**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, 2006 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**
              (State
                or other jurisdiction of incorporation or
                organization)
            **04-3474959**(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**


(Title
      of
      class)





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, or a non-accelerated filer. See definition of “accelerated filer and
      large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):




Large
                accelerated filer o
            Accelerated
                filer o
            Non-accelerated
                filer x




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 voting 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 December 29, 2006 was approximately $45,967,000. The
      registrant’s voting stock was not publicly traded as at the end its most
      recently completed second fiscal quarter.




As
      of
      March 2, 2007, the registrant had 76,511,741 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 17, 2007,
      are
      incorporated by reference in Part III of this Report.











**World
      Energy Solutions, Inc.**


**Form
      10-K**


**For
      the Year Ended December 31, 2006**





**Table
      of Contents**





**PART
                I**Item
                1.
            Business
            1Item
                1A.
            Risk
                Factors
            11Item
                1B.
            Unresolved
                Staff Comments
            19Item
                2.
            Properties
            19Item
                3.
            Legal
                Proceedings
            19Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            19**PART
                II**Item
                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 Disclosures about Market Risk
            33Item
                8.
            Financial
                Statements and Supplementary Data
            34Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            34Item
                9A.
            Controls
                and Procedures
            34Item
                9B.
            Other
                Information
            34**PART
                III**Item
                10.
            Directors,
                Executive Officers and Corporate Governance
            35Item
                11.
            Executive
                Compensation
            35Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            35Item
                13.
            Certain
                Relationships and Related Transactions, and Director Independence
            35Item
                14.
            Principal
                Accountant Fees and Services
            35**PART
                IV**Item
                15.
            Exhibits
                and Financial Statement Schedules
            36Signatures
            
            37Exhibit
                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 brokerage company that has developed an
      online auction platform, the World Energy Exchange, through which energy
      consumers in the United States are able to purchase electricity and other energy
      resources from competing energy suppliers which have agreed to participate
      on
      our auction platform in a given auction. We were 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 is brokering electricity, we adapted our World Energy
      Exchange auction platform to accommodate the brokering of natural gas in 2002,
      green power in 2003 (i.e., electricity generated by renewable resources) and
      certain other energy-related products in 2005. Since 2001, we have brokered
      over
      31 billion kilowatt hours of electricity for energy consumers in North
      America on the World Energy Exchange. 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. In
      addition, we have adapted our World Energy Exchange auction platform to
      accommodate transactions in fuel oils including: diesel, heating oil, propane
      and jet fuel and are in the process of adapting the platform to accommodate
      green credit transactions.





In
      the
      United States, the electricity 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 electricity 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 (CIG) energy consumers.





**The
      Industry**





We
      currently provide brokerage services primarily in two industries: deregulated
      retail and wholesale energy in the United States. Subsequent to year end, we
      provided brokerage services in a third emerging industry: the trading of green
      credits.





**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 Act* of
      1978,
      the *Energy
      Policy Act* of
      1992,
      or EPA 1992, and the recently enacted *Energy
      Policy Act* of
      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
      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




1


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.





*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 (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.





**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 of electricity 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,
      the Company estimates 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 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.





2


**Green
      Credits**





Concerns
      about global warming have spawned a number of initiatives to reduce greenhouse
      gas emissions. The most well known 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 seven Northeastern states and renewable portfolio standards - initiatives
      adopted by states and the District of Columbia regarding the minimum
      requirements mandated to utilities to derive power from renewable sources,
      including initiatives such as the New Jersey Solar Renewable Energy Credit
      (SREC) initiative.





These
      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.





**Company
      Strategy and Operations**





***Overview***





World
      Energy is an energy brokerage company that has developed an online auction
      platform, the World Energy Exchange. We bring energy suppliers and CIG energy
      consumers together in our virtual marketplace, often with the assistance of
      our
      channel partners, who identify and work with energy consumers on our behalf.
      The
      World Energy Exchange is part of a comprehensive online energy procurement
      process that includes the following modules:





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





•
            deal
                and task management — a module to list, assign and track steps to
                complete a procurement
                successfully;





•
            market
                intelligence — a database of information related to market rules and
                pricing trends for deregulated
                markets;





•
            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;





•
            energy
                consumer portfolio management — a database of consumer 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 comprehensive energy brokerage 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 World Energy
      Exchange auction platform 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 the volume
      of
      energy procured via our auction platform, and in return we pay them a commission
      at a fixed contractual commission rate based on the revenues earned from energy
      suppliers. The contractual commission rate is negotiated in 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),
      energy suppliers 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 energy supplier through
      the contract negotiation process and, accordingly, we are aware of whether
      a
      contract between the energy consumer and energy supplier is consummated. If
      a
      contract is entered into between an energy consumer and an energy supplier
      using
      the World Energy Exchange auction platform, we are compensated based upon a
      commission that is built into the price of the energy commodity. This approach
      is attractive to energy suppliers and energy consumers because there is no
      fee
      charged to the energy supplier or the energy consumer if the brokering process
      does not result in an energy procurement contract. Our commissions are based
      on
      energy usage transacted between the energy supplier and energy consumer
      multiplied by our contractual commission rate, and is set forth in two contracts
      between us and the energy supplier. The first agreement is an energy supplier
      master agreement, whereby energy suppliers are allowed to bid on energy consumer
      usage in exchange for agreeing to pay the fee that we have negotiated with
      the
      energy consumer, and the second is a fee addendum to the contract between the
      energy consumer and energy supplier that sets forth the fee and energy accounts
      to which the fee applies.





3


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 and gas 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 CIG 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 2002 through 2006. 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 CIG energy
      consumers and energy suppliers that are in force on such date, assuming such
      CIG
      energy consumers use energy at their historical usage levels. For any particular
      contract, annualized backlog is calculated by multiplying the CIG 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. Annualized backlog as
      at
      December 31, 2006 contains all contracts in force as of December 31,
      2006 that have expected revenue associated with them from January 1, 2007
      through December 31, 2007. 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, 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”.





4


***The
      Brokerage Process***





Our
      brokerage process is supported by a variety of software modules designed with
      the goal to find energy supplies at the lowest 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 utility 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 consulting agreement with us pursuant to which we are appointed
      as
      the energy brokerage service provider to solicit and obtain bids for the supply
      of energy and to assist in the procurement of energy. Government energy
      consumers will send out a solicitation at the commencement of the brokerage
      process which sets out the contract terms. Only energy suppliers that are
      qualified under the solicitation may participate in the auction. Energy
      suppliers who wish to bid on the provision of energy to such energy consumers
      must partake in our brokerage process and cannot contract with energy consumers
      outside of our brokerage process. The procurement consulting 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.





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 energy consumer 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 and alert the potential energy suppliers.
      Additionally, energy suppliers are provided with information about the energy
      consumer, historical energy usage information relating to the energy consumer’s
      facilities, and the desired contract parameters, several days in advance of
      the
      auction as part of the RFP. This advanced notice gives the energy suppliers
      the
      opportunity to analyze the value of a potential deal and the creditworthiness
      of
      the energy consumer. We believe that, using this information along with the
      auction parameters described in the RFP, the energy suppliers develop a bidding
      strategy for the auction.





The
      auction is run on the World Energy Exchange, which is our auction platform.
      The
      auction creates a competitive bidding environment that is designed to cause
      energy suppliers to bid their prices down during the auction event in response
      to other competitive bids. Specifically, energy suppliers enter an auction
      by
      submitting an opening bid at or lower than the suggested opening bid posted
      on
      the RFP. After they enter the auction and assess the bidding activity, energy
      suppliers may begin testing the competition by submitting a bid lower 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 energy suppliers until the final
      30
      seconds of the auction when bidding activity tends to increase. In the final
      seconds, all energy suppliers see the then-leading bid and must make a judgment
      as to how low to submit their last bid in order to win the deal. At this point
      in the auction, energy suppliers make their final bid without knowledge of
      what
      any other energy suppliers are bidding. We call this a final “blind” bid.
      Because an energy supplier does not know what the other energy suppliers will
      bid in their blind bid, this process has often resulted in the leading energy
      supplier 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 energy consumer’s specific energy needs
      will be held. Our World Energy Exchange provides rapid results and can
      accommodate a multitude of permutations for offers, including various year
      terms, utility territories, load factors and green power requirements. For
      commercial and industrial energy consumers, we typically run two to six auction
      events 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 utility rates where determinable
      rates are available, as well as automated stop times, which ensure the integrity
      of auction events. The World Energy Exchange is 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 energy consumer with the contracting process with
      the
      energy supplier 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.





As
      part
      of the contracting process between the successful energy supplier and the energy
      consumer, the energy supplier will enter into a fee addendum with us which
      provides for payment of a commission on a monthly basis based on actual energy
      usage by the energy consumer during the contract term. We also receive a monthly
      summary accounting of the energy consumer’s energy consumption. 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




5


commission
      ranging generally from $0.01 to $0.10 per decatherm of gas consumed by the
      energy consumer. 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.





The
      incumbent local utility serving a given location is typically obligated to
      deliver electric energy to the customer’s premises from the location where the
      supplier delivers electricity 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 on our auction platform.





We
      typically interface directly with the energy consumer 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 an energy
      consumer to sign a procurement consulting agreement, interacting with the energy
      consumer relating to World Energy analyses, supporting the decision-making,
      and
      interfacing with the energy consumer 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 suppliers, and
      scheduling, conducting and monitoring auctions and collecting the commission
      earned from the energy supplier.





***Growth
      Strategy***





Our
      overall objective is to achieve a preeminent position as the exchange for
      executing transactions in energy and energy-related products. We seek to achieve
      our objective by expanding our community of channel partners, energy consumers
      and energy suppliers on our exchange, strengthening and expanding long-term
      relationships with government agencies, broadening our exchange to include
      other
      geographic markets and other energy and energy-related markets, including
      wholesale transactions with utilities and the emerging green credits market,
      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 energy consumers using our auction platform 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 energy consumers using our
      auction platform and to increase the volume of energy procured on our World
      Energy Exchange. As illustrated by the diagram below, we have consistently
      increased the number of channel partners since 2002 from 3 to 29, 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, 2002
      and data is presented as at December 31, 2006.





**Number
      of Channel Partners**







*Strengthening
      and Expanding Long-term Relationships with Government*  *Agencies* 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 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. 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




6


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.





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 partner being
      awarded contracts to broker energy for the Commonwealth of Massachusetts,
      Montgomery County, Maryland, the District of Columbia and the Commonwealth
      of
      Pennsylvania. We intend to leverage this recognition to secure business
      relationships with other state and local governments. We believe that this
      strategy will not only permit us to grow our business laterally by establishing
      a business presence in other states but will also provide an opportunity for
      us
      to increase our base of energy consumers by branching out into other sectors
      and
      increasing our penetration into other levels of a particular state’s government
      agencies and organizations.





*Targeting
      Other Energy-Related Markets* While
      our core competence lies in electricity brokerage for CIG energy consumers,
      we
      intend to expand our brokerage services into new markets. To date, we have
      brokered over 64 million decatherms of natural gas under contract under
      GSA’s Natural Gas Acquisition Program and continue to grow our natural gas
      brokering activities to support existing energy consumer relationships. At
      the
      request of participants on our auction platform, we have adapted our World
      Energy Exchange platform to accommodate transactions in fuel oils including:
      diesel, heating oil, propane and jet fuel. Our World Energy Exchange has been
      and can further be modified to expand our capabilities to broker other
      energy-related transactions with appropriate resource allocation.





*Targeting
      Utilities* We
      have added the capability to auction energy-related products, and several
      auctions were closed for an aggregate of over 5 billion kilowatt hours of
      electricity. We believe that there is an opportunity for us to further expand
      our business operations to facilitate the brokering of energy-related products
      for utilities. Having successfully tested our wholesale market model with the
      recent auction described above, we seek to leverage our initial success and
      aim
      to build this aspect of our operations by replicating the auction process with
      other utilities.





*Brokering
      Green Credits* We
      also plan to expand our operations by entering into the green credits market
      through our established relationships and growing reputation in the energy
      procurement marketplace. The brokerage of green credits would complement our
      current business and remains aligned with our focus on brokerage of
      cost-effective energy transactions. 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 green
      credits will accelerate. We intend to utilize our auction platform to create
      an
      ascending auction for the trading of green credits between countries and
      companies who have made energy efficient improvements to reduce their emissions
      below the permissible levels, and those who have not.





*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 CIG markets and in the emerging Wholesale and Green Markets, it makes
      sense to have a direct sales presence. A key growth strategy for us will be
      to
      open regional offices (in addition to our current Worcester and
      Washington, DC sales offices), and staff them with direct sales people.
      Subsequent to year end, we have hired a new Senior Vice President of Sales
      and
      are in the process of opening a sales office in Houston.





***Energy
      Suppliers, Energy Consumers and Channel Partners***





*Energy
      Suppliers* Our
      success is heavily dependent on our energy supplier relationships, the
      credibility of our energy suppliers and the integrity of the auction process.
      There are approximately 240 competitive electricity, natural gas and
      wholesale electricity suppliers registered on the World Energy Exchange,
      representing a majority of all suppliers in the deregulated electricity and
      natural gas markets. Of the registered energy suppliers, approximately 45 had
      active contracts with energy consumers that were brokered through our World
      Energy Exchange as of December 31, 2006. 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, and four of these
      energy suppliers each accounted for over 10% individually and approximately
      57%
      in the aggregate of our revenue for the year ended December 31, 2005. In
      order to participate in an auction event, energy suppliers must register with
      us
      by either entering into a standard-form agreement pursuant to which the energy
      supplier 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 energy supplier
      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 energy
      consumer.





7


*Energy
      Consumers* Energy
      consumers using our auction platform to procure energy include government
      agencies and commercial and industrial energy consumers. Government energy
      consumers have complex energy needs in terms of both scope and scale, which
      management believes 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. Working
      with our channel partner, SAIC, we have brokered energy for the GSA and over
      25
      federal agencies, Montgomery County, Maryland, the State of Maryland, the
      District of Columbia, the Commonwealth of Massachusetts, and the Commonwealth
      of
      Pennsylvania.





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 3 of the 14 currently deregulated states and
      have
      recently run an auction for Delaware and were awarded a contract with New Jersey
      to assist in their online energy procurement needs. As additional states open
      their electricity markets to competition and suppliers enter those markets,
      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 existing energy procurements run through the termination date. A summary
      of
      our major governmental contracts is as follows:





·
              In
                  September 2005, we were awarded a five-year contract to assist
                  GSA in its
                  procurement of energy, and since that award we have run several
                  procurements for electricity in Texas, Illinois, New York and New
                  Jersey,
                  and natural gas in over 30 states. Most of the consummated electricity
                  contracts were for five-year terms and provide the company with
                  expected
                  revenue through 2012. The gas contracts were for one- and two-year
                  terms.





·
              In
                  January 2006, we successfully completed a retail, electric power
                  procurement for the Operating Services Division of the Commonwealth
                  of
                  Massachusetts under the terms of a multi-year contract that was
                  signed in
                  December 2005.





·
              In
                  March 2006, we were awarded a multi-year contract to assist Montgomery
                  County, Maryland with its energy procurement. During the second
                  quarter of
                  2006, we ran a successful procurement that placed certain facilities
                  in
                  Montgomery County under one-year contracts with two option
                  years.





·
              In
                  August 2006, for the District of Columbia, we received a co-award
                  for the
                  continuation of energy procurement services. In February 2007,
                  the
                  District of Columbia terminated this co-award for convenience.
                  It was not
                  clear as to the reasons for the District of Columbia’s actions and if they
                  will re-issue the co-contract or reopen the RFP
                  process.





·
              In
                  September 2006, we ran a series of gas auctions under the terms
                  of a
                  three-year contract with the Commonwealth of Pennsylvania Department
                  of
                  General Services.





·
              In
                  November 2006, the State of Maryland Department of General Services
                  renewed its energy procurement contract with us through 2009. Subsequent
                  to that award, we ran procurements that resulted in new contracts
                  for
                  existing accounts to lock in supply and pricing through June 2009,
                  and for
                  the first time included new accounts for the University system,
                  which
                  formerly used consultants to secure supply
                  contracts.





Four
      of
      the energy consumers using our auction platform (Maryland Department of General
      Services, District of Columbia Energy Office, General Services Administration
      and the Commonwealth of Massachusetts) each accounted for over 10% individually
      and approximately 63% in the aggregate of our revenue for the year ended
      December 31, 2006, and three of these energy consumers accounted for over
      10% individually and approximately 51% in the aggregate of our revenue for
      the
      year ended December 31, 2005.





**Contract
                Party**
            **Percent
                of Revenue**
              **for
                the Year Ended**
              **December 31,
                2006**State
                of Maryland
            20%General
                Services Administration
            17%District
                of Columbia
            16%Commonwealth
                of Massachusetts
            10%




We
      also
      maintain a direct sales arm. 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.





8


*Channel
      Partners* We
      target commercial and industrial energy consumers primarily through channel
      partners. These are firms with existing client relationships with certain
      commercial and industrial energy consumers that would benefit from the addition
      of an online energy 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, 2006,
      we
      have entered into agreements with 29 channel partners, including SAIC and
      Cargill Energy Services, LLC, which are currently engaged in efforts to source
      potential transactions to the World Energy Exchange 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 non-exclusive 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.





*Direct
      Sales* We also maintain a direct sales arm. 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.
      This sales force also will be expanded to support our efforts to secure
      relationships with wholesales buyers and green credit players.





***Competition***





Energy
      consumers have a broad array of options when purchasing energy. 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.





*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.





*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 RFP processes that are labor intensive, relying
      on
      phone, fax and email solicitations.





*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.





***Technology***





Our
      World
      Energy Exchange auction platform is comprised of a scalable transaction
      processing architecture and web-based energy consumer user interface. The
      auction platform is primarily based on internally developed proprietary
      software, but also includes third party components for user interface elements
      and reporting. The World Energy Exchange auction platform supports the selling
      and buying processes of energy-related products including bid placements, energy
      supplier registration and management, channel partner management, energy
      consumer management, deal process management, contract management, site
      management, collection and commission management, and reporting. The auction
      platform maintains 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 energy consumers and to protect the energy consumers’ private
      information. Our World Energy Exchange 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 World Energy Exchange 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.





9


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.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 manufacturing and selling transient voltage surge suppressors and
      related products and commercial and residential energy-saving equipment and
      applications to distributors and customers throughout the United States. Such
      filings indicate that this other company plans to implement a new business
      model
      to market a multi-product package to commercial, industrial and residential
      facilities in order to lower their overall cost of electricity, gas and water.
      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, 2006, we had 24 employees, which includes 20 full-time
      and four part-time employees. Full-time staff consists of three members of
      senior management, four sales employees, two information technology employees,
      eight trading desk employees and three 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., 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. Pursuant to a certificate of amendment filed on
      November 30, 1999, World Energy Exchange, Inc. changed its name to “World
      Energy Exchange.com, Inc.” and then back to “World Energy Exchange, Inc.” on
      November 2, 2000. World Energy Exchange, Inc. subsequently changed its name
      to World Energy Solutions, Inc. pursuant to a certificate of amendment filed
      on
      February 4, 2002. 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 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.





10


**Item
      1A. Risk Factors**





*You
      should carefully consider the risks*  *and
      uncertainties described below before deciding to invest in shares of our common
      stock. If*  *any
      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
      lose*  *all
      or part of your investment.*





**Risks
      Related to Our Business**





***We
      have limited operating experience and a history of operating losses, and we
      may
      be***  ***subject
      to risks inherent in early stage companies, which may make it difficult
      for***  ***you
      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, 2006, we had an accumulated deficit of
      approximately $4.2 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
      business is heavily influenced by how much regulated utility prices for
      energy***  ***are
      above or below competitive market prices for energy and, accordingly, any
      changes***  ***in
      regulated prices or cyclicality or volatility in competitive market
      prices***  ***heavily
      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 electricity and other energy-related products is a
      relatively***  ***new
      and emerging market and it is uncertain whether our auction model
      will***  ***gain
      widespread acceptance.***





The
      emergence of competition in the electricity market and other energy-related
      products is a relatively recent development, 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 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
      our***  ***revenue,
      many of which are government entities that have no obligation to use
      our***  ***auction
      platform or continue their relationship with us, and the partial or
      complete***  ***loss
      of business of one or more of these consumers could negatively affect
      our***  ***business.***





We
      have
      an energy consumer base comprised primarily of large businesses and government
      organizations. Four of these energy consumers each accounted for over 10%
      individually and approximately 63% in the aggregate of our revenue for the
      year
      ended December 31, 2006, and three of these energy consumers accounted for
      over 10% individually and approximately 51% in the aggregate of our revenue
      for
      the year ended December 31, 2005. 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




11


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
      our***  ***auction
      platform and we depend on a small number of key energy suppliers, and
      the***  ***partial
      or complete loss of one or more of these energy suppliers as a participant
      on***  ***our
      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. Four energy suppliers each accounted for over 10% individually
      and approximately 51% in the aggregate of our revenue for the year ended
      December 31, 2006, and four of these energy suppliers each accounted for
      over 10% individually and approximately 57% in the aggregate of our revenue
      for
      the year ended December 31, 2005. 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
      our***  ***relationships
      with energy consumers and the loss of certain channel partners
      could***  ***result
      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
      63% of our revenue for the year ended December 31, 2006, and two of our channel
      partners were involved with identifying and qualifying energy consumers which
      entered into contracts that accounted for over 10% individually and
      approximately 80% in the aggregate of our revenue for the year ended
      December 31, 2005. 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:





•
            continuing
                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;
                and





•
            develop
                a green credits auction platform.





We
      cannot
      assure you that we will be successful in implementing any of these key strategic
      initiatives, or that our time to 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
      of***  ***electricity,
      and as a result our business is highly susceptible to factors
      affecting***  ***the
      electricity market over which we have no control.***





We
      derived approximately 93% of revenue during 2006 and 91% of revenue during
      2005
      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




12


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
      from***  ***competitive
      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
      preferred***  ***means
      to transact electricity and other energy-related products, we may
      be***  ***unsuccessful
      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 and online services companies
      that can launch online auction services that are similar to ours.





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.





***Our
      costs will increase significantly as we expand our business and in the event
      that***  ***our
      revenue does not increase proportionately, we will generate
      significant***  ***operating
      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, 2006 we incurred a net loss of approximately
      $501,000, 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.





***We
      depend on the services of our senior executives and other key personnel, the
      loss***  ***of
      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 vice president of
      sales, vice president of business development, vice president of channel sales,
      chief information officer, vice president of operations and account management,
      and our market directors. If any one or more of such persons leave their
      positions and we are 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 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




13


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 inability to attract, hire and
      retain qualified staff on a cost efficient basis may 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-down***  ***in
      those relationships could damage our operations significantly if we are unable
      to***  ***find
      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
      or***  ***unavailability
      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 development of 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
      to***  ***do
      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 electricity
      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
      costs***  ***and
      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:





•
            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;





14


•
            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
      negatively***  ***affect
      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
      is scheduled to expire in November 2007. This moratorium does not prohibit
      federal, state, or local authorities from collecting taxes on our income or
      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 *Quill* decision,
      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 *Quill* decision
      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
      systems***  ***governing
      commodities or energy may affect our ability to conduct our
      business***  ***profitably.***





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.***





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;




15


•
            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
      us***  ***and
      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
      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 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
      infringe***  ***the
      intellectual property rights of others, which may lead to litigation that
      could***  ***itself
      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 person 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 is in the
      business of manufacturing and selling transient voltage surge suppressors and
      related products and commercial and residential energy-saving equipment and
      applications to distributors and customers throughout the United States. Such
      filings indicate that this other company plans to implement a new business
      model
      to market a multi-product package to commercial, industrial and residential
      facilities in order to lower their overall cost of electricity, gas and water.
      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.




16


**Risks
      Relating to Ownership of Our Common Stock**





***Because
      there is a limited trading history for our common stock and our stock
      price***  ***may
      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 could cause our stock price***  ***to
      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 are subject to lock-up
      agreements with the underwriters that restrict their ability to transfer their
      stock for at least 365 days after the date of the offering. Upon expiration
      of the lock-up agreements, an additional 43,368,733 shares of our common
      stock will be eligible for sale in the public market. In addition, we filed
      a
      registration statement with the SEC covering (a) substantially all of the
      shares of our common stock acquired upon option exercises prior to the closing
      of this offering, other than shares we believe are eligible for sale pursuant
      to
      Rule 144(k) under the U.S. Securities Act of 1933, as amended, as of
      the time of filing, (b) all of the shares subject to options outstanding,
      but not exercised, as of the closing of this offering, and (c) all of the
      shares available for future issuance under our stock incentive plans upon the
      closing of this offering. The market price of shares of our common stock may
      drop significantly when the restrictions on resale by our existing stockholders
      lapse and our stockholders are able to sell shares of our common stock into
      the
      market. 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 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.





17


***Our
      auditors identified a material weakness in our internal control over
      financial***  ***reporting
      as of December 31, 2005***





In
      a
      letter dated August 2, 2006, our external auditors, UHY LLP, advised us
      that they were concerned that as of and for the year ended December 31,
      2005, we were operating without an experienced principal accounting/financial
      officer with sufficient knowledge of accounting principles generally accepted
      in
      the United States, SEC financial reporting issues, internal controls, and other
      complex accounting and reporting issues, and that the lack of such an officer
      constituted a “material weakness” in our internal control over financial
      reporting as of December 31, 2005. A “material weakness” is a control
      deficiency or a combination of control deficiencies that results in more than
      a
      remote likelihood that a material misstatement in the financial statements
      or
      related disclosures will not be prevented or detected. In May 2006, we hired
      a
      full-time chief financial officer with the appropriate experience and background
      to manage the diverse and complex financial issues that may arise in our
      business. In addition, we have recently reorganized our accounting staff and
      have hired an additional professional to augment our staff. We believe that
      these staffing additions have mitigated these risks and that the material
      weakness identified as of December 31, 2005, no longer exists. As a public
      company we are subject to Section 404 of the Sarbanes-Oxley Act. Compliance
      with Section 404 will result in the incurrence of significant costs, the
      commitment of time and operational resources and the diversion of management’s
      attention. If our management identifies material weaknesses in our internal
      control over financial reporting, we will be unable to assert that our internal
      controls are effective. If we are unable to assert that our internal control
      over financial reporting is effective, or if our independent auditors are unable
      to attest that our management’s report is fairly stated or they are unable to
      express an opinion on our management’s evaluation or on the effectiveness of our
      internal controls, our business may be harmed. Market perception of our
      financial condition and the trading price of our stock may also be adversely
      affected and customer perception of our business may suffer.





***Our
      directors and executive officers have substantial control
      over***  ***us
      and could limit your ability to influence the outcome of
      key***  ***transactions,
      including changes of control.***





Our
      executive officers and directors and entities affiliated with them, in the
      aggregate, beneficially own approximately 35.8% of our outstanding common stock.
      In particular, Richard Domaleski, our president and chief executive officer,
      beneficially owns approximately 25.0% 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
      more***  ***difficult,
      we have a classified board of directors and certain provisions of
      our***  ***certificate
      of incorporation and by-laws require a super-majority vote to amend,
      all***  ***of
      which may prevent certain changes in control and limit the market price of
      our***  ***common
      stock.***





Our
      charter and by-laws and Section 203 of the Delaware General Corporation Law
      contain provisions that might enable our management to resist a takeover of
      our
      company. In general, Section 203 prohibits a publicly held Delaware
      corporation from engaging in a business combination with an interested
      stockholder for a period of three years after the person became an interested
      stockholder, unless the interested stockholder attained such status with the
      approval of our Board or the business combination is approved in a prescribed
      manner. 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.




18


***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
      available***  ***about
      us in the United States, and because we are not listing on a United
      States***  ***exchange,
      we do not have the same disclosure and corporate governance obligations
      as***  ***a
      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.





**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
                Use**446
                Main Street, Worcester, Massachusetts (1)
            
            5,104
            
            Executive
                office and general administration1215
                19thStreet
                NW, Washington, District of Columbia (2)
            
            1,500
            
            Branch
                office


____________


Note:





(1)
            Pursuant
                to a five-year lease agreement dated September 8, 2004 with Sovereign
                Bank at a monthly rate of $6,380 in the first year, $7,443.33 in
                the
                second year, $8,081.33 in the third and fourth years and $8,400.33
                in the
                fifth year, plus operating expenses and taxes.(2)
            Pursuant
                to a one-year lease agreement dated June 21, 2006 with Roosevelt
                Land, LP at a monthly rate of $4,000 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 the Company’s 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 since our initial public offering on November 16, 2006 to December 31,
        2006
        (in US $’s).


High
            LowFourth
                quarter
            $1.25
            $0.91




On
      March
      2, 2007, the last reported sale price of our common stock on TSX was CAD$0.95
      per share and there were approximately 131 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 2007 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 of 1933, as amended, or 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. The offering commenced as
      of
      November 10, 2006 and did not terminate before all securities were sold. The
      offering was co-managed by Sprott Securities, Inc., Cannacord Capital
      Corporation and CIBC World Markets Inc. A total of 30,441,064 shares of common
      stock were registered and sold in the initial public offering, including
      3,000,000 shares of common stock sold upon exercise of the underwriters’
over-allotment option. Of these shares, 7,441,064 shares were offered by certain
      selling shareholders from which we did not receive any proceeds. No payments
      for
      expenses related to the initial public offering were made directly or indirectly
      to (i) any of our directors, officers, or their associates, (ii) any person
      owning 10% or more of any class of our equity securities, or (iii) any of our
      affiliates. The net proceeds of the initial public offering, approximately
      $17.5
      million, were invested in short-term, highly liquid money market accounts with
      an original maturity of 90 days or less. As of March 2, 2007, we have used
      approximately $2 million of the net proceeds of the initial public offering
      to
      redeem our long-term debt. 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**


During
      the year ended December 31, 2006, we sold 2,190,671 shares of common stock
      to
      employees, directors, consultants or former employees through the exercise
      of
      options that were not registered under the Securities Act. These shares were
      issued pursuant to written compensatory plans or arrangements with our
      employees, directors and consultants, in reliance on the exemption from
      registration provided by Rule 701 under the Securities Act. In addition, common
      stock warrants were exercised by the payment of cash resulting in 1,070,958
      shares of common stock that were not registered under the Securities Act. These
      shares were issued pursuant to the exemption from registration provided by
      Section 4(2) of the Securities Act. No underwriters were involved in the
      foregoing sales of securities.




**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, 2006, 2005 and 2004, and the selected
      consolidated balance sheet data as of December 31, 2006 and 2005 are
      derived from the audited consolidated financial statements, which are included
      elsewhere in this document. The selected consolidated statements of operations
      data for the year ended December 31, 2003 and the consolidated balance
      sheet data at December 31, 2004 are derived from our audited consolidated
      financial statements not included in this document. The selected consolidated
      statement of operating data for the year ended December 31, 2002 and the
      consolidated balance sheet data as of December 31, 2003 and 2002 are 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,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****Consolidated
                Statement of Operations Data:**Revenue
            
            $
            5,763,098
            
            $
            4,673,987
            
            $
            3,191,660
            
            $
            2,474,699
            
            $
            1,627,286Cost
                of revenue
            
            
            1,166,426
            
            
            648,410
            
            
            563,972
            
            
            872,647
            
            
            795,367Gross
                profit
            
            
            4,596,672
            
            
            4,025,577
            
            
            2,627,688
            
            
            1,602,052
            
            
            831,919Operating
                expenses:Sales and
                marketing
            
            
            3,227,263
            
            
            2,649,786
            
            
            1,814,799
            
            
            1,781,173
            
            
            1,485,410General and
                administrative
            
            
            1,862,450
            
            
            995,703
            
            
            710,462
            
            
            557,910
            
            
            577,371Total
                operating expenses
            
            
            5,089,713
            
            
            3,645,489
            
            
            2,525,261
            
            
            2,339,083
            
            
            2,062,781Operating
                income (loss)
            
            
            (493,041
            )
            
            380,088
            
            
            102,427
            
            
            (737,031
            )
            
            (1,230,862
            )Other
                income (expense), net(1)
            
            
            (312,280
            )
            
            (86,838
            )
            
            960,524
            
            
            (180,738
            )
            
            (272,866
            )Income
                (loss) before income taxes
            
            
            (805,321
            )
            
            293,250
            
            
            1,062,951
            
            
            (917,769
            )
            
            (1,503,728
            )Income
                tax benefit
            
            
            304,228
            
            
            754,000
            
            
            —
            
            
            —
            
            
            —Net
                income (loss)
            
            
            (501,093
            )
            
            1,047,250
            
            
            1,062,951
            
            
            (917,769
            )
            
            (1,503,728
            )Accretion
                of preferred stock issuance costs
            
            
            (6,299
            )
            
            (7,199
            )
            
            (7,199
            )
            
            (7,199
            )
            
            —Net
                income (loss) available to common stockholders
            
            $
            (507,392
            )
            $
            1,040,051
            
            $
            1,055,752
            
            $
            (924,968
            )
            $
            (1,503,728
            )Net
                income (loss) available to common stockholders per share:Basic
                Voting
            
            $
            (0.01
            )
            $
            0.02
            
            $
            0.02
            
            $
            (0.03
            )
            $
            (0.05
            )Basic
                Non-Voting
            
            
            —
            
            
            0.02
            
            
            0.02
            
            
            (0.03
            )
            
            —Diluted
                Voting and Non-Voting
            
            
            (0.01
            )
            
            0.02
            
            
            0.02
            
            
            (0.03
            )
            
            (0.05
            )Weighted
                average shares outstanding — Basic:Voting
                Common Stock
            
            
            45,576,477
            
            
            33,049,472
            
            
            32,058,759
            
            
            30,105,188
            
            
            30,340,029Non-Voting
                Common Stock
            
            
            —
            
            
            6,778,327
            
            
            2,880,592
            
            
            339,726
            
            
            —Total
                Common Stock-Basic
            
            
            45,576,477
            
            
            39,827,799
            
            
            34,939,351
            
            
            30,444,914
            
            
            30,340,029Weighted
                Average Shares Outstanding — Diluted:
            
            
            45,576,477
            
            
            54,506,566
            
            
            52,096,206
            
            
            30,444,914
            
            
            30,340,029


____________


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




**For
                the Years Ended December 31,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****Consolidated
                Balance Sheet Data:**Cash
                and cash equivalents
            
            $
            17,483,886
            
            $
            1,584,066
            
            $
            49,389
            
            $
            220,796
            
            $
            263,531Working
                capital
            
            
            16,639,898
            
            
            1,372,542
            
            
            (882,162
            )
            
            (2,051,277
            )
            
            (999,592
            )Total
                assets
            
            
            20,791,381
            
            
            3,787,842
            
            
            941,688
            
            
            934,635
            
            
            1,141,337Long-term
                liabilities
            
            
            87,844
            
            
            1,879,745
            
            
            150,368
            
            
            25,565
            
            
            3,835,283Series A
                redeemable convertible preferred stock
            
            
            —
            
            
            1,501,698
            
            
            1,494,499
            
            
            1,487,300
            
            
            —Accumulated
                deficit
            
            
            (4,211,367
            )
            
            (3,710,274
            )
            
            (4,747,524
            )
            
            (5,820,475
            )
            
            (4,902,707
            )Total
                stockholders’ equity (deficit)
            
            $
            17,945,002
            
            $
            (938,883
            )
            $
            (2,241,134
            )
            $
            (3,485,026
            )
            $
            (2,669,421
            )






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
      and*  *results
      of operations together with our consolidated financial statements and
      related*  *notes
      appearing elsewhere in this Annual Report on Form 10-K. Some of the information
      contained in*  *this
      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
      of*  *important
      factors that could cause actual results to differ materially from
      the*  *results
      described in or implied by the forward-looking statements contained in
      the*  *following
      discussion and analysis.*





**Overview**





World
      Energy Solutions, Inc. is an energy brokerage company that has developed an
      online auction platform, the World Energy Exchange. We bring energy suppliers
      and commercial, industrial and government, or CIG, energy consumers together
      in
      the virtual marketplace, often with the assistance of channel partners. Our
      auction platform, the World Energy Exchange, is an online auction 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. While our core competency
      is
      brokering electricity, we have adapted our World Energy Exchange auction
      platform to accommodate the brokering of natural gas, green power (i.e.,
      electricity generated by renewable resources) and energy-related products.
      In
      addition, we have adapted our World Energy Exchange auction platform to
      accommodate transactions in fuel oils including: diesel, heating oil, propane
      and jet fuel and are in the process of adapting the platform to accommodate
      green credit transactions.





In
      2006,
      we grew our cost base to support our growth plans. As of December 31, 2006,
      we
      employed 20 full time employees versus 10 as of December 31, 2005 as we hired
      additional staff to pursue the development of our channel partner network,
      expand the base of energy consumers using our auction platform and accommodate
      expansion into brokerage of additional energy-related products. We also hired
      additional staff for our back office functions in expectation of the additional
      requirements of being a public company. These increased employee costs (salaries
      and commissions) and related costs were the major factors contributing to our
      increased cost structure in all functional areas in 2006. We expect to
      significantly increase our operating expenses in 2007 as we continue to expand
      our brokerage capabilities to offer additional energy-related products, increase
      our sales and marketing efforts and continue to expand our back office
      operation. In January 2007, we hired a Senior Vice President of Sales and expect
      to build out a sales staff within the major deregulated markets where we
      currently do not have a strong representation including Texas, New England,
      New
      York and the Midwest. In addition, we plan to build out our wholesale and green
      credit auction capability, which will require additional staffing and outside
      technical resources. We also expect there to be significant additional
      compliance costs associated with being a public company reporting in both the
      United States and Canada.





**Operations**





***Revenue***





For
      the
      vast majority of our 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 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 (kilowatt hours
      for
      electricity or decatherms for gas), 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


Revenue
      from commissions is recognized as earned on a monthly basis over the life of
      each contract as energy is consumed. We gather actual usage data through
      multiple mechanisms including certain suppliers’ contractual requirements to
      supply actual usage data to us on a monthly basis, and/or usage data we receive
      on a quarterly basis from local utilities. We review these usage reports in
      detail to determine whether we believe that the data reported is a full and
      accurate assessment of the usage during that period. 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. Actual data might not be received from
      energy suppliers due to any one of a number of things, including: timing of
      meter reads, utility delays in gathering the data, and/or delays within the
      supplier organization in forwarding data to us. 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;
      and
      usage data from utilities. We regularly evaluate our estimates and underlying
      assumptions based upon our historical experience and various other factors
      that
      we believe to be reasonable under the circumstances. To the extent actual
      results differ from those estimates, adjustments will be made in the period
      in
      which the difference is determined. 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. We also receive commissions on
      wholesale energy sales contracted through our online auction platform from
      each
      energy supplier based on a fixed fee for service. These revenues are not tied
      to
      future energy usage and are recognized upon the completion of the
      auction.





Contracts
      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 energy suppliers and, therefore, we report
      all
      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.





***Cost
      of revenue***





Cost
      of
      revenue primarily consists of:





•
            employee
                costs (salaries and commissions) and other employee-related costs
                (primarily payroll taxes and fringe benefits) 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 (our supply desk
                function);





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





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





***Sales
      and marketing***





Sales
      and
      marketing expenses consist primarily of:





•
            third
                party commission expenses to our channel partners;





•
            employee
                costs (salaries and commissions) and other employee-related costs
                (primarily payroll taxes and fringe benefits) related to sales and
                marketing personnel;





•
            travel
                and related expenses;





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





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





While
      third party and sales commission expense vary as a function of revenue from
      period-to-period, we expect increases in non-commission sales and marketing
      expenses as we plan to increase the size of our sales and marketing staff within
      our government and channel partner groups, expand our geographic reach through
      the opening of additional sales




23


offices
      within the United States and launch new business initiatives. In January 2007,
      we hired a Senior Vice President of Sales to extend our national footprint
      and
      deepen our Texas presence. As a result, we plan to establish a sales office
      in
      Texas and increase our staffing levels in that region and in other deregulated
      regions including, but not limited to, Texas, New England, New York and the
      Midwest. We expect to incur losses in the near term as we build our staff to
      address the opportunities within these regions.





***General
      and administration***





General
      and administrative expenses consist primarily of:





•
            employee
                costs (salaries), employee-related costs (primarily payroll taxes
                and
                fringe benefits) and stock-based compensation related to general
                and
                administrative personnel;





•
            accounting,
                legal and other professional fees; and





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





***Other
      income (expense)***





Other
      income (expense) consists primarily of:





•
            interest
                expense on our $500,000 line of credit with a bank that matured on
                December 14, 2005 and our $2.0 million subordinated note payable
                to Massachusetts Capital Resource Company (the “MCRC note”) that was
                redeemed on December 4, 2006;





•
            interest
                expense related to capital leases;





•
            interest
                income related to the proceeds from our initial public
                offering;





•
            interest
                expense related to the accretion of warrants associated with the
                MCRC
                note; and





•
            gain
                on extinguishment of debt in 2004.





***Income
      tax benefit***





Income
      tax benefit primarily relates to our pre-tax loss generated in 2006 and the
      partial reversal of our valuation allowance in 2005 against our previously
      established deferred tax assets. A valuation allowance is provided against
      the
      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 Year Ended**
              **December 31,****2006**
            
            **2005**
            
            **2004**Revenue
            
            
            100
            %
            
            100
            %
            
            100
            %Cost
                of revenue
            
            
            20
            
            
            14
            
            
            18Gross
                profit
            
            
            80
            
            
            86
            
            
            82Operating
                expenses:Sales
                and marketing
            
            
            56
            
            
            57
            
            
            57General
                and administrative
            
            
            33
            
            
            21
            
            
            22Operating
                income (loss)
            
            
            (9
            )
            
            8
            
            
            3Other
                income (expense)
            
            
            (5
            )
            
            (2
            )
            
            30Income
                tax benefit
            
            
            5
            
            
            16
            
            
            —Net
                income (loss)
            
            
            (9
            )%
            
            22
            %
            
            33
            %





24


***Comparison
      of the Years Ended December 31, 2006 and 2005***





*Revenue*




**For
                  the Years Ended****December 31,****2006**
            
            **2005**
            
            **Increase**Revenue
            
            $
            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**
            
            **Increase**Cost
                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**
            
            **Increase**Sales 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.





*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.





25


*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.





***Comparison
      of the Years Ended December 31, 2005 and 2004***





*Revenue*





**For
                the Years Ended December 31,****2005**
            
            **2004**
            
            **Increase
                (Decrease)**Revenue
            
            $
            4,673,987
            
            $
            3,191,660
            
            $
            1,482,327
            
            
            46
            %





Revenue
      increased approximately $1.5 million, or 46%, in 2005 primarily due to an
      increase in auction activity being conducted on the World Energy Exchange.
      The
      increase was substantially due to the increase to 16 channel partners at the
      end
      of 2005 from 10 at the end of 2004. Of those channel partners, 10 had
      successfully contributed to our revenue by brokering transactions over the
      World
      Energy Exchange in 2005, compared to eight in 2004. In addition, we benefited
      from a full year of revenue from the State of Maryland procurement in 2005,
      which was contracted in June 2004, and in December 2004, the second largest
      procurement in our history using our auction platform was completed by the
      District of Columbia.





*Cost
      of revenue*





**For
                the Years Ended December 31,****2005**
            
            **2004**
            
            **Increase**$
            
            **%
                of Revenue**
            
            $
            
            **%
                of Revenue**
            
            **(Decrease)**Cost
                of revenue
            
            $
            648,410
            
            
            14
            %
            $
            563,972
            
            
            18
            %
            $
            84,438
            
            
            15
            %





The
      15%
      increase in cost of revenue in 2005 was substantially due to employee-related
      costs within the supply desk function and, to a lesser extent, increased
      amortization of capitalized software costs, rent and depreciation expense.
      Employee related costs increased primarily due to increased internal commissions
      directly related to the increase in revenue. Cost of revenue as a percent of
      revenue decreased 4% primarily due to the 46% increase in revenue partially
      offset by the cost increases discussed above.





*Operating
      expenses*





**For
                the Years Ended December 31,****2005**
            
            **2004**$
            
            **%
                of Revenue**
            
            $
            
            **%
                of Revenue**
            
            **Increase
                (Decrease)**Sales
                and marketing
            
            $
            2,649,786
            
            
            57
            %
            $
            1,814,799
            
            
            57
            %
            $
            834,987
            
            
            46
            %General
                and administrative
            
            
            995,703
            
            
            21
            
            
            710,462
            
            
            22
            
            
            285,241
            
            
            40Total
                operating expenses
            
            $
            3,645,489
            
            
            78
            %
            $
            2,525,261
            
            
            79
            %
            $
            1,120,228
            
            
            44
            %





The
      46%
      increase in sales and marketing expense in 2005 was primarily due to third
      party
      commissions due our channel partners and, to a lesser extent, employee-related
      costs, including internal commissions and payroll and increased occupancy costs.
      Payroll increased due to the addition of one person in sales and marketing
      during 2005 and increased internal commission costs associated with our increase
      in revenue. Sales and marketing expenses as a percentage of revenue was flat
      year over year as the percentage increase in revenue in 2005 resulted in a
      corresponding percentage increase in commission expenses.





The
      40%
      increase in general and administrative expense in 2005 was primarily due to
      compliance related costs, including legal and accounting services,
      employee-related costs and recruiting and human resource costs. These cost
      increases were all related to developing and enhancing our internal processes
      including general business matters, auditing expense and staff requirements,
      retention and recruitment. In addition, employee related costs increased in
      2005
      as fewer costs were allocated to capitalized software costs as compared to
      2004.
      General and administrative expenses as a percentage of revenue decreased 1%
      primarily due to the increase in revenue substantially offset by the 40%
      increase in costs discussed above.





26


*Other
      income (expense)*





Other
      expense was approximately $87,000 in 2005 as compared to other income of
      approximately $961,000 in 2004. Other income in 2004 included an approximate
      $1,063,000 gain from extinguishment of debt with no similar gain in 2005.
      Interest expense decreased approximately $7,000, or 7%, primarily due to a
      decrease in interest expense on our capital leases and a decrease in interest
      expense related to an obligation to a securing party of our bank debt. These
      decreases were partially offset by interest on the MCRC note and increases
      in
      the effective borrowing rate on our $500,000 revolving line of credit with
      a
      bank.





*Income
      tax*





We
      recorded an income tax benefit during the fourth quarter in 2005 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. We did not record
      an
      income tax provision for the year ended December 31, 2004 as income (loss)
      before income taxes was substantially offset by net operating loss carryforwards
      of approximately $3.2 million and a valuation allowance was provided
      against our net deferred tax assets. At December 31, 2005, we had gross
      deferred tax assets of approximately $1.4 million, against which a
      valuation allowance of approximately $639,000 had been applied. Gross deferred
      tax liabilities of approximately $40,000 were applied against the net deferred
      tax asset. Prior to December 31, 2005, we had determined that it was not
      more likely than not that we would be able to benefit from our deferred tax
      assets in the future. At December 31, 2005, we reassessed the
      recoverability of these deferred tax items both on recent operating history
      and
      forecasts for the next three years and determined that a portion of our deferred
      tax assets would, more likely than not, be recoverable in the future. As a
      result, we recognized a tax benefit of approximately $754,000 for the year
      ended
      December 31, 2005.





*Net
      income*





We
      reported net income for the year ended December 31, 2005 of $1,047,250
      compared to net income of $1,062,951 in 2004. The decrease in net income in
      2005
      versus 2004 is primarily due to the $1,062,775 gain from debt extinguishment
      included in other income (expense) in 2004 with no similar gain in 2005. This
      decrease was substantially offset by the $754,000 tax benefit resulting from
      the
      release of a portion of the valuation allowance related to our deferred tax
      assets and, to a lesser extent, the approximate $278,000 increase in operating
      income resulting from the increased revenue and improvement in the gross margin
      percentage in 2005 as compared to 2004.





**Liquidity
      and Capital Resources**





We
      had a
      loan and security agreement with Silicon Valley Bank, which matured on
      December 14, 2005. The agreement consisted of a committed revolving line of
      credit of up to $500,000 and a security agreement with one of our investors
      who
      had agreed to provide an unconditional guarantee to the bank. We repaid the
      balance due under the agreement of $500,000 on November 7, 2005 and,
      accordingly, the security agreement was terminated.





In
      November 2005, we received $2.0 million in exchange for a subordinated note
      with the Massachusetts Capital Resource Company (“MCRC”), which bears interest
      of 10% per annum, and requires 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 the Company’s 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, the Company completed its initial public offering (listed
      on
      the Toronto Stock Exchange) 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 World Energy 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.





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, net of offering costs of approximately $3.6
      million. In addition, the Company 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 16 th and
      December 5 th 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.
      The Company valued the warrants at $274,129 and recorded it as a component
      of
      additional paid-in capital.





At
      December 31, 2006, we had no commitments for material capital expenditures.
      We have identified a number of strategic initiatives that we believe are key
      components of our future growth, including: expanding our
      community of channel partners, energy consumer and energy supplier on
      the exchange; strengthening and extending our long-term relationships with
      government agencies; entry into other energy-related




27


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. In January
      2007, we hired a Senior Vice President of Sales to extend our national sales
      efforts and deepen our Texas presence. We expect to hire additional resources
      in
      an effort to pursue our strategic initiatives including: development of our
      channel partner, government agency and utility relationships; pursuit and
      development of other energy-related markets; development of our green credit
      trading platform; and pursuit of overseas opportunities.





***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
            %Unbilled
                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 1,040%, 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.
      Unbilled 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





•
            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 unbilled 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.


28


***Comparison
      of December 31, 2005 to December 31, 2004***





**2005**
            
            **2004**
            
            **Increase/(Decrease)**Cash
                and cash equivalents
            
            $
            1,584,066
            
            $
            49,389
            
            $
            1,534,677
            
            
            3,107
            %Unbilled
                accounts receivable
            
            
            1,028,807
            
            
            548,904
            
            
            479,903
            
            
            87Days
                sales outstanding
            
            
            75
            
            
            63
            
            
            12
            
            
            19Working
                capital
            
            
            1,372,542
            
            
            (882,162
            )
            
            2,254,704
            
            
            256Stockholders’
                deficit
            
            
            (938,883
            )
            
            (2,241,134
            )
            
            (1,302,251
            )
            
            (58
            )





Cash
      and
      cash equivalents increased $1,534,677, or 3,107%, primarily due to the
      $2.0 million MCRC note. This increase was partially offset by the repayment
      of our $500,000 line of credit in December 2005. Unbilled accounts receivable
      increased $479,903, or 87%, due to the 46% increase in revenue in 2005 as
      compared to 2004. This increase in revenue was partially due to two large
      government procurements including the completion of the District of Columbia
      procurement in December 2004. These large government procurements accounted
      for
      the incremental percentage increase in unbilled accounts receivable in excess
      of
      the percentage revenue increase. Day’s sales outstanding increased 12 days, or
      19%, primarily due to the effect of these large government procurements. Working
      capital increased $2,254,704 or 256%, primarily due to the proceeds from the
      MCRC note and, to a lesser extent, an increase in unbilled accounts receivable.
      These increases were partially offset by the repayment of the line of credit
      and, to a lesser extent, increases in current liabilities. Stockholders’ deficit
      decreased $1,302,251, or 58%, substantially due to net income for the year
      and,
      to a lesser extent, the fair value of warrants associated with the MCRC
      note.





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 the 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, purchases of property and equipment. Cash
      provided by financing activities for the 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.





Cash
      provided by operating activities for the year ended December 31, 2004 was
      approximately $39,000 primarily resulting from net income for the period
      partially offset by an increase in working capital. Cash used in investing
      activities for the year ended December 31, 2004 was approximately $96,000
      primarily related to costs associated with software development and, to a lesser
      extent, purchases of property and equipment. Cash used in financing activities
      for the year ended December 31, 2004 was approximately $114,000 primarily
      due to a payment related to a note payable with a third party and, to a lesser
      extent, principal payments on other notes payable. These cash uses were
      partially offset by the receipt of approximately $169,000 from the exercise
      of
      options and warrants.





We
      have
      historically funded our operations from cash flow from operations and, when
      required, the issuance of various debt and equity instruments. We have
      approximately $17.5 million of cash and cash equivalents and no long term
      debt as of December 31, 2006. We expect to continue to fund our operations
      from
      operating cash flow and, when required, the issuance of various debt and equity
      instruments. That notwithstanding, we expect that our operations and our cash
      and cash equivalents on hand at December 31, 2006 will meet our working
      capital requirements at least to December 31, 2007.





**Contractual
      Obligations and Other Commercial Commitments**





The
      table
      below summarizes our gross contractual obligations and other commercial
      commitments as of December 31, 2006. As of December 31, 2006, we did
      not have any purchase obligations other than our capital and operating
      leases.





**Payments
                Due by Period****Contractual
                Obligations**
            
            **2007**
            
            **2008
                and 2009**
            
            **2010
                and 2011**
            
            **2012
                and**
              **Thereafter**
            
            **Total**Capital
                leases
            
            $
            66,277
            
            $
            91,968
            
            $
            3,990
            
            $
            —
            
            $
            162,235Operating
                leases
            
            
            123,040
            
            
            197,780
            
            
            —
            
            
            —
            
            
            320,820Total
                contractual obligations
            
            $
            189,317
            
            $
            289,748
            
            $
            3,990
            
            $
            —
            
            $
            483,055





29


**Critical
      Accounting Policies**





The
      preparation of financial statements in accordance with accounting principles
      generally accepted in the United States of America 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. Among the significant estimates affecting our consolidated financial
      statements are those relating to revenue recognition, software development
      costs, accrued commissions, employee and consultant stock option grants,
      impairment of long-lived assets and income taxes. 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 notes to
      consolidated financial statements for a description of our accounting
      policies.





***Revenue
      Recognition***





For
      the
      vast majority of our 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 they 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 attained, 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 conditions and usage data.
      Once the actual usage 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, the Company currently estimates approximately 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.





We
      generally do not directly invoice energy suppliers and, therefore, we report
      all
      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 based on the
      energy exchanged that month.





30


We
      also
      receive commissions on wholesale energy sales contracted through our online
      auction platform from each energy supplier based on a fixed fee for service.
      These revenues are not tied to future energy usage and are recognized upon
      the
      completion of the online auction. We also earn revenue for market research
      and
      analysis. We recognize revenue from these services as earned, generally on
      a
      time and materials basis, pursuant to the terms and conditions of the
      arrangement. Any research that we provide, in order to facilitate the online
      auction, is non-billable and is absorbed by us as a period cost and charged
      to
      operations during the period in which it is incurred.





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.





Our
      estimates in relation to revenue recognition affect revenue and sales and
      marketing expense as reflected on our statements of operations, and unbilled
      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 utilizing estimated usage based on the energy consumers’ historical
      usage profile. At the end of each reporting period, we adjust estimated revenue
      to reflect actual usage for the period. For the year ended December 31,
      2006, we estimated usage for approximately 17% of our revenue resulting in
      an
      approximate 0.1% ($4,000) adjustment. This reduction in revenue, which is based
      on adjusted revenue for the quarter, resulted in an approximate 0.05% 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 $60,000 effect
      on our revenue for the year ended December 31, 2006.





***Software
      Development***





Certain
      acquired software and significant enhancements to our software are recorded
      in
      accordance with Statement of Position 98-1, *“Accounting
      for Costs of Computer*  *Software
      Developed or Obtained for Internal Use”.* Accordingly,
      internally developed software costs of $65,652, $54,375 and $85,567 related
      to
      implementation, coding and configuration have been capitalized in 2006, 2005
      and
      2004, respectively. We amortize internally developed and purchased software
      over
      the estimated useful life of the software (generally three years). For the
      years
      ended December 31, 2006, 2005 and 2004, $73,290, $54,747 and $28,625 of
      amortization expense was recorded as a component of cost of revenue,
      respectively.





Our
      estimates for capitalization of software development costs affect cost of
      revenue and capitalized software as reflected on our statements of operations
      and on our balance sheets. We capitalize certain acquired software and internal
      costs related to significant enhancements to our software by estimating the
      amount of time our internal staff has expended for implementation, coding and
      configuration to develop software. During the year ended December 31, 2006,
      we capitalized approximately $66,000, or 0.3% of our total assets. We amortize
      internally developed and purchased software over its estimated useful life,
      which is generally three years. Amortization for the year ended
      December 31, 2006 was approximately 6% of cost of revenue ($73,000). 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.





***Long-Lived
      and Intangible Assets***





In
      accordance with Statement of Financial Accounting Standards, or 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 fully 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.





***Income
      Taxes***





We
      account for income taxes in accordance with SFAS 109, *“Accounting
      for Income*  *Taxes”.* 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. Results that differ
      materially from current expectations may cause management to change its judgment
      on future taxable income. These changes, if any, may require us to adjust our
      existing tax valuation allowance higher or lower than the amount
      recorded.





31


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 likely than not that the tax benefits will not be realized. As of
      December 31, 2006, we had deferred tax assets of approximately
      $1.7 million against which we had applied an approximate $639,000 valuation
      allowance. To the extent we determine that our deferred tax assets are no longer
      recoverable, it could result in a maximum $1.1 million non-cash tax charge.
      To
      the extent we determine that it is more likely than not that we will recover
      all
      our deferred tax assets, it could result in a maximum $639,000 non-cash tax
      credit.





***Stock-Based
      Compensation***





Effective
      January 1, 2006, we account for stock-based compensation in accordance with
      SFAS No. 123(R), *“Share-based
      Payments”,* which
      requires all share-based payments to employees, including grants of employee
      stock options, to be recognized in the income statement based on their fair
      values. 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, we will continue to apply Accounting
      Principles Board, or APB, Opinion No. 25 *“Accounting
      For Stock Issued*  *to
      Employees”,* 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 and prior period
      pro
      forma stock information has not been restated. In accordance with
      SFAS No. 123(R), we will recognize the compensation cost of
      share-based awards on a straight-line basis over the vesting period of the
      award.





Effective
      with the adoption of SFAS No. 123(R), we elected to use the
      Black-Scholes option pricing model to determine the weighted average fair value
      of options granted. As our stock has a limited trading history, we determined
      the volatility for options granted in 2006 based on an analysis of our
      historical data and reported data for a peer group of companies that issued
      options with substantially similar terms. The expected volatility for options
      granted for the year ended December 31, 2006 was 47% to 48%. 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
      expected life of options granted during the year ended December 31, 2006
      was 4.75 years. The risk-free interest rate is based on a treasury
      instrument whose term is consistent with the expected life of the stock options.
      We have not paid and do not anticipate paying cash dividends on our 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, we applied an estimated forfeiture rate of
      13% in the first nine months of 2006 and 12% in the last three months of 2006
      in
      determining the expense recorded in the accompanying consolidated statement
      of
      operations.





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, *“Accounting*  *for
      Stock-Based Compensation and Disclosure, an Amendment of FASB
      Statement*  *No. 123”.*





A
      summary
      of options outstanding and options exercisable as of December 31, 2006 is
      as follows:





**Options
                Outstanding**
            
            **Options
                Exercisable****Weighted****Average**
            
            **Weighted**
            
            
            
            
            
            **Weighted****Remaining**
            
            **Average**
            
            **Aggregate**
            
            **Number**
            
            **Average**
            
            **Aggregate****Range
                of**
            
            
            
            **Contractual**
            
            **Exercise**
            
            **Intrinsic**
            
            **of
                Shares**
            
            **Exercise**
            
            **Intrinsic****Exercise
                Price**
            
            **Options**
            
            **Life**
            
            **Price**
            
            **Value**
            
            **Exercisable**
            
            **Price**
            
            **Value**$0.025
            
            
            2,851,029
            
            
            3.85
                years
            
            $
            0.025
            
            $
            2,742,162
            
            
            2,665,171
            
            $
            0.025
            
            $
            2,563,402$0.240
            
            
            430,000
            
            
            5.22
                years
            
            
            0.240
            
            
            321,130
            
            
            182,500
            
            
            0.240
            
            
            136,294$0.380
            
            
            340,000
            
            
            6.05
                years
            
            
            0.380
            
            
            206,317
            
            
            —
            
            
            —
            
            
            —$0.950
            
            
            742,000
            
            
            6.58
                years
            
            
            0.950
            
            
            27,317
            
            
            —
            
            
            —
            
            
            —$0.950
            
            
            120,000
            
            
            6.96
                years
            
            
            1.130
            
            
            —
            
            
            —
            
            
            —
            
            
            —4,483,029
            
            
            4.68
                years
            
            $
            0.260
            
            $
            3,296,926
            
            
            2,847,671
            
            $
            0.039
            
            $
            2,699,696





The
      aggregate intrinsic value in the table above represents the total intrinsic
      value of our outstanding options and exercisable options as of December 31,
      2006. The aggregate intrinsic value of options exercised during the year ended
      December 31, 2006 was approximately $1,980,144.




32


**Recent
      Accounting Pronouncements**





In
      February 2006, the FASB issued SFAS No. 155, *“Accounting
      for Certain*  *Hybrid
      Financial Instruments”* which
      amends SFAS No. 133, *“Accounting
      for*  *Derivative
      Instruments and Hedging Activities”* ,
      and
      SFAS No. 140, *“Accounting*  *for
      Transfers and Servicing of Financial Assets and Extinguishment of
      Liabilities”.* SFAS No. 155 resolves issues addressed in SFAS No. 133
      Implementation Issue No. D1, Application of Statement 133 to
      Beneficial Interests in Securitized Financial Assets, among other matters,
      permits fair value remeasurement for any hybrid financial instrument that
      contains an embedded derivative that otherwise would require bifurcation.
      SFAS No. 155 is effective for all financial instruments acquired or
      issued after the beginning of an entity’s fiscal year that begins after
      September 15, 2006, except early adoption is allowed in certain
      circumstances. We expect to adopt SFAS No. 155 on January 1,
      2007.





In
      July
      2006, t he
      Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, *“Accounting
      for Uncertainty in*  *Income
      Taxes-an Interpretation of FASB Statement No. 109* ”,
      or
      FIN 48, which clarifies the accounting for uncertainty in tax positions.
      This interpretation requires that we recognize in our financial statements,
      the
      impact of a tax position, if that position is more likely than not to be
      sustained on audit, based on the technical merits of the position. The
      provisions of FIN 48 are effective as of January 1, 2007. The Company
      is currently in the process of evaluating the effects of the adoption of
      FIN 48.





In
      September 2006, the FASB issued Statement of Financial Accounting Standard
      No.
      157, Fair Value Measurements (“SFAS 157”). SFAS 157 provides guidance for using
      fair value to measure assets and liabilities. The standard also responds to
      investors’ requests for more information about (1) the extent to which companies
      measure assets and liabilities at fair value, (2) the information used to
      measure fair value, and (3) the effect that fair-value measurements have on
      earnings. SFAS 157 will apply whenever another standard requires (or permits)
      assets or liabilities to be measured at fair value. The standard does not expand
      the use of fair value to any new circumstances. FAS 157 is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years and will be in effect for the
      Company January 1, 2008. The Company is currently evaluating the potential
      impact that the adoption of SFAS 157 will have on its financial
      statements.





In
      September 2006, t he
      SEC
      staff issued Staff Accounting Bulletin No. 108, Considering the Effects of
      Prior
      Year Misstatements when Quantifying Misstatements in Current Year Financial
      Statements (SAB 108). SAB 108 was issued in order to eliminate the diversity
      in
      practice surrounding how public companies quantify financial statement
      misstatements. SAB 108 requires that registrants quantify errors using both
      a
      balance sheet and income statement approach and evaluate whether either approach
      results in a misstated amount that, when all relevant quantitative and
      qualitative factors are considered, is material. SAB 108 must be implemented
      by
      the end of the Company’s fiscal 2007. The Company is currently assessing the
      potential effect of SAB 108 on its financial statements.





**Seasonality**





Our
      revenue is subject to seasonality and fluctuations during the year primarily
      as
      a result of weather conditions and their 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.





**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, the Company
      is exposed to market risk resulting from changes in foreign currency exchange
      rates, and the Company regularly evaluates its exposure to such changes. The
      Company’s overall risk management strategy seeks to balance the magnitude of the
      exposure and the costs and availability of appropriate financial
      instruments.




33


**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.





**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.





**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 38.





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





Not
      applicable.





**Item
      9A. Controls and Procedures**





Evaluation
      of Disclosure Controls and Procedures





As
      required by Rule 13a-15 under 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, 2006. 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, 2006, 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. ****





In
      a
      letter dated August 2, 2006, our external auditors, UHY LLP, advised us
      that they were concerned that as of and for the year ended December 31,
      2005, we were operating without an experienced principal accounting/financial
      officer with sufficient knowledge of accounting principles generally accepted
      in
      the United States, SEC financial reporting issues, internal controls, and other
      complex accounting and reporting issues, and that the lack of such an officer
      constituted a “material weakness” in our internal control over financial
      reporting as of December 31, 2005. A “material weakness” is a control
      deficiency or a combination of control deficiencies that results in more than
      a
      remote likelihood that a material misstatement in the financial statements
      or
      related disclosures will not be prevented or detected. In May 2006, we hired
      a
      full-time chief financial officer with the appropriate experience and background
      to manage the diverse and complex financial issues that may arise in our
      business. In addition, we have recently reorganized our accounting staff and
      have hired an additional professional to augment our staff. We believe that
      these staffing additions have mitigated these risks and that the material
      weakness identified as of December 31, 2005 no longer exists. As a public
      company we are subject to Section 404 of the Sarbanes-Oxley Act.





Internal
      Control Over Financial Reporting





This annual
      report does not include a report of management’s assessment regarding internal
      control over financial reporting or an attestation report of the Company’s
      registered public accounting firm due to a transition period established by
      the
      rules of the Securities and Exchange Commission for newly public
      companies.





Changes
      in Internal Control Over Financial Reporting





The
      Company added professional staff at the end of the third fiscal quarter of
      2006
      that materially affected and improved the internal control over financial
      reporting during the fourth fiscal quarter of 2006.





**Item
      9B.****Other Information**





Not
      applicable.


34


**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
        waiter 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
        its 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.




35


**PART
      IV**


**Item
      15. Exhibits and Financial Statement Schedules**





The
      following Exhibits are either filed herewith or are incorporated by reference
      as
      may be indicated.




(a)(1)  
        Financial Statements
 For
        a
        list of the financial information included herein, see “Index to Consolidated
        Financial Statements” on page 38 of this Annual Report on Form
        10-K.
 
 (a)(2)  
        Financial Statement 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 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.

















36


**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.Date: March
              21, 2007
            By:
            /s/ Richard
              DomaleskiRichard
              DomaleskiChief
              Executive Officer and President





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 President
            March
                21, 2007/s/ James Parslow
              James
              Parslow
            Chief
              Financial Officer
            March
                21, 2007/s/ Edward Libbey
              Edward
              Libbey
            Chairman
              of the Board and Director
            March
                21, 2007


/s/ Nicholas Zaldastani
              Nicholas
              Zaldastani
            Director
            March
                21, 2007/s/ Patrick Bishcoff
              Patrick
              Bishcoff
            Director
            March
                21, 2007/s/ John Wellard
              John
              Wellard
            Director
            March
                21, 2007





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.




37


**WORLD
      ENERGY SOLUTIONS, INC.**





**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**Page**REPORT
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            39CONSOLIDATED
                FINANCIAL STATEMENTS:Consolidated
                Balance Sheets for World Energy Solutions, Inc. at December 31, 2006
                and December 31, 2005
            40Consolidated
                Statements of Operations for World Energy Solutions, Inc. for the
                years
                ended December 31, 2006, 2005 and 2004
            41Consolidated
                Statements of Stockholders’ Deficit for World Energy Solutions, Inc. for
                the years ended December 31, 2006, 2005 and 2004
            42Consolidated
                Statements of Cash Flows for World Energy Solutions, Inc. for the
                years
                ended December 31, 2006, 2005 and 2004
            43Notes
                to Consolidated Financial Statements
            44






















38


**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, 2006 and 2005, 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, 2006.
      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. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal controls over
      financial reporting. Our audits included consideration of internal control
      over
      financial reporting as a basis for designing our audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, 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, 2006 and 2005 and the consolidated
      results of their operations and their cash flows for each of the three years
      in
      the period ended December 31, 2006 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.




/s/  UHY
              LLP




Boston,
      Massachusetts


March
      21,
      2007





39


**WORLD
      ENERGY SOLUTIONS, INC.**





**Consolidated
      Balance Sheets**





**December 31,****2006**
            
            **2005****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            17,483,886
            
            $
            1,584,066Unbilled
                accounts receivable
            
            
            1,702,798
            
            
            1,028,807Prepaid
                expenses and other current assets
            
            
            211,749
            
            
            104,951Total
                current assets
            
            
            19,398,433
            
            
            2,717,824Property
                and equipment, net
            
            
            225,932
            
            
            203,084Capitalized
                software, net
            
            
            105,296
            
            
            112,934Deferred
                tax assets
            
            
            1,061,720
            
            
            754,000Total
                assets
            
            $
            20,791,381
            
            $
            3,787,842**LIABILITIES,
                SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
                (DEFICIT)**Current
                liabilities:Accounts
                payable
            
            $
            848,518
            
            $
            157,610Accrued
                commissions
            
            
            1,021,433
            
            
            864,893Accrued
                compensation
            
            
            304,330
            
            
            85,000Accrued
                expenses
            
            
            232,587
            
            
            48,009Due
                to customer
            
            
            277,546
            
            
            65,324Deferred
                revenue
            
            
            17,862
            
            
            64,416Guaranteed
                return on voting common stock
            
            
            —
            
            
            10,523Capital
                lease obligations
            
            
            56,259
            
            
            49,507Total
                current liabilities
            
            
            2,758,535
            
            
            1,345,282Long-term
                debt
            
            
            —
            
            
            1,748,000Capital
                lease obligations, net of current portion
            
            
            87,844
            
            
            131,745Total
                liabilities
            
            
            2,846,379
            
            
            3,225,027Commitments
                (Note 10)Series A
                redeemable convertible preferred stock, $0.0001 par value;
                15,000,000 shares authorized at December 31, 2005; no shares issued
                and outstanding at December 31, 2006 and 10,433,504 shares issued and
                outstanding at December 31, 2005; stated at redemption value;
                (liquidation preference of $1,523,295 at December 31,
                2005)
            
            
            —
            
            
            1,501,698Stockholders’
                equity (deficit):Preferred
                stock, $0.0001 par value; 5,000,000 shares authorized at December 31,
                2006; no shares issued or outstanding
            
            
            —
            
            
            —Common
                stock, non-voting, $0.0001 par value; no shares authorized at
                December 31, 2006 and 15,000,000 shares authorized at December 31,
                2005; no shares issued and outstanding at December 31, 2006 and
                6,792,135 shares issued and outstanding at December 31,
                2005
            
            
            —
            
            
            679Common
                stock, voting, $0.0001 par value; 150,000,000 shares authorized;
                76,511,741 shares issued and outstanding at December 31, 2006 and
                33,724,819 shares issued and 33,049,473 shares outstanding at
                December 31, 2005
            
            
            7,651
            
            
            3,372Treasury
                stock; 675,346 shares of voting common stock at cost, at
                December 31, 2005
            
            
            —
            
            
            (151,953
            )Additional
                paid-in capital
            
            
            22,148,718
            
            
            2,919,293Accumulated
                deficit
            
            
            (4,211,367
            )
            
            (3,710,274
            )Total
                stockholders’ equity (deficit)
            
            
            17,945,002
            
            
            (938,883
            )Total
                liabilities, Series A redeemable convertible preferred stock and
                stockholders’ equity (deficit)
            
            $
            20,791,381
            
            $
            3,787,842





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





40


**WORLD
      ENERGY SOLUTIONS, INC.**





**Consolidated
      Statements of Operations**





**Years
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Revenue:Brokerage
                commissions
            
            $
            5,762,098
            
            $
            4,673,987
            
            $
            3,186,660Consulting
            
            
            1,000
            
            
            —
            
            
            5,000Total
                revenue
            
            
            5,763,098
            
            
            4,673,987
            
            
            3,191,660Cost
                of revenue
            
            
            1,166,426
            
            
            648,410
            
            
            563,972Gross
                profit
            
            
            4,596,672
            
            
            4,025,577
            
            
            2,627,688Operating
                expenses:Sales
                and marketing
            
            
            3,227,263
            
            
            2,649,786
            
            
            1,814,799General
                and administrative
            
            
            1,862,450
            
            
            995,703
            
            
            710,462Total
                operating expenses
            
            
            5,089,713
            
            
            3,645,489
            
            
            2,525,261Operating
                income (loss)
            
            
            (493,041
            )
            
            380,088
            
            
            102,427Other
                income (expense):Gain
                from debt extinguishment
            
            
            —
            
            
            —
            
            
            1,062,775Interest
                income
            
            
            139,617
            
            
            8,004
            
            
            —Interest
                expense
            
            
            (451,897
            )
            
            (94,842
            )
            
            (102,251
            )Total
                other income (expense)
            
            
            (312,280
            )
            
            (86,838
            )
            
            960,524Income
                (loss) before income taxes
            
            
            (805,321
            )
            
            293,250
            
            
            1,062,951Income
                tax benefit
            
            
            304,228
            
            
            754,000
            
            
            —Net
                income (loss)
            
            
            (501,093
            )
            
            1,047,250
            
            
            1,062,951Accretion
                of preferred stock issuance costs
            
            
            (6,299
            )
            
            (7,199
            )
            
            (7,199
            )Net
                income (loss) available to common stockholders
            
            $
            (507,392
            )
            $
            1,040,051
            
            $
            1,055,752Earnings
                (loss) per share:Net
                income (loss) per voting common share — basic
            
            $
            (0.01
            )
            $
            0.02
            
            $
            0.02Net
                income (loss) per non-voting common share — basic
            
            $
            —
            
            $
            0.02
            
            $
            0.02Net
                income (loss) available to common stockholders —
                diluted
            
            $
            (0.01
            )
            $
            0.02
            
            $
            0.02Weighted
                average shares outstanding — basic:Voting
                common stock
            
            
            45,576,477
            
            
            33,049,472
            
            
            32,058,759Non-voting
                common stock
            
            
            —
            
            
            6,778,327
            
            
            2,880,59245,576,477
            
            
            39,827,799
            
            
            34,939,351Weighted
                average shares outstanding — diluted
            
            
            45,576,477
            
            
            54,506,566
            
            
            52,096,206





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


41


**WORLD
      ENERGY SOLUTIONS, INC.**





**Consolidated
      Statements of Stockholders’ Equity (Deficit)**


**Years
      Ended December 31, 2006, 2005, and 2004**





**Non-Voting**
            
            **Voting**
            
            
            
            
            
            
            
            **Total****Common
                Stock**
            
            **Common
                Stock**
            
            **Treasury
                Stock**
            
            **Additional**
            
            
            
            **Stockholders’****Number
                of**
            
            **$0.0001**
            
            **Number
                of**
            
            **$0.0001**
            
            **Number
                of**
            
            **Stated
                at**
            
            **Paid-in**
            
            **Accumulated**
            
            **Equity****Shares**
            
            **Par
                Value**
            
            **Shares**
            
            **Par
                Value**
            
            **Shares**
            
            **Cost**
            
            **Capital**
            
            **Deficit**
            
            **(Deficit)**Balance,
                December 31, 2003
            
            
            2,000,000
            
            $
            200
            
            
            31,889,204
            
            $
            3,189
            
            
            675,346
            
            $
            (151,953
            )
            $
            2,484,013
            
            $
            (5,820,475
            )
            $
            (3,485,026
            )Exercise
                of stock options
            
            
            4,552,135
            
            
            455
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            113,348
            
            
            —
            
            
            113,803Accretion
                of stock issuance costs
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (7,199
            )
            
            —
            
            
            (7,199
            )Common
                stock warrants exercised
            
            
            —
            
            
            —
            
            
            1,835,615
            
            
            183
            
            
            —
            
            
            —
            
            
            54,886
            
            
            —
            
            
            55,069Issuance
                of fully vested stock options to non-employees
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            19,268
            
            
            —
            
            
            19,268Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,062,951
            
            
            1,062,951Balance,
                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
            )Stock-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
            )
            $
            17,945,002





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


42


**WORLD
      ENERGY SOLUTIONS, INC.**





**Consolidated
      Statements of Cash Flows**





**Years
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Cash
                flows from operating activities:Net
                income (loss)
            
            $
            (501,093
            )
            $
            1,047,250
            
            $
            1,062,951Adjustments
                to reconcile net income (loss) to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            135,446
            
            
            105,831
            
            
            61,113Deferred
                taxes
            
            
            (307,720
            )
            
            (754,000
            )
            
            —Share-based
                compensation
            
            
            44,261
            
            
            —
            
            
            19,268Accretion
                of warrants
            
            
            252,000
            
            
            4,200
            
            
            —Gain
                related to the extinguishment of debt
            
            
            —
            
            
            —
            
            
            (1,062,775
            )Changes
                in operating assets and liabilities:Unbilled
                accounts receivable
            
            
            (673,991
            )
            
            (479,903
            )
            
            17,892Prepaid
                expenses and other current assets
            
            
            (106,798
            )
            
            (47,451
            )
            
            10,427Accounts
                payable
            
            
            690,908
            
            
            (42,041
            )
            
            (59,073
            )Accrued
                commissions
            
            
            156,540
            
            
            496,035
            
            
            (322,706
            )Accrued
                compensation
            
            
            193,330
            
            
            68,507
            
            
            (87,007
            )Accrued
                expenses
            
            
            210,578
            
            
            38,009
            
            
            3,536Due
                to customer
            
            
            212,222
            
            
            65,324
            
            
            —Deferred
                revenue
            
            
            (46,554
            )
            
            (330,540
            )
            
            394,956Net
                cash provided by operating activities
            
            
            259,129
            
            
            171,221
            
            
            38,582Cash
                flows from investing activities:Costs
                incurred in software development
            
            
            (65,652
            )
            
            (54,375
            )
            
            (85,567
            )Purchases
                of property and equipment
            
            
            (72,061
            )
            
            (25,374
            )
            
            (14,259
            )Proceeds
                from sale of property and equipment
            
            
            —
            
            
            —
            
            
            3,500Net
                cash used in investing activities
            
            
            (137,713
            )
            
            (79,749
            )
            
            (96,326
            )Cash
                flows from financing activities:Proceeds
                from exercise of options
            
            
            56,917
            
            
            6,000
            
            
            113,803Proceeds
                from exercise of warrants
            
            
            253,205
            
            
            —
            
            
            55,069Proceeds
                from initial public offering of common stock, net of offering costs
                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
            
            
            —
            
            
            2,000,000
            
            
            —Payment
                made on third party note
            
            
            —
            
            
            —
            
            
            (150,000
            )Principal
                payments on stockholder notes payable
            
            
            —
            
            
            —
            
            
            (115,000
            )Principal
                payments on capital lease obligations
            
            
            (50,092
            )
            
            (48,733
            )
            
            (4,836
            )Principal
                payments on guaranteed return
            
            
            (10,523
            )
            
            (14,062
            )
            
            (12,699
            )Purchase
                of treasury stock
            
            
            (12,500
            )
            
            —
            
            
            —Net
                cash provided by (used in) financing activities
            
            
            15,778,404
            
            
            1,443,205
            
            
            (113,663
            )Net
                (decrease) increase in cash and cash equivalents
            
            
            15,899,820
            
            
            1,534,677
            
            
            (171,407
            )Cash
                and cash equivalents, beginning of year
            
            
            1,584,066
            
            
            49,389
            
            
            220,796Cash
                and cash equivalents, end of year
            
            $
            17,483,886
            
            $
            1,584,066
            
            $
            49,389*Supplemental
                Disclosure of Cash Flow Information:*Cash
                paid for interest
            
            $
            129,401
            
            $
            94,842
            
            $
            157,827Property
                and equipment acquired through capital lease obligations
            
            $
            12,943
            
            $
            56,205
            
            $
            171,566Conversion
                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.





43


**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 on providing energy procurement
      and value-added energy services to commercial, industrial, and government
      customers. The Company commenced operations through an entity named Oceanside
      Energy, Inc., which was incorporated under the laws of the State of Delaware
      on
      September 3, 1996. The Company was incorporated 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. Pursuant to a certificate of amendment filed on
      November 30, 1999, World Energy Exchange, Inc. changed its name to “World
      Energy Exchange.com, Inc.” and then back to “World Energy Exchange, Inc.” on
      November 2, 2000. World Energy Exchange, Inc. subsequently changed its name
      to World Energy Solutions, Inc. pursuant to a certificate of amendment filed
      on
      February 4, 2002. 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 brokerage company that has developed an online auction
      platform, the World Energy Exchange, through which commercial, industrial and
      government energy consumers in the United States are able to purchase
      electricity and other energy resources from competing energy suppliers. Although
      the Company’s primary source of revenue is from brokering electricity, the
      Company has adapted its World Energy Exchange auction platform to accommodate
      the brokering of natural gas, green power (i.e., electricity generated by
      renewable resources) and energy-related products. In addition, the Company
      has
      recently adapted the World Energy Exchange auction platform to accommodate
      transactions in fuel oils including: diesel, heating oil, propane and jet fuel
      and are in the process of developing the World Green Exchange auction platform
      to accommodate green credit transactions.





On
      November 16, 2006, the Company completed its initial public offering (listed
      on
      the Toronto Stock Exchange) 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 World Energy 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 shall have 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 preferred stock.





On
      December 5, 2006, the Company issued an additional of 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.
      In
      addition, the Company 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
      warrants issuance (November 16, 2007 and December 5, 2007 related to the over
      allotment) and expire 18 months from the date of the one year anniversary (May
      15, 2009 and June 4, 2009, respectively). These warrants allow for net share
      settlement and certain of the holders of these warrants have piggy-back
      registration rights. The Company valued the warrants at $274,129 and recorded
      it
      as a component of additional paid-in capital.





In
      connection with the initial public offering, all 10,433,504 shares of Series
      A
      Redeemable Convertible Preferred Stock and 8,982,806 shares of Non-Voting Common
      Stock were converted into 19,416,310 shares of Common Stock.




**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




44


(“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 relate to revenue recognition and the
      estimate of actual energy usage between the energy supplier and end user
      (“energy consumer”) of such energy; software development costs; the fair value
      of the Company’s equity securities prior to our initial public offering when
      there was no ready market for the purchase and sale of those shares; impairment
      of long-lived assets; and estimates of future taxable income as it relates
      to
      the realization of the Company’s net deferred tax assets. The effect of those
      estimates could have a material impact on the Company’s estimation of commission
      revenue, accounts receivable, accrued commission expense, capitalized software,
      stock-based compensation, earnings per share and deferred tax
      assets.





***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’s commissions are earned based on executed contractual arrangements
      between the energy supplier and energy consumer of electricity or natural gas.
      These supply arrangements are typically 12 to 36 month arrangements and
      provide the Company with a monthly commission from each energy supplier based
      on
      the energy usage generated and transacted between the energy supplier and energy
      consumer multiplied by the Company’s contractual commission rate. Revenue from
      commissions is recognized as earned on a monthly basis using estimates of
      electricity and natural gas delivered for the month. To determine whether
      collectibility is reasonably assured, the Company assesses a variety of
      different factors including past transaction history and creditworthiness of
      the
      customer. The Company’s commission arrangements generally do not provide for
      refunds or cancellation privileges. The Company’s determination of whether the
      commission fee is fixed or determinable is based on the terms and conditions
      of
      the supply arrangement which provide for a fixed commission rate, and the
      ability of the Company to estimate actual energy usage when such actual
      information is not yet available from suppliers prior to the release of its
      financial statements.





The
      Company records brokerage commissions based upon the estimated amount of
      electricity and gas delivered to energy consumers through the end of the
      accounting period. The Company develops its estimates on a quarterly basis
      based on the following:





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





•
            Usage
                updates from energy suppliers;





•
            Usage
                data provided from utilities;





•
            Comparable
                historical usage data; and





•
            Historical
                variances to previous estimates.





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





45


We
      generally do not directly invoice energy suppliers and, therefore, we report
      all
      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 based on the
      energy exchanged for that month.





We
      also
      receive commissions on wholesale energy sales contracted through the Company’s
      online auction platform from each energy supplier based on a fixed fee for
      service. Certain of these revenues are not tied to future energy usage and
      are
      recognized upon the completion of the online auction, which is the delivery
      of
      our service, provided that all the other elements for revenue recognition are
      met. The Company has also earned revenue for market research and analysis.
      The
      Company recognizes revenue from these services as earned, generally on a time
      and materials basis, pursuant to the terms and conditions of the arrangement.
      Any research that the Company provides in order to facilitate the online auction
      is non-billable and is absorbed by the Company as a period cost and charged
      to
      operations during the period in which it is incurred.





The
      Company pays commissions to its channel partners at contractual commission
      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. The Company pays commissions to its
      salespeople at contractual commission rates based upon cash collections from
      its
      customers.





***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 Costs*  *of
      Computer Software Developed or Obtained for Internal Use”.* Accordingly,
      internally developed software costs of $65,652, $54,375, and $85,567 related
      to
      implementation, coding and configuration have been capitalized in 2006, 2005,
      and 2004, respectively. The Company amortizes internally developed and purchased
      software over the estimated useful life of the software (generally three years).
      Accordingly, during 2006, 2005, and 2004, $73,290, $54,747, and $28,625
      respectively, were amortized to cost of revenues resulting in accumulated
      amortization of $161,786, $88,496, and $33,749 at December 31, 2006, 2005,
      and 2004, respectively. At December 31, 2006, estimated amortization
      expense for capitalized internally developed software is as
      follows:





2007
            
            $
            60,1982008
            
            
            34,5382009
            
            
            10,560$
            105,296





***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.





***Long-Lived
      and Intangible Assets***





Long-lived
      assets primarily include property and equipment and intangible assets with
      finite lives (capitalized software). In accordance with Statement of Financial
      Accounting Standards (“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 business circumstances indicate that
      the carrying amount of the assets may not be fully recoverable or that the
      useful lives of those assets are no longer appropriate. Each impairment test
      is
      based on a comparison of the undiscounted cash flows to the carrying value
      of
      the asset.





***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.





***Income
      Taxes***





The
      Company accounts for its income taxes in accordance with SFAS No. 109,
“ *Accounting
      for Income Taxes* ”
      (“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 the differences
      between the financial statement carrying amounts of existing assets and
      liabilities and




46


their
      respective tax basis. Deferred income tax expense or credits are based on
      changes in the assets and liabilities and their respective tax basis. The
      deferred tax assets are reduced by a valuation allowance 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 dependant 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 we consider to be appropriate
      to
      be considered in estimating future taxable income. The Company’s forecast of
      expected future taxable income is for future periods that can be reasonably
      estimated. Results that differ materially from current expectations may cause
      management to change its judgment on future taxable income. These changes,
      if
      any, may require the Company to adjust its existing tax valuation allowance
      higher or lower than the amount recorded.





***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, 2006, 2005, and 2004.





***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) 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”* (“SFAS 107”), 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, 2006,
      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. At December 31, 2005, management believes
      that the fair value of the Company’s debt approximated its carrying value based
      on interest rates available to the Company at the time.





***Segment
      Reporting***





SFAS No. 131, *“Disclosures
      about Segments of an Enterprise and Related*  *Information”,* 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.





***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 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 provides credit to energy suppliers in the normal course of business.
      Collateral is not required for accounts receivable, but ongoing credit
      evaluations of energy suppliers 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.
      Accounts receivable are written off when deemed uncollectible.





47


The
      Company receives commission payments from energy suppliers based on the energy
      usage transacted between energy consumers and energy suppliers. The following
      represents revenue and accounts receivable from energy suppliers exceeding
      10%
      of the total in each category:


**December
                31, 2006**
            
            **December
                31, 2005**
            
            **December
                31, 2004****Customer**
            
            **Revenue**
            
            **Unbilled**
              **Accounts**
              **Receivable**
            
            **Revenue**
            
            **Unbilled**
              **Accounts**
              **Receivable**
            
            **Revenue**
            
            **Unbilled**
              **Accounts**
              **Receivable**A
            
            18%
            
            21%
            
            18%
            
            10%
            
            20%
            
            19%B
            
            13%
            
            12%
            
            10%
            
            16%
            
            —
            
            —C
            
            10%
            
            4%
            
            18%
            
            32%
            
            12%
            
            12%D
            
            10%
            
            4%
            
            —
            
            —
            
            —
            
            —E
            
            6%
            
            1%
            
            11%
            
            11%
            
            —
            
            11%








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.





The
      Company considers energy suppliers as its customers. However, the Company also
      has a direct contractual relationship with energy consumers for the online
      procurement of their energy usage needs. These energy consumers are primarily
      large businesses and government organizations. For the year ended
      December 31, 2006, four of these energy consumers accounted for
      transactions resulting in over 10% individually, and approximately 63% in the
      aggregate of our revenue, and three of these energy consumers accounted for
      transactions resulting in over 10% individually and approximately 51% in the
      aggregate of our revenue for the year ended December 31, 2005.





***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 Method*  *under
      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. The Company was required to adopt
      EITF Issue No. 03-6 in the quarter ended September 30, 2004 and to
      apply the provisions of EITF Issue No. 03-6 retroactively to all periods
      presented. For the years ended December 31, 2005 and 2004, 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 so no
      allocation of earnings to non-voting common stock or the Series A Preferred
      is required.





48


For
      the
      basic earnings per share calculation in 2005 and 2004, 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 Years Ended December 31,****2005**
            
            **2004**Net
                income (loss) available to common shareholders
            
            $
            1,040,051
            
            $
            1,055,752Allocation
                of net income (loss) for basic:Voting
                common stock
            
            
            684,354
            
            
            746,417Non-voting
                common stock
            
            
            140,407
            
            
            66,512Series A
                Preferred stock
            
            
            215,290
            
            
            242,823$
            1,040,051
            
            $
            1,055,752





As
      of
      December 31, 2006, the Company only had one issued and outstanding class of
      stock - common stock. As a result, the basic loss per share for the year ended
      December 31, 2006 is computed by dividing income 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,****2006**
            
            **2005**
            
            **2004**Weighed
                average number of voting common shares — basic
            
            
            45,576,477
            
            
            33,049,472
            
            
            32,058,759Weighed
                average number of non-voting common shares — basic
            
            
            —
            
            
            6,778,327
            
            
            2,880,592Weighted
                average number of common and common equivalent shares outstanding —
                basic
            
            
            45,576,477
            
            
            39,827,799
            
            
            34,939,351Dilutive
                Shares:Weighted
                average number of Series A Preferred shares
            
            
            —
            
            
            10,433,504
            
            
            10,433,504Incremental
                shares under the treasury stock method for outstanding
                warrant
            
            
            —
            
            
            1,191,808
            
            
            1,144,104Incremental
                shares under the treasury stock method for outstanding
                options
            
            
            —
            
            
            3,053,455
            
            
            5,579,247Weighted
                average number of common and common equivalent shares outstanding —
                diluted
            
            
            45,576,477
            
            
            54,506,566
            
            
            52,096,206





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, 2006, the Company only had one series
      of
      capital stock that had any issued and outstanding stock. 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.





The
      Company did not declare or pay any dividends in 2006, 2005 and
      2004.





***Stock-Based
      Compensation***


At
      December 31, 2006, the Company had one stock-based employee compensation
      plan, which is more fully described in Note 7. Effective January 1, 2006,
      the Company accounted for stock-based compensation in accordance with Statement
      of Financial Accounting Standards (“SFAS”) issued SFAS No. 123(R),
“ *Stock-Based
      Compensation* ”
which
      is a revision of SFAS No. 123 “ *Accounting
      for Stock-Based Compensation* ”.
      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, 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.





Effective
      with the adoption of SFAS No. 123(R), the Company has elected to use
      the Black-Scholes option pricing model to determine the weighted average fair
      value of options granted. As our stock has a limited trading history as of
      December 31, 2006, the Company determined




49


the
      volatility for options granted in 2006 based on an analysis of its historical
      data and reported data for a peer group of companies that issued options with
      substantially similar terms. The expected volatility for options granted during
      the year ended December 31, 2006 was 47% to 48%. 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
      expected life of options granted during 2006 was 4.75 years. 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
      an estimated forfeiture rate of 13% during the first nine months of 2006 and
      12%
      in the last three months of 2006 in determining the expense recorded in the
      accompanying consolidated statement of operations.





The
      weighted average fair value of options granted during the year ended
      December 31, 2006, under the Black-Scholes option pricing model was
      approximately $0.36 per option share. The weighted-average assumptions
      utilized to determine the above values are indicated in the following
      table:





Dividend
                yield
            0%Risk-free
                interest rate
            4.27%
                to 4.83%Expected
                life
            4.75 yearsVolatility
            47%
                to 48%





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 follows: $20,000 in sales and marketing, $2,000 in cost of revenue and
      $22,000 in general and administrative expenses. As of December 31, 2006,
      there was approximately $406,000 of unrecognized compensation expense related
      to
      non-vested stock option awards that is expected to be recognized over a
      weighted-average period of 3.75 years. See Note 7 for a summary of the
      stock option activity under the Company’s stock-based employee compensation plan
      for the years ended December 31, 2006, 2005 and 2004.





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 arm’s-length transactions, when applicable,
      involving the Company’s common stock supportive of the results produced by this
      valuation methodology.





During
      the years ended December 31, 2005 and 2004, the Company granted options to
      employees to purchase a total of 14,109,200 shares of non-voting common
      stock at exercise prices ranging from $0.025 to $0.24 per share. The
      Company granted the following stock options during 2006:





**Grant
                Date**
            
            **Options**
              **Granted**
            
            **Exercise**
              **Price**
            
            **Fair
                Value**
              **at
                Grant Date**
            
            **Estimated**
              **Intrinsic
                Value**
              **as
                of December 31,**
              **2006**January 16,
                2006
            
            
            300,000
            
            $
            0.38
            
            $
            0.38
            
            $
            182,045February 10,
                2006
            
            
            40,000
            
            $
            0.38
            
            $
            0.38
            
            $
            24,272March 30,
                2006
            
            
            60,000
            
            $
            0.38
            
            $
            0.50
            
            $
            —July 31,
                2006
            
            
            742,000
            
            $
            0.95
            
            $
            0.95
            
            $
            27,317December 15,
                2006
            
            
            120,000
            
            $
            1.13
            
            $
            1.01
            
            $
            —





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”)
      Practice Aid, *Valuation
      of Privately-Held-Company Equity Securities*  *Issued
      as Compensation*




50


*(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 years ended
      December 31, 2005 or 2004 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 Issued*  *to
      Other Than Employees for Acquiring, or in Conjunction With Selling, Goods
      or*  *Services”* .
      The
      Company granted stock options to purchase 526,400 shares of non-voting
      common stock during 2004 to non-employees, at an exercise price of $0.025 in
      consideration for services performed. At the time of the grants, these options
      had a fair value of $19,268 using the Black-Scholes option pricing model, based
      on the fair value of the Company’s non-voting common stock of $0.025 per
      share, an assumed volatility of 70%, risk-free interest rates ranging from
      2.94%
      to 4.65%, a weighted average expected life of five years, and a dividend rate of
      0.0%. All of these option grants were fully vested on the date of grant.
      Accordingly, the Company recognized a charge of $19,268 to general and
      administrative expense in the statements of operations for the year ended
      December 31, 2004 related to these grants.





The
      Company provides the disclosures as required by SFAS No. 148, *“Accounting*  *for
      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
      (loss) 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
      years
      ended December 31, 2005 and 2004.





Dividend
                yield
            0%Risk-free
                interest rate
            3.47%
                to 4.41%Expected
                life
            5 yearsVolatility
            0%




51


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




**2005**
            
            **2004**Net
                income available to common shareholders, as reported
            
            $
            1,040,051
            
            $
            1,055,752Deduct:
                total stock-based employee compensation expense determined under
                fair
                value based method for all awards, net of related taxeffects
            
            
            (7,499
            )
            
            (4,652
            )Net
                income available to common shareholders, pro forma
            
            $
            1,032,552
            
            $
            1,051,100**As
                Reported Per Share Amounts:**Basic
                net income per weighted average voting common share
            
            $
            0.02
            
            $
            0.02Basic
                net income per weighted average non-voting common share
            
            $
            0.02
            
            $
            0.02Diluted
                net income per weighted average common share
            
            $
            0.02
            
            $
            0.02**Pro-forma
                Per Share Amounts:**Pro-forma
                basic net income per weighted average voting common share
            
            $
            0.02
            
            $
            0.02Pro-forma
                basic net income per weighted average non-voting common
                share
            
            $
            0.02
            
            $
            0.02Pro-forma
                diluted net income per weighted average common share
            
            $
            0.02
            
            $
            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
      February 2006, the Financial Accounting Standards Board (“FASB”)
      issued
      SFAS No. 155, *“Accounting
      for Certain*  *Hybrid
      Financial Instruments”* which
      amends SFAS No. 133, *“Accounting
      for*  *Derivative
      Instruments and Hedging Activities”* ,
      and
      SFAS No. 140, *“Accounting*  *for
      Transfers and Servicing of Financial Assets and Extinguishment of
      Liabilities”.* SFAS No. 155 resolves issues addressed in SFAS No. 133
      Implementation Issue No. D1, Application of Statement 133 to
      Beneficial Interests in Securitized Financial Assets, among other matters,
      permits fair value remeasurement for any hybrid financial instrument that
      contains an embedded derivative that otherwise would require bifurcation.
      SFAS No. 155 is effective for all financial instruments acquired or
      issued after the beginning of an entity’s fiscal year that begins after
      September 15, 2006, except early adoption is allowed in certain
      circumstances. We expect to adopt SFAS No. 155 on January 1,
      2007.





In
      July
      2006, the FASB issued Interpretation No. 48, “ *Accounting
      for Uncertainty*  *in
      Income Taxes-an Interpretation of FASB Statement No. 109* ”,
      (“FIN 48”) which clarifies the accounting for uncertainty in tax positions.
      This Interpretation requires that the Company recognize in its financial
      statements, the impact of a tax position, if that position is more likely than
      not to be sustained on audit, based on the technical merits of the position.
      The
      provisions of FIN 48 are effective as of January 1, 2007. The Company
      is currently in the process of evaluating the effects of the adoption of
      FIN 48.





In
      September 2006, the FASB issued Statement of Financial Accounting Standard
      No.
      157, Fair Value Measurements (“SFAS 157”). SFAS 157 provides guidance for using
      fair value to measure assets and liabilities. The standard also responds to
      investors’ requests for more information about (1) the extent to which companies
      measure assets and liabilities at fair value, (2) the information used to
      measure fair value, and (3) the effect that fair-value measurements have on
      earnings. SFAS 157 will apply whenever another standard requires (or permits)
      assets or liabilities to be measured at fair value. The standard does not expand
      the use of fair value to any new circumstances. SFAS 157 is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years and will be in effect for the
      Company January 1, 2008. The Company is currently evaluating the potential
      impact that the adoption of SFAS 157 will have on its financial
      statements.





In
      September 2006, t he
      SEC
      staff issued Staff Accounting Bulletin No. 108, Considering the Effects of
      Prior
      Year Misstatements when Quantifying Misstatements in Current Year Financial
      Statements (SAB 108). SAB 108 was issued in order to eliminate the diversity
      in
      practice surrounding how public companies quantify financial statement
      misstatements. SAB 108 requires that registrants quantify errors using both
      a
      balance sheet and income statement approach and evaluate whether either approach
      results in a misstated amount that, when all relevant quantitative and
      qualitative factors are considered, is material. SAB 108 must be implemented
      by
      the end of the Company’s fiscal 2007. The Company is currently assessing the
      potential effect of SAB 108 on its financial statements.





52


**NOTE 3 —
      PROPERTY AND EQUIPMENT**





Property
      and equipment consists of the following:





**December 31,****2006**
            
            **2005**Leasehold
                improvements
            
            $
            16,751
            
            $
            —Equipment
            
            
            225,051
            
            
            190,826Furniture
                and fixtures
            
            
            194,552
            
            
            160,524436,354
            
            
            351,350Less
                accumulated depreciation:Leasehold
                improvements
            
            
            (1,339
            )
            
            —Equipment
            
            
            (150,583
            )
            
            (116,328
            )Furniture
                and fixtures
            
            
            (58,500
            )
            
            (31,938
            )(210,422
            )
            
            (148,266
            )Property
                and equipment, net
            
            $
            225,932
            
            $
            203,084





Depreciation
      expense for the years ended December 31, 2006, 2005 and 2004 was $62,156,
      $51,084 and $32,488, respectively. Property and equipment purchased under
      capital lease obligations during the years ended December 31, 2006 and 2005
      was $272,704 and $259,761, respectively. Accumulated depreciation for property
      and equipment purchased under capital lease was $137,758 and $91,828 at
      December 31, 2006 and 2005, respectively.





**NOTE 4 —
      LINE OF CREDIT**





The
      Company had a loan and security agreement (the “Agreement”) with a bank, which
      matured on December 14, 2005. The Agreement consisted of a committed
      revolving line of credit (the “Line”) of up to $500,000 and a security agreement
      with another party (the “Securing Party”), who is also an investor in the
      Company, who had agreed to provide an unconditional guarantee (the “Guarantee”)
      to the bank. The Company repaid the balance due under the Agreement of $500,000
      on November 7, 2005. The loan bore interest at the prime lending rate, plus
      1% and was payable monthly. Interest expense under the Agreement was
      approximately $30,000 and $29,000 for the years ended December 31, 2005 and
      2004, respectively.





The
      Company agreed to pay the Securing Party 2% interest per annum of any cash
      amounts that were used to secure the Line, as well as to issue the Securing
      Party 1.5 options for each $1.00 the Company drew down on the Line (see
      Note 6, “Series A Redeemable Convertible Preferred Stock”). The
      Company issued 750,000 options in conjunction with the Line during the year
      ended December 31, 2004. The options were accounted for at their estimated
      fair value of $11,214 and charged to interest expense in the year ended
      December 31, 2004 (see Note 7, “Common Stock”).





**NOTE 5 —
      DEBT**





***Subordinated
      Notes Payable***





Long-term
      debt consists of the following:





**December 31,****2006**
            
            **2005**Subordinated
                note payable to Massachusetts Capital Resource Company, bearing interest
                at 10% per annum net of unamortized discount of $252,000 related to
                warrants
            
            $
            —
            
            $
            1,748,000Total
                long-term debt
            
            
            —
            
            
            1,748,000Less:
                current portion
            
            
            —
            
            
            —$
            —
            
            $
            1,748,000





In
      November 2005, the Company received $2,000,000 in exchange for a subordinated
      note with the Massachusetts Capital Resource Company (“MCRC”), which bore
      interest at 10% per annum, and required quarterly interest payments
      beginning on December 31, 2005. The note also required quarterly principal
      payments of $125,000 beginning on September 30, 2009 through the maturity
      date of June 30, 2013 (hereinafter referred to as the “Subordinated Note”).





In
      connection with the Subordinated Note, the Company also issued to MCRC a warrant
      to purchase from the Company, at a purchase price per share of forty cents
      ($0.40), at any time before June 30, 2013, 3,000,000 fully paid and
      non-assessable shares of voting common stock of the Company, of which 600,000
      warrants vested upon issuance and 2,400,000 warrants were to vest by December
      31, 2006 if the Company did not consummate an initial underwritten public
      offering of its common stock with gross proceeds to the Company of at least
      $5,000,000 prior to December 31, 2006 (see Note 7 — Common Stock). The
      warrants provided for net share settlement.





53


In
      accordance with Accounting Principles Board No. 14, *“Accounting
      for*  *Convertible
      Debt and Debt Issued with Stock Purchase Warrants”* (“APB
      No. 14”), the Company allocated $256,200 to the warrants based on its
      relative fair value and has accounted for such warrants as additional paid-in
      capital with a corresponding discount on the Subordinated Note. The cost of
      the
      warrants was being amortized to interest expense over the expected life of
      the
      Subordinated Note and resulted in amortization expense of $252,000 and $4,200
      for the years ended December 31, 2006 and 2005, respectively. The discount
      on the Subordinated Note was fully amortized as of December 31,
      2006.





On
      December 4, 2006, the Company exercised its option to redeem the entire amount
      of principal and all accrued interest of the Subordinated Note without premium
      as a result of the completion of its initial public offering. In connection
      with
      the Note redemption, MCRC exercised warrants to purchase 600,000 shares of
      the
      Company’s common stock. The remaining warrants to purchase 2,400,000 shares of
      common stock did not vest and expired due to the successful consummation of
      the
      Company’s 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 Note was approximately $437,000 and $30,000,
      respectively.





***Third
      Party Note***





The
      Company entered into a note payable agreement on June 29, 2001 for the
      purchase of certain long-lived intangible assets from a third party, bearing
      interest at 10% per annum for a three year period with any unpaid principal
      and interest due on June 29, 2004. In June 2004, the third party forgave
      the principal balance due under the note plus accrued interest in exchange
      for a
      one-time payment. The net effect is the $1,062,775 included under the caption
      “other income (expense)” in the accompanying consolidated statement of
      operations. During the year ended December 31, 2004 approximately $46,000
      was charged to interest expense related to the third party note.





**NOTE 6 —
      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,
      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.





*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.





54


The
      Company has 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, 2006, 2005 and 2004 is as follows:





**Number
                of**
              **Shares**
            
            **Redemption**
              **Value**Balance,
                December 31, 2003
            
            
            10,433,504
            
            $
            1,487,300Accretion
                of stock issuance costs
            
            
            —
            
            
            7,199Balance,
                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 stock into common stock
            
            
            (10,433,504
            )
            
            (1,507,997
            )Balance,
                December 31, 2006
            
            
            —
            
            $
            —





**NOTE 7 —
      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
      stock.





On
      November 16, 2006, the Company completed its initial public offering (listed
      on
      the Toronto Stock Exchange) 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 World Energy 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 shall have 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, 2006, 2005 and 2004, 76,511,741, 33,049,473 and
      33,724,819 shares of Voting Common Stock were issued and outstanding,
      respectively, while 6,792,135 and 6,552,135 shares of Non-Voting Common Stock
      were issued and outstanding as of December 31, 2005 and 2004, respectively.
      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 an initial public offering of the Company’s
      common stock.





***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.





55


During
      each of the three years in the period ended December 31, 2006, the Company
      and the Board had determined the fair value of the Series A Preferred
      Stock, 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 Company’s Board of Directors voted to retire
      700,346 shares of its treasury stock which had a cost of
      $164,453.





***Common
      Stock Warrants***





At
      December 31, 2006, the Company had warrants to purchase 2,000,814 shares of
      common stock at a weighted average price of $0.54. During 2004, 1,835,615 shares
      of Voting Common Stock was issued upon the exercise of warrants. During 2005,
      the Company issued warrants to purchase 3,000,000 shares of Voting Common
      Stock in connection with the Subordinated Note issued to 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 (see Note 5). 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.





On
      November 16, 2006 and December 5, 2006, the Company granted the underwriters
      of
      the initial public offering warrants to purchase up to 1,000,000 and 150,000
      shares of common stock, respectively at the initial public offering price.
      The
      warrants are exercisable at the 1-year anniversary of the warrants issuance
      (November 16,  2007
      and
      December 5, 2007, respectively) and expire 18 months from the date of the one
      year anniversary (May 15, 2009 and June 4, 2009, respectively). These warrants
      allow for net share settlement and certain of the holders of these warrants
      have
      piggy-back registration rights. The Company valued the warrants at $274,129
      and
      recorded them as a component of additional paid-in capital. The following table
      summarizes the Company’s warrant activity:





**Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**Warrants
                outstanding, December 31, 2003
            
            
            3,157,387
            
            $
            0.03Granted
            
            
            —
            
            $
            —Exercised
            
            
            (1,835,615
            )
            $
            0.03Canceled/expired
            
            
            —
            
            $
            —Warrants
                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
            
            
            2,000,814
            
            $
            0.54





The
      weighed average remaining contractual life of warrants outstanding is
      2.3 years and 6.1 years as of December 31, 2006 and 2005,
      respectively.





56


***Stock
      Options***





On
      May 9, 2003, the Company formally approved the adoption of the 2003 Stock
      Incentive Plan (the “2003 Plan”) and had reserved 15,000,000 shares for the
      grant of options to purchase shares of Non-Voting Common Stock. As of
      December 31, 2006, 4,363,029 shares of common stock were reserved under the
      2003
      Plan. On November 16, 2006 the Company adopted the 2006 Stock Incentive Plan
      (the “2006 Plan”) and reserved 4,738,161 shares of common stock for grant
      thereunder. No further grants are allowed under the 2003 Plan. A summary of
      option activity under the Plan is as follows:





**Shares**
            
            **Weighted
                Average**
              **Exercise
                Price**Outstanding
                at December 31, 2003
            
            
            9,752,800
            
            $
            0.025Granted
            
            
            1,916,400
            
            $
            0.025Canceled
            
            
            (452,865
            )
            $
            0.025Exercised
            
            
            (4,552,135
            )
            $
            0.025Outstanding
                at December 31, 2004
            
            
            6,664,200
            
            $
            0.025Granted
            
            
            440,000
            
            $
            0.240Canceled
            
            
            (1,392,500
            )
            $
            0.025Exercised
            
            
            (240,000
            )
            $
            0.025Outstanding
                at December 31, 2005
            
            
            5,471,700
            
            $
            0.042Granted
            
            
            1,262,000
            
            $
            0.790Canceled
            
            
            (60,000
            )
            $
            0.380Exercised
            
            
            (2,190,671
            )
            $
            0.026Outstanding
                at December 31, 2006
            
            
            4,483,029
            
            $
            0.260





A
      summary
      of options outstanding and options exercisable as of December 31, 2006 is
      as follows:





**Options
                Outstanding**
            
            **Options
                Exercisable****Weighted****Average**
            
            **Weighted**
            
            
            
            
            
            **Weighted****Remaining**
            
            **Average**
            
            **Aggregate**
            
            **Number**
            
            **Average**
            
            **Aggregate****Range
                of**
            
            
            
            **Contractual**
            
            **Exercise**
            
            **Intrinsic**
            
            **of
                Shares**
            
            **Exercise**
            
            **Intrinsic****Exercise
                Prices**
            
            **Options**
            
            **Life**
            
            **Price**
            
            **Value**
            
            **Exercisable**
            
            **Price**
            
            **Value**$0.025
            
            
            2,851,029
            
            
            3.85
                years
            
            $
            0.025
            
            $
            2,742,162
            
            
            2,665,171
            
            $
            0.025
            
            $
            2,563,402$0.240
            
            
            430,000
            
            
            5.22
                years
            
            
            0.240
            
            
            321,130
            
            
            182,500
            
            
            0.240
            
            
            136,294$0.380
            
            
            340,000
            
            
            6.05
                years
            
            
            0.380
            
            
            206,317
            
            
            —
            
            
            —
            
            
            —$0.950
            
            
            742,000
            
            
            6.58
                years
            
            
            0.950
            
            
            27,317
            
            
            —
            
            
            —
            
            
            —$0.950
            
            
            120,000
            
            
            6.96
                years
            
            
            1.130
            
            
            —
            
            
            —
            
            
            —
            
            
            —4,483,029
            
            
            4.68
                years
            
            $
            0.260
            
            $
            3,296,926
            
            
            2,847,671
            
            $
            0.039
            
            $
            2,699,696








The
      aggregate intrinsic value in the table above represents the total intrinsic
      value of our outstanding options and exercisable options as of December 31,
      2006. The aggregate intrinsic value of options exercised during the year ended
      December 31, 2006 was approximately $1,980,144.





As
      of
      December 31, 2005 4,481,700 shares of common stock under the 2003 Plan were
      exercisable at a weighted average exercise price of $0.03.




There
      were 9,101,190 shares reserved for issuance under these plans at
      December 31, 2006.





**NOTE 8 —
      RELATED PARTIES**





In
      2006,
      the Company entered into a consulting agreement with a board member to assist
      the Company in its research of potential equity financing. Costs incurred during
      the year ended December 31, 2006 were approximately $32,000 and were
      charged to general and administrative expense.





57


**NOTE 9 —
      INCOME TAXES**





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





**December 31,****2006**
            
            **2005**Depreciation
                and amortization
            
            $
            22,242
            
            $
            21,226Commission
                income
            
            
            (266,310
            )
            
            (40,068
            )Accruals &
                reserves
            
            
            155,263
            
            
            115,451Prepaids
            
            
            20,099
            
            
            35,271Net
                operating loss carryforwards
            
            
            1,769,489
            
            
            1,261,1831,700,723
            
            
            1,393,063Valuation
                allowance
            
            
            (639,063
            )
            
            (639,063
            )$
            1,061,720
            
            $
            754,000





The
      provision for income taxes is comprised of the following:





**Years
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Current
                income tax expense:Federal
            
            $
            —
            
            $
            —
            
            $
            —State
            
            
            —
            
            
            —
            
            
            ——
            
            
            —
            
            
            —Deferred
                income tax benefit:Federal
            
            
            (232,091
            )
            
            (588,120
            )
            
            —State
            
            
            (72,137
            )
            
            (165,880
            )
            
            —(304,228
            )
            
            (754,000
            )
            
            —Total
                income tax benefit
            
            $
            (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,****2003**
            
            **2005**
            
            **2004**Income
                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
            
            
            2.1
            %
            
            2.3
            %
            
            0.6
            %Change
                in valuation allowance
            
            
            (.0
            )%
            
            (270.0
            )%
            
            (40.9
            )%Other
            
            
            0.0
            %
            
            0.0
            %
            
            0.0
            %(38.1
            )%
            
            (227.4
            )%
            
            0.0
            %





As
      of
      December 31, 2006, the Company has federal and state net operating loss
      carryforwards of approximately $4,400,000 each, which begin to expire in 2007
      through 2022 for state and federal purposes, respectively. 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.





Pursuant
      to SFAS No. 109, management of the Company has evaluated the positive
      and negative evidence bearing upon the realizability of its deferred tax assets,
      which are comprised principally of net operating loss carryforwards, and other
      temporary differences. Management has determined at this time that it is more
      likely than not that the Company will recognize a portion of the benefits of
      its
      federal and state deferred tax assets based on estimates of expected future
      income. Accordingly, as of December 31, 2006 the Company has recognized
      approximately $1.1 million of deferred taxes. The Company has maintained a
      valuation allowance of approximately $639,000 has been established at
      December 31, 2006. During 2005 the Company released $754,000 of its
      valuation allowance. During 2004, the Company’s deferred tax assets decreased
      $430,707. The amount of the net deferred tax asset considered realizable at
      December 31, 2006 could be reduced or increased in the near term if
      estimates of future taxable income during the carryforward period
      change.





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.




The
      Company has approximately $235,000 of future tax
      deductions which, when realized, will be credited to additional paid-in
      capital.





58


**NOTE 10 —
      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%. In December 2004,
      the Company entered into an operating lease for its office space under a five
      year agreement, paid in installments due the beginning of each month and which
      expires in December 2009. Future aggregate minimum payments under capital and
      operating leases as of December 31, 2006 were as follows:





**Capital**
              **Leases**
            
            **Operating**
              **Leases**2007
            
            $
            66,277
            
            $
            123,0402008
            
            
            47,223
            
            
            96,9762009
            
            
            44,745
            
            
            100,8042010
            
            
            3,192
            
            
            —2011
            
            
            798
            
            
            —Total
                future minimum lease payments
            
            
            162,235
            
            $
            320,820Less:
                amounts representing interest
            
            
            18,132Present
                value of future minimum lease payments
            
            
            144,103Less:
                current portion
            
            
            56,259Capital
                lease obligation, net of current portion
            
            $
            87,844





The
      accompanying statement of operations for the years ended December 31, 2006,
      2005, and 2004 includes approximately $118,902, $78,800 and $40,300 of rent
      expense, respectively.





***Service
      Agreement***





On
      February 2, 2005, the Company entered into a two year 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 monthly payments of $600. The agreement expires on February 1,
      2008.




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 by the Company. Employee
      contributions vest immediately, while Company matching contributions vest over
      5
      years beginning in the second year of service. To date, the Company has not
      made
      any discretionary contributions to the 401(k) Plan.




59


**EXHIBIT
      INDEX**











Exhibit
            Description3
            .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)).10
            .19
            
            Solicitation,
                Offer and Award, dated August 18, 2006, between Government of the
                District of Columbia and World Energy****(incorporated
                by reference to Exhibit 10.19 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.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