**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549








**FORM
      10-KSB/A**





(Mark
      One)





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





**For
      the Fiscal Year Ended December 31, 2004**


OR


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





Commission
      File No. 0-25474





**LUNA
      TECHNOLOGIES INTERNATIONAL, INC.**


(Name
      of
      Small Business Issuer in its charter)





Delaware
            91-1987288(State
                of incorporation)
            (IRS
                Employer Identification No.)61A
                Fawcett RoadCoquitlam,
                British Columbia, Canada
            V3K
                6V2(Address
                of Principal Executive Office)
            Zip
                Code




Registrant's
      telephone number, including Area Code: (888) 955-8883 Securities registered
      pursuant to Section 12(b) of the Act: None Securities registered pursuant to
      Section 12(g) of the Act:





**Common
      Stock**


(Title
      of
      Class)





Check
      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 past 12 months
      (or
      for such shorter period 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 o





Check
      if
      disclosure of delinquent filers in response to Item 405 of Regulation S-B is
      not
      contained in this form, and no disclosure will be contained, to the best of
      the
      Registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any amendment
      to
      this Form 10-KSB. x





The
      Company's revenues for the most recent fiscal year were $657,165.





The
      aggregate market value of the voting stock held by non-affiliates of the Company
      as of April 15, 2005 was approximately $1,392,044.





As
      of
      April 15, 2005 the Company had 10,009,648 issued and outstanding shares of
      common stock.


**EXPLANATORY
        NOTE:**  **This
        Amended Annual Report on Form 10-KSB/A is being filed for the purpose of
        amending the form on which the Company previously filed its Annual Report
        on
        Form 10-KSB filed by the Company on April 25, 2005. This amended Annual Report
        is being filed for the sole purpose of modifying Item 3** ***Controls
        and Procedures*** **and Exhibits 31.1, 31.2, 32.1 and 32.2. In all other material respects this
        Amended Annual Report on Form 10-QSB is unchanged from the Annual Report
        on Form
        10-KSB/A filed by the Company on April 25, 2005.**











**FORM
        10-KSB**
  **FOR
        THE FISCAL YEAR ENDED DECEMBER 31, 2004**
 
 **INDEX**
 
 
 **PART
                  I**PageItem
                  1.
              Description
                  of Business
              1Item
                  2.
              Description
                  of Property
              3Item
                  3.
              Legal
                  Proceedings
              3Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              3**PART
                  II**Item
                  5.
              Market
                  for the Registrant's Common Equity andRelated
                  Stockholder Matters and Small Business Issuer Purchases ofEquity
                  Securities
              3Item
                  6.
              Management's
                  Discussion and Analysis or Plan of Operation
              4Item
                  7.
              Financial
                  Statements
              5Item
                  8.
              Changes
                  in and Disagreements with Accountants onAccounting
                  and Financial Disclosure
              5Item
                  8A.
              Controls
                  and Procedures
              5**PART
                  III**Item
                  9.
              Directors,
                  Executive Officers, Promoters and Control Persons; Compliancewith
                  Section 16(A) of the Exchange Act.
              5Item
                  10.
              Executive
                  Compensation
              6Item
                  11.
              Security
                  Ownership of Certain Beneficial Owners and Management andRelated
                  Stockholder Matters
              12Item
                  12.
              Certain
                  Relationships and Related Transactions
              13Item
                  13.
              Exhibits
              14**PART
                  IV**Item
                  14.
              Principal
                  Accountant Fees and Services
              15SIGNATURES





**ITEM
      1. DESCRIPTION OF BUSINESS**





The
      Company was incorporated on March 25, 1999 in Delaware to develop, manufacture
      and sell photoluminescent products (High Performance Photoluminescent Lighting,
      "HPPL") used for emergency lighting, signs and markings, wayfinding systems
      and
      novelty products with applications in marine, commuter, rail, subway, building
      and toy markets. The Company conducts business in Canada through its
      wholly-owned Canadian subsidiary, Luna Technologies (Canada) Ltd.





The
      Company's executive offices are located at 61B Fawcett Road, Coquitlam, British
      Columbia, Canada V3K 6V2. The Company's telephone number is


(604)
      526-5890, its facsimile number is (604) 526-8995, its email address is
      info@lunaplast.com, and its web site is www.lunaplast.com.





From
      the
      date of its incorporation and through December 31, 2004 the Company had
      cumulative losses of $(2,406,065). There can be no assurance that the Company
      will ever earn any profits.





Phosphorescent
      (also referred to as photoluminescent) materials emit light continuously when
      they are excited by ultraviolet or visible light. However, unlike fluorescent
      materials, when the excitation source is extinguished, phosphorescent materials
      continue to emit light. It is this light (called afterglow) that people refer
      to
      as "glow-in-the-dark". The afterglow decreases (or decays) over time after
      the
      excitation source has been extinguished.





Although
      many people associate the word "photoluminescence" with "glow-in-the-dark"
      toys
      and novelties, in the lighting industry, photoluminescent products such as
      marker tapes and signs are commonly used to delineate emergency escape routes
      and danger areas, and to mark equipment, pipes, tools and working and accident
      prevention clothing.





Photoluminescent
      signs and markers are used in a variety of situations, including office
      buildings, industrial sites, passenger ships, offshore drilling platforms,
      underground mines, and aircraft. The use of photoluminescent materials for
      life
      safety applications is recommended or mandated in numerous building codes,
      fire
      safety codes, and transportation standards.





Most
      photoluminescent products are composed of inorganic pigments that can be
      incorporated into paint, plastic films, enamels, and flexible and rigid molded
      plastics. Typical products include adhesive vinyl tapes, rigid polyvinyl
      chloride (PVC) marker strips, and silk-screened plastic signage.
      Photoluminescent enamel-coated sheet metal and ceramic products are also
      available.





The
      main
      pigment commonly used in photoluminescent glow-type products is a zinc sulphide
      compound emitting a yellowish-green light. This material performs well when
      subjected to high ambient lighting levels but the decay rate is rather rapid.
      The Company's current LUNAplast pigment material, Strontium Aluminate, has
      a
      performance level 20 x that of zinc-based products. In addition, the decay
      curve
      for strontium-based products is measured in hours as opposed to minutes for
      zinc-based items.




2




Strontium
      Aluminate is more expensive than zinc sulphide and takes slightly longer to
      charge, but can "store" more light, making it much more suitable for use in
      locations where ambient light levels are low. Strontium Aluminate also offers
      much brighter and longer-lasting photoluminescence.





Although
      Strontium Aluminate PL material is superior to products made with zinc sulphide,
      the process required to manufacture Strontium Aluminate PL is very complex
      and
      manufacturers were unable to cost effectively produce Strontium Aluminate PL
      products in commercial quantities.





Between
      January 1995 and October 1999, Douglas Sinclair, presently the chief executive
      officer of the Company's Canadian subsidiary, developed the proprietary
      technology, formulas and processes needed to commercially manufacture Strontium
      Aluminate PL products on a cost-effective basis. The resulting product, referred
      to by the Company as Lunaplast, is up to 20 x times brighter than commercial
      zinc sulphide products, and is clearly visible after many hours of total
      darkness. During this same period of time, Mr. Sinclair and Kimberly Landry,
      an
      officer and director of the Company, developed an advanced Strontium Aluminate
      HPPL material which is four times brighter than the Company's Lunaplast product.
      Mr. Sinclair and Ms. Landry filed a patent application pertaining to this
      invention with the U.S. Patent and Trademark Office in November 1997. For a
      nominal consideration Mr. Sinclair and Ms. Landry assigned the rights in
      November 1997 to the patent application and related technology to Luna
      Technologies Inc. ("LTI"), a corporation formed by Ms. Landry in December 1994.





In
      April
      1999 the Company acquired from LTI the rights to the patent application and
      related technology assigned to LTI by Mr. Sinclair and Ms. Landry. In
      consideration for this assignment, the Company agreed to pay LTI $90,000,
      without interest, on or before June 30, 2000. Subsequent to June 30, 2000,
      the
      Company paid this debt in full. As of March 30, 2004 the patent application
      had
      been placed in abeyance.





In
      November 1999, the Company acquired from Mr. Sinclair the proprietary technology
      required to manufacture Lunaplast into PVC sheets, vinyl rolls and paints as
      well as the trademark rights to these products. In consideration for the
      assignment of this technology and the trademarks, the Company paid Mr. Sinclair
      $60,000.





During
      2000 the Company developed the processes required to manufacturer Strontium
      Aluminate PL products using vacuum forming, extrusion, and injection molding
      techniques.





Lunaplast
      is available in flexible vinyl and rigid PVC sheets. In addition, a wide range
      of polymer compounds for extrusions and injection molding was added during
      the
      year. The substantial increase in performance opens up a completely new range
      of
      opportunities in life safety. Direct replacement of electrical exit signs
      (Underwriters Laboratories UL 924) is expected to be a market for
      photoluminescent materials in the near future.





The
      Company began producing Lunaplast on a commercial basis during fiscal 2000.





During
      the year ended December 31, 2004 one customer accounted for 43% of the Company's
      gross revenues. The Company is of the opinion that the loss of this customer
      would not have a material adverse effect on the Company.




3




**Manufacturing**





Lunaplast
      is a three-part laminate, consisting of one base layer of highly reflective
      white material of PVC or vinyl, one mid-layer of photoluminescent PVC or vinyl
      impregnated with the Company's proprietary Strontium Aluminate polymer compound,
      and one top layer of clear PVC or vinyl with UV and fire-resistant properties.





All
      aspects of the Company's manufacturing process are subcontracted to various
      third parties which formulate, mix and produce Lunaplast to the Company's
      specifications. Once the manufacturing process is complete, Lunaplast is sold
      to
      fabricators which use Lunaplast in a variety of end user products. All
      subcontractors involved in manufacturing Lunaplast have agreed to maintain
      the
      confidential nature of the Company's proprietary manufacturing technology.





The
      Company does not have any long-term agreements with any of the third parties
      involved in manufacturing Lunaplast. The Company believes that alternative
      manufacturers are available which could produce Lunaplast on short notice and
      without disrupting product delivery schedules.





**Sales
      and Marketing**





World
      markets for photoluminescent lighting products are in the marine (shipping
      and
      cruise lines), transportation and commuter industry, and in the commercial,
      institutional and industrial retrofit and new building construction sector,
      in
      which the need for photoluminescent emergency lighting and wayfinding signage
      systems has risen sharply over the last two decades. A third primary marker
      is
      "glow-in-the-dark" toys and novelties.





The
      Company believes that the world market for HPPL lighting is underdeveloped
      due
      largely to the low illumination delivered by zinc sulphide products. The Company
      plans to build interest and sales for Lunaplast products in established markets
      around the world. The Company's marketing plan includes advertising in trade
      magazines, exhibiting at industry tradeshows, direct mail campaigns, soliciting
      editorial coverage from naval architecture, building design, architecture and
      lighting industry publications and distributing product samples, videos and
      brochures to designers and developers. The Company's website will also be used
      as a means to distribute product information to interested parties quickly.





The
      Company markets its products through its officers and through independent sales
      representatives. As of April 15, 2005 the Company had independent sales
      representatives marketing Lunaplast in North America, Latin America, Korea
      and
      Australia.





**Competition**





No
      single
      company dominates the world marketplace. Instead, a number of small and
      medium-sized firms are active within regional markets in Europe, the U.S. and
      elsewhere. Some producers include companies such as Permalight AG of Germany
      (Europe and North America), Safe T Glow (UK and U.S.), Datrex (U.S.), Jalite
      (UK), Everglow (Europe) and Existalight (Europe and U.S.). It is difficult
      to determine annual sales volumes and revenues for these firms, as most are
      privately held.




4





Although
      there are several manufacturers and distributors of photoluminescent products
      the Company believes it has a significant advantage over its competitors as
      a
      result of its proprietary manufacturing processes and cost effective approach
      to
      the production of Strontium Aluminate-based HPPL materials in commercial
      quantities. The Company also plans to be competitive in the HPPL industry by
      developing advanced Strontium Aluminate materials, enhancing formulation and
      focusing on higher volumes with a resultant lower cost of production. During
      the
      twelve-month period ending December 31, 2005 the Company plans to spend
      approximately $100,000 on research relating to the development of advanced
      strontium aluminate PL materials.





**Office
      Space**





The
      Company rents on a month to month basis approximately 4,800 square feet of
      executive office space at 61A and 16.B Fawcett Road, Coquitlam, British Columbia
      at a monthly rental of CDN$3,490.





**Employees**





As
      of
      April 15, 2005 the Company had ten full-time employees. See Item 9 of this
      report. As of April 15, 2005 the Company did not have any part time employees.
      Contingent upon the Company raising sufficient capital, the Company plans to
      hire additional employees as may be required by the level of the Company's
      operations.





**ITEM
      2. DESCRIPTION OF PROPERTIES**





See
      Item
      1 of this report.





**ITEM
      3. LEGAL PROCEEDINGS.**





The
      Company is not engaged in any litigation, and the officers and directors
      presently know of no threatened or pending litigation in which it is
      contemplated that the Company will be made a party.





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





Not
      Applicable





**ITEM
      5. MARKET FOR COMMON EQUITY AND OTHER RELATED STOCK- HOLDER MATTERS.**





The
      Company's common stock is quoted on the Over the Counter Bulletin Board under
      the symbol "LTII". The following table presents the high and low closing prices
      for the common stock as reported by the NASD for each quarter beginning in
      April
      2001 when the Company's stock was first quoted. The prices reflect inter-dealer
      quotations without adjustments for retail mark-up, markdown or commissions,
      and
      do not necessarily represent actual transactions.


Quarter
                  Ending
              
              High
              
              Low3/31/02
              
              $
              0.71
              
              $
              0.416/30/02
              
              $
              1.10
              
              $
              0.759/30/02
              
              $
              0.87
              
              $
              0.3512/31/02
              
              $
              0.48
              
              $
              0.253/31/03
              
              $
              0.51
              
              $
              0.306/30/03
              
              $
              0.55
              
              $
              0.409/30/03
              
              $
              0.76
              
              $
              0.3512/31/03
              
              $
              0.76
              
              $
              0.553/31/04
              
              $
              1.15
              
              $
              0.436/30/04
              
              $
              1.00
              
              $
              0.259/30/04
              
              $
              0.40
              
              $
              0.1912/31/04
              
              $
              0.40
              
              $
              0.19


5




As
      of
      April 15, 2005 there were 94 record owners of the Company's common stock.





Holders
      of common stock are entitled to receive such dividends as may be declared by
      the
      Board of Directors out of funds legally available therefore and, in the event
      of
      liquidation, to share pro rata in any distribution of the Company's assets
      after
      payment of liabilities. The Board of Directors is not obligated to declare
      a
      dividend. The Company has not paid any dividends and the Company does not have
      any current plans to pay any dividends.





The
      provisions in the Company's Articles of Incorporation relating to the Company's
      preferred stock would allow the Company's directors to issue preferred stock
      with rights to multiple votes per share and dividends rights which would have
      priority over any dividends paid with respect to the Company's common stock.
      The
      issuance of preferred stock with such rights may make more difficult the removal
      of management even if such removal would be considered beneficial to
      shareholders generally, and will have the effect of limiting shareholder
      participation in certain transactions such as mergers or tender offers if such
      transactions are not favored by incumbent management.





**During
      the year ended December 31, 2004 the Company:**





1. Sold
      100,000
      units to one private investor at a price of $0.65 per unit. Each unit consisted
      of one common share and one warrant. Each warrant entitles the holder to
      purchase one additional common share of the Company at a price of $1.00 per
      share until February 26, 2006.





2. Sold
      35,000
      units to one private investor at a price of $1.00 per unit. Each unit consisted
      of one common share and one warrant. Each warrant entitles the holder to
      purchase one additional common share of the Company at a price of $1.00 per
      share until March 31, 2006.




3. Sold
      1,250,000 units to one private investor at a price of $0.20 per unit. Each
      unit
      consisted of one common share and one warrant. Each warrant entitles the holder
      to purchase one additional common share of the Company at a price of $0.30
      per
      share until September 3, 2006.





4. Issued
      954,000 shares of its common stock upon the exercise of options granted in
      accordance with the Company's Non-Qualified Stock Option Plan.





5. Issued
      597,812 shares of its common stock in accordance with the Company's Stock Bonus
      Plan.





The
      Company relied upon the exemption provided by Section 4(2) of the Securities
      Act
      of 1933 with respect to the issuance of shares referred to in subparts 1 through
      3.





The
      shares referred to in subparts 4 and 5 were registered by means of a
      registration statement on Form S-8.





**ITEM
      6. MANAGEMENT'S DISCUSSION AND ANALYSIS/ PLAN OF OPERATIONS**





Sales
      during the year ended December 31, 2004 were $537,165, an increase of $155,444
      or 41% from the previous year. Gross margin increased 11% to 50% over the same
      period in 2003 due to the Company's improvement in productivity and cost
      controls. Two customers amounted to 84% of total sales in 2003 and 60% of total
      sales during 2004.





During
      the year ended December 31, 2004 the Company received payments totaling $120,000
      from customers in connection with pricing agreements.





General
      and administrative expenses for the year ended December 31, 2004 increased
      with
      the addition of management, staff and overhead needed to facilitate the
      Company's growth and ongoing product development. During the year ended December
      31, 2004, stock-based compensation of $154,600 was expensed as consulting fees
      representing the fair value of stock options granted and $124,868 was expensed
      as consulting fees representing the fair value of 597,812 common shares issued
      pursuant to the Company's stock bonus plan.





During
      the year ended December 31, 2004, the Company's operations used $314,683 in
      cash
      and the Company purchased $5,912 of equipment. During this period the Company
      satisfied its cash requirements through sales of common stock in private
      placements of $357,000 and advances from related parties of $49,509. The Company
      made $39,996 in convertible debenture repayments, $8,338 in notes payable
      repayments and decreased the bank overdraft by $11,068.





Between
      December 2002 and January 2003 the Company borrowed $120,000 from a third party.
      Loan proceeds of $60,000 were received in December 2002 and the remaining
      $60,000 was received in January 2003. The loan is secured by all of the
      Company's assets and bears interest at a rate of 8% per year. The loan is to
      be
      repaid in 30 monthly principal payments of $3,333, commencing June 21, 2003,
      with a final principal payment of $20,010 due on December 21, 2005. Interest
      on the
      outstanding principal balance is payable monthly commencing June 21, 2003.
      The
      unpaid balance of the loan and interest may be converted at any time into
      restricted shares of the Company's common stock at a price of $1.20 per share
      during 2005.




6





The
      Company anticipates that its capital needs during the year ending December
      31,
      2005 will be as follows:





$600,000
      for corporate expenses, $100,000 for research relating to the development of
      advanced strontium aluminate PL materials, $360,000 for current liabilities
      and
      $56,797 for convertible debenture payments.





The
      Company does not have any available credit, bank financing or other external
      sources of liquidity. Due to the operating losses of the Company during the
      Company's initial year of operations, the Company's operations have not been
      a
      source of liquidity. At December 31, 2004 the Company had a working capital
      deficiency of approximately $254,000. The ability of the Company to continue
      as
      a going concern is dependent on the Company raising additional capital and
      on
      future profitable operations. To that end the Company is seeking financing
      to
      expand its operations and for working capital purposes. There can be no
      assurance that the Company will be successful in obtaining additional funding.





**Critical
      Accounting Policies And Estimates**





Management's
      Discussion and Analysis of Financial Condition and Results of Operations
      discusses the Company's consolidated financial statements, which have been
      prepared in accordance with accounting principles generally accepted in the
      United States of America. The preparation of these financial statements requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities at the date of the financial statements and the reported
      amounts of revenues and expenses during the reporting period. On an on-going
      basis, management evaluates its estimates and judgments, including those related
      to revenue recognition, intangible assets, financing operations, and
      contingencies and litigation. Management bases its estimates and judgments
      on
      historical experience and on various other factors that are believed to be
      reasonable under the circumstances, the results of which form the basis for
      making judgments about the carrying value of assets and liabilities that are
      not
      readily apparent from other sources. Actual results may differ from these
      estimates under different assumptions or conditions. These accounting policies
      are described in the notes to the consolidated financial statements for the
      fiscal year ended December 31, 2004 which are included as part of this report.





**ITEM
      7. FINANCIAL STATEMENTS**





See
      the
      financial statements attached to this report.





**ITEM
      8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS**





None.




7




**ITEM
      8A. CONTROLS AND PROCEDURES**


(a)
          Evaluation of Disclosure Controls and Procedures. As of the end of our
        fiscal year ended December 31, 2004, we conducted an evaluation, under the
        supervision and with the participation of Kimberly Landry, our chief executive
        officer and chief financial officer of our disclosure controls and procedures
        (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based
        upon this evaluation, we have concluded that our disclosure controls and
        procedures are effective to ensure
        the timely collection, evaluation and disclosure of information relating
        to our
        company and our consolidated subsidiaries, that would potentially be subject
        to
        disclosure under the Securities Exchange Act of 1934, as amended, and the
        rules
        and regulations promulgated there under.
 
 (b)
          Changes in internal controls.   There was no change in our internal
        controls or in other factors that could affect these controls during our
        last
        fiscal quarter that has materially affected, or is reasonably likely to
        materially affect, our internal control over financial reporting.




**ITEM
      9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS**





The
      following sets forth certain information concerning the present management
      of
      the Company:





Name
            
            Age
            
            Position
                with CompanyScott
                Bullis
            
            42
            
            PresidentKimberly
                Landry
            
            39
            
            Chief
                Executive Officer, Principal Financial Officer, Chief Accounting
                Officer,
                Secretary and a DirectorRobert
                H. Humber
            
            60
            
            Director




Kimberly
      Landry was the Company's President between September 1, 2001 and August 31,
      2004. On August 31, 2004 Ms. Landry resigned as the Company President and was
      appointed the Company's Chief Executive Officer. Ms. Landry was appointed the
      Company's Principal Financial and Chief Accounting Officer on April 5, 2005.
      Ms.
      Landry has been the Secretary of the Company, as well as a director since April
      1999. Since December 1994 Ms. Landry has also been an officer and director
      of
      LTI.





Scott
      Bullis has the Company Presidents since August 31, 2004. Between September
      2000
      and October 2003 Mr. Bullis was the Chief Executive Officer of One5 Corporation,
      a business which provided technology to wireless telecommunications companies.
      Between June 1999 and June 2000 Mr. Bullis was Vice President of Marketing
      for
      iEngineer.com, Inc.





Robert
      Humber was the President of the Company between September 1, 2001 and April
      1999. Mr. Humber has been a director of the Company since April 1999. Between
      July 1996 and November 1999 Mr. Humber was the president of LTI. Prior to July
      1996 Mr. Humber worked with Douglas Sinclair and Kimberly Landry in developing
      photoluminescent products. For the past twenty-three years Mr. Humber has also
      been an independent investigator and security consultant providing services
      to
      law enforcement agencies and private industry.




8




The
      Company does not have a compensation committee. The Company's Board of Directors
      serves as the Company's Audit Committee. None of the Company's directors
      qualifies as a financial expert.





The
      Company has adopted a Code of Ethics which is applicable to the Company's
      principal executive, financial, and accounting officers and persons performing
      similar functions. The Code of Ethics is available on the Company's website
      located at www.lunaplast.com.





**Management
      Changes**




**Effective
      August 31, 2004:**





o
            Douglas
                Sinclair resigned as an officer of the Company and as an officer
                of the
                Company's subsidiaries.


o
            To
                satisfy amounts owed by the Company to Mr. Sinclair for management
                fees
                the Company agreed to pay Mr. Sinclair CDN$187,000 in a series of
                installments with the last installment due January 15, 2007.


o
            Mr.
                Sinclair agreed to maintain the confidential nature of the Company's
                trade
                secrets and proprietary technology.


o
            Mr.
                Sinclair agreed that he would not compete with the Company until
                July,
                2006.


o
            Kimberly
                Landry was appointed the Company's Chief Executive Officer.


o
            Scott
                Bullis was appointed the Company's President.





Brian
      Fiddler resigned as the Company's Principal Financial and Accounting Officer,
      and as a director of the Company on April 4, 2005. On that same date, Ms. Landry
      was appointed the Company's Principal Financial and Chief Accounting Officer.





**ITEM
      10. EXECUTIVE COMPENSATION**





The
      following table sets forth in summary form the compensation received by the
      Company's executive officers during the fiscal years ended December 31, 2002,
      2003, and 2004.





Annual
                Compensation
            
            Long
                Term CompensationOther
            
            RestrictedAnnual
            
            Stock
            
            OptionsFiscal
            
            Salary
            
            Bonus
            
            Compensation
            
            Awards
            
            GrantedName
                and Principal Position
            
            Year
            
            (1)
            
            (2)
            
            (3)
            
            (4)
            
            (5)Kimberly
                Landry,
            
            
            2004
            
            $
            55,705
            
            $
            46,750
            
            
            500,000President
                between
            
            
            2003
            
            $
            45,120
            
            
            —
            
            
            —
            
            
            —
            
            
            —September
                1, 2001
            
            
            2002
            
            $
            20,000
            
            
            —
            
            
            —
            
            
            —
            
            
            —and
                August 31, 2004,and
                Chief ExecutiveOfficer
                since August 31, 2004Scott
              Bullis,
            
            
            2004
            
            $
            22,016
            
            
            —
            
            
            —
            
            
            —
            
            
            659,200President
                since August 31, 2004





(1)
            The
                dollar value of base salary (cash and non-cash) received.


(2)
            The
                dollar value of bonus (cash and non-cash) received.


(3)
            Any
                other annual compensation not properly categorized as salary or bonus,
                including perquisites and other personal benefits, securities or
                property.


(4)
            Amounts
                reflect the value of the shares of the Company's common stock issued
                as
                compensation for services.





The
      table
      below shows the number of shares of the Company's common stock owned by the
      officers listed above, and the value of such shares as of December 31, 2004.





Name
            
            Shares
            
            ValueKimberly
                Landry
            
            
            2,025,000
            
            $
            790,000Scott
                Bullis
            
            
            —
            
            
            —




(5)
            The
                shares of common stock to be received upon the exercise of all stock
                options granted during the fiscal years shown in the table.






9




The
      Company's Canadian subsidiary had an employment agreement with Kimberly Landry
      whereby the subsidiary has agreed to pay Ms. Landry a salary of CDN$7,500 per
      month.





Mr.
      Bullis has an Employment Agreement with the Company which provides that the
      Company will pay Mr. Bullis CDN$7,500 per month. The monthly salary payable
      to
      Mr. Bullis will be renegotiated at the request of either Mr. Bullis or the
      Company during the term of the Employment Agreement. In the event that the
      Company and Mr. Bullis cannot agree on any increase in salary, the monthly
      salary payable to Mr. Bullis will be increased on an annual basis by the greater
      of (i) 15% or (ii) the percentage which is the average percentage increase
      of
      all compensation paid to the Company's officers during the previous twelve
      months. The Employment Agreement with Mr. Bullis may be terminated by either
      the
      Company or Mr. Bullis on thirty days notice.





In
      addition to his compensation Mr. Bullis was granted options in accordance with
      the following terms:





Shares
                Issuable Upon
            
            Option
                Exercise
            
            ExpirationExercise
                of Option
            
            Price
                (1)
            
            Date52,800
            
            
            US
                $0.35
            
            
            August
                26, 20076,400
            
            
            US
                $0.75
            
            
            August
                26, 2007400,000
                (1)
            
            
            US
                $0.35
            
            
            August
                26, 2007200,000
                (1)
            
            
            US
                $0.50
            
            
            August
                26, 2007





(1)
            Options
                will vest in equal monthly portions over a period of twenty-four
                months
                beginning on July 26, 2004.





Mr.
      Bullis is also entitled to participate in any medical or other benefit plans
      that are offered to the Company's employees generally.





The
      Company's Board of Directors may increase the compensation paid to the Company's
      officers depending upon the results of the Company's future operations.





**Long
      Term Incentive Plans - Awards in Last Fiscal Year**





None.





**Employee
      Pension, Profit Sharing or Other Retirement Plans**





Except
      as
      provided in the Company's employment agreements with its executive officers,
      the
      Company does not have a defined benefit, pension plan, profit sharing or other
      retirement plan, although the Company may adopt one or more of such plans in
      the
      future.





**Compensation
      of Directors**





Standard
      Arrangements. At present the Company does not pay its directors for attending
      meetings of the Board of Directors, although the Company may adopt a director
      compensation policy in the future. The Company has no standard arrangement
      pursuant to which directors of the Company are compensated for any services
      provided as a director or for committee participation or special assignments.





Other
      Arrangements. During the year ended December 31, 2004, and except as disclosed
      elsewhere in this report, no director of the Company received any form of
      compensation from the Company.





**Stock
      Option and Bonus Plans**





The
      Company has an Incentive Stock Option Plan, a Non-Qualified Stock Option Plan
      and a Stock Bonus Plan. A summary description of each Plan follows. In some
      cases these three Plans are collectively referred to as the "Plans". None of
      the
      plans have been approved by the Company's shareholders.





Incentive
      Stock Option Plan. The Incentive Stock Option Plan authorizes the issuance
      of
      shares of the Company's common stock to persons that exercise options granted
      pursuant to the Plan. Only officers, directors and key employees of the Company
      may be granted options pursuant to the Incentive Stock Option Plan.




10





In
      order
      to qualify for incentive stock option treatment under the Internal Revenue
      Code,
      the following requirements must be complied with:





1.
            Options
                granted pursuant to the Plan must be exercised no later than:




(a)
            The
                expiration of thirty (30) days after the date on which an option
                holder's
                employment by the Company is terminated.





(b)
            The
                expiration of one year after the date on which an option holder's
                employment by the Company is terminated, if such termination is due
                to the
                Employee's disability or death.





2.
            In
                the event of an option holder's death while in the employ of the
                Company,
                his legatees or distributees may exercise (prior to the option's
                expiration) the option as to any of the shares not previously exercised.





3.
            The
                total fair market value of the shares of Common Stock (determined
                at the
                time of the grant of the option) for which any employee may be granted
                options which are first exercisable in any calendar year may not
                exceed
                $100,000.





4.
            Options
                may not be exercised until one year following the date of grant.
                Options
                granted to an employee then owning more than 10% of the Common Stock
                of
                the Company may not be exercisable by its terms after five years
                from the
                date of grant.





5.
            The
                purchase price per share of Common Stock purchasable under an option
                is
                determined by the Committee but cannot be less than the fair market
                value
                of the Common Stock on the date of the grant of the option (or 110%
                of the
                fair market value in the case of a person owning the Company's stock
                which
                represents more than 10% of the total combined voting power of all
                classes
                of stock).





Non-Qualified
      Stock Option Plan. The Non-Qualified Stock Option Plan authorizes the issuance
      of shares of the Company's common stock to persons that exercise options granted
      pursuant to the Plan. The Company's employees, directors, officers, consultants
      and advisors are eligible to be granted options pursuant to the Plan, provided
      however that bona fide services must be rendered by such consultants or advisors
      and such services must not be in connection with the offer or sale of securities
      in a capital-raising transaction. The option exercise price is determined by
      the
      Committee but cannot be less than the par value of the Company's Common Stock
      on
      the date the option is granted.





Options
      granted pursuant to the Plan not previously exercised terminate upon the date
      specified when the option was granted.





Stock
      Bonus Plan. The Company's Stock Bonus Plan allows for the issuance of shares
      of
      common stock to the Company's employees, directors, officers, consultants and
      advisors; provided, however, that bona fide services must be rendered by
      consultants or advisors and such services must not be provided in connection
      with promoting the Company's common stock or a capital-raising transaction.





Other
      Information Regarding the Plans. The Plans are administered by the Company's
      Board of Directors. The Board of Directors has the authority to interpret the
      provisions of the Plans and supervise the administration of the Plans. In
      addition, the Board of Directors is empowered to select those persons to whom
      shares or options are to be granted, to determine the number of shares subject
      to each grant of a stock bonus or an option and to determine when, and upon
      what
      conditions, shares or options granted under the Plans will vest or otherwise
      be
      subject to forfeiture and cancellation.




11





In
      the
      discretion of the Board of Directors, any option granted pursuant to the Plans
      may include installment exercise terms such that the option becomes fully
      exercisable in a series of cumulating portions. The Board of Directors may
      also
      accelerate the date upon which any option (or any part of any options) is first
      exercisable. Any shares issued pursuant to the Stock Bonus Plan and any options
      granted pursuant to the Incentive Stock Option Plan or the Non-Qualified Stock
      Option Plan will be forfeited if the "vesting" schedule established by the
      Board
      of Directors at the time of the grant is not met. For this purpose, vesting
      means the period during which the employee must remain an employee of the
      Company or the period of time a non-employee must provide services to the
      Company. At the time an employee ceases working for the Company (or at the
      time
      a non-employee ceases to perform services for the Company), any shares or
      options not fully vested will be forfeited and cancelled. In the discretion
      of
      the Board of Directors payment for the shares of Common Stock underlying options
      may be paid through the delivery of shares of the Company's Common Stock having
      an aggregate fair market value equal to the option price, provided such shares
      have been owned by the option holder for at least one year prior to such
      exercise. A combination of cash and shares of Common Stock may also be permitted
      at the discretion of the Board of Directors.





Options
      are generally non-transferable except upon death of the option holder. Shares
      issued pursuant to the Stock Bonus Plan will generally not be transferable
      until
      the person receiving the shares satisfies the vesting requirements imposed
      by
      the Board of Directors when the shares were issued.





The
      Board
      of Directors of the Company may at any time, and from time to time, amend,
      terminate, or suspend one or more of the Plans in any manner it deems
      appropriate, provided that such amendment, termination or suspension cannot
      adversely affect rights or obligations with respect to shares or options
      previously granted. The Board of Directors may not, without shareholder
      approval: make any amendment which would materially modify the eligibility
      requirements for the Plans; increase or decrease the total number of shares
      of
      Common Stock which may be issued pursuant to the Plans except in the case of
      a
      reclassification of the Company's capital stock or a consolidation or merger
      of
      the Company; reduce the minimum option price per share; extend the period for
      granting options; or materially increase in any other way the benefits accruing
      to employees who are eligible to participate in the Plans.





The
      Plans
      are not qualified under Section 401(a) of the Internal Revenue Code, nor are
      they subject to any provisions of the Employee Retirement Income Security Act
      of
      1974.





**Summary.**





The
      following tables present certain information as of April 15, 2005 concerning
      the
      stock options and stock bonuses granted by the Company. Each option represents
      the right to purchase one share of the Company's common stock.




Total
            
            Shares
            
            
            
            RemainingShares
            
            Reserved
                for
            
            
            
            Shares
                Options/Reserved
            
            Outstanding
            
            Issued
                As
            
            SharesName
                of Plan
            
            Under
                Plan
            
            Options
            
            Stock
                Bonus
            
            Under
                PlanIncentive
                Stock Option Plan
            
            
            750,000
            
            
            —
            
            
            N/A
            
            
            445,000Non-Qualified
                Stock Option Plan
            
            
            4,000,000
                (1
            )
            
            770,200
            
            
            N/A
            
            
            2,193,130Stock
                Bonus Plan
            
            
            1,250,000
                (1
            )
            
            N/A
            
            
            777,812
            
            
            472,188





(1)
            Reflects
                amendment to Plan in February 2005 which increased number of shares
                issuable upon exercise of options granted pursuant to the Plan.






12


The
      persons listed below have received options or shares of the Company's common
      stock as a stock bonus:





Incentive
      Stock Options





Shares
            
            
            
            
            
            Expiration
            
            Options
                Expired/Subject
            
            Exercise
            
            Date
                of
            
            Date
                of
            
            Exercised
                as ofOption
                Holder
            
            To
                Option
            
            Price
            
            Grant
            
            Option
            
            April
                15, 2005Employee
            
            
            5,000
            
            $
            0.50
            
            
            03/04/03
            
            
            03/04/04
            
            
            5,000Consultant
            
            
            300,000
            
            $
            0.23
            
            
            10/7/04
            
            
            10/7/06
            
            
            300,000305,000





**Non-Qualified
      Stock Options**




Shares
            
            
            
            
            
            Expiration
            
            Options
                Expired/Subject
            
            Exercise
            
            Date
                of
            
            Date
                of
            
            Exercised
                as ofOption
                Holder
            
            To
                Option
            
            Price
            
            Grant
            
            Option
            
            April
                15, 2005Brian
                Fiddler
            
            
            40,000
            
            $
            0.10
            
            
            08/15/03
            
            
            08/30/08
            
            
            40,000Brian
                Fiddler
            
            
            40,000
            
            $
            0.18
            
            
            08/15/03
            
            
            08/30/08
            
            
            20,000Brian
                Fiddler
            
            
            20,000
            
            $
            0.50
            
            
            08/15/03
            
            
            08/30/08Brian
                Fiddler
            
            
            20,000
            
            $
            0.25
            
            
            08/15/03
            
            
            08/30/08Brian
                Fiddler
            
            
            20,000
            
            $
            0.40
            
            
            08/15/03
            
            
            08/30/08Brian
                Fiddler
            
            
            20,000
            
            $
            0.60
            
            
            08/15/03
            
            
            08/30/08Scott
                Bullis
            
            
            52,800
            
            $
            0.35
            
            
            07/26/04
            
            
            08/26/07Scott
                Bullis
            
            
            6,400
            
            $
            0.75
            
            
            07/26/04
            
            
            08/26/07Scott
                Bullis
            
            
            400,000
            
            $
            0.35
            
            
            07/26/04
            
            
            08/26/07Scott
                Bullis
            
            
            200,000
            
            $
            0.50
            
            
            07/26/04
            
            
            08/26/07Kimberly
                Landry
            
            
            359,000
            
            $
            0.04
            
            
            10/06/04
            
            
            11/04/04
            
            
            359,000KimberlyLandry
            
            
            130,000
            
            $
            0.04
            
            
            10/06/04
            
            
            11/18/04
            
            
            130,000Kimberly
                Landry
            
            
            11,000
            
            $
            0.04
            
            
            10/06/04
            
            
            10/06/14Other
                employees and consultants
            
            
            572,670
            
            $
            0.05/$0.50
            
            
            *
            
            
            *
            
            
            572,6701,891,870
            
            
            
            
            
            
            
            
            
            
            
            1,121,670





*
            Various
                dates







13




Stock
      Bonuses


Shares
                IssuedName
            
            as
                Stock Bonus
            
            Date
                IssuedBrian
                Fiddler
            
            
            18,000
            
            
            8/15/03Kimberly
                Landry
            
            
            205,000
            
            
            10/04/04Brian
                Fiddler
            
            
            30,000
            
            
            10/04/04Robert
                Humber
            
            
            100,000
            
            
            10/04/04Douglas
                Sinclair
            
            
            175,000
            
            
            10/04/04Kimberly
                Landry
            
            
            20,000
            
            
            12/31/04Brian
                Fiddler
            
            
            20,000
            
            
            12/31/04Kimberly
                Landry
            
            
            10,000
            
            
            01/25/05Brian
                Fiddler
            
            
            10,000
            
            
            01/25/05Other
                employees and consultants
            
            
            189,812
            
            
            Various
                dates777,812





Options
      Granted and Exercised During Year Ended December 31, 2004 and Year-End Option
      Values





The
      tables below present information concerning the options granted and exercised
      during the year ended December 31, 2004 to the persons named below and the
      fiscal year-end value of all unexercised options (regardless of when granted)
      held by these persons. The options shown below were all Non-Qualified Stock
      Options.




%
                of TotalOptionsGranted
                to
            
            ExerciseOptions
            
            Employees
                in
            
            Price
                Per
            
            ExpirationName
            
            Granted
                (#)
            
            Fiscal
                Year
            
            Share
            
            DateKimberly
                Landry
            
            
            489,000
            
            
            42
            %
            $
            0.04
            
            
            11/04Kimberly
                Landry
            
            
            11,000
            
            
            1
            %
            $
            0.04
            
            
            10/14Scott
                Bullis
            
            
            659,000
            
            
            57
            %
            
            Various
            
            
            8/07Brian
                Fiddler (5)
            
            
            —
            
            
            —
            
            
            —
            
            
            —Robert
                H. Humber
            
            
            —
            
            
            —
            
            
            —
            
            
            —





Value
                (in $) ofUnexercisedNumber
                of
            
            In-the-MoneyUnexercised
            
            Options
                at FiscalShares
            
            
            
            Options
                (3)
            
            Year-End
                (4)Acquired
                On
            
            Value
            
            Exercisable/
            
            Exercisable/Name
            
            Exercise
                (1)
            
            Realized
                (2)
            
            Unexercisable
            
            UnexercisableKimberly
                Landry
            
            
            489,000
            
            $
            148,990
            
            
            11,000/—
            
            $
            4,290/--Scott
                Bullis
            
            
            —
            
            
            —
            
            
            —
            
            
            —Brian
                Fiddler (5)
            
            
            —
            
            
            —
            
            
            —
            
            
            —Robert
                H. Humber
            
            
            —
            
            
            —
            
            
            —
            
            
            —





(1)
            The
                number of shares received upon exercise of options during the year
                ended
                December 31, 2004.


(2)
            With
                respect to options exercised during the Company's year ended December
                31,
                2004, the dollar value of the difference between the option exercise
                price
                and the market value of the option shares purchased on the date of
                the
                exercise of the options.


(3)
            The
                total number of unexercised options held as of December 31, 2004,
                separated between those options that were exercisable and those options
                that were not exercisable.


(4)
            For
                all unexercised options held as of December 31, 2004, the market
                value of
                the stock underlying those options as of December 31, 2004.


(5)
            Brian
                Fiddler resigned as an officer and director of the Company on April
                4,
                2005.






14




The
      table
      below shows the weighted average exercise price of the outstanding options
      granted pursuant to the Company's Incentive and Non-Qualified Stock Option
      Plans
      as of December 31, 2004. The Company's Incentive and Non-Qualified Stock Option
      Plans were not approved by the Company's shareholders.





Number
                of SecuritiesRemaining
                AvailableNumber
            
            
            
            For
                Future Issuanceof
                Securities
            
            
            
            Under
                Equityto
                be Issued
            
            Weighted-Average
            
            Compensation
                PlansUpon
                Exercise
            
            Exercise
                Price of
            
            (Excluding
                Securitiesof
                Outstanding
            
            of
                Outstanding
            
            Reflected
                inPlan
                Category
            
            Options
                [a]
            
            Options
            
            Column
                (a))Incentive
                Stock
            
            
            —
            
            
            —
            
            
            445,000Option
                PlanNon-Qualified
                Stock
            
            
            770,200
            
            $
            0.39
            
            
            2,193,130Option
                Plan





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





The
      following table sets forth the number of and percentage of outstanding shares
      of
      common stock owned by the Company's officers, directors and those shareholders
      owning more than 5% of the Company's common stock as of April 15, 2005.





Shares
                ofName
                and Address
            
            Common
                Stock (1)
            
            Percent
                of ClassKimberly
                Landry
            
            
            2,025,000
            
            
            21
            %1653
                Plateau CrescentCoquitlam,
                British ColumbiaCanada
                V3B 3E3


Scott
                Bullis
            
            
            —
            
            
            —1204
                - 939 Beatty St.Vancouver,
                British ColumbiaCanada,
                V6C 3Z1Robert
                H. Humber
            
            
            100,000
            
            
            1
            %13058
                1/2 39th Ave., N.ESeattle,
                WA 98125-4614Douglas
                Sinclair
            
            
            1,584,000
            
            
            16
            %1653
                Plateau CrescentCoquitlam,
                British ColumbiaCanada
                V3B 3E3Robert
                Young
            
            
            1,250,000
            
            
            12.9
            %6687
                Nelson St.West
                Vancouver, British ColumbiaCanada
                V7W 2A5All
                Officers and Directors as a Group (3 persons)
            
            
            2,125,000
            
            
            22
            %





*
            Less
                than 1%


(1)
            Excludes
                shares issuable upon the exercise of options or warrants held by
                the
                following persons:






15




Shares
                Issuable
              Upon
                Exercise ofName
            
            Options
                or Warrants ExercisableKimberly
                Landry
            
            
            11,000Scott
                Bullis
            
            
            659,000Robert
                H. Humber
            
            
            —





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





In
      April
      1999 the Company issued shares of its common stock to the persons, in the
      amounts, and for the consideration set forth below:





NumberName
            
            of
                Shares
            
            ConsiderationRobert
                H. Humber
            
            
            800,000
            
            $
            800Kimberly
                Landry
            
            
            1,580,000
            
            $
            1,580Other
                third parties
            
            
            2,120,000
            
            $
            2,120




In
      April
      1999 the Company acquired from LTI, a corporation formed by Kimberly Landry
      in
      December 1994, the rights to the Company's patent application and related
      technology. The patent application and related technology were assigned to
      LTI
      by Ms. Landry and Douglas Sinclair in November 1997. In consideration for the
      assignment of these rights, the Company paid LTI $90,000 during the year ended
      December 31, 2000. As of April 14, 2005 the patent application assigned to
      the
      Company was pending.





Ms.
      Landry is an officer and director of the Company. Mr. Sinclair was an officer
      of
      the Company prior to August 31, 2004. See "Management Changes" in Item 9 of
      this
      report for information concerning the resignation of Mr. Sinclair.





In
      November 1999, the Company acquired from Mr. Sinclair the proprietary technology
      required to manufacture Lunaplast into PVC sheets, vinyl rolls and paints as
      well as the trademark rights to these products. In consideration for the
      assignment of this technology and the trademarks, the Company paid Mr. Sinclair
      $60,000 during the year ended December 31, 2000.





During
      the year ended December 31, 2000 the Company borrowed $60,000 from Ms. Landry.
      During the year ended December 31, 2003 the Company issued 225,000 shares of
      its
      common stock to Ms. Landry in payment of this debt.





In
      January 2001 the Company acquired from LTI office and production equipment,
      as
      well as the rights to certain tradenames used by the Company. In consideration
      for these assets the Company agreed to pay LTI $41,142 prior to January 1,
      2006.





**ITEM
      13. EXHIBITS AND REPORTS ON FORM 8-K**





Exhibit
                Number
            Exhibit
                Name
            Page
                NumberExhibit
                3
            Articles
                of Incorporation and Bylaws
            *Exhibit
                4
            Instruments
                Defining the Rights of Security HoldersExhibit
                4.1
            Incentive
                Stock Option Plan
            **Exhibit
                4.2
            Non-Qualified
                Stock Option Plan
            **Exhibit
                4.3
            Stock
                Bonus Plan
            **Exhibit
                10
            Material
                ContractsExhibit
                10.1
            Agreement
                relating to purchase of patent rights
            *Exhibit
                10.2
            Assignment
                of patent rights
            *


Exhibit
                10.3
            Agreement
                relating to purchase of proprietary technology and
                trademarks
            *Exhibit
                10.4
            Assignment
                of trademarks
            *Exhibit
                10.5
            Non-Compete
                Agreement
            *Exhibit
                23
            Accountants'
                ConsentExhibit
                31
            Rule
                13a-14(a)/15d-14(a) certificationsExhibit
                32
            Section
                1350 certifications





*
              Incorporated
                  by reference to the same exhibit filed as part of the Company's
                  Registration Statement on Form
                  10-SB.
 **
              Incorporated by reference to the
                same exhibit
                filed as part of the Company's Registration Statement on Form S-8
                (Commission File # 333-112647).






16


**8-K
      Reports**





During
      the quarter ending December 31, 2004 the Company did not file any reports on
      Form 8-K.





**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**





Labonte
      & Co. served as the Company's independent public accountants during the
      fiscal year ended December 31, 2003. Effective January 1, 2004, LaBonte &
Co. merged with Dale Matheson Carr-Hilton Chartered Accountants. Dale Matheson
      Carr-Hilton LaBonte served as the Company's independent public accountants
      during the fiscal year ended December 31, 2004.





The
      following table sets forth the aggregate fees billed to the Company for the
      years ended December 31, 2003 and 2004 by LaBonte & Co. and by Dale Matheson
      Carr-Hilton LaBonte.





2003
            
            2004Audit
                Fees
            
            $
            17,600
            
            $
            18,297Audit-Related
                Fees
            
            
            —
            
            
            —Financial
                Information Systems
            
            
            —
            
            
            —Design
                and Implementation Fees
            
            
            —
            
            
            —Tax
                Fees
            
            
            —
            
            
            —All
                Other Fees
            
            
            —
            
            
            —




Audit
      fees represent amounts billed for professional services rendered for the audit
      of the Company's annual financial statements and the reviews of the financial
      statements included in the Company's Forms 10-Q for the fiscal year. Before
      LaBonte & Co. or Dale Matheson Carr-Hilton LaBonte was engaged by the
      Company to render audit services, the engagement was approved by the Company's
      Board of Directors.




17





**LUNA
      TECHNOLOGIES INTERNATIONAL, INC.**


**FINANCIAL
      STATEMENTS**





DECEMBER
      31, 2004





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Stockholders and Board of Directors of Luna Technologies International,
      Inc.





We
      have
      audited the consolidated balance sheets of Luna Technologies International,
      Inc.
      as at December 31, 2004 and 2003 and the consolidated statements
      of operations, stockholders' equity and cash flows for the years then ended.
      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 an audit to obtain reasonable assurance whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, these consolidated financial statements present fairly, in all material
      respects, the financial positions of the Company as at December 31, 2004 and
      2003 and the results of its operations and its cash flows and the changes in
      stockholders' equity for the years then ended in accordance with generally
      accepted accounting principles in the United States.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As discussed in Note 1 to the
      financial statements, the Company has a working capital deficiency and has
      incurred losses since inception raising substantial doubt about the Company's
      ability to continue as a going concern. Management's plans in regard to these
      matters are also described in Note 1. The financial statements do not include
      any adjustments that might result from the outcome of this uncertainty.





"Dale
      Matheson Carr-Hilton LaBonte"





**CHARTERED
      ACCOUNTANTS**





Vancouver,
      B.C.


Canada


March
      31,
      2005




18


**LUNA
      TECHNOLOGIES INTERNATIONAL, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


December
            
            December31,
                2004
            
            31,
                2003ASSETSCURRENT
                ASSETSAccounts
                receivable
            
            $
            81,357
            
            $
            49,127Prepaid
                expenses
            
            
            6,027
            
            
            3,960Inventory
            
            
            75,437
            
            
            88,247162,821
            
            
            141,334FURNITURE
                AND EQUIPMENT, net of depreciation of $81,424 (2003 -
                $70,340)
            
            
            15,605
            
            
            20,777$
            178,426
            
            $
            162,111**LIABILITIES
                AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)****CURRENT
                LIABILITIES**Bank
                overdraft
            
            $
            184
            
            $
            11,252Accounts
                payable and accrued liabilities
            
            
            265,505
            
            
            229,738Current
                portion of convertible debenture (Note 4)
            
            
            56,797
            
            
            39,996Due
                to related parties (Note 3)
            
            
            16,160
            
            
            167,506Current
                portion of notes payable (Note 3)
            
            
            78,168
            
            
            40,730416,814
            
            
            489,222CONVERTIBLE
                DEBENTURE (Note 4)
            
            
            —
            
            
            56,885NOTE
                PAYABLE (Note 3)
            
            
            101,497
            
            
            —518,311
            
            
            546,107**GOING
                CONCERN CONTINGENCY (Note 1)****STOCKHOLDERS'
                EQUITY (CAPITAL DEFICIENCY)**Capital
                stock (Note 5)Common
                stock, $0.0001 par value, 30,000,000 shares authorized 9,664,648
                (2003 -
                6,727,836) shares issued and outstanding
            
            
            966
            
            
            673Convertible
                preferred stock, $0.0001 par value, 5,000,000 shares
                authorizedNIL
                issued and outstanding
            
            
            —
            
            
            —Additional
                paid-in capital
            
            
            2,032,988
            
            
            1,342,003Warrants
            
            
            124,000
            
            
            74,000Deficit
            
            
            (2,406,065
            )
            
            (1,735,410
            )Accumulated
                other comprehensive loss
            
            
            (91,774
            )
            
            (65,262
            )(339,885
            )
            
            (383,996
            )$
            178,426
            
            $
            162,111





The
      accompanying notes are an integral part of these consolidated financial
      statements




19


**LUNA
      TECHNOLOGIES INTERNATIONAL, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


Year
                  Ended December 31,2004
              
              2003SALES
              
              $
              537,165
              
              $
              381,721COST
                  OF SALES
              
              
              269,395
              
              
              232,759GROSS
                  PROFIT
              
              
              267,770
              
              
              148,962OTHER
                  INCOME
              
              
              120,000
              
              
              100,000387,770
              
              
              248,962GENERAL
                  AND ADMINISTRATIVE EXPENSESConsulting
              
              
              85,519
              
              
              86,958Consulting
                  - stock based (Note 5)
              
              
              279,468
              
              
              193,500Depreciation
              
              
              11,084
              
              
              19,686Interest
                  and bank charges
              
              
              12,745
              
              
              49,542Interest
                  on convertible debenture
              
              
              6,197
              
              
              8,990Management
                  fees
              
              
              187,174
              
              
              145,558Office
                  and general
              
              
              166,584
              
              
              127,336Professional
                  fees
              
              
              101,987
              
              
              54,718Rent
              
              
              33,716
              
              
              27,303Research
                  and development, net of recoveries
              
              
              55,097
              
              
              46,925Wages
                  and benefits
              
              
              172,219
              
              
              99,958Gain
                  on write-off of accounts payable (Note 6)
              
              
              (53,365
              )
              
              —1,058,425
              
              
              860,474NET
                  LOSS FOR THE YEAR
              
              $
              (670,655
              )
              $
              (611,512
              )BASIC
                  NET LOSS PER SHARE
              
              $
              (0.09
              )
              $
              (0.10
              )WEIGHTED
                  AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
              
              
              7,615,138
              
              
              6,067,002





The
      accompanying notes are an integral part of these consolidated financial
      statements




20





**LUNA
      TECHNOLOGIES INTERNATIONAL, INC.**


**CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' EQUITY**


**FOR
      THE YEARS ENDED DECEMBER 31, 2004 AND 2003**


AccumulatedCommon
                  Stock
              
              Additional
              
              Share
              
              
              
              OtherNumber
                  of
              
              
              
              Paid
              
              Purchase
              
              
              
              ComprehensiveShares
              
              Amount
              
              Capital
              
              Warrants
              
              Deficit
              
              Income
                  (loss)
              
              TotalBalance,
                  December 31, 2002
              
              
              5,415,166
              
              $
              542
              
              $
              605,150
              
              $
              -
              
              $
              (1,123,898
              )
              $
              (2,970
              )
              $
              (521,176
              )Issued
                  for cash at - $0.50 per share
              
              
              200,000
              
              
              20
              
              
              79,980
              
              
              20,000
              
              
              —
              
              
              100,000-
                  $0.60 per share
              
              
              250,000
              
              
              25
              
              
              119,975
              
              
              30,000
              
              
              —
              
              
              150,000-
                  $0.80 per share
              
              
              150,000
              
              
              15
              
              
              95,985
              
              
              24,000
              
              
              —
              
              
              120,000Issued
                  for consulting services
              
              
              6,000
              
              
              1
              
              
              2,999
              
              
              —
              
              
              —
              
              
              —
              
              
              3,000Issued
                  for debt settlement
              
              
              225,000
              
              
              23
              
              
              86,877
              
              
              —
              
              
              —
              
              
              —
              
              
              86,900Issued
                  on exercise of options - $0.05 per share
              
              
              25,000
              
              
              3
              
              
              1,247
              
              
              —
              
              
              —
              
              
              —
              
              
              1,250-
                  $0.10 per share
              
              
              50,000
              
              
              5
              
              
              4,995
              
              
              —
              
              
              —
              
              
              —
              
              
              5,000-
                  $0.18 per share
              
              
              20,000
              
              
              2
              
              
              3,598
              
              
              —
              
              
              —
              
              
              —
              
              
              3,600-
                  $0.38 per share
              
              
              34,000
              
              
              3
              
              
              12,917
              
              
              —
              
              
              —
              
              
              —
              
              
              12,920-
                  $0.40 per share
              
              
              205,000
              
              
              20
              
              
              81,980
              
              
              —
              
              
              —
              
              
              —
              
              
              82,000-
                  $0.50 per share
              
              
              23,670
              
              
              2
              
              
              11,812
              
              
              —
              
              
              —
              
              
              —
              
              
              11,814Issued
                  pursuant to stock bonus plan
              
              
              124,000
              
              
              12
              
              
              62,088
              
              
              —
              
              
              —
              
              
              —
              
              
              62,100Beneficial
                  conversion feature of conversion option
              
              
              —
              
              
              —
              
              
              41,000
              
              
              —
              
              
              —
              
              
              —
              
              
              41,000Stock-based
                  compensation
              
              
              —
              
              
              —
              
              
              131,400
              
              
              —
              
              
              —
              
              
              —
              
              
              131,400Net
                  loss for the year
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (611,512
              )
              
              (611,512
              )Currency
                  translation adjustment
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (62,292
              )
              
              (62,292
              )Balance,
                  December 31, 2003
              
              
              6,727,836
              
              $
              673
              
              $
              1,342,003
              
              $
              74,000
              
              $
              (1,735,410
              )
              $
              (65,262
              )
              $
              (383,996
              )





The
      accompanying notes are an integral part of these consolidated financial
      statements




21





**LUNA
      TECHNOLOGIES INTERNATIONAL, INC.**


**CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' EQUITY**


**FOR
      THE YEARS ENDED DECEMBER 31, 2004 AND 2003**


AccumulatedCommon
                  Stock
              
              Additional
              
              Share
              
              
              
              OtherNumber
                  of
              
              
              
              Paid
              
              Purchase
              
              
              
              ComprehensiveShares
              
              Amount
              
              Capital
              
              Warrants
              
              Deficit
              
              Income
                  (loss)
              
              TotalBalance,
                  December 31, 2003
              
              
              6,727,836
              
              $
              673
              
              $
              1,342,003
              
              $
              74,000
              
              $
              (1,735,410
              )
              $
              (65,262
              )
              $
              (383,996
              )Issued
                  for cash at - $0.20 per share
              
              
              1,250,000
              
              
              125
              
              
              199,875
              
              
              50,000
              
              
              —
              
              
              —
              
              
              250,000-
                  $0.65 per share
              
              
              100,000
              
              
              10
              
              
              51,990
              
              
              13,000
              
              
              —
              
              
              —
              
              
              65,000-
                  $1.00 per share
              
              
              35,000
              
              
              4
              
              
              27,996
              
              
              7,000
              
              
              —
              
              
              —
              
              
              35,000Issued
                  on exercise of options - $0.04 per share
              
              
              489,000
              
              
              49
              
              
              19,511
              
              
              —
              
              
              —
              
              
              —
              
              
              19,560-
                  $0.10 per share
              
              
              160,000
              
              
              16
              
              
              15,984
              
              
              —
              
              
              —
              
              
              —
              
              
              16,000-
                  $0.23 per share
              
              
              300,000
              
              
              30
              
              
              68,220
              
              
              —
              
              
              —
              
              
              —
              
              
              68,250-
                  $0.40 per share
              
              
              5,000
              
              
              —
              
              
              2,000
              
              
              —
              
              
              —
              
              
              —
              
              
              2,000Issued
                  pursuant to stock bonus plan
              
              
              597,812
              
              
              59
              
              
              130,809
              
              
              —
              
              
              —
              
              
              —
              
              
              130,868Stock-based
                  compensation
              
              
              —
              
              
              —
              
              
              154,600
              
              
              —
              
              
              —
              
              
              —
              
              
              154,600Share
                  purchase warrants expired
              
              
              —
              
              
              —
              
              
              20,000
              
              
              (20,000
              )
              
              —
              
              
              —
              
              
              —Net
                  loss for the year
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (670,655
              )
              
              (670,655
              )Currency
                  translation adjustment
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (26,512
              )
              
              (26,512
              )Balance,
                  December 31, 2004
              
              
              9,664,648
              
              $
              966
              
              $
              2,032,988
              
              $
              124,000
              
              $
              (2,406,065
              )
              $
              (91,774
              )
              $
              (339,885
              )





The
      accompanying notes are an integral part of these consolidated financial
      statements




22





**LUNA
      TECHNOLOGIES INTERNATIONAL, INC.**


**CONSOLIDATED
      STATEMENT OF CASH FLOWS**


Year
                  Ended December 31,2004
              
              2003CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  loss for the year
              
              $
              (670,655
              )
              $
              (611,512
              )Adjustments
                  to reconcile net loss to net cash from operating
                  activities:-
                  depreciation
              
              
              11,084
              
              
              19,686-
                  stock-based compensation
              
              
              279,468
              
              
              193,500-
                  beneficial conversion feature
              
              
              —
              
              
              41,000-
                  non-cash gain on write-off of accounts payable
              
              
              (53,365
              )
              
              —-
                  accrued interest expense
              
              
              (88
              )
              
              1,957-
                  accounts receivable
              
              
              (32,230
              )
              
              (6,434
              )-
                  inventory
              
              
              12,810
              
              
              (67,189
              )-
                  prepaid expenses
              
              
              (2,067
              )
              
              (1,763
              )-
                  accounts payable and accrued liabilities
              
              
              140,360
              
              
              (4,033
              )NET
                  CASH USED IN OPERATING ACTIVITIES
              
              
              (314,683
              )
              
              (434,788
              )CASH
                  FLOWS FROM INVESTING ACTIVITIESPurchase
                  of fixed assets
              
              
              (5,912
              )
              
              (6,473
              )NET
                  CASH USED IN INVESTING ACTIVITIES
              
              
              (5,912
              )
              
              (6,473
              )CASH
                  FLOWS FROM FINANCING ACTIVITIESBank
                  overdraft
              
              
              (11,068
              )
              
              8,913Loan
                  repayment
              
              
              —
              
              
              (4,500
              )Issuance
                  of common shares
              
              
              357,000
              
              
              486,584Convertible
                  debenture proceeds (repayments)
              
              
              (39,996
              )
              
              36,669Loan
                  from (repayments to) related parties
              
              
              49,509
              
              
              (24,113
              )Payment
                  on notes payable
              
              
              (8,338
              )
              
              —NET
                  CASH FLOWS FROM FINANCING ACTIVITIES
              
              
              347,107
              
              
              503,553EFFECT
                  OF EXCHANGE RATE CHANGES
              
              
              (26,512
              )
              
              (62,292
              )INCREASE
                  (DECREASE) IN CASH
              
              
              —
              
              
              —CASH,
                  BEGINNING OF YEAR
              
              
              —
              
              
              —CASH,
                  END OF YEAR
              
              $
              —
              
              $
              —
 
 **SUPPLEMENTAL
                  CASH FLOW INFORMATION**Interest
                  paid
              
              $
              6,285
              
              $
              8,883Taxes
                  paid
              
              $
              Nil
              
              $
              Nil
 Non-cash
        activities:




**Refer
      to Notes 3, 5 and 6.**





The
      accompanying notes are an integral part of these consolidated financial
      statements




23





**LUNA
      TECHNOLOGIES INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2004**





**NOTE
      1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION**





The
      Company was incorporated on March 25, 1999 in the state of Delaware. The Company
      commenced operations April 30, 1999 and by agreement effective as of that date,
      acquired proprietary technology and patent rights from Luna Technology Inc.
      ("LTBC"), a private British Columbia company with certain directors and
      shareholders in common with the Company. In addition, by agreement effective
      November 15, 1999, the Company acquired proprietary technology and the trademark
      rights to "LUNA" and "LUNAPLAST" from Douglas Sinclair, an officer and employee
      of LTBC, which relate to the acquired Photoluminescent technology. This
      technology is used for the development and production of photoluminescent
      signage, wayfinding systems and other novelty products with applications in
      marine, commuter rail, subway, building and toy markets.





The
      consolidated financial statements have been prepared on the basis of a going
      concern which contemplates the realization of assets and the satisfaction of
      liabilities in the normal course of business. At December 31, 2004 the Company
      has a working capital deficiency of $253,993 (2003 - $347,888) and has incurred
      losses since inception raising substantial doubt as to the Company's ability
      to
      continue as a going concern. The ability of the Company and its subsidiary
      to
      continue as a going concern is dependent on raising additional capital and
      on
      generating future profitable operations. In addition, during 2004, 60% of the
      Company's total sales was derived from two customers, one customer of which
      also
      provided financing to the Company in connection with the Convertible Debenture
      as described in Note 4 accounted for 43%.





The
      Company anticipates meeting its working capital requirement for the next year
      through the sale of shares of common stock or through loans and advances from
      related parties as may be required.





**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





Principles
      of Consolidation


The
      financial statements include the accounts of the Company and its wholly-owned
      subsidiary Luna Technologies (Canada) Ltd. ("LTC"), a company incorporated
      June
      9, 1999 in the province of British Columbia. LTC was incorporated to conduct
      all
      future business activities in Canada. All significant intercompany balances
      and
      transactions are eliminated on consolidation.





Use
      of
      Estimates and Assumptions


Preparation
      of the Company's financial statements in conformity with United States generally
      accepted accounting principles requires management to make estimates and
      assumptions that affect certain reported amounts and disclosures. Accordingly,
      actual results could differ from those estimates. The areas requiring
      significant estimates and assumptions are determining the useful lives of
      furniture and equipment and the fair value of stock-based compensation.





Inventory


Inventory
      is carried at the lower of cost and net realizable value.





Furniture
      and Equipment


Furniture
      and equipment are recorded at cost. Depreciation is computed by the
      straight-line method on estimated useful lives of two to five years.





Revenue
      Recognition


The
      Company recognizes revenue when products have been shipped and collection is
      reasonably assured. The Company also generates other income from one-time fees
      charged in connection with territorial Supply Agreements. As the Company has
      no
      future obligations in connection with these agreements, these fees are
      recognized as other income upon execution of the agreements and when collection
      is reasonably assured.





Research
      and Development Costs


Ongoing
      new product and technology research and development costs are expensed as
      incurred net of contributions made by third parties toward research
      projects.




24





**LUNA
      TECHNOLOGIES INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2004**




**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)**





Foreign
      Currency Translation


The
      financial statements are presented in United States dollars. In accordance
      with
      Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency
      Translation", foreign denominated monetary assets and liabilities are translated
      to their United States dollar equivalents using foreign exchange rates which
      prevailed at the balance sheet date. Revenue and expenses are translated at
      average rates of exchange during the year. Related translation adjustments
      are
      reported as a separate component of stockholders' equity, whereas gains or
      losses resulting from foreign currency transactions are included in results
      of
      operations.





Fair
      Value of Financial Instruments


In
      accordance with the requirements of SFAS No. 107, management has determined
      the
      estimated fair value of financial instruments using available market information
      and appropriate valuation methodologies. The fair value of financial instruments
      classified as current assets or liabilities including bank overdraft and notes
      and accounts payable approximate carrying value due to the short-term maturity
      of the instruments. Management has also determined that the fair value of the
      convertible debenture approximates its carrying value as at December 31, 2004
      and 2003.





Risk
      Management


Currency
      risk. The majority of the Company's sales and cost of sales are made in U.S.
      currency while a significant amount of its general and administrative expenses
      are made in Canadian currency. The Company does not currently hedge its foreign
      currency exposure and accordingly is at risk for foreign currency exchange
      fluctuations.





Credit
      risk. Management does not believe the Company is exposed to significant credit
      risk and accordingly does not manage credit risk directly.





Net
      Loss
      per Common Share


Basic
      loss per share includes no dilution and is computed by dividing income available
      to common stockholders by the weighted average number of common shares
      outstanding for the period. Dilutive earnings per share reflects the potential
      dilution of securities that could share in the earnings of the Company. Share
      purchase warrants and stock options were not included in the calculation of
      weighted average number of shares outstanding because the effect would be
      anti-dilutive.





Stock-Based
      Compensation


In
      December 2002, the Financial Accounting Standards Board ("FASB") issued
      Financial Accounting Standard No. 148, "Accounting for Stock-Based Compensation -
      Transition and Disclosure" ("SFAS No. 148"), an amendment of Financial
      Accounting Standard No. 123 "Accounting for Stock-Based Compensation" ("SFAS
      No.
      123"). The purpose of SFAS No. 148 is to: (1) provide alternative methods of
      transition for an entity that voluntarily changes to the fair value based method
      of accounting for stock-based employee compensation, (2) amend the disclosure
      provisions to require prominent disclosure about the effects on reported net
      income of an entity's accounting policy decisions with respect to stock-based
      employee compensation, and (3) to require disclosure of those effects in interim
      financial information. The disclosure provisions of SFAS No. 148 were effective
      for the Company commencing for the year ended December 31, 2002 and the required
      disclosures have been made below.





The
      Company has elected to continue to account for stock-based employee compensation
      arrangements in accordance with the provisions of Accounting Principles Board
      Opinion No. 25, "Accounting for Stock Issued to Employees", ("APB No. 25")
      and
      comply with the disclosure provisions of SFAS No. 123 as amended by SFAS No.
      148
      as described above. In addition, in accordance with SFAS No. 123 the Company
      applies the fair value method using the Black-Scholes option-pricing model
      in
      accounting for options granted to consultants. Under APB No. 25, compensation
      expense is recognized based on the difference, if any, on the date of grant
      between the estimated fair value of the Company's stock and the amount an
      employee must pay to acquire the stock. Compensation expense is recognized
      immediately for past services and pro-rata for future services over the
      option-vesting period.




25





**LUNA
      TECHNOLOGIES INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2004**




**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)**





Stock-Based
      Compensation (cont'd)


The
      following table illustrates the pro forma effect on net income (loss) and net
      income (loss) per share as if the Company had accounted for its stock-based
      employee compensation using the fair value provisions of SFAS No. 123 using
      the
      assumptions as described in Note 5:




For
                  the year ended December 31,2004
              
              2003Net
                  loss for the year
              
              
              As
                  reported
              
              $
              (670,655
              )
              $
              (611,512
              )SFAS
                  123 compensation expense
              
              
              Pro-forma
              
              
              (63,050
              )
              
              (18,700
              )Net
                  loss for the year
              
              
              Pro-forma
              
              $
              (733,705
              )
              $
              (630,212
              )Pro-forma
                  basic net loss per share
              
              
              Pro-forma
              
              $
              (0.10
              )
              $
              (0.10
              )




The
      Company accounts for equity instruments issued in exchange for the receipt
      of
      goods or services from other than employees in accordance with SFAS No. 123
      and
      the conclusions reached by the Emerging Issues Task Force ("EITF") in Issue
      No.
      96-18, "Accounting for Equity Instruments That Are Issued to Other Than
      Employees for Acquiring or in Conjunction with Selling Goods or Services" ("EITF
      96-18"). Costs are measured at the estimated fair market value of the
      consideration received or the estimated fair value of the equity instruments
      issued, whichever is more reliably measurable. The value of equity instruments
      issued for consideration other than employee services is determined on the
      earlier of a performance commitment or completion of performance by the provider
      of goods or services as defined by EITF 96-18.





The
      Company has also adopted the provisions of the Financial Accounting Standards
      Board Interpretation No.44, "Accounting for Certain Transactions Involving
      Stock
      Compensation - An Interpretation of APB Opinion No. 25" ("FIN 44"), which
      provides guidance as to certain applications of APB No. 25.





Income
      Taxes


The
      Company follows the liability method of accounting for income taxes. Under
      this
      method, deferred tax assets and liabilities are recognized for the future tax
      consequences attributable to differences between the financial statement
      carrying amounts of existing assets and liabilities and their respective tax
      balances. Deferred tax assets and liabilities are measured using enacted or
      substantially enacted tax rates expected to apply to the taxable income in
      the
      years in which those differences are expected to be recovered or settled. The
      effect on deferred tax assets and liabilities of a change in tax rates is
      recognized in income in the period that includes the date of enactment or
      substantive enactment.





**Recent
      Accounting Pronouncements**





In
      December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets,
      an amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions
      ("SFAS 153") SFAS 153 requires that exchanges of non-monetary assets are to
      be
      measured based on fair value and eliminates the exception for exchanges of
      non-monetary, similar productive assets, and adds an exemption for non-monetary
      exchanges that do not have commercial substance. SFAS 153 will be effective
      for
      fiscal periods beginning after June 15, 2005. Management does not believe that
      the adoption of this standard will have a material impact on the Company's
      financial position or results of operations.





In
      December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which
      establishes standards for the accounting for transactions in which an entity
      exchanges its equity instruments for goods or services. A key provision of
      this
      statement is the requirement of a public entity to measure the cost of employee
      services received in exchange for an award of equity instruments (including
      stock options) based on the grant date fair value of the award. That cost will
      be recognized over the period during which an employee is required to provide
      service in exchange for the award (i.e., the requisite service period or vesting
      period). This standard becomes effective for the Company for its first annual
      or
      interim period ended on or after December 15, 2005. The Company will adopt
      SFAS
      123R no later than the beginning of the Company's fourth quarter ending December
      31, 2005. Management is currently evaluating the potential impact that the
      adoption of SFAS 123R will have on the Company's financial position and results
      of operations.




26





**LUNA
      TECHNOLOGIES INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2004**




**NOTE
      3 - RELATED PARTY TRANSACTIONS**





The
      Company pays the CEO, President, and Chief Financial Officer, CDN$7,500,
      CDN$5,000 and CDN$4,000 per month respectively. These obligations are on a
      month
      by month basis.





During
      2003 LTC and the Company executed a guarantee of certain unpaid management
      fees
      owing to the CEO of LTC (Doug Sinclair) totalling $123,750 (CAN$165,000). In
      connection with this guarantee, the CEO was granted the right to convert any
      or
      all of the unpaid amount into restricted shares of the Company's common stock
      at
      a price of $0.30 per share. During 2003 the Company recorded a $41,000 non-cash
      interest expense representing the beneficial conversion feature embedded in
      this
      conversion option. This beneficial conversion feature was valued using the
      intrinsic value method. Effective August 31, 2004, the CEO of LTC resigned
      and
      entered into an agreement with the Company for the payment of these guaranteed
      amounts an additional fees owing. Effective August 3, 2004, the Company has
      guaranteed, by a non-interest bearing promissory note, outstanding management
      fees due to the former CEO of LTC totalling CAN$187,000 payable as follows:
      CDN$20,000 upon acceptance, CDN$ 20,000 on January 15, 2005, CDN$25,000 on
      June
      15, 2005, CDN$30,000 on January 15, 2006, CDN$40,000 on June 15, 2006 and
      CDN$52,000 on January 15, 2007. In addition, the Company has agreed to a
      severance payment of CDN$43,200 to be paid in twelve equal monthly installments
      of CDN$3,600. To December 31, 2004 CDN$41,600 has been paid in connection with
      the above agreements leaving CDN$188,600 (US$156,905) owing of which $138,935
      has been reclassified to notes payable and $17,970 has been reclassified to
      accounts payable The Company did not pay the CDN $20,000 installment due January
      15, 2005.





During
      2004 the Company had transactions with directors, officers, a relative of a
      director, and LTBC as follows: expenses paid on behalf of and advances made
      to
      the Company - $96,655 (2003 - $44,332); management fees incurred by the Company


-
      $187,174 (2003 - $145,558); and payments and reimbursements made by the Company
      - $234,320 (2003 - $180,959). Also during 2004 $19,560 owing to a director
      of
      the Company was assigned to the Company as consideration for the issuance of
      489,000 shares of the Company's common stock on the exercise of stock options
      at
      a price of $0.04 per share. In addition, amounts owing to the former CEO of
      LTC
      totalling $181,295 were reclassified during the year to Notes payable leaving
      $16,160 owing as at December 31, 2004 (2003 - $167,506).





During
      2003 related party debts totalling $86,900 were settled by way of offset against
      the proceeds receivable on the exercise of options by assignment of these debts
      to an unrelated third party.





The
      Company and LTC have non-interest-bearing promissory notes totalling $40,730
      to
      LTBC originally due on or before June 30, 2001. The due dates on these notes
      have been extended to January 1, 2006.





Unless
      otherwise noted, all amounts due to related parties are unsecured, non-interest
      bearing and with no specific terms of repayment.





Effective
      June 26, 2003 the Company entered into two agreements to acquire certain
      proprietary technology and patent application rights from Inject A Light
      Corporation Inc. ("Inject A Light"), a private Delaware corporation controlled
      by a director and officer of the Company and the former CEO of LTC. This
      proprietary technology and these patent application rights were originally
      acquired by Inject A Light from these two individuals. Under the terms of the
      agreements, the Company was required to pay consideration of a total of
      1,250,000 restricted shares of the Company's common stock. Prior to the closing
      of the agreement the parties re-evaluated the terms and ultimate completion
      of
      this potential acquisition. Effective December 29, 2004, as a result of
      re-evaluating this acquisition, the parties entered into an Amending Agreement
      and Release whereby these parties agreed to transfer the Inject A Light
      proprietary technology at no cost to the Company. The parties determined that
      further significant development costs must be incurred to this technology and
      accordingly the parties were not able to determine an appropriate fair
      value.




27





**LUNA
      TECHNOLOGIES INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2004**




**NOTE
      4 - CONVERTIBLE DEBENTURE**





Effective
      December 21, 2002 the Company issued a $120,000 Secured Convertible Debenture
      (the "Debenture"). The Debenture is secured by a first floating charge on all
      of
      the property, assets and undertakings of the Company and bears interest at
      a
      rate of 8% per annum. The Company is required to make fixed monthly principal
      payments of $3,333 for a period of 30 months commencing June 21, 2003 and a
      final principal payment of $20,010 due December 21, 2005. Interest is calculated
      on the outstanding principal balance and is payable monthly commencing June
      21,
      2003. During 2004 the Company made principal and interest payments totalling
      $46,281 and as at December 31, 2004 a further $124 of interest has been accrued.
      This Debenture was issued to the Company's major customer as described in Note
      1.





The
      total
      unpaid balance of principal and interest may be converted at any time into
      restricted shares of the Company's common stock at a price of $0.90 per share
      during 2004 and $1.20 per share during 2005.





**NOTE
      5 - CAPITAL STOCK**





During
      2003 the Company issued 200,000 units at a price of $0.50 per unit for proceeds
      of $100,000. Each unit consists of one common share and one share purchase
      warrant entitling the holder to purchase one additional common share of the
      Company at a price of $0.75 per share until December 15, 2004. The estimated
      fair value of the warrants of $20,000 has been recorded as a separate component
      of stockholders' equity.





During
      2003 the Company issued 250,000 units at a price of $0.60 per unit for proceeds
      of $150,000. Each unit consists of one common share and one share purchase
      warrant entitling the holder to purchase one additional common share of the
      Company at a price of $0.75 per share until August 15, 2005. The estimated
      fair
      value of the warrants of $30,000 has been recorded as a separate component
      of
      stockholders' equity.





During
      2003 the Company issued 150,000 units at a price of $0.80 per unit for proceeds
      of $120,000. Each unit consists of one common share and one share purchase
      warrant entitling the holder to purchase one additional common share of the
      Company at a price of $1.00 per share until June 30, 2006. The estimated fair
      value of the warrants of $24,000 has been recorded as a separate component
      of
      stockholders' equity.





During
      2003 the Company issued 6,000 shares of common stock at $0.50 per share in
      settlement of $3,000 of accounts payable and 225,000 shares of common stock
      in
      settlement of a total of $86,900 of loans payable and other amounts previously
      owing to related parties which were assigned to a third party during 2003.





During
      2003 the Company issued 357,670 shares of common stock on exercise of stock
      options for total consideration of $116,584.





During
      2004 the Company issued 100,000 units at a price of $0.65 per unit for proceeds
      of $65,000. Each unit consists of one common share and one share purchase
      warrant entitling the holder to purchase one additional common share of the
      Company at a price of $1.00 per share until February 28, 2006. The estimated
      fair value of the warrants of $13,000 has been recorded as a separate component
      of stockholders' equity.





During
      2004 the Company issued 35,000 units at a price of $1.00 per unit for proceeds
      of $35,000. Each unit consists of one common share and one share purchase
      warrant entitling the holder to purchase one additional common share of the
      Company at a price of $1.00 per share until March 31, 2006. The estimated fair
      value of the warrants of $7,000 has been recorded as a separate component of
      stockholders' equity.





During
      2004 the Company issued 1,250,000 units at a price of $0.20 per unit for
      proceeds of $250,000. Each unit consists of one common share and one share
      purchase warrant entitling the holder to purchase one additional common share
      of
      the Company at a price of $0.30 per share until September 3, 2005. The estimated
      fair value of the warrants of $50,000 has been recorded as a separate component
      of stockholders' equity.





During
      2004 the Company issued 954,000 shares of common stock on exercise of various
      stock options for total consideration of $105,810 of which $7,000 was received
      in cash, $79,250 by offset of accounts payable and $19,560 by offset of amounts
      due to a director of the Company.




28





**LUNA
      TECHNOLOGIES INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2004**




**NOTE
      5 - CAPITAL STOCK (cont'd)**





Stock
      option plans


As
      approved by the directors effective January 26, 2004, the Company has adopted
      plans allowing for the granting of stock options and awarding of shares of
      common stock as follows:





Incentive
      Stock Option Plan


The
      Company adopted an Incentive Stock Option Plan authorizing the issuance of
      options to purchase up to 750,000 shares of common stock of the Company. Options
      granted under this plan will have a price and term to be determined at the
      time
      of grant, but shall not be granted at less than the then fair market value
      of
      the Company's common stock and can not be exercised until one year following
      the
      date of grant. This plan is available to officers, directors and key employees
      of the Company.





Non-Qualified
      Stock Option Plan


The
      Company adopted a Non-Qualified Stock Option Plan authorizing the issuance
      of
      options to purchase up to 1,350,000 shares of common of the Company. Options
      granted under this plan will have a price and term to be determined at the
      time
      of grant, but shall not be granted at less than the then par value of the
      Company's common stock and can be exercised at any time following the date
      of
      grant. This plan is available to officers, directors, employees, consultants
      and
      advisors of the Company.





Stock
      Bonus Plan


The
      Company adopted a Stock Bonus Plan authorizing the awarding of up to 1,000,000
      shares of common stock of the Company solely at the discretion of the board
      of
      directors. This plan is available to officers, directors, employees, consultants
      and advisors of the Company.





Effective
      February 10, 2004 the Company filed a Form S-8 Registration Statement for
      3,000,000 shares authorized under the Incentive Stock Option Plan, the
      Non-Qualified Stock Option Plan and the Stock Bonus Plan.





During
      2003 the Company awarded 124,000 shares of common stock under the Stock Bonus
      Plan with a fair value of $62,100.





During
      2004 the Company issued 12,000 shares of common stock under the Company's Stock
      Bonus Plan at $0.50 per share in settlement of $6,000 of accounts payable and
      awarded a further 585,812 shares under the Stock Bonus Plan with a fair value
      of
      $124,868. As at December 31, 2004 202,188 shares remain available for awards
      under the Stock Bonus Plan.





During
      2003 the Company granted 382,670 stock options to consultants at prices ranging
      from $0.05 per share to $0.50 per share. The fair value of these options was
      recorded as consulting fees of $84,400. The fair value of these options was
      estimated using the Black-Scholes option pricing model assuming expected lives
      ranging from 0.7 years to 1.6 years, a risk-free interest rate of 3% and
      expected volatilities ranging from 67% to 82%.





During
      2003 the Company granted 160,000 stock options to a director at prices ranging
      from $0.10 per share to $0.60 per share. Of these options, 120,000 vested in
      2003 and the remaining 40,000 options vested between March 1, 2004 and June
      1,
      2004. During 2003 the Company recorded a consulting expense of $47,000
      representing the intrinsic value of the vested options. Also in connection
      with
      the vested options, pro-forma disclosures were provided in Note 2 to reflect
      the
      fair value of these options of $18,700 as calculated using the Black-Scholes
      option pricing model assuming expected lives of 5 years, a risk-free interest
      rate of 3% and an expected volatility of 112%. During 2004, upon vesting of
      the
      remaining options, the Company recorded an additional consulting expense of
      $4,400 representing the intrinsic value of the options and disclosed additional
      pro-forma fair value of the options totalling $15,700 as calculated using the
      Black-Scholes option pricing model assuming expected lives of 5 years, a
      risk-free interest rate of 3% and an expected volatility of 112%.





During
      2004 the Company granted 460,000 stock options to consultants at prices ranging
      from $0.10 per share to $0.23 per share. The fair value of these options was
      recorded as consulting fees of $71,600. The fair value of these stock options
      was estimated using the Black-Scholes option pricing model assuming expected
      lives ranging from one year to five years, risk-free interest rates ranging
      from
      2% to 3% and expected volatilities ranging from 77% to 103%.




29





**LUNA
      TECHNOLOGIES INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2004**




**NOTE
      5 - CAPITAL STOCK (cont'd)**





During
      2004 the Company granted a total of 659,200 stock options to the Company's
      new
      president at exercise prices ranging from $0.35 per share to $0.75 per share,
      exercisable for a term of three years. The fair value of these stock options
      was
      estimated using the Black-Scholes option pricing model assuming an expected
      life
      of three years, a risk-free interest rate of 3% and an expected volatility
      of
      102% resulting in a pro forma expense of $142,200 to be disclosed in Note 2
      upon
      vesting of the options. Of these options, 59,200 vested immediately and the
      remaining 600,000 vest at a rate of 16,667 per month for a period of three
      years. During year ended December 31, 2004 $30,850 of the pro forma expense
      has
      been disclosed and the remaining $111,350 will be disclosed upon vesting of
      the
      options.





During
      2004 the Company granted a total of 505,000 stock options to an employee and
      a
      director of the Company at exercise prices ranging from $0.04 per share to
      $0.30
      per share, exercisable for terms ranging from one year to ten years. As the
      exercise price of certain of these options was less than the market price of
      the
      Company's common stock as at the date of grant, the Company has recorded an
      intrinsic value stock based compensation expense of $78,600. In addition the
      Company has disclosed a pro-forma expense of $16,500 relating to the additional
      fair value of these options as estimated using the Black-Scholes option pricing
      model assuming an expected life of ten years, a risk-free interest rate of
      3%
      and an expected volatility of 103%.





As
      at
      December 31, 2004, 305,000 shares have been granted and no stock options were
      outstanding under the Incentive Stock Option Plan and 770,200 stock options
      were
      outstanding under the Non-Qualified Stock Option Plan.





The
      Company's stock option activity is as follows:




Weighted
              
              WeightedNumber
                  of
              
              Average
              
              AverageOptions
              
              Exercise
                  Price
              
              Remaining
                  LifeBalance,
                  December 31, 2002
              
              
              —
              
              $
              —
              
              
              —Granted
                  during the year
              
              
              542,670
              
              
              0.33Expired
                  during the year
              
              
              —
              
              
              —Exercised
                  during the year
              
              
              (357,670
              )
              
              0.33Balance,
                  December 31, 2003
              
              
              185,000
              
              
              0.32
              
              
              2.98
                  yearsGranted
                  during the year
              
              
              1,624,200
              
              
              0.23Expired
                  during the year
              
              
              (85,000
              )
              
              0.25Exercised
                  during the year
              
              
              (954,000
              )
              
              0.11Balance,
                  December 31, 2004
              
              
              770,200
              
              $
              0.39
              
              
              2.81
                  years





Share
      Purchase Warrants


The
      Company's share purchase warrant activity is as follows:


Weighted
              
              WeightedNumber
                  of
              
              Average
              
              AverageWarrants
              
              Exercise
                  Price
              
              Remaining
                  LifeBalance,
                  December 31, 2002
              
              
              —
              
              $
              —
              
              
              —Issued
                  during the year
              
              
              914,255
              
              
              0.97Expired
                  during the year
              
              
              (75,000
              )
              
              1.25Exercised
                  during the year
              
              
              —
              
              
              —Balance,
                  December 31, 2003
              
              
              839,255
              
              
              0.94
              
              
              1.21
                  yearsIssued
                  during the year
              
              
              1,385,000
              
              
              0.37Expired
                  during the year
              
              
              (439,255
              )
              
              0.89Exercised
                  during the year
              
              
              —
              
              
              —Balance,
                  December 31, 2004
              
              
              1,785,000
              
              $
              0.51
              
              
              0.77
                  years






30


**LUNA
      TECHNOLOGIES INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**DECEMBER
      31, 2004**




**NOTE
      6 - OTHER GAIN**





During
      2002 a creditor of the Company seized inventory from the Company in an attempt
      to secure payment of certain amounts owing by the Company in excess of the
      carrying value of the inventory. As at December 31, 2003 the creditor was still
      in possession of the inventory and had not initiated any action in an attempt
      to
      receive payment. During 2004 management determined that any obligation relating
      to this dispute was unlikely and accordingly wrote-off previously accrued
      amounts resulting in a gain of $53,365.





**NOTE
      7 - INCOME TAXES**





There
      were no significant temporary differences between the Company's tax and
      financial bases, except for the Company's net operating loss carryforwards
      amounting to approximately $1,790,000 at December 31, 2004 (2003 - $1,400,000).
      These carryforwards will expire, if not utilized, beginning in 2006. The
      realization of the benefits from these deferred tax assets appears uncertain
      due
      to the Company's limited operating history. Accordingly, a valuation allowance
      has been recorded which offsets the deferred tax assets at the end of the year.





**NOTE
      8 - SUBSEQUENT EVENTS**





Subsequent
      to December 31, 2004, the Company issued 20,000 common shares under the Stock
      Bonus Plan and completed a private placement of 325,000 units at a price of
      $0.20 per unit for proceeds of $65,000. Each unit consist of one common share
      and one share purchase warrant entitling the holder to purchase one additional
      common share of the Company at prices ranging from $0.35 - $0.55 per share
      until
      March 11, 2007.






31





**SIGNATURES**





In
      accordance with Section 13 or 15(a) of the Exchange Act, the Registrant has
      caused this Report to be signed on its behalf by the undersigned, thereunto
      duly
      authorized on the 1st day of March 2006.




**LUNA
              TECHNOLOGIES INTERNATIONAL, INC.**By:
            /s/ Kimberly
              LandryKimberly
                Landry,
                President, Principal Financial Officer
              and
                Principal Accounting Officer




In
      accordance with the Exchange Act, this Report has been signed by the following
      persons on behalf of the Registrant in the capacities and on the dates
      indicated.




Signature
              
              Title
              
              Date/s/
                  Kimberly Landry
              
              Director
              
              March 1,
                  2006Kimberly
                  Landry/s/
                  Robert H. Humber
              
              Director
              
              March 1,
                    2006Robert
                  H. Humber








33