UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C.  20549





FORM
      10-K




x Annual
              Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
              of
              1934
 For
              the
              fiscal year ended December 31, 2007 or
 
 o Transition
          Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
          1934
 For
          the
          transition period from ___________ to ___________





Commission
      file number:  333-136528





World
      Energy Solutions, Inc.


(Exact
      name of registrant as specified in its charter)





Delaware
            04-3474959(State
                or other jurisdiction of incorporation or organization)
            (I.R.S.
                Employer Identification Number)





446
      Main Street


Worcester,
      Massachusetts  01608


(Address
      of principal executive offices)





(508)
      459-8100


(Registrant's
      telephone number, including area code)





Securities
      registered under Section 12(b) of the Act:


None





Securities
      registered under Section 12(g) of the Act:


None




Indicate
      by checkmark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.   Yes o  No x





Indicate
      by checkmark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.   Yes o No x




Indicate
      by checkmark whether the registrant (1) has filed all reports required to be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.    Yes x    No
o




Indicate
      by checkmark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this Form 10-K.    x





Indicate
      by checkmark whether the registrant is a large accelerated filer, an accelerated
      filer, a non-accelerated filer or a smaller reporting company. See definitions
      of “large accelerated filer”, “accelerated filer” and “smaller reporting
      company” in Rule 12b-2 of the Exchange Act. (Check
      one):


Large
                  accelerated
                  filer o
              Accelerated
                  filer x
              Non-accelerated
                  filer o
              Smaller
                  reporting
                  company o


Indicate
      by checkmark whether the registrant is a shell company (as defined in Rule
      12b-2
      of the Exchange Act).    Yes o  No x





The
      aggregate market value of the common stock held by non-affiliates of the
      registrant based on the last sale price of such stock as reported by the Toronto
      Stock Exchange on June 29, 2007 (the last business day of the Registrant’s most
      recently completed second fiscal quarter) was approximately
      $85,411,000.




As
      of
      February 29, 2008, the registrant had 84,023,734 shares of Common
      Stock outstanding.





DOCUMENTS
      INCORPORATED BY REFERENCE





Portions
      of the registrant’s definitive
      proxy statement for the Annual Meeting of Stockholders to be held on May 22,
      2008, are incorporated by reference into Part III of this Report.







World
      Energy Solutions, Inc.


Form
      10-K


For
      the Year Ended December 31, 2007





Table
      of Contents





PART
                IItem
                1.
            Business
            1Item
                1A.
            Risk
                Factors
            11Item
                1B.
            Unresolved
                Staff Comments
            18Item
                2.
            Properties
            19Item
                3.
            Legal
                Proceedings
            19Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            19PART
                IIItem
                5.
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            20Item
                6.
            Selected
                Consolidated Financial Data
            21Item
                7.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            22Item
                7A.
            Quantitative
                and Qualitative Disclosure about Market Risk
            35Item
                8.
            Financial
                Statements and Supplementary Data
            35Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            35Item
                9A.
            Controls
                and Procedures
            35Item
                9B.
            Other
                Information
            38PART
                IIIItem
                10.
            Directors,
                Executive Officers and Corporate Governance
            38Item
                11.
            Executive
                Compensation
            38Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            38Item
                13.
            Certain
                Relationships and Related Transactions and Director
                Independence
            38Item
                14.
            Principal
                Accountant Fees and Services
            38PART
                IVItem
                15.
            Exhibits
                and Financial Statement Schedules
            39Signatures
            
            40Exhibit
                Index





FORWARD-LOOKING
      STATEMENTS





This
      Report contains forward-looking statements within the meaning of Section 27A
      of
      the Securities Act of 1933, as amended, or the Securities Act, and Section
      21E
      of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which
      statements involve risks and uncertainties. These statements relate to our
      future plans, objectives, expectations and intentions. These statements may
      be
      identified by the use of words such as “may”, “could”, “would”, “should”,
“will”, “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”
and similar expressions. Our actual results and timing of certain events could
      differ materially from those discussed in these statements. Factors that could
      contribute to these differences include but are not limited to, those discussed
      under “Risk Factors”, “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations”, and elsewhere in this Report. The
      cautionary statements made in this Report should be read as being applicable
      to
      all forward-looking statements wherever they appear in this
      Report.





PART
      I





Item
      1.  Business





Overview





World
      Energy Solutions, Inc. is an energy and environmental commodities brokerage
      company that has developed online auction platforms, the World Energy Exchange
      and the World Green Exchange.  On the World Energy Exchange, energy
      consumers in the United States are able to negotiate for the purchase or sale
      of
      electricity and other energy resources from competing energy suppliers which
      have agreed to participate on our auction platform in a given auction. On the
      World Green Exchange, buyers and sellers negotiate for the purchase or sale
      of
      environmental commodities such as Renewable Energy Certificates, Verified
      Emissions Reductions and Certified Emissions Reductions.





World
      Energy was founded in response to the restructuring of the electricity industry
      in some U.S. states, which are increasingly permitting energy consumers to
      choose their electricity supplier. While our core competency has been brokering
      electricity, we adapted our World Energy Exchange auction platform to
      accommodate the brokering of natural gas in 2002 and green power in 2003 (i.e.,
      electricity generated by renewable resources). In 2005, we expanded the platform
      to handle wholesale transactions. In 2007, we created the World Green Exchange
      based on the World Energy Exchange technology and business process.





Since
      2001, we have brokered over 40 billion kilowatt hours of electricity for
      energy consumers in North America. We believe that we are among the pioneering
      companies brokering electricity online and we are not aware of any third-party
      competitor brokering more electricity online than we do. With our acquisition
      of
      substantially all of the assets of EnergyGateway, LLC, or EnergyGateway, in
      June
      of 2007, we have brokered over 1 trillion decatherms of natural
      gas.





In
      the
      United States, the electricity and natural gas industry restructuring that
      has
      permitted energy consumers a choice of supplier has taken place on a
      state-by-state basis. This development presents energy consumers with a number
      of challenges because they generally lack the expertise, experience and
      information necessary to effectively source energy from competitive energy
      suppliers. We provide energy consumers that choose to switch to a competitive
      energy supplier with a comprehensive energy procurement solution that is
      designed to ensure that they receive market-based pricing terms. To date we
      have
      focused on commercial, industrial and government, or CIG, energy consumers
      in
      the retail market.





Our
      expansion into the wholesale energy market was a natural outgrowth of our
      services to the retail energy markets. We apply the same tools and processes
      utilized within the retail electricity and natural gas markets to transactions
      between utilities, electricity retailers or intermediaries as buyers and energy
      suppliers or other intermediaries as sellers.





The
      environmental commodity market also has similar characteristics to the retail
      energy markets – lack of liquidity, lack of price transparency and
      differentiated products – creating an opportunity for the further deployment of
      our technology. Customers can be either buyers or sellers of environmental
      commodities including US CIG customers, utilities, independent power producers,
      project developers and environmental brokers.





The
      Retail Energy Industry





Retail
      Electricity Deregulation





The
      electricity industry in the United States is governed by both federal and state
      laws and regulations, with the federal government having jurisdiction over
      the
      sale and transmission of electricity at the wholesale level in interstate
      commerce, and the states having jurisdiction over the sale and distribution
      of
      electricity at the retail level.





The
      federal government regulates the electricity wholesale and transmission business
      through the Federal Energy Regulatory Commission, or FERC, which draws its
      jurisdiction from the Federal
      Power Act, and from other legislation such as the Public Utility Regulatory
      Policies
      Actof 1978, the Energy
      Policy Actof 1992, or EPA 1992, and the recently enacted Energy Policy Actof 2005.
      FERC has comprehensive and plenary jurisdiction over the rates and terms for
      sales of power at wholesale, and over the organization, governance and financing
      of the companies engaged in such sales. States regulate the sale of electricity
      at the retail level within their respective jurisdictions, in accordance with
      individual state laws which can vary widely in material respects. Restructuring
      of the retail electricity industry in the United States began in the mid-1990s,
      when certain state legislatures restructured their electricity markets to create
      competitive markets that enable energy consumers to purchase electricity from
      competitive energy suppliers.





Prior
      to
      the restructuring of the retail electricity industry, the electricity market
      structure in the United States consisted of vertically integrated utilities
      which had a near monopoly over the generation, transmission and distribution
      of
      electricity to retail energy consumers. In states that have embraced electricity
      restructuring, the generation component (i.e., the source of the electricity)
      has become more competitive while the energy delivery functions of transmission
      and distribution remain as monopoly services provided by the incumbent local
      utility and subject to comprehensive rate regulation. In other words, in these




-
          1
          -


states,
      certain retail energy consumers (specifically, those served by investor-owned
      utilities and not by municipal power companies or rural power cooperatives)
      can
      choose their electricity supplier but must still rely upon their local utility
      to deliver that electricity to their home or place of business.





The
      structure and, ultimately, the success level of industry restructuring has
      been
      determined on a state by state basis. There have been three general models
      for
      electricity industry restructuring: (i) delayed competition,
      (ii) phased-in competition, and (iii) full competition. The delayed
      competition model consists of the state passing legislation authorizing
      competitive retail electricity markets (i.e., customer choice of electric energy
      supplier), however, no action is taken by the state regulatory authority charged
      with utility industry oversight within such state to change the incumbent
      utility rates for electric energy to encourage competition. The phased-in
      competition model consists of the state passing legislation authorizing
      competitive retail electricity markets together with a gradual change of the
      incumbent local utility’s retail electric rates to encourage the competitive
      supply of electricity over time. The full competition model consists of the
      state passing legislation authorizing competitive retail electricity markets
      together with an immediate change to the incumbent local utilities’ retail
      electric rates that results in the whole CIG electricity market in such state
      being competitive immediately.





Energy
      consumers who choose to switch electricity suppliers can either do it themselves
      by contacting competitive energy suppliers directly, or indirectly, by engaging
      aggregators, brokers or consultants, collectively referred to as ABCs, to assist
      them with their electricity procurement.





Competitive
      Energy
      Suppliers:  These entities take title to power and resell it
      directly to energy consumers. These are typically well-funded entities, which
      both service energy consumers and also work with ABCs to contract with energy
      consumers. Presently, we estimate there are over 40 competitive suppliers
      several of which operate on a national level and are registered in nearly all
      of
      the 14 states and the District of Columbia that permit CIG energy consumers
      to choose their electricity supplier and have deregulated pricing to create
      competitive markets.  Of the 14 deregulated states, 10 have viable
      competitive markets.





Aggregators,
      Brokers and
      Consultants:  ABCs facilitate transactions by having
      competitive energy suppliers compete against each other in an effort to get
      their energy customers the lowest price. This group generally uses manual
      request for proposal, or RFP, processes that are labor intensive, relying on
      phone, fax and email solicitations. We believe that the online RFP process
      is
      superior to the traditional paper based RFP process as it involves a larger
      number of energy suppliers, can accommodate a larger number of bids within
      a
      shorter time span, and allows for a larger amount of contract variations
      including various year terms, territories and energy usage
      patterns.





Online
      Brokers:  Online brokers are a subset of the ABCs. These
      entities use online platforms to run electronic RFP processes in an effort
      to
      secure the lowest prices for their energy customers by having competitors bid
      against one another. We believe that we are among the pioneering companies
      brokering electricity online and we are not aware of any competitor that has
      brokered more electricity online than we have.








Retail
      Natural Gas





The
      natural gas industry in the United States is governed by both federal and state
      laws and regulations, with the federal government having jurisdiction over
      the
      transmission of natural gas in interstate commerce, and the states having
      jurisdiction over the sale and distribution at the retail level.





The
      federal government regulates the natural gas transmission business through
      FERC
      which draws its jurisdiction from the Natural Gas Act, and from other
      legislation such as the recently enacted Energy Policy Act of 2005. FERC has
      comprehensive and plenary jurisdiction over the rates and terms for transmission
      of gas in interstate commerce, and over the organization, governance and
      financing of the companies engaged in such transmission. States regulate the
      distribution and sale of gas at the retail level within their respective
      jurisdictions, in accordance with individual state laws which can vary widely
      in
      material respects.





The
      natural gas market in the United States is deregulated in most states and offers
      retail energy consumers access to their choice of natural gas commodity
      supplier.





Following
      a period of heavy regulation, the gas industry was deregulated in three phases
      as a result of legislation enacted in 1978 followed by multiple orders of FERC.
      The expected result of this deregulation was to stimulate competition in the
      natural gas industry down the pipeline to the distribution level.





At
      the
      retail level, reforms and restructuring have taken place on a state by state
      basis, with varying nuances to the restructuring in different states. For
      example, state commissions have allowed local distribution companies to offer
      unbundled transportation service to large customers; occasionally to provide
      flexible pricing in competitive markets; and to engage in other competitive
      activities.





Today,
      we
      estimate that utilities in over 40 states permit retail natural gas
      consumers to choose their natural gas commodity suppliers. In most instances,
      the incumbent local distribution utility still delivers the commodity to the
      consumers’ premises, even




-
          2
          -


if
      a
      different supplier is selected to provide the commodity. The level of
      competitive choice available to retail CIG energy consumers has increased,
      with
      a wide range of products and a significant number of suppliers participating
      in
      both retail and wholesale transactions.





Wholesale
      Energy





The
      wholesale electricity market is the competitive market that connects generators
      (sellers) with utilities, electricity retailers and intermediaries (buyers)
      who
      purchase electricity to re-sell on the retail market. Total wholesale purchases
      of electric power in 2006 totaled 5.5 billion MWh.  Natural gas is an
      important input fuel for generators, and purchases of natural gas in 2006
      totaled  6 trillion cubic feet.





The
      U.S.
      wholesale electricity market emerged in the late 1970’s when independent power
      producers, or IPPs, and other non-utilities entered the electricity generation
      market, although the market was restricted until the early 1990s when
      competitive constraints were removed. These new generation entities began to
      compete directly with traditional utilities and offered customers more than
      one
      choice to obtain electricity. Today, participants in the wholesale market
      include IPPs, traditional utilities, and intermediary power marketers. In
      addition, banks, traders, and brokers participate in the wholesale
      market.





IPPs
      and
      traditional utilities comprise the generation portion of the wholesale market.
      Many employ internal sales forces to assist in the sale and distribution of
      their power, enabling them to participate as both buyers and sellers within
      the
      wholesale market. However, a growing number of IPPs and utilities have found
      it
      easier and more cost effective to sell their generation through power marketing
      services, which has contributed to the power marketers’ increased role within
      the market. Power marketers utilize several different platforms to purchase
      power from generators for distribution, which include paper RFPs, phone
      brokerage, electronic exchanges and auctions.





Our
      customers in the wholesale market can be either buyers or sellers and can
      include utilities and municipal utilities that buy power to fill in gaps in
      their portfolios or natural gas to consume in their generation facilities,
      and
      retail marketers who buy natural gas and power to resell to retail
      customers.  If the customer is a buyer, we will run a reverse
      (descending price) auction to secure a low price.  If the customer is
      a seller, we will run a forward (ascending price) auction to secure a higher
      price.





Environmental
      Commodities





Concerns
      about global warming have spawned a number of initiatives to reduce greenhouse
      gas emissions. The most widely adopted of these initiatives is the Kyoto
      Protocol pursuant to which many countries in Europe, Asia and elsewhere have
      created carbon cap and trade systems. While the United States has not adopted
      the Kyoto Protocol at a federal level, there are a number of initiatives in
      the
      U.S. at the regional, state and local level aimed at limiting greenhouse
      gas emissions including the Regional Greenhouse Gas Initiative - a collaboration
      of 10 Northeastern states, and renewable portfolio standards - initiatives
      adopted by over 25 states and the District of Columbia regarding the minimum
      requirements mandated to utilities to derive power from renewable
      sources.





These
      initiatives and mandates are spurring investments in renewable energy, carbon
      efficiency and recovery processes to create credits that can be traded to
      countries or companies seeking to get beneath mandated carbon emission limits.
      Thus far, these credits are being traded privately or via exchanges (such as
      the
      European Climate Exchange, Evomarkets, and the Chicago Climate Exchange) that
      have been formed to take advantage of these opportunities, although we believe
      that a structured auction event may be a more efficient mechanism for
      transacting these credits.





Our
      customers in the exchange of environmental commodities can be either buyers
      or
      sellers and include US CIG customers seeking to buy renewable energy to
      voluntarily “green” their energy portfolio, utilities seeking to meet mandated
      renewable portfolio standards, independent power producers looking to sell
      renewable energy, project developers interested in selling carbon offsets,
      entities that must meet compliance requirements and need to purchase carbon
      offsets, and environmental commodity brokers. If the customer is a
      buyer, we will run a reverse (descending price) auction to secure a lower
      price.  If the customer is a seller, we will run a forward (ascending
      price) auction to secure a higher price.





Company
      Strategy and Operations





Overview





We
      are an
      energy and environmental commodities brokerage company that has developed online
      auction platforms, the World Energy Exchange and the World Green
      Exchange.  On the World Energy Exchange energy consumers in the US are
      able to negotiate for the purchase or sale of electricity and other energy
      resources from competing energy suppliers which have agreed to participate
      on
      our auction platform in a given auction. On the World Green Exchange, buyers
      and
      sellers negotiate for the purchase or sale of environmental commodities such
      as
      Renewable Energy Certificates, Verified Emissions Reductions and Certified
      Emissions Reductions.





-
          3
          -


We
      bring
      suppliers and consumers together in our virtual marketplaces, often with the
      assistance of our channel partners, who identify and work with customers to
      consummate transactions.  Our exchanges are comprised of a series of
      software modules that automate our comprehensive procurement process
      including:





•
            energy
                and environmental commodities sourcing management — a database of
                suppliers and contacts;


•
              lead
                  management — a module to track prospective customers through the
                  sales process;
 
 •
              deal
                  and task management — a module to list, assign and track steps to
                  complete a procurement
                  successfully;




•
            market
                intelligence — databases of information related to market rules and
                pricing trends for markets;





•
            request
                for proposal, or RFP, development — a module to create RFPs with a
                variety of terms and parameters;





•
            conducting
                auctions — underlying software to manage the bidding and timing of an
                auction and display the results;





•
            portfolio
                management — a database of contracts, sites, accounts and
                usage;





•
            commission
                reporting — a system to display forecasted and actual commissions due
                to channel partners; and





•
            receivables
                management — a system to upload data received from suppliers and
                track payment receipt.





Our
      technology-based solution is attractive to channel partners as it provides
      them
      with a business automation platform to enhance their growth, profitability
      and
      customer satisfaction. Channel partners are important to our business because
      these entities offer our auction platforms to enhance their service offerings
      to
      their customers. By accessing our market intelligence and automated auction
      platform, channel partners significantly contribute to our transaction volume,
      and in return we pay them a fixed percentage of the revenue we receive from
      winning bidders (i.e. energy suppliers and other buyers). This third party
      commission structure is negotiated in advance within the channel partner
      agreement based on a number of factors, including expected volume, effort
      required in the auction process and competitive factors.





As
      a
      requirement to bid in an auction (which is described in greater detail below),
      bidders must agree to an on-line agreement to pay our fee if they execute a
      contract as a result of the auction. Following an auction event, our employees
      continue to work with the energy consumer and other listers or collectively,
      the
      customer, and bidder through the contract negotiation process and, accordingly,
      we are aware of whether a contract between the customer and bidder is
      consummated. If a contract is entered into between a customer and bidder using
      our auction platforms, we are compensated based upon a fixed fee, or commission,
      that is built into the price of the commodity. This approach is attractive
      to
      both the customer and bidder as there is no fee charged to either party if
      the
      brokering process does not result in a contract. Our fees are based on the
      total
      amount of the commodity transacted between the customer and bidder multiplied
      by
      our contractual commission rate, and is set forth in two contracts between
      us
      and the bidder. The first agreement is a master agreement, whereby bidders
      are
      allowed to bid on customer requirements in exchange for agreeing to pay the
      fee
      that we have negotiated with the customer, and the second is a fee addendum
      to
      the contract between the bidder and us that sets forth the fee and products
      to
      which the fee applies. In addition, bidders are required to acknowledge and
      agree to our fee on our online platform prior to participating in any specific
      auction.





Retail
      Electricity
      Transactions





For
      retail electricity transactions, monthly revenue is based on actual usage data
      obtained from the energy supplier for a given month or, to the extent actual
      usage data is not available, based on the estimated amount of electricity
      delivered to the energy consumer for that month. While the number of contracts
      closed via the World Energy Exchange in any given period can fluctuate widely
      due to a number of factors, this revenue recognition method provides for a
      relatively predictable revenue stream, as revenue is based on the energy
      consumers’ actual historical energy usage profile. However, monthly revenue can
      still vary from our expectations because usage is affected by a number of
      variables which cannot always be accurately predicted, such as the weather
      and
      general business conditions affecting our energy consumers.





Contracts
      between energy consumers and energy suppliers are signed for a variety of term
      lengths, with a one year contract term being typical for commercial and
      industrial energy consumers, and government contracts typically having two
      to
      three year, and occasionally five year terms. The chart below displays our
      annualized backlog as at year-end from 2003 through 2007. Annualized backlog
      represents the revenue that we would derive within the twelve months following
      the date on which the backlog is calculated from contracts between energy
      consumers and energy suppliers that are in force on such date, assuming such
      energy consumers use energy at their historical usage levels. For any particular
      contract, annualized backlog is calculated by multiplying the energy consumer’s
      historical usage by our fixed contractual commission rate. This metric is not
      intended as an estimate of overall future revenues, since it does not purport
      to
      include revenues that may be earned during the relevant 12 month backlog
      period from new contracts or renewals of contracts that expire during such
      period. In addition, annualized backlog does not represent guaranteed future
      revenues, and to the extent actual usage under a particular contract varies
      from
      historical usage, our revenues under such contract will differ from the amount
      included in annualized backlog.





-
          4
          -


In
      addition to retail electricity contracts, we have ongoing contractual
      arrangements with retail natural gas customers under which we deliver certain
      risk management services for which we receive a monthly fee. Annualized backlog
      as at December 31, 2007 includes monthly management fees related to natural
      gas contracts of $1.4 million that have expected revenue associated with them
      from January 1, 2008 through December 31, 2008. These contracts may
      expire during the period and therefore the annualized backlog does not include
      any revenue from expected contract renewals.





Annualized
      Backlog


(in
      millions)










Because
      the calculation of backlog is a calculation of a contracted commission rate
      multiplied by a historical energy usage figure and our management contracts
      are
      cancelable by our natural gas customers, our annualized backlog may not
      necessarily be indicative of future results. Annualized backlog should not
      be
      viewed in isolation or as a substitute for our historical revenues presented
      in
      the financial statements included in this Form 10-K. Events that may cause
      future revenues from contracts in force to differ materially from our annualized
      backlog include the events that may affect energy usage, such as overall
      business activity levels, changes in energy consumers’ businesses, weather
      patterns and other factors described under “Risk Factors”.





Retail
      Natural Gas
      Transactions





There
      are
      two primary fee components to our retail natural gas services - transaction
      fees
      and management fees.  Transaction fees are billed to and paid by the
      supplier awarded business on the platform.  Transaction fees for
      natural gas awards are established prior to award and are the same for each
      supplier.  For the majority of our natural gas transactions, we bill
      the supplier upon the conclusion of the transaction based on the estimated
      energy volume transacted for the entire award term multiplied by the transaction
      fee.  Management fees are paid by our energy consumers and are
      generally billed on a monthly basis for services rendered based on terms and
      conditions included in contractual arrangements.  While substantially
      all of our retail natural gas transactions are accounted in accordance with
      this
      policy, a certain percentage is accounted for as the natural gas is consumed
      by
      the customer and recognized as revenue in accordance with the retail electricity
      transaction revenue recognition methodology described above.





Wholesale
      and Green
      Transactions





For
      wholesale energy and environmental commodity transactions, substantially all
      transaction fees are invoiced upon the conclusion of the auction based on a
      fixed fee.  These revenues are not tied to future energy usage and are
      recognized upon the completion of the online auction.  For reverse
      auctions where our customers bid for a consumer’s business, the fees are paid by
      the bidder. For forward auctions where a lister is selling energy or credits,
      the fees are typically paid by the lister. In




-
          5
          -


addition,
      revenue may not be recognized on certain green transactions until the credits
      being auctioned have been verified. While substantially all wholesale and green
      transactions are accounted for in this fashion, a small percentage of wholesale
      transactions is accounted for as the electricity or gas is delivered, similar
      to
      the retail electricity transaction methodology described above.





The
      Brokerage Process





Our
      brokerage process is supported by a variety of software modules designed with
      the goal to find the best possible price while providing step-by-step process
      management and detailed documentation prior to, during and following the
      auction. Our process includes data collection and analysis, establishing the
      benchmark price, conducting multiple auction events to enable testing of various
      term and price combinations and assisting in contract completion. We create
      an
      audit trail of all the steps taken in a given transaction. Specific web pages
      track all information provided to energy suppliers including energy supplier
      calls, supplier invitations, usage profiles and desired contract
      parameters.





At
      the
      commencement of the process, non-government energy consumers will enter into
      a
      procurement services agreement with us pursuant to which we are appointed as
      the
      brokerage service provider to solicit and obtain bids for the supply of energy
      or environmental commodities and to assist in the procurement of these
      commodities. Government energy consumers will send out a solicitation at the
      commencement of the brokerage process which sets out the contract terms. Only
      bidders that are qualified under the solicitation may participate in the
      auction. Bidders who wish to bid on the provision of energy or environmental
      commodities to such customers must partake in our brokerage process and cannot
      contract with customers outside of our brokerage process.





For
      retail energy, the procurement services agreement authorizes us to retrieve
      the
      energy consumer’s energy usage history from the utility serving its accounts. We
      utilize the usage history to identify and analyze the energy consumer’s energy
      needs and to run a rate and tariff model which calculates the utility rate
      for
      that energy consumer’s facilities. This price is used as a benchmark price to
      beat for the auction event. For other customers or commodities, the benchmark
      price may be negotiated or calculated in another manner.





Prior
      to
      conducting the auction, the auction parameters, including target price, supplier
      preferences, contract terms, payment terms and product mix, as applicable,
      are
      discussed with the customer and agreed upon. Approximately two to five days
      prior to the auction, we will post RFP’s with these auction parameters on our
      World Energy Exchange or World Green Exchange and alert the potential bidders.
      Additionally, bidders are provided with information about the customer,
      historical energy usage information relating to the energy consumer’s facilities
      (if retail customers), and the desired contract parameters, several days in
      advance of the auction as part of the RFP. This advanced notice gives the
      bidders the opportunity to analyze the value of a potential deal and the
      creditworthiness of the customer. We believe that, using this information along
      with the auction parameters described in the RFP, the bidders develop a bidding
      strategy for the auction.





The
      auction is run on the World Energy Exchange or the World Green Exchange,
      depending on the commodity auctioned. The auction creates a competitive bidding
      environment that is designed to cause bidders to deliver better prices in
      response to other competitive bids. Specifically, bidders enter an auction
      by
      submitting an opening bid at or better than the suggested opening bid posted
      on
      the RFP. After they enter the auction and assess the bidding activity, bidders
      may begin testing the competition by submitting a bid better than the then
      leading bid. They do this presumably to test their pricing and to gauge the
      relative level of competition for the deal. There is typically a modest level
      of
      bidding and counter-bidding activity among bidders until the final 30 seconds
      of
      the auction when bidding activity tends to increase. In the final seconds,
      all
      bidders see the then-leading bid and must make a judgment as to how aggressively
      to submit their last bid in order to win the deal. At this point in the auction,
      bidders make their final bid without knowledge of what any other bidders are
      bidding. We call this a final “blind” bid. Because a bidder does not know what
      the other bidders will bid in their blind bid, this process has often resulted
      in the leading bidder outbidding itself at the moment before the auction closes
      in an effort to maintain its lead position and win the auction
      event.





Typically,
      a number of auctions tailored to the customer’s specific needs will be held. Our
      exchanges provide rapid results and can accommodate a multitude of permutations
      for offers, including various year terms, quantities, load factors and green
      power requirements. For commercial and industrial customers or project owners,
      we typically run two to six auction events per procurement and for large
      government aggregations that generally are more complex, we typically run 20
      to
      40 auction events. Each auction event usually lasts less than 15 minutes.
      Included as part of any auction transaction are date and time stamping of bids,
      comparison of each bid with benchmark prices, as well as automated stop times,
      which ensure the integrity of auction events. The exchanges are also
      periodically synchronized to the atomic clock which is intended to ensure that
      auction start and stop times are precise.





Following
      an auction, the auction results are analyzed and if the auction has been
      successful, we assist the customer with the contracting process with the winning
      bidder which is typically finalized within one hour of the closing of the last
      auction event. In the case of a commercial energy consumer, we facilitate any
      remaining discussion between the leading energy supplier and the energy consumer
      relating to the energy supplier’s contract terms that were not addressed in
      establishing the auction parameters. In the case of government energy consumers,
      the energy suppliers have seen and, in general, have agreed to the form of
      supply contract being required by the government energy consumer. Accordingly,
      the time period between the end of the auction and the execution of a contract
      is usually shorter than in the case of non-government energy consumers. Not
      all
      auctions result in awarded contracts.





-
          6
          -


As
      part
      of the contracting process between the successful bidder and the customer,
      the
      bidder will enter into a fee addendum with us which provides for payment of
      a
      commission. For electricity contracts, we have historically received a
      commission ranging generally from $0.00005 to $0.0025 per kilowatt hour
      consumed by the energy consumer. For natural gas contracts, we have historically
      received a commission ranging generally from $0.01 to $0.10 per decatherm
      of gas consumed by the energy consumer. For wholesale transactions, we have
      historically received a commission ranging generally from $0.10 - $0.25 per
      megawatt hour and $0.01 to $0.10 per decatherm of gas. For environmental
      commodity transactions, we have historically received a commission ranging
      generally from $0.10 - $0.25 per unit.  If a channel partner was
      involved, the channel partner will receive a commission based on a fee sharing
      arrangement it has negotiated with us in the applicable channel partner
      agreement.





For
      retail energy transactions, the incumbent local utility serving a given location
      is typically obligated to deliver the commodity to the customer’s premises from
      the location where the supplier delivers electricity energy into that local
      utility’s delivery system. However, the energy supplier is responsible for
      enrolling the energy consumer’s account with the applicable local utility and
      the energy supplier remains liable for any costs resulting from the physical
      loss of energy during transmission and delivery to the customer’s premises. We
      never buy, sell or take title to the energy products or environmental
      commodities on our auction platform.





We
      typically interface directly with the customer through the brokerage process.
      However, if a channel partner is involved, the channel partner will often
      perform one or more of the following functions: working with a customer to
      sign
      a procurement services agreement, interacting with the customer relating to
      World Energy analyses, supporting the decision-making, and interfacing with
      the
      customer during the contracting process. However, even if a channel partner
      is
      involved, we are still primarily responsible for tasks such as interacting
      with
      utilities to obtain an energy consumer’s usage history, performing analyses,
      creating RFPs, interfacing with bidders, and scheduling, conducting and
      monitoring auctions and collecting the commission earned from the
      bidder.





Growth
      Strategy





Our
      overall objective is to achieve a preeminent position as the exchange of choice
      for executing transactions in energy and environmental commodities. We seek
      to
      achieve our objective by expanding our community of channel partners, customers
      and bidders on our exchange, strengthening and expanding long-term relationships
      with government agencies, broadening our product offerings, making strategic
      acquisitions, and growing our sales force. Key elements of our strategy are
      as
      follows:





Continuing
      to Develop Channel
      Partner Relationships.  A significant majority of the customers
      using our auction platforms have been introduced to us through our channel
      partners. Our primary growth strategy is to focus on developing and increasing
      our number of channel partner relationships in an effort to expand the base
      of
      customers using our auction platforms. As illustrated by the diagram below,
      we
      have consistently increased the number of channel partners since 2003 from
      6
      to 42, and have recently made investments to focus on recruitment and
      training in an effort to accelerate the addition of channel partners. We will
      also consider future opportunities to work with channel partners who have
      succeeded in establishing a significant customer base. The following table
      sets
      out the growth in our channel partner relationships since the fiscal year ended
      December 31, 2003 and data is presented as at December 31,
      2007.





Number
      of Channel Partners









Strengthening
      and Expanding
      Long-term Relationships with GovernmentAgencies.  We
      intend to build on the relationships we have established with federal, state
      and
      local government agencies. We expect that our expertise in brokering cost-saving
      energy




-
          7
          -


contracts
      for government agencies will continue to be in demand as contract terms expire
      and governments look to contract for low energy prices in a competitive
      market.  We also have seen government agencies leading the way in
      seeking energy supply from renewable sources and in purchasing Renewable Energy
      Certificates. We intend to leverage our government presence into the
      environmental commodities markets.





In
      2001,
      we first penetrated the government segment by brokering energy for the United
      States Federal Government’s General Services Administration, or GSA, as a
      subcontractor to channel partner Science Applications International Corporation,
      or SAIC. In September 2005, we were awarded a five-year contract to provide
      energy brokerage services to the GSA. Working with SAIC, we have completed
      hundreds of auctions resulting in dozens of procurements for GSA and its federal
      government electricity consumers in four states and for natural gas in over
      30 states. Many of these procurements have a “green” component, and
      government customers have purchased over 700,000,000 kilowatt hours of renewable
      energy or renewable energy certificates, and have won two awards for “greening”
their portfolios.





In
      2004,
      together with SAIC, we assisted the State of Maryland in procuring a two-year
      electricity supply contract through our World Energy Exchange, leading to an
      annual savings that we estimate to be over $5 million compared to the
      incumbent utility’s previous rate. In 2005, Maryland was awarded the National
      Association of State Facilities Administrators Innovation Award and the National
      Association of State Chief Administrators Outstanding Program Award in
      recognition of its innovative approach to energy procurement and leadership.
      This recognition has contributed to us along with our channel partners being
      awarded contracts to broker energy for the Commonwealth of Massachusetts,
      Montgomery County, Maryland, the Commonwealth of Pennsylvania, the State of
      Delaware, the State of New Jersey and the State of Connecticut. We intend to
      leverage this track record to secure business relationships with other state
      and
      local governments.





Expand
      our Share in the
      Natural Gas market.  While our core competence has
      traditionally been in electricity brokerage for retail energy consumers, we
      have
      significantly expanded our current natural gas market share with our acquisition
      of substantially all of the assets of EnergyGateway. This acquisition gives
      us
      additional staff, natural gas expertise and a post-and-respond software solution
      to add to our auction capability.  We expect this combination to
      strengthen our natural gas offering and present cross-selling
      opportunities.





Leverage
      Early Wins in the Wholesale
      Market.  An important rationale for our initial public offering
      was to enter the wholesale market where we had initial success in 2005 and
      2006.
      In 2007, we hired five individuals in sales, and subsequent to year end, one
      in
      operations to increase our presence in the wholesale markets. Our initial
      successes have been validated as we have now served fourteen wholesale
      customers, adding twelve new relationships in 2007.  We will continue
      our push into this market segment in order to expand our presence and market
      share.





Brokering
      Environmental
      Commodities.  We have expanded our operations by entering into
      the environmental commodities market by creating the World Green Exchange in
      2007 and successfully transacting a variety of commodities during the fourth
      quarter of 2007. This success led to a market entry announcement with the formal
      launch of the World Green Exchange subsequent to year end.  As
      countries attempt to reduce their environmental emissions in order to achieve
      compliance under the Kyoto Protocol and U.S.-based initiatives, we believe
      that
      the creation and trading of environmental commodities will accelerate. We also
      believe that the characteristics of this market and these commodities – namely
      lack of liquidity, lack of transparency, and product complexity and
      differentiation – make our auction software and process an excellent approach to
      transacting these commodities. We are pursuing several sub-markets both
      domestically and internationally – including serving utilities seeking to meet
      their renewable portfolio standards, working with project owners to maximize
      the
      value of their carbon offsets, and facilitating trades between brokers in the
      secondary market.





Making
      Strategic
      Acquisitions.  We are also pursuing strategic acquisitions to
      help us expand geographically, add expertise and product depth, provide
      accretive revenue and profit streams or a combination of two or more of the
      above.





Growing
      our Direct Sales
      Force.  In certain retail markets and in the emerging wholesale
      energy and environmental commodities markets, we believe a direct sales presence
      will be a benefit to us.  A key growth strategy for us has been to
      open regional offices (in addition to our Worcester headquarters and Washington,
      DC sales offices), and staff them with direct sales people.  In 2007,
      we added 23 sales, marketing and account management personnel, and opened
      offices in Houston, TX, Philadelphia, PA, and Boulder, CO, in addition to adding
      the EnergyGateway office in Dublin, OH.





Bidders,
      Customers and Channel Partners





Bidders.  Our
      success is heavily dependent on our bidder relationships, the credibility of
      our
      bidders and the integrity of the auction process. There are over
      200 competitive electricity and natural gas suppliers and over 75 wholesale
      electricity suppliers registered on the World Energy Exchange, representing
      a
      majority of all suppliers in the deregulated electricity and natural gas
      markets. To date, there are over 30 registered bidders on the World Green
      Exchange. Of the registered energy suppliers, approximately 40 had active
      contracts with energy consumers that were brokered through our World Energy
      Exchange as of December 31, 2007. Two of these energy suppliers each
      accounted for over 10% individually and approximately 31% in the aggregate
      of
      our revenue for the year ended December 31, 2007, and four of these energy
      suppliers each accounted for over 10% individually and approximately 51% in
      the
      aggregate of our revenue for the year ended December 31,
      2006.  In order to participate in an auction event, bidders must
      register with us by either entering into a standard-form agreement pursuant
      to
      which




-
          8
          -


the
      bidder is granted a license to access our auction platform and bid at auction
      events or by qualifying to participate in an auction pursuant to a government
      solicitation. Our national standard form agreement is for an indefinite term,
      may be terminated by either party upon 30 days prior written notice, is
      non-exclusive, non-transferable and cannot be sublicensed. Under our
      standard-form agreement or the government solicitation, the bidder agrees to
      pay
      us a commission, which varies from contract to contract and which is based
      on a
      set rate per energy unit consumed by the customer.





Customers. 
Customers
      using our auction platform to procure energy and environmental commodities
      include government agencies, commercial and industrial energy consumers,
      utilities, municipal utilities, environmental commodity project owners,
      financial institutions and brokers. Government energy consumers have complex
      energy needs in terms of both scope and scale, which we believe can best be
      met
      with a technology-based solution such as the World Energy Exchange.
      Additionally, the automated nature of our World Energy Exchange auction platform
      is designed to support protest free auctions. We have brokered energy for the
      GSA and over 25 federal agencies, Montgomery County, Maryland, the State of
      Maryland, the Commonwealth of Massachusetts, the Commonwealth of Pennsylvania,
      the State of Delaware, the State of New Jersey and the State of
      Connecticut.





Our
      contracts for the online energy procurements with these governmental entities
      are typically for multiple years ranging from 2 to 5 years.  During
      this contractual period, the governmental entity may run various auctions for
      different locations or agencies that fall under their purview.  As a
      result, revenue from these customers could extend beyond the actual contractual
      term.  We currently have contracts with 6 of the 10 currently
      deregulated states that are competitive.  As additional states open
      their electricity markets to competition and suppliers enter those markets
      creating a competitive landscape, we plan to actively market our services to
      them. These contracts do not require that the government energy consumer use
      our
      services and, as is typical in government procurements, contain termination
      for
      convenience clauses.   If a contract was terminated for
      convenience, it would typically not have any bearing on energy delivered through
      the termination date.





Two
      of
      the energy consumers using our auction platform each accounted for over 10%
      individually and approximately 30% in the aggregate of our revenue for the
      year
      ended December 31, 2007, and four of these energy consumers accounted for
      over 10% individually and approximately 63% in the aggregate of our revenue
      for
      the year ended December 31, 2006.




Contract
                Party
            
            Percent
                of Revenue
              for
                the Year Ended
              December 31,
                2007State
                of Maryland
            
            
            16%General
                Services Administration
            
            
            14%




Direct
      Sales.  We
      also maintain a direct sales arm. Retail targets of direct sales efforts are
      typically large companies with facilities in many geographic locations including
      hotel chains, wholesale clubs, property management firms, big box retailers,
      supermarkets, department stores, drug stores, convenience stores, restaurant
      chains, financial services firms, and manufacturers across various
      industries.  We also are pursuing utilities, municipal utilities, and
      retail energy providers in the wholesale market, and project owners, customers
      seeking to meet compliance obligations, and brokers in the environmental
      commodities markets.





Channel
      Partners.  We also target customers through our channel partner
      model. These are firms with existing client relationships with certain customers
      that would benefit from the addition of an online procurement solution. Channel
      partners consist of a diverse array of companies including energy service
      companies, demand side consultants and manufacturers, ABCs and strategic
      sourcing companies, but in the most general terms they are resellers or
      distributors. As of December 31, 2007, we have entered into agreements with
      42 channel partners, including SAIC and Cargill Energy Services, LLC, which
      are currently engaged in efforts to source potential transactions to our
      exchanges, although not all have sourced a transaction for which an auction
      has
      been completed. Upon identifying opportunities with new channel partners, we
      enter into a channel partner agreement that grants the channel partner a
      non-exclusive right to sell our procurement process for a term of one year,
      which term renews automatically unless terminated upon 30 days written
      notice. The channel partner receives a commission based on the amount of
      involvement of the channel partner in the procurement process.





Competition





Customers
      have a broad array of options when purchasing energy or environmental
      commodities. Retail energy consumers can either purchase energy directly from
      the utility at the utility’s rate or purchase energy in the deregulated market
      through one of the following types of entities: competitive energy suppliers,
      ABCs and online brokers. We compete with competitive energy suppliers, ABCs
      and
      other online brokers for energy consumers that are seeking an alternative to
      purchasing directly from the utility. Wholesale customers typically buy from
      generators, traders, traditional brokers who use phone-based methods, or bid-ask
      exchanges.  Environmental commodity customers typically buy or sell
      directly through bilateral transactions, brokers, traders or bid-ask
      exchanges.





Technology





Our
      World
      Energy Exchange and World Green Exchange auction platforms are comprised of
      a
      scalable transaction processing




-
          9
          -


architecture
      and web-based user interface. The auction platforms are primarily based on
      internally developed proprietary software, but also includes third party
      components for user interface elements and reporting. The auction platforms
      support the selling and buying processes including bid placements, bidder
      registration and management, channel partner management, deal process
      management, contract management, site management, collection and commission
      management, and reporting. The auction platforms maintain current and historical
      data online for all of these components.





Our
      technology systems are monitored and upgraded as necessary to accommodate
      increasing levels of traffic and transaction volume on the website. However,
      future upgrades or additional technology licensing may be required to ensure
      optimal performance of our auction platform services. See “Risk Factors” at Item
      1A. To provide maximum uptime and system availability, our auction platform
      is
      hosted in a multi-tiered, secure, and reliable fault tolerant environment which
      includes backup power supply to computer equipment, climate control, as well
      as
      physical security to the building and data center. In the event of a major
      system component failure, such as a system motherboard, spare servers are
      available.





We
      strive
      to offer a high level of data security in order to build the confidence in
      our
      services among customers and to protect the participants’ private information.
      Our security infrastructure has been designed to protect data from unauthorized
      access, both physically and over the Internet. The most sensitive data and
      hardware of the exchanges reside at the data centers.





Intellectual
      Property





We
      enter
      into confidentiality and non-disclosure agreements with third parties with
      whom
      we conduct business in order to limit access to and disclosure of our
      proprietary information.





We
      operate our auction platform under the trade names “World Energy Exchange” and
“World Green Exchange”. We also own the following domain names: worldenergy.com,
      wesplatform.com, wexch.com, worldenergyexchange.com, echoicenet.com,
      e-choicenet.com, worldenergysolutions.com, worldenergysolutions.net,
      worldenergy.biz, worldgreenexchange.com, worldgreenexchange.biz,
      worldgreenexchange.info, worldgreenexchange.us and worldpowerexchange.com.
      To
      protect our intellectual property, we rely on a combination of copyright and
      trade secret laws and the domain name dispute resolution system.





Our
      corporate name and certain of our trade names may not be eligible for protection
      if, for example, they are generic or in use by another party. We may be unable
      to prevent competitors from using trade names or corporate names that are
      confusingly similar or identical to ours. A company organized under the laws
      of
      the State of Florida and whose shares are publicly traded under the symbol
      “WEGY” also operates under the name “World Energy Solutions, Inc.” According to
      its filings with the Securities and Exchange Commission, this other company
      changed its name to “World Energy Solutions” in November 2005, and is in the
      business of energy conservation technologies and environmental
      sustainability.  This appears to be a different business than ours. We
      cannot assure you that this other company will not seek to challenge our right
      to the use of our name, in which case we could be drawn into litigation and,
      if
      unsuccessful could be required, or could decide, to cease using the name World
      Energy Solutions, Inc., in which case we would not realize any value we had
      built in our name.  Additionally, our reputation could be damaged if
      the other company continues its use of the name World Energy Solutions, Inc.
      and
      such other company develops a negative reputation.





We
      do not
      have any patents and if we are unable to protect our copyrights, trade secrets
      or domain names, our business could be adversely affected. Others may claim
      in
      the future that we have infringed their intellectual property
      rights.





Personnel





As
      of
      December 31, 2007, we had sixty-three employees consisting of three members
      of senior management, twenty-nine sales and marketing employees, four
      information technology employees, twenty-two trading desk employees and five
      administrative employees. In addition, we rely on a number of consultants and
      other advisors. The extent and timing of any increase in staffing will depend
      on
      the availability of qualified personnel and other developments in our business.
      None of the employees are represented by a labor union, and we believe that
      we
      have good relationships with our employees.





Company
      Information





We
      commenced operations through an entity named Oceanside Energy, Inc., or
      Oceanside, which was incorporated under the laws of the State of Delaware on
      September 3, 1996. We incorporated World Energy Solutions, Inc. under the
      laws of the State of Delaware under the name “World Energy Exchange, Inc.” on
      June 22, 1999, and on October 31, 1999, Oceanside became a
      wholly-owned subsidiary of World Energy Solutions, Inc. through a share exchange
      whereby Oceanside stockholders were given shares of common stock of World Energy
      in exchange for their Oceanside shares. Oceanside was subsequently dissolved
      on
      May 18, 2006. On December 21, 2006, we incorporated a 100% owned
      subsidiary, World Energy Securities Corp., under the laws of the Commonwealth
      of
      Massachusetts.





On
      December 5, 2006 we concluded our initial public offering for the sale of
      23,000,000 shares of common stock resulting in net proceeds to the Company
      of
      approximately $17.5 million (net of offering costs of approximately $3.6
      million).  In connection with the closing of this offering all of the
      outstanding shares of convertible preferred stock and non-voting common stock




-
          10
          -


converted
      into 19,416,310 shares of voting common stock.





Our
      registered and principal office is located at 446 Main Street, Worcester,
      Massachusetts, 01608, United States of America, and our telephone number is
      (508) 459-8100. Our website is located at www.worldenergy.com.





Item
      1A. Risk
      Factors





You
      should carefully consider the
      risksand uncertainties
      described below before deciding to invest in shares of our common stock.
      Ifany of the following
      risks or uncertainties actually occurs, our business, prospects,financial condition
      and operating
      results would likely suffer, possibly materially.In that event, the
      market price of
      our common stock could decline and you could loseall or part of your
      investment.





Risks
      Related to Our Business





We
      have limited
      operating experience and a history of operating losses, and we may
      besubject
      to risks
      inherent in early stage companies, which may make it difficult foryou
      to evaluate
      our business and prospects.





We
      have a
      limited operating history upon which you can evaluate our business and
      prospects. We began assisting in energy transactions in 2001 and introduced
      our
      current auction model in April of that same year. Further, we have a history
      of
      losses and, at December 31, 2007, we had an accumulated deficit of
      approximately $12.9 million. We cannot provide any assurance that we will
      be profitable in any given period or at all. You must consider our business,
      financial history and prospects in light of the risks and difficulties we face
      as an early stage company with a limited operating history. In particular,
      our
      management may have less experience in implementing our business plan and
      strategy compared to our competitors, including our strategy to increase our
      market share and build our brand name. In addition, we may face challenges
      in
      planning and forecasting accurately as a result of our limited historical data
      and inexperience in implementing and evaluating our business strategies. Our
      inability to successfully address these risks, difficulties and challenges
      as a
      result of our inexperience and limited operating history may have a negative
      impact on our ability to implement our strategic initiatives, which may have
      a
      material adverse effect on our business, prospects, financial condition and
      results of operations.





Our
      costs will
      increase significantly as we expand our business and in the event
      thatour
      revenue does
      not increase proportionately, we will generate significantoperating
      losses
      in the future.





We
      expect
      to significantly increase our operating expenses as we continue to expand our
      brokerage capabilities to offer additional energy-related products, increase
      our
      sales and marketing efforts and develop our administrative organization. We
      also
      are incurring increased costs as a result of being a publicly held company
      with
      shares listed on the Toronto Stock Exchange. As we seek to expand our business
      rapidly, we may incur significant operating losses. For the twelve months ended
      December 31, 2007, we incurred a net loss of approximately $8.6 million,
      which was a direct result of these increased costs. In addition, our budgeted
      expense levels are based, in significant part, on our expectations as to future
      revenue and are largely fixed in the short term. As a result, we may be unable
      to adjust spending in a timely manner to compensate for any unexpected shortfall
      in revenue which could compound those losses in any given fiscal
      period.





Our
      business is
      heavily influenced by how much regulated utility prices for energyare
      above or
      below competitive market prices for energy and, accordingly, any
      changesin
      regulated
      prices or cyclicality or volatility in competitive market pricesheavily
      impacts
      our business.





When
      energy prices increase in competitive markets above the price levels of the
      regulated utilities, energy consumers are less likely to lock-in to higher
      fixed
      price contracts in the competitive markets and so they are less likely to use
      our auction platform. Accordingly, reductions in regulated energy prices can
      severely negatively impact our business. Any such reductions in regulated energy
      prices over a large geographic area or over a long period of time would have
      a
      material adverse effect on our business, prospects, financial condition and
      results of operations. Similarly, cyclicality or volatility in competitive
      market prices that have the effect of driving those prices above the regulated
      utility prices will make our auction platform less useful to energy consumers
      and will negatively impact our business.





The
      online
      brokerage of energy and environmental commodities is a relativelynew
      and emerging
      market and it is uncertain whether our auction model willgain
      widespread
      acceptance.





The
      emergence of competition in the energy and environmental commodities markets
      are
      relatively recent developments, and industry participants have not yet achieved
      consensus on how to most efficiently take advantage of the competitive
      environment. We believe that as the online energy brokerage industry matures,
      it
      is likely to become dominated by a relatively small number of competitors that
      can offer access to the largest number of competitive suppliers and consumers.
      Brokerage exchanges with the highest levels of transaction volume will likely
      be
      able to offer energy suppliers lower transaction costs and offer consumers
      better prices, which we believe will increasingly create competitive barriers
      for smaller online brokerage exchanges. For us to capitalize on our position
      as
      an early entrant into this line of business, we will need to generate widespread
      support for our auction platform and continue to rapidly expand the scale of
      our
      operations. Other online auction or non-auction strategies may prove to be
      more




-
          11
          -


attractive
      to the industry than our auction model. If an alternative brokerage exchange
      model becomes widely accepted in the electricity industry and/or the other
      energy-related industries we participate in, our business will
      fail.





We
      depend on a
      small number of key energy consumers for a significant portion of
      ourrevenue,
      many of
      which are government entities that have no obligation to use ourauction
      platform
      or continue their relationship with us, and the partial or completeloss
      of business
      of one or more of these consumers could negatively affect ourbusiness.





We
      have
      an energy consumer base comprised primarily of large businesses and government
      organizations. Two of these energy consumers each accounted for over 10%
      individually and approximately 30% in the aggregate of our revenue for the
      year
      ended December 31, 2007, and four of these energy consumers accounted for
      over 10% individually and approximately 63% in the aggregate of our revenue
      for
      the year ended December 31, 2006. Our government contracts are typically
      for multiple years but are subject to government funding contingencies and
      cancellation for convenience clauses. Although our non-government contracts
      create a short-term exclusive relationship with the energy consumer, typically
      this exclusivity relates only to the specific auction event and expires during
      the term of the energy contract. Accordingly, we do not have ongoing commitments
      from these energy consumers to purchase any of their incremental energy
      requirements utilizing our auction platform, and they are not prohibited from
      using competing brokerage services. The loss of any of these key energy
      consumers will negatively impact our revenue, particularly in the absence of
      our
      ability to attract additional energy consumers to use our service.





We
      do not have
      contracts for fixed volumes with the energy suppliers who use ourauction
      platform
      and we depend on a small number of key energy suppliers, and thepartial
      or
      complete loss of one or more of these energy suppliers as a participant
      onour
      auction
      platform could undermine our ability to execute effective
      auctions.





We
      do not
      have contracts for fixed volumes with any of the energy suppliers who use our
      auction platform. Two energy suppliers each accounted for over 10% individually
      and approximately 32% in the aggregate of our revenue for the year ended
      December 31, 2007, and four of these energy suppliers each accounted for
      over 10% individually and approximately 51% in the aggregate of our revenue
      for
      the year ended December 31, 2006. The loss of any of these or other
      significant suppliers will negatively impact our operations, particularly in
      the
      absence of our ability to locate additional national suppliers. We do not have
      agreements with any of these suppliers preventing them from directly competing
      with us or utilizing competing services.





We
      depend on our
      channel partners to establish and develop certain of ourrelationships
      with energy consumers and the loss of certain channel partners couldresult
      in the
      loss of certain key energy consumers.





We
      rely
      on our channel partners to establish certain of our relationships with energy
      consumers. Our ability to maintain our relationships with our channel partners
      will impact our operations and revenue. We depend on the financial viability
      of
      our channel partners and their success in procuring energy consumers on our
      behalf. One of our channel partners was involved with identifying and qualifying
      energy consumers which entered into contracts that accounted for approximately
      38% and 63% of our revenue for the years ended December 31, 2007 and December
      31, 2006, respectively. Channel partners may be involved in various aspects
      of a
      deal including but not limited to lead identification, the selling process,
      project management, data gathering, contract negotiation, deal closing and
      post-auction account management. To the extent that a channel partner ceases
      to
      do business with us, or goes bankrupt, dissolves, or otherwise ceases to carry
      on business, we may lose access to that channel partner’s existing client base,
      in which case the volume of energy traded through the World Energy Exchange
      will
      be adversely affected and our revenue will decline.





If
      we are unable
      to rapidly implement some or all of our major strategic initiatives,our
      ability to
      improve our competitive position may be negatively impacted.





Our
      strategy is to improve our competitive position by implementing certain key
      strategic initiatives in advance of competitors, including the
      following:





•
            continue
                to develop channel partner
                relationships;





•
            strengthen
                and expand long-term relationships with government
                agencies;





•
            target
                other energy-related markets;





•
            target
                utilities in order to broker energy-related products for
                them;





•
            further
                develop a green credits auction
                platform


•
              make
                    strategic acquisitions; and
 
 •
              grow
                    our direct sales force.




We
      cannot
      assure you that we will be successful in implementing any of these key strategic
      initiatives, or that our time to




-
          12
          -


market
      will be sooner than that of competitors. Some of these initiatives relate to
      new
      services or products for which there are no established markets, or in which
      we
      lack experience and expertise. In addition, the execution of our growth
      strategies will require significant increases in working capital expenses and
      increases in capital expenditures and management resources and may subject
      us to
      additional regulatory oversight.





If
      we are
      unable to rapidly implement some or all of our key strategic initiatives in
      an
      effective and timely manner, our ability to improve our competitive position
      may
      be negatively impacted, which would have a material and adverse effect on our
      business and prospects.





We
      currently
      derive substantially all of our revenue from the brokerage ofelectricity,
      and
      as a result our business is highly susceptible to factors affectingthe
      electricity
      market over which we have no control.





We
      derived approximately 75% of revenue during 2007 and 93% of revenue during
      2006
      from the brokerage of electricity. Although we expect that our reliance on
      the
      brokerage of electricity will diminish as we implement our strategy to expand
      brokerage into other markets, we believe that our revenue will continue to
      be
      highly dependent on the level of activity in the electricity market for the
      near
      future. Transaction volume in the electricity market is subject to a number
      of
      variables, such as consumption levels, pricing trends, availability of supply
      and other variables. We have no control over these variables, which are affected
      by geopolitical events such as war, threat of war, terrorism, civil unrest,
      political instability, environmental or climatic factors and general economic
      conditions. We are particularly vulnerable during periods when energy consumers
      perceive that electricity prices are at elevated levels since transaction volume
      is typically lower when prices are high relative to regulated utility prices.
      Accordingly, if electricity transaction volume declines sharply, our results
      will suffer.





Our
      success
      depends on the widespread adoption of purchasing electricity fromcompetitive
      sources.





Our
      success will depend, in large part, on the willingness of commercial, industrial
      and governmental, or CIG, energy consumers to embrace competitive sources of
      supply, and on the ability of our energy suppliers to consistently source
      electricity at competitive rates. In most regions of North America, energy
      consumers have either no or relatively little experience purchasing electricity
      in a competitive environment. Although electricity consumers in deregulated
      regions have been switching from incumbent utilities to competitive sources,
      there can be no assurance that the trend will continue. In a majority of states
      and municipalities, including some areas which are technically “deregulated”,
      electricity is still provided by the incumbent local utility at subsidized
      rates
      or at rates that are too low to stimulate meaningful competition by other
      providers. In addition, extreme price volatility could delay or impede the
      widespread adoption of competitive markets. To the extent that competitive
      markets do not continue to develop rapidly our prospects for growth will be
      constrained. Also, there can be no assurance that trends in government
      deregulation of energy will continue or will not be reversed. Increased
      regulation of energy would significantly damage our business.





Even
      if our
      auction brokerage model achieves widespread acceptance as the
      preferredmeans
      to transact
      electricity and other energy-related products, we may beunsuccessful
      in
      competing against current and future competitors.





We
      expect
      that competition for online brokerage of electricity and other energy-related
      products will intensify in the near future in response to expanding restructured
      energy markets that permit consumer choice of energy sources and as
      technological advances create incentives to develop more efficient and less
      costly energy procurement in regional and global markets. The barriers to entry
      into the online brokerage marketplace are relatively low, and we expect to
      face
      increased competition from traditional off-line energy brokers, other
      established participants in the energy industry, online services companies
      that
      can launch online auction services that are similar to ours and demand response
      providers.





Many
      of
      our competitors and potential competitors have longer operating histories,
      better brand recognition and significantly greater financial resources than
      we
      do. The management of some of these competitors may have more experience in
      implementing their business plan and strategy and they may have pre-existing
      commercial or other relationships with large energy consumers and/or suppliers
      which would give them a competitive advantage. We expect that as competition
      in
      the online marketplace increases, brokerage commissions for the energy industry
      will decline, which could have a negative impact on the level of brokerage
      fees
      we can charge per transaction and may reduce the relative attractiveness of
      our
      exchange services. We expect that our costs relating to marketing and human
      resources may increase as our competitors undertake marketing campaigns to
      enhance their brand names and to increase the volume of business conducted
      through their exchanges. We also expect many of our competitors to expend
      financial and other resources to improve their network and system infrastructure
      to compete more aggressively. Our inability to adequately address these and
      other competitive pressures would have a material adverse effect on our
      business, prospects, financial condition and results of operations.





We
      depend on the
      services of our senior executives and other key personnel, the lossof
      whom could
      negatively affect our business.





Our
      future performance will depend substantially on the continued services of our
      senior management and other key personnel, including our senior vice president
      of sales and marketing, vice presidents of business development, chief
      information officer, senior vice presidents of operations and our market
      directors. If any one or more of such persons leave their positions and we
      are




-
          13
          -


unable
      to
      find suitable replacement personnel in a timely and cost efficient manner,
      our
      business may be disrupted and we may not be able to achieve our business
      objectives, including our ability to manage our growth and successfully
      implement our strategic initiatives. We do not have long-term employment
      agreements with any of our senior management or other key personnel and we
      do
      not have a non-competition agreement with our current chief executive
      officer.





We
      must
      also continue to seek ways to retain and motivate all of our employees through
      various means, including through enhanced compensation packages. In addition,
      we
      will need to hire more employees as we continue to implement our key strategy
      of
      building on our market position and expanding our business. Competition for
      qualified personnel in the areas in which we compete remains intense and the
      pool of qualified candidates is limited. Our failure to attract, hire and retain
      qualified staff on a cost efficient basis would have a material adverse effect
      on our business, prospects, financial condition, results of operations and
      ability to successfully implement our growth strategies.





We
      depend on
      third-party service and technology providers and any loss or
      break-downin
      those
      relationships could damage our operations significantly if we are unable
      tofind
      alternative
      providers.





We
      depend
      on a number of third party providers for web hosting, elements of our online
      auction system, data management and other systems, as well as communications
      and
      networking equipment, computer hardware and software and related support and
      maintenance. There can be no assurance that any of these providers will be
      able
      to continue to provide these services without interruption and in an efficient,
      cost-effective manner or that they will be able to adequately meet our needs
      as
      our transaction volume increases. An interruption in or the cessation of such
      third-party services and our inability to make alternative arrangements in
      a
      timely manner, or at all, could have a material adverse effect on our business,
      financial condition and operating results. There is also no assurance that
      any
      agreements that we have in place with such third-party providers will be
      renewed, or if renewed, renewed on favorable terms.





Our
      business
      depends heavily on information technology systems the interruption
      orunavailability
      of
      which could materially damage our operations.





The
      satisfactory performance, reliability and availability of our exchange,
      processing systems and network infrastructure are critical to our reputation
      and
      our ability to attract and retain energy consumers and energy suppliers to
      the
      World Energy Exchange. Our efforts to mitigate systems risks may not be adequate
      and the risk of a system failure or interruption cannot be eliminated. Although
      we have never experienced an unscheduled interruption of service, any such
      interruption in our services may result in an immediate, and possibly
      substantial, loss of revenue and damage to our reputation.





Our
      business also depends upon the use of the Internet as a transactions medium.
      Therefore, we must remain current with Internet use and technology developments.
      Our current technological architecture may not effectively or efficiently
      support our changing business requirements.





Any
      substantial increase in service activities or transaction volume on the World
      Energy Exchange and the World Green Exchange may require us to expand and
      upgrade our technology, transaction processing systems and network
      infrastructure. There can be no assurance that we will be able to successfully
      do so, and any failure could have a material adverse effect on our business,
      results of operations and financial condition.





Breaches
      of
      online security could damage or disrupt our reputation and our ability
      todo
      business.





To
      succeed, online communications must provide a secure transmission of
      confidential information over public networks. Security measures that are
      implemented may not always prevent security breaches that could harm our
      business. Although to our knowledge we have never experienced a breach of online
      security, compromise of our security could harm our reputation, cause users
      to
      lose confidence in our security systems and to not source their energy using
      our
      auction platform and also subject us to lawsuits, sanctions, fines and other
      penalties. In addition, a party who is able to circumvent our security measures
      could misappropriate proprietary information, cause interruptions in our
      operations, damage our computers or those of our users, or otherwise damage
      our
      reputation and business. Our insurance policies may not be adequate to reimburse
      us for losses caused by security breaches.





We
      may
      need to expend significant resources to protect against security breaches or
      to
      address problems caused by breaches. These issues are likely to become more
      difficult and costly as our business expands.





To
      the extent
      that we expand our operations into foreign markets, additional costsand
      risks
      associated with doing business internationally will apply.





It
      is
      possible that we will have international operations in the near future. These
      operations may include the brokering of green credits in countries signatory
      to
      the Kyoto Protocol, the outsourcing of data and programming to lower cost
      locations, and the brokering of energy in other geographic markets where we
      believe the demand for our services may be strong. To the extent we enter
      geographic markets outside of the United States, our international operations
      will be subject to a number of risks and potential costs,
      including:





-
          14
          -


•
            different
                regulatory requirements governing the energy
                marketplace;





•
            difficulty
                in establishing, staffing and managing international
                operations;





•
            regulatory
                regimes governing the Internet and auctioneering that may limit or
                prevent
                our operations in some
                jurisdictions;





•
            different
                and more stringent data privacy
                laws;





•
            differing
                intellectual property laws;





•
            differing
                contract laws that prevent the enforceability of agreements between
                energy
                suppliers and energy consumers;





•
            the
                imposition of special taxes, including local taxation of our fees
                or of
                transactions through our exchange;





•
            strong
                local competitors;





•
            currency
                fluctuations; and





•
            political
                and economic instability.





Our
      failure to manage the risks associated with international operations could
      limit
      the future growth of our business and adversely affect our operating results.
      We
      may be required to make a substantial financial investment and expend
      significant management efforts in connection with any international
      expansion.





The
      application
      of taxes including sales taxes and other taxes could negativelyaffect
      our
      business.





The
      application of indirect taxes (such as sales and use tax, value added tax,
      goods
      and services tax, business tax, and gross receipt tax) to e-commerce businesses
      and our users is a complex and evolving issue. Many of the fundamental statutes
      and regulations that impose these taxes were established before the growth
      of
      the Internet and e-commerce. In many cases, it is not clear how existing
      statutes apply to the Internet or e-commerce. In addition, some jurisdictions
      have implemented or may implement laws specifically addressing the Internet
      or
      some aspect of e-commerce. The application of existing or future laws could
      have
      adverse effects on our business.





Several
      proposals have been made at the United States state and local level that would
      impose additional taxes on the sale of goods and services through the Internet.
      These proposals, if adopted, could substantially impair the growth of
      e-commerce, and could diminish our opportunity to derive financial benefit
      from
      our activities. The United States federal government’s moratorium on states and
      other local authorities imposing access or discriminatory taxes on the Internet,
      which was scheduled to expire on November 1, 2007, has been extended by seven
      years. This moratorium, however, does not prohibit federal, state, or local
      authorities from collecting taxes on our income or generally from collecting
      taxes that are due under existing tax rules.





In
      conjunction with the Streamlined Sales Tax Project — an ongoing, multi-year
      effort by certain state and local governments to require collection and
      remittance of distant sales tax by out-of-state sellers — bills have been
      introduced in the U.S. Congress to overturn the Supreme Court’s Quilldecision, which limits
      the ability of state governments to require sellers outside of their own state
      to collect and remit sales taxes on goods purchased by in-state residents.
      An
      overturning of the Quilldecision would harm
      our users and our business.





The
      passage of new legislation and the imposition of additional tax requirements
      could increase the costs to energy suppliers and energy consumers using our
      auction platform and, accordingly, could harm our business. There have been,
      and
      will continue to be, ongoing costs associated with complying with the various
      indirect tax requirements in the numerous states, localities or countries in
      which we currently conduct or will conduct business.





U.S. federal
      or state legislative or regulatory reform of the current systemsgoverning
      commodities or energy may affect our ability to conduct our businessprofitably.





We
      are
      currently not regulated as an energy provider, broker or commodities dealer.
      Changes to the laws or regulations governing activities related to commodities
      trading or energy procurement, supply, distribution or sale, or transacting
      in
      energy-related products or securities could adversely affect the profitability
      of our brokerage operations or even our ability to conduct auctions. In
      addition, our future lines of business under consideration, including
      transacting in green credits, could subject us to additional regulation. Changes
      to the current regulatory framework could result in additional costs and
      expenses or prohibit certain of our current business activities or future
      business plans. We cannot predict the form any such legislation or rule making
      may take, the probability of passage, and the ultimate effect on
      us.





We
      may expand our business through acquisition of other businesses and technologies
      which will present special risks.





-
          15
          -


We
      may
      expand our business in certain areas through the acquisition of businesses,
      technologies, products and services from other businesses. Acquisitions involve
      a number of special problems, including:




•   the
      need to incur additional indebtedness, issue stock or use cash in order to
      complete the acquisition;




•   difficulty
      integrating acquired technologies, operations and personnel with the existing
      business;




•   diversion
      of management attention in connection with both negotiating the acquisitions
      and
      integrating the assets;




•   strain
      on managerial and operational resources as management tries to oversee larger
      operations;




•   the
      funding requirements for acquired companies may be significant;




•   exposure
      to unforeseen liabilities of acquired companies;




•   increased
      risk of costly and time-consuming litigation, including stockholder lawsuits;
      and




•   potential
      issuance of securities in connection with an acquisition with rights that are
      superior to the rights of our common stockholders, or which may have a dilutive
      effect on our common stockholders.




We
      may
      not be able to successfully address these problems. Our future operating results
      will depend to a significant degree on our ability to successfully integrate
      acquisitions and manage operations while also controlling expenses and cash
      burn.





Risks
      Relating to Intellectual Property





We
      may be unable
      to adequately protect our intellectual property, which could harm usand
      affect our
      ability to compete effectively.





We
      have
      developed proprietary software, logos, brands, service names and web sites,
      including our proprietary auction platform. Although we have taken certain
      limited steps to protect our proprietary intellectual property (including
      consulting with outside patent and trademark counsel regarding protection of
      our
      intellectual property and implementing a program to protect our trade secrets),
      we have not applied for any patents with respect to our auction platform, and
      although we have filed applications for certain trademarks, we have not
      registered any trademarks. The steps we have taken to protect our intellectual
      property may be inadequate to deter misappropriation of our proprietary
      information or deter independent development of similar technologies by others.
      We may not be able to prevent the unauthorized disclosure or use of our
      technical knowledge or trade secrets by consultants, vendors, former employees
      and current employees, despite the existence of confidentiality agreements
      and
      other contractual restrictions. If our intellectual property rights are not
      adequately protected, we may not be able to continue to commercialize our
      services. We may be unable to detect the unauthorized use of, or take adequate
      steps to enforce, our intellectual property rights. In addition, certain of
      our
      trade names may not be eligible for protection if, for example, they are generic
      or in use by another party. Accordingly, we may be unable to prevent competitors
      from using trade names that are confusingly similar or identical to
      ours.





Our
      auction
      platform, services, technologies or usage of trade names could
      infringethe
      intellectual
      property rights of others, which may lead to litigation that coulditself
      be costly,
      could result in the payment of substantial damages or royalties,and/or
      prevent us
      from using technology that is essential to our business.





Although
      no third party has threatened or alleged that our auction platform, services,
      technologies or usage of trade names infringe their patents or other
      intellectual property rights, we cannot assure you that we do not infringe
      the
      patents or other intellectual property rights of third parties.





Infringement
      and other intellectual property claims and proceedings brought against us,
      whether successful or not, could result in substantial costs and harm to our
      reputation. Defending our intellectual property rights could result in the
      expenditure of significant financial and managerial resources, which could
      adversely affect our business, financial condition, and operating results.
      If
      our business is successful, the possibility may increase that others will assert
      infringement claims against us.





We
      use
      intellectual property licensed from third parties in our operations. There
      is a
      risk that such licenses may be terminated, which could significantly disrupt
      our
      business. In such an event, we may be required to spend significant time and
      money to develop a non-infringing system or process or license intellectual
      property that does not infringe upon the rights of that other party or to obtain
      a license for the intellectual property from the owner. We may not be successful
      in that development or any such license may not be available on commercially
      acceptable terms, if at all. In addition, any litigation could be lengthy and
      costly and could adversely affect us even if we are successful in such
      litigation.





Our
      corporate name and certain of our trade names may not be eligible for protection
      if, for example, they are generic or in use by another party. We may be unable
      to prevent competitors from using trade names or corporate names that are
      confusingly similar or identical to ours. A company organized under the laws
      of
      the State of Florida and whose shares are publicly traded under the symbol
      “WEGY” also operates under the name “World Energy Solutions, Inc.” According to
      its filings with the Securities and Exchange Commission, this other company
      changed its name to “World Energy Solutions” in November 2005, and




-
          16
          -


is
      in the
      business of energy conservation technologies and environmental sustainability.
      This appears to be a different business than ours. We cannot assure you that
      this other company will not seek to challenge our right to the use of our name,
      in which case we could be drawn into litigation and, if unsuccessful could
      be
      required, or could decide, to cease using the name World Energy Solutions,
      Inc.,
      in which case we would not realize any value we had built in our name.
      Additionally, our reputation could be damaged if the other company continues
      its
      use of the name World Energy Solutions, Inc. and such other company develops
      a
      negative reputation.





Risks
      Relating to Ownership of Our Common Stock





Because
      there is
      a limited trading history for our common stock and our stock pricemay
      be volatile,
      you may not be able to resell your shares at or above your purchase
      price.





We
      cannot
      predict the extent to which investors’ interests will provide an active trading
      market for our common stock or whether the market price of our common stock
      will
      be volatile. The market for early stage Internet and technology stocks has
      been
      extremely volatile. The following factors, many of which are outside of our
      control, could cause the market price of our common stock to decrease
      significantly from recent prices:





•
            loss
                of any of the major energy consumers or suppliers using our auction
                platform;





•
            departure
                of key personnel;





•
            variations
                in our quarterly operating results;





•
            announcements
                by our competitors of significant contracts, new transaction capabilities,
                enhancements, lower fees, acquisitions, distribution partnerships,
                joint
                ventures or capital commitments;





•
            changes
                in governmental regulations and standards affecting the energy industry
                and our products, including implementation of additional regulations
                relating to consumer data privacy;





•
            decreases
                in financial estimates by equity research
                analysts;





•
            sales
                of common stock or other securities by us in the
                future;





•
            decreases
                in market valuations of Internet or technology
                companies; and





•
            fluctuations
                in stock market prices and volumes.





In
      the
      past, securities class action litigation often has been initiated against a
      company following a period of volatility in the market price of the company’s
      securities. If class action litigation is initiated against us, we will incur
      substantial costs and our management’s attention will be diverted from our
      operations. All of these factors could cause the market price of our stock
      to
      decline, and you may lose some or all of your investment. Also due to the size
      of the market capitalization of our shares, and the fact that we are only
      publicly listed on the Toronto Stock Exchange, the market for our common stock
      may be volatile and may not afford a high level of liquidity.





Future
      sales of
      our common stock by persons who were stockholders prior to our initial public
      offering or who required restricted securities that became available for public
      resale could cause our stock priceto
      decline.





If
      persons who were stockholders prior to our initial public offering sell
      substantial amounts of our common stock in the public market, the market price
      of our common stock could decrease significantly. The perception in the public
      market that our stockholders might sell shares of common stock could also
      depress the market price of our common stock. A substantial portion of our
      stockholders prior to our initial public offering were subject to lock-up
      agreements with the underwriters that restricted their ability to transfer
      their
      stock for at least 365 days after the date of the offering. On November 30,
      2007, these lock-up provisions expired and an additional 43,368,733 shares
      of our common stock became eligible for sale in the public market. In addition,
      in January 2007 we filed a registration statement with the SEC covering all
      of the shares subject to options outstanding, but not exercised, and all of
      the
      shares available for future issuance under our stock incentive plans. In
      November 2007, we filed a registration statement with the SEC covering all
      of
      the shares issued to the former owner of the EnergyGateway shares.  A
      decline in the price of shares of our common stock might impede our ability
      to
      raise capital through the issuance of additional shares of our common stock
      or
      other equity securities, and may cause you to lose part or all of your
      investment in our shares of common stock.





Massachusetts
      Capital Resource Company holds certain piggy-back and demand registration rights
      with respect to 600,000 shares. Certain underwriters for our initial public
      offering have piggy-back registration rights with respect to shares issuable
      upon exercise of the warrants issued in connection with our initial public
      offering. In the event that the holders of




-
          17
          -


registration
      rights were to exercise such rights, upon registration of the shares of our
      common stock in connection with any such exercises, sales of a substantial
      number of shares of our common stock in the applicable public market could
      occur. Such sales, or the perception in such market that the holders of a large
      number of shares intend to sell shares, could reduce the market price of our
      common stock.





Our
      directors and
      executive officers have substantial control overus
      and could
      limit your ability to influence the outcome of keytransactions,
      including changes of control.





As
      of
      February 29, 2008, our executive officers and directors and entities affiliated
      with them, beneficially own, in the aggregate, approximately 29% of our
      outstanding common stock. In particular, Richard Domaleski, our chief executive
      officer, beneficially owns approximately 23% of our outstanding common stock.
      Our executive officers, directors and affiliated entities, if acting together,
      would be able to control or influence significantly all matters requiring
      approval by our stockholders, including the election of directors and the
      approval of mergers or other significant corporate transactions. These
      stockholders may have interests that differ from yours, and they may vote in
      a
      way with which you disagree and that may be adverse to your interests. The
      concentration of ownership of our common stock may have the effect of delaying,
      preventing or deterring a change of control of our company, could deprive our
      stockholders of an opportunity to receive a premium for their common stock
      as
      part of a sale of our company, and may affect the market price of our common
      stock.





Our
      corporate
      documents and Delaware law make a takeover of our company moredifficult,
      we
      have a classified board of directors and certain provisions of ourcertificate
      of
      incorporation and by-laws require a super-majority vote to amend,
      allof
      which may
      prevent certain changes in control and limit the market price of ourcommon
      stock.





Our
      charter and by-laws contain provisions that might enable our management to
      resist a takeover of our company. Our certificate of incorporation and by-laws
      establish a classified board of directors such that our directors serve
      staggered three-year terms and do not all stand for re-election every year.
      In
      addition, any action required or permitted to be taken by our stockholders
      at an
      annual meeting or special meeting of stockholders may only be taken if it is
      properly brought before the meeting and may not be taken by written action
      in
      lieu of a meeting, and special meetings of the stockholders may only be called
      by the chairman of the Board, the Chief Executive Officer or our Board. Further,
      our certificate of incorporation provides that directors may be removed only
      for
      cause by the affirmative vote of the holders of 75% of our shares of capital
      stock entitled to vote, and any vacancy on our Board, including a vacancy
      resulting from an enlargement of our Board, may only be filled by vote of a
      majority of our directors then in office. In addition, our by-laws establish
      an
      advance notice procedure for stockholder proposals to be brought before an
      annual meeting of stockholders, including proposed nominations of persons for
      election to the Board. These provisions of our certificate of incorporation
      and
      by-laws, including those setting forth the classified board, require a
      super-majority vote of stockholders to amend. These provisions might discourage,
      delay or prevent a change in the control of our company or a change in our
      management. These provisions could also discourage proxy contests and make
      it
      more difficult for you and other stockholders to elect directors and take other
      corporate actions. The existence of these provisions could limit the price
      that
      investors might be willing to pay in the future for shares of our common
      stock.





We
      may choose not
      to continue to file periodic reports with the SEC  if we are not
      required to do so, which would limit the information availableabout
      us in the
      United States, and because we are not listing on a United Statesexchange,
      we do
      not have the same disclosure and corporate governance obligations asa
      company that is
      so listed.





Under
      United States securities laws, we are required to file informational reports
      about us with the SEC, including periodic reports on Forms 10-K and 10-Q
      and current reports on Form 8-K. However, unless we list our shares on a
      market located in the United States, our obligation to file those reports will
      be suspended as to any year in the event that our shares are held by fewer
      than
      300 stockholders of record as of the beginning of that year. In such an event,
      we may choose not to file those reports and the information you would thereafter
      receive about us would be limited. We may choose not to file those reports
      for
      cost or other reasons. In addition, in the event we are not required to be
      a
      reporting issuer under the Exchange Act we will no longer be subject to certain
      rules intended to protect U.S. investors, such as the Sarbanes-Oxley Act.
      Our determination not to file those reports could have the result of limiting
      the market for our shares, and thereby have a negative effect on our stock
      price. Should we not have an obligation to file periodic reports in accordance
      with United States securities laws, we expect to file periodic reports in
      compliance with National Instrument 51-102 of the Canadian securities regulators
      so long as shares of our common stock is listed on the Toronto Stock
      Exchange.





Our
      shares are registered on the Toronto Stock Exchange and not on any
      U.S. exchange. Because we are not currently listed on any
      U.S. exchange, we do not have the same disclosure and corporate governance
      obligations as companies that are listed on a U.S. exchange. However, we
      are subject to corporate governance and disclosure requirements of companies
      listed on the Toronto Stock Exchange and as a result of being a reporting issuer
      in each of the provinces of Canada.





Item
      1B.  Unresolved Staff Comments





Not
      applicable.





-
          18
          -


Item
      2.  Properties





We
      do not
      own any real property. We lease the business premises in the following locations
      for the stated principal uses:





Location
            Approximate
              Floor
                Space
              (Square
                Feet)
            
            Principal
                Use446
                Main Street, Worcester, Massachusetts (1)
            7,458
            
            Executive
                office and general administration1215
                19th Street
                NW, Washington, District of Columbia (2)
            400
            
            Branch
                office1035
                Pearl Street, Boulder, CO (3)
            322
            
            Branch
                office10001
                Woodloch Forest Drive, The Woodlands, TX (4)
            2,027
            
            Branch
                office208
                West 10th
                Street, Georgetown, TX (5)
            400
            
            Branch
                office770
                East Market Street, West Chester, PA (6)
            575
            
            Branch
                office4495
                Bradenton Avenue, Dublin OH (7)
            4,500
            
            Branch
                office





Note:





(1)
            Pursuant
                to two lease agreements with Sovereign Bank expiring December 31,
                2009, at
                a monthly rate escalating to $11,931 in 2009, plus operating expenses
                and
                taxes.(2)
            Pursuant
                to a five-year lease agreement with Roosevelt Land, LP expiring July
                16,
                2011, at a monthly rate of $5,000, plus operating expenses and
                taxes.(3)
            Pursuant
                to a one-year lease agreement with Kabili, LLC expiring March 31,
                2008, at
                a monthly rate of $1,950, plus certain operating
                expenses.(4)
            Pursuant
                to a five-year lease agreement with NNN Waterway Plaza, expiring
                March 31,
                2012, at a monthly rate escalating to $5,574, plus operating expenses
                and
                taxes.(5)
            Pursuant
                to a one-year lease agreement with Kevin Stotz, expiring May 31,
                2008, at
                a monthly rate of $400, plus certain operating
                expenses.(6)
            Pursuant
                to a two year lease agreement with High Associates LTD expiring December
                31, 2009, at a monthly rate escalating to $970, plus certain operating
                expenses.(7)
            Pursuant
                to a sixty two-month lease agreement with Rickert Property Management,
                expiring July 31, 2012, a monthly rate escalating to $3,750, plus
                operating expenses and taxes.





Item
      3.  Legal
      Proceedings





From
      time
      to time we may be a party to various legal proceedings arising in the ordinary
      course of our business. Our management is not aware of any litigation
      outstanding, threatened or pending as of the date hereof by or against us or
      our
      properties which we believe would be material to our financial condition or
      results of operations.





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





Not
      applicable.





-
          19
          -


PART
      II





Item
      5.  Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
      of Equity Securities





Our
      common stock (Symbol “XWE”) began trading on the Toronto Stock Exchange (“TSX”)
      on November 16, 2006.  Prior to this date, there was no established
      public trading market for our common stock.  Our common stock does not
      currently trade on a U.S. national market.





The
      following table sets forth the high and low closing prices per share reported
      on
      TSX for the periods shown, commencing with the quarter of our initial public
      offering on November 16, 2006 (in US $’s):





High
            Low2007:First
                quarter
            $1.00
            $0.82Second
                quarter
            $1.53
            $0.82Third
                quarter
            $1.77
            $1.08Fourth
                quarter
            $1.31
            $0.552006:Fourth
                quarter
            $1.25
            $0.91





On
      February 29, 2008, the last reported sale price of our common stock on TSX
      was
      CAD$0.75 per share and there were 141 holders of record of our common
      stock.





We
      have
      never declared or paid any cash dividends on our common stock.  We
      currently intend to retain our future earnings, if any, to finance the expansion
      of our business and do not expect to pay any dividends in the foreseeable
      future.





Information
      regarding our equity compensation plans required by this item is incorporated
      by
      reference to the information appearing under the caption “Equity Compensation
      Plan Information” in our definitive Proxy Statement for the 2008 Annual Meeting
      of Stockholders.




Use
      of Proceeds from Registered
      Securities






We
      registered shares of our common stock in connection with our initial public
      offering concurrently in Canada under the terms of a Supplemented Prep
      Prospectus dated November 9, 2006 and in the United States under the Securities
      Act. Our Registration Statement on Form S-1 (No. 333-136528) in connection
      with
      our initial public offering was declared effective by the SEC on November 9,
      2006. As of December 31, 2007, we
      have used approximately $10 million of the net proceeds of the initial public
      offering to redeem our long-term debt, to acquire the assets of Energy Gateway,
      for working capital and to fund operations.  The remaining net
      proceeds of the initial public offering are invested in short-term, highly
      liquid money market accounts with an original maturity of 90 days or
      less.There has been no material change in the planned use of
      proceeds from our initial public offering as described in our final prospectus
      filed with the SEC pursuant to Rule 424(b).






Recent
      Sales of Unregistered
      Securities






None.




Repurchase
      of Equity
      Securities


None.





-
          20
          -


Item
      6. Selected
      Consolidated Financial Data





The
      following table summarizes our consolidated financial data for the periods
      presented. You should read the following financial information together with
      the
      information under “Management’s Discussion and Analysis of Financial Condition
      and Results of Operations” and our consolidated financial statements and the
      notes to those consolidated financial statements appearing elsewhere in this
      annual report. The selected consolidated statements of operations data for
      the
      fiscal years ended December 31, 2007, 2006 and 2005, and the selected
      consolidated balance sheet data as of December 31, 2007 and 2006 are
      derived from the audited consolidated financial statements, which are included
      elsewhere in this document. The selected consolidated statements of operations
      data for the years ended December 31, 2004 and 2003, and the consolidated
      balance sheet data at December 31, 2005 and 2004 are derived from our
      audited consolidated financial statements not included in this document. The
      consolidated balance sheet data as of December 31, 2003 is derived from our
      unaudited consolidated financial statements not included in this document.
      Historical results are not necessarily indicative of the results to be expected
      in future periods.




For
                the Years Ended
                December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Consolidated
                Statement of Operations Data:Revenue
            
            $
            9,188,265
            
            
            $
            5,763,098
            
            
            $
            4,673,987
            
            
            $
            3,191,660
            
            
            $
            2,474,699Cost
                of revenue
            
            
            2,874,678
            
            
            
            1,166,426
            
            
            
            648,410
            
            
            
            563,972
            
            
            
            872,647Gross
                profit
            
            
            6,313,587
            
            
            
            4,596,672
            
            
            
            4,025,577
            
            
            
            2,627,688
            
            
            
            1,602,052Operating
                expenses:Sales and
                marketing
            
            
            8,598,256
            
            
            
            3,227,263
            
            
            
            2,649,786
            
            
            
            1,814,799
            
            
            
            1,781,173General and
                administrative
            
            
            5,858,810
            
            
            
            1,862,450
            
            
            
            995,703
            
            
            
            710,462
            
            
            
            557,910Total
                operating expenses
            
            
            14,457,066
            
            
            
            5,089,713
            
            
            
            3,645,489
            
            
            
            2,525,261
            
            
            
            2,339,083Operating
                income (loss)
            
            
            (8,143,479
            )
            
            
            (493,041
            )
            
            
            380,088
            
            
            
            102,427
            
            
            
            (737,031
            )Other
                income (expense), net(1)
            
            
            563,294
            
            
            
            (312,280
            )
            
            
            (86,838
            )
            
            
            960,524
            
            
            
            (180,738
            )Income
                (loss) before income taxes
            
            
            (7,580,185
            )
            
            
            (805,321
            )
            
            
            293,250
            
            
            
            1,062,951
            
            
            
            (917,769
            )Income
                tax (expense) benefit
            
            
            (1,061,720
            )
            
            
            304,228
            
            
            
            754,000
            
            
            
            —
            
            
            
            —Net
                income (loss)
            
            
            (8,641,905
            )
            
            
            (501,093
            )
            
            
            1,047,250
            
            
            
            1,062,951
            
            
            
            (917,769
            )Accretion
                of preferred stock issuance costs
            
            
            —
            
            
            
            (6,299
            )
            
            
            (7,199
            )
            
            
            (7,199
            )
            
            
            (7,199
            )Net
                income (loss) available to common stockholders
            
            $
            (8,641,905
            )
            
            $
            (507,392
            )
            
            $
            1,040,051
            
            
            $
            1,055,752
            
            
            $
            (924,968
            )Net
                income (loss) available to common stockholders per share:Basic
                Voting
            
            $
            (0.11
            )
            
            $
            (0.01
            )
            
            $
            0.02
            
            
            $
            0.02
            
            
            $
            (0.03
            )Basic
                Non-Voting
            
            $
            —
            
            
            $
            —
            
            
            $
            0.02
            
            
            $
            0.02
            
            
            $
            (0.03
            )Diluted
                Voting and Non-Voting
            
            $
            (0.11
            )
            
            $
            (0.01
            )
            
            $
            0.02
            
            
            $
            0.02
            
            
            $
            (0.03
            )Weighted
                average shares outstanding — Basic:Voting
                Common Stock
            
            
            79,793,590
            
            
            
            45,576,477
            
            
            
            33,049,472
            
            
            
            32,058,759
            
            
            
            30,105,188Non-Voting
                Common Stock
            
            
            —
            
            
            
            —
            
            
            
            6,778,327
            
            
            
            2,880,592
            
            
            
            339,726Total
                Common Stock-Basic
            
            
            79,793,590
            
            
            
            45,576,477
            
            
            
            39,827,799
            
            
            
            34,939,351
            
            
            
            30,444,914Weighted
                Average Shares Outstanding — Diluted:
            
            
            79,793,590
            
            
            
            45,576,477
            
            
            
            54,506,566
            
            
            
            52,096,206
            
            
            
            30,444,914


____________


(1)
            Other
                income (expense) for the year ended December 31, 2004 includes a gain
                of $1,062,775 from extinguishment of debt.




As
                of December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Consolidated
                Balance Sheet Data:Cash
                and cash equivalents
            
            $
            7,001,884
            
            
            $
            17,483,886
            
            
            $
            1,584,066
            
            
            $
            49,389
            
            
            $
            220,796Working
                capital
            
            
            5,323,622
            
            
            
            16,639,898
            
            
            
            1,372,542
            
            
            
            (882,162
            )
            
            
            (2,051,277
            )Total
                assets
            
            
            20,800,565
            
            
            
            20,791,381
            
            
            
            3,787,842
            
            
            
            941,688
            
            
            
            934,635Long-term
                liabilities
            
            
            46,222
            
            
            
            87,844
            
            
            
            1,879,745
            
            
            
            150,368
            
            
            
            25,565Series A
                redeemable convertible preferred stock
            
            
            —
            
            
            
            —
            
            
            
            1,501,698
            
            
            
            1,494,499
            
            
            
            1,487,300Accumulated
                deficit
            
            
            (12,853,272
            )
            
            
            (4,211,367
            )
            
            
            (3,710,274
            )
            
            
            (4,747,524
            )
            
            
            (5,820,475
            )Total
                stockholders’ equity (deficit)
            
            $
            16,859,799
            
            
            $
            17,945,002
            
            
            $
            (938,883
            )
            
            $
            (2,241,134
            )
            
            $
            (3,485,026
            )








-
          21
          -


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





You
      should read the following
      discussion and analysis of our financial condition andresults of operations
      together with
      our consolidated financial statements and relatednotes appearing elsewhere
      in this
      Annual Report on Form 10-K. Some of the information contained inthis discussion and
      analysis
      includes forward-looking statements that involve risks and
      uncertainties.You
      should review the “Risk Factors” section of this Annual Report for a discussion
      ofimportant factors
      that could cause actual results to differ materially from theresults described
      in or implied by
      the forward-looking statements contained in thefollowing discussion
      and
      analysis.





Overview





World
      Energy is an energy and environmental commodities brokerage company that has
      developed online auction platforms, the World Energy Exchange and the World
      Green Exchange. On the World Energy Exchange, retail energy consumers
      (commercial, industrial and government, or CIG) and wholesale energy
      participants (utilities and retail suppliers) in the United States are able
      to
      negotiate for the purchase or sale of electricity and other energy resources
      from competing energy suppliers which have agreed to participate on our auction
      platform in a given auction. The World Energy Exchange is supplemented with
      information about market rules, pricing trends, energy consumer usage and load
      profiles. Our procurement staff uses this auction platform to conduct auctions,
      analyze results, guide energy consumers through contracting, and track their
      contracts, sites, accounts and usage history. Although our primary source of
      revenue is from brokering electricity and natural gas, we adapted our World
      Energy Exchange auction platform to accommodate the brokering of green power
      in
      2003 (i.e., electricity generated by renewable resources), wholesale electricity
      in 2004, certain other energy-related products in 2005.  In 2007, we
      created the World Green Exchange based on the World Energy Exchange technology
      and business process.  On the World Green Exchange, buyers and sellers
      negotiate for the purchase or sale of environmental commodities such as
      Renewable Energy Certificates, Verified Emissions Reductions and Certified
      Emissions Reductions.





During
      2007, we continued to increase our cost structure to support our growth plans.
      As of December 31, 2007, we employed 63 full time employees versus 20 as of
      December 31, 2006.  The staffing increases in 2007 were primarily
      related to the acquisition of substantially all of the assets of EnergyGateway
      LLC (“EnergyGateway”), which employed eighteen individuals, and the hiring of
      eleven sales and marketing professionals, eight individuals specifically focused
      on the green markets and six individuals within our operations and
      administrative groups.  Four of the eleven sales and marketing
      professionals hired in 2007 are specifically assigned to the wholesale
      market.  These increased employee and related costs were the major
      factors contributing to our increased cost structure in all functional areas
      during 2007 as compared to 2006. We expect our operating expenses to rise
      slightly as we expand our brokerage capabilities in our retail, wholesale and
      green product lines, including increased sales and marketing efforts and
      continued expansion of our back office operation.  We also expect
      there to be continued significant compliance costs associated with being a
      public company reporting in both the United States and Canada.





On
      June
      1, 2007, we acquired substantially all of the assets of EnergyGateway for
      $4,951,758 in cash and 5,375,000 of our common shares plus the assumption of
      certain liabilities.  The EnergyGateway operations are included in our
      financial statements from June 1, 2007. EnergyGatewayprovided energy
      procurement and value-added energy services to customers in many major
      industries in the U.S. and Canada, from large multi-site Fortune 500 industrials
      to middle-market manufacturing and small commercial operations.





Operations





Revenue





Retail
      Electricity
      Transactions





We
      receive a monthly commission on energy sales contracted through our online
      auction platform from each energy supplier based on the energy usage generated
      and transacted between the energy supplier and energy consumer. Our commissions
      are not based on the retail price for electricity; rather, commissions are
      based
      on the energy usage generated and transacted between the energy supplier and
      energy consumer multiplied by our contractual commission rate. Our contractual
      commission rate is negotiated with the energy consumer on a
      procurement-by-procurement basis based on energy consumer specific
      circumstances, including size of auction, internal effort required to organize
      and run the respective auction and competitive factors, among others. Once
      the
      contractual commission is agreed to with the energy consumer, all energy
      suppliers participating in the auction agree to that rate. That commission
      rate
      remains fixed for the duration of the contractual term regardless of energy
      usage. Energy consumers provide us with a letter of authority to request their
      usage history from the local utility. We then use this data to compile a usage
      profile for that energy consumer that will become the basis for the auction.
      This data may also be used to estimate revenue on a going forward basis, as
      noted below.





-
          22
          -


Historically,
      our revenue and operating results have varied from quarter-to-quarter and are
      expected to continue to fluctuate in the future. These fluctuations are
      primarily due to energy usage, particularly electricity, having higher demand
      in
      our second and third quarters and lower demand during our fourth and first
      quarters. In addition, the activity levels on the World Energy Exchange can
      fluctuate due to a number of factors, including geopolitical events, weather
      conditions and market prices. To the extent these factors affect the purchasing
      decisions of energy consumers our future results of operations may be
      affected.





Contracts
      between energy suppliers and energy consumers are signed for a variety of term
      lengths, with a one year contract term being typical for commercial and
      industrial energy consumers, and government contracts typically having two
      to
      three year terms. Our revenue has grown over the last three years through new
      participants utilizing our World Energy Exchange as well as energy consumers
      increasing the size or frequency of their transactions on our exchange
      platform.





We
      generally do not directly invoice our electricity energy suppliers and,
      therefore, we report a substantial portion of our receivables as “unbilled.”
Unbilled accounts receivable represents management’s best estimate of energy
      provided by the energy suppliers to the energy consumers for a specific
      completed time period at contracted commission rates and is made up of two
      components. The first component represents energy usage for which we have
      received actual data from the supplier and/or the utility but for which payment
      has not been received at the balance sheet date. The majority of our contractual
      relationships with energy suppliers require them to supply actual usage data
      to
      us on a monthly basis and remit payment to us based on that usage. The second
      component represents energy usage for which we have not received actual data,
      but for which we have estimated usage.





Retail
      Natural Gas
      Transactions





There
      are
      two primary fee components to our retail natural gas services - transaction
      fees
      and management fees.  Transaction fees are billed to and paid by the
      energy supplier awarded business on the platform.  Transaction fees
      for natural gas and electricity awards are established prior to award and are
      the same for each supplier.  For the majority of our natural gas
      transactions, we bill the supplier upon the conclusion of the transaction based
      on the estimated energy volume transacted for the entire award term multiplied
      by the transaction fee.  Management fees are paid by our energy
      consumers and are generally billed on a monthly basis for services rendered
      based on terms and conditions included in contractual arrangements. While
      substantially all of our retail natural gas transactions are accounted in
      accordance with this policy, a certain percentage is accounted for as the
      natural gas is consumed by the customer and recognized as revenue in accordance
      with the retail electricity transaction revenue recognition methodology
      described above.








Wholesale
      and Green
      Transactions





For
      wholesale energy and environmental commodity transactions, substantially all
      transaction fees are invoiced upon the conclusion of the auction based on a
      fixed fee.  These revenues are not tied to future energy usage and are
      recognized upon the completion of the online auction.  For reverse
      auctions where our customers bid for a consumer’s business, the fees are paid by
      the bidder. For forward auctions where a lister is selling energy or credits,
      the fees are typically paid by the lister. In addition, revenue may not be
      recognized on certain green transactions until the credits being auctioned
      have
      been verified. While substantially all wholesale and green transactions are
      accounted for in this fashion, a small percentage is accounted for as the
      wholesale electricity or gas is delivered similar to the retail electricity
      transaction methodology described above.





Cost
      of revenue





Cost
      of
      revenue consists primarily of:


•
              salaries,
                    employee benefits and stock-based compensation associated with
                    our auction
                    management services, which are directly related to the development
                    and
                    production of the online auction and maintenance of market-related
                    data on
                    our auction platform and monthly management fees (our supply
                    desk
                    function);




•
            amortization
                of capitalized costs associated with our auction platform and acquired
                developed technology; and





•
            rent,
                depreciation and other related overhead and facility-related
                costs.





Sales
      and marketing





Sales
      and
      marketing expenses consist primarily of:





-
          23
          -


•
            salaries,
                employee benefits and stock-based compensation related to sales and
                marketing personnel;





•
            third
                party commission expenses to our channel
                partners;





•
            travel
                and related expenses;





•
            amortization
                related to customer relationships and
                contracts;





•
            rent,
                depreciation and other related overhead and facility-related costs;
                and





•
            general
                marketing costs such as trade shows marketing materials and outsourced
                services;





General
      and administrative





General
      and administrative expenses consist primarily of:





•
            salaries,
                employee benefits and stock-based compensation related to general
                and
                administrative personnel;





•
            accounting,
                legal, recruiting and other professional
                fees; and





•
            rent,
                depreciation and other related overhead and facility-related
                costs.





Interest
      income (expense), net





Interest
      income (expense), net consists primarily of:





•
            interest
                income in 2007 related to the invested portion of the proceeds from
                our
                initial public offering;





•
            interest
                expense in 2007 and 2006 related to capital leases;
                and





•
            interest
                expense in 2006 on our $2.0 million subordinated note payable to
                Massachusetts Capital Resource Company, or MCRC, including the accretion
                of warrants, that was redeemed on December 4,
                2006.





Income
      tax expense





Income
      tax expense of approximately $1.1 million for the year ended December 31, 2007
      resulted from the application of a full valuation allowance provided against
      deferred tax assets generated in prior years due to uncertainty regarding the
      realization of those deferred tax assets, primarily net operating loss
      carryforwards, in the future.





Results
      of Operations





The
      following table sets forth certain items as a percent of revenue for the periods
      presented:




For
                the Years Ended
              December 31,2007
            
            
            2006
            
            
            2005Revenue
            
            
            100%
            
            
            
            100%
            
            
            
            100%Cost
                of revenue
            
            
            31
            
            
            
            20
            
            
            
            14Gross
                profit
            
            
            69
            
            
            
            80
            
            
            
            86Operating
                expenses:Sales
                and marketing
            
            
            94
            
            
            
            56
            
            
            
            57General
                and administrative
            
            
            64
            
            
            
            33
            
            
            
            21Operating
                income (loss)
            
            
            (89)
            
            
            
            (9)
            
            
            
            8Interest
                income (expense)
            
            
            7
            
            
            
            (5)
            
            
            
            (2)Income
                tax benefit (expense)
            
            
            (12)
            
            
            
            5
            
            
            
            16Net
                income (loss)
            
            
            (94)%
            
            
            
            (9)%
            
            
            
            22%





-
          24
          -


Comparison
      of the Years Ended December 31, 2007 and 2006





Revenue





For
                the Years EndedDecember 31,2007
            
            
            2006
            
            
            IncreaseRevenue
            
            $
            9,188,265
            
            
            $
            5,763,098
            
            
            $
            3,425,167
            
            
            
            59%




Revenue
      increased 59% primarily due to
      increased auction activity in multiple product lines, new customer wins and
      the
      acquisition of the assets of EnergyGateway during the year ended December 31,
      2007 as compared to the same period in 2006.  The revenue increase
      reflects the growth of our wholesale customer base to 12 in 2007 from 2 in
      2006
      as well as an increase to 42 channel partners as of December 31, 2007 from
      29 as
      of December 31, 2006. Of those channel partners, 25 had contributed to our
      revenue by brokering transactions over the exchange during 2007 as compared
      to
      18 during 2006.





Cost
      of revenue





For
                the Years Ended
                December 31,2007
            
            
            2006$
            
            
            %
                of Revenue
            
            
            $
            
            
            %
                of Revenue
            
            
            IncreaseCost
                of revenue
            
            $
            2,874,678
            
            
            
            31%
            
            
            $
            1,166,426
            
            
            
            20%
            
            
            $
            1,708,252
            
            
            
            146%





The
      146%
      increase in cost of revenue related to the year ended December 31, 2007 as
      compared to the same period in 2006 was substantially due to the addition of
      ten
      former EnergyGateway employees, an increase in salary and benefit costs
      associated with nine new supply desk employees and, to a lesser extent,
      amortization related to developed technology acquired. Cost of revenue as a
      percent of revenue increased 11% due to the cost increases noted above partially
      offset by the 59% increase in revenue.





Operating
      expenses





For
                the Years Ended
                December 31,2007
            
            
            2006$
            
            
            %
                of Revenue
            
            
            $
            
            
            %
                of Revenue
            
            
            IncreaseSales and
                marketing
            
            $
            8,598,256
            
            
            
            94%
            
            
            $
            3,227,263
            
            
            
            56%
            
            
            $
            5,370,993
            
            
            
            166%General and
                administrative
            
            
            5,858,810
            
            
            
            64
            
            
            
            1,862,450
            
            
            
            33
            
            
            
            3,996,360
            
            
            
            215Total
                operating expenses
            
            $
            14,457,066
            
            
            
            158%
            
            
            $
            5,089,713
            
            
            
            89%
            
            
            $
            9,367,353
            
            
            
            184%





The
      166%
      increase in sales and marketing expense for the year ended December 31, 2007
      as
      compared to the same period in 2006 primarily reflects the addition of eleven
      new sales and marketing employees, general salary increases and the addition
      of
      the former EnergyGateway employees.  In addition, the increased costs
      include amortization related to customer relationships and contracts as well
      as
      increases in travel, consulting and marketing expenses. Sales and marketing
      expense as a percentage of revenue increased 38% due to increased costs
      discussed above partially offset by the 59% increase in revenue.





The
      215%
      increase in general and administrative expenses related to the year ended
      December 31, 2007 as compared to the same period in 2006 was primarily due
      to an
      increase in legal, audit and other compliance costs, the addition of four
      corporate employees, the addition of the former EnergyGateway employees and
      assets and increases in benefits, recruiting, and occupancy related costs.
      The
      increase in legal and audit costs were primarily related to increased compliance
      and infrastructure activities in support of our growth initiatives, including
      compliance with the Sarbanes-Oxley Act and ongoing public company costs and
      the
      acquisition of the assets of EnergyGateway. General and administrative expenses
      as a percent of revenue increased 31% substantially due to the cost
      increases noted above, partially offset by the 59% increase in
      revenue.





Interest
      income (expense), net





Interest
      income, net was approximately $563,000 for the year ended December 31,
      2007.  Interest expense, net was approximately $312,000 for the year
      ended December 31, 2006.  Interest income in 2007 was primarily due to
      interest earned on the invested portion of the proceeds from our initial public
      offering.  Interest expense in 2006 was primarily due to interest paid
      on our $2.0 million subordinated note with the MCRC.  This note was
      retired in December 2006.





Income
      tax provision





We
      recorded an income tax provision of approximately $1.1 million for the year
      ended December 31, 2007, reflecting the application of a full valuation
      allowance provided against deferred tax assets generated in prior years due
      to
      uncertainty regarding the realization of those deferred tax assets, primarily
      net operating loss carryforwards, in the future. We recorded an income tax
      benefit of approximately $304,000 for the year ended December 31, 2006,
      reflecting an effective federal and




-
          25
          -


state
      tax
      rate of 38% as we determined that it was more likely than not that a portion
      of
      our deferred tax assets would be benefited against expected future
      income.





Net
      loss





We
      reported a net loss for the year ended December 31, 2007 of approximately $8.6
      million as compared to a net loss of approximately $501,000 for the year ended
      December 31, 2006. The increase in net loss is primarily due to the higher
      operating expenses discussed above and, to a lesser extent, the income tax
      provision partially offset by increases in revenue and interest
      income.





Comparison
      of the Years Ended December 31, 2006 and 2005





Revenue





For
                the Years EndedDecember 31,2006
            
            
            2005
            
            
            IncreaseRevenue
            
            $
            5,763,098
            
            
            $
            4,673,987
            
            
            $
            1,089,111
            
            
            
            23%





Revenue
      increased 23% primarily due to increased energy usage by energy consumers during
      the year ended December 31, 2006 as compared to the same period in 2005. This
      increase was primarily due to the addition of new government procurements and
      the increase to 29 channel partners as of December 31, 2006 from 16 as of
      December 31, 2005.  Of those channel partners, 18 had
      successfully contributed to our revenue by brokering transactions over the
      exchange during 2006 as compared to 10 during 2005.





Cost
      of revenue





For
                the Years Ended
                December 31,2006
            
            
            2005$
            
            
            %
                of Revenue
            
            
            $
            
            
            %
                of Revenue
            
            
            IncreaseCost
                of revenue
            
            $
            1,166,426
            
            
            
            20%
            
            
            $
            648,410
            
            
            
            14%
            
            
            $
            518,016
            
            
            
            80%





The
      80%
      increase in cost of revenue related to the year ended December 31, 2006 as
      compared to the same period in 2005 was substantially due to an increase in
      employee and employee-related costs associated with the addition of four new
      employees and general salary increases. Cost of revenue as a percent of revenue
      increased 6% primarily due to the cost increases noted above, partially offset
      by the 23% increase in revenue.





Operating
      expenses





For
                the Years Ended
                December 31,2006
            
            
            2005$
            
            
            %
                of Revenue
            
            
            $
            
            
            %
                of Revenue
            
            
            IncreaseSales and
                marketing
            
            $
            3,227,263
            
            
            
            56%
            
            
            $
            2,649,786
            
            
            
            57%
            
            
            $
            577,477
            
            
            
            22%General and
                administrative
            
            
            1,862,450
            
            
            
            33
            
            
            
            995,703
            
            
            
            21
            
            
            
            866,747
            
            
            
            87Total
                operating expenses
            
            $
            5,089,713
            
            
            
            89%
            
            
            $
            3,645,489
            
            
            
            78%
            
            
            $
            1,444,224
            
            
            
            40%





The
      22%
      increase in sales and marketing expense for the year ended December 31,
      2006 as compared to the same period in 2005 was primarily due to an increase
      in
      employee and employee-related costs associated with one additional employee,
      general salary increases and increased commission costs associated with our
      higher sales activity as well as higher travel expenses. Sales and marketing
      expense as a percentage of revenue during the period decreased 1% due to the
      increase in revenue discussed above substantially offset by the increase in
      employee and employee-related costs.





The
      87%
      increase in general and administrative expenses related to the year ended
      December 31, 2006 as compared to the same period in 2005 was primarily due
      to employee-related costs associated with the addition of four new employees,
      compliance and recruiting costs as we increased staffing in all functional
      areas. General and administrative expenses as a percent of revenue increased
      12% substantially due to the cost increases noted above, partially offset
      by the 23% increase in revenue.





Other
      income (expense)





Interest
      expense increased approximately $357,000, or 376%, during the year ended
      December 31, 2006 as compared to the same period in 2005 primarily due to
      eleven months of interest on the MCRC note in 2006 as compared to two months
      in
      2005. The increase in interest expense was substantially offset by an
      approximate $132,000 increase in interest income earned on the invested portion
      of the proceeds from our initial public offering in November 2006 and, to a
      lesser extent, proceeds from the MCRC note.  In addition, in
      connection with our initial public offering, we redeemed the MCRC note at face
      value resulting in non-cash interest expense of approximately $221,000 due
      to
      the accelerated amortization of the balance of unamortized discount related
      to
      warrant issuances.




-
          26
          -


Income
      tax benefit





We
      recorded an income tax benefit of approximately $304,000 for the year ended
      December 31, 2006 reflecting an expected effective federal and state tax
      rate of 38% as we determined that it was more likely than not that a portion
      of
      our deferred tax assets would be benefited against expected future income.
      At
      December 31, 2006, we had gross deferred tax assets of approximately $1.7
      million, against which a valuation allowance of approximately $639,000 had
      been
      applied.  Gross deferred tax liabilities of approximately $266,000
      were also applied against the net deferred tax asset. A valuation allowance
      was
      provided against the tax benefit generated during this period due to uncertainty
      regarding the realization of the net operating loss in the future.





We
      recorded an income tax benefit of $754,000 for the year ended December 31,
      2005
      as we determined it was more likely than not that a portion of our deferred
      tax
      assets would be benefited against future income.





Net
      income (loss)





We
      reported a net loss for the year ended December 31, 2006 of approximately
      $501,000 compared to net income of approximately $1,047,000 in 2005. The net
      loss in 2006 versus net income in 2005 is primarily due to the increases in
      operating expenses and net interest expense discussed above, which were
      partially offset by the 23% increase in revenue for the year ended December
      31,
      2006 as compared to 2005.





Liquidity
      and Capital Resources





In
      November 2005, we received $2.0 million in exchange for a subordinated note
      with the MCRC, which bore interest at the rate of 10% per annum, and
      required quarterly interest payments beginning on December 31, 2005. On
      December 4, 2006, we exercised our option to redeem the MCRC note without
      premium as a result of the completion of our initial public offering. In
      connection with the MCRC note redemption, MCRC exercised warrants to purchase
      600,000 shares of our common stock.  The remaining warrants to
      purchase 2,400,000 shares of common stock did not vest and subsequently expired
      due to the successful completion of our initial public offering on November
      16,
      2006.  The net redemption amount was $1,795,000, including interest
      earned through the date of redemption.  For the years ended
      December 31, 2006 and 2005, interest expense related to the subordinated
      debt was $437,000 and $29,444, respectively.





On
      November 16, 2006, we completed our initial public offering of 27,441,064 shares
      of common stock at a price of CDN$1.05 (approximately US$0.93) per
      share.  The offering was comprised of 20,000,000 shares sold by us for
      gross proceeds to us of CDN$21,000,000 and 7,441,064 shares sold by certain
      selling stockholders for gross proceeds to such stockholders of approximately
      CDN$7,800,000.





On
      December 5, 2006, we issued an additional 3,000,000 shares of common stock
      in
      accordance with an over-allotment option granted to the underwriters of the
      initial public offering at a price of CDN$1.05 (approximately US$0.92) per
      share
      for gross proceeds to the Company of CDN$3,150,000.  Net proceeds to
      us from the initial public offering and over-allotment option were approximately
      $17.5 million, net of offering costs of approximately $3.6
      million.  In addition, we granted the underwriters of the initial
      public offering, warrants to purchase up to 1,150,000 shares of common stock
      at
      the public offering price. The warrants are exercisable from the 1-year
      anniversary of the warrant issuance (November 16th
      and
      December 5th
      for the
      over allotment) and expire 18 months from that date (May 15, 2009 and June
      4,
      2009 for the over allotment).  The warrants allow for net share
      settlement and certain of the holders of these warrants have piggy-back
      registration rights.   We valued the warrants at $274,129 and
      recorded it as a component of additional paid-in capital.





At
      December 31, 2007, we had no commitments for material capital expenditures.
      We have identified and executed against a number of strategic initiatives that
      we believe are key components of our future growth, including: expanding our
      community of channel partners, energy consumers and energy suppliers on the
      exchange; strengthening and extending our long-term relationships with
      government agencies; entry into other energy-related markets; wholesale
      transactions with utilities and emerging green credits market; making strategic
      acquisitions and growing our sales force. We believe that our current management
      and financial resources are adequate to pursue these initiatives and to maintain
      our competitive position in both the short and long term.  During 2007
      we increased our workforce to 63 from 20 at December 31, 2006.  At
      December 31, 2007, we had 29 professionals in our sales and marketing and
      account management groups, 22 in our supply desk group and 12 in our general
      and
      administrative group.  While we expect to hire additional
      professionals as the need and/or opportunities arise, we do not expect to
      continue our expansion of the workforce at the same rate as 2007.





-
          27
          -


Comparison
      of December 31, 2007 to December 31, 2006





December 31,
              2007
            
            
            December 31,
              2006
            
            
            Increase/(Decrease)Cash
                and cash equivalents
            
            $
            7,001,884
            
            
            $
            17,483,886
            
            
            $
            (10,482,002
            )
            
            
            (60)%Trade
                accounts receivable
            
            
            1,878,233
            
            
            
            1,702,798
            
            
            
            175,435
            
            
            
            10Days
                sales outstanding
            
            
            56
            
            
            
            95
            
            
            
            (39
            )
            
            
            (41)Working
                capital
            
            
            5,323,622
            
            
            
            16,639,898
            
            
            
            (11,316,276
            )
            
            
            (68)Stockholders’
                equity
            
            
            16,859,799
            
            
            
            17,945,002
            
            
            
            (1,085,203
            )
            
            
            (6)





Cash
      and
      cash equivalents decreased 60%, primarily due to the acquisition of the
      EnergyGateway assets and the pre-tax loss for the year. Trade accounts
      receivable increased 10% due to the acquisition of the EnergyGateway assets
      and
      the 59% increase in revenue, both offset by an improvement in days sales
      outstanding.  Days sales outstanding decreased by 39 days primarily
      due to the addition of EnergyGateway receivables, which are due net 15, the
      increase in wholesale transactions, which are typically due net 30, and improved
      collection rates. Revenue from our energy suppliers representing greater than
      10% of our revenue decreased from 51% from four energy suppliers to 32% from
      two
      energy suppliers for the year ended December 31, 2007 and 2006, respectively.
      This decrease was directly related to the addition of the EnergyGateway
      customers.





Working
      capital (consisting of current assets less current liabilities) decreased
      approximately 68%, primarily due to the decrease in cash and cash equivalents
      resulting from the acquisition of the EnergyGateway assets and funding of the
      pre-tax loss for the year.  Stockholders’ equity decreased 6% due to
      the net loss for the period substantially offset by the fair value of the stock
      issued as part of the acquisition of EnergyGateway assets.





Cash
      used
      in operating activities for the year ended December 31, 2007 was approximately
      $4.6 million due primarily to the pre-tax loss for the period. Cash used in
      investing and financing activities for the year ended December 31, 2007 was
      approximately $5.8 million, primarily due to the purchase of the EnergyGateway
      assets and, to a lesser extent, costs incurred in software development and
      purchases of property and equipment.





Cash
      provided by operating activities for the year ended December 31, 2006 was
      approximately $259,000, due primarily to increases in accounts payable and
      accrued expenses substantially offset by an increase in accounts receivable,
      the
      net loss for the year and deferred taxes for the period. Cash used in investing
      activities for the year ended December 31, 2006 was approximately $138,000,
      primarily due to the purchases of property and equipment and costs incurred
      in
      software development. Cash provided by financing activities for year ended
      December 31, 2006 was approximately $15.8 million, primarily due to the net
      proceeds from our initial public offering and the issuance of warrants partially
      offset by the retirement of long-term debt.





We
      have
      historically funded our operations with cash flow from operations and, when
      required, the issuance of various debt and equity instruments. We have
      approximately $7.0 million of cash and cash equivalents and no long term bank
      debt as of December 31, 2007.  We expect to continue to fund our
      operations from existing cash resources, operating cash flow and, when required,
      the issuance of various debt and equity instruments. That notwithstanding,
      we
      expect that our cash and cash equivalents on hand at December 31, 2007 will
      meet
      our working capital requirements at least to December 31, 2008.





Comparison
      of December 31, 2006 to December 31, 2005





December 31,
              2006
            
            
            December 31,
              2005
            
            
            Increase/(Decrease)Cash
                and cash equivalents
            
            $
            17,483,886
            
            
            $
            1,584,066
            
            
            $
            15,899,820
            
            
            
            1,004%Trade
                accounts receivable
            
            
            1,702,798
            
            
            
            1,028,807
            
            
            
            673,991
            
            
            
            66Days
                sales outstanding
            
            
            95
            
            
            
            75
            
            
            
            20
            
            
            
            27Working
                capital
            
            
            16,639,898
            
            
            
            1,372,542
            
            
            
            15,267,356
            
            
            
            1,112Stockholders’
                equity (deficit)
            
            
            17,945,002
            
            
            
            (938,883
            )
            
            
            18,883,885
            
            
            
            N/A





Cash
      and
      cash equivalents increased approximately $15.9 million, or 1,004%, due primarily
      to net proceeds of $17.5 million from our initial public offering in late
      2006.  This increase was partially offset by the redemption of the
      $2.0 million MCRC note in December 2006 and the net loss for the year ended
      December 31, 2006.  Trade accounts receivable increased 66%, due to
      the increase in large government procurements. These procurements tend to have
      longer payment cycles due to:





•
            added
                complexity and volume;





•
            the
                inclusion of various federal, state and local agencies that may be
                covered
                by the procurement (e.g. housing and prison
                authorities);





•
            varied
                and extensive internal approval
                processes; and





-
          28
          -


•
            an
                additional party (e.g., the local utility) involved in the payment
                cycle.





To
      the
      extent we are awarded any large government procurements in the future, we expect
      to experience short term increases in our trade accounts receivable. We believe
      that we have adequate working capital to account for these short term
      fluctuations and that these accounts will not have a significant short-term
      impact on our future liquidity. We believe these receivables are collectible
      and
      the energy consumers and energy suppliers who are parties to these contracts
      are
      all large, credit worthy entities.





Working
      capital (consisting of current assets less current liabilities) increased
      approximately $15.3 million, or 1,112%, primarily due to the increase in cash
      described above. Stockholders’ equity increased due to our initial public
      offering and, to a lesser extent, the automatic conversion of Series A Preferred
      stock into common stock concurrent with the offering, and the exercise of
      warrants. These increases in stockholders’ equity were partially offset by the
      net loss for the year ended December 31, 2006.


Cash
      provided by operating activities for the year ended December 31, 2006 was
      approximately $259,000, due primarily to increases in accounts payable and
      accrued expenses substantially offset by accounts receivable, the net loss
      for
      the year and deferred taxes for the period. Cash used in investing activities
      for the year ended December 31, 2006 was approximately $138,000, primarily
      due to the purchases of property and equipment and costs incurred in software
      development. Cash provided by financing activities for year ended
      December 31, 2006 was approximately $15.8 million, primarily due to the net
      proceeds from our initial public offering and the issuance of warrants partially
      offset by the retirement of long-term debt.





Cash
      provided by operating activities for the year ended December 31, 2005 was
      approximately $171,000, primarily resulting from net income for the period
      partially offset by increases in deferred tax assets and working capital. Cash
      used in investing activities for the year ended December 31, 2005 was
      approximately $80,000 primarily related to costs associated with software
      development and, to a lesser extent, purchase of property and equipment. Cash
      provided by financing activities for year ended December 31, 2005 was
      approximately $1.4 million primarily due to the MCRC note described above less
      the repayment of the $500,000 line of credit.





Contractual
      Obligations and Other Commercial Commitments





The
      table
      below summarizes our gross contractual obligations and other commercial
      commitments as of December 31, 2007. As of December 31, 2007, we did
      not have any purchase obligations other than our capital and operating
      leases.





Payments
                Due by PeriodContractual
                Obligations
            
            2008
            
            
            2009
                and 2010
            
            
            2011
                and 2012
            
            
            2013
                and
              Thereafter
            
            
            TotalCapital
                leases
            
            $
            47,223
            
            
            $
            47,937
            
            
            $
            798
            
            
            $
            —
            
            
            $
            95,958Operating
                leases
            
            
            304,537
            
            
            
            447,656
            
            
            
            178,603
            
            
            
            —
            
            
            
            930,796Total
                contractual obligations
            
            $
            $
              351,760
            
            
            $
            495,593
            
            
            $
            179,401
            
            
            $
            —
            
            
            $
            1,026,754





Critical
      Accounting Policies





The
      preparation of financial statements in accordance with accounting principles
      generally accepted in the United States of America (“generally accepted
      accounting principles”) requires us to make estimates and assumptions that
      affect the reported amounts of assets and liabilities and disclosure of
      contingent assets and liabilities at the date of the financial statements and
      the reported amounts of revenue and expenses during the reporting
      period.





The
      most
      judgmental estimates affecting our consolidated financial statements are those
      relating to revenue recognition and the estimate of actual energy purchased
      from
      the energy supplier and end user, or energy consumer, of such energy; software
      development costs; the fair value of our equity securities prior to our initial
      public offering when there was no ready market for the purchase and sale of
      these shares; the valuation of intangible assets and goodwill; impairment of
      long-lived assets; and estimates of future taxable income as it relates to
      the
      realization of our net deferred tax assets. We regularly evaluate our estimates
      and assumptions based upon historical experience and various other factors
      that
      we believe to be reasonable under the circumstances, the results of which form
      the basis for making judgments about the carrying values of assets and
      liabilities that are not readily apparent from other sources. To the extent
      actual results differ from those estimates, our future results of operations
      may
      be affected. We believe the following critical accounting policies affect our
      more significant judgments and estimates used in the preparation of our
      consolidated financial statements. Refer to Note 2 of our consolidated
      financial statements filed herewith for a description of our accounting
      policies.





Revenue
      Recognition





Retail
      Electricity
      Transactions





We
      receive a monthly commission on energy sales contracted through our online
      auction platform from each energy supplier based on the energy usage generated
      and transacted between the energy supplier and energy consumer. Our




-
          29
          -


commissions
      are not based on the retail price for electricity; rather, commissions are
      based
      on the energy usage generated and transacted between the energy supplier and
      energy consumer multiplied by our contractual commission rate. Revenue from
      commissions is recognized as earned on a monthly basis over the life of each
      contract as energy is consumed, provided there is persuasive evidence of an
      arrangement, the sales price is fixed or determinable, collection of the related
      receivable is reasonably assured, and customer acceptance criteria, if any,
      has
      been successfully demonstrated.





We
      record
      brokerage commissions based on actual usage data obtained from the energy
      supplier for that accounting period, or to the extent actual usage data is
      not
      available, based on the estimated amount of electricity and gas delivered to
      the
      energy consumers for that accounting period. We develop our estimates on a
      quarterly basis based on the following criteria:





•
            Payments
                received prior to the issuance of the financial
                statements;





•
            Usage
                updates from energy
                suppliers;





•
            Usage
                data from utilities;





•
            Comparable
                historical usage data; and





•
            Historical
                variances to previous estimates.





To
      the
      extent usage data cannot be obtained, we estimate revenue as
      follows:





•
            Historical
                usage data obtained from the energy consumer in conjunction with
                the
                execution of the auction;





•
            Geographic/utility
                usage patterns based on actual data
                received;





•
            Analysis
                of prior year usage
                patterns; and





•
            Specific
                review of individual energy supplier/location
                accounts.





In
      addition, we perform sensitivity analyses on this estimated data based on
      overall industry trends including prevailing weather and usage data. Once the
      actual data is received, we adjust the estimated accounts receivable and revenue
      to the actual total amount in the period during which the payment is received.
      Based on management’s current capacity to obtain actual energy usage, we
      currently estimate 4 to 6 weeks of revenue at the end of our accounting period.
      Differences between estimated and actual revenue have been within management’s
      expectations and have not been material to date.





We
      generally do not directly invoice our electricity energy suppliers and,
      therefore, we report a substantial portion of our receivables as “unbilled.”
Unbilled accounts receivable represents management’s best estimate of energy
      provided by the energy suppliers to the energy consumers for a specific
      completed time period at contracted commission rates and is made up of two
      components. The first component represents energy usage for which we have
      received actual data from the supplier and/or the utility but for which payment
      has not been received at the balance sheet date. The majority of our contractual
      relationships with energy suppliers require them to supply actual usage data
      to
      us on a monthly basis and remit payment to us based on that usage. The second
      component represents energy usage for which we have not received actual data,
      but for which we have estimated usage.  Commissions paid in advance by
      certain energy suppliers are recorded as deferred revenue and amortized to
      commission revenue on a monthly basis on the energy exchanged that
      month.





Retail
      Natural Gas
      Transactions





There
      are
      two primary fee components to our retail natural gas services - transaction
      fees
      and management fees.  Transaction fees are billed to and paid by the
      energy supplier awarded business on the platform.  Transaction fees
      for natural gas awards are established prior to award and are the same for
      each
      supplier. For the majority of our natural gas transactions, we bill the supplier
      upon the conclusion of the transaction based on the estimated energy volume
      transacted for the entire award term multiplied by the transaction
      fee.  Management fees are paid by our energy consumers and are
      generally billed on a monthly basis for services rendered based on terms and
      conditions included in contractual arrangements. While substantially all of
      our
      retail natural gas transactions are accounted in accordance with this policy,
      a
      certain percentage is accounted for as the natural gas is consumed by the
      customer and recognized as revenue in accordance with the retail electricity
      transaction revenue recognition methodology described above.





-
          30
          -


Wholesale
      and Green
      Transactions





Substantially
      all transaction fees are invoiced upon the conclusion of the auction based
      on a
      fixed fee.  These revenues are not tied to future energy usage and are
      recognized upon the completion of the online auction.  For reverse
      auctions where our customers bid for a consumer’s business, the fees are paid by
      the bidder. For forward auctions where a lister is selling energy or credits,
      the fees are typically paid by the lister. In addition, revenue may not be
      recognized on certain green transactions until the credits being auctioned
      have
      been verified. While substantially all wholesale and green transactions are
      accounted for in this fashion, a small percentage is accounted for as the
      wholesale electricity or gas is delivered similar to the retail electricity
      transaction revenue recognition methodology described above.





Channel
      Partner
      Commissions





We
      pay
      commissions to our channel partners at contractual rates based on monthly energy
      transactions between energy suppliers and energy consumers. The commission
      is
      accrued monthly and charged to sales and marketing expense as revenue is
      recognized. We pay commissions to our salespeople at contractual commission
      rates based upon cash collections from our customers.





Revenue
      Estimation





Our
      estimates in relation to revenue recognition affect revenue and sales and
      marketing expense as reflected on our statements of operations, and trade
      accounts receivable and accrued commissions accounts as reflected on our balance
      sheets. For any quarterly reporting period, we may not have actual usage data
      for certain energy suppliers and will need to estimate revenue. We record
      revenue based on the energy consumers’ historical usage profile. At the end of
      each reporting period, we adjust historical revenue to reflect actual usage
      for
      the period. For the year ended December 31, 2007, we estimated usage for
      approximately 10% of our revenue resulting in an approximate 0.4%, or$35,179, adjustment.
      This increase in revenue, which is based on adjusted year to date revenue for
      the quarter, resulted in an approximate 0.1% reduction in sales and marketing
      expense related to third party commission expense associated with those
      revenues. Corresponding adjustments were made to unbilled accounts receivable
      and accrued commissions, respectively. A 1% difference between this estimate
      and
      actual usage would have an approximate $9,000 effect on our revenue for the
      year
      ended December 31, 2007.





Software
      Development





Certain
      acquired software and significant enhancements to our software are recorded
      in
      accordance with Statement of Position (“SOP”) 98-1, “Accounting for Costsof
      Computer Software Developed or
      Obtained for Internal Use”.Accordingly, internally developed software
      costs of approximately $469,000, $66,000, and $54,000 related to implementation,
      coding and configuration have been capitalized in 2007, 2006, and 2005,
      respectively. We amortize internally developed and purchased software over
      the
      estimated useful life of the software (generally three years). Accordingly,
      during 2007, 2006, and 2005, approximately $111,000, $73,000, and $55,000,
      respectively, were amortized to cost of revenues resulting in accumulated
      amortization of approximately $273,000, $162,000, and $89,000 at
      December 31, 2007, 2006, and 2005, respectively.





Our
      estimates for capitalization of software development costs affect cost of
      revenue and capitalized software as reflected on our consolidated statements
      of
      operations and on our consolidated balance sheets. During the year ended
      December 31, 2007, we capitalized approximately $469,000, or 2.3% of our total
      assets.  Amortization expense related to capitalized software for the
      year ended December 31, 2007 was approximately 3.8% of cost of revenue. To
      the
      extent the carrying amount of the capitalized software costs may not be fully
      recoverable or that the useful lives of those assets are no longer appropriate,
      we may need to record an impairment (non-cash) charge and write-off a portion
      or
      all of the capitalized software balance on the balance sheet.





Goodwill





We
      use
      assumptions in establishing the carrying value and fair value of our
      goodwill.  Goodwill represents the excess of the purchase price over
      the fair value of identifiable net assets of acquired businesses.  We
      account for goodwill that results from acquired businesses in accordance with
      Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible
      Assets” (“SFAS No. 142”).  Under SFAS No. 142, goodwill and
      intangible assets having indefinite lives are not amortized but instead are
      assigned to reporting units and tested for impairment annually or more
      frequently if changes in circumstances or the occurrence of events indicate
      possible impairment.





Pursuant
      to SFAS No. 142, we perform an annual impairment test for
      goodwill.  The impairment test for goodwill is a two-step
      process.  Step one consists of a comparison of the fair value of a
      reporting unit with its carrying amount, including the goodwill allocated to
      each reporting unit.  If the carrying amount is in excess of the fair
      value, step two requires the




-
          31
          -


comparison
      of the implied fair value of the reporting unit whereby the carrying amount
      of
      the reporting unit’s goodwill over the implied fair value of the reporting
      unit’s goodwill will be recorded as an impairment loss. There was no impairment
      of goodwill in the year ended December 31, 2007.  Future events could
      cause management to conclude that impairment indicators exist and that goodwill
      of previously acquired businesses is impaired.  Any related impairment
      loss could have a material impact on our financial condition and results of
      operations.





Intangible
      Assets





We
      use
      assumptions in establishing the carrying value, fair value and estimated lives
      of our intangible assets.  The criteria used for these assumptions
      include management’s estimate of the assets continuing ability to generate
      positive income from operations and positive cash flow in future periods
      compared to the carrying value of the asset, as well as the strategic
      significance of any identifiable intangible asset in our business
      objectives.  If assets are considered impaired, the impairment
      recognized is the amount by which the carrying value of the assets exceeds
      the
      fair value of the assets.  Useful lives and related amortization
      expense are based on our estimate of the period that the assets will generate
      revenues or otherwise be used by us.  Factors that would influence the
      likelihood of a material change in our reported results include significant
      changes in the asset’s ability to generate positive cash flow, a significant
      decline in the economic and competitive environment on which the asset depends
      and significant changes in our strategic business objectives.





Intangible
      assets consist of customer relationships and contracts, purchased technology
      and
      other intangibles, and are stated at cost less accumulated amortization.
      Intangible assets with a definite life are amortized using the straight-line
      method over their estimated useful lives, which range from one to ten
      years.





Impairment
      of Long-Lived and Intangible Assets





In
      accordance with SFAS No. 144, “Accounting for the Impairment
      or
      Disposal of Long-Lived Assets”, we periodically review long-lived assets
      and intangible assets for impairment whenever events or changes in circumstances
      indicate that the carrying amount of such assets may not be recoverable or
      that
      the useful lives of those assets are no longer appropriate. Recoverability
      of
      these assets is determined by comparing the forecasted undiscounted net cash
      flows of the operation to which the assets relate to the carrying
      amount.  There was no impairment of intangible assets in the year
      ended December 31, 2007.





Income
      Taxes





We
      account for income taxes in accordance with SFAS No. 109, “Accounting for IncomeTaxes”(“SFAS
      No. 109”).Deferred tax assets and liabilities are determined at the end of each
      period based on the future tax consequences that can be attributed to net
      operating loss carryforwards, as well as differences between the financial
      statement carrying amounts of the existing assets and liabilities and their
      respective tax basis. Deferred income tax expense or credits are based on
      changes in the asset or liability from period to period. Valuation allowances
      are provided if, based on the weight of available evidence, it is more likely
      than not that some or all of the deferred tax assets will not be realized.
      The
      realization of deferred tax assets is dependent upon the generation of future
      taxable income. In determining the valuation allowance, we consider past
      performance, expected future taxable income, and qualitative factors which
      we
      consider to be appropriate in estimating future taxable income.  Our
      forecast of expected future taxable income is for future periods that can be
      reasonably estimated.  We have historically utilized a three year
      forecasting window to determine our expected future taxable income. As of
      December 31, 2006, we had cumulative net income for the three years then ended
      and the expected future taxable income anticipated from 2007 through 2009 was
      deemed adequate on a present value basis to benefit the majority of our deferred
      tax assets (primarily net operating loss carryforwards).  During 2007,
      we accelerated our growth in excess of our initial expectations to address
      the
      strategic initiatives outlined at the time of our initial public
      offering.  We grew from 20 employees as of December 31, 2006 to 63 as
      of December 31, 2007, acquired one of our main competitors in the retail energy
      market, and developed our wholesale and environmental commodity product lines.
      These initiatives increased our loss for 2007 resulting in a three-year
      cumulative loss as of December 31, 2007 and increased our near term operating
      expenses. Athree-year cumulative
      loss is significant negative evidence in considering whether the deferred tax
      assets are realizable and generally precludes relying on projections of future
      taxable income to support the recovery of deferred tax assets.While we
      expect our future income will be adequate on a present value basis to
      benefit substantially all of our current deferred tax assets, the recent
      three-year cumulative loss is given more weight than projected future income
      when determining the need for a valuation.  Therefore, during the fourth
      quarter of
      2007, we recorded a full valuation allowance against its deferred tax assets
      of
      approximately $4.1 million, and maintain a cumulative valuation allowance of
      approximately $4.7 million at December 31, 2007.





Our
      estimates in relation to income taxes affect income tax benefit and deferred
      tax
      assets as reflected on our statements of operations and balance sheets,
      respectively. The deferred tax assets are reduced by a valuation allowance
      if it
      is more




-
          32
          -


likely
      than not that the tax benefits will not be realized in the near
      term.  As of December 31, 2007, we had deferred tax assets of
      approximately $4.7 million against which a full valuation allowance has been
      established. To the extent we determine that it is more likely than not that
      we
      will recover all of our deferred tax assets, it could result in an approximate
      $4.7 million non-cash tax benefit.




We
      adopted Financial Accounting Standards (“FASB”) Interpretation No. 48, “Accounting for Uncertainty
      in Income
      Taxes” (“FIN 48”), on January 1, 2007.  FIN 48 clarifies the
      accounting for uncertainty in income taxes recognized in an enterprise’s
      financial statements in accordance with SFAS 109. FIN 48 prescribes a two-step
      process to determine the amount of tax benefit to recognize.  First,
      the tax position must be evaluated to determine the likelihood that it will
      be
      sustained upon examination by a tax authority.  If the tax position is
      deemed “more-likely-than-not” to be sustained, the tax position is then assessed
      to determine the amount of benefit to recognize in the financial
      statements.  The amount of the benefit that may be recognized is the
      largest amount that has a greater than 50 percent likelihood of being realized
      upon ultimate settlement.  If the tax position does not meet the
“more-likely-than-not” threshold, then it is not recognized in the financial
      statements.  As of our adoption date of January 1, 2007, and also at
      December 31, 2007, FIN 48 did not have a material impact on our financial
      position or results of operations.




We
      have
      reviewed the tax positions taken, or to be taken, in our tax returns for all
      tax
      years currently open to examination by the taxing authorities in accordance
      with
      the recognition and measurement standards of FIN 48.  At December 31,
      2007, there is no expected material, aggregate tax effect as a result of
      differences between tax return positions and the benefits recognized in our
      financial statements.





Share-Based
      Compensation





In
      accordance with SFAS No. 123(R), we recognize the compensation cost of
      share-based awards on a straight-line basis over the requisite service period
      of
      the award.  In 2007, share-based awards consisted of grants of stock
      options and restricted stock. The restrictions on the restricted stock lapse
      over the vesting period.  The vesting period of restricted stock is
      determined by the Board of Directors, and is generally four years for
      employees.





The
      per-share weighted-average fair value of stock options granted during the year
      ended December 31, 2007 and 2006 was $0.58 and $0.36, respectively, on the
      date
      of grant, using the Black-Scholes option-pricing model with the following
      weighted-average assumptions and estimated forfeiture rates of 13% in 2007
      and
      2006, respectively:





Year
                ended
              December
                31,
            
            Expected
              Dividend
                Yield
            
            Risk
              Interest
                Rate
            
            Expected
              Option
                Life
            
            Expected
              Volatility2007
            
            —
            
            4.66%
            
            4.61
                years
            
            54%2006
            
            —
            
            4.66%
            
            4.75
                years
            
            48%





Prior
      to
      January 1, 2006, we accounted for our stock-based awards to employees using
      the intrinsic value method prescribed in APB 25 and related
      interpretations. Under the intrinsic value method, compensation expense is
      measured on the date of grant as the difference between the deemed fair value
      of
      the company’s common stock and the option exercise price multiplied by the
      number of options granted. We provided the disclosures as required by
      SFAS No. 148, “Accountingfor
      Stock-Based Compensation and
      Disclosure, an Amendment of FASB StatementNo. 123”.





A
      summary
      of options outstanding and options exercisable as of December 31, 2007 is
      as follows:





Options
                Outstanding
            
            
            Options
                ExercisableWeighted
            
            
            
            
            
            
            WeightedAverage
            
            
            
            
            
            
            AverageRange
                of
            
            
            
            
            Remaining
            
            Aggregate
            
            
            Number
            
            Remaining
            
            AggregateExercise
            
            
            
            
            Contractual
            
            Intrinsic
            
            
            Of
                Shares
            
            Contractual
            
            IntrinsicPrices
            
            
            Options
            
            Life
            
            Value
            
            
            Exercisable
            
            Life
            
            Value$
            0.02
                - $0.23
            
            
            
            2,651,029
            
            2.82
                Years
            
            $
            2,081,058
            
            
            
            2,646,029
            
            2.82
                Years
            
            $
            2,077,133$
            0.24
                - $1.12
            
            
            
            1,612,000
            
            4.78
                Years
            
            
            391,300
            
            
            
            670,625
            
            4.87
                Years
            
            
            229,263$
            1.13
                - $1.34
            
            
            
            2,440,000
            
            6.36
                Years
            
            
            —
            
            
            
            30,000
            
            5.96
                Years
            
            
            —6,703,029
            
            4.58
                Years
            
            $
            2,472,358
            
            
            
            3,346,654
            
            3.26
                Years
            
            $
            2,306,396





The
      aggregate intrinsic value in the table above represents the total intrinsic
      value of our outstanding options and exercisable options as of December 31,
      2007. The aggregate intrinsic value of options exercised during the year ended
      December 31, 2007 was approximately $126,000.





-
          33
          -


A
      summary
      of restricted stock activity for the year ended December 31, 2007 is as
      follows:





Shares
            
            Weighted
                Average
              Grant
                PriceOutstanding
                at December 31, 2006
            —
            
            $   —Granted
            1,928,500
            
            $
                1.13Cancelled
            (80,000)
            
            $
                1.21Vested
            (400,000)
            
            $
                1.21Unvested
                at December 31, 2007
            1,448,500
            
            $
                1.10





Recent
      Accounting Pronouncements





In
      December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      141 (revised 2007), “Business
      Combinations”(“SFAS No. 141(R)”).  SFAS No. 141(R) requires an
      acquiring entity in a business combination to recognize all (and only) the
      assets acquired and liabilities assumed in the transaction; establishes the
      acquisition-date fair value as the measurement objective for all assets acquired
      and liabilities assumed; and requires the acquirer to disclose to investors
      and
      other users all of the information they need to evaluate and understand the
      nature and financial effect of the business combination.  SFAS No.
      141(R) is effective for fiscal years beginning after December 15,
      2008.  We expect to adopt SFAS No. 141(R) on January 1,
      2009.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
      in
      Consolidated Financial Statements” (“SFAS No. 160”).  SFAS No.
      160 clarifies that a noncontrolling or minority interest in a subsidiary is
      considered an ownership interest and, accordingly, requires all entities to
      report such interests in subsidiaries as equity in the consolidated financial
      statements.  SFAS No. 160 is effective for fiscal years beginning
      after December 15, 2008.  We expect to adopt SFAS No. 160 on January
      1, 2009.





In
        September 2006, the FASB issued SFAS No. 157, “Fair Value
        Measurements” (“SFAS No. 157”).  This standard defines fair value,
        establishes a framework for measuring fair value in accounting principles
        generally accepted in the United States of America, and expands disclosure
        about fair value measurements. This pronouncement applies to other accounting
        standards that require or permit fair value measurements. Accordingly, this
        statement does not require any new fair value measurement. This statement
        is
        effective for fiscal years beginning after November 15, 2007, and interim
        periods within those fiscal years. In December of 2007, the FASB agreed to
        a one
        year deferral of SFAS No. 157’s fair value measurement requirements
        for nonfinancial assets and liabilities that are not required or permitted
        to be
        measured at fair value on a recurring basis. Management is currently evaluating
        the requirements of SFAS No. 157, but does not expect it to have a
        material impact on our 2008 consolidated financial
        statements.





In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
        for Financial Assets and Financial Liabilities” (“SFAS No.
        159”).  SFAS No. 159 allows entities the option to measure
        eligible financial instruments at fair value as of specified dates. Such
        election, which may be applied on an instrument by instrument basis, is
        typically irrevocable once elected. SFAS No. 159 is effective for
        fiscal years beginning after November 15, 2007.  We adopted
        SFAS No. 159 on January 1, 2008, but have not yet elected the
        fair value option for any items permitted under
        SFAS No. 159.





Seasonality





Our
      revenue is subject to seasonality and fluctuations during the year primarily
      as
      a result of weather conditions and its impact on the demand for energy. Our
      revenue is generated from the commissions we receive under any given energy
      contract, which is tied to the energy consumer’s consumption of energy.
      Therefore, revenue from natural gas consumption tends to be strongest during
      the
      winter months due to the increase in heating usage, and revenue from electricity
      consumption tends to be strongest during the summer months due to the increase
      in air conditioning usage. Our revenue is also subject to fluctuations within
      any given season, depending on the severity of weather conditions — during
      a particularly cold winter or an unseasonably warm summer, energy consumption
      will rise.





Cyclicality





We
      believe that our business will be cyclical in nature and is tied, in part,
      to
      market energy prices which impact transaction volume. When energy prices
      increase in competitive markets above the price levels of the regulated
      utilities, energy consumers are less likely to lock-in to higher fixed price
      contracts in the competitive markets and so they are less likely to use our
      auction platform. Conversely, when energy prices decrease in competitive markets
      below the price levels of the regulated utilities, energy consumers are more
      likely to lock-in to lower fixed price contracts in the competitive markets
      and
      so they are more likely to use our auction platform. Although our short term
      revenue is impacted by usage trends, these cyclical effects will also have
      longer term implications on our business because we derive future revenue from
      current auctions.




-
          34
          -


Item
      7A.Quantitative
      and Qualitative
      Disclosures about Market Risk





Market
      Risk





Market
      risk is the potential loss arising from adverse changes in market rates and
      prices, such as foreign currency rates, interest rates, and other relevant
      market rates or price changes.  In the ordinary course of business, we
      are exposed to market risk resulting from changes in foreign currency exchange
      rates, and we regularly evaluate our exposure to such changes.  Our
      overall risk management strategy seeks to balance the magnitude of the exposure
      and the costs and availability of appropriate financial
      instruments.





Impact
      of Inflation and Changing Prices





Historically,
      our business has not been materially impacted by inflation. We provide our
      service at the inception of the service contract between the energy supplier
      and
      energy consumer. Our fee is set as a fixed dollar amount per unit of measure
      and
      fluctuates with changes in energy demand over the contract period.





Foreign
      Currency Fluctuation





Our
      commission revenue is primarily denominated in U.S. dollars. Therefore, we
      are not directly affected by foreign exchange fluctuations on our current
      orders. However, fluctuations in foreign exchange rates do have an effect on
      energy consumers’ access to U.S. dollars and on pricing competition. We
      have entered into non-U.S. dollar contracts but they have not had a
      material impact on our operations. We do not believe that foreign exchange
      fluctuations will materially affect our results of operations.





Item
      8.Financial
      Statements and Supplementary Data





The
      consolidated financial statements listed in Item 15(a) are incorporated herein
      by reference and are filed as a part of this report and follow the signature
      pages to this Annual Report on Form 10-K on page 42.





Item
      9.Changes in
      and
      Disagreements with Accountants on Accounting and Financial
      Disclosure





None.





Item
      9A.Controls
      and
      Procedures





Evaluation
      of Disclosure
      Controls and Procedures





As
      required by Rule 13a-15 under the
      Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company
      carried out an evaluation under the supervision and with the participation
      of
      the Company’s management, including the Chief Executive Officer and Chief
      Financial Officer, of the effectiveness of the Company’s disclosure controls and
      procedures as of December 31, 2007. In designing and
      evaluating the Company’s disclosure controls and procedures, the Company and its
      management recognize that there are inherent limitations to the effectiveness
      of
      any system of disclosure controls and procedures, including the possibility
      of
      human error and the circumvention or overriding of the controls and
      procedures.  Accordingly, even effective disclosure controls and
      procedures can only provide reasonable assurance of achieving their desired
      control objectives. Additionally, in evaluating and implementing possible
      controls and procedures, the Company’s management was required to apply its
      reasonable judgment. Based upon the required evaluation, the Chief Executive
      Officer and the Chief Financial Officer concluded that as of December 31,
      2007,  the Company’s disclosure controls and procedures were effective
      at the reasonable assurance level to ensure that information required to be
      disclosed by the Company in the reports it files or submits under the Exchange
      Act is recorded, processed, summarized and reported within the time periods
      specified in the Securities and Exchange Commission’s rules and
      forms.





Internal
                Control
                Over Financial Reporting




a)           Management’s
      Report on Internal Control Over Financial Reporting




Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting for the Company, as such term is defined in
      Rule 13a-15(f) under the Exchange Act.  Because of its inherent
      limitations, internal control over financial reporting may not prevent or detect
      misstatements.  Projections of any evaluation of effectiveness to
      future periods are subject to the risk that controls may become inadequate
      because of changes in conditions, or that the degree of compliance with the
      policies or procedures may deteriorate.  Our management assessed the
      effectiveness of our internal control over financial reporting as of December
      31, 2007.  In making this assessment, the Company’s management used
      the criteria set forth by the Committee of Sponsoring Organizations of the
      Treadway Commission (COSO) in Internal Control-Integrated
      Framework.




-
          35
          -


Management
      has excluded the assets and business lines of EnergyGateway from its assessment
      of internal control over financial reporting as of December 31, 2007 because
      the
      assets of this entity were acquired by the Company in 2007.  The
      EnergyGateway assets represent 5% of our consolidated total assets and 20%
      of
      consolidated revenue as of and for the year ended December 31,
      2007.




Based
      on
      this assessment, our management believes that, as of December 31, 2007, our
      internal control over financial reporting is effective based on those
      criteria.




Our
      independent registered public accounting firm has issued an audit report on
      our
      management’s assessment of our internal control over financial reporting. This
      report appears below.




-
          36
          -


b)
            Attestation
                Report of the Independent Registered Public Accounting Firm









REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
      the
      Board of Directors and Stockholders


World
      Energy Solutions, Inc.


Worcester,
      Massachusetts







We
      have
      audited World Energy Solutions, Inc.‘s (“the Company”) internal control over
      financial reporting as of December 31, 2007, based on criteria established
      in Internal Control—Integrated
      Frameworkissued by the Committee of Sponsoring Organizations of the
      Treadway Commission (COSO). The Company’s management is responsible for
      maintaining effective internal control over financial reporting and for its
      assessment of the effectiveness of internal control over financial reporting,
      included in Part II, Item 9A of this Form 10-K. Our responsibility is to
      express an opinion on the Company’s internal control over financial reporting
      based on our audit.




We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, assessing the risk that a material weakness exists, testing
      and evaluating the design and operating effectiveness of internal control,
      and
      performing such other procedures as we considered necessary in the
      circumstances. We believe that our audit provides a reasonable basis for our
      opinion.




A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with accounting principles generally accepted in the United States of America.
      A
      company’s internal control over financial reporting includes those policies and
      procedures that (1) pertain to the maintenance of records that, in
      reasonable detail, accurately and fairly reflect the transactions and
      dispositions of the assets of the company; (2) provide reasonable assurance
      that transactions are recorded as necessary to permit preparation of financial
      statements in accordance with accounting principles generally accepted in the
      United States of America, and that receipts and expenditures of the company
      are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (3) provide reasonable assurance regarding prevention or
      timely detection of unauthorized acquisition, use, or disposition of the
      company’s assets that could have a material effect on the financial
      statements.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.




In
      our
      opinion, World Energy Solutions, Inc. maintained, in all material respects,
      effective internal control over financial reporting as of December 31, 2007,
      based on criteria established in Internal Control—Integrated Framework issued by
      the Committee of Sponsoring Organizations of the Treadway
      Commission.




We
      have
      also audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheet of World Energy
      Solutions, Inc. as of December 31, 2007, and the related consolidated statements
      of operations, stockholders’ equity (deficit) and cash flows for the year then
      ended, and our report dated March 12, 2008, expressed an unqualified opinion
      on
      those consolidated financial statements.





As
      described in Management’s Report on Internal Control over Financial Reporting,
      management excluded Energy Gateway LLC from its assessment of internal
      control over financial reporting as of December 31, 2007, which is included
      in the 2007 consolidated financial statements of World Energy Solutions, Inc.
      and constituted 5% of the consolidated assets and 20% of the consolidated
      revenue as of and for the year ended December 31, 2007. Our audit of
      internal control over financial reporting of World Energy Solutions, Inc. also
      did not include an evaluation of the internal control over financial reporting
      of Energy Gateway LLC.




/S/    UHY
      LLP




Boston,
      Massachusetts


March
      12,
      2008





-
          37
          -
 
 c)
              Changes
                    in Internal Control Over Financial
                    Reporting


No
      change
      in our internal control over financial reporting occurred during the fiscal
      quarter ended December 31, 2007 that has materially affected, or is
      reasonably likely to materially affect, our internal control over financial
      reporting.







Item
      9B.Other
      Information





Not
      applicable.





PART
      III





Item  10.  
      Directors, Executive Officers and Corporate Governance





The
      information required to be
      disclosed by this item 10 is hereby incorporated by reference to the Company’s
      definitive proxy statement to be filed by the Company within 120 days of the
      close of its fiscal year.





We
      have adopted a code of business
      conduct and ethics applicable to all of our directors and
      employees.  The code of  business conduct and ethics is
      available on the corporate governance section of “Investor Relations” of our
      website www.worldenergy.com.





Any
      waiver of the code of business
      conduct and ethics for directors or executive officers, or any amendment to
      the
      code that applies to directors or executive officers, may only be made by the
      board of directors.  We intend to satisfy the disclosure requirement
      under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a
      provision of this code of ethics by posting such information on our website,
      at
      the address and location specified above.  To date, no such waivers
      have been requested or granted.





Item
      11. 
 Executive Compensation





The
      information required to be
      disclosed by this item 11 is hereby incorporated by reference to the Company’s
      definitive proxy statement to be filed by the Company within 120 days after
      the
      close of its fiscal year.







Item
      12.  
Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters







The
      information required to be disclosed by this item 12 is hereby incorporated
      by
      reference to the Company’s definitive proxy statement to be filed by the Company
      within 120 days after the close of its fiscal year.







Item
      13.   Certain
      Relationships and Related Transactions and Director
      Independence





The
      information required to be disclosed by this item 13 is hereby incorporated
      by
      reference to the Company’s definitive proxy statement to be filed by the Company
      within 120 days after the close of its fiscal year.







Item
      14.    Principal Accountant Fees and
      Services





The
      information required to be
      disclosed by this item 14 is hereby incorporated by reference to the Company’s
      definitive proxy statement to be filed by the Company within 120 days after
      the
      close of its fiscal year.


-
          38
          -


PART
      IV




Item
      15.   
Exhibits and Financial Statement Schedules





(a)(1)
      Financial Statements





For
      a list of the financial information included herein, see “Index to Consolidated
      Financial Statements” on page 41 of this Annual Report on Form
      10-K.





(a)(2)
      Financial Statements Schedules





All
      schedules are omitted because they are not applicable or the required
      information is included in the financial statements or notes
      thereto.





(a)(3)
      Exhibits





The
      list of exhibits filed as a part of this Annual Report on Form 10-K is set
      forth
      on the Exhibit Index immediately preceding the exhibits hereto and is
      incorporated herein by reference.








-
          39
          -


SIGNATURES








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




WORLD
                  ENERGY SOLUTIONS, INC.By:
              /s/  Richard
                Domaleski
              March
                  13, 2008Richard
                DomaleskiChief
                Executive Officer


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




Signature
              Title
              Date/s/
                  Richard Domaleski
                Richard
                Domaleski
              Chief
                  Executive Officer and Director
              March
                  13, 2008/s/
                  James
                  Parslow
                James
                Parslow
              Chief
                  Financial Officer
              March
                  13, 2008/s/
                  Edward Libbey
                
                Edward
                  Libbey
              Chairman
                  of the Board and Director
              March
                  13, 2008/s/
                  Patrick Bischoff
                Patrick
                Bischoff
              Director
              March
                  13, 2008/s/
                  John
                  Wellard
                John
                Wellard
              Director
              March
                  13, 2008/s/
                  Thad
                  Wolfe
                Thad
                Wolfe
              Director
              March
                  13, 2008
  SUPPLEMENTAL
      INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF
      THE
      EXCHANGE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
      SECTION 12 OF THE EXCHANGE ACT




No
      annual
      report to security holders covering the Company’s prior fiscal year or proxy
      materials have been furnished to security holders which have not been furnished
      to the Securities and Exchange Commission.  The Company will furnish
      to the Securities and Exchange Commission any annual report to security holders
      covering the Company’s prior fiscal year and any proxy materials to be furnished
      to security holders subsequent to the filing of this annual report.








-
          40
          -








WORLD
      ENERGY SOLUTIONS, INC.





INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS







PageREPORT
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            42CONSOLIDATED
                FINANCIAL STATEMENTS:Consolidated
                Balance Sheets for World Energy Solutions, Inc. at December 31, 2007
                and December 31, 2006
            43Consolidated
                Statements of Operations for World Energy Solutions, Inc. for the
                years
                ended December 31, 2007, 2006 and 2005
            44Consolidated
                Statements of Stockholders’ Equity (Deficit) for World Energy Solutions,
                Inc. for the years ended December 31, 2007, 2006 and
                2005
            45Consolidated
                Statements of Cash Flows for World Energy Solutions, Inc. for the
                years
                ended December 31, 2007, 2006 and 2005
            46Notes
                to Consolidated Financial Statements
            47














































-
          41
          -


REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM







To
      the
      Board of Directors and Stockholders


World
      Energy Solutions, Inc.


Worcester,
      Massachusetts






We
      have
      audited the accompanying consolidated balance sheets of World Energy Solutions,
      Inc. (the “Company”) as of December 31, 2007 and 2006, and the related
      consolidated statements of operations, stockholders’ equity (deficit), and cash
      flows for each of the three years in the period ended December 31, 2007.
      These financial statements are the responsibility of the Company’s management.
      Our responsibility is to express an opinion on these financial statements based
      on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of World Energy
      Solutions, Inc. as of December 31, 2007 and 2006 and the consolidated
      results of their operations and their cash flows for each of the three years
      in
      the period ended December 31, 2007 in conformity with accounting principles
      generally accepted in the United States of America.





As
      discussed in Note 2 to the consolidated financial statements, on January 1,
      2006, the Company adopted the provisions of Statement of Financial Accounting
      Standard No. 123(R), Share-Based Payment





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of World Energy Solutions,
      Inc.’s internal control over financial reporting as of December 31, 2007, based
      on criteria established in Internal Control—Integrated Framework issued by the
      Committee of Sponsoring Organizations of the Treadway Commission (COSO), and
      our
      report dated March 12, 2008 expressed an unqualified opinion on the
      effectiveness of the Company’s internal control over financial
      reporting.








/S/    UHY
      LLP








Boston,
      Massachusetts


March
      12,
      2008





-
          42
          -


WORLD
      ENERGY SOLUTIONS, INC.





Consolidated
      Balance Sheets





December 31,2007
            
            
            2006ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            7,001,884
            
            
            $
            17,483,886Trade
                accounts receivable, net
            
            
            1,878,233
            
            
            
            1,702,798Prepaid
                expenses and other current assets
            
            
            338,049
            
            
            
            211,749Total
                current assets
            
            
            9,218,166
            
            
            
            19,398,433Property
                and equipment, net
            
            
            595,950
            
            
            
            225,932Capitalized
                software, net
            
            
            463,888
            
            
            
            105,296Intangibles,
                net
            
            
            7,316,916
            
            
            
            —Goodwill
            
            
            3,178,701
            
            
            
            —Deferred
                taxes and other assets
            
            
            26,944
            
            
            
            1,061,720Total
                assets
            
            $
            20,800,565
            
            
            $
            20,791,381LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                liabilities:Accounts
                payable
            
            $
            980,488
            
            
            $
            848,518Accrued
                commissions
            
            
            712,919
            
            
            
            1,021,433Accrued
                compensation
            
            
            1,516,418
            
            
            
            304,330Accrued
                expenses
            
            
            279,162
            
            
            
            232,587Deferred
                revenue and customer advances
            
            
            363,933
            
            
            
            295,408Capital
                lease obligations
            
            
            41,624
            
            
            
            56,259Total
                current liabilities
            
            
            3,894,544
            
            
            
            2,758,535Capital
                lease obligations, net of current portion
            
            
            46,222
            
            
            
            87,844Total
                liabilities
            
            
            3,940,766
            
            
            
            2,846,379Commitments
                (Note 9)Stockholders’
                equity:Preferred
                stock, $0.0001 par value; 5,000,000 shares authorized, no shares
                issuedor
                outstanding
            
            
            —
            
            
            
            —Common
                stock, $0.0001 par value; 150,000,000 shares authorized;
                82,399,241and
                76,511,741 shares issued and outstanding at December 31, 2007 and
                2006,respectively
            
            
            8,240
            
            
            
            7,651Additional
                paid-in capital
            
            
            29,704,831
            
            
            
            22,148,718Accumulated
                deficit
            
            
            (12,853,272
            )
            
            
            (4,211,367
            )Total
                stockholders’ equity
            
            
            16,859,799
            
            
            
            17,945,002Total
                liabilities and stockholders’ equity
            
            $
            20,800,565
            
            
            $
            20,791,381





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







-
          43
          -


WORLD
      ENERGY SOLUTIONS, INC.





Consolidated
      Statements of Operations





Years
                Ended
                December 31,2007
            
            
            2006
            
            
            2005Revenue:Brokerage
                commissions and transaction fees
            
            $
            8,401,791
            
            
            $
            5,762,098
            
            
            $
            4,673,987Management
                fees
            
            
            786,474
            
            
            
            1,000
            
            
            
            —Total
                revenue
            
            
            9,188,265
            
            
            
            5,763,098
            
            
            
            4,673,987Cost
                of revenue
            
            
            2,874,678
            
            
            
            1,166,426
            
            
            
            648,410Gross
                profit
            
            
            6,313,587
            
            
            
            4,596,672
            
            
            
            4,025,577Operating
                expenses:Sales
                and marketing
            
            
            8,598,256
            
            
            
            3,227,263
            
            
            
            2,649,786General
                and administrative
            
            
            5,858,810
            
            
            
            1,862,450
            
            
            
            995,703Total
                costs and expenses
            
            
            14,457,066
            
            
            
            5,089,713
            
            
            
            3,645,489Operating
                income (loss)
            
            
            (8,143,479
            )
            
            
            (493,041
            )
            
            
            380,088Interest
                income (expense):Interest
                income
            
            
            573,395
            
            
            
            139,617
            
            
            
            8,004Interest
                expense
            
            
            (10,101
            )
            
            
            (451,897
            )
            
            
            (94,842
            )Total
                interest income (expense), net
            
            
            563,294
            
            
            
            (312,280
            )
            
            
            (86,838
            )Income
                (loss) before income taxes
            
            
            (7,580,185
            )
            
            
            (805,321
            )
            
            
            293,250Income
                tax (expense) benefit
            
            
            (1,061,720
            )
            
            
            304,228
            
            
            
            754,000Net
                income (loss)
            
            
            (8,641,905
            )
            
            
            (501,093
            )
            
            
            1,047,250Accretion
                of preferred stock issuance costs
            
            
            —
            
            
            
            (6,299
            )
            
            
            (7,199
            )Net
                income (loss) available to common stockholders
            
            $
            (8,641,905
            )
            
            $
            (507,392
            )
            
            $
            1,040,051Earnings
                (loss) per share:Net
                income (loss) per voting common share — basic
            
            $
            (0.11
            )
            
            $
            (0.01
            )
            
            $
            0.02Net
                income (loss) per non-voting common share — basic
            
            $
            —
            
            
            $
            —
            
            
            $
            0.02Net
                income (loss) available to common stockholders —
                diluted
            
            $
            (0.11
            )
            
            $
            (0.01
            )
            
            $
            0.02Weighted
                average shares outstanding — basic:Voting
                common stock
            
            
            79,793,590
            
            
            
            45,576,477
            
            
            
            33,049,472Non-voting
                common stock
            
            
            —
            
            
            
            —
            
            
            
            6,778,32779,793,590
            
            
            
            45,576,477
            
            
            
            39,827,799Weighted
                average shares outstanding — diluted
            
            
            79,793,590
            
            
            
            45,576,477
            
            
            
            54,506,566




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






-
          44
          -


WORLD
      ENERGY SOLUTIONS, INC.





Consolidated
      Statements of Stockholders’ Equity (Deficit)


Years
      Ended December 31, 2007, 2006, and 2005







Non-Voting
            
            
            VotingCommon
                Stock
            
            
            Common
                Stock
            
            
            Treasury
                Stock
            
            
            Additional
            
            
            
            
            
            TotalNumber
                of
            
            
            $0.0001
            
            
            Number
                of
            
            
            $0.0001
            
            
            Number
                of
            
            
            Stated
                at
            
            
            Paid-in
            
            
            Accumulated
            
            
            Stockholders’Shares
            
            
            Par
                Value
            
            
            Shares
            
            
            Par
                Value
            
            
            Shares
            
            
            Cost
            
            
            Capital
            
            
            Deficit
            
            
            Equity
                (Deficit)Balance,
                December 31, 2004
            
            
            6,552,135
            
            
            
            655
            
            
            
            33,724,819
            
            
            
            3,372
            
            
            
            675,346
            
            
            
            (151,953
            )
            
            
            2,664,316
            
            
            
            (4,757,524
            )
            
            
            (2,241,134
            )Exercise
                of stock options
            
            
            240,000
            
            
            
            24
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            5,976
            
            
            
            —
            
            
            
            6,000Accretion
                of stock issuance costs
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (7,199
            )
            
            
            —
            
            
            
            (7,199
            )Issuance
                of warrants in connection with long-term debt
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            256,200
            
            
            
            —
            
            
            
            256,200Net
                income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,047,250
            
            
            
            1,047,250Balance,
                December 31, 2005
            
            
            6,792,135
            
            
            
            679
            
            
            
            33,724,819
            
            
            
            3,372
            
            
            
            675,346
            
            
            
            (151,953
            )
            
            
            2,919,293
            
            
            
            (3,710,274
            )
            
            
            (938,883
            )Exercise
                of stock options
            
            
            2,190,671
            
            
            
            219
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            56,698
            
            
            
            —
            
            
            
            56,917Common
                stock warrants exercised
            
            
            —
            
            
            
            —
            
            
            
            1,070,958
            
            
            
            107
            
            
            
            —
            
            
            
            —
            
            
            
            253,098
            
            
            
            —
            
            
            
            253,205Issuance
                of common stock in connection with initial public offering, net of
                $3.6
                million of offering costs
            
            
            —
            
            
            
            —
            
            
            
            23,000,000
            
            
            
            2,300
            
            
            
            —
            
            
            
            —
            
            
            
            17,264,968
            
            
            
            —
            
            
            
            17,267,268Issuance
                of warrants in connection with initial public offering
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            274,129
            
            
            
            —
            
            
            
            274,129Conversion
                of Non-Voting Common Stock to Voting Common Stock in connection with
                initial public offering
            
            
            (8,982,806
            )
            
            
            (898
            )
            
            
            8,982,806
            
            
            
            898
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Conversion
                of Series A Redeemable Convertible Preferred Stock in connection
                with
                initial public offering
            
            
            —
            
            
            
            —
            
            
            
            10,433,504
            
            
            
            1,044
            
            
            
            —
            
            
            
            —
            
            
            
            1,506,953
            
            
            
            —
            
            
            
            1,507,997Accretion
                of stock issuance costs
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (6,299
            )
            
            
            —
            
            
            
            (6,299
            )Share-based
                compensation
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            44,261
            
            
            
            —
            
            
            
            44,261Purchase
                of treasury stock
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            25,000
            
            
            
            (12,500
            )
            
            
            —
            
            
            
            —
            
            
            
            (12,500
            )Retirement
                of treasury stock
            
            
            —
            
            
            
            —
            
            
            
            (700,346
            )
            
            
            (70
            )
            
            
            (700,346
            )
            
            
            164,453
            
            
            
            (164,383
            )
            
            
            —
            
            
            
            —Net
                loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (501,093
            )
            
            
            (501,093
            )Balance,
                December 31, 2006
            
            
            —
            
            
            
            —
            
            
            
            76,511,741
            
            
            
            7,651
            
            
            
            —
            
            
            
            —
            
            
            
            22,148,718
            
            
            
            (4,211,367
            )
            
            
            17,945,002Share-based
                compensation
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            982,190
            
            
            
            —
            
            
            
            982,190Issuance
                of common stock in connection with acquisition of
                EnergyGateway
            
            
            —
            
            
            
            —
            
            
            
            5,375,000
            
            
            
            538
            
            
            
            —
            
            
            
            —
            
            
            
            6,522,694
            
            
            
            —
            
            
            
            6,523,232Issuance
                of common stock in connection with restricted stock grant
            
            
            —
            
            
            
            —
            
            
            
            400,000
            
            
            
            40
            
            
            
            —
            
            
            
            —
            
            
            
            (40
            )
            
            
            —
            
            
            
            —Reversal
                of issuance costs related to initial public offering of common
                stock
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            48,468
            
            
            
            —
            
            
            
            48,468Exercise
                of stock options
            
            
            —
            
            
            
            —
            
            
            
            112,500
            
            
            
            11
            
            
            
            —
            
            
            
            —
            
            
            
            2,801
            
            
            
            —
            
            
            
            2,812Net
                loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (8,641,905
            )
            
            
            (8,641,905
            )Balance,
                December 31, 2007
            
            
            —
            
            
            $
            —
            
            
            
            82,399,241
            
            
            $
            8,240
            
            
            
            —
            
            
            $
            —
            
            
            $
            29,704,831
            
            
            $
            (12,853,272
            )
            
            $
            16,859,799





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






-
          45
          -


WORLD
      ENERGY SOLUTIONS, INC.





Consolidated
      Statements of Cash Flows




Years
                Ended
                December 31,2007
            
            
            2006
            
            
            2005Cash
                flows from operating activities:Net
                income (loss)
            
            $
            (8,641,905
            )
            
            $
            (501,093
            )
            
            $
            1,047,250Adjustments
                to reconcile net income (loss) to net cash provided by (used in)
                operating
                activities:Depreciation
                and amortization
            
            
            1,028,497
            
            
            
            135,446
            
            
            
            105,831Deferred
                taxes
            
            
            1,061,720
            
            
            
            (307,720
            )
            
            
            (754,000
            )Share-based
                compensation
            
            
            982,190
            
            
            
            44,261
            
            
            
            —Accretion
                of
                warrants
            
            
            —
            
            
            
            252,000
            
            
            
            4,200Changes
                in operating assets and liabilities , net of the effects of
                acquisition:Trade
                accounts receivable
            
            
            17,590
            
            
            
            (673,991
            )
            
            
            (479,903
            )Prepaid
                expenses and other
                assets
            
            
            (133,377
            )
            
            
            (106,798
            )
            
            
            (47,451
            )Accounts
                payable
            
            
            80,491
            
            
            
            690,908
            
            
            
            (42,041
            )Accrued
                commissions
            
            
            (308,514
            )
            
            
            156,540
            
            
            
            496,035Accrued
                compensation
            
            
            1,212,088
            
            
            
            193,330
            
            
            
            68,507Accrued
                expenses
            
            
            33,762
            
            
            
            210,578
            
            
            
            38,009Deferred
                revenue and customer
                advances
            
            
            68,525
            
            
            
            165,668
            
            
            
            (265,216
            )Net
                cash provided by (used in) operating activities
            
            
            (4,598,933
            )
            
            
            259,129
            
            
            
            171,221Cash
                flows from investing activities:Costs
                incurred in software
                development
            
            
            (469,171
            )
            
            
            (65,652
            )
            
            
            (54,375
            )Net
                cash paid in acquisition of EnergyGateway, net of cashacquired
            
            
            (4,904,358
            )
            
            
            —
            
            
            
            —Purchases
                of property and
                equipment
            
            
            (456,095
            )
            
            
            (72,061
            )
            
            
            (25,374
            )Net
                cash used in investing activities
            
            
            (5,829,624
            )
            
            
            (137,713
            )
            
            
            (79,749
            )Cash
                flows from financing activities:Proceeds
                from exercise of stock
                options
            
            
            2,812
            
            
            
            56,917
            
            
            
            6,000Proceeds
                from exercise of stock
                warrants
            
            
            —
            
            
            
            253,205
            
            
            
            —Proceeds
                from initial public offering of common stock, net of offeringcosts
                of $3.6 million
            
            
            —
            
            
            
            17,541,397
            
            
            
            —Retirement
                of long-term
                debt
            
            
            —
            
            
            
            (2,000,000
            )
            
            
            —Principal
                payments on line of
                credit
            
            
            —
            
            
            
            —
            
            
            
            (500,000
            )Proceeds
                from the issuance of long-term debt
            
            
            —
            
            
            
            —
            
            
            
            2,000,000Principal
                payments on capital lease obligations
            
            
            (56,257
            )
            
            
            (50,092
            )
            
            
            (48,733
            )Principal
                payments on guaranteed
                return
            
            
            —
            
            
            
            (10,523
            )
            
            
            (14,062
            )Purchase
                of treasury
                stock
            
            
            —
            
            
            
            (12,500
            )
            
            
            —Net
                cash provided by (used in) financing activities
            
            
            (53,445
            )
            
            
            15,778,404
            
            
            
            1,443,205Net
                (decrease) increase in cash and cash equivalents
            
            
            (10,482,002
            )
            
            
            15,899,820
            
            
            
            1,534,677Cash
                and cash equivalents, beginning of year
            
            
            17,483,886
            
            
            
            1,584,066
            
            
            
            49,389Cash
                and cash equivalents, end of year
            
            $
            7,001,884
            
            
            $
            17,483,886
            
            
            $
            1,584,066Supplemental
                Disclosure of Cash Flow Information:Net
                cash received (paid) for interest
            
            $
            612,303
            
            
            $
            (129,401
            )
            
            $
            (94,842
            )Non-cash
                investing and financing activities:
              Property
                and equipment acquired through capital lease obligations
            
            $
            —
            
            
            $
            12,943
            
            
            $
            56,205Non-cash
                investing and financing activities:Fair
                value of common stock issued in acquisition of
                EnergyGateway
            
            $
            6,536,000
            
            
            $
            —
            
            
            $
            —Reversal
                of accrued expenses related to initial public offering of common
                stock
            
            $
            48,468
            
            
            $
            —
            
            
            $
            —Conversion
                of series A preferred stock to common stock
            
            $
            —
            
            
            $
            1,507,997
            
            
            $
            —Conversion
                of non-voting common stock to common stock
            
            $
            —
            
            
            $
            898
            
            
            $
            —Issuance
                of warrants in connection with initial public offering of common
                stock
            
            $
            —
            
            
            $
            274,129
            
            
            $
            —Issuance
                of warrants in connection with debt offering
            
            $
            —
            
            
            $
            —
            
            
            $
            256,200





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






-
          46
          -


WORLD
      ENERGY SOLUTIONS, INC.





Notes
      to Consolidated Financial Statements





NOTE 1 —
      NATURE OF BUSINESS AND BASIS OF PRESENTATION





World
      Energy Solutions, Inc. (“World Energy” or the “Company”) was incorporated in
      1999 as a Delaware corporation and is focused in one operating segment –
brokering energy and environmental commodities utilizing online auction
      platforms. The Company commenced operations through an entity named Oceanside
      Energy, Inc. (“Oceanside”), which was incorporated under the laws of the State
      of Delaware on September 3, 1996.  We incorporated World Energy
      Solutions, Inc. under the laws of the State of Delaware under the name “World
      Energy Exchange, Inc.” on June 22, 1999 and on October 31, 1999, Oceanside
      became a wholly-owned subsidiary of World Energy Solutions, Inc.. Oceanside
      was
      subsequently dissolved on May 18, 2006.  On December 15, 2006 the
      Company established World Energy Securities Corp., a Massachusetts Securities
      Corporation, as a wholly-owned subsidiary.





World
      Energy is an energy and environmental commodities brokerage company that has
      developed online auction platforms, the World Energy Exchange and the World
      Green Exchange. On the World Energy Exchange, retail energy consumers
      (commercial, industrial and government) and wholesale energy participants
      (utilities and retail suppliers) in the United States are able to negotiate
      for
      the purchase or sale of electricity and other energy resources from competing
      energy suppliers which have agreed to participate on our auction platform in
      a
      given auction. Although the Company’s primary source of revenue is from
      brokering electricity and natural gas, the Company adapted its World Energy
      Exchange auction platform to accommodate the brokering of green power in 2003
      (i.e., electricity generated by renewable resources), wholesale electricity
      in
      2004 and certain other energy-related products in 2005.  In 2007, the
      Company created the World Green Exchange based on the World Energy Exchange
      technology and business process. On the World Green Exchange,
      buyers and
      sellers negotiate for the purchase or sale of environmental commodities such
      as
      Renewable Energy Certificates, Verified Emissions Reductions and Certified
      Emissions Reductions.





On
      November 16, 2006, the Company
      completed its initial public offering of common stock, including the exercise
      by
      the underwriters of an over-allotment option on December 5, 2006, for the sale
      of 23,000,000 shares of common stock resulting in net proceeds to the Company
      of
      approximately $17.5 million (net of offering costs of approximately $3.6
      million).





On
      June 1, 2007, the Company acquired
      substantially all of the assets of EG Partners, LLC, formerly known
      as  EnergyGateway LLC (“EnergyGateway”), for $4,951,758 in cash and
      5,375,000 common shares of World Energy plus the assumption of certain
      liabilities.  The EnergyGateway operations are included in these
      financial statements from June 1, 2007.  See Note 10 for further
      discussion of this acquisition.







NOTE 2 —
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Principles
      of Consolidation





The
      Company’s consolidated financial statements include its wholly-owned subsidiary
      World Energy Securities Corp.  All intercompany accounts and
      transactions have been eliminated in consolidation.





Use
      of Estimates





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America (“generally accepted
      accounting principles”) requires management to make estimates and assumptions
      that affect the reported amounts of assets and liabilities and disclosure of
      contingent assets and liabilities at the date of the financial statements and
      the reported amounts of revenues and expenses during the reporting period.
      Accordingly, actual results could differ from those estimates.





The
      Company’s most judgmental estimates affecting the consolidated financial
      statements are those relating to revenue recognition and the estimate of actual
      energy purchased from the energy supplier and end user, or energy consumer,
      of
      such energy; software development costs; the fair value of equity securities
      prior to the Company’s initial public offering when there was no ready market
      for the purchase and sale of these shares; the valuation of intangible assets
      and goodwill; impairment of long-lived assets; and estimates of future taxable
      income as it relates to the realization of net deferred tax
      assets.  The Company regularly evaluates its estimates and assumptions
      based upon historical experience and various other factors that it believes
      to
      be reasonable under the circumstances, the results of which form the basis
      for
      making judgments about the carrying values of assets and liabilities that are
      not readily apparent from other sources. To the extent actual results differ
      from those estimates, future results of operations may be affected. The Company
      believes the following critical accounting policies affect  its more
      significant judgments and estimates used in the preparation of the consolidated
      financial statements.




-
          47
          -


Revenue
      Recognition





The
      Company generates revenue through commissions on sales of energy usage
      transacted on the Company’s online auction platform. The Company recognizes
      revenues in accordance with the United States Securities and Exchange
      Commission’s (“SEC”) Staff Accounting Bulletin No. 104, Revenue Recognition(“SAB 104”). SAB 104 requires that
      four basic criteria must be
      met before revenue can be recognized: (1) persuasive evidence of an
      arrangement exists; (2) the service has been rendered; (3) the fee is
      fixed or determinable; and (4) collectibility is reasonably
      assured.





The
      Company participates in four primary markets: retail electricity, retail natural
      gas, wholesale energy and environmental commodities.  Prior to the
      June 1, 2007 acquisition of substantially all of the assets of EnergyGateway,
      the Company primarily received revenue from the brokering of electricity on
      the
      World Energy Exchange, utilizing reverse auction technology (“retail electricity
      transactions”). While EnergyGateway also utilized an online auction format, its
      primary focus was on the brokering of natural gas and its “post and bid”
methodology (“retail natural gas transactions”). In addition, the Company
      adapted the World Energy Exchange to conduct reverse and forward online auctions
      for the wholesale electricity and natural gas markets and recently conducted
      several green credit auctions (“wholesale and green transactions”). The revenue
      recognition policy and related third party commissions for each of these
      products is more fully described below.





Retail
      Electricity
      Transactions





The
      Company receives a monthly commission on energy sales contracted through its
      online auction platform from each energy supplier based on the energy usage
      generated and transacted between the energy supplier and energy consumer. The
      Company’s commissions are not based on the retail price for electricity; rather,
      commissions are based on the energy usage generated and transacted between
      the
      energy supplier and energy consumer multiplied by the contractual commission
      rate. Revenue from commissions is recognized as earned on a monthly basis over
      the life of each contract as energy is consumed, provided there is persuasive
      evidence of an arrangement, the sales price is fixed or determinable, collection
      of the related receivable is reasonably assured, and customer acceptance
      criteria, if any, has been successfully demonstrated.





The
      Company records brokerage commissions based on actual usage data obtained from
      the energy supplier for that accounting period, or to the extent actual usage
      data is not available, based on the estimated amount of electricity delivered
      to
      the energy consumers for that accounting period.  The Company’s
      estimates are developed on a quarterly basis based on the following
      criteria:





•
            Payments
                received prior to the issuance of the financial
                statements;


•
            Usage
                updates from energy
                suppliers;


•
            Usage
                data from utilities;


•
            Comparable
                historical usage data; and


•
            Historical
                variances to previous estimates.





To
      the
      extent usage data cannot be obtained, revenue is estimated as
      follows:





•
            Historical
                usage data obtained from the energy consumer in conjunction with
                the
                execution of the auction;


•
            Geographic/utility
                usage patterns based on actual data
                received;


•
            Analysis
                of prior year usage
                patterns; and


•
            Specific
                review of individual energy supplier/location
                accounts.





In
      addition, the Company performs sensitivity analyses on this estimated data
      based
      on overall industry trends including prevailing weather and usage data. Once
      the
      actual data is received, estimated accounts receivable and revenue is adjusted
      to the actual total amount in the period during which the payment is received.
      Based on management’s current capacity to obtain actual energy usage, the
      Company currently estimates 4 to 6 weeks of revenue at the end of its accounting
      period. Differences between estimated and actual revenue have been within
      management’s expectations and have not been material to date.





The
      Company generally does not directly invoice its electricity energy suppliers
      and, therefore, reports a substantial portion of its receivables as “unbilled.”
Unbilled accounts receivable represents management’s best estimate of energy
      provided by the energy suppliers to the energy consumers for a specific
      completed time period at contracted commission rates and is made up of two
      components. The first component represents energy usage for which actual data
      has been received from the supplier and/or the utility but for which payment
      has
      not been received at the balance sheet date. The majority of the Company’s
      contractual relationships with energy suppliers require that the suppliers
      provide the Company with actual usage data on a monthly basis and remit payment
      based on that usage. The second component represents energy usage for which
      the
      Company has not received actual data, but for which it has




-
          48
          -


estimated
      usage.  Commissions paid in advance by certain energy suppliers are
      recorded as deferred revenue and amortized to commission revenue on a monthly
      basis on the energy exchanged that month.





Retail
      Natural Gas
      Transactions





There
      are
      two primary components related to retail natural gas services - transaction
      fees
      and management fees.  Transaction fees are billed to and paid by the
      energy supplier awarded business on the platform.  Transaction fees
      for natural gas awards are established prior to award and are the same for
      each
      supplier. For the majority of natural gas transactions, the Company bills the
      supplier upon the conclusion of the transaction based on the estimated energy
      volume transacted for the entire award term multiplied by the transaction
      fee.  Management fees are paid by the energy consumers and are
      generally billed on a monthly basis for services rendered based on terms and
      conditions included in contractual arrangements. While substantially all retail
      natural gas transactions are accounted for in accordance with this policy,
      a
      certain percentage is accounted for as the natural gas is consumed by the
      customer and recognized as revenue in accordance with the retail electricity
      transaction revenue recognition methodology described above.





Wholesale
      and Green
      Transactions





Substantially
      all transaction fees are invoiced upon the conclusion of the auction based
      on a
      fixed fee.  These revenues are not tied to future energy usage and are
      recognized upon the completion of the online auction.  For reverse
      auctions where customers bid for a consumer’s business, the fees are paid by the
      bidder. For forward auctions where a lister is selling energy or credits, the
      fees are typically paid by the lister. In addition, revenue may not be
      recognized on certain green transactions until the credits being auctioned
      have
      been verified. While substantially all wholesale and green transactions are
      accounted for in this fashion, a small percentage is accounted for as the
      wholesale electricity or gas is delivered similar to the retail electricity
      transaction methodology described above.





Third
      Party Channel
      Commissions





Commissions
      are paid to channel partners at contractual rates based on monthly energy
      transactions between energy suppliers and energy consumers. The commission
      is
      accrued monthly and charged to sales and marketing expense as revenue is
      recognized.  Commissions are paid to salespeople at contractual
      commission rates based upon cash collections from customers.





Revenue
      Estimation





The
      Company’s estimates in relation to revenue recognition affect revenue and sales
      and marketing expense as reflected on its statements of operations, and trade
      accounts receivable and accrued commissions accounts as reflected on its balance
      sheets. For any quarterly reporting period, the Company may not have actual
      usage data for certain energy suppliers and will need to estimate
      revenue.  Revenue is recorded based on the energy consumers’
historical usage profile. At the end of each reporting period, the Company
      adjusts historical revenue to reflect actual usage for the period. For the
      year
      ended December 31, 2007, usage was estimated for approximately 10% of the
      Company’s revenue resulting in a $35,179, or 0.4%, adjustment. This increase in
      revenue resulted in an approximate 0.1% reduction in sales and marketing expense
      related to third party commissions associated with those revenues. Corresponding
      adjustments were made to unbilled accounts receivable and accrued commissions,
      respectively. A 1% difference between this estimate and actual usage would
      have
      an approximate $9,000 effect on the Company’s revenue for the year ended
      December 31, 2007.





Software
      Development





Certain
      acquired software and significant enhancements to the Company’s software are
      recorded in accordance with Statement of Position (“SOP”) 98-1, “Accounting for Costsof
      Computer Software Developed or
      Obtained for Internal Use”.Accordingly, internally developed software
      costs of approximately $469,000, $66,000, and $54,000 related to implementation,
      coding and configuration have been capitalized in 2007, 2006, and 2005,
      respectively. The Company amortizes internally developed and purchased software
      over the estimated useful life of the software (generally three years).
      Accordingly, during 2007, 2006, and 2005, approximately $111,000, $73,000,
      and
      $55,000, respectively, were amortized to cost of revenues resulting in
      accumulated amortization of approximately $273,000, $162,000, and $89,000 at
      December 31, 2007, 2006, and 2005, respectively. At December 31, 2007,
      future amortization expense for capitalized internally developed software is
      as
      follows:





2008
            
            $
            188,0002009
            
            
            167,0002010
                and thereafter
            
            
            109,000$
            464,000





-
          49
          -


Pre-
      and
      post- software implementation and configuration costs have historically been
      immaterial and charged to cost of revenue as incurred.





Goodwill





The
      Company uses assumptions in establishing the carrying value and fair value
      of
      its goodwill.  Goodwill represents the excess of the purchase price
      over the fair value of identifiable net assets of acquired
      businesses.  The Company accounts for goodwill that results from
      acquired businesses in accordance with Statement of Financial Accounting
      Standards (“SFAS”) No. 142, “Goodwill and Other Intangible
      Assets” (“SFAS No. 142”).  Under SFAS No. 142, goodwill and
      intangible assets having indefinite lives are not amortized but instead are
      assigned to reporting units and tested for impairment annually or more
      frequently if changes in circumstances or the occurrence of events indicate
      possible impairment.





Pursuant
      to SFAS No. 142, the Company performs an annual impairment test for
      goodwill.  The impairment test for goodwill is a two-step
      process.  Step one consists of a comparison of the fair value of a
      reporting unit with its carrying amount, including the goodwill allocated to
      each reporting unit.  If the carrying amount is in excess of the fair
      value, step two requires the comparison of the implied fair value of the
      reporting unit whereby the carrying amount of the reporting unit’s goodwill over
      the implied fair value of the reporting unit’s goodwill will be recorded as an
      impairment loss.  There was no impairment of goodwill in the year
      ended December 31, 2007.  Future events could cause management to
      conclude that impairment indicators exist and that goodwill of previously
      acquired businesses is impaired.  Any related impairment loss could
      have a material impact on the Company’s financial condition and results of
      operations.





Intangible
      Assets





The
      Company uses assumptions in establishing the carrying value, fair value and
      estimated lives of its intangible assets.  The criteria used for these
      assumptions include management’s estimate of the assets continuing ability to
      generate positive income from operations and positive cash flow in future
      periods compared to the carrying value of the asset, as well as the strategic
      significance of any identifiable intangible asset in our business
      objectives.  If assets are considered impaired, the impairment
      recognized is the amount by which the carrying value of the assets exceeds
      the
      fair value of the assets.  Useful lives and related amortization
      expense are based on an estimate of the period that the assets will generate
      revenues or otherwise be used by the Company.  Factors that would
      influence the likelihood of a material change in the Company’s reported results
      include significant changes in the asset’s ability to generate positive cash
      flow, a significant decline in the economic and competitive environment on
      which
      the asset depends and significant changes in the Company’s strategic business
      objectives.





Intangible
      assets consist of customer relationships and contracts, purchased technology
      and
      other intangibles, and are stated at cost less accumulated amortization.
      Intangible assets with a definite life are amortized using the straight-line
      method over their estimated useful lives, which range from one to ten
      years.  Accumulated amortization of intangible assets amounted to
      approximately $813,000 at December 31, 2007.





Impairment
      of Long-Lived and Intangible Assets





In
      accordance with SFAS No. 144, “Accounting for the Impairment
      or
      Disposal of Long-Lived Assets”, the Company periodically reviews
      long-lived assets and intangible assets for impairment whenever events or
      changes in circumstances indicate that the carrying amount of such assets may
      not be recoverable or that the useful lives of those assets are no longer
      appropriate. Recoverability of these assets is determined by comparing the
      forecasted undiscounted net cash flows of the operation to which the assets
      relate to the carrying amount.  There was no impairment of intangible
      assets in the year ended December 31, 2007.





Cash
      and Cash Equivalents





The
      Company considers all highly liquid debt instruments purchased with an original
      maturity of 90 days or less to be cash equivalents.





Property
      and Equipment





Property
      and equipment is stated at cost. Depreciation is provided on a straight-line
      basis over the estimated useful lives of the related assets or the life of
      the
      related lease, whichever is shorter, which range from 3 to
      7 years.





-
          50
          -


Income
      Taxes





The
      Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for IncomeTaxes”(“SFAS
      No. 109”).Deferred tax assets and liabilities are determined at the end of each
      period based on the future tax consequences that can be attributed to net
      operating loss carryforwards, as well as differences between the financial
      statement carrying amounts of the existing assets and liabilities and their
      respective tax basis. Deferred income tax expense or credits are based on
      changes in the asset or liability from period to period. Valuation allowances
      are provided if, based on the weight of available evidence, it is more likely
      than not that some or all of the deferred tax assets will not be realized.
      The
      realization of deferred tax assets is dependent upon the generation of future
      taxable income. In determining the valuation allowance, the Company considers
      past performance, expected future taxable income, and qualitative factors which
      are considered to be appropriate in estimating future taxable income. The
      Company’s forecast of expected future taxable income is for future periods that
      can be reasonably estimated.  The Company has historically utilized a
      three year forecasting window to determine its expected future taxable income.
      As of December 31, 2006, the Company had cumulative net income for the three
      years then ended and the expected future taxable income anticipated from 2007
      through 2009 was deemed adequate on a present value basis to benefit the
      majority of our deferred tax assets (primarily net operating loss
      carryforwards).  During 2007, the Company accelerated its growth in
      excess of  its initial expectations to address the strategic
      initiatives outlined at the time of our initial public offering.  The
      Company grew from 20 employees as of December 31, 2006 to 63 as of December
      31,
      2007, acquired one of its main competitors in the retail energy market, and
      developed its wholesale and environmental commodity product lines. These
      initiatives increased the Company’s loss for 2007 resulting in a three-year
      cumulative loss as of December 31, 2007 and increased its near term operating
      expenses. Athree-year cumulative
      loss is significant negative evidence in considering whether the deferred tax
      assets are realizable and generally precludes relying on projections of future
      taxable income to support the recovery of deferred tax assets.While the
      Company expects  its future income will be adequate on a present value
      basis to benefit substantially all of  its current deferred tax
      assets, the recent three-year cumulative loss is given more weight than
      projected future income when determining the need for a
      valuation.  Therefore,
      during the fourth quarter of 2007, the Company recorded a full valuation
      allowance against its deferred tax assets of approximately $4.1 million, and
      maintains a cumulative valuation allowance of approximately $4.7 million at
      December 31, 2007.





The
      Company’s estimates in relation to income taxes affect income tax expense and
      deferred tax assets as reflected on its statements of operations and balance
      sheets, respectively. The deferred tax assets are reduced by a valuation
      allowance if it is more likely than not that the tax benefits will not be
      realized in the near term.  As of December 31, 2007, the Company had
      deferred tax assets of approximately $4.7 million against which a full valuation
      allowance has been established. To the extent the Company determines that it
      is
      more likely than not that it will recover all of its deferred tax assets, it
      could result in an approximate $4.7 million non-cash tax benefit.




The
      Company adopted Financial Accounting Standards (“FASB”) Interpretation No. 48,
“Accounting for Uncertainty
      in
      Income Taxes” (“FIN 48”), on January 1, 2007.  FIN 48 clarifies
      the accounting for uncertainty in income taxes recognized in an enterprise’s
      financial statements in accordance with SFAS 109. FIN 48 prescribes a two-step
      process to determine the amount of tax benefit to recognize.  First,
      the tax position must be evaluated to determine the likelihood that it will
      be
      sustained upon examination by a tax authority.  If the tax position is
      deemed “more-likely-than-not” to be sustained, the tax position is then assessed
      to determine the amount of benefit to recognize in the financial
      statements.  The amount of the benefit that may be recognized is the
      largest amount that has a greater than 50 percent likelihood of being realized
      upon ultimate settlement.  If the tax position does not meet the
“more-likely-than-not” threshold, then it is not recognized in the financial
      statements.  As of  its adoption date of January 1, 2007,
      and also at December 31, 2007, FIN 48 did not have a material impact on our
      financial position or results of operations.




The
      Company has reviewed the tax positions taken, or to be taken, in its tax returns
      for all tax years currently open to examination by the taxing authority in
      accordance with the recognition and measurement standards of FIN
      48.  At December 31, 2007, there are no expected material, aggregate
      tax effect of differences between tax return positions and the benefits
      recognized in our financial statements.





Advertising
      Expense





Advertising
      expense primarily includes promotional expenditures and is expensed as incurred,
      as such efforts have not met the direct-response criteria required for
      capitalization. Amounts incurred for advertising expense were not material
      for
      the years ended December 31, 2007, 2006, and 2005.





Comprehensive
      Income





SFAS No. 130,
      “Reporting Comprehensive
      Income”,establishes standards for reporting and displaying comprehensive
      income (loss) and its components in financial statements. Comprehensive income
      (loss)




-
          51
          -


is
      defined as the change in stockholders’ equity of a business enterprise during a
      period from transactions and other events and circumstances from non-owner
      sources. The comprehensive income (loss) for all periods presented does not
      differ from the reported net income (loss).





Fair
      Value of Financial Instruments





SFAS No. 107,
      “Disclosures about Fair Value
      of Financial Instruments”, requires management to disclose the estimated
      fair value of certain assets and liabilities defined by SFAS 107 as
      financial instruments.  Financial instruments are generally defined as
      cash, evidence of ownership interest in an entity, or a contractual obligation
      that both conveys to one entity a right to receive cash or other financial
      instruments from another entity and imposes on the other entity the obligation
      to deliver cash or other financial instruments to the first entity. At
      December 31, 2007, management believes that the carrying value of cash and
      cash equivalents, receivables and payables approximated fair value because
      of
      the short maturity of these financial instruments.





Segment
      Reporting





SFAS No. 131,
      “Disclosures about Segments
      of
      an Enterprise and RelatedInformation”,established
      standards for reporting information about operating segments in financial
      statements. Operating segments are defined as components of an enterprise about
      which separate financial information is available that is evaluated regularly
      by
      the chief decision maker in deciding how to allocate resources and in assessing
      performance. The Company’s chief decision maker is the chief executive officer.
      The Company’s chief decision maker reviews the results of operations based on
      one industry segment: the brokering of energy and environmental commodities
      utilizing online auction platforms.





Concentration
      of Credit Risk and Off-Balance Sheet Risk





Financial
      instruments that potentially expose the Company to concentrations of credit
      risk
      consist principally of cash and trade accounts receivable. The Company has
      no
      significant off-balance sheet risk such as foreign exchange contracts, option
      contracts, or other foreign hedging arrangements. The Company places its cash
      with primarily one institution, which management believes is of high credit
      quality.





The
      Company receives commission payments from energy suppliers based on the energy
      usage transacted between energy consumers and energy suppliers.  The
      Company provides credit in the form of invoiced and unbilled accounts receivable
      to energy suppliers and energy consumers in the normal course of
      business.  Collateral is not required for trade accounts receivable,
      but ongoing credit evaluations of energy suppliers and energy consumers are
      performed.  Management provides for an allowance for doubtful accounts
      on a specifically identified basis, as well as through historical experience
      applied to an aging of accounts, if necessary.  Trade accounts
      receivable are written off when deemed uncollectible.  To date
      write-offs have not been material.





The
      following represents revenue and trade accounts receivable from energy suppliers
      exceeding 10% of the total in each category:




Revenue
                for the year ended December
                31,
            
            Trade
                accounts receivable as of
              December
                31,Energy
                supplier
            
            
            2007
            
            2006
            
            2005
            
            2007
            
            2006A
            
            
            
            11
            %
            
            
            18
            %
            
            
            18
            %
            
            
            10
            %
            
            
            21
            %B
            
            
            
            5
            %
            
            
            13
            %
            
            
            10
            %
            
            
            7
            %
            
            
            12
            %C
            
            
            
            6
            %
            
            
            10
            %
            
            
            18
            %
            
            
            12
            %
            
            
            4
            %D
            
            
            
            7
            %
            
            
            10
            %
            
            
            —
            
            
            
            10
            %
            
            
            4
            %E
            
            
            
            6
            %
            
            
            6
            %
            
            
            11
            %
            
            
            2
            %
            
            
            1
            %F
            
            
            
            21
            %
            
            
            9
            %
            
            
            —
            
            
            
            22
            %
            
            
            4
            %





During
      2006, supplier A was acquired by another supplier who is not reflected above
      as
      its revenues represented less than 10% of total revenue. If these suppliers
      were
      combined as of January 1, 2006, revenue attributable to these customers would
      have been 27% for the year ended December 31, 2006 and unbilled accounts
      receivable would have represented 46% of total unbilled accounts receivable
      as
      of December 31, 2006.





In
      addition to its direct relationship with energy suppliers, the Company also
      has
      direct contractual relationships with energy consumers for the online
      procurement of certain of their energy needs.  These energy consumers
      are primarily large businesses and government organizations.  For the
      years ended December 31, 2007, 2006 and 2005, two, four and three of these
      energy consumers accounted for transactions resulting in over 10% individually,
      respectively, and approximately 30%, 63% and 51% in the aggregate of our
      revenue, respectively.




-
          52
          -


Reclassifications





Certain
      prior year amounts have been reclassified to conform with the current
      presentation.





Earnings
      (Loss) Per Share





In
      March
      2004, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue
      No. 03-6, “Participating
      Securities and the Two — Class Methodunder FAS 128”(“EITF
      Issue No. 03-6”). EITF Issue No. 03-6 provides guidance in determining
      when the two-class method, as defined in SFAS No. 128, “Earnings Per Share”, must be
      utilized in calculating earnings per share.  For the year ended
      December 31, 2005, the Company had determined that its non-voting common stock
      and Series A redeemable convertible preferred stock (the “Series A
      Preferred”) represented participating securities. The non-voting common had the
      same privileges and rights of the voting common stock, except for the right
      to
      vote. The Series A Preferred participated in dividends, if any, paid by the
      Company on a proportional basis with the voting common stock. The Series A
      Preferred and non-voting common automatically converted into voting common
      stock
      on a one-for-one basis upon the closing of the Company’s initial public
      offering. EITF Issue No. 03-6 requires the income per share for each class
      of common stock to be calculated assuming 100% of the Company’s earnings are
      distributed as dividends to each class of common stock based upon their
      respective dividend rights, even though the Company does not anticipate
      distributing 100% of its earnings as dividends.





Basic
      earnings per share for the Company’s voting common and non-voting common stock
      is calculated by dividing net income (loss) allocated to voting common and
      non-voting common stock by the weighted average number of shares of voting
      common and non-voting common stock outstanding, respectively. Diluted earnings
      per share for the Company’s voting common stock assumes the conversion of all
      the Company’s non-voting common stock and Series A Preferred therefore no
      allocation of earnings to non-voting common stock or the Series A Preferred
      is required.





For
      the
      basic earnings per share calculation in 2005, net income was allocated to
      Series A Preferred shareholders based on dividend rights and then among the
      Company’s two classes of common stock; voting common stock and non-voting common
      stock based on ownership interests. The allocation among each class of stock
      was
      based upon the two-class method. The following table reflects the allocation
      of
      net income using this method:




For
                the Year EndedDecember
                31, 2005Net
                income available to common shareholders
            
            $
            1,040,051Allocation
                of net income for basic:Voting
                common stock
            
            $
            684,354Non-voting
                common stock
            
            
            140,407Series A
                Preferred stock
            
            
            215,290$
            1,040,051





On
      November 16, 2006, the Company completed an initial public offering of its
      common stock.  As a result, all issued and outstanding shares of
      Series A Preferred Stock and non-voting common stock were automatically
      converted into voting common stock.  As of December 31, 2007 and 2006,
      the Company only had one issued and outstanding class of stock – common
      stock.  As a result, the basic loss per share for the years ended
      December 31, 2007 and 2006 is computed by dividing net loss available to common
      stockholders by the weighted average number of common shares outstanding for
      the
      period.  The computed loss per share does not assume conversion,
      exercise, or contingent exercise of securities that would have an anti-dilutive
      effect on loss per share. The following table reflects the weighted average
      shares used to calculate basic and diluted earnings per share:




For
                the Years Ended
                December 31,2007
            
            
            2006
            
            
            2005Weighed
                average number of voting common shares — basic
            
            
            79,793,590
            
            
            
            45,576,477
            
            
            
            33,049,472Weighed
                average number of non-voting common shares — basic
            
            
            —
            
            
            
            —
            
            
            
            6,778,327Weighted
                average number of common and common equivalent shares outstanding —
                basic
            
            
            79,793,590
            
            
            
            45,576,477
            
            
            
            39,827,799Dilutive
                Shares:
              Weighted
                average number of Series A Preferred shares
            
            
            —
            
            
            
            —
            
            
            
            10,433,504Incremental
                shares under the treasury stock method for outstanding
                warrants
            
            
            —
            
            
            
            —
            
            
            
            1,191,808Incremental
                shares under the treasury stock method for outstanding
                options
            
            
            —
            
            
            
            —
            
            
            
            3,053,455Weighted
                average number of common and common equivalent shares outstanding —
                diluted
            
            
            79,793,590
            
            
            
            45,576,477
            
            
            
            54,506,566





-
          53
          -


For
      the
      year ended December 31, 2007, 1,048,575, 1,826,375 and 493,718 weighted
      average shares issuable relative to common stock warrants, common stock options
      and restricted stock, respectively, were excluded from net loss per share since
      the inclusion of such shares would be anti-dilutive due to the Company’s net
      loss position.  For the year ended December 31, 2006, 9,147,182,
      2,251,072 and 2,230,232 weighted average shares issuable relative to preferred
      stock, common stock warrants and stock options, respectively, were excluded
      from
      net loss per share since the inclusion of such shares would be anti-dilutive
      due
      to the Company’s net loss position.  For the year ended December 31,
      2007, 2,320,000 shares issuable relative to common stock options had exercise
      prices that exceeded the average market price of the Company’s common stock and
      were excluded from the calculation of diluted shares since the inclusion of
      such
      shares would be anti-dilutive.





The
      Company did not declare or pay any dividends in 2007, 2006 and
      2005.





Share-Based
      Compensation





At
      December 31, 2007, the Company had two share-based employee compensation
      plans, which are more fully described in Note 6. Effective January 1, 2006,
      the Company accounted for stock-based compensation in accordance with
      SFAS No. 123(R), “Stock-Based Compensation”
(“SFAS No. 123(R)”) which is a revision
      of SFAS No. 123
“Accounting for Stock-Based
      Compensation” (“SFAS No. 123”).  SFAS No. 123(R)
      superseded Accounting Principles Board (APB) No. 25, “Accounting for Stock Issued
      to
      Employees”, and amends SFAS No. 95, “Statement of Cash
      Flows”.  SFAS No. 123(R) requires all share-based
      payments to employees, including grants of employee stock options and restricted
      stock, to be recognized in the income statement based on their fair
      values.  Pro forma disclosure is no longer an
      alternative.





SFAS No. 123(R)
      requires nonpublic companies that used the minimum value method in
      SFAS No. 123 for either recognition or pro forma disclosures to apply
      SFAS No. 123(R) using the prospective-transition method. As such, the
      Company will continue to apply APB 25 in future periods to equity awards
      outstanding at the date of SFAS No. 123(R)’s adoption that were
      measured using the minimum value method. In accordance with this standard,
      the
      prior period pro forma stock information has not been restated. In accordance
      with SFAS No. 123(R), the Company will recognize the compensation cost
      of share-based awards on a straight-line basis over the vesting period of the
      award.





The
      per-share weighted-average fair value of stock options granted during the year
      ended December 31, 2007 and 2006 was $0.58 and $0.36, respectively, on the
      date
      of grant, using the Black-Scholes option-pricing model with the following
      weighted-average assumptions and estimated forfeiture rates of 13% in 2007
      and
      2006, respectively:





Year
                ended
              December
                31,
            
            Expected
              Dividend
                Yield
            
            Risk
              Interest
                Rate
            
            Expected
              Option
                Life
            
            Expected
              Volatility2007
            
            —
            
            4.66%
            
            4.61
                years
            
            54%2006
            
            —
            
            4.66%
            
            4.75
                years
            
            48%





Effective
      with the adoption of SFAS No. 123(R), the Company elected to use the
      Black-Scholes option pricing model to determine the weighted average fair value
      of options granted. As the Company’s stock has a limited trading history as of
      December 31, 2007, the Company determined the volatility for stock options
      granted in 2007 based on a weighted combination of per share closing prices
      reported on the Toronto Stock Exchange, and historical and reported data for
      a
      peer group of companies that issued options with substantially similar
      terms.  The expected life of options has been determined utilizing the
“simplified” method as prescribed by the Securities and Exchange Commission’s
      Staff Accounting Bulletin No. 107, “Share-Based Payment”.The
      risk-free interest rate is based on a treasury instrument whose term is
      consistent with the expected life of the stock options. The Company has not
      paid
      and does not anticipate paying cash dividends on its common stock; therefore,
      the expected dividend yield is assumed to be zero. In addition,
      SFAS No. 123(R) requires companies to utilize an estimated forfeiture
      rate when calculating the expense for the period, whereas,
      SFAS No. 123 permitted companies to record forfeitures based on actual
      forfeitures, which was the Company’s historical policy under
      SFAS No. 123.  As a result, the Company applied estimated
      forfeiture rates of between 11% and 13%, and 12% and 13% during the years ended
      December 31, 2007 and 2006, respectively, in determining the expense recorded
      in
      the accompanying consolidated statements of operations.  The effect on
      compensation expense for the year ended December 31, 2007 from changes in the
      forfeiture rate in 2007 of previous years’ stock option grants, resulted in an
      increase in compensation expense of less than $1,000.





For
      the
      year ended December 31, 2007, the Company recorded stock-based compensation
      expense of approximately $982,000 in connection with share-based payment awards
      as follows: approximately $753,000 in sales and marketing, approximately
      $103,000 in cost of revenue and approximately $126,000 in general and
      administrative expenses.  For the year ended December 31, 2006,
      the Company recorded stock-based compensation expense of approximately $44,000
      in connection with share-based payment awards as




-
          54
          -


follows:
      approximately $20,000 in sales and marketing, approximately $2,000 in cost
      of
      revenue and approximately $22,000 in general and administrative expenses. As
      of
      December 31, 2007, there was approximately $3,024,000 of unrecognized
      compensation expense related share-based awards, including approximately
      $1,513,000 related to non-vested stock option awards that is expected to be
      recognized over a weighted-average period of 3.18 years, and approximately
      $1,511,000 related to non-vested restricted stock awards. See Note 6 for a
      summary of the share-based activity under the Company’s stock-based employee
      compensation plans for the years ended December 31, 2007, 2006 and
      2005.





Prior
      to
      January 1, 2006, the Company accounted for its stock-based awards to employees
      using the intrinsic value method prescribed in APB 25 and related
      interpretations. Under the intrinsic value method, compensation expense is
      measured on the date of grant as the difference between the deemed fair value
      of
      the Company’s common stock and the option exercise price multiplied by the
      number of options granted. Generally, the Company grants stock options with
      exercise prices equal to the estimated fair value of its common stock; however,
      to the extent that the deemed fair value of the common stock exceeded the
      exercise price of stock options granted to employees on the date of grant,
      the
      Company recorded stock-based compensation expense ratably over the vesting
      schedule of the options, generally four years. The fair value of the Company’s
      common stock is determined by the Company’s Board of Directors (the
“Board”).





Prior
      to
      November 16, 2006, there had been no public market for the Company’s common
      stock and the fair value for the Company’s common stock was estimated by the
      Board, with input from management as well as from independent appraisals. The
      Board exercised judgment in determining the estimated fair value of the
      Company’s common stock on the date of grant based on several factors, including
      the liquidation preferences, dividend rights, and voting control attributable
      to
      the Company’s then-outstanding convertible preferred stock and, primarily, the
      likelihood of achieving a liquidity event such as an initial public offering
      or
      sale of the Company. In the absence of a public trading market for the Company’s
      common stock, the Board considered objective and subjective factors in
      determining the fair value of the Company’s common stock. The Company believes
      this to have been a reasonable methodology based upon the Company’s internal
      peer company analyses and based on arms-length transactions, when applicable,
      involving the Company’s common stock supportive of the results produced by this
      valuation methodology.





For
      the
      years ended December 31, 2007 and 2006, options to purchase 3,020,000 and
      1,262,000 shares of common stock were granted, respectively, at weighted
      exercise prices of $1.24 and $0.79, respectively.  The weighted
      average fair value of the Company’s common stock at option grant date for the
      years ended December 31, 2007 and 2006 was $1.17 and $0.78,
      respectively.  Additionally, 1,928,500 shares of restricted stock were
      granted for the twelve months ended December 31, 2007.





In
      preparing for the initial public offering of the Company’s common stock, the
      Company reassessed the valuations of its common stock during 2006, in accordance
      with the American Institute of Certified Public Accountants (“AICPA’s”) Practice
      Aid, Valuation of
      Privately-Held-Company Equity Securities Issued as Compensation
      (the
“Practice Aid”).In May 2006, the company engaged an unrelated
      third-party valuation specialist to assist management in providing a
      retrospective valuation report of option grants during the first quarter of
      2006
      and a prospective valuation of the July 31, 2006 option grants. The third-party
      valuation specialist valued the Company’s common stock (both voting and
      non-voting common stock) at approximately $0.30, $0.39 and $0.95 as of
      January 16, 2006, February 10, 2006 and July 31, 2006, respectively,
      representing the dates when certain stock options were granted.





The
      Company believes that the valuation methodologies that were used were consistent
      with the Practice Aid. With the exception of one option to purchase
      60,000 shares on March 30, 2006, the Company has concluded that for
      all options granted to employees during the two years ended December 31,
      2005 and the period from January 1, 2006 to November 16, 2006, the fair value
      of
      its common stock, for financial reporting purposes, did not exceed the exercise
      price for those options at the time of grant. The Company granted stock options
      to purchase 60,000 shares of non-voting common stock, on March 30,
      2006, to an employee with an exercise price of $0.38 per share, which was
      $0.12 per share below fair value as subsequently determined by the Board of
      Directors. Compensation expense related to this grant was deemed to be
      immaterial. On July 19, 2006 the Company and the option holder agreed to
      terminate the option grant. On July 31, 2006, the Company granted this
      employee an option to purchase 72,000 shares of common stock at an exercise
      price of $0.95, which the Board determined to be the fair value at that date.
      No
      stock-based compensation expense was recorded for the year ended
      December 31, 2005 as the exercise price of the Company’s stock options was
      equal to the estimated fair value of the Company’s common stock on the date of
      grant.





The
      Company accounts for transactions in which services are received from
      non-employees in exchange for equity instruments based on the fair value of
      such
      services received or of the equity instruments issued, whichever is more
      reliably measured, in accordance with SFAS No. 123(R)and EITF 96-18,
“Accounting
      for Equity
      Instruments That Are Issuedto Other Than Employees
      for
      Acquiring, or in Conjunction With Selling, Goods orServices”. The Company
      granted 455,000 shares of restricted common stock during 2007 to
      non-employees in consideration for services performed. At the time of the
      grants, these shares of restricted stock had a




-
          55
          -


fair
      value of approximately $523,000, based on the fair value of the Company’s common
      stock at the grant date.  The Company recognized a charge of
      approximately $488,000 to sales and marketing expense in the statements of
      operations for the year ended December 31, 2007 related to these
      grants.





The
      Company provides the disclosures as required by SFAS No. 148, “Accountingfor
      Stock-Based Compensation and
      Disclosure, an Amendment of FASB Statement No.123”.





The
      following table illustrates the assumptions used and the effect on net income
      if
      the Company had applied the fair value recognition provisions of
      SFAS No. 123 to stock-based employee compensation. For purposes of
      this pro forma disclosure, the Company estimated the fair value of stock options
      issued to employees using the minimum value option-pricing model. The Company’s
      use of the minimum value model was primarily due to the determination as to
      its
      appropriateness, as well as its general acceptance as an option valuation
      technique for private companies.





The
      weighted-average assumptions used to calculate the SFAS No. 123 pro
      forma expense for stock options granted to employees and directors for the
      year
      ended December 31, 2005:





Dividend
                yield
            0%Risk-free
                interest rate
            3.63%
                to
                4.22%Expected
                life
            5 yearsVolatility
            0%





Had
      compensation cost for these awards been determined consistent with
      SFAS No. 123, the Company’s net income would have been as
      follows:


2005Net
                income available to common shareholders, as reported
            
            $
            1,040,051Deduct:
                total stock-based employee compensation expense determined under
                fair
                value based method for all awards, net of related taxeffects
            
            
            (7,499
            )Net
                income available to common shareholders, pro forma
            
            $
            1,032,552As
                Reported Per Share Amounts:Basic
                net income per weighted average voting common share
            
            $
            0.02Basic
                net income per weighted average non-voting common share
            
            $
            0.02Diluted
                net income per weighted average common share
            
            $
            0.02Pro-forma
                Per Share Amounts:Pro-forma
                basic net income per weighted average voting common share
            
            $
            0.02Pro-forma
                basic net income per weighted average non-voting common
                share
            
            $
            0.02Pro-forma
                diluted net income per weighted average common share
            
            $
            0.02





As
      stock
      options vest over several years and additional stock option grants are expected
      to be made each year, the above pro forma disclosures are not necessarily
      representative of pro forma effects on results of operations for future
      periods.





Recent
      Accounting Pronouncements





In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”(“SFAS No. 141(R)”).  SFAS No. 141(R) requires
      an acquiring
      entity in a business combination to recognize all (and only) the assets acquired
      and liabilities assumed in the transaction; establishes the acquisition-date
      fair value as the measurement objective for all assets acquired and liabilities
      assumed; and requires the acquirer to disclose to investors and other users
      all
      of the information they need to evaluate and understand the nature and financial
      effect of the business combination.  SFAS No. 141(R) is effective for
      fiscal years beginning after December 15, 2008.  The Company expects
      to adopt SFAS No. 141(R) on January 1, 2009.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
      in
      Consolidated Financial Statements” (“SFAS No. 160”).  SFAS No.
      160 clarifies that a noncontrolling or minority interest in a subsidiary is
      considered an ownership interest and, accordingly, requires all entities to
      report such interests in subsidiaries as equity in the consolidated financial
      statements.  SFAS No. 160 is effective for fiscal years beginning
      after December 15, 2008.  The Company expects to adopt SFAS No. 160 on
      January 1, 2009.





In
        September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
        (“SFAS No. 157”). This standard defines fair value, establishes a framework for
        measuring fair value in accounting principles generally accepted in the
        United States of America, and expands disclosure about fair value
        measurements. This pronouncement applies to other accounting standards that
        require or permit
  -
            56
            -
 fair
        value measurements. Accordingly, this statement does not require any new
        fair
        value measurement. This statement is effective for fiscal years beginning
        after
        November 15, 2007, and interim periods within those fiscal years. In
        December of 2007, the FASB agreed to a one year deferral of
        SFAS No. 157’s fair value measurement requirements for nonfinancial
        assets and liabilities that are not required or permitted to be measured
        at fair
        value on a recurring basis.  The Company’s management is currently
        evaluating the requirements of SFAS No. 157, but does not expect it to
        have a material impact on the Company’s 2008 consolidated financial
        statements.





In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
        for Financial Assets and Financial Liabilities.” SFAS No. 159 allows
        entities the option to measure eligible financial instruments at fair value
        as
        of specified dates. Such election, which may be applied on an instrument
        by
        instrument basis, is typically irrevocable once elected. SFAS No. 159
        is effective for fiscal years beginning after November 15, 2007. The
        Company adopted SFAS No. 159 on January 1, 2008, but has not yet
        elected the fair value option for any items permitted under
        SFAS No. 159.





NOTE 3 —
      TRADE ACCOUNTS RECEIVABLE, NET





The
      Company generally does not directly
      invoice energy suppliers and, therefore, reports a significant portion of its
      receivables as “unbilled.” Unbilled accounts receivable represents management’s
      best estimate of energy provided by the energy suppliers to the energy consumers
      for a specific completed time period at contracted commission
      rates.





Trade
      accounts receivable, net consists
      of the following:


December 31,2007
            
            
            2006Unbilled
                accounts receivable
            
            $
            1,619,440
            
            
            $
            1,698,665Billed
                accounts receivable
            
            
            263,793
            
            
            
            4,1331,883,233
            
            
            
            1,702,798Allowance
                for doubtful accounts
            
            
            (5,000
            )
            
            
            —Trade
                accounts receivable,
                net
            
            $
            1,878,233
            
            
            $
            1,702,798






NOTE 4 —
      PROPERTY AND EQUIPMENT, NET





Property
      and equipment, net consists of the following:


December 31,2007
            
            
            2006Leasehold
                improvements
            
            $
            65,451
            
            
            $
            16,751Equipment
            
            
            426,781
            
            
            
            225,051Furniture
                and fixtures
            
            
            418,974
            
            
            
            194,552911,206
            
            
            
            436,354Less
                accumulated depreciation
            
            
            (315,256
            )
            
            
            (210,422
            )Property
                and equipment, net
            
            $
            595,950
            
            
            $
            225,932





Depreciation
      expense for the years ended December 31, 2007, 2006 and 2005 was $104,834,
      $62,156 and $51,084, respectively. Property and equipment purchased under
      capital lease obligations at December 31, 2007 and 2006 was $271,104 for
      both years, respectively. Accumulated depreciation for property and equipment
      purchased under capital lease was $182,872 and $137,758 at December 31,
      2007 and 2006, respectively.







NOTE 5 —
      SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK





On
      November 16, 2006, in connection with its initial public offering, the Company
      amended its Certificate of Incorporation to eliminate all references to the
      Series A Preferred Stock and authorize 5,000,000 shares of $0.0001 par value
      undesignated preferred stock.  No shares have been issued as of
      December 31, 2007 and 2006.





Prior
      to
      November 16, 2006, the Company had authorized 15,000,000 shares of $0.0001
      par
      value Series A Redeemable Convertible Preferred Stock (the “Series A
      Preferred”). The Series A Preferred had the following terms and
      conditions:





Dividends —
In
      the event
      that the Company pays a dividend (other than a dividend payable solely in shares
      of common stock) on its common stock, the holders of shares of Series A
      will be entitled to a proportionate share of any such distribution as though
      it
      was the holder of the number of shares of common stock into which its share
      of
      Series A is convertible as of the date fixed for the determination of the
      holders of common stock entitled to receive the distribution.




-
          57
          -


Automatic
      Conversion —
Shares of Series A Preferred will automatically convert into common stock
      at the applicable conversion rate (one share of common stock for one share
      of
      Series A Preferred) in the event of: (1) the closing of an
      underwritten initial public offering with aggregate proceeds to the Company
      of
      at least $10,000,000 and a per share price to the public of at least three
      times
      the initial conversion price (a “qualified public offering”) or (2) the
      election of the holders of a majority of the outstanding shares of Series A
      Preferred.





Optional
      Conversion —
The holders of Series A Preferred have the right to convert their shares,
      at any time, into shares of voting common stock on a one for one
      basis.





Liquidation
      Preference —
In the event of liquidation or winding up of the Company, each holder
      of
      Series A Preferred shall be entitled to be paid out of the assets of the
      Company available for distribution to its stockholders in preference to the
      common stockholders, in an amount equal to the price per share of the
      Series A Preferred or $0.146 (the “Liquidation Amount”). After the payment
      of this amount to holders of Series A Preferred, the common stockholders
      will be entitled to receive any remaining assets of the Company on a pro rata
      basis. The following qualify as events that would trigger a liquidation:
      (1) a merger or consolidation (other than one in which the stockholders, at
      the time of the merger or consolidation, continue to hold more than 50% of
      the
      stock of the surviving entity) or (2) a sale or exclusive license of all or
      substantially all of the assets or intellectual property of the
      Company.





Redemption Provisions —
      All shares of Series A Preferred will be redeemed by the Company, at the
      Liquidation Amount, at any time after January 31, 2009, if the holders of
      two-thirds of the outstanding shares of Series A Preferred request, by
      written notice to the Company, that the shares be redeemed. The shares will
      be
      redeemed within 60 days of the Company receiving such written
      notice.





The
      Company had classified the Series A Preferred outside of permanent equity
      due to its redemption feature being outside the control of the Company. The
      activity within the Series A Preferred shares and redemption value for the
      years ended December 31, 2007, 2006 and 2005 is as follows:





Number
                of
              Shares
            
            
            Redemption
              ValueBalance,
                December 31, 2004
            
            
            10,433,504
            
            
            
            1,494,499Accretion
                of stock issuance costs
            
            
            —
            
            
            
            7,199Balance,
                December 31, 2005
            
            
            10,433,504
            
            
            
            1,501,698Accretion
                of stock issuance costs
            
            
            —
            
            
            
            6,299Conversion
                of Series A Preferred into common stock
            
            
            (10,433,504
            )
            
            
            (1,507,997
            )Balance,
                December 31, 2006 and 2007
            
            
            —
            
            
            $
            —







NOTE 6 —
      COMMON STOCK





On
      March 31, 2003, the Board increased the number of shares of
      $0.0001 par value common stock from 50,000,000 to 90,000,000, of which
      75,000,000 were designated voting common stock (“Voting Common Stock”) and
      15,000,000 were designated as non-voting common stock (“Non-Voting Common
      Stock”).





On
      October 16, 2006, the Company amended its Certificate of Incorporation to
      increase the authorized shares of voting common stock from 75,000,000 to
      100,000,000 shares.  The total number of shares of all classes of
      stock which the Company had the authority to issue after this amendment was
      130,000,000, consisting of 15,000,000 shares of Non-Voting Common Stock,
      100,000,000 shares of Voting Common Stock and 15,000,000 shares of Series A
      Preferred.





On
      November 16, 2006, the Company completed its initial public offering of
      27,441,064 shares of common stock at a price of CDN$1.05 (approximately US$0.93)
      per share. The offering was comprised of 20,000,000 shares sold by the Company
      for gross proceeds to the Company of CDN$21,000,000 and 7,441,064 shares sold
      by
      certain selling stockholders for gross proceeds to such stockholders of
      approximately CDN$7,800,000. In connection with this offering, the Company
      amended its Certificate of Incorporation to increase the authorized shares
      of
      common stock from 100,000,000 to 150,000,000 shares.  The total number
      of shares of all classes of stock which the Company has the authority to issue
      after this amendment is 155,000,000, consisting of 150,000,000 shares of common
      stock and 5,000,000 shares of undesignated preferred stock.





On
      December 5, 2006, the Company issued an additional 3,000,000 shares of common
      stock in accordance with an over-allotment option granted to the underwriters
      of
      the initial public offering at a price of CDN$1.05 (approximately US $0.92)
      per
      share for gross proceeds to the Company of CDN$3,150,000.  Net
      proceeds to the Company from the initial public offering and over-allotment
      option were approximately $17.5 million, after deducting the underwriting
      discount of $1.3 million and other direct costs of $2.3 million.





As
      of
      December 31, 2007, 2006 and 2005, 82,399,241, 76,511,741 and
      33,049,473 shares of Voting Common Stock were issued and outstanding,
      respectively, while 6,792,135 shares of Non-Voting Common Stock were issued
      and
      outstanding as of December 31, 2005.  The holders of the
      Non-Voting Common Stock had the same privileges and rights of the holders of
      the
      Voting Common Stock, except for the right to vote. The 8,982,806 shares of
      Non-Voting Common Stock automatically converted to Voting Common Stock at the
      closing of the initial public offering of the Company’s common
      stock.





-
          58
          -


On
      June
      1, 2007, the Company issued 5,375,000 common shares of World Energy in
      connection with the acquisition of substantially all of the assets of
      EnergyGateway. The shares were valued at approximately $6,536,000 based on
      the
      average closing price on the Toronto Stock Exchange for the two days before
      and
      after the announcement date of $1.22 per share. Approximately 2.175 million
      of
      the shares that the Company delivered to EnergyGateway in connection with this
      transaction (or the proceeds upon any sale thereof) are being held in escrow
      for
      18 months following the closing of the sale to secure various indemnification
      obligations of EnergyGateway and its members.





Guaranteed
      Return on Voting Common Stock





In
      2002,
      a certain shareholder purchased shares of Voting Common Stock of the Company
      and
      the Company agreed to pay an 8% guaranteed return per year based on the initial
      investment of $200,000 with payments to continue until the earlier of a liquid
      market for the Company’s equity or August 31, 2006. In accordance with
      SFAS 133, “Accounting for
      Derivatives and Hedging Activities”, the Company bifurcated the
      guaranteed return on the Voting Common Stock at its then deemed fair value
      of
      $66,651 and recorded the guaranteed return as a liability. The payments on
      the
      guaranteed return were being amortized to principal and interest, using the
      interest method, through August 31, 2006. The Company has deemed the
      difference between the stated value and the fair value of the derivative feature
      to be immaterial and has not recorded a “mark-to-market” adjustment during the
      life of the feature.





Fair
      Value of Common Stock





The
      Company has granted common stock, common stock warrants, and common stock option
      awards (“equity awards”) to consultants, employees, debt holders, and others
      since its inception. The Company’s determination of the fair value of the
      underlying common stock is a significant aspect in accounting for these
      aforementioned equity awards in accordance with generally accepted accounting
      principles.





During
      each of the two years in the period ended December 31, 2006, the Company
      and the Board had determined the fair value of the Series A Preferred, the
      Voting and Non-Voting Common Stock at each issuance of such equity awards.
      Prior
      to the consummation of the Company’s initial public offering the fair value of
      the Voting and Non-Voting Common Stock had been determined by the Board at
      the
      measurement date of each of the aforementioned equity awards, based on a variety
      of different factors including, but not limited to the Company’s financial
      position and historical financial performance, the status of technological
      developments within the Company, the composition and ability of the current
      engineering, operations, and management team, an evaluation and benchmark of
      the
      Company’s competition, the current climate in the marketplace, the illiquid
      nature of the common stock, arms-length sales and anticipated sales of the
      Company’s capital stock (including preferred stock), the effect of the rights
      and preferences of preferred shareholders, independent third party appraisals,
      and the prospects of a liquidity event, among others.





Treasury
      Stock





On
      March 14, 2006, the Company purchased 25,000 of its Voting Common Stock
      from certain shareholders at $2.00 per share. The excess of the purchase
      price and the then deemed fair value on the date of the purchase of
      $0.50 per share, or $37,500, has been charged to general and administrative
      expense. On June 19, 2006, the Board voted to retire all its treasury stock
      (700,346 shares) which had a cost of $164,453.





Common
      Stock Warrants





At
      December 31, 2007, the Company had outstanding warrants to purchase 2,000,814
      shares of common stock at a weighted average exercise price of $0.54. During
      2005, the Company issued warrants to purchase 3,000,000 shares of Voting
      Common Stock in connection with the subordinated note issued to Massachusetts
      Capital Resource Company, or MCRC. Of the warrants that were issued in
      connection with this note, 600,000 were vested upon issuance and the remaining
      2,400,000 did not vest and subsequently expired due to the successful
      consummation of the Company’s initial underwritten public offering of its common
      stock on November 16, 2006. On December 4, 2006, MCRC exercised its warrant
      to
      purchase 600,000 shares of the Company’s common stock at $0.40 in connection
      with the redemption of the subordinated note by the Company.










-
          59
          -


Shares
            
            
            Weighted
              Average
              Exercise
              PriceWarrants
                outstanding, December 31, 2004
            
            
            1,321,772
            
            
            $
            0.03Granted
            
            
            3,000,000
            
            
            $
            0.40Exercised
            
            
            —
            
            
            $
            —Canceled/expired
            
            
            —
            
            
            $
            —Warrants
                outstanding, December 31, 2005
            
            
            4,321,772
            
            
            $
            0.29Granted
            
            
            1,150,000
            
            
            $
            0.92Exercised
            
            
            (1,070,958
            )
            
            $
            0.24Canceled/expired
            
            
            (2,400,000
            )
            
            $
            0.40Warrants
                outstanding, December 31, 2006 and 2007
            
            
            2,000,814
            
            
            $
            0.54





The
      weighed average remaining contractual life of warrants outstanding is
      1.3 years and 2.3 years as of December 31, 2007 and 2006,
      respectively.





Stock
      Options





On
      May 9, 2003, the Company formally approved the adoption of the 2003 Stock
      Incentive Plan (the “2003 Plan”) and authorized 15,000,000 shares for the
      grant of options to purchase shares of Voting Common Stock.  As of
      December 31, 2007, 4,163,029 shares of common stock were reserved under the
      2003
      Plan.  No further grants are allowed under the 2003
      Plan.  On November 16, 2006, the Company adopted the 2006 Stock
      Incentive Plan (the “2006 Plan”) and authorized 4,738,161 shares of common stock
      for grant thereunder.  A summary of option activity under the Plans is
      as follows:





Shares
            
            
            Weighted
              Average
              Exercise
              PriceOutstanding
                at December 31, 2004
            
            
            6,664,200
            
            
            $
            0.03Granted
            
            
            440,000
            
            
            $
            0.24Canceled
            
            
            (1,392,500
            )
            
            $
            0.03Exercised
            
            
            (240,000
            )
            
            $
            0.03Outstanding
                at December 31, 2005
            
            
            5,471,700
            
            
            $
            0.04Granted
            
            
            1,262,000
            
            
            $
            0.79Canceled
            
            
            (60,000
            )
            
            $
            0.38Exercised
            
            
            (2,190,671
            )
            
            $
            0.03Outstanding
                at December 31, 2006
            
            
            4,483,029
            
            
            $
            0.26Granted
            
            
            3,020,000
            
            
            $
            1.24Canceled
            
            
            (687,500
            )
            
            $
            0.82Exercised
            
            
            (112,500
            )
            
            $
            0.03Outstanding
                at December 31, 2007
            
            
            6,703,029
            
            
            $
            0.65





A
      summary
      of options outstanding and options exercisable as of December 31, 2007 is
      as follows:





Options
                Outstanding
            
            
            Options
                ExercisableWeighted
            
            
            
            
            
            
            WeightedAverage
            
            
            
            
            
            
            AverageRange
                of
            
            
            
            
            Remaining
            
            Aggregate
            
            
            Number
            
            Remaining
            
            AggregateExercise
            
            
            
            
            Contractual
            
            Intrinsic
            
            
            Of
                Shares
            
            Contractual
            
            IntrinsicPrices
            
            
            Options
            
            Life
            
            Value
            
            
            Exercisable
            
            Life
            
            Value$0.02
              - $0.23
            
            
            
            2,651,029
            
            2.82
                Years
            
            $
            2,081,058
            
            
            
            2,646,029
            
            2.82
                Years
            
            $
            2,077,133$0.24
              - $1.12
            
            
            
            1,612,000
            
            4.78
                Years
            
            
            391,300
            
            
            
            670,625
            
            4.87
                Years
            
            
            229,263$1.13
              - $1.34
            
            
            
            2,440,000
            
            6.36
                Years
            
            
            —
            
            
            
            30,000
            
            5.96
                Years
            
            
            —6,703,029
            
            4.58
                Years
            
            $
            2,472,358
            
            
            
            3,346,654
            
            3.26
                Years
            
            $
            2,306,396





The
      aggregate intrinsic value in the table above represents the total intrinsic
      value of our outstanding options and exercisable options as of December 31,
      2007. The aggregate intrinsic value of options exercised during the year ended
      December 31, 2007 was approximately $126,000.  At December 31,
      2007, the weighted average exercise price of options outstanding and exercisable
      was $0.64 and $0.13, respectively.  The weighted average fair value of
      option grants for the years ended December 31, 2007 and 2006 was $0.58 and
      $0.36, respectively.




-
          60
          -


Restricted
      Stock





A
      summary
      of restricted stock activity under the 2006 Plan for the year ended December
      31,
      2007 is as follows:





Shares
            
            
            Weighted
                Average
              Grant
                PriceOutstanding
                at December 31, 2006
            
            
            —
            
            
            $
            —Granted
            
            
            1,928,500
            
            
            $
            1.13Cancelled
            
            
            (80,000
            )
            
            $
            1.21Vested
            
            
            (400,000
            )
            
            $
            1.21Unvested
                at December 31, 2007
            
            
            1,448,500
            
            
            $
            1.10





There
      were 8,151,529 shares reserved for issuance under these plans, and 349,661
      shares available for grant under the 2006 Plan at December 31,
      2007.







NOTE 7 —
      RELATED PARTIES





In
      2006,
      the Company entered into a consulting agreement with a member of the Board
      to
      assist the Company with strategic planning. Costs incurred during the year
      ended
      December 31, 2007 were approximately $209,000 and were charged to general
      and administrative expense.  Amounts owed by the Company at December
      31, 2007 on behalf of the agreement were $9,700.







NOTE 8 —
      INCOME TAXES





The
      components of the net deferred tax asset are as follows:





December 31,2007
            
            
            2006Depreciation
                and amortization
            
            $
            166,694
            
            
            $
            22,242Commission
                income
            
            
            (462,079
            )
            
            
            (266,310
            )Accruals and
                reserves
            
            
            753,407
            
            
            
            155,263Prepaids
            
            
            (13,428
            )
            
            
            20,099Net
                operating loss carryforwards
            
            
            4,254,013
            
            
            
            1,769,4894,698,607
            
            
            
            1,700,783Valuation
                allowance
            
            
            (4,698,607
            )
            
            
            (639,063
            )$
            —
            
            
            $
            1,061,720





The
      provision for income taxes is comprised of the following:





Years
                Ended
                December 31,2007
            
            
            2006
            
            
            2005Current
                income tax expense:Federal
            
            $
            —
            
            
            $
            —
            
            
            $
            —State
            
            
            —
            
            
            
            —
            
            
            
            ——
            
            
            
            —
            
            
            
            —Deferred
                income tax expense (benefit):Federal
            
            
            823,703
            
            
            
            (232,091
            )
            
            
            (588,120
            )State
            
            
            238,017
            
            
            
            (72,137
            )
            
            
            (165,880
            )1,061,720
            
            
            
            (304,228
            )
            
            
            (754,000
            )Total
                income tax expense (benefit)
            
            $
            1,061,720
            
            
            $
            (304,228
            )
            
            $
            (754,000
            )





A
      reconciliation of the Company’s federal statutory tax rate to its effective rate
      is as follows:




Years
                Ended
                December 31,2007
            
            
            2006
            
            
            2005Income
                tax at federal statutory rate
            
            
            (34.0)%
            
            
            
            (34.0)%
            
            
            
            34.0%Increase
                (decrease) in tax resulting from:State
                taxes, net of federal benefit
            
            
            (6.3)%
            
            
            
            (6.3)%
            
            
            
            6.3%Permanent
                differences
            
            
            0.7%
            
            
            
            2.1%
            
            
            
            2.3%Change
                in valuation allowance
            
            
            53.6%
            
            
            
            0.0%
            
            
            
            (270.0)%14.0%
            
            
            
            (38.1)%
            
            
            
            (227.4)%





-
          61
          -


As
      of
      December 31, 2007, the Company has federal net operating loss carryforwards
      of approximately $10,800,000 which begin to expire in 2022, and state net
      operating loss carryforwards of approximately $10,300,000, which begin to expire
      in 2008.  A valuation allowance is established, if it is more likely
      than not, that all or a portion of the deferred tax asset will not be
      realized.





The
      Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for IncomeTaxes”(“SFAS
      No. 109”).Deferred tax assets and liabilities are determined at the end of each
      period based on the future tax consequences that can be attributed to net
      operating loss carryforwards, as well as differences between the financial
      statement carrying amounts of the existing assets and liabilities and their
      respective tax basis. Deferred income tax expense or credits are based on
      changes in the asset or liability from period to period. Valuation allowances
      are provided if, based on the weight of available evidence, it is more likely
      than not that some or all of the deferred tax assets will not be realized.
      The
      realization of deferred tax assets is dependent upon the generation of future
      taxable income. In determining the valuation allowance, the Company considers
      past performance, expected future taxable income, and qualitative factors which
      are considered to be appropriate in estimating future taxable income. The
      Company’s forecast of expected future taxable income is for future periods that
      can be reasonably estimated.  The Company has historically utilized a
      three year forecasting window to determine its expected future taxable income.
      As of December 31, 2006, the Company had cumulative net income for the three
      years then ended and the expected future taxable income anticipated from 2007
      through 2009 was deemed adequate on a present value basis to benefit the
      majority of our deferred tax assets (primarily net operating loss
      carryforwards).  During 2007, the Company accelerated its growth in
      excess of its initial expectations to address the strategic initiatives outlined
      at the time of our initial public offering.  The Company grew from 20
      employees as of December 31, 2006 to 63 as of December 31, 2007, acquired one
      of
      its main competitors in the retail energy market, and developed its wholesale
      and environmental commodity product lines. These initiatives increased the
      Company’s loss for 2007 resulting in a three-year cumulative loss as of December
      31, 2007 and increased its operating expenses. Athree-year cumulative loss
      is
      significant negative evidence in considering whether the deferred tax assets
      are
      realizable and generally precludes relying on projections of future taxable
      income to support the recovery of deferred tax assets.While the Company
      expects its near term future income will be adequate on a present value basis
      to
      benefit substantially all of its current deferred tax assets, the recent
      three-year cumulative loss is given more weight than projected future income
      when determining the need for a valuation.  Therefore, during the fourth
      quarter of
      2007, the Company recorded a full valuation allowance against its deferred
      tax
      assets of approximately $4.1 million, and maintains a cumulative valuation
      allowance of approximately $4.7 million at December 31,
      2007.




The
      amount of the net deferred tax asset considered realizable at December 31,2007
      could be reduced or increased in the near term if estimates of future taxable
      income during the carryforward period change.




The
      Company has reviewed the tax positions taken, or to be taken, in its tax returns
      for all tax years currently open to examination by the taxing authorities in
      accordance with the recognition and measurement standards of FIN
      48.  At December 31, 2007, there are no expected material, aggregate
      tax effect of differences between tax return positions and the benefits
      recognized in the financial statements.





Under
      the
      provisions of the Internal Revenue Code, certain substantial changes in the
      Company’s ownership may have limited or may limit in the future the amount of
      net operating loss carryforwards which could be utilized annually to offset
      future taxable income and income tax liabilities. The amount of any annual
      limitation is determined based upon the Company’s value prior to an ownership
      change.







NOTE 9 —
      COMMITMENTS





Leases





The
      Company leases certain equipment under capital leases that expire through May
      2011 and are collateralized by the related equipment. The Company has accounted
      for these leases using an incremental borrowing rate of 8%. The Company
      maintains operating leases for office space in seven locations in the United
      States, paid in installments due the beginning of each month and that expire
      through July 2012. Future aggregate minimum payments under capital and operating
      leases as of December 31, 2007 were as follows:


























-
          62
          -




Capital
              Leases
            
            
            Operating
              Leases2008
            
            $
            47,223
            
            
            $
            304,5372009
            
            
            44,745
            
            
            
            295,3812010
            
            
            3,192
            
            
            
            152,2752011
            
            
            798
            
            
            
            135,6302012
            
            
            —
            
            
            
            42,973Total
                future minimum lease payments
            
            
            95,958
            
            
            $
            930,796Less:
                amounts representing interest
            
            
            (8,112
            )Present
                value of future minimum lease payments
            
            
            87,846Less:
                current portion
            
            
            41,624Capital
                lease obligation, net of current portion
            
            $
            46,222





The
      accompanying statement of operations for the years ended December 31, 2007,
      2006, and 2005 includes $242,813, $118,902 and $78,800 of rent expense,
      respectively.





Service
      Agreement





In
      2007,
      the Company entered into a service agreement with an unrelated party for a
      hosting environment and dedicated server for the Company’s online energy
      procurement software. The terms of the agreement requires quarterly and monthly
      payments amounting to approximately $8,400 per quarter. The agreement expires
      in
      May 2008.







NOTE 10 —
      ACQUISITION





On
      June
      1, 2007, the Company acquired substantially all of the assets of EnergyGateway
      for $4,951,758 in cash and 5,375,000 common shares of World Energy plus the
      assumption of certain liabilities. The shares were valued at approximately
      $6,536,000 based on the average closing price on the Toronto Stock Exchange
      for
      the two days before and after the announcement date of $1.22 per share.
      Approximately 2.175 million of the shares that the Company delivered to
      EnergyGateway in connection with this transaction (or the proceeds upon any
      sale
      thereof) are being held in escrow for 18 months following the closing of the
      sale to secure various indemnification obligations of EnergyGateway and its
      members. EnergyGateway, located near Columbus, Ohio, was an online broker of
      natural gas and electricity for commercial and industrial consumers in the
      United States. It provided its customers with professional energy purchasing
      services, including access to its proprietary ‘post and bid’ online procurement
      system called EGate.





The
      total
      purchase price was $11,440,358, net of cash acquired, and includes related
      acquisition costs of $229,500, plus the assumption of certain liabilities of
      $138,128. The EnergyGateway operations have been included within our
      consolidated results from June 1, 2007.  The cost of the acquisition
      was allocated to the assets and liabilities assumed based on estimates of their
      respective fair values at the date of acquisition resulting in net assets of
      $8,261,657. The excess purchase price of $3,178,701 has been recorded as
      goodwill which is fully deductible for tax purposes. Management is responsible
      for the valuation of net assets acquired and considered a number of factors,
      including valuations and appraisals, when estimating the fair values and
      estimated useful lives of acquired assets and liabilities. During the third
      quarter of 2007, the Company refined estimates recorded in the second quarter
      of
      2007 and finalized the valuation of intangible assets through a reduction of
      $660,000 in customer relationships resulting in a corresponding increase to
      goodwill.





The
      Company has allocated the purchase price for the acquisition as
      follows:





Current
                assets
            
            $
            247,938Fixed
                assets
            
            
            18,755Other
                assets
            
            
            3,092Intangible
                assetsNon-compete
                agreements
            
            
            680,000Customer
                relationships
            
            
            4,740,000Customer
                contracts
            
            
            500,000Supplier
                agreements
            
            
            380,000Developed
                technology
            
            
            1,830,000Goodwill
            
            
            3,178,701Current
                liabilities
            
            
            (138,128
            )Net
                assets
                acquired
            
            $
            11,440,358





-
          63
          -


The
      intangible assets, excluding goodwill, are being amortized on a straight-line
      basis over their weighted average lives as follows: non-compete agreements
– 1
      to 5 years; customer relationships – 10 years; customer contracts – 3 years;
      supplier agreements – 5 years; and developed technology – 5 years.





The
      following unaudited pro forma information assumes that the acquisition of
      EnergyGateway assets had been completed as of January 1, 2006:





Years
                Ended December 31,2007
            
            
            2006Revenues
            
            $
            10,461,780
            
            
            $
            8,617,678Net
                loss available to common stockholders
            
            $
            (9,448,352
            )
            
            $
            (1,719,847
            )Loss
                per share:
              Net
                loss available to
                common
              stockholders
                per share –
                basic
            
            $
            (0.12
            )
            
            $
            (0.03
            )Net
                loss available to
                common
              stockholders
                per share –
                diluted
            
            $
            (0.12
            )
            
            $
            (0.03
            )Weighted
                average number of common
              and
                common equivalent
                shares
              outstanding
–
                basic
            
            
            82,017,220
            
            
            
            50,951,477Weighted
                average number of common
              and
                common equivalent
                shares
              outstanding
–
                diluted
            
            
            82,017,220
            
            
            
            50,951,477





The
      pro
      forma financial information is not necessarily indicative of the results to
      be
      expected in the future as a result of the acquisition of
      EnergyGateway.







NOTE 11 —
      401(k) PLAN





During
      the fourth quarter of 2006, the Company established the World Energy Solutions,
      Inc. 401(k) Plan (the “401(k) Plan”) under Section 401(k) of the Internal
      Revenue Code covering all eligible employees.  Employees of the
      Company may participate in the 401(k) Plan after reaching the age of
      21.  The Company may make discretionary matching contributions as
      determined from time to time. Employee contributions vest immediately, while
      Company matching contributions begin to vest after one year service and continue
      to vest at 20% per year over the next five years.  To date, the
      Company has not made any discretionary contributions to the 401(k)
      Plan.



















-
          64
          -


EXHIBIT
      INDEX








Exhibit
            
            Description2
            .1
            
            Asset
                Purchase Agreement by and among World Energy Solutions, Inc.,
                EnergyGateway, LLC and the Members of EnergyGateway,   LLC
                dated May 23, 2007 (incorporated by reference to Exhibit 99.1 to
                our
                report on Form 8-K filed May 24, 2007 (File No.
                333-136528)).3
            .1
            
            Form
                of Amended and Restated Certificate of Incorporation of World Energy
                (incorporated by reference to Exhibit 3.4 to our Registration
                Statement of Form S-1(File No. 333-136528)).3
            .2
            
            Form
                of Amended and Restated By-laws of World Energy (incorporated by
                reference
                to Exhibit 3.5 to our Registration Statement of Form S-1(File
                No. 333-136528)).4
            .1
            
            Specimen
                Certificate evidencing shares of common stock (incorporated by reference
                to Exhibit 4.1 to our Registration Statement of Form S-1(File
                No. 333-136528)).10
            .1+
            
            2003
                Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to
                our Registration Statement of Form S-1(File
                No. 333-136528)).10
            .2+
            
            2006
                Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to
                our Registration Statement of Form S-1(File
                No. 333-136528)).10
            .3
            
            Note
                and Warrant Purchase Agreement, dated November 7, 2005, between World
                Energy and Massachusetts Capital Resource Company (incorporated by
                reference to Exhibit 10.3 to our Registration Statement of
                Form S-1(File No. 333-136528)).10
            .4
            
            Subordinated
                Note due 2013, dated November 7, 2005 (incorporated by reference to
                Exhibit 10.4 to our Registration Statement of Form S-1(File
                No. 333-136528)).10
            .5
            
            Voting
                Common Stock Purchase Warrant, dated November 7, 2005 (incorporated
                by reference to Exhibit 10.5 to our Registration Statement of
                Form S-1(File No. 333-136528)).10
            .6
            
            Form
                of Common Stock Purchase Warrants (incorporated by reference to
                Exhibit 10.6 to our Registration Statement of Form S-1(File
                No. 333-136528)).10
            .7
            
            Solicitation/Contract/Order
                for Commercial Items, dated September 28, 2005, between
                U.S. General Services Administration and World Energy (incorporated
                by reference to Exhibit 10.7 to our Registration Statement of
                Form S-1(File No. 333-136528)).10
            .8
            
            Agreement
                to Provide Software and Support for a Reverse Energy Auction Procurement
                to the Maryland Department of General Services, dated March 16, 2006,
                by and between World Energy and the State of Maryland (incorporated
                by
                reference to Exhibit 10.8 to our Registration Statement of
                Form S-1(File No. 333-136528)).10
            .9
            
            Contract,
                dated January 9, 2006, by and between Montgomery County, Maryland and
                World Energy (incorporated by reference to Exhibit 10.9 to our
                Registration Statement of Form S-1(File
                No. 333-136528)).10
            .10
            
            Emergency
                Purchase/Interim Agreement, dated March 28, 2006, by and between the
                Commonwealth of Pennsylvania, Department of General Services and
                World
                Energy (incorporated by reference to Exhibit 10.10 to our
                Registration Statement of Form S-1(File
                No. 333-136528)).10
            .11
            
            Professional
                Services Agreement, dated June 1, 2005, between World Energy and
                Science Applications International Corporation (incorporated by reference
                to Exhibit 10.11 to our Registration Statement of Form S-1(File
                No. 333-136528)).10
            .12
            
            Escrow
                Agreement (incorporated by reference to Exhibit 10.12 to our
                Registration Statement of Form S-1(File
                No. 333-136528)).10
            .13+
            
            Offer
                letter agreement, dated October 1, 2003, between World Energy and
                Philip V. Adams (incorporated by reference to Exhibit 10.13 to our
                Registration Statement of Form S-1(File
                No. 333-136528)).10
            .14+
            
            Offer
                letter agreement, dated April 5, 2006, between World Energy and James
                Parslow (incorporated by reference to Exhibit 10.14 to our
                Registration Statement of Form S-1(File
                No. 333-136528)).10
            .15
            
            Lease,
                dated September 8, 2004, between Sovereign Bank and World Energy
                (incorporated by reference to Exhibit 10.15 to our Registration
                Statement of Form S-1(File No. 333-136528)).10
            .16
            
            Lease,
                dated June 21, 2006, between Roosevelt Land, LP and World Energy
                (incorporated by reference to Exhibit 10.16 to our Registration
                Statement of Form S-1(File No. 333-136528)).10
            .17
            
            Form
                of Warrant being issued to Underwriters (incorporated by reference
                to
                Exhibit 10.17 to our Registration Statement of Form S-1(File
                No. 333-136528)).10
            .18
            
            Form
                of Registration Rights Agreement with Underwriters (incorporated
                by
                reference to Exhibit 10.18 to our Registration Statement of
                Form S-1(File No. 333-136528)).21
            .1*
            
            List
                of Subsidiaries23
            .1*
            
            Consent
                of UHY LLP, Independent Registered Public Accounting
                Firm31
            .1*
            
            Certification
                of the Chief Executive Officer pursuant to Rule 15d-14(a) under the
                Securities Exchange Act.31
            .2*
            
            Certification
                of the Chief Financial Officer pursuant to Rule 15d-14(a) under the
                Securities Exchange Act.




-
          65
          -
 
 32
              .1*
              
              Certification
                  of the Chief Executive Officer pursuant to Rule 15d-14(b) under the
                  Securities Exchange Act.


32
            .2*
            
            Certification
                of the Chief Financial Officer pursuant to Rule 15d-14(b) under the
                Securities Exchange Act.*   Filed
                herewith
              +   Indicates
                a management contract or any compensatory plan, contract or
                arrangement









-
          66
          -