##### Table of Contents



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, 2007
 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
    
    The NASDAQ Stock Market LLC
 Securities registered under Section 12(g) of the Exchange Act:
  
 (Title of class)
 o þ
 o þ
 þ o
 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, 2007 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. Business
    
    
    1Item 1A. Risk Factors
    
    
    5Item 1B. Unresolved Staff Comments
    
    
    9Item 2. Properties
    
    
    10Item 3. Legal Proceedings
    
    
    10Item 4. Submission of Matters to a Vote of Security Holders
    
    
    10PART II
    
    
    11Item 5. Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
    
    
    11Item 6. Selected Financial Data
    
    
    15Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    16Item 8. Financial Statements and Supplementary Data
    
    
    33Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    33Item 9A(T). Controls and Procedures
    
    
    34Item 9B. Other Information
    
    
    35PART III
    
    
    35Item 10. Directors, Executive Officers and Corporate
Governance
    
    
    35Item 11. Executive Compensation
    
    
    35Item 12. Security Ownership of Certain Beneficial Owners and
Management
    
    
    35Item 13. Certain Relationships and Related Transactions, and Director
Independence
    
    
    36Item 14. Principal Accountant Fees and Services
    
    
    36PART IV
    
    
    36Item 15. Exhibits and Financial Statement Schedules
    
    
    36SIGNATURES
    
    
    42Specimen Stock CertificateList of subsidiariesConsent of BDO Seidman LLP302 Certification302 Certification906 Certification906 Certification




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PART I
 
 Item 1. Business.
   Overview
  History
    1




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Products and Services
 Energy Services
   
    
    building energy audits;
    
    energy management planning;
    
    engineering design review with a view to optimizing energy efficiency and energy
rebates;
    
    project management of energy related construction or upgrade projects;
    
    HVAC and boiler system optimization; and
    
    incentive and rebate application processing and procurement.
 2




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eMAC & uMAC
      Marketing, Sales and Distribution
  3




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Customers
  Competition
    Manufacturing
    4




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Compliance With Environmental Laws
  Research and Development
  Intellectual Property
  Employees
  
 Item 1A. Risk Factors.
  5




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Risks Related to Our Business
 We have incurred significant operating losses since inception and may not achieve or sustain
profitability in the future.
  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.
  The failure to effectively maintain and upgrade our proprietary products could adversely
affect our business.
  6




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Failure to replace a significant customer could materially and adversely affect our results
of operations and financial condition.
  We expect our quarterly revenue and operating results to fluctuate. If we fail to meet the
expectations of market analysts or investors, the market price of our common stock could
decline substantially, and we could become subject to securities litigation.
  A decrease in electric retail rates could lessen demand for our products.
  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.
  7




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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.
   
    
    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.
  8




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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.
  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.
  9




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Item 2. Properties.
   Location:
    
    Business Segment
    
    Square Feet
    
    Lease ExpirationAustin, TX
    
    Energy Services
    
    
    2,000
    
    
    June 2008Dallas, TX
    
    Energy Services
    
    
    2,900
    
    
    January 2009Glendora, CA
    
    Energy Services
    
    
    9,350
    
    
    December 2009New York, NY
    
    Energy Technology
    
    
    2,800
    
    
    September 2010Peekskill, NY
    
    Energy Services
    
    
    2,000
    
    
    Month-to-monthSan Diego, CA
    
    Energy Technology
    
    
    8,200
    
    
    September 2012Seattle, WA
    
    Energy Services
    
    
    1,877
    
    
    December 2009Ventura, CA
    
    Energy Services
    
    
    1,776
    
    
    November 2010
  
 Item 3. Legal Proceedings.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
    10




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PART II
 
 Item 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
   Common StockHigh
    
    LowFiscal Year Ended December 31, 2006:Fiscal Quarter Ended March 31, 2006
    
    $
    117.60
    
    
    $
    58.80Fiscal Quarter Ended June 30, 2006
    
    $
    71.40
    
    
    $
    4.90Fiscal Quarter Ended September 30, 2006
    
    $
    9.80
    
    
    $
    5.25Fiscal Quarter Ended December 31, 2006
    
    $
    9.03
    
    
    $
    5.32Fiscal Year Ended December 31, 2007:Fiscal Quarter Ended March 31, 2007
    
    $
    7.70
    
    
    $
    6.30Fiscal Quarter Ended June 30, 2007
    
    $
    15.05
    
    
    $
    5.81Fiscal Quarter Ended September 30, 2007
    
    $
    14.21
    
    
    $
    9.45Fiscal Quarter Ended December 31, 2007
    
    $
    15.75
    
    
    $
    5.60
 Holders
  Dividends
   11




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Securities Authorized for Issuance Under Equity Compensation Plans
  Equity Compensation Plan Information(a)
    
    
    (b)
    
    
    (c)Number ofsecuritiesremaining availableNumber of
    
    
    
    
    
    
    for future issuancesecurities to be
    
    
    
    
    
    
    under equityissued upon
    
    
    Weighted-average
    
    
    compensation plansexercise of
    
    
    exercise price of
    
    
    (excludingoutstanding
    
    
    outstanding
    
    
    securitiesoptions, warrants
    
    
    options, warrants
    
    
    reflected in columnPlan Category
    
    and rights
    
    
    and rights
    
    
    (a))Equity compensation plans approved
by security holders
    
    
    90,672
    
    
    $
    29.88
    
    
    
    16,948Equity compensation plans not
approved by security holders (1)
    
    
    2,079,676
    
    
    $
    23.02
    
    
    
    Total
    
    
    2,170,348
    
    
    $
    23.31
    
    
    
    16,948
 
 (1)
    
    We grant stock options to our non-employee directors pursuant to a Directors Stock
Option Plan (See Compensation of Directors), which grants are included in this category. Recent Sales of Unregistered Securities
  
    
    In January 2007, pursuant to the Directors Stock Option Plan we granted options to
certain outside directors with an exercise price of $6.30 per share, which was the market
price on the date of issuance. Warrants held by 12 investors, including Messrs. Asplund
and Kiphart, contained anti-dilution 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 of the newly issued security is less than the exercise price on the
holders warrant. Prior to the granting of the directors options in January 2007, the
exercise price on these warrants was $7.00 per share. The grant of the director options
caused the exercise price on these warrants to automatically be reduced to $6.30 per share.
    
    During January 2007, we issued warrants to consultants with terms of two to three years
to purchase 38,571 shares of our common stock at prices of $7.00 to $7.56 per share as
partial consideration for services provided to us.
    
    A provision of our June 2006 PIPE transaction required us to file and have declared
effective by no later than November 3, 2006, a registration statement registering the
shares issued as part of the transaction. To the extent that we failed to have the
registration statement declared effective by this date, we were required to pay penalties
to the PIPE investors at the rate of 1% per month of the purchase price paid by the
investors. Largely as a result of the questions regarding the need to amend our
Certificate of Incorporation to effect the 2006 reverse split of our common stock, we were
not able to have the registration statement declared effective until February 14,
 12




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2007. All of the investors in the PIPE transaction agreed to accept shares of our common
stock as payment of this registration penalty. As of December 31, 2006, we had accrued
$345,583 in penalties related to our failure to register these shares. These accrued
penalties, along with $268,125 of penalties for the period from January 1, 2007 through
February 14, 2007, were satisfied through the issuance of 87,673 shares of our common stock
in January and February 2007.
    
    On February 23, 2007, we commenced a rights offering to stockholders in which we
distributed to each holder of record as of February 23, 2007 (other than the former Series
E Preferred stockholders and Daniel Parke, who waived their rights to participate),
non-transferable subscription rights to purchase shares of our common stock at $7.00 per
share. Stockholders that participated in the rights offering were also able to subscribe
for any shares that were not purchased by other stockholders pursuant to their subscription
rights. The rights offering closed on March 30, 2007 and raised $2,796,700 (net of
issuance costs of $202,932) through the issuance of 428,519 shares of common stock to 260
of our existing stockholders. We received the proceeds from the offering and issued the
common stock to the participants during the first week of April 2007.
    
    In connection with the placement of the subordinated convertible term notes during the
second quarter of 2007 we issued four-year warrants to eight investors, including Richard
Kiphart, our chairman and largest individual stockholder, to purchase 206,043 shares of our
common stock at $7.28 per share.
    
    As part of the MPG acquisition, 23,735 shares of common stock were deposited in escrow
for the benefit of the selling stockholders of MPG to be released over the two-year period
following the April 30, 2005 purchase of MPG if it achieved certain revenue targets during
the period. During May 2007 we issued 2,818 shares to the former MPG stockholders which
we determined we owed them pursuant to the MPG merger agreement.
    
    Delano Group Securities LLC acted as an advisor on the acquisition of MPG in 2005. Part
of Delanos compensation for its services was tied to the purchase price paid for MPG.
David Asplund owned and operated Delano prior to joining Lime Energy as our CEO in January
2006. Since the release of the escrow shares was considered a payment of additional
consideration to the former stockholders of MPG, we issued Mr. Asplund 141 shares of our
common stock in May 2007 in satisfaction of the commission owed Delano.
    
    On June 6, 2007, retroactive to May 31, 2007, we acquired the assets and assumed certain
liabilities of George Bradley Boyett dba Texas Energy Products. The purchase consideration
consisted of 28,571 shares of our common stock and cash of $312,787.
    
    On August 6, 2007, retroactive to July 31, 2007, we acquired the assets and assumed
certain liabilities of Preferred Lighting, Inc. for 15,069 shares of our common stock and
cash of $409,953 in cash (including $109,953 paid in 2008 pursuant to an earn-out based on
2007 earnings). We also issued five year warrants to the former owners of Preferred
Lighting to purchase 21,429 shares of our common stock at $13.23 per share.
    
    During 2007, we issued 7,088 shares of our common stock to the holders of our
subordinated convertible term notes in satisfaction of 50% of the interest owed on the
notes.
    
    During 2007 certain employees and a former director exercised options to purchase 33,005
shares of our common stock at prices ranging from $6.30 to $7.14 per share.
 13




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
    
    During 2007 six investors exercised their warrants to purchase 5,011 shares of our
common stock at $6.30 per share. One of these investors elected to exercise its warrant on
a cashless basis, surrendering 569 shares it would have otherwise be entitled to receive on
exercise to cover the exercise price.
  14




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Item 6. Selected Financial Data
  LIME ENERGY CO. AND SUBSIDIARIES
Selected Financial Data
 Year ended December 31,2007 (1)
    
    
    2006 (1)
    
    
    2005
    
    
    2004
    
    
    2003Statement of Operations Data:Revenue
    
    $
    19,481,130
    
    
    $
    8,143,624
    
    
    $
    3,693,429
    
    
    $
    733,630
    
    
    $
    2,280,532Cost of sales
    
    
    15,082,400
    
    
    
    6,931,294
    
    
    
    3,691,854
    
    
    
    862,366
    
    
    
    1,945,554Gross profit (loss)
    
    
    4,398,730
    
    
    
    1,212,330
    
    
    
    1,575
    
    
    
    (128,736
    )
    
    
    334,978Selling, general and administrative
    
    
    13,072,381
    
    
    
    12,165,700
    
    
    
    5,363,503
    
    
    
    4,234,240
    
    
    
    3,921,121Amortization of intangibles
    
    
    2,011,878
    
    
    
    1,210,006
    
    
    
    471,765
    
    
    
    
    
    
    
    Impairment loss
    
    
    4,181,969
    
    
    
    1,183,525
    
    
    
    242,830
    
    
    
    
    
    
    
    Operating loss
    
    
    (14,867,498
    )
    
    
    (13,346,901
    )
    
    
    (6,076,523
    )
    
    
    (4,362,976
    )
    
    
    (3,586,143
    )Other income (expense)
    
    
    (685,230
    )
    
    
    (3,079,188
    )
    
    
    (544,253
    )
    
    
    (626,049
    )
    
    
    (354,941
    )Loss from continuing operations
    
    
    (15,552,728
    )
    
    
    (16,426,089
    )
    
    
    (6,620,776
    )
    
    
    (4,989,025
    )
    
    
    (3,941,084
    )Loss from discontinued operations
    
    
    
    
    
    
    (21,425
    )
    
    
    (251,962
    )
    
    
    (170,337
    )
    
    
    (1,540,858
    )Net loss
    
    $
    (15,552,728
    )
    
    $
    (16,447,514
    )
    
    $
    (6,872,738
    )
    
    $
    (5,159,362
    )
    
    $
    (5,481,942
    )Basic and diluted loss per common share
from continuing operations (2)(3)
    
    $
    (2.06
    )
    
    $
    (10.60
    )
    
    $
    (18.59
    )
    
    $
    (25.34
    )
    
    $
    (27.30
    )Basic and diluted loss per common share (2)(3)
    
    $
    (2.06
    )
    
    $
    (10.61
    )
    
    $
    (19.14
    )
    
    $
    (25.76
    )
    
    $
    (32.06
    )Weighted average common shares
outstanding (2)(3)
    
    
    7,541,960
    
    
    
    3,844,087
    
    
    
    455,809
    
    
    
    380,013
    
    
    
    321,538Balance Sheet Data:Cash and cash equivalents
    
    $
    4,780,701
    
    
    $
    4,663,618
    
    
    $
    4,229,150
    
    
    $
    1,789,808
    
    
    $
    2,467,023Working capital
    
    
    5,825,753
    
    
    
    3,606,419
    
    
    
    646,483
    
    
    
    263,304
    
    
    
    2,050,157Total assets
    
    
    25,943,832
    
    
    
    25,396,865
    
    
    
    17,098,974
    
    
    
    6,479,320
    
    
    
    7,353,627Long-term debt, including current portion
    
    
    3,269,634
    
    
    
    567,091
    
    
    
    4,980,032
    
    
    
    1,230,353
    
    
    
    1,348,645Total stockholders equity
    
    
    13,869,832
    
    
    
    18,184,756
    
    
    
    4,377,637
    
    
    
    1,780,271
    
    
    
    3,040,932
 
 (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. We recognized $3,726,731 and $4,828,955 of stock
compensation expense during 2007 and 2006, respectively.(2)
    
    During 2006 we effected a 1 for 15 reverse split of our common stock. The weighted average
common shares outstanding and the earnings per share values have all been adjusted to reflect
the reverse split.(3)
    
    During 2008 we effected a 1 for 7 reverse split of our 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 of Financial Condition and Results of Operations.
  Overview
       16




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Critical Accounting Policies and Estimates
  Use of Estimates
  Revenue Recognition
   Profit Recognition on Long-Term Contracts
  17




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Allowance for Doubtful Accounts
  Impairment of Long-Lived Assets.
   Goodwill
   18




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Stock-based Compensation
  Material Trends and Uncertainties
   Recent changes in the composition of our company.
 19




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Uncertainty regarding our Energy Technology Segment.
   Results of Operations
    20




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
    
    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; and
    
    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.
  Twelve-Month Period Ended December 31, 2007 Compared With the Twelve-Month Period Ended December 31, 2006
 Revenue.
   21




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Gross Profit.
 SG&A Expense.
 Amortization of Intangibles.
 Impairment Loss.
 22




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Other Non-Operating Income (Expense).
 Year ended December 31
    
    2007
    
    2006Line of credit
    
    $
    
    
    
    $
    50,344Note payable
    
    
    16,547
    
    
    
    16,563Mortgage
    
    
    43,931
    
    
    
    46,495Subordinated convertible notes
    
    
    293,683
    
    
    
    Convertible term loans
    
    
    
    
    
    
    249,065Other
    
    
    5,476
    
    
    
    1,772Amortization of deferred issuance
costs and debt discount
    
    
    592,456
    
    
    
    1,175,970Prepayment penalty
    
    
    
    
    
    
    516,071Value of adjustment in conversion
Price
    
    
    
    
    
    
    950,865Termination of post re-payment
interest obligation
    
    
    
    
    
    
    266,225Total Interest Expense
    
    $
    952,093
    
    
    $
    3,273,370
   23




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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 Expense.
 Amortization of Intangibles.
 Impairment Loss.
 24




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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
   25




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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
     26




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Liquidity and Capital Resources
     Year ended December 31
    
    2007
    
    2006
    
    2005Net cash used in operating activities
    
    $
    (6,774,805
    )
    
    $
    (6,248,085
    )
    
    $
    (6,956,642
    )Net cash used in investing activities
    
    
    (1,217,834
    )
    
    
    (4,264,930
    )
    
    
    (2,181,846
    )Net cash provided by financing activities
    
    
    8,109,722
    
    
    
    10,947,483
    
    
    
    11,577,830Net Increase in Cash and Cash Equivalents
    
    
    117,083
    
    
    
    434,468
    
    
    
    2,439,342Cash and Cash Equivalents, at beginning of period
    
    
    4,663,618
    
    
    
    4,229,150
    
    
    
    1,789,808Cash and Cash Equivalents, at end of period
    
    $
    4,780,701
    
    
    $
    4,663,618
    
    
    $
    4,229,150
 27




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2007 Compared to 2006
  Operating Activities
     Investing Activities
  Financing Activities
  28




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2006 Compared to 2005
  Operating Activities
   Investing Activities
   Financing Activities
  29




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##### Table of Contents



LIQUIDITY
     
    
    Focus on increasing the sales and profitability of our products and services.
During the past two years we have increased our revenue by $15,787,701, or 427% and we saw
our gross profit increase from $1,575 to $4,398,720. This improvement in our gross profit
was largely offset by $7,708,878 increase in our SG&A
($3,982,147 excluding non-cash share based
compensation) over the period, the result of acquisitions and the addition of sales and
administrative support personnel. However, we believe that we have the infrastructure in
place to support a doubling of revenue in 2008, without the need to increase our headcount
significantly from current levels. If we can achieve this, we believe we will
significantly reduce or eliminate the cash consumed from operating activities, before
changes in working capital.
    
    Turn around the performance of our Energy Technology segment. Largely as a
result of lower than expected sales, our Energy Technology segment recorded an operating
loss of approximately $8.2 million during 2007, or 55% of our total operating loss. Part
of the failure to achieve scale in this business is due to delays in getting a new version
of the eMAC into production. We have taken steps to address this issue and hope that the
new version of the eMAC will be available during the second half of 2008. We have secured
a supply of discontinued parts to allow us to continue to service and sell to existing
customers on a limited basis until the new version is available. In the meantime, we have
taken steps to reduce the overhead costs of this segment to better align them with the
anticipated level of business activity. Based on marketing studies commissioned in 2007,
and our experience marketing the product since forming Lime Energy, we believe there is a
good market for this segments products and we have an established base of customers to
build upon. We are committed to turning around the performance of this segment and are
carefully reviewing all of our alternatives for this business.
    
    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.
 30




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##### Table of Contents



Off-Balance Sheet Arrangements
  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)(2)(3)
    
    $
    6,909,932
    
    
    $
    590,860
    
    
    $
    6,250,639
    
    
    $
    67,884
    
    
    $
    549Operating leases
    
    
    870,541
    
    
    
    337,796
    
    
    
    447,466
    
    
    
    85,279
    
    
    
    Employment agreements
    
    
    2,634,000
    
    
    
    1,144,000
    
    
    
    1,490,000
    
    
    
    
    
    
    
    Total
    
    $
    9,186,480
    
    
    $
    2,072,656
    
    
    $
    8,188,105
    
    
    $
    153,163
    
    
    $
    549
 
 (1)
    
    Excludes floating rate interest on the long-term debt. Interest payments required during
2008, based on current interest rates are projected to be $32,000.(2)
    
    Includes $602,740 of interest on subordinated notes payable in shares of common stock(3)
    
    $5,000,000 in subordinated convertible notes will automatically convert to common stock if
the closing price on our common stock is $10.50 or greater for 20 days in a 30 day period at
any time after May 31, 2008. Recent Accounting Pronouncements
      31




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##### Table of Contents



Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk.
 1 2
 32




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data.
  F-1
    
    Report of Independent Registered Public Accounting FirmF-2 - F-3
    
    Consolidated Balance Sheets as of December 31, 2007 and December 31, 2006F-4
    
    Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005F-5
    
    Statements of Stockholders Equity for the years ended December 31, 2007, 2006 and 2005F-6  - F-7
    
    Statements of Consolidated Cash Flows for the years ended December 31, 2007, 2006 and 2005F-8 - F-52
    
    Notes to Consolidated Financial StatementsF-53
    
    Schedule II, Valuation and Qualifying Accounts
 
 Item 9.
    
    Change in and Disagreements with Accountants on Accounting and Financial Disclosure.
  33




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##### Table of Contents



Item 9A(T). Controls and Procedures.
   Managements Annual Report on Internal Control Over Financial Reporting
  Internal ControlIntegrated Framework
  Changes in Internal Control Over Financial Reporting
  34




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##### Table of Contents



Item 9B. Other Information.
  
 PART III
  
 Item 10. Directors, Executive Officers and Corporate Governance.
  
 Item 11. Executive Compensation.
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management.
  35




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##### Table of Contents



Item 13. Certain Relationships and Related Transactions, and Director Independence.
  
 Item 14. Principal Accountant Fees and Services.
  
 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 Exhibit2.1
    
    
    Agreement and Plan of Merger, dated as of April 29,
2005, by and among the Company, MPG Acquisition
Corporation, and Maximum Performance Group, Inc.
(Incorporated herein by reference to Exhibit 10.2 of
the Companys Current Report on Form 8-K dated April
28, 2005 and filed on May 4, 2005)2.2.1
    
    
    Agreement and Plan of Merger, dated as of May 19, 2006,
by and among the Company, Parke Acquisition LLC, and
Parke P.A.N.D.A. Corporation (Incorporated herein by
reference to Exhibit 10.1 of the Companys Current
Report on Form 8-K dated May 19, 2006 and filed on May
22, 2006)
 36




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit2.2.2
    
    
    Joinder and Amendment to Agreement and Plan of Merger
by and among the Company, Parke Acquisition LLC, and
Parke P.A.N.D.A. Corporation (Incorporated herein by
reference to Exhibit 10.1 of the Companys Current
Report on Form 8-K dated June 29, 2006 and filed on
July 6, 2006)2.3
    
    
    Agreement and Plan of Merger dated September 26, 2006
by and among the Company, Kapadia Acquisition, Inc.,
Kapadia Consulting, Inc., and Pradeep Kapadia
(Incorporated herein by reference to Exhibit 10.1 of
the Companys Current Report on Form 8-K dated
September 26, 2006 and filed on September 29, 2006)3.1.1
    
    
    Certificate of Incorporation (Incorporated herein by
reference to Exhibit 3.01 of the Companys Amendment
No. 4 to Form S-1 filed on February 14, 2007 (File No.
333-136992))3.1.2
    
    
    Certificate of Amendment to Certificate of
Incorporation dated August 30, 2001 (Incorporated
herein by reference to Exhibit 3.02 of the Companys
Amendment No. 4 to Form S-1 filed on February 14, 2007
(File No. 333-136992))3.1.3
    
    
    Certificate of Amendment to Certificate of
Incorporation dated July 31, 2002 (Incorporated herein
by reference to Exhibit 3.03 of the Companys Amendment
No. 4 to Form S-1 filed on February 14, 2007 (File No.
333-136992))3.1.4
    
    
    Certificate of Amendment to Certificate of
Incorporation dated May 4, 2005 (Incorporated herein by
reference to Exhibit 3.04 of the Companys Amendment
No. 4 to Form S-1 on February 14, 2007 (File No.
333-136992))3.1.5
    
    
    Certificate of Amendment to Certificate of
Incorporation dated January 23, 2007 (Incorporated
herein by reference to Exhibit 3.05 of the Companys
Amendment No. 4 to Form S-1 filed on February 14, 2007
(File No. 333-136992))3.1.6
    
    
    Certificate of Ownership and Merger Merging Lime Energy
Subsidiary Company into Electric City Corp.
(Incorporated herein by reference to Exhibit 3.06 of
the Companys Amendment No. 4 to Form S-1 filed on
February 14, 2007 (File No. 333-136992))3.1.7
    
    
    Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of
Preferred Stock and Qualifications, Limitations and
Restrictions Thereof of Series A Convertible Preferred
Stock of the Company dated August 30, 2001
(Incorporated herein by reference to Exhibit 3.07 of
the Companys Amendment No. 4 to Form S-1 filed on
February 14, 2007 (File No. 333-136992))3.1.8
    
    
    Certificate of Designations of the Relative Rights and
Preferences of the Series B Convertible Preferred Stock
of the Company dated October 13, 2000 (Incorporated
herein by reference to Exhibit 3.08 of the Companys
Amendment No. 4 to Form S-1 filed on February 14, 2007
(File No. 333-136992))3.1.9
    
    
    Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of
Preferred Stock and Qualifications, Limitations and
Restrictions Thereof of Series C Convertible Preferred
Stock of the Company dated June 3, 2002 (Incorporated
herein by reference to Exhibit 3.09 of the Companys
Amendment No. 4 to Form S-1 filed on February 14, 2007
(File No. 333-136992))3.1.10
    
    
    Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of
Preferred Stock and Qualifications, Limitations and
Restrictions Thereof of Series D Convertible Preferred
Stock of the Company dated June 26, 2003 (Incorporated
herein by reference to Exhibit 3.10 of the Companys
Amendment No. 4 to Form S-1 filed on February 14, 2007
(File No. 333-136992))
 37




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit3.1.11
    
    
    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 the Company dated March 18, 2004 (Incorporated
herein by reference to Exhibit 3.11 of the Companys
Amendment No. 4 to Form S-1 filed on February 14, 2007
(File No. 333-136992))3.2
    
    
    Amended and Restated Bylaws, as amended (Incorporated
herein by reference to Exhibit 3.1 of the Companys
Current Report on Form 8-K dated June 8, 2007 and filed
June 11, 2007)4.1
    *
    
    Specimen Stock Certificate4.2.1
    
    
    2001 Stock Incentive Plan (Incorporated herein by
reference to Annex B of the Companys Proxy Statement
on Form 14A filed on April 28, 2006)4.2.2
    
    
    Amendment to Stock Incentive Plan (Incorporated herein
by reference to Annex A of the Companys Proxy
Statement on Form 14A on April 28, 2006)4.3
    
    
    Amended and Restated Directors Stock Option Plan
(Incorporated herein by reference to Exhibit 4.63 of
the Companys Quarterly Report on Form 10-Q for the
period ended March 31, 2004 and filed on May 13, 2004)4.4
    
    
    Form of Common Stock Warrant Used to Pay Certain
Vendors (Incorporated herein by reference to Exhibit
4.44 of the Companys Annual Report on Form 10-K/A for
the year ended December 31, 2004 and filed on April 14,
2005)4.5
    
    
    Form of Common Stock Warrant (with Cashless Exercise
Provision) Used to Pay Certain Vendors (Incorporated
herein by reference to Exhibit 4.45 of the Companys
Annual Report on Form 10-K/A for the year ended
December 31, 2004 and filed on April 14, 2005)4.6
    
    
    Form of Common Stock Warrant, With Vesting Period
issued April 28, 2005 Incorporated herein by reference
to Exhibit 4.1 of the Companys Current Report on Form
8-K dated April 28, 2005 and filed on May 4, 2005)4.7
    
    
    Form of Common Stock Warrant, Without Vesting Period
issued April 28, 2005 Incorporated herein by reference
to Exhibit 4.2 of the Companys Current Report on Form
8-K dated April 28, 2005 and filed on May 4, 2005)4.8
    
    
    Stock Trading Agreement dated as of April 29, 2005
Incorporated herein by reference to Exhibit 4.3 of the
Companys Current Report on Form 8-K dated April 28,
2005 and filed on May 4, 2005)4.9
    
    
    Warrant Certificate dated November 22, 2005 to Purchase
2,000,000 shares of common stock Par Value $0.0001 Per
Share, of the Company issued to Laurus Master Fund,
Ltd. (Incorporated herein by reference to Exhibit 4.1
of the Companys Current Report on Form 8-K/A dated
November 22, 2005 and filed on February 9, 2006)4.10
    
    
    Registration Rights Agreement dated November 22, 2005
by and between the Company and Laurus Master Fund, Ltd.
(Incorporated herein by reference to Exhibit 4.2 of the
Companys Current Report on Form 8-K/A dated November
22, 2005 and filed on February 9, 2006)4.11
    
    
    Employee Stock Option Agreement dated June 30, 2006
between the Company and Daniel Parke (Incorporated
herein by reference to Exhibit 10.5 of the Companys
Current Report on Form 8-K dated June 29, 2006 and
filed on July 6, 2006)4.12
    
    
    Employee Stock Option Agreement dated July 11, 2006
between the Company and David Asplund (Incorporated
herein by reference to Exhibit 10.1 of the Companys
Current Report on Form 8-K dated July 11, 2006 and
filed on July 17, 2006)4.13
    
    
    Employee Stock Option Agreement dated July 11, 2006
between the Company and Daniel Parke (Incorporated
herein by reference to Exhibit 10.2 of the Companys
Current Report on Form 8-K dated July 11, 2006 and
filed on July 17, 2006)
 38




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit4.14
    
    
    Employee Stock Option Agreement dated July 11, 2006
between the Company and Jeffrey Mistarz (Incorporated
herein by reference to Exhibit 10.3 of the Companys
Current Report on Form 8-K dated July 11, 2006 and
filed on July 17, 2006)4.15
    
    
    Employee Stock Option Agreement dated July 11, 2006
between the Company and Leonard Pisano (Incorporated
herein by reference to Exhibit 10.4 of the Companys
Current Report on Form 8-K dated July 11, 2006 filed on
July 17, 2006)4.16
    
    
    Employee Option Agreement dated August 15, 2006 between
the Company and Jeffrey Mistarz (Incorporated herein by
reference to Exhibit 10.2 of the Companys Current
Report on Form 8-K dated August 15, 2006 filed on
August 18, 2006)4.17
    
    
    Warrant Certificate dated May 29, 2007 to purchase
shares of common stock, par value $0.0001 per share, of
the Company issued Richard P. Kiphart (Incorporated
herein by reference to Exhibit 4.1 of the Companys
Current Report on Form 8-K dated May 29, 2007 filed on
May 30, 2007)10.1
    
    
    Common Stock Purchase Warrant dated September 11, 2003
issued by the Company in favor of Laurus Master Fund,
Ltd. (Incorporated herein by reference to Exhibit 10.5
of the Companys Current Report on Form 8-K dated
September 11, 2003 and filed on September 16, 2003)10.2
    
    
    Form of Secured Convertible Revolving Note dated
September 11, 2003, made by the Company in favor of
Laurus Master Fund, Ltd. (Incorporated herein by
reference to Exhibit 10.9 of the Companys Current
Report on Form 8-K dated September 11, 2003 and filed
on September 16, 2003)10.3
    
    
    Securities Purchase Agreement dated March 19, 2004,
among the Company and Security Equity Fund, Mid Cap
Value Series, SBL Fund, Series V, Security Mid Cap
Growth and SBL Fund Series J (Incorporated herein by
reference to Exhibit 10.1 of the Companys Current
Report on Form 8-K dated March 19, 2004 and filed on
March 23, 2004)10.4
    
    
    Redemption and Exchange Agreement dated March 19, 2004,
by and among the Company and Newcourt Capital USA 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, LP
(Incorporated herein by reference to Exhibit 10.2 of
the Companys Current Report on Form 8-K dated March
19, 2004 and filed on March 23, 2004)10.5.1
    
    
    Third Amended and Restated Mortgage, Assignment of
Rents and Security Agreement dated December 13, 2005 by
the Company and American Chartered Bank (Incorporated
herein by reference to Exhibit 10.1 of the Companys
Current Report on Form 8-K dated December 13, 2005 and
filed on December 15, 2005)10.5.2
    
    
    Fourth Modification to Mortgage, Assignment of Rents
and Security Agreement dated December 28, 2006 by the
Company and American Chartered Bank (Incorporated
herein by reference to Exhibit 10.1 of the Companys
Current Report on Form 8-K dated December 28, 2006 and
filed on December 29, 2006)10.6
    
    
    Employment Agreement, dated as of May 3, 2005, between
the Company and Leonard Pisano (Incorporated herein by
reference to Exhibit 10.31 of the Companys Annual
Report on Form 10-K for the year ended December 31,
2005 and filed March 21, 2006)10.7
    
    
    Consulting Agreement with John Mitola dated January 21,
2006 (Incorporated herein by reference to Exhibit 10.1
of the Companys Current Report on Form 8-K dated
January 22, 2006 and filed on January 26, 2006)
 39




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit10.8
    
    
    Employment Agreement, dated as of January 23, 2006,
between the Company and David Asplund (Incorporated
herein by reference to Exhibit 10.1 of the Companys
Current Report on Form 8-K dated January 22, 2006 and
filed on February 22, 2006)10.9
    
    
    Stock Purchase Agreement dated as of April 3, 2006
between the Company, Eugene Borucki and Denis Enberg
(Incorporated herein by reference to Exhibit 10.1 of
the Companys Current Report on Form 8-K dated April 3,
2006 and filed on April 7, 2006)10.10
    
    
    Non-Competition, Non-Disclosure And Non-Solicitation
Agreement Dated as of March 31, 2006 between the
Company and Eugene Borucki (Incorporated herein by
reference to Exhibit 10.2 of the Companys Current
Report on Form 8-K dated April 3, 2006 and filed on
April 7, 2006)10.11
    
    
    Non-Competition, Non-Disclosure And Non-Solicitation
Agreement Dated as of March 31, 2006 between the
Company and Denis Enberg (Incorporated herein by
reference to Exhibit 10.3 of the Companys Current
Report on Form 8-K dated April 3, 2006 and filed on
April 7, 2006)10.12
    
    
    Securities Purchase Agreement dated June 29, 2006 by
and among the Company and the investors named therein
(Incorporated herein by reference to Exhibit 10.2 of
the Companys Current Report on Form 8-K dated June 29,
2006 and filed on July 6, 2006)10.13.1
    
    
    Employment Agreement dated as of June 30, 2006 between
Parke Acquisition, LLC and Daniel Parke (Incorporated
herein by reference to Exhibit 10.3 of the Companys
Current Report on Form 8-K dated June 29, 2006 and
filed on July 6, 2006)10.13.2
    
    
    Amendment to Employment Agreement dated October 1, 2007
between Parke Acquisition, LLC and Daniel W. Parke.
(Incorporated herein by reference to Exhibit 10.2 of
the Companys Current Report on Form 8-K dated October
1, 2007 and filed on October 2, 2007)10.14
    
    
    Non-Competition Agreement dated as of June 30, 2006 by
and among the Company, Parke Acquisition, LLC and
Daniel Parke (Incorporated herein by reference to
Exhibit 10.4 of the Companys Current Report on Form
8-K dated June 29, 2006 and filed on July 6, 2006)10.15
    
    
    First Amendment to Commercial Lease Agreement dated
June 30, 2006 by and between M&D Investments and Parke
Industries, LLC (Incorporated herein by reference to
Exhibit 10.6 of the Companys Current Report on Form
8-K dated June 29, 2006 and filed on July 6, 2006)10.16.1
    
    
    Employment Agreement, dated as of August 9, 2006,
between the Company and Jeffrey Mistarz (Incorporated
herein by reference to Exhibit 10.3 of the Companys
Current Report on Form 8-K dated August 15, 2006 and
filed on August 18, 2006)10.16.2
    
    
    Amendment to Employment Agreement dated October 1, 2007
between Lime Energy Co. and Jeffrey R. Mistarz.
(Incorporated herein by reference to Exhibit 10.3 of
the Companys Current Report on Form 8-K dated October
1, 2007 and filed on October 2, 2007)10.17
    
    
    Agreement with The Parke Family Trust dated February 1,
2007 (Incorporated herein by reference to Exhibit 10.1
of the Companys Current Report on Form 8-K dated
January 24, 2007 and filed on February 21, 2007)10.18
    
    
    Agreement with the PIPE Transaction investors dated
February 1, 2007 (Incorporated herein by reference to
Exhibit 10.2 of the Companys Current Report on Form
8-K dated January 24, 2007 and filed on February 21,
2007)10.19.1
    
    
    Agreement with David Asplund dated November 3, 2006
(Incorporated herein by reference to Exhibit 10.3 of
the Companys Current Report on Form 8-K dated January
24, 2007 and filed on February 21, 2007)
 40




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit10.19.2
    
    
    Second Amendment to Employment Agreement dated October
1, 2007 between Lime Energy Co. and David R. Asplund.
(Incorporated herein by reference to Exhibit 10.1 of
the Companys Current Report on Form 8-K dated October
1, 2007 and filed on October 2, 2007)10.20
    
    
    Agreement with Richard Kiphart dated November 2, 2006
(Incorporated herein by reference to Exhibit 10.4 of
the Companys Current Report on Form 8-K dated January
24, 2007 and filed on February 21, 2007)10.21
    
    
    Agreement with David Valentine dated November 2, 2006
(Incorporated herein by reference to Exhibit 10.5 of
the Companys Current Report on Form 8-K dated January
24, 2007 and filed on February 21, 2007)10.22
    
    
    Loan Agreement between the Company and various lenders,
including Richard P. Kiphart, dated May 29, 2007
(Incorporated herein by reference to Exhibit 10.1 of
the Companys Current Report on Form 8-K dated May 29,
2007 and filed on May 30, 2007)10.23
    
    
    Investor Rights Agreement between the Company and
various investors, including Richard P. Kiphart, dated
May 29, 2007 (Incorporated herein by reference to
Exhibit 10.2 of the Companys Current Report on Form
8-K dated May 29, 2007 and filed on May 30, 2007)10.24
    
    
    Fifth Modification to Mortgage, Assignment of Rents and
Security Agreement dated December 17, 2007 by the
Company and American Chartered Bank (Incorporated
herein by reference to Exhibit 10.1 of the Companys
Current Report on Form 8-K dated December 17, 2007 and
filed on December 18, 2007)10.25
    
    
    Third Amended and Restated Mortgage Note dated December
17, 2007, by and among American Chartered Bank and the
Company (Incorporated herein by reference to Exhibit
10.2 of the Companys Current Report on Form 8-K dated
December 17, 2007 and filed on December 18, 2007)10.26
    
    
    Revolving Line of Credit Note dated March 12, 2008 by
and among the Company and Advanced Biotherapy, Inc. and
Richard P. Kiphart (Incorporated herein by reference to
Exhibit 10.1 of the Companys Current Report on Form
8-K/A dated March 12, 2008 and filed on March 14, 2008)10.27
    
    
    Note Issuance Agreement dated March 12, 2008 by and
among the Company and Advanced Biotherapy, Inc. and
Richard P. Kiphart (Incorporated herein by reference to
Exhibit 10.2 of the Companys Current Report on Form
8-K/A dated March 12, 2008 and filed on March 14, 2008)14.1
    
    
    Code of Ethics For Chief Executive Officer and Chief
Financial Officer of the Company (Incorporated herein
by reference to Exhibit 14 of the Companys Annual
Report on Form 10-KSB for the year ended December 31,
2003 and filed on March 29, 2004)14.2
    
    
    Code of Business Conduct and Ethics (All Officers,
Directors and Employees) (Incorporated herein by
reference to Exhibit 14.2 of the Companys Annual
Report on Form 10-K for the year ended December 31,
2005 and filed March 21, 2006)21
    *
    
    List of subsidiaries23.1
    *
    
    Consent of BDO Seidman LLP
 41




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##### Table of Contents



SIGNATURES
  LIME ENERGY CO.By:
    
    /s/ David R. AsplundDavid R. AsplundChief Executive OfficerMarch 31, 2008
  Signature
    
    Title
    
    Date/s/ David Asplund

David Asplund
    
    Chief Executive Officer & Director
    
    March 31, 2008/s/ Daniel Parke

Daniel Parke
    
    President, Chief Operating Officer
& Director
    
    March 31, 2008/s/ Jeffrey Mistarz

Jeffrey Mistarz
    
    Chief Financial Officer & Treasurer
    
    March 31, 2008/s/ Richard Kiphart

Richard Kiphart
    
    Chairman of the Board
    
    March 31, 2008/s/ Gregory Barnum

Gregory Barnum
    
    Director
    
    March 31, 2008/s/ William Carey

William Carey
    
    Director
    
    March 31, 2008/s/ Joseph Desmond

Joseph Desmond
    
    Director
    
    March 31, 2008/s/ David Valentine

David Valentine
    
    Director
    
    March 31, 2008
 42




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
      Chicago, Illinois
    /s/ BDO SEIDMAN, LLPMarch 28, 2008 F-1




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##### Table of Contents



Lime Energy Co.
Consolidated Balance Sheets
 December 31,
    
    2007
    
    
    2006AssetsCurrent AssetsCash and cash equivalents
    
    $
    4,780,701
    
    
    $
    4,663,618Accounts receivable, less allowance for doubtful accounts of
$151,000 and $366,000 at December 31, 2007 and 2006,
respectively
    
    
    6,382,060
    
    
    
    2,825,947Inventories (Note 6)
    
    
    693,227
    
    
    
    614,491Advances to suppliers
    
    
    374,713
    
    
    
    132,083Costs of Uncompleted Contracts in Excess of Related Billings
    
    
    952,997
    
    
    
    Prepaid expenses and other
    
    
    250,169
    
    
    
    279,017Total Current Assets
    
    
    13,433,867
    
    
    
    8,515,156Net Property and Equipment(Note 7)
    
    
    1,542,327
    
    
    
    1,201,008Long Term Receivables
    
    
    224,568
    
    
    
    102,904Deferred Financing Costs,net of amortization of $1,687 at
December 31, 2007 (Note 12)
    
    
    6,885
    
    
    
    Intangibles,net of amortization of $3,693,648 and $1,681,771 at
December 31, 2007 and 2006, respectively (Notes 4 and 8)
    
    
    3,979,052
    
    
    
    5,126,829Cost in Excess of Assets Acquired
    
    
    6,757,133
    
    
    
    10,450,968$
    25,943,832
    
    
    $
    25,396,865
 F-2




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##### Table of Contents



Lime Energy Co.
Consolidated Balance Sheets
 December 31,
    
    2007
    
    
    2006Liabilities and Stockholders EquityCurrent LiabilitiesNotes payable (Note 14)
    
    
    150,000
    
    
    
    150,000Current maturities of long-term debt (Note 15)
    
    
    81,954
    
    
    
    46,699Accounts payable
    
    
    3,092,226
    
    
    
    1,344,725Accrued expenses (Note 9)
    
    
    1,571,683
    
    
    
    1,251,777Deferred revenue
    
    
    1,531,417
    
    
    
    967,446Customer deposits
    
    
    1,180,834
    
    
    
    1,148,090Total Current Liabilities
    
    
    7,608,114
    
    
    
    4,908,737Deferred Revenue
    
    
    244,792
    
    
    
    748,980Long-Term Debt,less current maturities net of unamortized
discount of $2,412,305 and $0 as of December 31, 2007
and 2006, respectively (Notes 12 and 15)
    
    
    3,187,680
    
    
    
    520,392Deferred Tax Liability
    
    
    1,034,000
    
    
    
    1,034,000Total Liabilities
    
    
    12,074,586
    
    
    
    7,212,109Commitments(Notes 17 and 19)Stockholders Equity(Notes 20, 21, 22, 23 and 24)Common stock, $.0001 par value; 200,000,000 shares authorized,
7,720,269 and 7,112,374 issued as of December 31, 2007
and December 31, 2006, respectively
    
    
    773
    
    
    
    711Additional paid-in capital
    
    
    106,267,336
    
    
    
    95,030,180Accumulated deficit
    
    
    (92,398,863
    )
    
    
    (76,846,135
    )Total Stockholders Equity
    
    
    13,869,246
    
    
    
    18,184,756$
    25,943,832
    
    
    $
    25,396,865
 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,
    
    
    December 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2005Revenue
    
    $
    19,481,130
    
    
    $
    8,143,624
    
    
    $
    3,693,429Cost of sales (includes reserve for obsolete inventory of
$0, $568,558 and $19,232 in the years ended December 31,
2007, 2006 and 2005, respectively)
    
    
    15,082,400
    
    
    
    6,931,294
    
    
    
    3,691,854Gross profit
    
    
    4,398,730
    
    
    
    1,212,330
    
    
    
    1,575Selling, general and administrative (includes share based
compensation expense of $3,582,066, $4,519,686 and $0 for
the years ended December 31, 2007, 2006 and 2005,
respectively)
    
    
    13,072,381
    
    
    
    12,165,700
    
    
    
    5,363,503Amortization of intangibles (Note 8)
    
    
    2,011,878
    
    
    
    1,210,006
    
    
    
    471,765Impairment loss (Note 3)
    
    
    4,181,969
    
    
    
    1,183,525
    
    
    
    242,830Operating loss
    
    
    (14,867,498
    )
    
    
    (13,346,901
    )
    
    
    (6,076,523
    )Other Income (Expense)Interest income
    
    
    266,863
    
    
    
    194,182
    
    
    
    58,737Interest expense (Notes 11, 12, 13, 14 and 15)
    
    
    (952,093
    )
    
    
    (3,273,370
    )
    
    
    (602,990
    )Total other income (expense)
    
    
    (685,230
    )
    
    
    (3,079,188
    )
    
    
    (544,253
    )Loss from continuing operations before discontinued operations
    
    
    (15,552,728
    )
    
    
    (16,426,089
    )
    
    
    (6,620,776
    )Discontinued Operations:Loss from operation of discontinued business
    
    
    
    
    
    
    (21,425
    )
    
    
    (251,962
    )Net Loss
    
    
    (15,552,728
    )
    
    
    (16,447,514
    )
    
    
    (6,872,738
    )Preferred Stock Dividends(Note 23)
    
    
    
    
    
    
    (24,347,725
    )
    
    
    (1,851,345
    )Net Loss Available to Common Shareholders
    
    $
    (15,552,728
    )
    
    $
    (40,795,239
    )
    
    $
    (8,724,083
    )Basic and diluted loss per common share from
continuing operations
    
    $
    (2.06
    )
    
    $
    (10.60
    )
    
    $
    (18.59
    )Discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    (0.55
    )Basic and Diluted Loss Per Common Share
    
    $
    (2.06
    )
    
    $
    (10.61
    )
    
    $
    (19.14
    )Weighted Average Common Shares Outstanding (Note 24)
    
    
    7,541,960
    
    
    
    3,844,087
    
    
    
    455,809
 See accompanying notes to consolidated financial statements.
 F-4




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##### Table of Contents



Lime Energy Co.
Consolidated Statements of Stockholders Equity
 Series E
    
    
    Series E
    
    
    Additional
    
    
    
    
    
    
    TotalCommon
    
    
    Preferred
    
    
    Preferred
    
    
    Paid-in
    
    
    Accumulated
    
    
    Stock-holdersCommon Shares
    
    
    Stock
    
    
    Shares
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    EquityBalance,December 31, 2004
    
    
    396,311
    
    
    $
    40
    
    
    
    224,752
    
    
    $
    2,248
    
    
    $
    55,303,866
    
    
    $
    (53,525,883
    )
    
    $
    1,780,271Issuance of common stock (net of offering costs of $211,787)
    
    
    59,524
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    5,413,207
    
    
    
    
    
    
    
    5,413,213Conversion of preferred stock
    
    
    2,064
    
    
    
    
    
    
    
    (2,167
    )
    
    
    (22
    )
    
    
    22
    
    
    
    
    
    
    
    Acquisition of Maximum Performance Group, Inc.
    
    
    23,735
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2,691,605
    
    
    
    
    
    
    
    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
    
    
    2,147
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,484
    
    
    
    
    
    
    
    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
    
    
    483,781
    
    
    $
    48
    
    
    
    236,254
    
    
    $
    2,363
    
    
    $
    64,773,847
    
    
    $
    (60,398,621
    )
    
    $
    4,377,637Issuance of common stock (net of offering costs of $115,107)
    
    
    2,553,571
    
    
    
    255
    
    
    
    
    
    
    
    
    
    
    
    17,759,639
    
    
    
    
    
    
    
    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
    
    
    3,099,411
    
    
    
    310
    
    
    
    (243,234
    )
    
    
    (2,433
    )
    
    
    2,123
    
    
    
    
    
    
    
    Sale of Great Lakes Controlled Energy Corporation
    
    
    (2,027
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (193,743
    )
    
    
    
    
    
    
    (193,743
    )Acquisition of Parke P.A.N.D.A. Corporation
    
    
    714,286
    
    
    
    72
    
    
    
    
    
    
    
    
    
    
    
    4,999,928
    
    
    
    
    
    
    
    5,000,000Acquisition of Kapadia Consulting, Inc.
    
    
    71,429
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    479,993
    
    
    
    
    
    
    
    480,000Conversion of revolver
    
    
    135,838
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    951,963
    
    
    
    
    
    
    
    951,977Beneficial value of adjustment in revolver conversion price
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    950,865
    
    
    
    
    
    
    
    950,865Term loan liquidated damages satisfied through the issuance of common stock
    
    
    23,014
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    185,258
    
    
    
    
    
    
    
    185,260Termination of post repayment interest obligation
    
    
    33,071
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    266,222
    
    
    
    
    
    
    
    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
    
    
    7,112,374
    
    
    $
    711
    
    
    
    
    
    
    $
    
    
    
    $
    95,030,180
    
    
    $
    (76,846,135
    )
    
    $
    18,184,756Issuance of common stock (less issuance costs of $202,932)
    
    
    428,519
    
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    2,796,657
    
    
    
    
    
    
    
    2,796,700Offering costs for 2006 issuance of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45,361
    )
    
    
    
    
    
    
    (45,361
    )Acquisition of Texas Energy Products, Inc.
    
    
    28,571
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    213,997
    
    
    
    
    
    
    
    214,000Acquisition of Preferred Lighting, Inc.
    
    
    15,069
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    384,920
    
    
    
    
    
    
    
    384,922Release of escrow shares to former owners of Maximum Performance Group, Inc.
    
    
    2,959
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,309
    
    
    
    
    
    
    
    26,309Satisfaction of liquidated damages through the issuance of common stock
    
    
    87,673
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    613,699
    
    
    
    
    
    
    
    613,708Share based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,726,731
    
    
    
    
    
    
    
    3,726,731Warrants issued in connection with Subordinated Convertible Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,136,537
    
    
    
    
    
    
    
    1,136,537Value of beneficial conversion feature on Subordinated Convertible Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,866,537
    
    
    
    
    
    
    
    1,866,537Satisfaction of interest obligation through issuance of common stock
    
    
    7,088
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    83,826
    
    
    
    
    
    
    
    83,827Warrants issued for services received
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    162,000
    
    
    
    
    
    
    
    162,000Exercise of options
    
    
    33,005
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    222,006
    
    
    
    
    
    
    
    222,009Exercise of warrants
    
    
    5,011
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    30,094
    
    
    
    
    
    
    
    30,095Warrant repricing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,204
    
    
    
    
    
    
    
    19,204Net loss for the year ended December 31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,552,728
    )
    
    
    (15,552,728
    )Balance,December 31, 2007
    
    
    7,720,269
    
    
    $
    773
    
    
    
    
    
    
    $
    
    
    
    $
    106,267,336
    
    
    $
    (92,398,863
    )
    
    $
    13,869,246
 See accompanying notes to consolidated financial statements.
 F-5




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##### Table of Contents



Lime Energy Co.
Statements of Cash Flows
 Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2005Cash Flows From Operating ActivitiesNet loss
    
    $
    (15,552,728
    )
    
    $
    (16,447,514
    )
    
    $
    (6,872,738
    )Adjustments to reconcile net loss to net cash used in
operating activities, net of assets acquired and disposed of:Provision for bad debts
    
    
    126,241
    
    
    
    105,442
    
    
    
    96,872Share based compensation
    
    
    3,726,731
    
    
    
    4,828,955
    
    
    
    Depreciation and amortization
    
    
    2,200,444
    
    
    
    1,386,597
    
    
    
    601,869Amortization of deferred financing costs
    
    
    1,687
    
    
    
    299,964
    
    
    
    93,774Amortization of issuance discount
    
    
    590,769
    
    
    
    898,409
    
    
    
    71,639Liquidated damages satisfied through issuance of
common stock
    
    
    613,708
    
    
    
    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
    
    
    162,000
    
    
    
    25,200
    
    
    
    319,800Accrued interest converted to common stock
    
    
    83,827
    
    
    
    
    
    
    
    Loss on disposal of fixed assets
    
    
    
    
    
    
    115,914
    
    
    
    11,743Warrant repricing
    
    
    19,204
    
    
    
    
    
    
    
    Asset impairment
    
    
    
    
    
    
    1,183,525
    
    
    
    Provision for inventory obsolescence
    
    
    
    
    
    
    568,558
    
    
    
    19,232Goodwill impairment
    
    
    4,181,969
    
    
    
    
    
    
    
    242,830Changes in assets and liabilities, net of dispositionsAccounts receivable
    
    
    (3,701,117
    )
    
    
    (279,822
    )
    
    
    (484,685
    )Inventories
    
    
    42,397
    
    
    
    519,491
    
    
    
    (121,254
    )Advances to suppliers
    
    
    (242,630
    )
    
    
    192,594
    
    
    
    148,012Other current assets
    
    
    (902,614
    )
    
    
    72,537
    
    
    
    (81,604
    )Accounts payable
    
    
    1,646,123
    
    
    
    (359,331
    )
    
    
    (1,299,561
    )Accrued liabilities
    
    
    280,501
    
    
    
    (300,017
    )
    
    
    2,136Deferred revenue
    
    
    23,999
    
    
    
    (196,310
    )
    
    
    401,050Customer deposits
    
    
    (75,316
    )
    
    
    (273,149
    )
    
    
    (105,757
    )Net cash used in operating activities
    
    
    (6,774,805
    )
    
    
    (6,248,085
    )
    
    
    (6,956,642
    )Cash Flows From Investing ActivitiesAcquisitions (including acquisition costs), net of cash acquired
    
    
    (703,539
    )
    
    
    (4,098,377
    )
    
    
    (1,632,972
    )Sale of discontinued operations
    
    
    
    
    
    
    (83,586
    )
    
    
    Purchase of property and equipment
    
    
    (514,295
    )
    
    
    (82,967
    )
    
    
    (548,874
    )Net cash used in investing activities
    
    
    (1,217,834
    )
    
    
    (4,264,930
    )
    
    
    (2,181,846
    )Cash Flows From Financing ActivitiesBorrowings (payments) on line of credit
    
    
    
    
    
    
    (1,456,545
    )
    
    
    2,000,000Proceeds from long-term debt
    
    
    5,171,440
    
    
    
    
    
    
    
    5,000,000Payments on long-term debt
    
    
    (56,592
    )
    
    
    (5,355,865
    )
    
    
    (541,547
    )Proceeds from issuance of common stock
    
    
    2,999,632
    
    
    
    17,875,000
    
    
    
    5,625,000Costs related to stock issuances
    
    
    (248,293
    )
    
    
    (115,107
    )
    
    
    (211,787
    )Cash paid for deferred financing costs
    
    
    (8,572
    )
    
    
    
    
    
    
    (293,836
    )Proceeds from exercise of options and warrants
    
    
    252,107
    
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    8,109,722
    
    
    
    10,947,483
    
    
    
    11,577,830Net Increase in Cash and Cash Equivalents
    
    
    117,083
    
    
    
    434,468
    
    
    
    2,439,342Cash and Cash Equivalents, at beginning of period
    
    
    4,663,618
    
    
    
    4,229,150
    
    
    
    1,789,808Cash and Cash Equivalents, at end of period
    
    $
    4,780,701
    
    
    $
    4,663,618
    
    
    $
    4,229,150
 F-6




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##### Table of Contents



Lime Energy Co.
Statements of Cash Flows
 Year ended
    
    
    Year ended
    
    
    Year endedDecember 31,
    
    
    December 31,
    
    
    December 31,2007
    
    
    2006
    
    
    2005Supplemental Disclosures of Cash Flow InformationCash paid during the period for interest  continuing
operations (including prepayment penalties)
    
    $
    134,000
    
    
    $
    911,000
    
    
    $
    214,200Cash paid during the period for interest  discontinued
operations
    
    
    
    
    
    
    
    
    
    
    400Interest obligation satisfied through the issuance of
common stock
    
    
    83,827
    
    
    
    
    
    
    
    Stock, warrants and options issued in
exchange for services received
    
    
    17,143
    
    
    
    3,600
    
    
    
    45,686Accrual satisfied through the issuance of
common stock
    
    
    345,583
    
    
    
    7,410
    
    
    
    Satisfaction of accrued dividends on Series E PreferredStock through the issuance of 6,980 and 13,669
shares of Series E Preferred stock during the years
endedDecember 31, 2006 and 2005, respectively
    
    
    
    
    
    
    698,000
    
    
    
    1,366,900Conversion of convertible debt to common stock
    
    $
    
    
    
    $
    943,455
    
    
    $
    
     See accompanying notes to consolidated financial statements.
 F-7




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##### Table of Contents



Note 1  Description of Business
  Note 2  Basis of Presentation
  Note 3  Summary of Significant Accounting Policies
 Principles of Consolidation
  Use of Estimates
  Cash and Cash Equivalents
  Concentration of Risk
  F-8




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##### Table of Contents



Allowance for Doubtful Accounts
  Inventories
  Properties & Equipment
  Buildings
    
    39 yearsOffice equipment
    
    3  5 yearsFurniture
    
    5  10 yearsEquipment
    
    3  5 yearsTransportation equipment
    
    3  5 years
 Cost in Excess of Assets Acquired
  F-9




---



##### Table of Contents



Deferred Financing Costs
   Impairment of Long-Lived Assets
  F-10




---



##### Table of Contents



Revenue Recognition
     Costs of Uncompleted Contracts in Excess of Related Billings
  F-11




---



##### Table of Contents



Shipping and Handling Costs
  Research and Development Costs
  Advertising, Marketing and Promotional Costs
  Income Taxes
  Net Loss Per Share
   December 31,
    
    2007
    
    
    2006
    
    
    2005Weighted average shares issuable
upon exercise of outstanding options
    
    
    1,744,873
    
    
    
    778,310
    
    
    
    111,623Weighted average shares issuable
upon exercise of outstanding
warrants
    
    
    332,560
    
    
    
    156,783
    
    
    
    130,097Weighted average shares issuable
upon conversion of preferred stock
    
    
    
    
    
    
    108,663
    
    
    
    217,030Weighted average shares issuable
upon conversion of convertible debt
    
    
    419,276
    
    
    
    25,272
    
    
    
    22,460Total
    
    
    2,496,709
    
    
    
    1,069,028
    
    
    
    481,210
 F-12




---



##### Table of Contents



Fair Value of Financial Instruments
  Stock-based Compensation
    Year ended December 31,
    
    2005Net Loss, as reported
    
    $
    (6,873,000
    )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
    )Pro forma net loss
    
    $
    (7,647,000
    )Net loss per share:Basic and diluted  as reported
    
    $
    (19.14
    )Basic and diluted  pro forma
    
    $
    (20.84
    )
 F-13




---



##### Table of Contents



December 31,
    
    2005Risk-free interest rate
    
    
    2.27
    %Expected volatility
    
    
    65
    %Expected life (years)
    
    
    9.1Expected dividend yield
    
    
    0
    %
  Warranty Obligations
  Insurance Reserves
  Recent Accounting Pronouncements
  F-14




---



##### Table of Contents



F-15




---



##### Table of Contents



Note 4  Acquisitions
 Maximum Performance Group, Inc.
    F-16




---



##### Table of Contents



Accounts receivable
    
    $
    292,102Inventory
    
    
    326,122Advances to suppliers
    
    
    472,689Other current assets
    
    
    63,611Net Property and equipment
    
    
    121,608Identifiable intangible assets
    
    
    2,432,600Goodwill (non-deductible)
    
    
    4,181,969Total assets acquired
    
    
    7,890,701Accounts payable
    
    
    (928,509
    )Accrued expenses
    
    
    (658,940
    )Deferred revenue
    
    
    (1,011,616
    )Other current liabilities
    
    
    (525,676
    )Notes payable
    
    
    (289,587
    )Total liabilities acquired
    
    
    (3,414,328
    )Net assets acquired
    
    
    4,476,373Less valuation of shares issued for
acquisition
    
    
    (2,716,664
    )Acquisition costs paid through the
issuance of common stock
    
    
    (126,737
    )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
    
    
    4.0 yearsCustomer relationships
    
    
    267,800
    
    
    9.7 yearsCustomer contracts
    
    
    184,900
    
    
    12 months
 F-17




---



##### Table of Contents



Parke P.A.N.D.A. Corporation
 
      Cash
    
    $
    1,710Accounts receivable
    
    
    710,465Inventory
    
    
    142,789Other current assets
    
    
    7,088Net property and equipment
    
    
    79,917Identifiable intangible assets
    
    
    3,247,000Goodwill (non-deductible)
    
    
    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
    )Acqusition costs
    
    
    (145,605
    )Total cash paid
    
    $
    2,720,000
 F-18




---



##### Table of Contents



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
 Kapadia Consulting, Inc.
    F-19




---



##### 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 (non-deductible)
    
    
    710,433Total assets acquired
    
    
    2,729,478Accounts payable
    
    
    (657,079
    )Accrued expenses
    
    
    (299,316
    )Other current liabilities
    
    
    (11,272
    )Total liabilities assumed
    
    
    (967,667
    )Net assets acquired
    
    
    1,761,811Less valuation of shares issued
for acquisition
    
    
    (480,000
    )Acqusition costs
    
    
    (31,811
    )Total cash paid
    
    $
    1,250,000
  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
 Texas Energy Products and Preferred Lighting, Inc.
  F-20




---



##### Table of Contents



Texas
    
    
    PreferredEnergy
    
    
    LightingCash
    
    $
    17,899
    
    
    $
    31,127Accounts receivable
    
    
    78,410
    
    
    
    24,491Inventory
    
    
    67,634
    
    
    
    53,499Other current assets
    
    
    4,800
    
    
    
    16,735Property and equipment
    
    
    7,000
    
    
    
    8,593Identifiable intangible assets
    
    
    496,000
    
    
    
    368,100Goodwill (deductible)
    
    
    28,780
    
    
    
    433,045Total assets acquired
    
    
    700,523
    
    
    
    935,590Accounts payable
    
    
    (101,356
    )
    
    
    (22
    )Accrued expenses
    
    
    (19,241
    )
    
    
    (20,164
    )Other current liabilities
    
    
    (35,784
    )
    
    
    (108,059
    )Total liabilities assumed
    
    
    (156,381
    )
    
    
    (128,245
    )Net assets acquired
    
    
    544,142
    
    
    
    807,345Less valuation of shares and
warrants issued for acquisition
    
    
    (214,000
    )
    
    
    (384,922
    )Acqusition costs
    
    
    (10,818
    )
    
    
    (12,470
    )Total cash paid
    
    
    319,324
    
    
    
    409,953
  F-21




---



##### Table of Contents



Estimated
    
    EstimatedAsset Class
    
    Value
    
    Useful LifeTexas Energy ProductsSales backlog
    
    $
    223,000
    
    
    3 MonthsSales pipeline
    
    
    273,000
    
    
    6 MonthsPreferred LightingSales backlog
    
    $
    15,400
    
    
    4 monthsSales pipeline
    
    
    335,000
    
    
    16 monthsCustomer list
    
    
    17,700
    
    
    3 years
    Year ended December 31,
    
    2006
    
    
    2005Revenue:As Reported
    
    $
    8,143,624
    
    
    $
    3,693,429Pro-forma
    
    
    10,027,454
    
    
    
    7,298,786Net Loss from Continuing Operations:As Reported
    
    $
    (16,426,089
    )
    
    $
    (6,620,776
    )Pro-forma
    
    
    (16,056,887
    )
    
    
    (8,360,207
    )Basic and Diluted Loss per Share
from Continuing Operations:As Reported
    
    $
    (10.61
    )
    
    $
    (19.14
    )Pro-forma
    
    
    (8.84
    )
    
    
    (19.01
    )
  F-22




---



##### Table of Contents



Note 5  Discontinued Operations
    Year ended December 31
    
    2006
    
    
    2005Revenue
    
    $
    485,787
    
    
    $
    1,161,343Net Loss
    
    
    (21,425
    )
    
    
    (251,962
    )
 Note 6  Inventories
  December 31,
    
    2007
    
    
    2006Raw materials
    
    $
    681,602
    
    
    $
    1,010,995Work in process
    
    
    
    
    
    
    3,700Finished goods
    
    
    13,463
    
    
    
    196,586Reserve for obsolescence (1)
    
    
    (1,838
    )
    
    
    (596,790
    )$
    693,227
    
    
    $
    614,491
 (1)
    
    Includes $553,909 reserve for obsolete EnergySaver inventory as of December 31,
2006.
 F-23




---



##### Table of Contents



Note 7  Property and Equipment
  December 31,
    
    2007
    
    
    2006Land
    
    $
    205,000
    
    
    $
    205,000Building
    
    
    1,011,723
    
    
    
    997,381Furniture
    
    
    120,609
    
    
    
    82,946Equipment
    
    
    121,622
    
    
    
    43,192Office equipment
    
    
    561,785
    
    
    
    342,906Transportation equipment
    
    
    303,212
    
    
    
    123,0552,323,951
    
    
    
    1,794,480Less accumulated depreciation
    
    
    (781,624
    )
    
    
    (593,472
    )$
    1,542,327
    
    
    $
    1,201,008
 F-24




---



##### Table of Contents



Note 8  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
    
    
    $
    10,450,967Release of escrow shares to
Former owners of Maximum
Performance Group, Inc.
    
    
    
    
    
    
    26,309
    
    
    
    
    
    
    
    26,309Acquisition of Texas Energy
Products, Inc.
    
    
    
    
    
    
    
    
    
    
    28,780
    
    
    
    28,780Acquisition of Preferred
Lighting, Inc.
    
    
    
    
    
    
    
    
    
    
    433,045
    
    
    
    433,045Impairment charge
    
    
    
    
    
    
    (4,181,969
    )
    
    
    
    
    
    
    (4,181,969
    )Balance at December 31, 2007
    
    $
    
    
    
    $
    
    
    
    $
    6,757,132
    
    
    $
    6,757,132
  F-25




---



##### Table of Contents



WeightedAverageRemainingLife
    
    
    Gross Book
    
    
    Accumulated
    
    
    Net Book(months)
    
    
    Value
    
    
    Amortization
    
    
    ValueAs of December 31, 2007Indefinite-lived assets
    
    
    
    
    
    $
    2,652,000
    
    
    $
    
    
    
    $
    2,652,000Amortized intangible assets:Technology and software
    
    
    8.5
    
    
    
    1,979,900
    
    
    
    1,319,933
    
    
    
    659,967Customer relationships
    
    
    57.1
    
    
    
    432,500
    
    
    
    86,390
    
    
    
    346,110Customer contracts
    
    
    0.0
    
    
    
    816,300
    
    
    
    816,300
    
    
    
    Non-compete agreements
    
    
    3.9
    
    
    
    423,000
    
    
    
    306,375
    
    
    
    116,625Sales pipe-line
    
    
    6.6
    
    
    
    1,369,000
    
    
    
    1,164,650
    
    
    
    204,350Total
    
    
    
    
    
    $
    7,672,700
    
    
    $
    3,693,648
    
    
    $
    3,979,052As 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-compete 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
    
    
    $
    5,126,829
  AmortizationExpense2008
    
    $
    857,5132009
    
    
    215,9272010
    
    
    44,7362011
    
    
    39,8132012
    
    
    36,440$
    1,194,429
 F-26




---



##### Table of Contents



Note 9  Accrued Expenses
  December 31,
    
    2007
    
    
    2006Commissions
    
    $
    30,222
    
    
    $
    56,590Compensation
    
    
    302,922
    
    
    
    149,320Insurance
    
    
    137,531
    
    
    
    47,866Interest
    
    
    172,975
    
    
    
    31,059Job costs
    
    
    230,665
    
    
    
    122,924Lease expense
    
    
    36,840
    
    
    
    13,502Professional fees
    
    
    10,386
    
    
    
    82,238Real estate taxes
    
    
    42,012
    
    
    
    41,689Registration penalties
    
    
    
    
    
    
    345,583Sales tax payable
    
    
    211,549
    
    
    
    35,050Warranty reserve
    
    
    377,902
    
    
    
    196,783Other
    
    
    18,679
    
    
    
    129,173$
    1,571,683
    
    
    $
    1,251,777
 Note 10  Warranty Liability
  December 31,
    
    2007
    
    
    2006Balance, beginning of year
    
    $
    196,783
    
    
    $
    228,331Warranties issued
    
    
    231,737
    
    
    
    54,790Settlements
    
    
    (50,618
    )
    
    
    (66,307
    )Adjustments (1)
    
    
    
    
    
    
    (20,031
    )Balance, end of year
    
    $
    377,902
    
    
    $
    196,783
 (1)
    
    Reflects the sale of Great Lakes Controlled Energy
 Note 11  Line of Credit
   F-27




---



##### Table of Contents



Note 12  Subordinated Convertible Term Notes
     F-28




---



##### Table of Contents



Value Allocated to Term Notes:Proceeds from issuance
    
    $
    5,000,000Less value allocated to warrants
    
    
    (1,136,537
    )Value allocated to Term Notes
    
    $
    3,863,463Market Value of Shares Issuable Upon Conversion:Shares issuable upon conversion of the Term Notes
    
    
    714,286Closing market value of stock on Term Note issuance date
    
    $
    8.022Market value of shares issuable upon conversion
    
    
    5,730,000Beneficial Conversion Value:Market value of shares issuable upon conversion
    
    $
    5,730,000Less value allocated to Term Notes
    
    
    (3,863,463
    )Value of beneficial conversion feature
    
    $
    1,866,537
   Note 13  Convertible Term Loans
    F-29




---



##### 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-30




---



##### Table of Contents



Note 14  Notes Payable
  Note 15  Long Term Debt
  December 31,
    
    2007
    
    
    2006Mortgage note to American Chartered Bank, prime (7.25% as of
December 31, 2007) plus 1/2%, payable in monthly
installments of $3,000, plus interest until January
2010. A final payment of $415,000 is due in February
2010. This note is collateralized by the building and
land in Elk Grove Village, Illinois.
    
    $
    490,000
    
    
    $
    526,000Subordinated convertible term note (less debt discount
of $2,412,305, as of December 31, 2007).
    
    
    2,587,695
    
    
    
    Various other notes
    
    
    191,939
    
    
    
    41,091Total debt
    
    
    3,269,634
    
    
    
    567,091Less current portion
    
    
    81,954
    
    
    
    46,699Total long-term debt
    
    $
    3,187,680
    
    
    $
    520,392
  AggregateMaturities2008
    
    
    81,9542009
    
    
    81,3872010
    
    
    5,453,1492011
    
    
    36,9522112
    
    
    27,9502113
    
    
    547$
    5,681,939
 F-31




---



##### Table of Contents



Note 16  Interest Expense
  Year ended December 31
    
    2007
    
    
    2006
    
    
    2005Line of credit (Note 11)
    
    $
    
    
    
    $
    50,344
    
    
    $
    138,097Note payable (Note 14)
    
    
    16,547
    
    
    
    16,563
    
    
    
    9,563Mortgage (Note 15)
    
    
    43,931
    
    
    
    46,495
    
    
    
    39,181Subordinated convertible notes
(Note 12)
    
    
    293,683
    
    
    
    
    
    
    
    Convertible term loans (Note 13)
    
    
    
    
    
    
    249,065
    
    
    
    87,709Other
    
    
    5,476
    
    
    
    1,772
    
    
    
    3,027Amortization of deferred issuance
costs and debt discount
(Notes 12 and 13)
    
    
    592,456
    
    
    
    1,175,970
    
    
    
    165,413Value of warrant issued to
Laurus (Note 22(b))
    
    
    
    
    
    
    
    
    
    
    160,000Prepayment penalty (Note 13)
    
    
    
    
    
    
    516,071
    
    
    
    Value of adjustment in conversion
price (Note 13)
    
    
    
    
    
    
    950,865
    
    
    
    Termination of post re-payment
interest obligation (Note 13)
    
    
    
    
    
    
    266,225
    
    
    
    Total Interest Expense
    
    $
    952,093
    
    
    $
    3,273,370
    
    
    $
    602,990
 Note 17  Lease Commitments
   Related
    
    
    UnrelatedYear ending December 31,
    
    Party
    
    
    Party
    
    
    Total2008
    
    $
    126,126
    
    
    $
    211,671
    
    
    $
    337,7972009
    
    
    130,403
    
    
    
    181,750
    
    
    
    312,1532010
    
    
    
    
    
    
    135,313
    
    
    
    135,3132011
    
    
    
    
    
    
    85,279
    
    
    
    85,279Total
    
    $
    256,529
    
    
    $
    614,013
    
    
    $
    870,542
 F-32




---



##### Table of Contents



Note 18  Income Taxes
  Year ended December 31
    
    2007
    
    
    2006
    
    
    2005DeferredFederal
    
    $
    (5,353,000
    )
    
    $
    (5,453,000
    )
    
    $
    (2,272,000
    )State
    
    
    (945,000
    )
    
    
    (962,000
    )
    
    
    (401,000
    )Change in valuation allowance
    
    
    6,298,000
    
    
    
    6,415,000
    
    
    
    2,673,000Benefit for income taxes
    
    $
    
    
    
    $
    
    
    
    $
    
  December 31
    
    2007
    
    
    2006Deferred tax asset consisting principally of net operating losses
    
    $
    33,897,000
    
    
    $
    28,368,000Deferred tax liabilities, principally related to non-deductible
identifiable intangible assets
    
    
    (1,231,000
    )
    
    
    (2,000,000
    )Less valuation allowance
    
    
    (33,700,000
    )
    
    
    (27,402,000
    )Total net deferred tax liability
    
    $
    (1,034,000
    )
    
    $
    (1,034,000
    )
  F-33




---



##### Table of Contents



Year ended December 31,
    
    2007
    
    
    2006
    
    
    2005Income tax (benefit) at federal statutory rate
    
    $
    (5,288,000
    )
    
    $
    (5,592,000
    )
    
    $
    (2,337,000
    )State taxes (net of federal tax benefit)
    
    
    (1,010,000
    )
    
    
    (823,000
    )
    
    
    (336,000
    )Increase in valuation allowance
    
    
    6,298,000
    
    
    
    6,415,000
    
    
    
    2,673,000Income tax expense (benefit)
    
    $
    
    
    
    $
    
    
    
    $
    
  Note 19  Commitments and Contingencies
 a)
    
    The Company entered into employment agreements with certain officers and employees expiring
in 2010. Total future commitments under these agreements are as follows:
 Year ending December 31,2008
    
    $
    1,144,0002009
    
    
    745,0002010
    
    
    745,000Total
    
    $
    2,634,000
 b)
    
    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 20  The June 2006 PIPE Transaction
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Note 21  The Series E Conversion
   F-35




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Note 22  Equity Transactions
 2005 Transactions
 a)
    
    During 2005, two holders of the Companys Series E Convertible
Preferred Stock converted 2,167 shares of Series E Convertible
Preferred Stock into 2,064 shares of common stock.b)
    
    During 2005, the Company issued the following warrants:
 
    
    On April 28, 2005, Laurus Master Fund, Ltd. received a warrant to purchase 3,810
shares of common stock in exchange for its consent to the Company entering into the
PIPE Transaction described under c) 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 $105.00 per share and
a term of five years. The warrant was valued at $160,000 using a modified
Black-Scholes 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 parties received warrants to purchase 4,191 shares of the Companys common
stock with exercise prices between $105.00 and $108.15 per share and terms of three to
ten years. The warrants were valued collectively at $159,800 using a modified
Black-Scholes 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.
 c)
    
    On April 28, 2005 the Company issued to five (5) institutional investors, for an aggregate
gross purchase price of $5,625,000, 59,524 shares of its common stock and 42 month warrants to
purchase 29,762 additional shares of common stock at $110.25 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 476 shares of common stock and Mr.
Valentine 476 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 the Companys CEO.d)
    
    On May 3, 2005 the Company issued 23,735 shares of common stock in connection with the
acquisition of Maximum Performance Group, Inc. Please refer to Note 4 for additional
information regarding this transaction.
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##### Table of Contents



Delano Group Securities LLC acted as an advisor on the acquisition of MPG and was paid $82,176
and 1,195 shares of common stock for its services. These shares were valued at $105.00 per
share, which was the closing market price of the Companys common stock on April 28, 2005.
Delano
Group Securities LLC is owned by Mr. David Asplund, one of Lime Energys directors and effective
January 23, 2006, its CEO.e)
    
    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 19,048 shares of its common stock at $121.80 per share anytime
prior to November 22, 2012. The warrants were valued at $920,000 using a modified
Black-Scholes 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.f)
    
    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.
 2006 Transactions
 g)
    
    In January 2006 the Company issued stock options at the then
current market price of $65.10 per share, which was less than
the $96.60 exercise price on a warrant held by one of its former
Series E Preferred stock holders. Adjusting the exercise price
of this warrant resulted in a non-cash deemed dividend of
$266,390.h)
    
    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
6,790 shares of common stock.i)
    
    Effective March 31, 2006, the Company received 2,027 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.j)
    
    A number of the Companys common stock warrants contain
anti-dilution 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 described in i)
above, the exercise price on these warrants ranged from $94.50
per share to $105.00 per share. The issuance of common stock in
the PIPE Transaction caused the exercise price on these warrants
to automatically be reduced to $7.00 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. The
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Company used the following assumptions when determining the
change in value of these warrants: risk free rate of 5.036%;
expected volatility of between 97.8% and 154.7; expected
dividend of $0; and expected lives of between 0.4 years and 2.7
years.k)
    
    Immediately following completion of the PIPE Transaction
described in Note 20 above, 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 135,838 shares of the Companys common stock. In
addition, in consideration of the issuance of 56,085 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.l)
    
    On June 30, 2006, the Company issued 714,286 shares to the Parke
Family Trust as part of the consideration in the acquisition of
Parke P.A.N.D.A. Corporation. Please refer to Note 4 for
additional information regarding this transaction.m)
    
    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.n)
    
    On July 25, 2006, the Company issued a three year warrant to
purchase 8,571 shares of its common stock at $7.00 per share to
Bristol Capital, Ltd. This warrant was valued at $25,200 using
a modified Black-Scholes 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.o)
    
    On September 26, 2006, the Company issued 71,429 shares of its
common stock to Pradeep and Susan Kapadia as part of the
consideration in the acquisition of Kapadia Consulting, Inc.
Please refer to Note 4 for additional information regarding this
transaction.
 2007 Transactions
 p)
    
    In January 2007, pursuant to the Directors Option Plan the
Company granted options to certain outside directors with an
exercise price of $6.30 per share, which was the market price on
the date of issuance. Warrants held by 12 investors, including
Messrs. Asplund and Kiphart, contained anti-dilution 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 granting of the director options, the exercise price on these
warrants was $7.00 per share. The grant of the director options
caused the exercise price on these warrants to automatically be
reduced to $6.30 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 $19,204, which the Company recorded as an expense in January
2007. The Company used the following assumptions when
determining the change in value of these warrants: risk free
rate of 5.026%; expected volatility of between 73.5% and 127.7;
expected dividend of $0; and expected lives of between 0.5 years
and 1.7 years.
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##### Table of Contents



q)
    
    During January 2007, the Company issued consultants warrants
with terms of two to three years to purchase 38,571 shares of
its common stock at prices of $7.00 to $7.56 per share as
partial consideration for services provided the Company. These
warrants were valued at $162,000 using a modified Black-Scholes
option pricing model utilizing the following assumptions: risk
free rate of
5.129%; expected volatility of 88.9%; expected dividend of $0; and expected life of two to three
years. The value of the warrants was charged to operations during 2007.r)
    
    A provision of the June 2006 PIPE transaction required the Company to
file and have declared effective by no later than November 3, 2006, a
registration statement registering the shares issued as part of the
transaction. To the extent that it failed to have the registration
statement declared effective by this date, it was required to pay
penalties to the PIPE investors at the rate of 1% per month of the
purchase price paid by the investors. Largely as a result of the
questions regarding the need to amend its Certificate of Incorporation
to effect the 2006 reverse split of its stock, the Company was not
able to have the registration statement declared effective until
February 14, 2007. All of the investors in the PIPE transaction
agreed to accept shares of the Companys common stock as payment of
this registration penalty. As of December 31, 2006, the Company had
accrued $345,583 in penalties related to its failure to register these
shares. The accrued penalties, along with $268,125 of penalties for
the period from January 1, 2007 through February 14, 2007, were
satisfied through the issuance of 87,673 shares of common stock in
January and February 2007.s)
    
    On February 23, 2007, the Company commenced a rights offering to
stockholders in which it distributed to each holder of record as of
February 23, 2007 (other than the former Series E Preferred
stockholders and Daniel Parke, who waived their rights to
participate), non-transferable subscription rights to purchase shares
of the Companys common stock at $7.00 per share. Stockholders that
participated in the rights offering were also able to subscribe for
any shares that were not purchased by other stockholders pursuant to
their subscription rights. The rights offering closed on March 30,
2007 and raised $2,796,700 (net of issuance costs of $202,932) through
the issuance of 428,519 shares of common stock to 260 of the Companys
existing stockholders. The Company received the proceeds from the
offering and issued the common stock to the participants during the
first week of April 2007.t)
    
    In connection with the placement of the subordinated convertible term
notes during the second quarter of 2007 the Company issued four-year
warrants to eight investors, including Richard Kiphart, the Companys
chairman and largest individual stockholder, to purchase 206,043
shares of its common stock at $7.28 per share. These warrants were
valued at $1,136,537 using a modified-Black Scholes option pricing
model utilizing the following assumptions: risk free rate of 4.846%;
expected volatility of 93.3%; expected dividend of $0; and expected
life of four years. The value of the warrants was recorded as a
discount to the subordinated convertible term notes and will be
amortized over the life of the notes using the effective interest
method.
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u)
    
    As part of the MPG acquisition, 23,735 shares of common stock were
deposited in escrow for the benefit of the selling stockholders of MPG
to be released over the two-year period following the April 30, 2005
purchase of MPG if it achieved certain revenue targets during the
period. During May 2007 the Company issued 2,818 shares to the
former MPG stockholders which it determined it owed them pursuant to
the MPG merger agreement. These shares were valued at $8.89 per
share, the market value on the date of their release, and recorded as
an increase in the goodwill associated with the MPG acquisition. The
remaining 20,917 shares that were in escrow were returned to the
Company and retired and became authorized but un-issued shares.v)
    
    Delano Group Securities LLC acted as an advisor on the acquisition of
MPG in 2005. Part of Delanos compensation for its services was tied
to the purchase price paid for MPG. Mr. David Asplund owned and
operated Delano prior to joining Lime Energy as its CEO in January
2006. Since the release of the escrow shares was considered a payment
of additional consideration to the former stockholders of MPG, the
Company issued Mr. Asplund 141 shares of its common stock in May 2007
in satisfaction of the commission owed Delano. These shares were
valued at $1,252, based on the market value on the date of their
issuance, and recorded as an increase in the goodwill associated with
the MPG acquisition.w)
    
    On June 6, 2007, retroactive to May 31, 2007, the Company acquired the
assets and assumed certain liabilities of George Bradley Boyett dba
Texas Energy Products. The purchase consideration consisted of 28,571
shares of Lime Energy common stock and cash of $312,787. For
accounting purposes the stock was valued at $7.49 per share, the
average closing price of the stock for the 20 trading days immediately
prior to the closing. Please refer to Note 4 for additional
information regarding this transaction.x)
    
    On August 6, 2007, retroactive to July 31, 2007, the Company acquired
the assets and assumed certain liabilities of Preferred Lighting, Inc.
for 15,069 shares of Lime Energy common stock and cash of $409,953
(including $109,953 paid in 2008 pursuant to an earn-out based on 2007
earnings). The company also issued five year warrants to the former
owners of Preferred Lighting to purchase 21,429 shares of the
Companys common stock at $13.23 per share. These warrants were
valued at $184,500 using a modified-Black Scholes option pricing model
utilizing the following assumptions: risk free rate of 4.909%;
expected volatility of 75.0%; expected dividend of $0; and expected
life of four years. The value of the warrants were considered part of
the purchase consideration. Please refer to Note 4 for additional
information regarding this transaction.y)
    
    During 2007, the Company issued 7,088 shares of its common stock to
the holders of its subordinated convertible term notes in satisfaction
of 50% of the interest owed on the note.z)
    
    During 2007 certain employees and a former director exercised options
to purchase 33,005 shares of the Companys common stock as exercise
prices ranging from $6.30 to $7.14 per share.aa)
    
    During 2007 six investors exercised their warrants to purchase 5,011
shares of the Companys common stock at $6.30 per share. One of these
investors elected to exercise its warrant on a cashless basis,
surrendering 569 shares it would have otherwise be entitled to receive
on exercise to cover the exercise price.
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##### Table of Contents



bb)
    
    The Company had outstanding warrants to purchase 417,907 and 157,443
shares of its common stock as of December 31, 2007 and 2006,
respectively, at an exercise price of between $6.30 per share and
$688.80 per share. These warrants can be exercised at any time prior
to their expiration dates which range between January 2008 and May
2015. The following table summarizes information about warrants
outstanding as of December 31, 2007:
 Warrants OutstandingNumber
    
    
    WeightedAverage
    
    
    WeightedOutstanding at
    
    
    Remaining
    
    
    AverageDecember 31,
    
    
    Contractual
    
    
    ExerciseExercise Price
    
    2007
    
    
    Life
    
    
    Price$6.30  $7.00
    
    
    106,579
    
    
    1.0 years
    
    
    $
    6.58$7.01  $10.00
    
    
    227,473
    
    
    4.3 years
    
    
    
    7.31$10.01  $15.00
    
    
    21,429
    
    
    4.6 years
    
    
    
    13.23$15.01  $104.99
    
    
    
    
    
    
    
    
    
    
    $105.00  $688.80
    
    
    62,426
    
    
    2.1 years
    
    
    
    127.24417,907
    
    
    2.6 years
    
    
    $
    25.34
 Note 23  Dividends
  Year ended December 31,
    
    2007
    
    
    2006
    
    
    2005Accrual of Series E 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
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Note 24  Reverse Splits
  Note 25  Stock Options
 st
   F-42




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##### Table of Contents



WeightedExercise
    
    
    AveragePrice Per
    
    
    ExerciseShares
    
    
    Share
    
    
    PriceOutstanding at December 31, 2004
    
    
    105,876
    
    
    $
    88.20-$1,363.95
    
    
    $
    343.35Granted
    
    
    9,976
    
    
    $
    105.00-$130.20
    
    
    $
    109.20Forfeited
    
    
    (1,566
    )
    
    $
    105.00-$840.00
    
    
    $
    163.80Outstanding at December 31, 2005
    
    
    114,286
    
    
    $
    88.20-$1,363.95
    
    
    $
    325.50Granted
    
    
    1,446,903
    
    
    $
    6.72-$105.00
    
    
    $
    7.84Forfeited
    
    
    (31,626
    )
    
    $
    7.14-$735.00
    
    
    $
    137.76Outstanding at December 31, 2006
    
    
    1,529,563
    
    
    $
    6.72-$1,363.95
    
    
    $
    33.25Granted
    
    
    701,723
    
    
    $
    6.30-$13.30
    
    
    $
    10.58Exercised
    
    
    (35,086
    )
    
    $
    6.30-$7.14
    
    
    $
    7.05Forfeited
    
    
    (25,852
    )
    
    $
    6.30-$247.80
    
    
    $
    31.55Outstanding at December 31, 2007
    
    
    2,170,348
    
    
    $
    6.30-$1,363.95
    
    
    $
    23.31Options exercisable at
December 31, 2007
    
    
    1,095,512
    
    
    $
    6.30-$1,363.95
    
    
    $
    36.86Options exercisable at
December 31, 2006
    
    
    663,636
    
    
    $
    6.72-$1,363.95
    
    
    $
    7.95Options exercisable at
December 31, 2005
    
    
    103,360
    
    
    $
    88.20-$1,363.95
    
    
    $
    338.10
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Year ended December 31,
    
    2007
    
    
    2006
    
    
    2005Weighted average fair value per options granted
    
    $
    8.12
    
    
    $
    7.35
    
    
    $
    4.76Significant assumptions (weighted average):Risk-free interest rate at grant date
    
    
    4.06
    %
    
    
    5.02
    %
    
    
    2.27
    %Expected stock price volatility
    
    
    88
    %
    
    
    90
    %
    
    
    65
    %Expected dividend payout
    
    
    
    
    
    
    
    
    
    
    Expected option life (years)
    
    
    6.1
    
    
    
    5.6
    
    
    
    9.1
   2007
    
    2006Cost ofSales
    
    SG&A
    
    Total
    
    Cost of Sales
    
    SG&A
    
    TotalEnergy services
    
    $
    129,716
    
    
    $
    591,560
    
    
    $
    721,276
    
    
    $
    217,271
    
    
    $
    623,277
    
    
    $
    840,548Energy technology
    
    
    14,949
    
    
    
    529,112
    
    
    
    544,061
    
    
    
    79,663
    
    
    
    817,287
    
    
    
    896,950Corporate overhead
    
    
    
    
    
    
    2,461,394
    
    
    
    2,461,394
    
    
    
    
    
    
    
    3,079,122
    
    
    
    3,079,122Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,335Total
    
    $
    144,665
    
    
    $
    3,582,066
    
    
    $
    3,726,731
    
    
    $
    296,934
    
    
    $
    4,519,686
    
    
    $
    4,828,955
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Options Outstanding
    
    
    Options ExercisableNumber
    
    
    Weighted AverageOutstanding at
    
    
    Remaining
    
    
    Weighted Average
    
    
    Number Exercisable
    
    
    Weighted AverageDecember 31,
    
    
    Contractual
    
    
    Exercise
    
    
    at December 31,
    
    
    ExerciseExercise Price
    
    2007
    
    
    Life
    
    
    Price
    
    
    2007
    
    
    Price$6.30  $7.00
    
    
    548,571
    
    
    8.6 years
    
    $
    6.74
    
    
    
    256,285
    
    
    $
    6.74$7.01  $8.50
    
    
    907,053
    
    
    7.6 years
    
    
    7.19
    
    
    
    728,243
    
    
    
    7.16$8.51  $11.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $11.00  $12.00
    
    
    599,536
    
    
    9.8 years
    
    
    11.15
    
    
    
    1,429
    
    
    
    11.20$12.01  $13.50
    
    
    3,570
    
    
    9.5 years
    
    
    12.88
    
    
    
    
    
    
    
    $13.51  100.00
    
    
    14,286
    
    
    8.1 years
    
    
    65.10
    
    
    
    14,286
    
    
    
    65.10$100.01$1,363.95
    
    
    97,332
    
    
    2.1 years
    
    
    336.00
    
    
    
    95,269
    
    
    
    341.002,170,348
    
    
    8.2 years
    
    $
    23.31
    
    
    
    1,095,512
    
    
    $
    36.86
   Year ending December 31,2008
    
    $
    3,600,9562009
    
    
    1,280,6522010
    
    
    518,891Total
    
    $
    5,400,499
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WeightedAverage GrantDate FairNumber of Options
    
    
    ValueNonvested at December 31, 2006
    
    
    865,950
    
    
    $
    8.86Granted
    
    
    701,673
    
    
    
    8.12Vested
    
    
    (473,981
    )
    
    
    9.03Forfeited
    
    
    (18,806
    )
    
    
    7.61Nonvested at December 31, 2007
    
    
    1,074,836
    
    
    $
    8.30
 Note 26  Related Parties
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Shares Issued Upon
    
    Common Shares
    
    Aggregate PriceConversion of
    
    Issued Pursuant to
    
    Paid for PIPESeries E
    
    PIPE
    
    SharesDavid R. Asplund
    
    
    50,600
    
    
    
    214,286
    
    
    $
    1,500,000Richard P. Kiphart
    
    
    1,271,915
    
    
    
    814,286
    
    
    
    5,700,000David Valentine
    
    
    20,814
    
    
    
    28,571
    
    
    
    200,000Total
    
    
    1,343,329
    
    
    
    1,057,143
    
    
    $
    7,400,000
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Note 27  Business Segment Information
      F-49




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##### Table of Contents



Year ended December 31,
    
    2007
    
    
    2006
    
    
    2005Revenues:Energy Services
    
    $
    16,182,172
    
    
    $
    3,302,014
    
    
    $
    Energy Technology
    
    
    3,609, 816
    
    
    
    4,841,610
    
    
    
    3,693,429Financial Services
    
    
    8,292
    
    
    
    
    
    
    
    Intercompany sales
    
    
    (319,150
    )
    
    
    
    
    
    
    Total
    
    
    19,481,130
    
    
    
    8,143,624
    
    
    
    3,693,429Operating Income (Loss):Energy Services
    
    
    (1,239,361
    )
    
    
    (1,175,253
    )
    
    
    Energy Technology
    
    
    (8,234,325
    )
    
    
    (6,692,648
    )
    
    
    (4,578,753
    )Financial Services
    
    
    8,292
    
    
    
    
    
    
    
    Corporate
    
    
    (5,402,104
    )
    
    
    (5,479,000
    )
    
    
    (1,497,770
    )Total
    
    
    (14,867,498
    )
    
    
    (13,346,901
    )
    
    
    (6,076,523
    )Interest Expense, net
    
    
    (685,230
    )
    
    
    (3,079,188
    )
    
    
    (544,253
    )Loss from continuing operations
    
    
    (15,552,728
    )
    
    
    (16,426,089
    )
    
    
    (6,620,776
    )Depreciation and Amortization:Energy Services
    
    
    1,559,850
    
    
    
    641,870
    
    
    
    9,598Energy Technology
    
    
    578,853
    
    
    
    742,706
    
    
    
    592,271Financial Services
    
    
    
    
    
    
    
    
    
    
    Building Control and Automation
    
    
    
    
    
    
    2,021
    
    
    
    Corporate
    
    
    61,741
    
    
    
    
    
    
    
    Total
    
    
    2,200,444
    
    
    
    1,386,597
    
    
    
    601,869Capital Additions:Energy Services
    
    
    261,943
    
    
    
    12,096
    
    
    
    Energy Technology
    
    
    122,884
    
    
    
    68,406
    
    
    
    530,925Financial Services
    
    
    
    
    
    
    
    
    
    
    Building Control and Automation
    
    
    
    
    
    
    2,465
    
    
    
    17,949Corporate
    
    
    129,468
    
    
    
    
    
    
    
    Total
    
    
    514,295
    
    
    
    82,967
    
    
    
    548,874Total Assets:Energy Services
    
    
    16,493,666
    
    
    
    12,490,117
    
    
    
    Energy Technology
    
    
    3,166,073
    
    
    
    7,486,535
    
    
    
    10,760,824Financial Services
    
    
    351,297
    
    
    
    
    
    
    
    Building Control and Automation
    
    
    
    
    
    
    
    
    
    
    674,514Corporate
    
    
    5,932,796
    
    
    
    5,420,213
    
    
    
    5,663,636Total
    
    $
    25,943,832
    
    
    $
    25,396,865
    
    
    $
    17,098,974
 F-50




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##### Table of Contents



Note 28  Selected Quarterly Financial Data (unaudited)
  Fiscal 2007 Quarters EndedMarch 31
    
    June 30
    
    September 30
    
    December 31
    
    TotalRevenue
    
    $
    2,528,547
    
    
    
    4,102,693
    
    
    
    5,461,090
    
    
    
    7,388,800
    
    
    $
    19,481,130Gross profit
    
    
    372,067
    
    
    
    1,157,969
    
    
    
    1,434,435
    
    
    
    1,434,259
    
    
    
    4,398,730Net loss
    
    
    (3,310,939
    )
    
    
    (2,043,553
    )
    
    
    (2,565,425
    )
    
    
    (7,632,811
    )
    
    
    (15,552,728
    )Preferred dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss available to common shareholders
    
    
    (3,310,939
    )
    
    
    (2,043,553
    )
    
    
    (2,565,425
    )
    
    
    (7,632,811
    )
    
    
    (15,552,728
    )Basic and Diluted Loss Per Common Share
    
    
    (0.47
    )
    
    
    (0.27
    )
    
    
    (0.33
    )
    
    
    (0.99
    )
    
    
    (2.06
    )Weighted averages shares
    
    
    7,172,382
    
    
    
    7,632,656
    
    
    
    7,664,534
    
    
    
    7,691,220
    
    
    
    7,541,960
 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
    
    
    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
    
    
    (5.24
    )
    
    
    (45.45
    )
    
    
    (0.58
    )
    
    
    (0.80
    )
    
    
    (10.60
    )Discontinued operations
    
    
    (0.04
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.01
    )Basic and Diluted Loss Per Common Share
    
    
    (5.28
    )
    
    
    (45.45
    )
    
    
    (0.58
    )
    
    
    (0.80
    )
    
    
    (10.61
    )Weighted averages shares
    
    
    487,208
    
    
    
    624,748
    
    
    
    7,044,050
    
    
    
    7,112,373
    
    
    
    3,844,087
 F-51




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##### Table of Contents



Note 29  Subsequent Events
   i)
    
    failure to pay interest or unused funds fees within 10 days of written demand;ii)
    
    failure to pay outstanding principal and accrued interest thereon on the maturity date;iii)
    
    failure to pay termination fees on the termination date;iv)
    
    the Company makes an assignment for the benefit of creditors or admits in
writing its inability to pay its debts generally as they become due; or an order,
judgment or decree is entered adjudicating the Company bankrupt or insolvent; or any
order for relief with respect to the Company is entered under the Federal Bankruptcy
Code; or the Company petitions or applies to any tribunal for the appointment of a
custodian, trustee, receiver or liquidator of the Company, or of any substantial part
of the assets of the Company, or commences any proceeding relating to the Company under
bankruptcy reorganization, arrangement, insolvency, readjustment of debt, dissolution
or liquidation law of any jurisdiction; or any such petition or application is filed,
or any such proceeding is commenced, against the Company and such petition, application
or proceeding is not dismissed within sixty (60) days; orv)
    
    the Company sell substantially all of its assets.
  F-52




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##### Table of Contents



Additions/(recoveries)
    
    DeductionsBalance at
    
    charged to costs
    
    Amounts
    
    Other
    
    Balance at endbeginning of period
    
    and expenses
    
    written-off
    
    adjustments
    
    of periodAllowance for doubtful
accounts:Year 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
    )
    
    $
    366,000Year ended December 31, 2007
    
    $
    366,000
    
    
    $
    126,000
    
    
    $
    (341,000
    )
    
    $
    
    
    
    $
    151,000
   Additions/(recoveries)
    
    DeductionsBalance at
    
    charged to costs
    
    Amounts
    
    Other
    
    Balance at endbeginning of period
    
    and expenses
    
    written-off
    
    adjustments
    
    of periodReserve for obsolete inventory:Year ended December 31, 2005
    
    $
    
    
    
    $
    35,000
    
    
    $
    (16,000
    )
    
    $
    9,000
    
    
    $
    28,200Year ended December 31, 2006
    
    $
    28,200
    
    
    $
    578,400
    
    
    $
    (9,800
    )
    
    $
    
    
    
    $
    596,800Year ended December 31, 2007
    
    $
    596,800
    
    
    $
    
    
    
    $
    (596,800
    )
    
    $
    1,800
    
    
    $
    1,800
   F-53