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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-K
 þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended:December 31, 2006
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission
file number 001-16265
 
 LIME ENERGY CO.
  Delaware
    
    36-4197337(State or other jurisdiction of incorporation or
    
    (I.R.S. Employer Identification No.)organization)1280 Landmeier Road, Elk Grove Village, IL
    
    60007-2410(Address of principal executive offices)
    
    (Zip Code)
 Issuers telephone number (847) 437-1666
 Securities registered under Section 12(b) of the Exchange Act:
 Title of each class
    
    Name of each exchange on which registeredCommon Stock $0.0001 par value
    
    Over-the-counter market
 Securities registered under Section 12(g) of the Exchange Act:
  
 (Title of class)
 o þ
 o þ
 þ o
 o
  o o þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCEDOCUMENT DESCRIPTION
    
    10-K PARTPortions of the Registrants notice of annual meeting of
shareowners and proxy statement to be filed pursuant to
Regulation 14A within 120 days after Registrants fiscal year
end of December 31, 2006 are incorporated by reference into
Part II, Item 5 and Part III of this Report.
    
    II, ITEM 5 III




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TABLE OF CONTENTS
 PART I
    
    
    
    
    1Item 1.
    
    Description of Business
    
    
    1Item 1A.
    
    Risk Factors
    
    
    6Item 1B.
    
    Unresolved Staff Comments
    
    
    10Item 2.
    
    Properties
    
    
    10Item 3.
    
    Legal Proceedings
    
    
    11Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    11PART II
    
    
    
    
    12Item 5.
    
    Market for Common Equity and Related Stockholder Matters
    
    
    12Item 6.
    
    Selected Financial Data
    
    
    15Item 7.
    
    Management's Discussion and Analysis or Plan of Operation
    
    
    16Item 8.
    
    Financial Statements and Supplemental Data
    
    
    31Item 9
    
    Change in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    31Item 9A.
    
    Controls and Procedures
    
    
    32Item 9B.
    
    Other Information
    
    
    32PART III
    
    
    
    
    33Item 10.
    
    Directors, Executive Officers of the Registrant and Corporate Governance
    
    
    33Item 11.
    
    Executive Compensation
    
    
    33Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    33Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    33Item 14.
    
    Principal Accountant Fees and Services
    
    
    33PART IV
    
    
    
    
    34Item 15.
    
    Exhibits and Financial Statement Schedules
    
    
    34SIGNATURES
    
    
    
    
    39Specimen Stock CertificateList of SubsidiariesConsent of Independent Registered Public Accounting Firm302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer




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PART I
 
 Item 1. Description of Business
   Overview/History
     1




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2




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Products And Services
  eMAC & uMAC
     3




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Energy Services
   Marketing, Sales and Distribution
  Customers
  Competition
  4




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Manufacturing
     Compliance With Environmental Laws
  5




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Research and Development
  Intellectual Property
  Employees
  
 Item 1A. Risk Factors
  Risks Related to Our Business
 We have incurred significant operating losses since inception and may not achieve or sustain
profitability in the future.
  6




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Failure to effectively market our energy management products and services could impair our
ability to sell significant quantities of these products and services.
  If our products and services do not achieve or sustain market acceptance, our ability to
compete will be adversely affected.
  Failure to replace a significant customer could materially and adversely affect our results
of operations and financial condition.
  A decrease in electric retail rates could lessen demand for our products.
  7




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If we are not able to protect our intellectual property rights against infringement, or if
others obtain intellectual property rights relating to energy management technology, we
could lose our competitive advantage in the energy management market.
   If we are unable to achieve or manage our growth, it will adversely affect our business, the
quality of our products and services, and our ability to attract and retain key personnel.
  
    
    further develop and improve our operating, information, accounting, financial
and other internal systems and controls on a timely basis;
    
    improve our business development, marketing and sales capabilities; and
    
    expand, train, motivate and manage our employee base.
  If our management fails to properly identify companies to acquire and to effectively
negotiate the terms of these acquisition transactions, our growth may be impaired.
  8




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
    
    our inability to interest such companies in a proposed transaction;
    
    our inability to agree on the terms of an acquisition;
    
    incompatibility between our management and management of a target company; and
    
    our inability to obtain the approval of the holders of our common stock, if required.
  Our growth may be impaired and our current business may suffer if we do not successfully
address risks associated with acquisitions.
  
    
    difficulties in integrating acquired operations and products with our existing
operations and products;
    
    difficulties in meeting operating expectations for acquired businesses;
    
    diversion of managements attention from other business concerns;
    
    adverse impact on earnings of amortization or write-offs of goodwill and other
intangible assets relating to acquisitions; and
    
    issuances of equity securities that may be dilutive to existing stockholders to
pay for acquisitions.
  If sufficient additional funding is not available to us, the commercialization of our
products and services and our ability to grow is likely to be hindered.
  9




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Raising additional capital or consummation of additional acquisitions through the issuance
of equity or equity-linked securities could dilute your ownership interest in us.
  
 Item 1B.
Unresolved Staff Comments
  
 Item 2. Properties
      10




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Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
   11




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PART II
 
 Item 5. Market for Common Equity and Related Stockholder Matters
    Common StockHigh
    
    LowFiscal Year Ended December 31, 2004:Fiscal Quarter Ended March 31, 2004
    
    $
    37.05
    
    
    $
    25.50Fiscal Quarter Ended June 30, 2004
    
    $
    31.20
    
    
    $
    23.25Fiscal Quarter Ended September 30, 2004
    
    $
    28.95
    
    
    $
    16.65Fiscal Quarter Ended December 31, 2004
    
    $
    21.30
    
    
    $
    15.75Fiscal Year Ended December 31, 2005:Fiscal Quarter Ended March 31, 2005
    
    $
    19.50
    
    
    $
    12.90Fiscal Quarter Ended June 30, 2005
    
    $
    16.05
    
    
    $
    12.15Fiscal Quarter Ended September 30, 2005
    
    $
    18.60
    
    
    $
    10.05Fiscal Quarter Ended December 31, 2005
    
    $
    13.65
    
    
    $
    7.50Fiscal Year Ended December 31, 2006:Fiscal Quarter Ended March 31, 2006
    
    $
    16.80
    
    
    $
    8.40Fiscal Quarter Ended June 30, 2006
    
    $
    10.20
    
    
    $
    0.70Fiscal Quarter Ended September 30, 2006
    
    $
    1.40
    
    
    $
    0.75Fiscal Quarter Ended December 31, 2006
    
    $
    1.29
    
    
    $
    0.76
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Holders
  Dividends
    Recent Sales of Unregistered Securities
  
    
    During the first three months of 2006, two holders of our Series E Convertible Preferred
Stock converted a total of 7,130 shares of Series E Convertible Preferred Stock into 47,533
shares of common stock.
    
    Effective March 31, 2006, we received 14,194 shares of our common stock as part of the
sale of our Great Lakes Controlled Energy Corporation subsidiary to Messrs. Eugene Borucki
and Denis Enberg. These shares have been returned to the status of authorized, unissued
shares of common stock.
    
    On June 29, 2006 we entered into a Securities Purchase Agreement and issued to 17
investors, including 10 existing holders of our Series E Convertible Stock, for an
aggregate purchase price of $17,875,000, 17,875,000 shares of our common stock (the PIPE
Transaction). We used $2.72 million of the proceeds to fund the cash consideration for
the acquisition of Parke P.A.N.D.A. Corporation; approximately $5.6 million to prepay two
convertible secured term loans and related prepayment penalties and accrued interest owed
to Laurus Master Fund Ltd.; $400,000 to pay off Parkes line of credit and $90,079 for
transaction related costs. The balance of the gross proceeds of approximately $9 million
has been and will be used for working capital and other general corporate purposes, except
that $1,250,000 was used to pay the cash portion of the acquisition price for Kapadia
Consulting, Inc. in September 2006, as described in Note 5 to our financial statements.
    
    Concurrently with the closing of the PIPE Transaction pursuant to the Securities
Purchase Agreement described above, the holders of all of our outstanding Series E
Preferred Stock converted such shares into 21,648,346 shares of our common stock. The
Series E Preferred Stock as originally issued was convertible at $15.00 per share. The
outstanding Series E shares prior to the PIPE Transaction were convertible into 1,574,027
shares of our common stock, however, the Series E contained antidilution provisions which
automatically reduced the conversion price of the Series E to the $1.00 per share issuance
price of common stock in the PIPE Transaction. This adjustment in the conversion price
resulted in 20,074,319 additional shares being issued upon conversion of the Series E.
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
    
    A number of our common stock warrants, all but one of which are held by former holders
of our Series E Convertible Preferred Stock (the exception is a warrant held by an
affiliate of a former holder of Series E Preferred), contain antidilution provisions that
automatically adjust the exercise price on the warrants to the issuance price of any
security convertible into our common stock if the price is less than the exercise price on
the holders warrant. Prior to the PIPE Transaction, the exercise price on these warrants
ranged from $13.50 per share to $15.00 per share (adjusted for the reverse split). The
issuance of common stock in the PIPE Transaction caused the exercise price on these
warrants to automatically be reduced to $1.00 per share.
    
    Immediately following completion of the PIPE Transaction and prepayment of the Laurus
term loans, Laurus elected to convert the entire outstanding balance on its revolving line
of credit, along with accrued interest thereon, into 950,865 shares of our common stock.
In addition, in consideration of our issuance of 392,596 shares of common stock, Laurus
agreed to (i) waive the payment of liquidated damages due as a result of our failure to
register shares of common stock into which the November 2005 $5 million term loan was
convertible, and (ii) terminate the requirement that we pay it a portion of the cash flows
generated by VNPP projects for a period of 5 years following the repayment of the November
2005 $5 million convertible term loan.
    
    On June 30, 2006, we issued 5,000,000 shares to the Parke Family Trust as part of the
consideration in the acquisition of Parke P.A.N.D.A. Corporation.
    
    During the first six months of 2006, our Board of Directors declared dividends payable
on our Series E Convertible Preferred Stock of $698,000. The dividends were paid with 6,980
additional shares of Series E Convertible Preferred Stock.
    
    On July 25, 2006, we issued a three year warrant to purchase 60,000 shares of our common
stock at $1.00 per share to Bristol Capital, Ltd. as consideration for services.
    
    On September 26, 2006, we issued 500,000 shares of our common stock to Pradeep and Susan
Kapadia as part of the consideration in the acquisition of Kapadia Consulting, Inc.
    
    The sales and issuances of common stock, debt instruments and warrants to purchase
common stock in private placements listed above were made by us in reliance upon the
exemptions from registration provided under Sections 4(2) and 4(6) of the Securities Act of
1933, as amended, and Rule 506 of Regulation D, promulgated by the SEC under federal
securities laws and comparable exemptions for sales to accredited investors under state
securities laws. The offers and sales were made to accredited investors as defined in Rule
501(a) under the Securities Act and no general solicitation was made by us or any person
acting on our behalf; the securities sold were subject to transfer restrictions, and the
certificates for those shares contained an appropriate legend stating that they had not
been registered under the Securities Act and may not be offered or sold absent registration
unless sale is pursuant to an exemption therefrom.
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Item 6. Selected Financial Data
  LIME ENERGY CO. AND SUBSIDIARIES
Selected Financial Data
 Year ended December 31,2006 (1)
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002 (2)Statement of Operations Data:Revenue
    
    $
    8,143,624
    
    
    $
    3,693,429
    
    
    $
    733,630
    
    
    $
    2,280,532
    
    
    $
    3,627,113Cost of sales
    
    
    6,931,294
    
    
    
    3,691,854
    
    
    
    862,366
    
    
    
    1,945,554
    
    
    
    3,273,150Gross profit
    
    
    1,212,330
    
    
    
    1,575
    
    
    
    (128,736
    )
    
    
    334,978
    
    
    
    353,963Selling, general and administrative
    
    
    12,165,700
    
    
    
    5,363,503
    
    
    
    4,234,240
    
    
    
    3,921,121
    
    
    
    5,464,950Amortization of intangibles
    
    
    1,210,006
    
    
    
    471,765
    
    
    
    
    
    
    
    
    
    
    
    Impairment loss
    
    
    1,183,525
    
    
    
    242,830
    
    
    
    
    
    
    
    
    
    
    
    108,000Operating loss
    
    
    (13,346,901
    )
    
    
    (6,076,523
    )
    
    
    (4,362,976
    )
    
    
    (3,586,143
    )
    
    
    (5,218,987
    )Other income (expense)
    
    
    (3,079,188
    )
    
    
    (544,253
    )
    
    
    (626,049
    )
    
    
    (354,941
    )
    
    
    (32,920
    )Loss from continuing operations
    
    
    (16,426,089
    )
    
    
    (6,620,776
    )
    
    
    (4,989,025
    )
    
    
    (3,941,084
    )
    
    
    (5,251,907
    )Loss from discontinued operations
    
    
    (21,425
    )
    
    
    (251,962
    )
    
    
    (170,337
    )
    
    
    (1,540,858
    )
    
    
    (1,756,020
    )Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,103,872
    )Net loss
    
    
    (16,447,514
    )
    
    
    (6,872,738
    )
    
    
    (5,159,362
    )
    
    
    (5,481,942
    )
    
    
    (11,111,799
    )Basic and diluted loss per common share
from continuing operations (3)
    
    $
    (1.52
    )
    
    $
    (2.65
    )
    
    $
    (3.62
    )
    
    $
    (3.90
    )
    
    $
    (4.50
    )Basic and diluted loss per common share
(3)
    
    
    (1.52
    )
    
    
    (2.73
    )
    
    
    (3.68
    )
    
    
    (4.58
    )
    
    
    (7.32
    )Weighted average common shares
outstanding (3)
    
    
    26,908,608
    
    
    
    3,190,664
    
    
    
    2,660,092
    
    
    
    2,250,766
    
    
    
    2,080,878Balance Sheet Data:Cash and cash equivalents
    
    $
    4,663,618
    
    
    $
    4,229,150
    
    
    $
    1,789,808
    
    
    $
    2,467,023
    
    
    $
    1,555,904Working capital
    
    
    3,606,419
    
    
    
    646,483
    
    
    
    263,304
    
    
    
    2,050,157
    
    
    
    3,546,270Total assets
    
    
    25,396,865
    
    
    
    17,098,974
    
    
    
    6,479,320
    
    
    
    7,353,627
    
    
    
    8,908,551Long-term debt, including current portion
    
    
    567,091
    
    
    
    4,980,032
    
    
    
    1,230,353
    
    
    
    1,348,645
    
    
    
    1,089,791Total stockholders equity
    
    
    18,184,756
    
    
    
    4,377,637
    
    
    
    1,780,271
    
    
    
    3,040,932
    
    
    
    4,284,291
 
 (1)
    
    Effective January, 1, 2006, we adopted SFAS 123(R) which requires companies to
record stock compensation expense for equity-based awards granted, including stock options and
restricted stock unit grants, over the service period of the equity-based award based on the
fair value of the award at the date of grant. During 2006, the we recognized $4,828,955 of
stock compensation expense.(2)
    
    In the year ended December 31, 2002, we adopted FAS 142 Goodwill and Other Intangible
Assets, which required us to test our intangible assets for possible impairment. As a result
of this testing we determined the goodwill associated with the Power Management segment was
impaired and recorded a write-down of the asset in the amount of $4,103,872, which was
reported as a cumulative effect of accounting change in 2002.(3)
    
    During 2006 the Company effected a 1 for 15 reverse split of its common stock. The weighted
average common shares outstanding and the earnings per share values have all been adjusted to
reflect the reverse split. 15




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Item 7. Managements Discussion and Analysis or Plan of Operation
  Critical Accounting Policies and Estimates
  Use of Estimates
  Revenue Recognition
   16




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Profit Recognition on Long-Term Contracts
  Allowance for Doubtful Accounts
  Impairment of Long-Lived Assets.
   Goodwill
  17




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Stock-based Compensation
  Material Trends and Uncertainties
   Decision to Discontinue the Active Marketing of the EnergySaver.
 18




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Results of Operations
      
    
    direct labor and commission costs related to our employee sales force;
    
    expenses related to our non-manufacturing management, supervisory and staff
salaries and employee benefits, including the costs of share based compensation;
    
    commission costs related to our independent sales representatives and our
distributors;
    
    costs related to insurance, travel and entertainment and office supplies and the
cost of non-manufacturing utilities;
    
    costs related to marketing and advertising our products;
    
    legal and accounting expenses;
    
    research and development expenses;
    
    costs related to administrative functions that serve to support the existing
businesses of the Company, as well as to provide the infrastructure for future
growth.
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Twelve-Month Period Ended December 31, 2006 Compared With the Twelve-Month Period Ended December
31, 2005
 Revenue.
 Gross Profit.
 SG&A Expenses and Amortization of Intangibles.
 20




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Impairment Loss.
 Other Non-Operating Income (Expense).
 Twelve months ended December 31,
    
    2006
    
    2005Contractual interest
    
    $
    364,239
    
    
    $
    277,577Amortization of deferred issuance costs
and debt discount
    
    
    1,175,970
    
    
    
    165,413Value of warrant
    
    
    
    
    
    
    160,000Value of adjustment in conversion price
    
    
    950,865
    
    
    
    Prepayment penalties
    
    
    516,071
    
    
    
    Termination of post re-payment interest
obligation
    
    
    266,225
    
    
    
    Total Interest Expense
    
    $
    3,273,370
    
    
    $
    602,990
  21




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Preferred Stock Dividends .
 Year ended December 31,
    
    2006
    
    2005Accrual of Series E Convertible Preferred
dividend
    
    $
    698,000
    
    
    $
    1,366,900Deemed dividend associated with change in
conversion price of the Series E Convertible
Preferred Stock
    
    
    23,085,467
    
    
    
    Deemed dividend associated with change in the
exercise price of warrants to purchase shares
of common stock
    
    
    564,258
    
    
    
    484,445Total
    
    $
    24,347,725
    
    
    $
    1,851,345
    22




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Twelve-Month Period Ended December 31, 2005 Compared With the Twelve-Month Period Ended December
31, 2004
 Revenue.
 Gross Profit.
 SG&A Expenses and Amortization of Intangibles.
 Impairment Loss.
 23




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Other Non-Operating Income (Expense).
 Twelve months ended December 31,
    
    2005
    
    2004Contractual interest
    
    $
    277,577
    
    
    $
    74,117Amortization of deferred issuance costs
and debt discount
    
    
    165,413
    
    
    
    574,437Value of warrant
    
    
    160,000
    
    
    
    Total Interest Expense
    
    $
    602,990
    
    
    $
    648,554
   24




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Preferred Stock Dividends.
 Year ended December 31,
    
    2005
    
    2004Accrual of dividend on Series A Convertible
Preferred
    
    $
    
    
    
    $
    540,705Accrual of Series C Preferred dividend
    
    
    
    
    
    
    53,206Accrual of Series D Preferred dividend
    
    
    
    
    
    
    35,932Accrual of Series E Preferred dividend
    
    
    1,366,900
    
    
    
    1,006,937Deemed dividend associated with beneficial
conversion price on shares issuable in
satisfaction preferred dividends
    
    
    
    
    
    
    1,127,021Deemed dividend associated with the redemption
and exchange of outstanding preferred stock
    
    
    
    
    
    
    1,860,458Deemed dividend associated with change in the
expiration date of warrants to purchase shares
of preferred stock
    
    
    
    
    
    
    15,000Deemed dividend associated with change in the
exercise price of warrants to purchase shares
of common stock
    
    
    484,455
    
    
    
    Total
    
    $
    1,851,345
    
    
    $
    4,639,259
   25




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Liquidity and Capital Resources
    26




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Year ended December 31
    
    2006
    
 
    2005
    
 
    2004Net cash used in operating activities
    
    $
    (6,248,085
    )
    
    $
    (6,956,642
    )
    
    $
    (4,039,058
    )Net cash used in investing activities
    
    
    (4,264,930
    )
    
    
    (2,181,846
    )
    
    
    (149,603
    )Net cash provided by financing activities
    
    
    10,947,483
    
    
    
    11,577,830
    
    
    
    3,511,446Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    434,468
    
    
    
    2,439,342
    
    
    
    (677,215
    )Cash and Cash Equivalents, at beginning of period
    
    
    4,229,150
    
    
    
    1,789,808
    
    
    
    2,467,023Cash and Cash Equivalents, at end of period
    
    $
    4,663,618
    
    
    $
    4,229,150
    
    
    $
    1,789,808
 2006 Compared to 2005
  Operating Activities
   Investing Activities
  27




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Financing Activities
  2005 Compared to 2004
  Operating Activities
  Investing Activities
  Financing Activities
  28




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LIQUIDITY
     
    
    Focus on increasing the sales of our products and services. During 2006 we were
able to increase our revenue by 120% and we saw our gross margin increase from $1,575 to
$1,780,907 (excluding the write-off of obsolete inventory). Although the increase in our
gross margin was more than offset by increases in SG&A, much of this increase in SG&A was
the result of non-cash charges (share based compensation and amortization of intangibles)
or expenses we do not expect to recur (asset write-offs, registration penalties, legal and
accounting costs). We believe that we have the infrastructure in place to support revenue
of two to three times what we achieved in 2006, without the need to significantly increase
our SG&A expense in 2007. If we can achieve this, we believe we will significantly reduce
or eliminate the cash consumed for operating activities, before changes in working capital.
We have taken several important steps toward increasing our revenue, starting with the
acquisitions of Parke and Kapadia. Dan Parke, our new President and COO, is an experienced
manager who has spent the last six months focused on integrating and training our sales and
marketing staff. We have increased the number of people involved in sales and marketing
from 9 at the end of last year to 23 currently, all but five of which
 29




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##### Table of Contents



are new. We have also invested a great deal of time and money in training these sales
people how to sell our products. We believe the sales we recorded in the fourth quarter of
2006 indicate that some of these efforts are beginning to have their desired affect.
    
    Expand our sales through internal product development, acquisitions and/or opening
new offices. We believe there are opportunities for further growth through geographic
and product line expansion. We can expand geographically by opening new offices, hiring
additional sales people and/or by acquiring established businesses in regions of the
country we do not currently serve. We can add to our product line through internal product
development, partnerships, joint ventures, licensing agreements and/or by acquiring
business with products, services and/or expertise that we do not currently have. An
expanded product line would allow us to offer additional energy solutions to our customers,
thereby increasing the value of each customer relationship. During 2006 we decided to
invest in research and development to enhance the capabilities of the eMAC with the
objective of addressing needs that we see in the market, thereby creating new opportunities
for selling the product.
    
    Aggressively manage our costs in order to conserve cash. The prudent use of the
capital resources available to us remains one of our top priorities. We are constantly
reviewing our operations looking for more efficient ways to achieve our objectives.
   Contractual Obligations
  Payments due by periodLess than
    
    
    1 to 3
    
    
    3 to 5
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsLong-term debt (1)
    
    $
    572,382
    
    
    $
    48,128
    
    
    $
    506,896
    
    
    $
    13,886
    
    
    $
    3,472Capital leases
    
    
    373
    
    
    
    373
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    422,438
    
    
    
    140,803
    
    
    
    228,321
    
    
    
    53,314
    
    
    
    Employment agreements
    
    
    2,187,500
    
    
    
    1,290,000
    
    
    
    897,500
    
    
    
    
    
    
    
    Total
    
    $
    3,182,693
    
    
    $
    1,479,304
    
    
    $
    1,632,717
    
    
    $
    67,200
    
    
    $
    3,472
 
 (1)
    
    Excludes floating rate interest on the long-term debt. Interest payments required during
2007, based on current interest rates are projected to be $47,000. 30




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##### Table of Contents



Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement
No. 109
 Item 7A. Quantitative and Qualitative Disclosures
 1 2
 
 Item 8. Financial Statements and Supplemental Data
  F-1
    
    Report of Independent Registered Public Accounting FirmF-2 - F-3
    
    Consolidated Balance Sheets as of December 31, 2006 and December 31, 2005F-4
    
    Consolidated Statements of Operations for the years ended December 31, 2006,
2005 and 2004F-5
    
    Statements of Stockholders Equity for the years ended December 31, 2006, 2005
and 2004F-6 - F-8
    
    Statements of Consolidated Cash Flows for the years ended December 31,
2006, 2005 and 2004F-9 - F-48
    
    Notes to Consolidated Financial StatementsF-49
    
    Schedule II, Valuation and Qualifying Accounts
 
 Item 9
    
    Change in and Disagreements with Accountants on
Accounting and Financial Disclosure
  31




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##### Table of Contents



Item 9A. Controls and Procedures
 (a)
    
    Explanation of disclosure controls and procedures.Our chief executive officer
and chief financial officer, after evaluating the effectiveness of the Companys
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934 (the Exchange Act)) as of the end of the period
covered by this report, have concluded that our disclosure controls and procedures were
effective.(b)
    
    Changes in internal controls.During the fourth quarter of 2006 there were no
changes in the Companys internal controls or in other factors which materially
affected or are reasonably likely to materially affect our internal controls over
financial reporting.
 
 Item 9B.
Other Information
  32




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##### Table of Contents



PART III
  
 Item 10. Directors, Executive Officers of the Registrant and Corporate Governance
  
 Item 11. Executive Compensation
  
 Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
   
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accountant Fees and Services
  33




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##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 (a)(1)
    
    Financial StatementsThe information required by this item is included in Item 8 of Part II of this report.(a)(2)
    
    Financial Statement ScheduleThe information required by this item is included in Item 8 of Part II of this report.(a)(3)
    
    ExhibitsSee Item 15(b) below.
 (b) Exhibits
 ExhibitNumber
    
    Description of Exhibit2.01 (12)
    
    Agreement and Plan of Merger, dated as of April 29, 2005, by and among Electric City
Corp., MPG Acquisition Corporation, and Maximum Performance Group, Inc.2.02 (20)
    
    Agreement and Plan of Merger, dated as of May 19, 2006, by and among Electric City
Corp., Parke Acquisition LLC, and Parke P.A.N.D.A. Corporation2.03 (25)
    
    Agreement and Plan of Merger dated September 26, 2006 by and among Lime Energy Co.,
Kapadia Acquisition, Inc., Kapadia Consulting, Inc., and Pradeep Kapadia.3.01 (1)
    
    Certificate of Incorporation3.02 (1)
    
    By-laws3.03 (4)
    
    Certificate of Amendment to Certificate of Incorporation dated August 30, 2001.3.04 (4)
    
    Bylaws, as amended3.05 (5)
    
    Certificate of Amendment to Certificate of Incorporation, dated July 31, 2002.3.06 (9)
    
    Charter of Audit Committee, as restated.3.07 (9)
    
    Charter of Governance and Nominating Committee3.08 (17)
    
    Certificate of Amendment to Certificate of Incorporation, dated May 4, 2005.3.09 (24)
    
    Certificate of Ownership and Merger Merging Lime Energy Subsidiary Company into
Electric City Corp.3.10 (27)
    
    Certificate of Amendment to Certificate of Incorporation, dated January 23, 20074.01(2)
    
    Specimen Stock Certificate4.02 (3)
    
    2001 Stock Incentive Plan4.03 (7)
    
    Certificate Of Designations, Preferences And Relative, Participating, Optional And
Other Special Rights Of Preferred Stock And Qualifications, Limitations
And Restrictions Thereof Of Series E Convertible Preferred Stock Of Electric City Corp.
 34




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit4.04 (7)
    
    Amended and Restated Investor Rights Agreement, dated as of March 19, 2004 made by and
among Electric City Corp. and Newcourt Capital USA Inc., CIT Capital Securities, Inc.,
Morgan Stanley Dean Witter Equity Funding, Inc., Originators Investment Plan, L.P.,
Cinergy Ventures II, LLC, Leaf Mountain Company, LLC, SF Capital Partners, Ltd.,
Richard Kiphart, David P. Asplund, John Thomas Hurvis Revocable Trust, John Donohue,
Augustine Fund, LP, And Technology Transformation Venture Fund, LP4.07 (10)
    
    Amended and Restated Directors Stock Option Plan4.08 (11)
    
    Form of Common Stock Warrant Used to Pay Certain Vendors4.09 (11)
    
    Form of Common Stock Warrant (with Cashless Exercise Provision) Used to Pay Certain
Vendors4.10 (12)
    
    Form of Common Stock Warrant, With Vesting Period issued April 28, 20054.11 (12)
    
    Form of Common Stock Warrant, Without Vesting Period issued April 28, 20054.12 (12)
    
    Stock Trading Agreement dated as of April 29, 20054.13 (13)
    
    Warrant Certificate dated November 22, 2005 to Purchase 2,000,000 shares of common
stock Par Value $0.0001 Per Share, of Electric City Corp. issued to Laurus Master
Fund, Ltd.4.14 (13)
    
    Registration Rights Agreement dated November 22, 2005 by and between Electric City
Corp. and Laurus Master Fund, Ltd.4.15 (19)
    
    Amendment to 2001 Stock Incentive Plan4.16 (22)
    
    Employee Stock Option Agreement dated July 11, 2006 between Electric City Corp. and
David Asplund4.17 (22)
    
    Employee Stock Option Agreement dated July 11, 2006 between Electric City Corp. and
Daniel Parke4.18 (22)
    
    Employee Stock Option Agreement dated July 11, 2006 between Electric City Corp. and
Jeffrey Mistarz4.19 (22)
    
    Employee Stock Option Agreement dated July 11, 2006 between Electric City Corp. and
Leonard Pisano4.20 (23)
    
    Employee Option Agreement dated August 15, 2006 between Electric City Corp. and
Jeffrey Mistarz10.01 (1)
    
    Sales, Distribution and Patent License Agreement, dated January 1, 1998, by and
between Giorgio Reverberi and Joseph C. Marino10.02 (1)
    
    Sublicense Agreement, dated June 24, 1998, by and between the Electric City Corp. and
Joseph C. Marino10.03 (6)
    
    Common Stock Purchase Warrant dated September 11, 2003 issued by Electric City Corp.
in favor of Laurus Master Fund, Ltd.10.04 (6)
    
    Form of Secured Convertible Revolving Note dated September 11, 2003, made by Electric
City Corp. in favor of Laurus Master Fund, Ltd.10.05 (14)
    
    Third Amended and Restated Mortgage, Assignment of Rents and Security Agreement dated
December 13, 2005 by Electric City Corp. and American Chartered Bank.10.06 (14)
    
    Amended and Restated Mortgage Note made and entered into on the 13th day of December
2005, by and among American Chartered Bank and Electric City Corp., and Great Lakes
Controlled Energy Corporation.10.07 (17)
    
    Employment Agreement, dated as of May 3, 2005, between the Company and Leonard Pisano
 35




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit10.08 (15)
    
    Consulting agreement with John Mitola dated January 21, 200610.09 (16)
    
    Employment Agreement, dated as of January 23, 2006, between the Company and David
Asplund10.10 (18)
    
    Stock Purchase Agreement dated as of April 3, 2006 between Electric City Corp., Eugene
Borcuki and Denis Enberg10.11 (18)
    
    Non-Competition, Non-Disclosure And Non-Solicitation Agreement Dated as of March 31,
2006 between Electric City Corp. and Eugene Borucki10.12 (18)
    
    Non-Competition, Non-Disclosure And Non-Solicitation Agreement Dated as of March 31,
2006 between Electric City Corp. and Denis Enberg10.13 (21)
    
    Securities Purchase Agreement dated June 29, 200610.14 (23)
    
    Employment Agreement, dated as of August 9, 2006, between the Company and Jeffrey
Mistarz10.15 (26)
    
    Fourth Modification to Mortgage, Assignment of Rents and Security Agreement dated
December 28, 2006 by Electric City Corp. and American Chartered Bank.10.16 (26)
    
    Second Amended and Restated Mortgage Note made and entered into on the 28th day of
December 2006, by and among American Chartered Bank and Electric City Corp., and Great
Lakes Controlled Energy Corporation.10.17 (28)
    
    Agreement with The Parke Family Trust dated February 1, 200710.18 (28)
    
    Agreement with the PIPE Transaction investors dated February 1, 200710.19 (28)
    
    Agreement with David Asplund dated November 3, 200610.20 (28)
    
    Agreement with Richard Kiphart dated November 2, 200610.21 (28)
    
    Agreement with David Valentine dated November 2, 200614.1 (8)
    
    Code of Ethics For Chief Executive Officer And Chief Financial Officer of Electric
City Corp.14.2(17)
    
    Code of Business Conduct And Ethics (All Officers, Directors and Employees)21 *
    
    List of subsidiaries23.01*
    
    Consent of BDO Seidman LLP with respect to the consolidated financial statements of
Electric City Corp.24
    
    Power of Attorney (included on signature page hereto)
 
 *
    
    Filed herewith(1)
    
    Incorporated herein by reference to Electric City Corp.s registration statement on Form
10SB filed on September 9, 1999 (No. 000-2791).(2)
    
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-A
filed with the SEC on December 8, 2000 (No. 0-2791).(3)
    
    Incorporated herein by reference to the Companys definitive Proxy Statement for the
2000 Annual Meeting of Stockholders, filed August 14, 2001 (No. 0-2791)(4)
    
    Incorporated herein by reference to Electric City Corps Annual Report on Form10-KSB
for the year ended December 31, 2001, filed April 15, 2002 (No. 0-2791). 36




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##### Table of Contents



(5)
    
    Incorporated herein by reference to Electric City Corps Annual Report on Form10-KSB
for the year ended December 31, 2002, filed March 31, 2003 (No. 0-2791).(6)
    
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K
dated September 11, 2003 filed with the SEC on September 16, 2003 (No. 0-2791).(7)
    
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K
dated March 19, 2004 filed with the SEC on March 23, 2004 (No. 0-2791).(8)
    
    Incorporated herein by reference to Electric City Corps Annual Report on Form10-KSB
for the year ended December 31, 2003, filed March 29, 2004 (No. 0-2791).(9)
    
    Incorporated herein by reference to the Companys definitive Proxy Statement for the
2004 Annual Meeting of Stockholders, filed April 30, 2004 (No. 0-2791)(10)
    
    Incorporated herein by reference to Electric City Corps Quarterly Report on Form
10-Q for the period ended March 31, 2004, filed with the SEC on May 13, 2004 (No. 0-2791).(11)
    
    Incorporated herein by reference to Electric City Corps Annual Report on Form10-K
for the year ended December 31, 2004, filed March 31, 2005, as amended April 14, 2005 (No.
0-2791).(12)
    
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K
dated April 28, 2005 filed with the SEC on May 4, 2005 (No. 0-2791).(13)
    
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K
dated November 22, 2005 filed with the SEC on November 30, 2005, as amended on February 9,
2006 (No. 0-2791).(14)
    
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K
dated December 13, 2005 filed with the SEC on December 15, 2005 (No. 0-2791).(15)
    
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K
dated January 22, 2006 filed with the SEC on January 26, 2006 (No. 0-2791).(16)
    
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K
dated January 22, 2006 filed with the SEC on February 22, 2006 (No. 0-2791).(17)
    
    Incorporated herein by reference to Electric City Corps Annual Report on Form10-K
for the year ended December 31, 2005, filed March 21, 2006 (No. 0-2791).(18)
    
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K
dated April 3, 2006 filed with the SEC on April 7, 2006 (No. 0-2791).(19)
    
    Incorporated herein by reference to Electric City Corps Proxy Statement on Form 14A
filed with the SEC on April 28, 2006 (No 0-2791).(20)
    
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K
dated May 19, 2006 filed with the SEC on May 22, 2006 (No. 0-2791).(21)
    
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K
dated June 29, 2006 filed with the SEC on July 6, 2006 (No. 0-2791).(22)
    
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K
dated July 11, 2006 filed with the SEC on July 17, 2006 (No. 0-2791).(23)
    
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K
dated August 15, 2006 filed with the SEC on August 18, 2006 (No. 0-2791).(24)
    
    Incorporated herein by reference to Lime Energy Co.s Current Report on Form 8-K
dated September 13, 2006 filed with the SEC on September 15, 2006 (No. 0-2791).(25)
    
    Incorporated herein by reference to Lime Energy Co.s Current Report on Form 8-K
dated September 26, 2006 filed with the SEC on September 29, 2006 (No. 0-2791). 37




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##### Table of Contents



(26)
    
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K
dated December 28, 2006 filed with the SEC on December 29, 2006 (No. 0-2791).(27)
    
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K
dated January 22, 2007 filed with the SEC on January 24, 2007 (No. 0-2791).(28)
    
    Incorporated herein by reference to Electric City Corps Current Report on Form 8-K
dated January 24, 2007 filed with the SEC on February 21, 2007 (No. 0-2791). 
 38




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##### Table of Contents



SIGNATURES
  LIME ENERGY CO.By:
    
    /s/ David R. AsplundDavid R. AsplundChief Executive Officer
   Signature
    
    
    
    Date/s/ David R. Asplund
    
    
    
    April 2, 2007David R. AsplundChief Executive Officer & Director (principal executive officer)/s/ Jeffrey R. Mistarz
    
    
    
    April 2, 2007Jeffrey R. MistarzChief Financial Officer (principal financial and accounting officer)
 39




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##### Table of Contents



POWER OF ATTORNEY
   Signature
    
    Title
    
    Date/s/ David Asplund
    
    Chief Executive Officer & Director
    
    April 2, 2007David Asplund/s/ Daniel Parke
    
    President, Chief Operating Officer
& Director
    
    April 2, 2007Daniel Parke/s/ Jeffrey Mistarz
    
    Chief Financial Officer & Treasurer
    
    April 2, 2007Jeffrey Mistarz/s/ Richard Kiphart
    
    Chairman of the Board
    
    April 2, 2007Richard Kiphart/s/ Gregory Barnum
    
    Director
    
    April 2, 2007Gregory Barnum/s/ William Carey
    
    Director
    
    April 2, 2007William Carey/s/ Joseph Desmond
    
    Director
    
    April 2, 2007Joseph Desmond/s/ Gerald Pientka

Gerald Pientka
    
    Director
    
    April 2, 2007/s/ David Valentine
    
    Director
    
    April 2, 2007David Valentine
 40




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
      Chicago, Illinois
    
    /s/ BDO SEIDMAN, LLPMarch 30, 2007
 F-1




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##### Table of Contents



Lime Energy Co.
Consolidated Balance Sheets
 December 31,
    
    2006
    
    
    2005AssetsCurrent AssetsCash and cash equivalents
    
    $
    4,663,618
    
    
    $
    4,229,150Accounts receivable, less allowance for doubtful accounts of
$366,000 and $325,000 at December 31, 2006 and 2005,
respectively
    
    
    2,825,947
    
    
    
    1,747,019Inventories (Note 7)
    
    
    614,491
    
    
    
    1,457,789Advances to suppliers
    
    
    132,083
    
    
    
    324,677Costs and estimated earnings in excess of billings on
uncompleted contracts
    
    
    
    
    
    
    28,462Prepaid expenses and other
    
    
    279,017
    
    
    
    207,480Total Current Assets
    
    
    8,515,156
    
    
    
    7,994,577Net Property and Equipment(Note 8)
    
    
    1,201,008
    
    
    
    2,514,196Long Term Receivables
    
    
    102,904
    
    
    
    Deferred Financing Costs,net of amortization of $680,100 at
December 31, 2005 (Note 14)
    
    
    
    
    
    
    299,964Intangibles,net of amortization of $1,681,771 and $471,765 at
December 31, 2006 and 2005, respectively (Notes 4 and Note 9)
    
    
    5,126,829
    
    
    
    1,960,835Cost in Excess of Assets Acquired
    
    
    10,450,968
    
    
    
    4,329,402$
    25,396,865
    
    
    $
    17,098,974
 F-2




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##### Table of Contents



Lime Energy Co.
Consolidated Balance Sheets
 December 31,
    
    2006
    
    
    2005Liabilities and Stockholders EquityCurrent LiabilitiesLine of credit (Note 13)
    
    $
    
    
    
    $
    2,000,000Notes payable (Note 15)
    
    
    150,000
    
    
    
    150,000Current maturities of long-term debt (Notes 14 and 16)
    
    
    46,699
    
    
    
    651,313Accounts payable
    
    
    1,344,725
    
    
    
    913,369Accrued expenses (Note 11)
    
    
    1,251,777
    
    
    
    1,228,765Deferred revenue
    
    
    967,446
    
    
    
    984,728Customer deposits
    
    
    1,148,090
    
    
    
    1,419,919Total Current Liabilities
    
    
    4,908,737
    
    
    
    7,348,094Deferred Revenue
    
    
    748,980
    
    
    
    1,044,524Long-Term Debt,less current maturities net of unamortized
discount of $0 and $898,409 as of December 31, 2006
and 2005, respectively (Notes 14 and 16)
    
    
    520,392
    
    
    
    4,328,719Deferred Tax Liability
    
    
    1,034,000
    
    
    
    Total Liabilities
    
    
    7,212,109
    
    
    
    12,721,337Commitments(Note 18 and 20)Stockholders Equity(Notes 21, 22, 23, 24 and 25)Preferred stock, $.01 par value; 5,000,000 shares authorized,
Series E 0 and 236,254 issued and outstanding as of
December 31, 2006 and December 31, 2005, respectively
(liquidation value of $0 and $47,250,800 at December 31, 2006
and December 31, 2005, respectively)
    
    
    
    
    
    
    2,363Common stock, $.0001 par value; 200,000,000 shares authorized,
49,786,611 and 3,386,465 issued as of December 31, 2006
and December 31, 2005, respectively
    
    
    4,979
    
    
    
    339Additional paid-in capital
    
    
    95,025,912
    
    
    
    64,773,556Accumulated deficit
    
    
    (76,846,135
    )
    
    
    (60,398,621
    )Total Stockholders Equity
    
    
    18,184,756
    
    
    
    4,377,637$
    25,396,865
    
    
    $
    17,098,974
 See accompanying notes to consolidated financial statements.
 F-3




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##### Table of Contents



Lime Energy Co.
Consolidated Statements of Operations
 Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,2006
    
    
    December 31,2005
    
    
    December 31,2004Revenue
    
    $
    8,143,624
    
    
    $
    3,693,429
    
    
    $
    733,630Cost of sales (includes reserve for obsolete inventory of
$578,442 and $35,078 in the years ended December 31, 2006
and 2005)
    
    
    6,931,294
    
    
    
    3,691,854
    
    
    
    862,366Gross
profit (loss)
    
    
    1,212,330
    
    
    
    1,575
    
    
    
    (128,736
    )Selling, general and administrative (includes share based
compensation expense of $4,532,001, $0 and $0 for the
years ended December 31, 2006, 2005 and 2004,
respectively)
    
    
    12,165,700
    
    
    
    5,363,503
    
    
    
    4,234,240Amortization
of intangibles (Note 9)
    
    
    1,210,006
    
    
    
    471,765
    
    
    
    Impairment
loss (Note 10)
    
    
    1,183,525
    
    
    
    242,830
    
    
    
    Operating loss
    
    
    (13,346,901
    )
    
    
    (6,076,523
    )
    
    
    (4,362,976
    )Other
Income (Expense)Interest income
    
    
    194,182
    
    
    
    58,737
    
    
    
    22,505Interest
expense (Notes 13, 14 and 17)
    
    
    (3,273,370
    )
    
    
    (602,990
    )
    
    
    (648,554
    )Total other
income (expense)
    
    
    (3,079,188
    )
    
    
    (544,253
    )
    
    
    (626,049
    )Loss from continuing operations before discontinued operations
    
    
    (16,426,089
    )
    
    
    (6,620,776
    )
    
    
    (4,989,025
    )Discontinued Operations:Loss from operation of discontinued business
    
    
    (21,425
    )
    
    
    (251,962
    )
    
    
    (170,337
    )Net Loss
    
    
    (16,447,514
    )
    
    
    (6,872,738
    )
    
    
    (5,159,362
    )Preferred
Stock Dividends(Note 24)
    
    
    (24,347,725
    )
    
    
    (1,851,345
    )
    
    
    (4,639,259
    )Net Loss Available to Common Shareholders
    
    $
    (40,795,239
    )
    
    $
    (8,724,083
    )
    
    $
    (9,798,621
    )Basic and diluted loss per common share from
continuing operations
    
    $
    (1.52
    )
    
    $
    (2.65
    )
    
    $
    (3.62
    )Discontinued operations
    
    
    0.00
    
    
    
    (0.08
    )
    
    
    (0.06
    )Basic and Diluted Loss Per Common Share
    
    $
    (1.52
    )
    
    $
    (2.73
    )
    
    $
    (3.68
    )Weighted
Average Common Shares Outstanding (Note 25)
    
    
    26,908,608
    
    
    
    3,190,664
    
    
    
    2,660,092
 See accompanying notes to consolidated financial statements.
 F-4




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##### Table of Contents



Lime Energy Co.
Consolidated Statements of Stockholders Equity
 TotalSeries A
    
    
    Series A
    
    
    Series C
    
    
    Series C
    
    
    Series D
    
    
    Series D
    
    
    Series E
    
    
    Series E
    
    
    Additional
    
    
    Accumu-
    
    
    Stock-Common
    
    
    Common
    
    
    Preferred
    
    
    Preferred
    
    
    Preferred
    
    
    Preferred
    
    
    Preferred
    
    
    Preferred
    
    
    Preferred
    
    
    Preferred
    
    
    Paid-in
    
    
    lated
    
    
    holdersShares
    
    
    Stock
    
    
    Shares
    
    
    Stock
    
    
    Shares
    
    
    Stock
    
    
    Shares
    
    
    Stock
    
    
    Shares
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    EquityBalance,December 31, 2003
    
    
    2,289,468
    
    
    $
    229
    
    
    
    2,396,590
    
    
    $
    23,966
    
    
    
    233,614
    
    
    $
    2,336
    
    
    
    157,769
    
    
    $
    1,578
    
    
    
    
    
    
    $
    
    
    
    $
    51,379,344
    
    
    $
    (48,366,521
    )
    
    $
    3,040,932Issuance of common stock (net of offering costs of
$910,393)
    
    
    333,333
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,089,574
    
    
    
    
    
    
    
    10,089,607Conversion of preferred stock
    
    
    130,447
    
    
    
    13
    
    
    
    (145,000
    )
    
    
    (1,450
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,067
    )
    
    
    (51
    )
    
    
    1,488
    
    
    
    
    
    
    
    Redemption of preferred stock
    
    
    
    
    
    
    
    
    
    
    (514,375
    )
    
    
    (5,144
    )
    
    
    
    
    
    
    
    
    
    
    (24,087
    )
    
    
    (241
    )
    
    
    
    
    
    
    
    
    
    
    (6,994,621
    )
    
    
    
    
    
    
    (7,000,006
    )Exchange of preferred stock
    
    
    
    
    
    
    
    
    
    
    (1,737,215
    )
    
    
    (17,372
    )
    
    
    (233,614
    )
    
    
    (2,336
    )
    
    
    (133,682
    )
    
    
    (1,337
    )
    
    
    210,451
    
    
    
    2,105
    
    
    
    18,940
    
    
    
    
    
    
    
    Cumulative dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,636,780
    )
    
    
    
    
    
    
    (1,636,780
    )Satisfaction of accrued dividends through the issuance
of preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,368
    
    
    
    164
    
    
    
    1,636,616
    
    
    
    
    
    
    
    1,636,780Conversion of term note
    
    
    8,667
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    275,599
    
    
    
    
    
    
    
    275,600Exercise of warrants (net of offering costs of $24,000)
    
    
    12,333
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000
    
    
    
    30
    
    
    
    460,969
    
    
    
    
    
    
    
    461,000Warrants issued for services received
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72,500
    
    
    
    
    
    
    
    72,500Other
    
    
    (74
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss for the year ended December 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,159,362
    )
    
    
    (5,159,362
    )Balance,December 31, 2004
    
    
    2,774,174
    
    
    $
    277
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    224,752
    
    
    $
    2,248
    
    
    $
    55,303,629
    
    
    $
    (53,525,883
    )
    
    $
    1,780,271Issuance of common stock (net of offering costs of
$211,787)
    
    
    416,666
    
    
    
    42
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,413,171
    
    
    
    
    
    
    
    5,413,213Conversion of preferred stock
    
    
    14,446
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,167
    )
    
    
    (22
    )
    
    
    20
    
    
    
    
    
    
    
    Acquisition of Maximum Performance Group, Inc.
    
    
    166,148
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,691,591
    
    
    
    
    
    
    
    2,691,607Cumulative dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,366,900
    )
    
    
    
    
    
    
    (1,366,900
    )Satisfaction of accrued dividends through the issuance
of preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,669
    
    
    
    137
    
    
    
    1,366,763
    
    
    
    
    
    
    
    1,366,900Warrants issued in connection with convertible debt
issuance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    920,000
    
    
    
    
    
    
    
    920,000Common stock issued for services received
    
    
    15,031
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,482
    
    
    
    
    
    
    
    125,484Warrants issued for services received
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    319,800
    
    
    
    
    
    
    
    319,800Net loss for the year ended December 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,872,738
    )
    
    
    (6,872,738
    )Balance,December 31, 2005
    
    
    3,386,465
    
    
    $
    339
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    236,254
    
    
    $
    2,363
    
    
    $
    64,773,556
    
    
    $
    (60,398,621
    )
    
    $
    4,377,637Issuance of common stock (net of offering costs of
$115,107)
    
    
    17,875,000
    
    
    
    1,787
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,758,107
    
    
    
    
    
    
    
    17,759,894Cumulative dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (698,000
    )
    
    
    
    
    
    
    (698,000
    )Satisfaction of accrued dividends through the issuance
of preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,980
    
    
    
    70
    
    
    
    697,930
    
    
    
    
    
    
    
    698,000Conversion of preferred stock
    
    
    21,695,879
    
    
    
    2,170
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (243,234
    )
    
    
    (2,433
    )
    
    
    263
    
    
    
    
    
    
    
    Sale of Great Lakes Controlled Energy Corporation
    
    
    (14,194
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (193,742
    )
    
    
    
    
    
    
    (193,743
    )Acquisition of Parke P.A.N.D.A. Corporation
    
    
    5,000,000
    
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,999,500
    
    
    
    
    
    
    
    5,000,000Acquisition of Kapadia Consulting, Inc.
    
    
    500,000
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    479,950
    
    
    
    
    
    
    
    480,000Conversion of revolver
    
    
    950,865
    
    
    
    95
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    951,882
    
    
    
    
    
    
    
    951,977Beneficial value of adjustment in revolver conversion price
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    950,865
    
    
    
    
    
    
    
    950,865Term loan liquidated damages satisfied through the
issuance of common stock
    
    
    161,096
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    185,244
    
    
    
    
    
    
    
    185,260Termination of post repayment interest obligation
    
    
    231,500
    
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    266,202
    
    
    
    
    
    
    
    266,225Warrants issued for services received
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,200
    
    
    
    
    
    
    
    25,200Share based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,828,955
    
    
    
    
    
    
    
    4,828,955Net loss for the year ended December 31, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,447,514
    )
    
    
    (16,447,514
    )Balance,December 31, 2006
    
    
    49,786,611
    
    
    $
    4,979
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    95,025,912
    
    
    $
    (76,846,135
    )
    
    $
    18,184,756
 See accompanying notes to consolidated financial statements.
 F-5




---



##### Table of Contents



Lime Energy Co.
Statements of Cash Flows
 Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004Cash Flows From Operating ActivitiesNet loss
    
    $
    (16,447,514
    )
    
    $
    (6,872,738
    )
    
    $
    (5,159,362
    )Adjustments to reconcile net loss to net cash used in
operating activities, net of assets acquired and disposed of:Provision for bad debts
    
    
    105,442
    
    
    
    96,872
    
    
    
    5,865Share based compensation
    
    
    4,828,955
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    1,386,597
    
    
    
    601,869
    
    
    
    58,878Amortization of deferred financing costs
    
    
    299,964
    
    
    
    93,774
    
    
    
    382,710Amortization of issuance discount
    
    
    898,409
    
    
    
    71,639
    
    
    
    191,727Liquidated damages satisfied through issuance of
common stock
    
    
    185,260
    
    
    
    
    
    
    
    Termination of post repayment interest and interest
converted to common stock
    
    
    274,747
    
    
    
    
    
    
    
    Beneficial value of adjustment in revolver conversion price
    
    
    950,865
    
    
    
    
    
    
    
    Issuance of shares and warrants in exchange for
services received
    
    
    25,200
    
    
    
    319,800
    
    
    
    72,500Accrued interest converted to common stock
    
    
    
    
    
    
    
    
    
    
    4,736Loss on disposal of fixed assets
    
    
    115,914
    
    
    
    11,743
    
    
    
    Asset impairment
    
    
    1,183,525
    
    
    
    
    
    
    
    Provision for inventory obsolescence
    
    
    568,558
    
    
    
    19,232
    
    
    
    Goodwill impairment
    
    
    
    
    
    
    242,830
    
    
    
    Changes in assets and liabilities, net of dispositionsAccounts receivable
    
    
    (279,822
    )
    
    
    (484,685
    )
    
    
    377,842Inventories
    
    
    519,491
    
    
    
    (121,254
    )
    
    
    (334,628
    )Advances to suppliers
    
    
    192,594
    
    
    
    148,012
    
    
    
    Other current assets
    
    
    72,537
    
    
    
    (81,604
    )
    
    
    (143,971
    )Accounts payable
    
    
    (359,331
    )
    
    
    (1,299,561
    )
    
    
    (14,401
    )Accrued liabilities
    
    
    (300,017
    )
    
    
    2,136
    
    
    
    26,101Deferred revenue
    
    
    (196,310
    )
    
    
    401,050
    
    
    
    4,112Customer deposits
    
    
    (273,149
    )
    
    
    (105,757
    )
    
    
    488,833Net cash used in operating activities
    
    
    (6,248,085
    )
    
    
    (6,956,642
    )
    
    
    (4,039,058
    )Cash Flows From Investing ActivitiesAcquisitions
(including acquisition costs), net of cash acquired
    
    
    (4,098,377
    )
    
    
    (1,632,972
    )
    
    
    Sale of discontinued operations
    
    
    (83,586
    )
    
    
    
    
    
    
    Purchase of property and equipment
    
    
    (82,967
    )
    
    
    (548,874
    )
    
    
    (149,603
    )Net cash
(used in) provided by investing activities
    
    
    (4,264,930
    )
    
    
    (2,181,846
    )
    
    
    (149,603
    )Cash Flows From Financing ActivitiesBorrowings
(payments) on line of credit
    
    
    (1,456,545
    )
    
    
    2,000,000
    
    
    
    Proceeds from long-term debt
    
    
    
    
    
    
    5,000,000
    
    
    
    Payments on long-term debt
    
    
    (5,355,865
    )
    
    
    (541,547
    )
    
    
    (39,155
    )Preferred stock redemption
    
    
    
    
    
    
    
    
    
    
    (7,000,006
    )Proceeds from issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    11,000,000Proceeds from issuance of common stock
    
    
    17,875,000
    
    
    
    5,625,000
    
    
    
    Costs related to stock issuances
    
    
    (115,107
    )
    
    
    (211,787
    )
    
    
    (910,393
    )Cash paid for deferred financing costs
    
    
    
    
    
    
    (293,836
    )
    
    
    Proceeds from exercise of warrants
    
    
    
    
    
    
    
    
    
    
    461,000Net cash provided by financing activities
    
    
    10,947,483
    
    
    
    11,577,830
    
    
    
    3,511,446Net
Increase (Decrease) in Cash and Cash Equivalents
    
    
    434,468
    
    
    
    2,439,342
    
    
    
    (677,215
    )Cash and Cash Equivalents, at beginning of period
    
    
    4,229,150
    
    
    
    1,789,808
    
    
    
    2,467,023Cash and Cash Equivalents, at end of period
    
    $
    4,663,618
    
    
    $
    4,229,150
    
    
    $
    1,789,808
 F-6




---



##### Table of Contents



Lime Energy Co.
Statements of Cash Flows
 Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004Supplemental Disclosures of Cash Flow InformationCash paid during the period for interest  continuing
Operations (including prepayment penalties)
    
    $
    911,000
    
    
    $
    214,200
    
    
    $
    82,400Cash paid during the period for interest  discontinued
operations
    
    
    0
    
    
    
    400
    
    
    
    600Stock, warrants and options issued in
exchange for services received
    
    
    25,200
    
    
    
    319,800
    
    
    
    72,500Accrual satisfied through the issuance of
common stock
    
    
    7,410
    
    
    
    
    
    
    
    4,736Inventory transferred to fixed assets (VNPP assets)
    
    
    
    
    
    
    
    
    
    
    762,243Satisfaction of accrued dividends on Series A Preferred
Stock through the issuance of 5,407 shares of Series E
Preferred stock during the year ended December 31, 2004
and 225,398 shares of Series A Preferred stock during
the year ended December 31, 2003
    
    
    
    
    
    
    
    
    
    
    540,705Satisfaction of accrued dividends on Series C Preferred
Stock through the issuance of 532 shares of Series E
Preferred stock during the year ended December 31, 2004
    
    
    
    
    
    
    
    
    
    
    53,206Satisfaction of accrued dividends on Series D Preferred
Stock through the issuance of 359 shares of Series E
Preferred stock during the year ended December 31, 2004
    
    
    
    
    
    
    
    
    
    
    35,932Satisfaction of accrued dividends on Series E Preferred
Stock through the issuance of 6,980, 13,669 and 10,070
shares of Series E Preferred stock during the years ended
December 31, 2006, 2005 and December 31, 2004,
respectively
    
    
    698,000
    
    
    
    1,366,900
    
    
    
    1,006,937Conversion of convertible debt to common stock
    
    $
    943,455
    
    
    $
    
    
    
    $
    270,864
     F-7




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##### Table of Contents



Lime Energy Co.
Statements of Cash Flows
 Supplemental Disclosures of Noncash Investing and Financing Activities:
  Cash
    
    $
    1,710Accounts receivable
    
    
    710,465Inventory
    
    
    142,789Other current assets
    
    
    7,088Property and equipment
    
    
    79,917Identifiable intangible assets
    
    
    3,247,000Cost in excess of assets acquired
    
    
    5,584,874Total assets acquired
    
    
    9,773,843Line of credit
    
    
    (400,000
    )Accounts payable
    
    
    (338,536
    )Accrued expenses
    
    
    (89,571
    )Notes payable
    
    
    (45,763
    )Other current liabilities
    
    
    (368
    )Deferred tax liability
    
    
    (1,034,000
    )Total liabilities assumed
    
    
    (1,908,238
    )Net assets acquired
    
    
    7,865,605Less valuation of shares issued for acquisition
    
    
    (5,000,000
    )Acquisition costs
    
    
    (145,605
    )Total cash paid
    
    $
    2,720,000
  Cash
    
    $
    47,329Accounts receivable
    
    
    574,160Inventory
    
    
    111,962Other current assets
    
    
    122,451Long term receivables
    
    
    17,713Property and equipment
    
    
    16,430Identifiable intangible assets
    
    
    1,129,000Cost in excess of assets acquired
    
    
    710,433Total assets acquired
    
    
    2,729,478Accounts payable
    
    
    (657,080
    )Accrued expenses
    
    
    (299,316
    )Other current liabilities
    
    
    (11,271
    )Total liabilities assumed
    
    
    (967,667
    )Net assets acquired
    
    
    1,761,811Less valuation of shares issued for acquisition
    
    
    (480,000
    )Acquisition costs
    
    
    (31,811
    )Total cash paid
    
    $
    1,250,000
 See accompanying notes to consolidated financial statements.
 F-8




---



##### Table of Contents



Note 1  Description of Business
  Note 2  Basis of Presentation
  Note 3  Name Change
  Note 4  Summary of Significant Accounting Policies
 Principles of Consolidation
  F-9




---



##### Table of Contents



Use of Estimates
  Cash and Cash Equivalents
  Concentration of Risk
    Allowance for Doubtful Accounts
  Inventories
  F-10




---



##### Table of Contents



Properties & Equipment
  Buildings
    
39
    yearsComputer equipment
    
    3
    yearsOffice equipment
    
3 - 5
    yearsFurniture
    
5 - 10
    yearsManufacturing equipment
    
3 - 5
    yearsTransportation equipment
    
3 - 5
    years
 Cost in Excess of Assets Acquired
   Deferred Financing Costs
  F-11




---



##### Table of Contents



Impairment of Long-Lived Assets
  Revenue Recognition
     Shipping and Handling Costs
  F-12




---



##### Table of Contents



Research and Development Costs
  Advertising, Marketing and Promotional Costs
  Income Taxes
  Net Loss Per Share
   December 31,
    
    2006
    
    
    2005
    
    
    2004Weighted average shares issuable
upon exercise of outstanding
options
    
    
    5,448,173
    
    
    
    781,358
    
    
    
    712,703Weighted average shares issuable
upon exercise of outstanding warrants
    
    
    1,097,481
    
    
    
    910,678
    
    
    
    733,594Weighted average shares issuable
upon conversion of preferred stock
    
    
    760,641
    
    
    
    1,519,209
    
    
    
    1,536,382Weighted average shares issuable
upon conversion of convertible
debt
    
    
    176,904
    
    
    
    157,225
    
    
    
    23,845Total
    
    
    7,483,199
    
    
    
    3,368,470
    
    
    
    3,006,524
 F-13




---



##### Table of Contents



Fair Value of Financial Instruments
  Stock-based Compensation
    Year ended December 31,
    
    2005
    
    
    2004Net Loss, as reported
    
    $
    (6,873,000
    )
    
    $
    (5,159,000
    )Deduct: Stock-based employee
compensation expense included
in reported net loss
    
    
    
    
    
    
    Add: Total stock-based employee
compensation expense
determined under fair value
based method for awards
    
    
    (774,000
    )
    
    
    (898,000
    )Pro forma net loss
    
    $
    (7,647,000
    )
    
    $
    (6,057,000
    )Net loss per share:Basic and diluted  as reported
    
    $
    (2.73
    )
    
    $
    (3.68
    )Basic and diluted  pro forma
    
    $
    (2.97
    )
    
    $
    (4.02
    )
 F-14




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##### Table of Contents



December 31,
    
    2005
    
    
    2004Risk-free interest rate
    
    
    2.27
    %
    
    
    1.04
    %Expected volatility
    
    
    65
    %
    
    
    72
    %Expected life (years)
    
    
    9.1
    
    
    
    9.1Expected dividend yield
    
    
    0
    %
    
    
    0
    %
  Warranty Obligations
  Insurance Reserves
  Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement
No. 109
 F-15




---



##### Table of Contents



Note 5  Acquisitions
     Accounts receivable
    
    $
    292,102Inventory
    
    
    326,122Advances to suppliers
    
    
    472,689Other current assets
    
    
    63,611Net property and equipment
    
    
    121,608Identifiable intangible assets
    
    
    2,432,600Goodwill
    
    
    4,155,660Total assets acquired
    
    
    7,864,392Accounts payable
    
    
    928,509Accrued expenses
    
    
    658,940Deferred revenue
    
    
    1,011,616Other current liabilities
    
    
    525,676Notes payable
    
    
    289,587Total liabilities acquired
    
    
    3,414,328Net assets acquired
    
    
    4,450,064
 F-16




---



##### Table of Contents



Less valuation of shares issued for
acquisition
    
    
    (2,691,607
    )Acquisition costs paid through the
issuance of common stock
    
    
    (125,485
    )Total cash paid, including acquisition
costs, net of cash acquired
    
    $
    1,632,972
  Estimated
    
    
    EstimatedAsset Class
    
    Value
    
    
    Useful LifeeMac technology and software
    
    $
    1,979,900
    
    
    
    4.0Customer relationships
    
    
    267,800
    
    
    
    9.7Customer contracts
    
    
    184,900
    
    
    
    1.0
     F-17




---



##### Table of Contents



Cash
    
    $
    1,710Accounts receivable
    
    
    710,465Inventory
    
    
    142,789Other current assets
    
    
    7,088Net property and equipment
    
    
    79,917Identifiable intangible assets
    
    
    3,247,000Goodwill
    
    
    5,584,874Line of credit
    
    
    400,000Accounts payable
    
    
    338,536Accrued expenses
    
    
    89,571Notes payable
    
    
    45,763Other current liabilities
    
    
    368Deferred tax liability
    
    
    1,034,000
  Estimated
    
    
    EstimatedAsset Class
    
    Value
    
    
    Useful LifeNon-compete agreement
    
    $
    336,000
    
    
    2 YearsCustomer contracts
    
    
    206,000
    
    
    1 monthSales pipeline
    
    
    53,000
    
    
    5 monthsTrade name
    
    
    2,652,000
    
    
    Indefinite
   F-18




---



##### Table of Contents



Cash
    
    $
    47,329Accounts receivable
    
    
    574,160Inventory
    
    
    111,962Other current assets
    
    
    122,451Long term receivables
    
    
    17,713Property and equipment
    
    
    16,430Identifiable intangible assets
    
    
    1,129,000Goodwill
    
    
    710,433Accounts payable
    
    
    657,079Accrued expenses
    
    
    299,316Other current liabilities
    
    
    11,271
  Estimated
    
    
    EstimatedAsset Class
    
    Value
    
    
    Useful LifeSales backlog
    
    $
    187,000
    
    
    6 MonthsSales pipeline
    
    
    708,000
    
    
    12 MonthsNon-compete agreement
    
    
    87,000
    
    
    2 YearsCustomer list
    
    
    147,000
    
    
    10 Years
  F-19




---



##### Table of Contents



Year ended December 31,
    
    2006
    
    
    
    2005
    
    
    2004Revenue:As Reported
    
    $
    8,143,624
    
    
    $
    3,693,429
    
    
    $
    733,630Pro-forma
    
    
    10,027,454
    
    
    
    7,298,786
    
    
    
    3,045,945Net Loss from Continuing Operations:As Reported
    
    $
    (16,426,089
    )
    
    $
    (6,620,776
    )
    
    $
    (4,989,025
    )Pro-forma
    
    
    (16,056,887
    )
    
    
    (8,360,207
    )
    
    
    (8,108,503
    )Basic and Diluted Loss per Share
from Continuing Operations:As Reported
    
    $
    (1.52
    )
    
    $
    (2.65
    )
    
    $
    (3.62
    )Pro-forma
    
    
    (1.26
    )
    
    
    (2.72
    )
    
    
    (4.33
    )
  Note 6  Discontinued Operations
   F-20




---



##### Table of Contents



Year ended December 31
    
    2006
    
    
    2005Accounts receivable
    
    $
    
    
    
    $
    439,456Other current assets
    
    
    
    
    
    
    45,287Total current assets
    
    
    
    
    
    
    484,743Net property plant and equipment
    
    
    
    
    
    
    16,028Total assets
    
    
    
    
    
    $
    500,771Accounts payable
    
    $
    
    
    
    $
    73,825Accrued expenses
    
    
    
    
    
    
    81,167Current portion of long term debt
    
    
    
    
    
    
    2,160Deferred revenue
    
    
    
    
    
    
    241,154Customer deposits
    
    
    
    
    
    
    50,000Total current liabilities
    
    
    
    
    
    
    448,306Total liabilities
    
    $
    
    
    
    $
    448,306
  Year ended December 31
    
    2006
    
    
    2005
    
    
    2004Revenue
    
    $
    485,787
    
    
    $
    1,161,343
    
    
    $
    1,679,005Net Loss
    
    
    (21,425
    )
    
    
    (251,962
    )
    
    
    (170,337
    )
 Note 7  Inventories
  December 31,
    
    2006
    
    
    2005Raw materials
    
    $
    1,010,995
    
    
    $
    948,045Work in process
    
    
    3,700
    
    
    
    Finished goods
    
    
    196,586
    
    
    
    537,957Reserve for obsolesce (1)
    
    
    (596,790
    )
    
    
    (28,232
    )$
    614,491
    
    
    $
    1,457,789
 (1)
    
    Includes $553,909 reserve for obsolete EnergySaver inventory. F-21




---



##### Table of Contents



Note 8  Property and Equipment
  December 31,
    
    2006
    
    
    2005Land
    
    $
    205,000
    
    
    $
    205,000Building
    
    
    997,381
    
    
    
    984,396Furniture
    
    
    82,946
    
    
    
    75,005Manufacturing equipment
    
    
    43,192
    
    
    
    47,169Office equipment
    
    
    342,906
    
    
    
    288,271Transportation equipment
    
    
    123,055
    
    
    
    95,516VNPP assets
    
    
    
    
    
    
    1,376,0051,794,480
    
    
    
    3,071,362Less accumulated depreciation
    
    
    593,472
    
    
    
    557,166$
    1,201,008
    
    
    $
    2,514,196
 Note 9  Goodwill and Other Intangible Assets
  BuildingControl and
    
    
    Energy
    
    
    EnergyAutomation
    
    
    Technology
    
    
    Services
    
    
    TotalBalance at January 1, 2005
    
    $
    416,573
    
    
    
    
    
    
    
    
    
    
    
    416,573Acquisition of Maximum
Performance Group, Inc.
    
    
    
    
    
    
    4,155,660
    
    
    
    
    
    
    
    4,155,660Impairment charge
    
    
    (242,831
    )
    
    
    
    
    
    
    
    
    
    
    (242,831
    )Balance at December 31, 2005
    
    $
    173,742
    
    
    $
    4,155,660
    
    
    $
    
    
    
    $
    4,329,402Sale of Great Lakes Controlled
Energy Corporation
    
    
    (173,742
    )
    
    
    
    
    
    
    
    
    
    
    (173,742
    )Acquisition of Parke P.A.N.D.A.
Corporation
    
    
    
    
    
    
    
    
    
    
    5,584,874
    
    
    
    5,584,874Acquisition of Kapadia Consulting,
Inc.
    
    
    
    
    
    
    
    
    
    
    710,433
    
    
    
    710,433Balance at December 31, 2006
    
    $
    
    
    
    $
    4,155,660
    
    
    $
    6,295,307
    
    
    $
    10,450,967
 F-22




---



##### Table of Contents



WeightedAverageRemainingLife
    
    
    Gross Book
    
    
    Accumulated
    
    
    Net Book(months)
    
    
    Value
    
    
    Amortization
    
    
    ValueAs of December 31, 2006Indefinite-lived assets
    
    
    
    
    
    $
    2,652,000
    
    
    $
    
    
    
    $
    2,652,000Amortized intangible assets:Technology and software
    
    
    14.5
    
    
    
    1,979,900
    
    
    
    824,958
    
    
    
    1,154,942Customer relationships
    
    
    64.6
    
    
    
    414,800
    
    
    
    47,538
    
    
    
    367,262Customer contracts
    
    
    2.0
    
    
    
    577,900
    
    
    
    484,400
    
    
    
    93,500Non-complete agreements
    
    
    9.8
    
    
    
    423,000
    
    
    
    94,875
    
    
    
    328,125Sales pipe-line
    
    
    5.0
    
    
    
    761,000
    
    
    
    230,000
    
    
    
    531,000Total
    
    
    
    
    
    $
    6,808,600
    
    
    $
    1,681,771
    
    
    $
    5,126,829As of December 31, 2005Indefinite-lived assets
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Amortized intangible assets:Technology and software
    
    
    26.5
    
    
    
    1,979,900
    
    
    
    329,983
    
    
    
    1,649,917Customer relationships
    
    
    53.7
    
    
    
    267,800
    
    
    
    18,515
    
    
    
    249,285Customer contracts
    
    
    2.5
    
    
    
    184,900
    
    
    
    123,267
    
    
    
    61,633Non-complete agreements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sales pipe-line
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    $
    2,432,,600
    
    
    $
    471,765
    
    
    $
    1,960,835
  AmortizationExpense2007
    
    $
    1,367,3692008
    
    
    650,6132009
    
    
    206,2772010
    
    
    41,2952011
    
    
    39,813$
    2,305,768
 F-23




---



##### Table of Contents



Note 10  Asset Impairment
     F-24




---



##### Table of Contents



Note 11  Accrued Expenses
  December 31,
    
    2006
    
    
    2005Commissions
    
    $
    56,590
    
    
    $
    124,736Compensation
    
    
    149,320
    
    
    
    133,463Contract labor
    
    
    37,634
    
    
    
    293,456Insurance
    
    
    47,866
    
    
    
    73,432Interest
    
    
    31,059
    
    
    
    71,216Inventory costs
    
    
    85,290
    
    
    
    Lease expense
    
    
    13,502
    
    
    
    55,191Legal
    
    
    47,408
    
    
    
    14,456Professional fees
    
    
    34,830
    
    
    
    26,328Real estate taxes
    
    
    41,689
    
    
    
    73,135Registration penalties
    
    
    345,583
    
    
    
    Royalties
    
    
    5,700
    
    
    
    12,900Sales tax payable
    
    
    35,050
    
    
    
    43,439Warranty reserve
    
    
    196,783
    
    
    
    228,331Other
    
    
    123,473
    
    
    
    78,682$
    1,251,777
    
    
    $
    1,228,765
 Note 12  Warranty Liability
  December 31,
    
    2006
    
    
    2005Balance, beginning of year
    
    $
    228,331
    
    
    $
    151,008Warranties issued
    
    
    54,790
    
    
    
    116,298Settlements
    
    
    (66,307
    )
    
    
    (38,975
    )Adjustments (1)
    
    
    (20,031
    )
    
    
    Balance, end of year
    
    $
    196,783
    
    
    $
    228,331
 
 (1)
    
    Reflects the sale of Great Lakes Controlled Energy Note 13  Line of Credit
  F-25




---



##### Table of Contents



Note 14  Convertible Term Loans
     F-26




---



##### Table of Contents



PaymentPrincipal
    
    $
    5,038,030Interest through the date of repayment
    
    
    40,568Prepayment penalties
    
    
    516,071Related fees
    
    
    6,749Total payment
    
    $
    5,601,418
   F-27




---



##### Table of Contents



Note 15  Notes Payable
  Note 16  Long Term Debt
  December 31,
    
    2006
    
    
    2005Mortgage note to American Chartered Bank, prime (8.25% as of
December 31, 2006) plus 1/2%, payable in monthly
installments of $3,000, plus interest until January 2008.
A final payment of $487,000 is due in February 2008.
This note is collateralized by the building and land.
    
    $
    526,000
    
    
    $
    562,000Convertible term note to Laurus Master Fund (less debt discount
of $7,768, as of December 31, 2005). Repaid in full on
June 29, 2006. (see Note 14)
    
    
    
    
    
    
    284,022Convertible term note to Laurus Master Fund (less debt discount
of $890,641 as of December 31, 2005). Repaid in full on
June 29, 2006. (see Note 14)
    
    
    
    
    
    
    4,109,359Various other notes
    
    
    41,091
    
    
    
    24,651Total debt
    
    
    567,091
    
    
    
    4,980,032Less current portion
    
    
    46,699
    
    
    
    651,313Total long-term debt
    
    $
    520,392
    
    
    $
    4,328,719
 F-28




---



##### Table of Contents



AggregateMaturities2007
    
    $
    46,6992008
    
    
    498,4842009
    
    
    5,8062010
    
    
    6,1582011
    
    
    6,5312112
    
    
    3,413$
    567,091
 Note 17  Interest Expense
  Year ended December 31
    
    2006
    
    
    2005
    
    
    2004Line of credit (Note 13)
    
    $
    50,344
    
    
    $
    138,097
    
    
    $
    Note payable (Note 15)
    
    
    16,563
    
    
    
    9,563
    
    
    
    Mortgage (Note 16)
    
    
    46,495
    
    
    
    39,181
    
    
    
    30,200Convertible term loans (Note 14)
    
    
    249,065
    
    
    
    87,709
    
    
    
    43,917Other
    
    
    1,772
    
    
    
    3,027
    
    
    
    Amortization of deferred issuance
costs and debt discount (Note 14)
    
    
    1,175,970
    
    
    
    165,413
    
    
    
    574,437Value of warrant issued to
Laurus (Note 23(i))
    
    
    
    
    
    
    160,000
    
    
    
    Prepayment penalty (Note 14)
    
    
    516,071
    
    
    
    
    
    
    
    Value of adjustment in conversion
price (Note 14)
    
    
    950,865
    
    
    
    
    
    
    
    Termination of post re-payment
interest obligation (Note 14)
    
    
    266,225
    
    
    
    
    
    
    
    Total Interest Expense
    
    
    3,273,370
    
    
    
    602,990
    
    
    
    648,554
 F-29




---



##### Table of Contents



Note 18  Lease Commitments
   Related
    
    
    UnrelatedYear ending December 31,
    
    Party
    
    
    Party
    
    
    Total2007
    
    $
    43,260
    
    
    $
    97,543
    
    
    $
    140,8032008
    
    
    44,558
    
    
    
    68,083
    
    
    
    112,6412009
    
    
    45,895
    
    
    
    69,785
    
    
    
    115,6802010
    
    
    
    
    
    
    53,314
    
    
    
    53,314Total
    
    $
    133,713
    
    
    $
    288,725
    
    
    $
    422,438
 Note 19  Income Taxes
  Year ended December 31
    
    2006
    
    
    2005
    
    
    2004DeferredFederal
    
    $
    (5,453,000
    )
    
    $
    (2,272,000
    )
    
    $
    (2,025,000
    )State
    
    
    (962,000
    )
    
    
    (401,000
    )
    
    
    (358,000
    )Change in valuation allowance
    
    
    6,415,000
    
    
    
    2,673,000
    
    
    
    2,383,000Benefit for income taxes
    
    $
    
    
    
    $
    
    
    
    $
    
  December 31
    
    2006
    
    
    2005Deferred tax asset consisting principally of net operating losses
    
    $
    28,368,000
    
    
    $
    22,454,000Deferred tax liabilities, principally related to non-deductible
identifiable intangible assets
    
    
    (2,000,000
    )
    
    
    (765,000
    )Less valuation allowance
    
    
    (27,402,000
    )
    
    
    (21,689,000
    )Total net deferred tax liability
    
    $
    (1,034,000
    )
    
    $
    
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##### Table of Contents



Year ended December 31,
    
    2006
    
    
    2005
    
    
    2004Income tax (benefit) at federal statutory rate
    
    $
    (5,592,000
    )
    
    $
    (2,337,000
    )
    
    $
    (1,754,000
    )State taxes (net of federal tax benefit)
    
    
    (823,000
    )
    
    
    (336,000
    )
    
    
    (258,000
    )Other nondeductible expenses
    
    
    
    
    
    
    
    
    
    
    34,000Other
    
    
    
    
    
    
    
    
    
    
    (404,000
    )Increase in valuation allowance
    
    
    6,415,000
    
    
    
    2,673,000
    
    
    
    2,382,000Income tax expense (benefit)
    
    $
    
    
    
    $
    
    
    
    $
    
  Note 20  Commitments and Contingencies
 a)
    
    Pursuant to the Consolidated Agreement dated January 8, 2001, among the Company, Giorgio
Reverberi (Reverberi), the owner of the patent relating to certain technologies used in the
EnergySaver, and Joseph Marino, former Chairman and CEO of Lime Energy (who assigned the
rights to the Company), the Company agreed to pay Reverberi a royalty of $200 for each
EnergySaver unit made by or for the Company and sold by the Company and Mr. Marino is also
paid a royalty of $100 for each unit sold by the Company. The term of the license granted to
the Company expires when the last of Reverberis patents expires, which the Company expect to
be in November, 2017. The license may be terminated by Reverberi if the Company materially
breaches its terms and fails to cure the breach within 180 days after Reverberi gives the
Company written notice of the breach. Approximately $37,200, $60,000 and $34,000 of expense
was incurred under the agreement
 F-31




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##### Table of Contents



for the years ended December 31, 2006, 2005 and 2004, respectively. The Company has accrued
$5,700 and $12,900 in royalties payable at December 31, 2006 and 2005, respectively.b)
    
    The Company entered into employment agreements with certain officers and employees expiring
in 2009. Total future commitments under these agreements are as follows:
 Year ending December 31,2007
    
    $
    1,290,0002008
    
    
    873,7502009
    
    
    23,750Total
    
    $
    2,187,500
 c)
    
    The Company is involved in certain litigation in the normal course of its business.
Management intends to vigorously defend these cases. In the opinion of management, the
litigation now pending will not have a material adverse affect on the consolidated financial
statements of the Company.
 Note 21  The June 2006 PIPE Transaction
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Note 22  The Series E Conversion
   Note 23  Equity Transactions
 2004 Transactions
 a)
    
    During fiscal 2004, holders of the Companys Series A Convertible Preferred Stock converted
145,000 shares of Series A into 96,667 shares of common stock. All shares of the Companys
Series A Convertible Preferred Stock were originally issued in private placements to
accredited investors pursuant to Regulation D which took place in 2001, or were subsequently
issued as dividends on outstanding shares of Series A Preferred.
 b)
    
    Also during 2004, holders of the Companys Series E Convertible Preferred Stock converted
5,067 shares of Series E Convertible Preferred Stock into 33,780 shares of common stock. All
shares of the Series E Convertible Preferred Stock were originally issued in a private
transactions described under c) below not involving a public offering, or were subsequently
issued as dividends on outstanding shares of Series E Preferred.
 c)
    
    On March 19, 2004, the Company entered into a securities purchase agreement with a group of
four mutual funds managed by Security Benefit Group, Inc. whereby it issued to such
purchasers, in exchange for $11,000,000 in gross proceeds, a package of securities that
included 333,333 shares of the Companys common stock and 5 year warrants to purchase 116,667
additional shares of common stock at $36.30 per share. The Company used $7,000,006 of the
proceeds to facilitate the Redemption and Exchange (described below). The balance of the
funds were used to pay transaction costs and for general corporate purposes.
 F-33




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##### Table of Contents



On March 22, 2004, the Company entered into a Redemption and Exchange Agreement with the holders
of its outstanding Series A Convertible Preferred Stock, Series C Convertible Preferred Stock
and Series D Convertible Preferred Stock (collectively, the Old Preferred Stock) under which
it redeemed 538,462 shares of the outstanding Old Preferred Stock which were convertible into
358,975 shares of common stock, at a redemption price equivalent to $19.50 per common share for
a total cost of $7,000,006, and exchanged 210,451 shares of its newly authorized Series E
Convertible Preferred Stock (the Series E Preferred) for the remaining 2,104,509 outstanding
shares of the Old Preferred Stock (the Exchange) on a 1 for 10 basis (one share of Series E
Preferred exchanged for 10 shares of Old Preferred Stock). All of the Old Preferred Stock has
been cancelled. As part of the Exchange, all outstanding warrants to purchase shares of Series
D Convertible Preferred Stock were exchanged for similar warrants to purchase shares of Series E
Preferred and the expiration date was changed from June 30, 2004 to December 31, 2004. Such
Series E warrants issued were exercisable for an aggregate of 3,750 shares of Series E Preferred
at a price of $100 per share. They replaced warrants exercisable for 37,500 shares of Series D
Preferred at an exercise price of $10 per share.Except as with respect to dividends, the Series E Preferred had substantially the same rights as
the shares of Old Preferred Stock that it replaced, including:
 
    
    special approval rights with respect to certain actions by the Company;
    
    a conversion price of $15.00 per share;
    
    the right to elect up to four directors;
    
    the right to vote with the holders of common stock on an as converted basis on all
matters on which holders of the Companys common stock are entitled to vote, except
with respect to the election of directors or as otherwise provided by law;
    
    a right of first offer on the sale of equity in a private transaction; and
    
    anti-dilution protection that would adjust the conversion price in the event that
the Company issued equity at a price which was less than the conversion price .
 The Series E Preferred accrued dividends at a rate of 6% (versus 10% for the Old Preferred) per
annum, which at the Companys option could be paid by issuing more shares of Series E Preferred.Fees and expenses related to the transactions totaled $910,393.d)
    
    During fiscal 2004, the Company received proceeds of $485,000 in connection with the exercise
of 12,333 common stock warrants and 3,000 Series E Convertible Preferred warrants. The
proceeds from the exercise of these warrants was used for general corporate purposes.e)
    
    During fiscal 2004, the Company issued warrants to purchase 8,000 shares of its common stock
at prices between $15.00 and $23.25 per share to consultants for services received. The
warrants were valued at $72,500 using a modified Black-Sholes option pricing model utilizing
the following assumptions: risk free rate of 1.607% to 2.772%, expected volatility of 42.5 to
53.6%, expected dividend of $0 and expected life of 2 to 3 years. The value of the warrants
was charged to operations during the period.f)
    
    During fiscal 2004, Laurus Master Fund Ltd. converted $270,864 of principal and $4,736 of
accrued interest on the Companys outstanding $1,000,000 Convertible Term Note (issued in
September, 2003) into 8,667 shares of the Companys common stock.
 F-34




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##### Table of Contents



g)
    
    During fiscal 2004, the Company satisfied the accrued dividend on its preferred stock of
$1,636,780 though the issuance of 16,368 shares of its Series E Preferred stock.
 2005 Transactions
 h)
    
    During 2005, two holders of the Companys Series E Convertible Preferred Stock converted
2,167 shares of Series E Convertible Preferred Stock into 14,447 shares of common stock.i)
    
    During 2005, the Company issued the following warrants:
 
    
    On February 10, 2005, Delano Group Securities, LLC received a five year warrant to
purchase 2,000 shares of common stock at $15.45 per share, pursuant to an agreement to
provide investment banking services. Delano Group Securities, LLC, was a company owned
by Mr. David Asplund, one of the Companys directors and effective January 23, 2006 the
Companys CEO. The warrant was valued at $13,200 using a modified Black-Sholes option
pricing model utilizing the following assumptions: risk free rate of 2.53%, expected
volatility of 45.3%, expected dividend of $0 and expected life of 5 years. The value
of the warrant was charged to operations during the period.
    
    M&A Railroad and Electric Supply, LLC received a three year warrant to purchase
6,667 shares of common stock at $16.95 per share to as part of a legal settlement.
This warrant was valued at $35,000 using a modified Black-Sholes option pricing model
utilizing the following assumptions: risk free rate of 2.767%, expected volatility of
45.0%, expected dividend of $0 and expected life of 3 years. Of the total warrant
value $33,000 was charged to operations during the forth quarter of 2004 and $2,000 was
charged to operations during the first quarter of 2005.
    
    On April 28, 2005, Laurus Master Fund, Ltd. received a warrant to purchase 26,667
shares of common stock in exchange for its consent to the Company entering into the
PIPE Transaction described under k) below and acquiring MPG, as well as waiving its
right to adjust the conversion price on the Companys convertible term note and
convertible revolving note. The warrant has an exercise price of $15.00 per share and
a term of five years. The warrant was valued at $160,000 using a modified Black-Sholes
option pricing model utilizing the following assumptions: risk free rate of 2.941%,
expected volatility of 43.7%, expected dividend of $0 and expected life of 5 years.
The value of the warrant was charged to interest expense during 2005.
    
    Various consultants received warrants to purchase 27,333 shares of the Companys
common stock with exercise prices between $15.00 and $15.45 per share and terms of
three to ten years. The warrants were valued collectively at $144,600 using a modified
Black-Sholes option pricing model utilizing the following assumptions (depending on the
warrant being valued): risk free rate of 2.366% to 3.029%, expected volatility of 40.7%
to 46.5%, an expected dividend of $0 and an expected life of 3 to 10 years. The values
of the warrants were charged to operations during the 2005.
 F-35




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##### Table of Contents



j)
    
    On April 28, 2005 the Company issued to five (5) institutional investors, for an aggregate
gross purchase price of $5,625,000, 416,667 shares of its common stock and 42 month warrants
to purchase 208,333 additional shares of common stock at $15.75 per share. Net proceeds from
the transaction were approximately $5,413,000, of which approximately $1,644,000 was used to
fund the acquisition of Maximum Performance Group, Inc. The balance of the proceeds were used
to pay transaction costs and for general corporate purposes.Delano Group Securities LLC and Mr. David Valentine acted as advisors on the transaction. The
Company paid Delano Group Securities LLC $16,250 and 3,333 shares of common stock and Mr.
Valentine 3,333 shares of common stock for their services. Mr. Asplund and Mr. Valentine both
were serving as directors of Lime Energy at that time. Subsequently, on January 23, 2006, Mr.
Asplund became its CEO.k)
    
    On May 3, 2005 the Company issued 166,148 shares of common stock in connection with the
acquisition of Maximum Performance Group, Inc. In addition, 166,148 shares of common stock
are being held in escrow and will be issued in the event MPG meets specific performance
criteria during the two year period following the acquisition. No escrow shares have been
released as of December 31, 2006.Delano Group Securities LLC acted as an advisor on the acquisition of MPG and was paid $82,176
and 8,366 shares of common stock for its services. These shares were valued at $15.00 per
share, which was the closing market price of the Companys common stock on April 28, 2005. In
addition, the Company may issue up to 8,366 additional shares of common stock to Delano if any
of the MPG shares held in escrow are released. Delano Group Securities LLC is owned by Mr.
David Asplund, one of Lime Energys directors and effective January 23, 2006, its CEO.l)
    
    On November 22, 2005 the Company entered into a securities purchase agreement with Laurus
Master Fund, Ltd. whereby the Company issued to Laurus a $5 million secured convertible term
note and warrants to purchase 133,333 shares of its common stock at $17.40 per share anytime
prior to November 22, 2012. The warrants were valued at $920,000 using a modified
Black-Sholes option pricing model utilizing the following assumptions: risk free rate of
4.034%, expected volatility of 67.4%, expected dividend of $0 and expected life of 7 years.
The value of the warrants was recorded as a discount to the term loan and was to be amortized
over the term of the underlying debt utilizing the effective interest method.This term loan was retired through a cash payment on June 29, 2006. No portion of the term loan
was converted to common stock while the note was outstanding.m)
    
    During the year ended December 31, 2005, the Companys Board of Directors declared dividends
payable on its Series E Convertible Preferred Stock of $1,366,900. The dividends were paid
with 13,699 additional shares of Series E Convertible Preferred Stock.
 F-36




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##### Table of Contents



2006 Transactions
 n)
    
    During the first three months of 2006, two holders of the Companys Series E Convertible
Preferred Stock converted a total of 7,130 shares of Series E Convertible Preferred Stock into
47,533 shares of common stock.o)
    
    Effective March 31, 2006, the Company received 14,194 shares of its common stock as part of
the sale of its Great Lakes Controlled Energy Corporation subsidiary to Messrs. Eugene Borucki
and Denis Enberg. These shares have been returned to the status of authorized, unissued
            shares of common stock.p)
    
    On June 29, 2006 the Company entered into a Securities Purchase Agreement and issued to 17
investors, including 10 existing holders of its Series E Convertible Stock, for an aggregate
purchase price of $17,875,000, 17,875,000 shares of its common stock (the PIPE Transaction).
The Company used $2.72 million of the proceeds to fund the cash consideration for the
acquisition of Parke P.A.N.D.A. Corporation, approximately $5.6 million to prepay two
convertible secured term loans and related prepayment penalties and accrued interest owed to
Laurus Master Fund Ltd., $400,000 to pay off Parkes line of credit, and $115,107 for
transaction related costs. The balance of the gross proceeds of approximately $9 million has
been and will be used for working capital and other general corporate purposes, except that
$1,250,000 was used to pay the cash portion of the acquisition price for Kapadia Consulting,
Inc. on September 27, 2006, as described under w) below.q)
    
    Concurrently with the closing of the PIPE Transaction pursuant to the Securities Purchase
Agreement described in p) above, the holders of all of the Companys outstanding Series E
Preferred Stock converted such shares into 21,648,346 shares of its common stock. Please
refer to Note 22 for additional information regarding this conversion.r)
    
    A number of the Companys common stock warrants contain antidilution provisions that
automatically adjust the exercise price on the warrants to the issuance price of any security
convertible into the Companys common stock if the price of the newly issued security is less
than the exercise price on the holders warrant. Prior to the PIPE Transaction, the exercise
price on these warrants ranged from $13.50 per share to $15.00 per share. The issuance of
common stock in the PIPE Transaction caused the exercise price on these warrants to
automatically be reduced to $1.00 per share. Utilizing a modified Black-Scholes option
pricing model, the Company determined that the increase in value of these warrants that
resulted from this adjustment was $297,868, which the Company recorded as a non-cash deemed
dividend on June 29, 2006.s)
    
    Immediately following completion of the PIPE Transaction and prepayment of the Laurus term
loans, Laurus elected to convert the entire outstanding balance on its revolving line of
credit, along with accrued interest thereon, into 950,865 shares of the Companys common
stock. In addition, in consideration of the issuance issuance of 392,596 shares of common
stock, Laurus agreed to (i) waive the payment of liquidated damages due as a result of the
Companys failure to register shares of common stock into which the November 2005 $5 million
term loan was convertible, and (ii) terminate the requirement that the Company pay it a
portion of the cash flows generated by VNPP projects for a period of 5 years following the
repayment of the November 2005 $5 million convertible term loan.
 F-37




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##### Table of Contents



t)
    
    On June 30, 2006, the Company issued 5,000,000 shares to the Parke Family Trust as part of
the consideration in the acquisition of Parke P.A.N.D.A. Corporation.u)
    
    During the first six months of 2006, the Companys Board of Directors declared dividends
payable on the Companys Series E Convertible Preferred Stock of $698,000. The dividends were
paid with 6,980 additional shares of Series E Convertible Preferred Stock.v)
    
    On July 25, 2006, the Company issued a three year warrant to purchase 60,000 shares of its
common stock at $1.00 per share to Bristol Capital, Ltd. This warrant was valued at $25,200
using a modified Black-Sholes option pricing model utilizing the following assumptions: risk
free rate of 5.108%, expected volatility of 91.4%, expected dividend of $0 and expected life
of 3 years. The value of this warrant was charged to operations during the period.w)
    
    On September 26, 2006, the Company issued 500,000 shares of its common stock to Pradeep and
Susan Kapadia as part of the consideration in the acquisition of Kapadia Consulting, Inc.x)
    
    The Company had outstanding warrants to purchase 1,102,119 and 1,078,868 shares of its common
stock as of December 31, 2006 and 2005, respectively, at an exercise price of between $1.00
per share and $98.40 per share. These warrants can be exercised at any time prior to their
expiration dates which range between June 2007 and May 2015. The following table summarizes
information about warrants outstanding as of December 31, 2006:
 Warrants OutstandingNumber
    
    
    Weighted AverageOutstanding at
    
    
    Remaining
    
    
    Weighted AverageDecember 31,
    
    
    Contractual
    
    
    ExerciseExercise Price
    
    2006
    
    
    Life
    
    
    Price$1.00
    
    
    665,118
    
    
    1.8 years
    
    $
    1.00$1.01 - $14.99
    
    
    
    
    
    
    
    
    
    
    $15.00  $19.99
    
    
    404,335
    
    
    3.0 years
    
    
    16.19$20.00  $98.40
    
    
    32,666
    
    
    1.9 years
    
    
    42.771,102,119
    
    
    2.2 years
    
    $
    7.81
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##### Table of Contents



Note 24  Dividends
  Year ended December 31,
    
    2006
    
    
    2005
    
    
    2004Accrual of dividend on Series A
Convertible Preferred
    
    $
    
    
    
    $
    
    
    
    $
    540,705Accrual of Series C Preferred
dividend
    
    
    
    
    
    
    
    
    
    
    53,206Accrual of Series D Preferred
dividend
    
    
    
    
    
    
    
    
    
    
    35,932Accrual of Series E Preferred
dividend
    
    
    698,000
    
    
    
    1,366,900
    
    
    
    1,006,937Deemed dividend associated
with change in conversion
price of the Series E
Convertible Preferred Stock
    
    
    23,085,467
    
    
    
    
    
    
    
    Deemed dividend associated
with beneficial conversion
price on shares issuable in
satisfaction preferred
dividends
    
    
    
    
    
    
    
    
    
    
    1,127,021Deemed dividend associated
with the redemption and
exchange of outstanding
preferred stock
    
    
    
    
    
    
    
    
    
    
    1,860,458Deemed dividend associated
with change in the expiration
date of warrants to purchase
shares of preferred stock
    
    
    
    
    
    
    
    
    
    
    15,000Deemed dividend associated
with change in the exercise
price of warrants to purchase
shares of common stock
    
    
    564,258
    
    
    
    484,445
    
    
    
    Total
    
    $
    24,347,725
    
    
    $
    1,851,345
    
    
    $
    4,639,259
 F-39




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##### Table of Contents



Note 25  Reverse Split
  Note 26  Stock Options
 st
   F-40




---



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##### Table of Contents



WeightedExercise
    
    
    AveragePrice Per
    
    
    ExerciseShares
    
    
    Share
    
    
    PriceOutstanding at December 31, 2003
    
    
    681,479
    
    
    $
    12.60-$194.85
    
    
    $
    51.75Granted
    
    
    67,767
    
    
    $
    17.25-$35.40
    
    
    $
    25.68Forfeited
    
    
    (8,111
    )
    
    $
    18.75-$105.00
    
    
    $
    79.75Outstanding at December 31, 2004
    
    
    741,135
    
    
    $
    12.60-$194.85
    
    
    $
    49.05Granted
    
    
    69,833
    
    
    $
    15.00-$18.60
    
    
    $
    15.60Forfeited
    
    
    (10,967
    )
    
    $
    15.00-$120.00
    
    
    $
    23.40Outstanding at December 31, 2005
    
    
    800,001
    
    
    $
    12.60-$194.85
    
    
    $
    46.50Granted
    
    
    10,128,318
    
    
    $
    0.96-$15.00
    
    
    $
    1.12Forfeited
    
    
    (221,187
    )
    
    $
    1.02-$105.00
    
    
    $
    19.68Outstanding at December 31, 2006
    
    
    10,707,132
    
    
    $
    0.96-$194.85
    
    
    $
    1.02Options exercisable at
December 31, 2006
    
    
    4,645,455
    
    
    $
    0.96-$194.85
    
    
    $
    7.95Options exercisable at
December 31, 2005
    
    
    723,518
    
    
    $
    12.60-$194.85
    
    
    $
    48.30Options exercisable at
December 31, 2004
    
    
    651,896
    
    
    $
    12.60-$194.85
    
    
    $
    51.00
  Year ended December 31,
    
    2006
    
    
    2005
    
    
    2004Weighted average fair value per options granted
    
    $
    1.05
    
    
    $
    0.68
    
    
    $
    1.16Significant assumptions (weighted average):Risk-free interest rate at grant date
    
    
    5.02
    %
    
    
    2.27
    %
    
    
    1.04
    %Expected stock price volatility
    
    
    90
    %
    
    
    65
    %
    
    
    72
    %Expected dividend payout
    
    
    
    
    
    
    
    
    
    
    Expected option life (years)
    
    
    5.6
    
    
    
    9.1
    
    
    
    9.1
 F-42




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WeightedExercise
    
    
    AveragePrice Per
    
    
    ExerciseShares
    
    
    Share
    
    
    PriceOutstanding at December 31, 2005
    
    
    800,001
    
    
    $
    12.60-$194.85
    
    
    $
    46.50Granted
    
    
    10,128,318
    
    
    $
    0.96-$15.00
    
    
    $
    1.12Forfeited
    
    
    (221,187
    )
    
    $
    1.02-$105.00
    
    
    $
    19.68Outstanding at December 31, 2006
    
    
    10,707,132
    
    
    $
    0.96-$194.85
    
    
    $
    1.02Options exercisable at December 31, 2006
    
    
    4,645,455
    
    
    $
    0.96-$194.85
    
    
    $
    7.95
  Options Outstanding
    
    
    Options ExercisableWeightedNumber
    
    
    Average
    
    
    Weighted
    
    
    Number
    
    
    WeightedOutstanding at
    
    
    Remaining
    
    
    Average
    
    
    Exercisable at
    
    
    AverageDecember 31,
    
    
    Contractual
    
    
    Exercise
    
    
    December 31,
    
    
    ExerciseExercise Price
    
    2006
    
    
    Life
    
    
    Price
    
    
    2006
    
    
    Price$0.90 - $1.00
    
    
    3,440,000
    
    
    9.5 years
    
    $
    0.97
    
    
    
    100,000
    
    
    $
    1.00$1.01 - $1.10
    
    
    6,455,000
    
    
    9.6 years
    
    
    1.02
    
    
    
    3,866,653
    
    
    
    1.02$1.11 - $10.00
    
    
    100,000
    
    
    9.1 years
    
    
    9.30
    
    
    
    
    
    
    
    $10.01 - $194.85
    
    
    712,132
    
    
    3.6 years
    
    
    46.85
    
    
    
    678,802
    
    
    
    48.4110,707,132
    
    
    9.1 years
    
    $
    4.13
    
    
    
    4,645,455
    
    
    $
    7.95
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##### Table of Contents



Year ending December 31,2007
    
    $
    2,568,5082008
    
    
    843,1902009
    
    
    6,028Total
    
    $
    3,417,726
  Weighted AverageNumber of
    
    
    Grant Date FairOptions
    
    
    ValueNonvested at December 31, 2005
    
    
    76,490
    
    
    $
    29.64Granted
    
    
    10,128,318
    
    
    
    1.05Vested
    
    
    (4,009,149
    )
    
    
    2.01Forfeited
    
    
    (133,982
    )
    
    
    36.84Nonvested at December 31, 2006
    
    
    6,061,677
    
    
    $
    1.29
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Note 27  Related Parties
   Shares Issued Upon
    
    
    Common Shares
    
    
    Aggregate PriceConversion of
    
    
    Issued Pursuant to
    
    
    Paid for PIPESeries E
    
    
    PIPE
    
    
    SharesDavid R. Asplund
    
    
    354,200
    
    
    
    1,500,000
    
    
    $
    1,500,000Richard P. Kiphart
    
    
    8,903,400
    
    
    
    5,700,000
    
    
    
    5,700,000David Valentine
    
    
    145,700
    
    
    
    200,000
    
    
    
    200,000Total
    
    
    9,403,300
    
    
    
    7,400,000
    
    
    $
    7,400,000
      F-45




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##### Table of Contents



Note 28  Business Segment Information
     F-46




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##### Table of Contents



Year ended December 31,
    
    2006
    
    
    2005
    
    
    2004Revenues:Energy Technology
    
    $
    4,841,610
    
    
    $
    3,693,429
    
    
    $
    733,630Energy Services
    
    
    3,306,610
    
    
    
    
    
    
    
    Intercompany sales
    
    
    (4,596
    )
    
    
    
    
    
    
    Total
    
    
    8,143,624
    
    
    
    3,693,429
    
    
    
    733,630Operating Loss:Energy Technology
    
    
    (6,692,648
    )
    
    
    (4,578,753
    )
    
    
    (2,386,678
    )Energy Services
    
    
    (1,175,253
    )
    
    
    
    
    
    
    Corporate
    
    
    (5,479,000
    )
    
    
    (1,497,770
    )
    
    
    (1,976,298
    )Total
    
    
    (13,346,901
    )
    
    
    (6,076,523
    )
    
    
    (4,362,976
    )Interest Expense, net
    
    
    (3,079,188
    )
    
    
    (544,253
    )
    
    
    (626,049
    )Loss from continuing operations
    
    
    (16,426,089
    )
    
    
    (6,620,776
    )
    
    
    (4,989,025
    )Depreciation and Amortization:Energy Technology
    
    
    742,706
    
    
    
    592,271
    
    
    
    50,257Energy Services
    
    
    641,870
    
    
    
    9,598
    
    
    
    8,621Building Control and Automation
    
    
    2,021
    
    
    
    
    
    
    
    Total
    
    
    1,386,597
    
    
    
    601,869
    
    
    
    58,878Capital Additions:Energy Technology
    
    
    68,406
    
    
    
    530,925
    
    
    
    149,603Energy Services
    
    
    12,096
    
    
    
    
    
    
    
    Building Control and Automation
    
    
    2,465
    
    
    
    17,949
    
    
    
    Total
    
    
    82,967
    
    
    
    548,874
    
    
    
    149,603Total Assets:Energy Technology
    
    
    12,906,748
    
    
    
    16,424,460
    
    
    
    5,167,814Energy Services
    
    
    12,490,117
    
    
    
    
    
    
    
    Building Control and Automation
    
    
    
    
    
    
    674,514
    
    
    
    1,311,506Total
    
    $
    25,396,865
    
    
    $
    17,098,974
    
    
    $
    6,479,320
 F-47




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##### Table of Contents



Note 29  Selected Quarterly Financial Data (unaudited)
  Fiscal 2006 Quarters EndedMarch 31
    
    June 30
    
    September 30
    
    December 31
    
    TotalRevenue
    
    $
    1,146,345
    
    
    $
    1,334,818
    
    
    $
    2,130,158
    
    
    $
    3,532,303
    
    
    $
    8,143,624Gross profit (loss)
    
    
    237,943
    
    
    
    361,337
    
    
    
    537,545
    
    
    
    75,505
    
    
    
    1,212,330Loss from continuing operations
    
    
    (1,935,180
    )
    
    
    (4,659,818
    )
    
    
    (4,117,510
    )
    
    
    (5,713,581
    )
    
    
    (16,426,089
    )Loss from discontinued operations
    
    
    (21,425
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,425
    )Net loss
    
    
    (1,956,605
    )
    
    
    (4,659,818
    )
    
    
    (4,117,510
    )
    
    
    (5,713,581
    )
    
    
    (16,447,514
    )Preferred dividends
    
    
    (615,290
    )
    
    
    (23,732,435
    )
    
    
    
    
    
    
    
    
    
    
    (24,347,725
    )Net loss available to common shareholders
    
    
    (2,571,895
    )
    
    
    (28,392,253
    )
    
    
    (4,117,510
    )
    
    
    (5,713,581
    )
    
    
    (40,795,239
    )Basic and diluted loss per common share from
continuing operations
    
    
    (0.74
    )
    
    
    (6.49
    )
    
    
    (0.08
    )
    
    
    (0.12
    )
    
    
    (1.52
    )Discontinued operations
    
    
    (0.01
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.00
    )Basic and Diluted Loss Per Common Share
    
    
    (0.75
    )
    
    
    (6.49
    )
    
    
    (0.08
    )
    
    
    (0.12
    )
    
    
    (1.52
    )Weighted averages shares
    
    
    3,410,455
    
    
    
    4,373,236
    
    
    
    49,308,350
    
    
    
    48,786,611
    
    
    
    26,908,608
 Fiscal 2005 Quarters EndedMarch 31
    
    June 30
    
    September 30
    
    December 31
    
    TotalRevenue
    
    $
    250,713
    
    
    $
    1,550,089
    
    
    $
    1,123,360
    
    
    $
    769,267
    
    
    $
    3,693,429Gross profit (loss)
    
    
    145,742
    
    
    
    104,689
    
    
    
    (74,580
    )
    
    
    (174,276
    )
    
    
    1,575Loss from continuing operations
    
    
    (912,957
    )
    
    
    (1,712,523
    )
    
    
    (1,966,007
    )
    
    
    (2,029,289
    )
    
    
    (6,620,776
    )Income (loss) from discontinued operations
    
    
    237,700
    
    
    
    (112,111
    )
    
    
    (48,088
    )
    
    
    (329,463
    )
    
    
    (251,962
    )Net loss
    
    
    (675,257
    )
    
    
    (1,824,634
    )
    
    
    (2,014,095
    )
    
    
    (2,358,752
    )
    
    
    (6,872,738
    )Preferred dividends
    
    
    (334,800
    )
    
    
    (339,000
    )
    
    
    (344,000
    )
    
    
    (833,545
    )
    
    
    (1,851,345
    )Net loss available to common shareholders
    
    
    (1,010,057
    )
    
    
    (2,163,634
    )
    
    
    (2,358,095
    )
    
    
    (3,192,297
    )
    
    
    (8,724,083
    )Basic and diluted loss per common share from
continuing operations
    
    
    (0.45
    )
    
    
    (0.64
    )
    
    
    (0.69
    )
    
    
    (0.84
    )
    
    
    (2.65
    )Discontinued operations
    
    
    0.09
    
    
    
    (0.04
    )
    
    
    (0.01
    )
    
    
    (0.10
    )
    
    
    (0.08
    )Basic and Diluted Loss Per Common Share
    
    
    (0.36
    )
    
    
    (0.68
    )
    
    
    (0.70
    )
    
    
    (0.94
    )
    
    
    (2.73
    )Weighted averages shares
    
    
    2,784,438
    
    
    
    3,195,194
    
    
    
    3,387,567
    
    
    
    3,386,677
    
    
    
    3,190,664
 Note 30  Subsequent Events
  F-48




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##### Table of Contents



Additions/(recoveries)Balance at
    
    charged to
    
    Deductionsbeginning of
    
    costs and
    
    Amounts
    
    Other
    
    Balance at endperiod
    
    expenses
    
    written-off
    
    adjustments
    
    of periodAllowance for doubtful
accounts:Year ended December 31, 2004
    
    
    326,000
    
    
    
    6,000
    
    
    
    (133,000
    )
    
    
    
    
    
    
    199,000Year ended December 31, 2005
    
    $
    199,000
    
    
    $
    97,000
    
    
    $
    (13,000
    )
    
    $
    42,000
    
    
    $
    325,000Year ended December 31, 2006
    
    $
    325,000
    
    
    $
    105,000
    
    
    $
    (62,000
    )
    
    $
    (3,000
    )
    
    $
    366,000
   Additions/(recoveries)Balance at
    
    charged to
    
    Deductionsbeginning of
    
    costs and
    
    Amounts
    
    Other
    
    Balance at endperiod
    
    expenses
    
    written-off
    
    adjustments
    
    of periodReserve for obsolete inventory:Year ended December 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Year ended December 31, 2005
    
    $
    
    
    
    $
    35,000
    
    
    $
    (16,000
    )
    
    $
    9,000
    
    
    $
    28,200Year ended December 31, 2006
    
    $
    28,200
    
    
    $
    578,400
    
    
    $
    (9,800
    )
    
    $
    
    
    
    $
    596,800
  F-49