6% Convertible Preferred
        Stock
        for each thirty (30) day period effectiveness of a registration statement
        is not
        maintained.
 
 In
        connection therewith, on
        July
        12, 2005, the Company filed on Form SB-2, a Registration Statement under
        the
        Securities Act of 1933, related to the sale of up to 30,727,420 shares of
        Lighting Science Group Corporation common stock, par value $.001 by the selling
        stockholders named therein. Of the common stock offered thereby, (i) 9,043,864
        shares of the common stock are issuable upon conversion of $7,235,086 aggregate
        principal amount of our 6% Convertible Preferred Stock, (ii) 7,422,733 shares
        of
        common stock are issuable upon exercise of warrants issued in connection
        with
        the sale of the 6% Convertible Preferred Stock, and (iii) 14,260,823 shares
        of
        common stock were acquired prior to May 12, 2005 by certain selling stockholders
        who agreed to the terms of a lock-up agreement dated as of May 12, 2005 and
        which may not be sold by the selling stockholders except pursuant to the
        lock-up
        agreement. The Company will not receive any proceeds from any sales made
        by the
        selling stockholders but will pay the expenses of the offering. We will,
        however, receive the proceeds from the exercise of the warrants issued to
        the
        selling stockholders if and when they are exercised. This registration was
        declared effective by the SEC on August 23, 2005, and remains effective as
        of
        the date of this filing.
 
 
 **NOTE
        14: SUBSEQUENT EVENT**
 
 In
        January 2006, a former executive of the Company returned to the Company 100,000
        shares of its common stock. The stock was returned to the Company pursuant
        to
        the termination of the former executive’s employment agreement with the Company.
        The shares were returned to the Company in return for the Company agreeing
        to
        waive certain obligations of the former executive under the terminated
        employment agreement. The returned shares will be cancelled.