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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION   Form 10-KSB [X]
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2003 [  ]
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission file number 000-2791    ELECTRIC CITY CORP.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    36-4197337
(I.R.S. Employer Identification No.)
 1280 Landmeier Road, Elk Grove Village, IL
(Address of principal executive offices)
    
    60007-2410
(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 registered
 Securities registered under Section 12(g) of the Exchange Act: Common Stock $0.0001 par value  (Title of class)
   (Title of class)
 Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
[X] Yes [  ]
No Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [  ] State issuers revenues for its most recent fiscal year. $4,631,833 The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant as of March 2, 2004 was approximately
$40,169,000 for purposes of this computation, all executive officers, directors
and 10% stockholders were deemed affiliates. Such a determination should not be
construed as an admission that such executive officers, directors or 10%
stockholders are affiliates. As of March 26, 2004, there were 40,922,021 shares of common stock, $0.0001 par
value, of the Company issued and outstanding. Transitional
Small Business Disclosure Format (Check one): Yes ____; No X




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TABLE OF CONTENTS PART I
    
    
    1Item 1. Description of Business
    
    
    1Item 2. Description of Property
    
    
    17Item 3. Legal Proceedings
    
    
    17Item 4. Submission of Matters to a Vote of Security Holders
    
    
    18PART II
    
    
    19Item 5. Market for Common Equity and Related Stockholder Matters
    
    
    19Item 6. Managements Discussion and Analysis or Plan of Operation
    
    
    22Item 7. Financial Statements
    
    
    37Item 8. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    37Item 8A. Controls and Procedures
    
    
    38PART III
    
    
    39Item 9. Directors and Executive Officers of the Registrant
    
    
    39Item 10. Executive Compensation
    
    
    42Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    49Item 12. Certain Relationships And Related Transactions
    
    
    54Item 13. Exhibits and Reports on Form 8-K
    
    
    55Item 14. Principal Accountant Fees and Services
    
    
    64SIGNATURES
    
    
    65EX-14 Code of EthicsEX-31.1 Certification Pursuant to Section 302EX-31.2 Certification Pursuant to Section 302EX-32.1 Certification Pursuant to Section 906EX-32.2 Certification Pursuant to Section 906EX-99 Insider Trading Policy/Guidelines






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PART I 
 Item 1. Description of Business Included in this report, exhibits and associated documents are
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, as well as historical information. Although we believe
that the expectations reflected in such forward-looking statements are
reasonable, we can give no assurances that such expectations reflected in such
forward-looking statements will prove to be correct. Our actual results could
differ materially from those anticipated in forward-looking statements as a
result of certain factors, including matters described in the section titled
Managements Discussion and Analysis of Financial Condition and Results of
Operations. Forward-looking statements include those that use forward-looking
terminology, such as the words anticipate, believe, estimate, expect,
intend, may, project, plan, will, shall, should, and similar
expressions, including when used in the negative. Although we believe that the
expectations reflected in these forward-looking statements are reasonable and
achievable, such statements involve risks and uncertainties and no assurance
can be given that the actual results will be consistent with these
forward-looking statements. Unless the context otherwise requires, Electric City, the Company,
we, our, us and similar expressions refers to Electric City Corp. and its
subsidiaries. Overview/History We are a developer, manufacturer and integrator of energy saving
technologies and building automation controls as well as an independent
developer of scalable, negative power systems. Our premier energy saving
product is the EnergySaver system, which reduces energy consumed by lighting,
typically by 20% to 30%, with minimal lighting level reduction. This technology
has applications in commercial buildings, factories and office structures, as
well as street lighting and parking lot lighting. Our GlobalCommander
integrates with the EnergySaver allowing us to link multiple EnergySaver units
together and to provide remote communications, measurement and verification of
energy savings. The combined technology of the EnergySaver and GlobalCommander
led to the development of our Virtual Negawatt Power Plan (VNPP), which is
essentially a negative power system which we market primarily to utilities as a
demand response system. In addition to our EnergySaver system, we also provide,
through our subsidiary, Great Lakes Controlled Energy Corporation (Great
Lakes), integrated building and environmental control solutions for commercial
and industrial facilities. Until June 1, 2003, we also manufactured custom
electrical switchgear through Switchboard Apparatus Inc. (Switchboard), a
wholly owned subsidiary located in Broadview Illinois. In an effort to refocus
our resources and shed the continuing losses from the switchgear business, we
sold the operating assets of Switchboard to a group of investors that included
the President of Switchboard, effective as of May 31, 2003. On December 5, 1997, we were initially formed as Electric City LLC, a
Delaware limited liability company, by Joseph C. Marino, one of our principal
stockholders, and NCVC, L.L.C., an entity controlled by Victor Conant, Kevin
McEneely and DYDX Consulting LLC (which is 1




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controlled by Nikolas Konstant). In May 1998, Mr. Marino assigned his
membership interest in us to Pino Manufacturing, LLC, an entity controlled by
Mr. Marino. On June 5, 1998, we changed from a limited liability company into a
corporation by merging Electric City LLC into Electric City Corp., a Delaware
corporation. In connection with our merger, NCVC, L.L.C. and Pino
Manufacturing, LLC received shares of common stock in Electric City Corp. in
exchange for their membership interests in Electric City LLC. On June 10, 1998, Electric City issued 1,200,272 shares of our common
stock with a fair market value of $1,200,272, representing approximately six
(6%) percent of Electric Citys issued and outstanding common stock, to the
approximately 330 shareholders of Pice Products Corporation (Pice), an
inactive, unaffiliated company with minimal assets, pursuant to a merger
agreement under which Pice was merged with and into Electric City. The number
of shares issued to Pice was determined and negotiated with the principals of
Pice by the Companys Board of Directors as a whole and was concluded by the
Board to be an arms length transaction in that none of the Board of
Directors was in any way affiliated with, or related to the principals of Pice.
The purpose of the merger was to substantially increase the number of our
shareholders to facilitate the establishment of a public trading market for our
common stock. Trading in our common stock commenced on August 14, 1998 through
the OTC Bulletin Board under the trading symbol ECCC. In May 1999, we purchased most of the assets of Marino Electric, Inc., an
entity controlled by Mr. Marino, for $1,792,000 in cash and 1,600,000 shares of
our common stock. Marino Electric was engaged in the business of designing
and manufacturing custom electrical switchgear and distribution panels. Under
the terms of the purchase agreement, we were obligated to pay the cash portion
of the purchase price upon the closing of our private issuance of common stock
that commenced in July 1999. In May 2000, Mr. Marino waived this requirement
and instead received a payment of $820,000 in cash and a subordinated secured
term note for the principal amount of $972,000 at an interest rate of 10% per
annum, payable in equal installments over 24 months. This note was repaid in
full in May 2002. On August 31, 2000, pursuant to an Agreement and Plan of Merger among us,
Switchboard Apparatus, Inc. and Switchboard Apparatuss stockholders, Dale
Hoppensteadt, George Miller and Helmut Hoppe, we acquired Switchboard
Apparatus. In connection with the acquisition, Switchboard Apparatus was merged
into our wholly owned subsidiary, with our subsidiary continuing as the
surviving corporation under the name Switchboard Apparatus, Inc. The aggregate
purchase price of $1,941,750 was paid in the form of 551,226 shares of our
common stock. Effective December 4, 2000, Joseph P. Marino, one of our founders and
former Chairman of the Board of Directors, resigned his position as Chairman
and terminated his employment with us. Concurrently with his resignation, Mr.
Marino became a distributor for our EnergySaver products in the states of
California, Arizona and Nevada (See, Item 12  Certain Relationships and
Related Transactions). On June 7, 2001, pursuant to an Agreement and Plan of Merger by and among
us, Electric City Great Lakes Acquisition Corporation, Great Lakes Controlled
Energy Corporation (Great Lakes) and Great Lakes stockholders, Eugene Borucki
and Denis Enberg, we acquired 2




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Great Lakes. Great Lakes is an independent systems integrator and
facilities support specialist and focuses on building automation controls for
lighting and HVAC systems for commercial applications. Great Lakes is also a
national representative and distributor of select energy metering and control
systems. In connection with the acquisition, Great Lakes was merged into our
wholly-owned subsidiary Electric City Great Lakes Acquisition Corporation, with
our subsidiary continuing as the surviving corporation under the name Great
Lakes Controlled Energy Corporation. The aggregate purchase price of $678,500
was paid to the Sellers in the form of 212,904 shares of Electric City common
stock. On June 3, 2003, the Company entered into an asset purchase agreement with
Hoppensteadt Acquisition Corp., whereby Hoppensteadt acquired all of the
assets, except for certain receivables and cash, and assumed all of the
liabilities, except for bank debt, of the Company Power Management segment as
of May 31, 2003, in exchange for $929,032 in cash. Hoppensteadt Acquisition
Corp. is owned by a group of investors that includes former managers of the
Companys Power Management segment. Products And Services The Company currently manufactures products or provides services under two
distinct business segments. The energy technology segment includes the
EnergySaver and GlobalCommander product lines manufactured and sold by Electric
City Corp. In addition, this segment markets the Virtual Negawatt Power Plan
(VNPP), which is essentially a negative power system which is designed for
utilities as a demand response system. The building control and automation
business segment is served by our subsidiary, Great Lakes Controlled Energy
Corporation, which specializes in the installation and maintenance of building
control and automation systems. See note 18 to the consolidated financial
statements for additional information regarding the segments of our business. EnergySaver The EnergySaver system is a state-of-the-art lighting control system that
reduces energy consumption in indoor and outdoor commercial, institutional and
industrial ballasted lighting systems, while maintaining appropriate lighting
levels. The EnergySaver is a freestanding enclosure that contains control
panels with electrical parts and is connected between the incoming power line
and the buildings electrical lighting circuits. The EnergySaver also contains
a computer with software that allows the customer to control the amount of
energy savings desired which, depending on the application, can be as high as
50%, and provides self-diagnosis and self-correction. The customer can access
the EnergySavers computer directly or remotely via modem, network or two-way
radio. The EnergySaver is manufactured to varying sizes and capacities to address
differing lighting situations. We can interface our EnergySaver products with
new and existing lighting panels, ballasts and lamps without modification. In
addition, the EnergySaver system reduces the power consumed by lamps and
ballasts and reduces power spikes, drops and surges inherent in any power
supply, resulting in a reduction of heat generated within the lighting system,
which enhances ballast and lamp life and reduces the amount of air conditioning
necessary to cool the building. 3




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GlobalCommander The GlobalCommander system is an advanced lighting controller capable of
providing large-scale demand side management and savings measurement and
verification without turning off the users lights. The GlobalCommander bundles
the EnergySaver technology with an area-wide communication package to allow for
maximum energy reductions across entire systems in response to the guidelines
of a customers facility manager. In addition, the GlobalCommander has the
ability to measure and store information about the actual savings generated
from the use of the EnergySaver. This information, which can be viewed in a
tabular or graphical format and can be downloaded to a users computer, is
often required for a customer to qualify for utility incentives for energy
savings and curtailment. The GlobalCommander also allows customers to control
their facilities loads and lighting requirements from a single control point.
This single-point control is available for a virtually unlimited number of
remote facilities and can be accessed through the Internet, intranet or over
standard telephone lines through dial-up modems. Virtual Negawatt Power Plan The combined technology of the EnergySaver and GlobalCommander led to the
development of our Virtual Negawatt Power Plan (VNPP), which is essentially
a negative power system which we market primarily to utilities as a demand
response system. The VNPP allows a utility to remotely control commercial,
industrial and government lighting systems over a managed and secure IP
network. Through the use of the EnergySaver/GlobalCommander system, the
utility is able to reduce electric demand requirements during periods of peak
demand, providing instantaneous control, measurement and verification of load
reduction. The demand reduction can be specifically placed across a utility
grid targeting potential hot spots such as particular substations, etc. The
Electric City VNPP is the first demand response system to provide this level of
control to a utility without requiring active customer participation and
without impacting a customers operations or ability to do business. Our first VNPP system is under development for ComEd in Chicago. The 50
MW system will represent one of the largest deployments of demand control
technology in the United States. The system will cost approximately $17
million to $20 million and is expected to incorporate approximately 1,500
EnergySaver systems (the actual cost and number of units installed will depend
on many factors including the mix of EnergySaver models installed and the cost
of installation which will vary by site). We expect that the cost of the
system will be financed by third party investors, supported through a long-term
agreement with ComEd. In exchange for hosting the system and allowing remote
control over peak demand, ComEd customers will receive the technology for free
and will receive free steady state energy savings. For additional information
regarding the VNPP please see the discussion under the section entitled Risks
Related to Our Business. Building Control and Automation Through our wholly owned subsidiary, Great Lakes Controlled Energy
Corporation, we provide integration of building and automation control systems
for commercial and industrial customers. Great Lakes has been providing
building automation services for over 20 years and is an authorized distributor
for Delta Controls, WattStopper and Power Measurement Ltd., and is a dealer for
Novar Controls and ABB Drives. 4




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Marketing, Sales And Distribution We have established relationships with distributors (also referred to as
State Representatives) to market and distribute our EnergySaver products to
end-users. As of December 31, 2003, we had eight distributor/state
representative agreements covering Arizona, California, Illinois, Indiana,
Nevada, New Jersey, Pennsylvania, and Texas. Each distributor is responsible
for developing and managing a sales network within its respective territory.
Typically the distributor does this by establishing direct relationships with
end-users or through dealerships within the territory and overseeing the sales,
installation and maintenance of our products by those dealerships. If a
distributor sells any of our products outside its territory, such distributor
operates as a dealer, meaning it manages end-user sales only. The distributor
earns a commission on any sale of our products in its territory whether
initiated by the distributor itself, a dealer, or by us. Our standard distribution agreement gives the distributor certain
exclusive rights of distribution in a particular territory, includes sales
quotas that increase periodically throughout the term of the agreement, and
requires the distributor to make payment to us within 30 to 60 days of product
shipment. The agreement contains penalties for failure to meet quotas or make
payments, including the loss of certain exclusive rights of distribution.
Currently, a number of our distributors have violated the terms of their
agreements for failing to meet their quotas and are delinquent in payments due
Electric City. We are working with our distributors to address these issues. In
addition, the standard distribution agreement has a term of 10 years after
which it is renewable at our discretion. The standard distribution agreement
can be terminated at our discretion if the distributor fails to meet the terms
of the distribution agreement. National accounts (such as chain stores, and large multi-site
corporations), municipalities and other large campus customers are managed by
our corporate sales engineering group. This group concentrates its sales
efforts on the energy engineering staffs of these types of entities, which
analyze and recommend the purchase of products like ours for their multiple
sites. The sales force also supports, coordinates and manages multiple sales
channels. Our Utility Development area is responsible for marketing the VNPP to
utilities. Once a utility signs a VNPP agreement we work jointly with the
utility to sign up energy users to participate in the curtailment program by
agreeing to permit the installation of the EnergySaver in their facilities at
no cost to the user. Great Lakes sells its building automation control systems either directly
to end-users (typically commercial or industrial building owners) or by bidding
on contracts let by general contractors for new construction or building
renovation projects. Customers During 2003, sales to our top five EnergySaver customers accounted for 90%
of total EnergySaver sales. The top five customers for 2003 were Cal State
University, Electric City of Pennsylvania, M&A Railroad and Electric Supply,
the New York Power Authority and Sports Chalet, two of which were dealers or
distributors of the Companys products. End user customers for the EnergySaver
during 2003 included, but were not limited to, A&P, Federal 5




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Express, Gillette, Raleys, Telmex, PetSmart and U.S. Foodservice. During
2002, sales to our top five EnergySaver customers accounted for 79% of total
EnergySaver sales. The top five customers for 2002 were Electric City of
Pennsylvania, The Illinois Department of Central Management Services, LGI
Energy Solutions, M&A Railroad and Electric Supply and PSEG Energy
Technologies, all but one of which are dealers or distributors of the Companys
products. The end user customers of these dealers and distributors include
Linens N Things, Toyota Motors, and Lifetime Fitness. Other end user
customers for the EnergySaver during 2002 included, but were not limited to,
Bunzl Distribution, Gillette, Reckitt Benckiser, Sage Products, the U.S. Post
Office and Union Pacific. During 2003, sales to the top five customers of Great Lakes Controlled
Energy accounted for 85% of Great Lakes sales. Great Lakes top five
customers were Claires Stores, Discover Card Financial, Hill Mechanical,
Jacobsen-Power and Teschky, Inc. During 2002, sales to the top five customers
of Great Lakes Controlled Energy accounted for 88% of Great Lakes sales.
Great Lakes top five customers for 2002 were 5445 Edgewater Plaza Condo
Association, BBM Engineering, Golub & Company, Jacobson-Power, and Teschky,
Inc. Competition There are a number of products on the market that directly or indirectly
compete with the EnergySaver products. These competing products can be
categorized into three general types:  
    
    those that convert AC to DC at a central location,
    
    those that pulsate the power to the lighting system; and
    
    other control products similar to the EnergySaver system. Products that fall into the first category convert AC to DC at a central
location and do so more efficiently than it is done by the standard electronic
ballast in each light fixture. The main drawback to this technology is that the
transmission of DC power over any distance is generally less efficient and more
dangerous than transmitting AC power. This technology also requires the
rewiring of every light fixture on the circuit. Products that pulsate the power in the lighting system turn the power off
and on so quickly (120 times/second) that the lights remain on. This process,
which is generally known as wave chopping, distorts the AC waveform and
thereby produces harmonics in a buildings electrical system that can damage
other electrical components such as electric motors and electronic devices. The
process also contributes to the reduction of life of lamps and ballasts in
lighting fixtures. Control products control power consumption at the lights, at the lighting
circuit or at the control panel. Products that control the power at the lights
or at the lighting circuit must be wired to each fixture or to each circuit,
resulting in high installation cost, which makes these products less
competitive from an economic perspective. The EnergySaver controls power
consumption at the lighting panel, making it much simpler and less expensive to
install and maintain. There are other products on the market that also control
power consumption at the lighting panel, but the EnergySaver is the only
product that we are aware of that offers total real-time variability of savings
levels, remote communications and savings measurement and 6




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verification capabilities. We also believe that the EnergySaver has the
largest installed base of any lighting control power reduction system of its
type. Great Lakes Controlled Energy competes against both large national
controls companies and smaller regional distributors of building controls. Two
of the large national controls companies that Great Lakes competes with are
Siemens and Johnson Controls, both of whom have significantly greater financial
and operating resources than Great Lakes. Great Lakes sells its products and
services based on system capabilities, experience, service and price. Manufacturing Our EnergySaver product line is manufactured at our facilities in Elk
Grove Village, Illinois, with manufacturing and assembly scaled to order
demand. Rather than adding significantly to our manufacturing overhead to meet
anticipated increases in demand, we plan to leverage a new outsourcing
relationship recently established with GE Industrial to provide major system
components and outsourced production for our EnergySaver product line. The
three-year non-binding agreement includes reciprocal purchasing, VNPP
participation, joint product development and additional joint efforts. The primary components for the EnergySaver are sourced from multiple
manufacturers. We are in continuous discussion with additional parts suppliers,
seeking to ensure lowest cost pricing and reliability of supply. During 2003, approximately 40% of our consolidated material purchases were
made from Delta Controls. Great Lakes is a distributor of Delta Controls
products and uses Deltas products extensively in its building control
projects. Delta components are also used in our EnergySaver product line. Compliance With Environmental Laws Neither the Companys production nor sales of its products in any material
way generate activities or materials that require compliance with federal,
state or local environmental laws. Research and Development The Company, through the day-to-day use of the EnergySaver and its
components and its use at various testing sites around the country, develops
modifications and improvements to its products. Total research and development
costs charged to operations were approximately $70,000 and $65,000 for the
years ended December 31, 2003 and December 31, 2002, respectively. Intellectual Property Certain technologies underlying the EnergySaver products have been
patented in the U.S. and Italy by Giorgio Reverberi. A U.S. patent application
was filed by Mr. Reverberi in November 1997, and a patent was issued in June
2000. 7




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Since January 1, 1998, we, along with Mr. Reverberi and Mr. Marino, have
entered into a number of agreements relating to the license of the EnergySaver
technology, which grant us the exclusive license rights of Mr. Reverberis
patent of the EnergySaver technology in all of North America, Central America,
South America (excluding the countries of Argentina, Brazil, Chile, Paraguay
and Uruguay) and the Caribbean (except Cuba), as well as Africa (excluding the
countries of Algeria, Libya, Morocco and Tunisia). Our license expires upon the
expiration of Mr. Reverberis last expiring patent, which we expect to be on or
around November 2017. If either party materially breaches the license and fails
to cure the breach within 180 days after notice by the other party of the
breach, the other party can terminate the license. We pay Mr. Reverberi a
royalty of $200 and Mr. Marino a royalty of $100 for each EnergySaver product
we make or sell in territories in which Mr. Reverberi holds a valid patent. We have applied for several patents on improvements we have made to the
core technology developed by Mr. Reverberi. In January 2004 our patent
application on the core technology utilized by the GlobalCommander was allowed
and the patent is expected to be issued in due course. We have other patents
that are pending before the U.S. Patent and Trademark Office, as well as
foreign patent offices. We have applied for registration of the name EnergySaver pursuant to a
U.S. trademark application filed September 15, 2000. In addition, we filed with
the U.S. Patent and Trademark Office an intent-to-use trademark application for
each of GlobalCommander, Virtual Negawatt Power Plant and VNPP on November 13,
2000. During January 2002, we were notified that the application for the name
GlobalCommander and VNPP had been approved. We abandoned efforts to register
the name Virtual Negawatt Power Plant because of existing trademarks that
included similar terms. The registration of the name EnergySaver is still
pending with the U.S. Patent and Trademark Office. During March 2001, we established a new policy that requires all non-union
employees to sign an Employee Innovations and Proprietary Rights Assignment
Agreement. This agreement is intended to ensure that any intellectual property
or know-how developed as part of an employees work for the Company is and
remains the property of the Company. All current non-union employees have
signed such an agreement. On April 12, 2001, Denis Enberg assigned his rights to any technology
developed by him for, or on behalf of the Company or Switchboard Apparatus to
the Company. Mr. Enberg had been working for the Company on the GlobalCommander
Technology. Mr. Enberg was also a shareholder and director of Great Lakes,
which we acquired on June 7, 2001. Employees As of March 26, 2004, we had 27 full time employees, of which five were
management and corporate staff, three were engineers, six were engaged in sales
and marketing, six were engaged in field service and seven were engaged in
manufacturing. Of those employees engaged in manufacturing, five are covered by
collective bargaining agreements between each of Electric City and the
International Brotherhood of Electrical Workers (IBEW), which is affiliated
with the American Federation of Labor and Congress of Industrial Organizations
(AFL-CIO). In May of 2002 we renewed the collective bargaining agreement
covering all union employees. The new agreement will expire on May 31, 2005. 8




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Risk Factors We caution you that the following risk factors may not be exhaustive. We
operate in a continually changing business environment and may as a result
enter into new businesses and product lines. We cannot predict new risk factors
that may arise in the future, and we cannot assess the impact, if any, of these
new risk factors on our businesses or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from
those projected in any forward-looking statements. Accordingly, you should not
rely on forward-looking statements as a prediction of actual results. In
addition, our estimates of future operating results are based on our current
complement of businesses, which is constantly subject to change as we continue
to assess and refine our business strategy. If any of the following risks
actually occur, our business, results of operations, and financial condition
could be adversely affected in a material manner. Risks Related to Our Business We have a limited operating history upon which to evaluate our potential
for future success. We were formed in December 1997. To date, we have only generated limited
revenues from the sale of our products and do not expect to generate
significant revenues until we sell a significantly larger number of our
products. Accordingly, we have only a limited operating history upon which you
can base an evaluation of our business and prospects. The likelihood of our
success must be considered in light of the risks and uncertainties frequently
encountered by early stage companies like ours in an evolving market. If we are
unsuccessful in addressing these risks and uncertainties, our business will be
materially harmed. We have incurred significant operating losses since inception and may not
achieve or sustain profitability in the future. We have incurred substantial net losses in each year since we commenced
operations in December 1997. We must overcome significant manufacturing and
marketing hurdles to sell large quantities of our products. In addition, we may
be required to reduce the prices of our products in order to increase sales. If
we reduce product prices, we may not be able to reduce product costs
sufficiently to achieve acceptable profit margins. As we strive to grow our
business, we expect to spend significant funds (1) for general corporate
purposes, including working capital, marketing, recruiting and hiring
additional personnel; and (2) for research and development. To the extent that
our revenues do not increase as quickly as these costs and expenditures, our
results of operations and liquidity will be materially adversely affected. If
we experience slower than anticipated revenue growth or if our operating
expenses exceed our expectations, we may not achieve profitability. Even if we
achieve profitability in the future, we may not be able to sustain it. A decrease in electric retail rates could lessen demand for our
EnergySaver products. Our principal products, our EnergySaver products, have the greatest profit
potential in areas where commercial electric rates are relatively high.
However, retail electric rates for 9




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commercial establishments in the United States may not remain at their current
high levels. Due to a potential overbuilding of power generating stations
throughout certain regions of the United States, wholesale power prices may
decrease in the future. Because the price of commercial retail electric power
is largely attributed to the wholesale cost of power, it is reasonable to
expect that commercial retail rates may decrease as well. In addition, much of
the wholesale cost of power is directly related to the price of certain fuels,
such as natural gas, oil and coal. If the prices of those fuels decrease, the
prices of the wholesale cost of power may also decrease. This could result in
lower electric retail rates and reduced demand for energy saving devices such
as our EnergySaver products. We have a license under certain patents and our ability to sell our
products may be adversely impacted if the license expires or is
terminated. We have entered into a license agreement with Messrs. Giorgio Reverberi
and Joseph Marino. Mr. Reverberi holds a U.S. patent and has applied for
several patents in other countries. Pursuant to the terms of the license, we
have been granted the exclusive right to manufacture and sell products
containing the load reduction technology claimed under Mr. Reverberis U.S.
patent or any other related patent held by him in the U.S., the remainder of
North America, parts of South America and parts of Africa. However, the
exclusive rights that we received may not have any value in territories where
Mr. Reverberi does not have or does not obtain protectable rights. The term of
the license expires when the last of these patents expires. We expect that
these patents will expire or around November 2017. The license agreement may be
terminated if we materially breach its terms and fail to cure the breach within
180 days after we are notified of the breach. If our license is terminated it
could impact our ability to manufacture, sell or otherwise commercialize
products in those countries where Mr. Reverberi holds valid patents relating to
our products, including the United States. If we are not able to protect our intellectual property rights against
infringement or others obtain intellectual property rights relating to
energy management technology, we could lose our competitive advantage in
the energy management market. We regard our intellectual property rights, such as patents, licenses of
patents, trademarks, copyrights and trade secrets, as important to our success.
Although we entered into confidentiality and rights to inventions agreements
with our non-union employees and consultants during March 2001 (and non-union
employees hired since March 2001 have also signed these agreements), the steps
we have taken to protect our intellectual property rights may not be adequate.
Third parties may infringe or misappropriate our intellectual property rights
or we may not be able to detect unauthorized use and take appropriate steps to
enforce our rights. Failure to take appropriate protective steps could
materially adversely affect our competitive advantage in the energy management
market. Furthermore, our license to use Mr. Reverberis patents may have little
or no value to us if Mr. Reverberis patents are not valid. In addition,
patents held by third parties may limit our ability to manufacture, sell or
otherwise commercialize products and could result in the assertion of claims of
patent infringement against us. If that were to happen, we could try to modify
our products to be non-infringing, but we might not be successful or such
modifications might not avoid infringing on the intellectual property rights of
third parties. 10




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Claims of patent infringement against us, regardless of merit, could
result in the expenditure of significant financial and managerial resources by
us. We may be forced to seek to enter license agreements with third parties
(other than Mr. Reverberi) to resolve claims of infringement by our products of
the intellectual property rights of third parties. These licenses may not be
available on acceptable terms or at all. The failure to obtain such licenses on
acceptable terms could have a negative effect on our business. The loss of key personnel may harm our ability to obtain and retain
customers, manage our rapid growth and compete effectively. Our future success will depend significantly upon the continued
contributions of certain members of our senior management, including John P.
Mitola, our Chief Executive Officer, because he is critical to obtaining and
retaining customers, managing our growth and the future development of our VNPP
concept. Our future success will also depend upon our ability to attract and
retain highly qualified technical, operating and marketing personnel. We
believe that there is intense competition for qualified personnel in the energy
management industry. If we cannot hire, train and retain qualified personnel or
if a significant number of our current employees depart, we may be unable to
successfully manufacture and market our products. If we are unable to manage our growth, it will adversely affect our
business, the quality of our products and our ability to attract and
retain key personnel. We are subject to the risks inherent in the expansion and growth of a
business enterprise. Growth in our business will place a strain on our
operational and administrative resources and increase the level of
responsibility for our existing and new management personnel. To manage our
growth effectively, we will need to:  
    
    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. Our current senior management has limited experience managing a publicly
traded company. Our systems currently in place may not be adequate if we
continue to grow and may need to be modified and enhanced. The skills of
management currently in place may not be adequate if we continue to grow. If our EnergySaver products do not achieve or sustain market acceptance,
our ability to compete will be adversely affected. To date, we have not sold our EnergySaver product line in very large
quantities and a sufficient market may not develop for it. Significant
marketing will be required in order to establish a sufficient market for the
EnergySaver products. The technology underlying these products may not become a
preferred technology to address the energy management needs of our customers
and potential customers. Failure to successfully develop, manufacture and
commercialize products on a timely and cost-effective basis will have a
material adverse effect on our ability to compete in the energy management
market. 11




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Failure to meet customers expectations or deliver expected technical
performance could result in losses and negative publicity. Customer engagements involve the installation of energy management
equipment that we design to help our clients reduce energy/power consumption.
We rely on outside contractors to install our EnergySaver products. Any defects
in this equipment and/or its installation or any other failure to meet our
customers expectations could result in:  
    
    delayed or lost revenues due to adverse customer reaction;
    
    requirements to provide additional products and/or services to a customer at no charge;
    
    negative publicity regarding us and our products, which could
adversely affect our ability to attract or retain customers; and
    
    claims for substantial damages against us, regardless of our
responsibility for such failure. If sufficient additional funding is not available to us, the
commercialization of our products and our ability to grow may be
hindered. Our operations have not generated positive cash flow since the inception
of the Company in 1997. We have funded our operations through the issuance of
common and preferred stock and secured debt. Our ability to continue to
operate until our cash flow turns positive may depend on our ability to
continue to raise funds through the issuance of equity or debt. If we are not
successful in raising additional funds, we might have to significantly scale
back or delay our growth plans, or possibly cease operations altogether. Any
reduction or delay in our growth plans could materially adversely affect our
ability to compete in the marketplace, take advantage of business opportunities
and develop or enhance our products. Raising additional capital or consummation of additional acquisitions
through the issuance of equity or equity-linked securities could dilute
your ownership interest in us. We may need to obtain additional funds in the future to grow our product
development, manufacturing, marketing and sales activities at the pace that we
intend, or to continue to fund operating losses until our cash flow turns
positive. If we determine that we do need to raise additional capital in the
future and we are not successful in doing so, we might have to significantly
scale back or delay our growth plans, reduce staff and delay planned
expenditures on research and development and capital expenditures in order to
continue as a going concern. Any reduction or delay in our growth plans could
materially adversely affect our ability to compete in the marketplace, take
advantage of business opportunities and develop or enhance our products. If we receive additional funds through the issuance of equity securities
or convertible debt securities, our existing stockholders will likely
experience dilution of their present equity ownership position and voting
rights. Depending on the number of shares issued and the terms and conditions
of the issuance, new equity securities could have rights, preferences, or
privileges senior to those of our common stock. 12




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Failure to effectively market our energy management products could impair
our ability to sell large quantities of these products. One of the challenges we face in commercializing our energy management
products is demonstrating the advantages of our products over more traditional
products and competitive products. As we grow, we will need to further develop
our marketing and sales force. In addition to our internal sales force, we rely
on third parties to market and sell our products. We currently maintain a
number of relationships and have a number of agreements with third parties
regarding the marketing and distribution of our EnergySaver products and are
dependent upon the efforts of these third parties in marketing and selling
these products. Maintenance of these relationships is based primarily on an
ongoing mutual business opportunity and a good overall working relationship.
The current contracts associated with certain of these relationships allow the
distributors to terminate the relationship upon 30 days written notice.
Without these relationships, our ability to market and sell our EnergySaver
products could be harmed and we may need to divert even more resources to
increasing our internal sales force. If we are unable to expand our internal
sales force and maintain our third party marketing relationships, our ability
to generate significant revenues could be seriously harmed. The distribution rights we have granted to third parties in specified
geographic territories may make it difficult for us to grow our business in
such territories if those distributors do not successfully market and support
our products in those territories. We have in the past been, are now, and may
in the future be, involved in disputes with distributors that have distribution
rights in specified geographic territories, but are not achieving our goals.
During 2000, we repurchased for cash and stock consideration the distribution
rights from three distributors that were not meeting our sales goals. We may
have to expend additional funds, incur debt or issue additional securities in
the future to repurchase other distribution rights that we have granted or may
grant in the future. If our Virtual Negawatt Power Plan concept is unsuccessful,
distribution of our EnergySaver product line may be impaired and our
growth could suffer. During 2001, we announced our Virtual Negawatt Power Plan concept. The
VNPP is intended to allow a utility to remotely control commercial, industrial
and government lighting systems over a managed and secure IP network. It is
envisioned that through the use of the EnergySaver/GlobalCommander system, a
utility will be able to reduce electric demand requirements during periods of
peak demand, providing nearly instantaneous control, measurement and
verification of load reduction. The successful implementation of the VNPP
concept could significantly increase the sales and profitability of our
EnergySaver product line. We recently announced an agreement with Commonwealth
Edison to implement a 50-Megawatt VNPP system in northern Illinois. A VNPP
agreement was executed with ComEd during the third quarter of 2003 and we began
installing product under the program in late 2003. As of December 31, 2003 we
had begun installing EnergySavers but we have not recognized revenue on the
shipments. We are currently negotiating to transfer the ComEd VNPP contract to
a limited liability company (the LLC) being created by a Chicago based
investment bank. The LLC will in turn purchase all the equipment installed
under the ComEd program from us and effectively rent the curtailment capacity
to ComEd. Under this agreement the LLC is expected to pay us approximately $17
million to $20 million for equipment and installation as the equipment 13




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is installed and accepted by the host customer. We expect to receive these
payments over an 18 to 24 month period. While we have made significant progress toward implementing this program
with ComEd, we still have a number of hurdles to clear before we can start
recognizing revenue related to this program, including legal and financing
issues, the failure to accomplish any one of which could delay or cancel the
program. Also, if we fail to recruit enough customers to participate in the
program we may not be able to deliver 50MW of demand curtailment, which would
result in less revenue from the program than we expect. If our attempts to
advance the VNPP concept are unsuccessful, our plans to significantly increase
the distribution of our EnergySaver product line may not develop and our growth
may be impaired. If we do not successfully compete with others in the very competitive
energy management market, we may not achieve profitability. In the energy management market, we compete with other manufacturers of
traditional energy management products that are currently used by our potential
customers. Many of these companies have substantially greater financial
resources, larger research and development staffs and greater manufacturing and
marketing capabilities than us. Our competitors may provide energy management
products at lower prices and/or with superior performance. If we are unable to
successfully compete with conventional and new technologies our business may be
materially harmed. Product liability claims could result in losses and could divert our
managements time and resources. The manufacture and sale of our products creates a risk of product
liability claims. Any product liability claims, with or without merit, could
result in costly litigation and reduced sales, cause us to incur significant
liabilities and divert our managements time, attention and resources. We do
have product liability insurance coverage; however, there is no assurance that
such insurance is adequate to cover all potential claims. The successful
assertion of any such large claim against us could materially harm our
liquidity and operating results. Our current internal manufacturing capacity is limited and if demand for
our products increases significantly and we are unable to increase our
capacity quickly and efficiently our business could suffer. Our EnergySaver products are manufactured at our facilities. To be
financially successful, we must manufacture our products, including our
EnergySaver products, in substantial quantities, at acceptable costs and on a
timely basis. While we have produced approximately 1,000 EnergySaver units over
the past six years, we have never approached what we believe is our production
capacity. To produce larger quantities of our EnergySaver products at
competitive prices and on a timely basis, we will have to further develop our
processing, production control, assembly, testing and quality assurance
capabilities. We will probably have to hire contract manufacturers and
outsource the manufacturing of some or all of our products. We have had
discussions with several potential contract manufacturers and they have
produced units on a trial basis, but their ability to deliver significant
quantities of product in a timely manner is still unproven. We may be unable to
manufacture our EnergySaver products in 14




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sufficient volume and may incur substantial costs and expenses in connection
with manufacturing larger quantities of our EnergySaver products. If we are
unable to make the transition to large-scale commercial production
successfully, our business will be negatively affected. We could encounter
substantial difficulties if we decide to outsource the manufacturing of our
products, including delays in manufacturing and poor production quality. Risks Related to Our Common Stock Because of the current market price of our common stock, in conjunction with
the fact that we are a relatively small company with a history of operating
losses, the future trading market for our stock may not be active on a
consistent basis, which may make it difficult for you to sell your shares. The trading volume of our stock in the future will depend in part on our
ability to increase our revenue and reduce or eliminate our operating losses,
which should increase the attractiveness of our stock as an investment, thereby
leading to a more liquid market for our stock on a consistent basis. If an
active and liquid trading market does not exist for our common stock on AMEX,
you may have difficulty selling your shares. The need to raise additional capital will most likely be dilutive to our
current stockholders and could result in new investors receiving rights that
are superior to those of existing stockholders. Since September 2001, we have issued shares of our preferred stock that
are convertible into 26,429,710 shares of our common stock. These shares of
preferred stock are currently accruing dividends at the rate of 6% per year,
though prior to March 22, 2004 they were accruing at the rate of 10% per year.
To date we have issued shares of convertible preferred stock in satisfaction of
accrued dividends convertible into 5,379,710 shares of Common Stock. The
preferred stockholders all have rights that are superior to the rights of our
common stockholders, including:  
    
    a liquidation preference of $200 per share (under our Series
E Preferred which was issued on March 22, 2004 in a 1 for 10
exchange for the outstanding Series A, C and D Preferred shares.
See Liquidity and Capital Resources.);
    
    special approval rights in respect of certain actions by the
Company, including any issuance of shares of capital stock by the
Company that would have the right to receive dividends or the right
to participate in any distribution upon liquidation which was senior
to or equal to the rights of the Series E Preferred (other than to
pay dividends on the preferred and under certain other limited
exceptions such as conversion of outstanding convertible securities)
and any acquisition, sale, merger, joint venture, consolidation or
reorganization involving the Company or any of its subsidiaries;
    
    a conversion price that may be below the market price of our common stock;
    
    the right to elect up to four directors; 15




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
    
    the right to vote with the holders of common stock on an as
converted basis on all matters on which holders of our common stock
are entitled to vote, except with respect to the election of
directors or as otherwise provided by law;
    
    a right of first offer on the sale of equity by the Company
in a private transaction; and
    
    anti-dilution protection that would adjust the conversion
price on their preferred shares and the exercise price on their
warrants in the event we issue equity at a price which is less than
the conversion price or exercise price of their securities. These rights associated with our preferred stock are substantially
different than the rights of our common stockholders and may materially
decrease the value of our common stock. Joseph Marino, Richard Kiphart and DYDX may be able to control matters
requiring stockholder approval or could cause our stock price to decline
through future sales because they beneficially own a large percentage of our
common stock. There are 40,922,021 shares of our common stock outstanding as of March
26, 2004, of which Joseph C. Marino beneficially owns approximately 20%,
Richard Kiphart beneficially owns approximately 18% and DYDX beneficially owns
approximately 8% (each of the aforementioned percentages includes stock options
that are currently exercisable). As a result of their significant ownership,
Mr. Marino, Mr. Kiphart and DYDX have the ability to exercise a controlling
influence over our business and corporate actions requiring stockholder
approval, including the election of our directors (other than those directors
to be chosen by the holders of our preferred stock), a sale of substantially
all of our assets, a merger between us and another entity or an amendment to
our certificate of incorporation. This concentration of ownership could delay,
defer or prevent a change of control and could adversely affect the price
investors might be willing to pay in the future for shares of our common stock.
Also, in the event of a sale of our business, Mr. Marino and Mr. Kiphart and
DYDX could elect to receive a control premium to the exclusion of other
stockholders. A significant percentage of the outstanding shares of our common stock,
including the shares beneficially owned by Mr. Marino, Mr. Kiphart or DYDX, can
be sold in the public market from time to time, subject to limitations imposed
by Federal securities laws and by trading agreements entered into with us. The
market price of our common stock could decline as a result of sales of a large
number of our presently outstanding shares of common stock by Mr. Marino, Mr.
Kiphart, DYDX or other stockholders in the public market or due to the
perception that these sales could occur. This could also make it more difficult
for us to raise funds through future offerings of our equity securities. Provisions of our charter and by-laws, in particular our blank check
preferred stock, could discourage an acquisition of our company that would
benefit our stockholders. Provisions of our charter and by-laws may make it more difficult for a
third party to acquire control of our company, even if a change in control
would benefit our stockholders. In particular, shares of our preferred stock
have been issued and may be issued in the future without further stockholder
approval and upon those terms and conditions, and having those rights,
privileges and preferences, as our Board of Directors may determine. The rights
of the holders of our common stock will be subject to, and may be adversely
affected by, the rights of the holders of any of our preferred stock which is
currently outstanding or which may be issued in the future. 16




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The issuance of our preferred stock, while providing desirable flexibility
in pursuing possible additional equity financings and other corporate purposes,
could have the effect of making it more difficult for a third party to acquire
control of us. This could limit the price that certain investors might be
willing to pay in the future for shares of our common stock and discourage
these investors from acquiring a majority of our common stock. In addition, the
price that future investors may be willing to pay for our common stock may be
lower due to the conversion price and exercise price granted to investors in
any such private financing. 
 Item 2. Description of Property Our headquarters and the EnergySaver system production facility are
located at 1280 Landmeier Road in Elk Grove Village, Illinois. This facility is
approximately 13,000 square feet and houses the corporate headquarters,
manufacturing operations and warehouse. We acquired this facility in August
1998 for a purchase price of $1,140,000, $800,000 of which we financed through
a mortgage and $340,000 of which we paid by issuing to the sellers 340,000
shares of our common stock. The mortgage was refinanced in September 2003,
bears interest at the rate of prime plus 0.5%, and is payable in monthly
installments of $3,000 plus interest, until a final balloon payment which is
due on February 2005. There is no penalty for prepayment of the mortgage. As of
January 31, 2004, the outstanding principal amount of the mortgage was
$631,000. On June 7, 2001, we acquired Great Lakes Controlled Energy Corporation
(Great Lakes). Great Lakes currently operates its business from a facility
located in Elk Grove Village, Illinois, which is approximately 10,000 square
feet. In connection with our acquisition of Great Lakes, we entered into a
three-year lease beginning on the date of the acquisition at a monthly rate of
$10,000, with an option to purchase the facility. The building is owned by the
former shareholders of Great Lakes, Eugene Borucki and Denis Enberg, both of
whom are currently employed by the Company. We believe that the space and location of our current facilities in
combination with the planned outsourcing of a portion of our manufacturing will
be sufficient to reach a level of production projected for the current year. 
 Item 3. Legal Proceedings From time to time, the Company has been a party to pending or threatened
legal proceedings and arbitrations that are routine and incidental to its
business. In early October 2003, the Company notified one of its significant
distributors, that the Company was terminating the distributorship agreement
between the parties due to certain unresolved issues (including breaches by
such distributor), such termination to be effective after 60 days. In such
notice, the Company indicated that it would be willing to enter into a new
agreement with such distributor if the disputed issues could be resolved to the
mutual satisfaction of the parties. Subsequent to giving such notice, the
Company has received a demand for arbitration from such distributor pursuant to
the provisions of the agreement, seeking, among other things, money damages in
an unspecified amount and a declaration of the meaning of certain provisions of
the distributorship agreement. The matter is currently in arbitration before
the American Arbitration Association in Chicago, Illinois. The Company intends
to defend the arbitration, but cannot predict the 17




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outcome at this time. Based upon information presently available, and in
light of legal and other defenses available to the Company, management does not
consider the liability from any threatened or pending litigation (including the
foregoing arbitration) to be material to the Company. 
 Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the
three months ended December 31, 2003. 18




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PART II 
 Item 5. Market for Common Equity and Related Stockholder Matters Our common stock has traded since December 12, 2000 on the American Stock
Exchange under the symbol ELC. The following table sets forth the quarterly high and low closing prices
for our common stock as reported on The American Stock Exchange since January
1, 2002. Common StockHigh
    
    LowFiscal Year Ended December 31, 2002:Fiscal Quarter Ended March 31, 2002
    
    $
    2.29
    
    
    $
    1.15Fiscal Quarter Ended June 30, 2002
    
    $
    1.68
    
    
    $
    1.15Fiscal Quarter Ended September 30, 2002
    
    $
    1.60
    
    
    $
    1.10Fiscal Quarter Ended December 31, 2002
    
    $
    1.15
    
    
    $
    0.75Fiscal Year Ended December 31, 2003:Fiscal Quarter Ended March 31, 2003
    
    $
    1.50
    
    
    $
    0.70Fiscal Quarter Ended June 30, 2003
    
    $
    1.66
    
    
    $
    0.90Fiscal Quarter Ended September 30, 2003
    
    $
    2.21
    
    
    $
    0.92Fiscal Quarter Ended December 31, 2003
    
    $
    2.70
    
    
    $
    2.03
 Holders As of March 26, 2004, we had approximately 5,600 holders of record of our
common stock and 40,922,021 shares of common stock outstanding. 19




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Dividends For the three months ended December 31, 2003, we declared and paid the
following dividends on our Convertible Preferred Stock:  
    
    On December 22, 2003, the Board of Directors declared and paid
dividends on our Series A, Series C and Series D Convertible Preferred
Stock for the fourth calendar quarter ending December 31, 2003 to
shareholders of record of our Series A Convertible Preferred Stock,
Series C Convertible Preferred Stock and Series D Convertible Preferred
Stock as of December 31, 2003. The dividends were paid in additional
 shares of Series A, Series C and/or Series D Convertible Preferred
Stock to the holders as follows: 58,453 shares to the holders of the
Series A Convertible Preferred Stock, 5,698 shares to the holders of
the Series C Convertible Preferred Stock and 3,848 shares to the
holders of the Series D Convertible Preferred Stock. Each share of
Series A, Series C and Series D Convertible Preferred Stock was
convertible into 10 shares of our common stock. As the result of a redemption and exchange offering completed March 22,
2004, the dilutive effect of the payment-in-kind dividend on the preferred
stock will be reduced significantly in the future due to a reduction in the
number of shares of preferred stock outstanding and a reduction in the dividend
rate on the preferred stock. We project that without this redemption and
exchange we would have issued shares of preferred stock as dividends over the
next three years that would have been convertible into 10,306,790 shares of
common stock. As a result of the redemption and exchange we only expect to
issue preferred stock as dividends over the same period that will be
convertible into 4,473,919 shares of common stock, a reduction of 5,832,871
shares or 56.6%. For a further discussion of this transaction please see Item
6  Managements Discussion and Analysis or Plan of Operations  Liquidity and
Capital Resources, or Note 19 to the Consolidated Financial
Statements. For a further discussion regarding preferred stock dividends, see Item 6
 Managements Discussion and Analysis or Plan of Operations  Preferred Stock
Dividends. We have never declared or paid any cash dividends on our common stock and
we do not anticipate paying any cash dividends in the foreseeable future. See
Item 6 - Managements Discussion and Analysis of Results of Operations and
Financial Condition  Liquidity and Capital Resources. Recent Sales of Unregistered Securities During the twelve months ended December 31, 2003, we issued the securities
listed below (in addition to those securities listed under the preceding
Dividends and to those issuances which we have reported on Form 10-QSB during
the past year): On October 3, 2003, the holder of a warrant to purchase common stock
exercised the warrant, receiving 20,000 share of our common stock in exchange
for $20,000. 20




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On October 10, 2003, we issued a warrant to purchase 10,000 shares of our
common stock to a consultant as compensation for services received in a private
transaction not involving any solicitation or offering of such warrant to
anyone else. The warrant has a term of one year and an exercise price of $1.00
per share. This warrant was valued at $14,200 using a modified
Black-Scholes
option pricing model. On October 29, 2003, the holder of a warrant to purchase common stock
exercised the warrant, receiving 5,000 shares of our common stock in exchange
of $5,000. On November 5, 2003, the holder of a warrant to purchase common stock
exercised the warrant, receiving 5,000 shares of our common stock in exchange
for $5,000. On November 12, 2003, the holder of a warrant to purchase common stock
exercised the warrant, receiving 5,000 shares of our common stock in exchange
for $5,000. On November 20, 2003, the holder of a warrant to purchase common stock
exercised the warrant, receiving 5,000 shares of our common stock in exchange
for $5,000. On November 24, 2003, the holder of a warrant to purchase common stock
exercised the warrant, receiving 10,000 shares of our common stock in exchange
for $10,000. On November 26, 2003, Laurus Master Funds converted $52,346 of principal
and $664 of accrued interest on the Companys Convertible Term Note into 25,000
shares of our common stock. On December 5, 2003, the holder of a warrant to purchase common stock
exercised the warrant, receiving 100,000 shares of our common stock in exchange
for $100,000. On December 15, 2003, the holder of a warrant to purchase common stock
exercised the warrant, receiving 15,000 shares of our common stock in exchange
for $15,000. On December 30, 2003, we issued a warrant to purchase 75,000 shares of our
common stock to a consultant as compensation for services received in a private
transaction not involving any solicitation or offering of such warrant to
anyone else. The warrant has a term of three years and an exercise price of
$2.10 per share. This warrant was valued at $80,250 using a modified
Black-Scholes option pricing model. On January 2, 2004, Laurus Master Funds converted $63,600 of principal on
the Companys Convertible Term Note into 30,000 shares of our common stock. On January 28, 2004, Laurus Master Funds converted $207,264 of principal
and $4,736 of accrued interest on the Companys Convertible Term Note into
100,000 shares of our common stock. On March 19, 2004, the Company entered into a securities purchase
agreement with a group of four mutual funds managed by Security Benefit Group,
Inc., whereby the Company issued to such purchasers, in exchange for
$11,000,000 in gross proceeds, a package of securities 21




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that included 5,000,000 shares of the Companys common stock and 5 year
warrants to purchase 1,750,000 additional shares of common stock at $2.42 per
share. The sales and issuances of common stock, debt instruments and warrants to
purchase common stock in private placements listed above were made by us in
reliance upon the exemptions from registration provided under Sections 4(2) and
4(6) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D,
promulgated by the SEC under federal securities laws and comparable exemptions
for sales to accredited investors under state securities laws. The offers and
sales were made to accredited investors as defined in Rule 501(a) under the
Securities Act and no general solicitation was made by us or any person acting
on our behalf; the securities sold were subject to transfer restrictions, and
the certificates for those shares contained an appropriate legend stating that
they had not been registered under the Securities Act and may not be offered or
sold absent registration or pursuant to an exemption therefrom. 
 Item 6. Managements Discussion and Analysis or Plan of Operation The following discussion regarding us and our business and operations
contains forward-looking statements within the meaning of the Private
Securities Litigation Act of 1995. Such statements consist of any statement
other than a recitation of historical fact and can be identified by the use of
forward-looking terminology such as may, expect, anticipate, estimate
or continue or the negative of such terms or other variations of such terms
or comparable terminology. You are cautioned that all forward-looking
statements are necessarily speculative and there are certain risks and
uncertainties that could cause actual events or results to differ materially
from those referred to in such forward-looking statements. We do not have a
policy of updating or revising forward-looking statements and, therefore, you
should not assume that our silence over time means that actual events are
bearing out as estimated in such forward-looking statements. We have a short operating history. All risks inherent in a new and
inexperienced enterprise are inherent in our business. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or conditions. Critical
accounting policies are defined as those that are reflective of significant
judgments and uncertainties, and potentially result in materially different
results under different assumptions and conditions. We believe that our
critical accounting policies are limited to those described below. For a
detailed discussion on the application of these and other accounting policies,
see Note 2 in the notes to the consolidated financial statements. Use of Estimates 22




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Preparation of the consolidated financial statements in accordance with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions affecting the reported amounts of
assets, liabilities, revenues and expenses and related contingent liabilities.
On an on-going basis, the Company evaluates its estimates, including those
related to revenues, bad debts, income taxes and contingencies and litigation.
The Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates under different assumptions or
conditions. Revenue Recognition The Company recognizes revenue when all four of the following criteria are
met: (i) persuasive evidence has been received that an arrangement exists; (ii)
delivery of the products and/or services has occurred; (iii) the selling price
is fixed or determinable; and (iv) collectibility is reasonably assured. In
addition, the Company follows the provisions of the Securities and Exchange
Commissions Staff Accounting Bulletin No. 104, Revenue Recognition, which sets
forth guidelines in the timing of revenue recognition based upon factors such
as passage of title, installation, payments and customer acceptance. Any
amounts received or invoiced prior to satisfying the Companys revenue
recognition criteria is recorded as deferred revenue in the accompanying
balance sheet. The most common source of deferred revenue for the Company is
building automation projects in which the customer is billed in advance for
some portion of the work to be performed. The Company also records the
purchase price for certain distributor territories as deferred revenue,
recognizing the purchase price as revenue over the term of the underlying
distribution agreement. Profit Recognition on Long-Term Contracts We account for long-term contracts under the percentage of completion
method. Effective January 1, 2003, due to our limited experience in estimating
the profitability on long-term building automation control contracts, we
elected to begin to defer profit on all long-term building automation control
contracts until completion of the job, at which time the actual profit on the
job will be known and recognized. Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. The
allowance is largely based upon specific knowledge of customers from whom
collection is determined to be doubtful and the Companys historical collection
experience with such customers. If the financial condition of our customers or
the economic environment in which they operate were to deteriorate, resulting
in an inability to make payments, or if our estimates of certain customers
ability to pay are incorrect, additional allowances may be required. During
2003, the Company recovered $66,632 on receivables that it had previously
reserved for a doubtful. As of December 31, 2003 the Companys allowance for
doubtful accounts was approximately $326,000, or 18.3% of the outstanding
accounts receivable. Impairment of Long-Lived Assets. 23




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We record impairment losses on long-lived assets used in operations when
events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount of those items. Our cash flow estimates are based on
historical results adjusted to reflect our best estimate of future market and
operating conditions. The net carrying value of assets not recoverable is
reduced to fair value. Our estimates of fair value represent our best estimate
based on industry trends and reference to market rates and transactions. Goodwill The Company had made acquisitions in the past that included a significant
amount of goodwill and other intangible assets. Under generally accepted
accounting principles in effect through December 31, 2001, these assets were
amortized over their estimated useful lives, and were tested periodically to
determine if they were recoverable from operating earnings on an undiscounted
basis over their useful lives. Effective in 2002, goodwill is no longer
amortized but is subject to an annual (or under certain circumstances more
frequent) impairment test based on its estimated fair value. Estimated fair
value is less than values based on undiscounted operating earnings because fair
value estimates include a discount factor in valuing future cash flows. There
are many assumptions and estimates underlying the determination of an
impairment loss, including economic and competitive conditions, operating costs
and efficiencies. Another estimate using different, but still reasonable,
assumptions could produce a significantly different result. During the year
ended December 31, 2002 the Company determined that the estimated fair value of
goodwill associated with its power management business exceeded the carrying
value and as a result recognized an impairment loss of $4,103,872, which was
recorded as a cumulative effect of a change in an accounting principle. As
part of our 2002 year-end assessment of the fair value of our goodwill we
determined that the carrying value of the goodwill associated with the building
automation and control business exceeded the fair value by $108,000. This
difference between the carrying value and the estimated fair value of the
goodwill was recorded as an impairment loss in 2002. As part of our 2003
year-end assessment, we updated our long-term projections for the building
automation and controls business and estimated the fair value based on the
discounted current value of the expected future cash flows. We then compared
the implied fair value of the goodwill to its carrying value and determined
that the value of the goodwill was not impaired. It is possible that upon
completion of future impairment tests, as the result of changes in facts or
circumstances, we may have to take additional charges in future periods to
recognize a further write-down of the value of the goodwill attributed to our
acquisitions to their estimated fair values. Results of Operations Our revenues reflect the sale of our products and services, net of
allowances for returns and other adjustments. Electric Citys sales are
generated from the sale of products and services, primarily in the U.S. Four
customers individually accounted for more than 10% of our consolidated sales
during the year ended December 31, 2003, and December 31, 2002, though only one
of these customers individually accounted for more than 10% of our consolidated
sales in both years. 24




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Our cost of goods sold consists primarily of materials and labor. Also
included in our cost of goods sold are freight, the costs of operating our
manufacturing facility, charges from outside contractors used to install our
product in our customers facilities, charges for potential future warranty
claims and royalty costs related to EnergySaver sales. Sales and gross profits depend in part on the volume and mix of products
sold during any given period. Generally, products that we manufacture have a
higher gross profit margin than products and services that we purchase and
resell. A portion of our operating expense is relatively fixed, such as the cost
of our facilities. Accordingly, an increase in the volume of sales will
generally result in an increase to our gross margins since these fixed expenses
do not increase proportionately with sales. We have never fully utilized the
manufacturing capacity of our facilities and, therefore, believe that the fixed
nature of some of our expenses would contribute to an increase in our gross
margin in future periods if sales volumes increase. In particular we believe
that our facility in Elk Grove Village can support a sales level of
EnergySavers of approximately $15 million to $20 million without a significant
investment in fixed assets. It is our intent to outsource manufacturing to
third party contract manufacturers once we approach the capacity of our current
facility. Selling, general and administrative (SG&A) expenses include the
following components:  
    
    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;
    
    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;
    
    research and development expenses;
    
    costs related to administrative functions that serve to
support the existing businesses of the Company, as well as to
provide the infrastructure for future growth. Interest expense for continuing operations includes the costs and expenses
associated with working capital indebtedness, the mortgage on our headquarters
building, a convertible term loan, and various auto loans, all as reflected on
our current and prior financial statements. Also included in interest expense
for 2003 is amortization of the debt discount which includes the fair value of
the warrants issued to Laurus Master Funds, as well as the value of beneficial
conversion feature attributed to the Convertible Term Loan. Also reported as
interest expense is the amortization of deferred financing costs related to the
credit facility with Laurus Master Funds. Audited Twelve-Month Period Ended December 31, 2003 Compared With the Audited
Twelve-Month Period Ended December 31, 2002 Revenue.Our revenue declined $902,689 or 16.3% to $4,631,833 during the
twelve months ended December 31, 2003 from $5,534,522 for the year earlier
period. Revenue from the sale of the EnergySaver and GlobalCommanders
decreased 32% or $888,000, to $1.83 25




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million in 2003 from $2.72 million in 2002.
EnergySaver unit sales decreased 34% from 327 units in 2002 to 217 units in
2003. The average selling price per EnergySaver unit increased slightly from
$8,300 in 2002 to $8,400 in 2003. This increase in the average selling price
is a reflection of change in the mix of models sold. We believe the decline in EnergySaver revenue is the result of (1) our
customers continued deferral of discretionary expenditures until economic
conditions improve, and (2) to managements decision to shift resources to
focus on the Companys new utility initiative, and in particular the
Commonwealth Edison (ComEd) VNPP. This shift created a lag in revenue
experienced in the latter part of 2003 due to the startup of our ComEd VNPP.
The ComEd VNPP agreement was finalized during the third quarter of 2003 and as
a result the Companys in house sales resources have been actively seeking
customers to participate in the newly created program. As of December 31, 2003
we had begun shipment of EnergySavers as part of the ComEd program, but we have
not recognized revenue on the shipments. We are currently negotiating to transfer the ComEd contract to a limited
liability company (the LLC) being created by a Chicago based investment bank.
The LLC will in turn purchase all the equipment installed under the ComEd
program from us and effectively rent the curtailment capacity to ComEd. Under
this arrangement ComEd secures a long-term source of curtailment, which among
other things reduces their requirements for peak generating capacity and
provides a hedge against rising fuel costs, the investment bank holds a
long-term investment and we receive payment for the equipment up front, thereby
minimizing our working capital requirements. We are currently in the process
of negotiating and structuring this transaction and as a result have not yet
received a firm commitment from the investment bank. We are also reviewing
revenue recognition methodologies related to this transaction determine if we
will be able to recognize revenue at the time we transfer equipment to the LLC,
or if we will be required to recognize revenue as service revenue over a longer
period. We have targeted the second quarter of 2004 for the closing date of
this transaction, at which time if we close we will transfer of the first batch
of installed units to the LLC, and receive payment on the installed units.
After the first transfer to the LLC, we anticipate transferring newly installed
equipment and receiving payment on a quarterly basis. The ComEd agreement is
expected to result in sales of approximately 1,500 units over the next 18 to 24
months. EnergySaver shipments are expected to increase significantly,
beginning in the second quarter 2004, primarily as a result of the ComEd
program in combination with continuing sales to large scalable commercial
customers including among others, the Chicago Public Schools, Linen N Things
and the Xcel Energy. Revenue from building controls and automation increased $123,000 or 5%, to
$2.60 million in 2003 from $2.48 million in 2002. Great Lakes 2003 revenue was
derived primarily from five major building automation projects, two of which
were begun during 2002 and completed in 2003. One of the projects begun in
2002 and completed in 2003 was the expansion of the Discover Card headquarters
in Riverwoods, Illinois. While the profit earned on this contract will not
cover all of Great Lakes fully allocated costs, it was a strategically
important contract for Great Lakes because we believe the building automation
system installed by Great Lakes is one of the most sophisticated systems ever
completed. The success of this project has resulted in Great Lakes receiving
opportunities to bid on other projects of similar size, but with
better profit margins. Due to constraints on Great Lakes capacity to
handle additional business, we expect revenue to remain relatively unchanged
for 2004, but it is our hope that we can increase the capacity of this division
in order to realize increased revenue in future periods. 26




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Other revenue decreased by $133,000 or 36% to $232,000 in 2003 compared to
$365,000 recorded in 2002. Other revenue includes revenue from the installation
of EnergySavers, freight, and the pro-rata recognition of a one time payment
received for the right to certain EnergySaver distributorships. Gross Profit.Our consolidated gross profit decreased $5,024, or 2.6%, to
$190,146 for 2003 compared to $195,170 for 2002. Our gross profit as a
percentage of sales increased to 4.1% during 2003 compared to 3.5% during 2002.
The gross margin earned on EnergySaver sales, including ancillary products and
service, increased from 10.8% in 2002 to 14.3% in 2003. The improvement in the
EnergySaver margin was primarily the result of increased labor efficiency and a
shift in the mix of products sold. We expect to see continued improvement in
the gross margin as our capacity utilization increases due to higher volumes
resulting from sales under the ComEd program. Our building automation and controls business reported a loss at the gross
profit line during 2003 and 2002 of approximately $106,000 and $115,000,
respectively. We account for long-term building automation control contracts
under the percentage of completion method. Effective January 1, 2003, due to
our limited experience in estimating the profitability on long-term contracts,
we elected to begin to defer profit on all long-term contracts until completion
of the job, at which time the actual profit on the job will be known and
recognized. We estimate that had we not made this change, this segment of our
business would have reported a gross profit for 2003 of $193,000, an
improvement of $308,000 from the prior year. Due to the change in our
accounting policy, most of this deferred profit will be recognized in 2004 when
we complete the associated project and the actual profit is known. We expect a
continued improvement in the gross margin earned by this segment as its mix of
business shifts from projects where it aggressively bid in order to establish
itself in a new market segment to more profitable jobs. SG&A Expenses.SG&A expense declined 29.0% or $1,753,507 to $4,290,078
for the year ended December 31, 2003 from $6,043,585 during the year ended
December 31, 2002. Labor expense was reduced by $837,000, or 30% as a result
of the annualization of layoffs implemented in 2002 and further reductions in
labor during 2003. Bad debt expense declined $410,000 during 2003 and sales
commissions declined $271,000, the result of fewer sales by third party dealers
and reduced sales into territories owned by state distributors. We expect
consolidated SG&A expense to increase moderately in 2004, as we hire additional
salespeople and field support technicians to support the increase in expected
business activity resulting primarily from the ComEd VNPP program. Impairment Loss.The Company reported an impairment loss of $108,000
during 2002 related to the reduction in the carrying value of the goodwill
associated with the acquisition of Great Lakes Controlled Energy to its
estimated fair value. Under SFAS 142 we are required to assess our goodwill
for impairment at least annually. We used a discounted cash flow valuation to
determine the estimated fair value of the goodwill utilizing assumptions based
on known facts and circumstances and estimates of future revenues and profits
for the business. As a result of
the losses incurred by the building automation and controls segment of our
business during 2002, we adjusted our estimates for future profitability, which
led to the reduction in the estimated fair value of the goodwill. 27




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Other Non-Operating Income (Expense).Other non-operating expense is
comprised of interest expense and interest income. Interest expense increased
$308,798 to $365,688 during 2003 as compared to $56,890 for the year ended
December 31, 2002. As is more fully explained in note 9 to the consolidated
financial statements, included in the 2003 interest expense is amortization of
the deferred issuance costs and debt discount related to the Laurus convertible
term loan totaling $305,621. The other components of 2003 interest expense
included $32,000 on our mortgage, $18,000 on our convertible term loan and
$9,500 on our revolving line of credit. Interest income earned during the year ended December 31, 2003 decreased
$12,946 or 56% to $10,329 from $23,275 earned during the same period in 2002.
The decline in interest income was the result of lower average cash balances
during 2003 as compared to 2002 and lower interest rates paid on invested
balances. Discontinued Operations.During 2003 we agreed to sell substantially all
of the assets and to transfer most of the liabilities of our Power Management
segment to a group of investors that included members of the segments
management. The sale closed on June 3, 2003, effective as of May 31, 2003. As
required by SFAS 144 we have presented the operating results as well as the
loss on disposal for this segment as discontinued operations. During the
twelve-month period ended December 31, 2003 the Power Management segments
operating loss was $262,503 as compared to an operating loss of $1,017,897 for
the year earlier period. We also recorded a $764,148 loss on the disposal of
the segment during 2003. Cumulative Effect of Accounting Change.On January 1, 2002, we adopted
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets effective for fiscal years beginning after December
15, 2001. In accordance with SFAS No. 142, we completed our transitional
impairment testing of intangible assets during the second quarter of fiscal
2002. Subsequent to the first quarter of fiscal 2002, with the assistance of a
third-party valuation firm, we finalized the testing of goodwill subject to
SFAS 142. The testing resulted in a write-down of recorded goodwill related to
our Power Management segment in the amount of $4,103,872, which was recorded as
a cumulative effect of a change in an accounting principle. Preferred Stock Dividends.There were three series of our convertible
preferred stock issued and outstanding at various times during 2002 and 2003,
up to March 22, 2004 including: our Series A Convertible Preferred Stock
(Series A Preferred Stock), which was first issued during September 2001, our
Series C Convertible Preferred Stock (Series C Preferred Stock), which was
first issued during June 2002 and our Series D Convertible Preferred Stock
(Series D Preferred Stock), which was first issued in June 2003. The Series A Preferred Stock accrued a dividend at the rate of 10%, which
was payable during the first three years following initial issuance at our
option in cash or additional shares of Series A Preferred Stock (the dividend
rate was scheduled to increase by 1⁄2% each six months, beginning on October
1, 2004 until the dividend rate equaled 15%). We accrued dividends on the
shares of Series A Preferred Stock totaling $2,041,992 and $2,253,978 during
2002 and 2003, respectively, which we elected to pay by issuing additional
shares of Series A Preferred
Stock. We were required to recognize non-cash deemed dividends of $495,589
and $1,627,985 during 2002 and 2003, respectively, due to the fact that the
conversion price on these dividend shares was lower than the market price of
our common stock on the dates of issuance. The 28




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increase in this deemed
dividend is primarily the result of the increased difference in the market
price of our common stock relative to the conversion price of the dividend
shares on the dates we issued the dividend shares. On June 4, 2002 we raised $2.0 million in gross proceeds through the
issuance of a package of securities that included 200,000 shares of our Series
C Convertible Preferred Stock, 30,082 shares of our common stock, warrants to
purchase 50,000 additional shares of our Series C Convertible Preferred Stock
and warrants to purchase additional shares of our common stock. For accounting
purposes, proceeds from this transaction were allocated to the Series C
Convertible Preferred Stock, the common stock and warrants issued as part of
the transaction based on their relative fair values. The difference between
the value allocated to the Series C Convertible Preferred Stock and the market
price of our common stock on the date of issue, in addition to the value of the
stock and warrants issued as part of the transaction were deemed to be
equivalent to a non-cash preferred stock dividend. We recorded the deemed
dividend on the date of issuance by offsetting charges and credits to
additional paid-in capital in the amount of $1,444,697, without any effect on
total stockholders equity. The Series C Preferred Stock accrued a dividend at the rate of 10%, which
was payable during the first three years following initial issuance at our
option in cash or additional shares of Series C Preferred Stock (the dividend
rate was scheduled to increase by 1⁄2% each six months, beginning on July 1,
2005 until the dividend rate equaled 15%). We accrued dividends on the shares
of Series C Preferred Stock totaling $116,426 and $219,712 during 2002 and
2003, respectively, which we elected to pay by issuing additional shares of
Series C Preferred Stock. We were required to recognize non-cash deemed
dividends of $12,403 and $158,691 during 2002 and 2003, respectively, due to
the fact that the conversion price on these dividend shares was lower than the
market price of our common stock on the dates of issuance. The increase in
this deemed dividend is related to the fact that the Series C was outstanding
for the entire twelve month period during 2003, where as it was only
outstanding for slightly more than six months during 2002. Also contributing
to the increase in the deemed dividend was the increased difference in the
market price of our common stock relative to the conversion price of the
dividend shares on the dates we issued the dividend shares. On June 27, 2003 we raised $1.5 million in gross proceeds through the
issuance of a package of securities that included shares of our Series D
Convertible Preferred Stock, shares of our common stock, warrants to purchase
additional shares of our Series D Convertible Preferred Stock and warrants to
purchase additional shares of our common stock. For accounting purposes,
proceeds from this transaction were allocated to the Series D Convertible
Preferred Stock, the common stock and warrants issued as part of the
transaction based on their relative fair values. The difference between the
value allocated to the Series D Convertible Preferred Stock and the market
price of our common stock on the date of issue, in addition to the value of the
stock and warrants issued as part of the transaction were deemed to be
equivalent to a non-cash preferred stock dividend. We recorded the deemed
dividend on the date of issuance by offsetting charges and credits to
additional paid-in capital in the amount of $386,984, without any effect on
total stockholders equity. The Series D Preferred Stock accrued a dividend at the rate of 10%, which
was payable during the first three years following initial issuance at our
option in cash or additional shares of Series D Preferred Stock (the dividend
rate was scheduled to increase by 1⁄2% each six months, 29




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beginning on July 1,
2006 until the dividend rate equaled 15%). We accrued dividends on the shares
of Series D Preferred Stock totaling $77,689 during 2003, which we elected to
pay by issuing additional shares of Series D Preferred Stock. We were required
to recognize non-cash deemed dividends of $92,878 during 2003, due to the fact
that the conversion price on these dividend shares was lower than the market
price of our common stock on the dates of issuance. All
outstanding shares of Series A, Series C and Series D Preferred stock
were redeemed or exchanged for shares of Series E Convertible Preferred stock
on March 22, 2004. See Liquidity and Capital Resources below for additional
information on this transaction. The dividend expense recognized during 2003 and 2002 is comprised of the
following: Year ended December 31,
    
    2003
    
    2002Accrual of Dividend on Series A Convertible
Preferred (see note 14e and 14ll)
    
    $
    2,253,978
    
    
    $
    2,041,992Deemed dividend associated with beneficial
conversion price on shares issuable in
satisfaction of Series A Convertible Preferred
dividend (See notes 14e and 14ll)
    
    
    1,627,985
    
    
    
    495,589Deemed dividend associated
with beneficial conversion feature of Series C
Convertible Preferred Stock dividend (See note
14c)
    
    
    
    
    
    
    1,444,697Accrual of Series C Preferred dividend (see
note 14e and 14ll)
    
    
    219,712
    
    
    
    116,426Deemed dividend associated with beneficial
conversion price on shares issued in
satisfaction of Series C Preferred dividend
(See note 14c and 14ll)
    
    
    158,691
    
    
    
    12,403Deemed dividend associated
with beneficial conversion feature of Series D
Convertible Preferred Stock dividend (See note
14u)
    
    
    386,984
    
    
    
    Accrual of Series D Preferred dividend (see
note 14ll)
    
    
    77,689
    
    
    
    Deemed dividend associated with beneficial
conversion price on shares issued in
satisfaction of Series D Preferred dividend
(See note 14ll)
    
    
    92,878
    
    
    
    Total
    
    $
    4,817,917
    
    
    $
    4,111,107
 30




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Liquidity and Capital Resources As of December 31, 2003, we had cash and cash equivalents of $2,467,023,
compared to cash and cash equivalents of $1,555,904 on December 31, 2002. Our
debt obligations as of December 31, 2003 consisted of a convertible term loan
in the amount of $947,654, a mortgage in the amount of $634,000 on our facility
in Elk Grove Village Illinois, and a vehicle loan of $8,766. The Companys principal cash requirements are for operating expenses,
including employee costs, the costs related to research and development,
advertising costs, the cost of outside services including those providing
accounting, legal, engineering and electrical contracting services, and the
funding of inventory and accounts receivable, and capital expenditures. The
Company has financed its operations since inception primarily through the
private placement of its common and preferred stock, as well as through various
forms of secured debt. Net cash increased $911,119 during the year ended December 31, 2003 while
net cash decreased $3,930,169 during the year ended December 31, 2002. The cash
consumed by operating activities declined $4,050,394 or 58.9% to $2,830,117
during the twelve-month period ended December 31, 2003 as compared to
$6,880,511 consumed during the twelve-month period ended December 31, 2002.
Cash used to fund the net loss, calculated at the net loss less non-cash
charges declined $2,209,897 or 35.7% in 2003 to $3,973,968 from $6,183,865 in
2002. The improvement in cash used to fund the net loss is primarily due to a
$1.753 million reduction in SG&A expense, and the $755,394 reduction in the
loss from discontinued operations. The net loss less non-cash charges is
calculated as the net cash used in operating activities, less the changes in
assets and liabilities as reported on the statement of cash flows. Changes in net working capital generated $1,143,851 in cash during 2003 as
compared to consuming $696,646 during 2002. Increases in accounts receivable
consumed cash of $22,101 during 2003 as compared to consuming $252,138 during
2002. The increase in accounts receivable during 2003 is the result of project
retainage in the Building Automation and Control segment. For large building
construction projects it is typical for the building owner to retain 5% to 10%
of the contractors billing until the end of the project to ensure that all the
final punchlist items are completed. Since a greater portion of Great Lakes
projects are larger, longer-term projects, it has experienced a significant
increase in the amount of retainage withheld by its customers. We expect to
collect a significant portion of this retainage during 2004. Reductions in
inventory generated $713,689 during 2003 as we continued to focus on reducing
inventory in the Energy Technology segment by doing a better job of forecasting
our requirements for raw material and finished goods. Increases in inventory
consumed $941,584 during 2002, most of which was related to product shipped to
three large EnergySaver customers for whom all of our revenue recognition
requirements had not been satisfied. In situations such as this, we carry the
product as outside inventory until the revenue recognition requirements are
met, then we record the revenue and move the product from inventory to cost of
goods sold. Changes in other current assets consumed $87,660 during 2003 as
compared to generating $12,639 during 2002. The
2003 increase was largely the result of increases in prepaid insurance
premiums and deferred expenses related to the ComEd program. These deferred
expenses are the costs of installing EnergySaver at various ComEd customer
sites, which will be recognized concurrently with recognition of the revenue
from the sale of the units. 31




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Increases in accounts payable generated $74,346 during 2003 as compared to
generating $416,867 during 2002. The increase in accounts payable is primarily
related to the various building automation control projects that Great Lakes is
currently working on. In order to better manage our working capital
requirements related to these jobs, we have agreements with our larger
subcontractors that their payments are contingent on us receiving payment from
our customers. This has resulted in a large increase in the accounts payable
at Great Lakes. The increase in accounts payable during 2002 was generally the
result of increased business activity in both the Energy Technology and
Building Automation Controls segments. Changes in accrued expenses consumed
cash of $328,898 during 2003 and generated cash of $555,167 during 2002. Most
of the increase in the accrued expenses during 2002 was related to these
accrued contractor fees. At the end of 2002 we had accrued $350,000 in
contractors fees for work related to various building automation projects
underway at the time. Subsequent to year-end we received invoices from these
contractors and moved the expense from accrued expense to accounts payable.
Deferred revenue increased $283,308 during 2003 as compared to decreasing
$487,597 in 2002. The increase in deferred revenue during 2003 is attributable
to situations where the Building Automation Controls segment invoiced its
customers in advance of completing the work for which it had invoiced, a
practice which is typical for its industry. The decline in deferred revenue is
the result of completing work during 2002 that was invoiced during 2001.
Changes in customer deposits generated $511,167 during 2003, largely the result
of a $500,000 prepayment received from ComEd pursuant to the VNPP contract. Investing activities generated cash of $896,728 during the twelve-month
period ended December 31, 2003 as compared to consuming cash of $6,987 during
2002. In June 2003, we sold certain assets and transferred certain liabilities
of our Power Management business, generating cash proceeds of $929,032. This
source of cash was partially offset by the purchase of equipment during 2003
totaling $32,304. During 2002 we spent $17,487 on new equipment, but this use
of cash was partially offset by $10,500 generated through the sale of equipment
we no longer used. Financing activities generated cash of $2,845,162 and $2,957,329 during
2003 and 2002, respectively. In September 2003 we raised $1,000,000 in gross
proceeds through the issuance of a convertible term loan to Laurus Funds.
These proceeds were partially offset by issuance costs totaling $308,228. In
November 2003 Laurus converted $52,346 in principal into shares of our common
stock. We also raised gross proceeds of $1.5 million from the issuance of our
Series D Convertible Preferred Stock and $1,669,914 from the issuance of
$1,815,125 shares of our common stock in three separate private placements
during 2003. The proceeds from these private placements of our common stock
were partially offset by issuance costs of $297,462. During 2003, various
holders of warrants exercised their rights under the warrants to purchase
197,000 shares of common stock for $197,000 in cash. We used a portion of the
proceeds generated from the sale of our Power Management segment to repay
$298,000 in equipment loans and to pay down the outstanding balance on our
revolving line of credit of $500,000. We also prepaid $47,000 on our mortgage
as an inducement for the lender to refinance the mortgage and extend the
maturity until February 1, 2005. During 2003 we made scheduled payments of
$33,000 on our mortgage, $51,500 on our equipment loan, and $7,014 on
various auto loans. During 2003 we also received a payment of $798 from a
board member that represented the short-swing profit inadvertently earned when
he purchased shares of our stock within six months of selling shares, which is
a violation of section 16(b) of the Securities Exchange Act of 1934. 32




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During 2002 we issued preferred and common stock which generated net
proceeds of $2,800,257. We also refinanced the mortgage on our building and
our equipment loan, generating $22,000 after the repayment of the existing
loans, and borrowed $500,000 on our line of credit. Offsetting these sources
of cash were scheduled payments of $147,000 on our long-term debt and $219,067
on the Marino Sellers note. During 2002 we also received $1,300 from one of
our 10% stockholders, which represented the short-swing profit inadvertently
earned when he purchased shares of our stock within six months of selling
shares, which is a violation of section 16(b) of the Securities Exchange Act of
1934. Our working capital line of credit with American Chartered Bank expired on
September 30, 2003. We entered into new a financing arrangement with Laurus
Master Fund, Ltd. (Laurus) as of September 11, 2003, providing for a
$1,000,000 term loan (the Term Loan) and a revolving credit facility of up to
$2,000,000. The Term Loan has a term of two years and accrues interest at the
greater of prime (currently 4.00%) plus 1.75%, or 6%. Interest on the Term
Loan is due monthly in arrears and the loan will amortize at the rate of
$50,000 per month beginning February 1, 2004. We have the option of paying
scheduled interest and principal or prepaying all or a portion of the Term Loan
with shares of our common stock at the fixed conversion price of $2.12 per
share (which was equal to 103% of the recent market price of our common stock
at that time), provided that the closing price of the common stock is greater
than $2.43 per share for the 11 trading days immediately preceding the payment
date and that the shares are registered with Securities and Exchange
Commission. We completed the registration of these shares in November 2003.
Laurus also has the option to convert all or a portion of the Term Loan into
shares of our common stock at any time, subject to certain limitations, at a
fixed conversion price of $2.12 per share. The Term Loan is secured by a
blanket lien on all our assets, except for our real estate. In conjunction
with the Term Loan, Laurus was paid a fee of $50,000 and received a five year
warrant to purchase up to 140,000 shares of our common stock at prices ranging
from $2.44 per share to $3.07 per share. The revolving credit facility provides
for borrowings of up to the lesser of (i) $2 million or (ii) 90% of our
eligible accounts receivable. We have not borrowed under the facility, thus it
remains fully available to the extent we have eligible receivables to support
borrowings. The revolving credit facility also has a term of two years and
accrues interest at the rate of prime (currently 4.00%) plus 1.75%. We have
the option of paying interest and principal, or prepaying all or a portion of
the advances under each Secured Convertible Revolving Note with shares of our
common stock at the fixed conversion price of $2.12 per share, provided that
the closing price of our common stock is greater than $2.43 per share for the
11 trading days immediately preceding the payment date and that the shares are
registered with the Securities and Exchange Commission. In addition, Laurus
has the option to convert all or a portion of the advances under any Secured
Convertible Revolving Note into shares of our common stock at any time, subject
to certain limitations, at a fixed conversion price of $2.12 per share. The
revolving credit facility is also secured by a blanket lien on all of our
assets, except for our real estate. In conjunction with the revolving credit
facility, Laurus was paid a fee of $100,000 and received a five year warrant to
purchase up to 280,000 shares of our common stock at prices ranging from $2.54
per share to $3.18 per share. On November 26, 2003, Laurus converted $52,346
of principal and $664 of accrued interest into 25,000 shares of
our common stock. The conversion was offset against the scheduled
principal payments for February and March of 2004. During January 2004, Laurus
converted $270,864 of principal and $4,736 of accrued interest into 130,000
shares of our common stock. The January conversions were offset against
principal payments scheduled for March through August 2004. 33




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In March 2004, we closed on a series of transactions in which we issued 5
million shares of our Common Stock and warrants to purchase an additional
1,750,000 shares of Common Stock at $2.42 per share to four affiliated
investors in exchange for $11 million in gross proceeds. We used $7 million of
the proceeds from the transaction to facilitate a redemption and exchange
offering for our outstanding preferred stock, in order to eliminate the
requirement that we begin paying dividends in cash at the end of 2004, and to
reduce the dividend rate on the remaining preferred. Under the redemption and
exchange offering we redeemed 538,462 shares of our outstanding convertible
preferred stock which was convertible into 5,384,620 shares of Common Stock and
exchanged the remaining 2,104,509 shares of convertible preferred stock into
210,451 shares of a new Series E Convertible Preferred Stock (the Series E
Preferred). (In February and March 2004, a total of 145,000 shares of Series
A Preferred were converted to 1,450,000 shares of common stock, thus were not
included in the redemption and exchange.) The Series E Preferred is
convertible into Common Stock at any time at the rate of 100 shares of Common
Stock for each share of Series E Preferred stock. The Series E Preferred Stock
carries a dividend rate of 6%, which is payable at our election in cash or
additional shares of Series E Preferred stock. We retained approximately $3.3
million of the proceeds from the Common Stock sale after the redemption and all
offering costs. These funds will be used for general corporate purposes. All
shares of Series A, Series C and Series D Preferred stock have been cancelled. Our ability to continue the development, manufacturing and expansion of
sales of our products, including the EnergySaver and the GlobalCommander, will
require the continued commitment of significant funds. The actual timing and
amount of our future funding requirements will depend on many factors,
including the amount and timing of future revenues, the level and amount of
product marketing and sales efforts, the magnitude of research and development,
and our ability to improve margins on our products. During the last four fiscal years we have raised net proceeds of $25.2
million through the issuance of shares of our common and preferred stock, which
has allowed us to continue to execute our business plan. Most of these funds
have been consumed by operating activities, either used to fund our losses or
working capital requirements. As of December 31, 2003 our cash balance was
$2,467,023. In an attempt to move the Company to a position where it can start
to generate positive cash flow our management has set the following key
objectives for cash flow improvement in 2004:  
    
    Successfully execute on the ComEd contract. We believe that this
is important from several different perspectives. First we anticipate
that it will have an immediate positive impact on our cash flow.
Secondly, we believe it will establish Electric City as the leader in
negative power development, thereby supporting VNPP opportunities with
other utilities. And finally we believe it will lead to increased
commercial sales of the EnergySaver as customers who participate in the
ComEd VNPP with operations outside the ComEd territory gain exposure to
the technology. This project is under contract,
therefore we are focusing a great deal of our resources on this project
and will be hiring additional personnel in an attempt to keep this
project on schedule.
    
    Increase the profitability of EnergySaver sales. Increasing the
margins earned on EnergySaver sales will also have an immediate and
positive impact on our cash flow. We 34




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have seen improvements in
EnergySaver margins over the past two years, but believe that the
product has the potential for significantly higher margins. We believe
that increased volumes that will result from the ComEd program will
lead to higher margins as a result of increased capacity utilization.
In addition, a price increase that we implemented effective January 1,
2004 should also lead to improved profitability of the EnergySaver.
    
    Build on the recent project successes at Great Lakes Controlled
Energy to make the Building Controls and Automation business grow and
become profitable. Great Lakes has recently been awarded new business
and is currently working on existing projects that we believe will
result in this segment turning profitable during 2004. This segment
must execute effectively in order to realize the profitability
potential of these projects.
    
    Continue to aggressively manage our costs in order to conserve
cash. While we made significant progress in reducing our costs during
the last two years, we must continue to effectively manage all of our
costs so that they do not negate the anticipated improvement in
profitability in our Energy Technology and Building Automation and
Control segments.
    
    Be prepared to raise additional capital in limited amounts if
necessary to continue to fund operations until the business turns cash
flow positive. Our ability to raise additional capital in the future
will depend a great deal on our ability to make progress toward the
goals outline above. Our projections indicate that if we are successful in achieving these
priorities we should have sufficient liquidity to allow us to operate until our
operations turn cash flow positive. These projections contain certain key
assumptions, which may or may not occur. If, for one reason or another certain
key assumptions contained in our projections are proven to be wrong, we may
begin to experience a liquidity shortage sometime next year which could force
us to scale back our growth plans, or in the worst case cease operations. If we determine we need to raise additional capital in the future (which
may require stockholder approval), our existing stockholders will likely
experience dilution of their present equity ownership position and voting
rights, depending upon the number of shares issued and the terms and conditions
of the issuance. The new equity securities will likely have rights, preferences
or privileges senior to those of our common stock. Recent Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46).
In general, a variable interest entity is a corporation, partnership, trust or
any other legal structure used for business purposes that either (a) does not
have equity investors with voting rights or (b) has equity investors that do
not provide sufficient financial resources for the entity to support its activities.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The consolidation
requirements of FIN 46 apply immediately to variable interest entities 35




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created after January 31, 2003. The Company adopted the provisions of FIN 46 effective
February 1, 2003 and such adoption did not have a material impact on its
consolidated financial statements since it currently has no variable interest
entities. In December 2003, the FASB issued FIN 46R with respect to variable
interest entities created before January 31, 2003, which among other things,
revised the implementation date to the first fiscal year or interim period
ending after March 15, 2004, with the exception of Special Purpose Entities
(SPE). The consolidation requirements apply to all SPEs in the first fiscal
year or interim period ending after December 15, 2003. The Company adopted the
provisions of FIN 46R effective December 29, 2003 and such adoption did not
have a material impact on its consolidated financial statements since it
currently has no SPEs. In April 2003, FASB issued Statement of Financial Accounting Standards No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities (SFAS No. 149). SFAS No. 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is
effective for contracts and hedging relationships entered into or modified
after June 30, 2003. The Company adopted the provisions of SFAS No. 149
effective June 30, 2003 and such adoption did not have a material impact on its
consolidated financial statements since the Company has not entered into any
derivative or hedging transactions. In May 2003, FASB issued Statement of Financial Accounting Standards No.
150, Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both debt and equity and requires an issuer to classify the
following instruments as liabilities in its balance sheet:  
    
    a financial instrument issued in the form of shares that is
mandatorily redeemable and embodies an unconditional obligation that
requires the issuer to redeem it by transferring its assets at a
specified or determinable date or upon an event that is certain to
occur;
    
    a financial instrument, other than an outstanding share, that
embodies an obligation to repurchase the issuers equity shares, or is
indexed to such an obligation, and requires the issuer to settle the
obligation by transferring assets; and
    
    a financial instrument that embodies an unconditional obligation
that the issuer must settle by issuing a variable number of its equity
 shares if the monetary value of the obligation is based solely or
predominantly on (1) a fixed monetary amount, (2) variations in
something other than the fair value of the issuers equity shares, or
(3) variations inversely related to changes in the fair value of the
issuers equity shares. In November 2003, FASB issued FASB Staff Position No. 150-3 (FSS 150-3)
which deferred the effective dates for applying certain provisions of SFAS 150
related to mandatorily redeemable financial instruments of certain non-public
entities and certain mandatorily redeemable non-controlling interests for
public and non-public companies. For public entities, SFAS 150 is
effective for mandatorily redeemable financial instruments entered into or
modified after May 31, 2003 and is effective for all other financial
instruments as of the first interim period beginning after June 15, 2003. For
mandatorily redeemable non-controlling interests that would not have to be
classified as liabilities by a subsidiary under the exception in paragraph 9 of
SFAS 150, but would be classified as liabilities by the parent, the
classification and measurement provisions of SFAS 36




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150 are deferred
indefinitely. The measurement provisions of SFAS 150 are also deferred
indefinitely for other mandatorily redeemable non-controlling interests that
were issued before November 4, 2003. For those instruments, the measurement
guidance for redeemable shares and non-controlling interests in other
literature shall apply during the deferral period. On December 17, 2003, the Staff of the SEC issued Staff Accounting
Bulletin No. 104 (SAB 104), Revenue Recognition, which supercedes SAB 101,
Revenue Recognition in Financial Statements. SAB 104s primary purpose is to
rescind accounting guidance contained in SAB 101 related to multiple element
revenue arrangements, superceded as a result of the issuance of EITF 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables. Additionally,
SAB 104 rescinds the SECs Revenue Recognition in Financial Statements
Frequently Asked Questions and Answers (the FAQ) issued with SAB 101 that had
been codified in SEC Topic 13, Revenue Recognition. Selected portions of the
FAQ have been incorporated into SAB 104. While the wording of SAB 104 has
changed to reflect the issuance of EITF 00-21, the revenue recognition
principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The
adoption of SAB 104 did not materially affect our revenue recognition policies,
nor our results of operations, financial position or cash flows. 
 Item 7. Financial Statements Index to Financial Statements F-1
    
    Report of Independent Certified Public AccountantsF-2 - F-3
    
    Consolidated Balance Sheets as of December 31, 2003 and
December 31, 2002F-4
    
    Consolidated Statements of Operations for the years ended
December 31, 2003 and December 31, 2002F-5
    
    Statements of Stockholders Equity for the years ended
December 31, 2003 and December 31, 2002F-6-F-8
    
    Statements of Consolidated Cash Flows for the years
ended December 31, 2003 and December 31, 2002F-9 - F-36
    
    Notes to Consolidated Financial Statements
 
 Item 8. Change in and Disagreements with Accountants on Accounting and Financial Disclosure None 37




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Item 8A. Controls and Procedures  (a)
    
    Explanation of disclosure controls and procedures.Our chief executive
officer and chief financial officer, after evaluating the effectiveness of
the Companys disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
Exchange Act)) as of the end of the period covered by this report, have
concluded that our disclosure controls and procedures were effective and
designed to ensure that material information relating to the Company and
its consolidated subsidiaries would be made known to them by others within
those entities.(b)
    
    Changes in internal controls.During the fourth quarter of 2003 there
were no significant changes in the Companys internal controls or in other
factors which materially affected or are reasonably likely to materially
affect our internal controls over financial reporting. 38




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##### Table of Contents



PART III 
 Item 9. Directors and Executive Officers of the Registrant The table below shows certain information about our directors, executive
officers and significant employees: Name
    
    Age
    
    Principal PositionsDirectors and Executive
OfficersJohn P. Mitola
    
    
    39
    
    
    Chief Executive Officer and DirectorJeffrey R. Mistarz
    
    
    45
    
    
    Executive Vice President, Chief
Financial Officer, Treasurer and
Assistant SecretaryDenis Enberg
    
    
    55
    
    
    Senior Vice President, EngineeringDavid Asplund
    
    
    45
    
    
    DirectorFrederic F. Brace
    
    
    46
    
    
    Director (3)John C. Bukovski
    
    
    61
    
    
    Director (1)Felicia Ferguson
    
    
    44
    
    
    Director (3)Robert J. Manning
    
    
    61
    
    
    Director (2)Gerald A. Pientka
    
    
    48
    
    
    Director (1)(2)Michael S. Stelter
    
    
    47
    
    
    DirectorRobert D. Wagner, Jr
    
    
    62
    
    
    Director (1)(2)(3)
   (1)
    
    Member of our Audit Committee.(2)
    
    Member of our Compensation Committee.(3)
    
    Messrs. Brace, and Wagner and Ms. Ferguson were
appointed by the holders of our Convertible Preferred Stock. Our Board of Directors is currently authorized for a membership of twelve
directors. As of February 29, 2004, our Board of Directors had three vacancies,
of which one is to be appointed by the holders of our Series A Convertible
Preferred Stock. John P. Mitola has been one of our directors since November 1999 and has
been our chief executive officer since January 2000. From August 1993 until
joining us, Mr. Mitola was with Unicom Thermal Technologies (now Exelon Thermal
Technologies), Unicom (now Exelon) Corporations largest (at that time)
unregulated subsidiary, serving most recently as vice president and general
manager. Mr. Mitola led the growth of Unicom Thermal through the development of
Unicom Thermals Northwind ice technology and through thermal energy joint
ventures between Unicom Thermal and several leading electric utility companies
across North America. Prior to his appointment at Unicom Thermal, Mr. Mitola
was director of business development for Commonwealth Edison Company, the local
electric utility serving Chicago, Illinois and the northern Illinois region.
Since April 2003, Mr. Mitola has also served as the chairman of the Illinois
State Toll Highway Authority, appointed by the Governor of Illinois. Jeffrey R. Mistarz has been our chief financial officer since January
2000, our treasurer since October 2000 and our assistant secretary since
February 2003. From January 1994 until 39




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joining us, Mr. Mistarz served as chief
financial officer for Nucon Corporation, a privately held manufacturer of
material handling products and systems, responsible for all areas of finance
and accounting, managing capital and shareholder relations. Prior to joining
Nucon, Mr. Mistarz was with First Chicago Corporation (now Bank One
Corporation) for 12 years where he held several positions in corporate lending,
investment banking and credit strategy. Denis Enberg has been our Senior Vice President of Engineering since
Electric City acquired his company, Great Lakes Controlled Energy, in June
2001. Mr. Enberg co-founded Great Lakes Controlled Energy Corp in 1985. From
1975 to 1985 he was president of C.E. Electric Incorporated, a Chicago licensed
commercial and industrial electrical contracting firm that also specialized in
industrial automation and controls. Mr. Enberg is a charter life member of the
Association of Energy Engineers and holds certifications as Certified Energy
Manager, Certified Lighting Efficiency Professional and Certified
Demand-Side Management professional and is considered one of the early
pioneers in the building automation industry. David R. Asplund was nominated to our board of directors during June 2002.
Mr. Asplund is, and has been, the founder and President of Delano Group
Securities, LLC since October 1999. From March 1995 through October 1999, Mr.
Asplund was employed by Bear, Stearns and Company, Inc., serving as a Senior
Managing Director from July 1997 until October 1999. John C. Bukovski has been one of our directors since January 2004. From
January 1992 until his retirement in January 2002, Mr. Bukovski was the Senior
Vice President and Chief Financial Officer of Commonwealth Edison Company, the
largest subsidiary of Unicom Corporation (now Exelon). During his thirty-seven
year career with Commonwealth Edison Mr. Bukovski held a variety of management
positions within the company. During the 1990s Mr. Bukovski served on the
Board of Directors of Northwestern Memorial Hospital in Chicago Illinois. Frederic F. Brace has been one of our directors since October 2001 and is
an appointee of the holders of our Series A Convertible Preferred Stock. Mr.
Brace is, and has been, the Executive Vice President and Chief Financial
Officer of UAL Corporation, the parent of United Airlines since August 2002.
From September 2001 through July 2002, Mr. Brace was Senior Vice President and
Chief Financial Officer of UAL Corporation. From July 1999 through September
2001, Mr. Brace was Senior Vice President and Treasurer of United Airlines and
its Vice President of Finance from October 1996 through July 1999. Felicia A. Ferguson has been one of our directors since February 2004 and
is an appointee of the holders of our Series A Convertible Preferred Stock. Ms.
Ferguson is the Managing Director of Cinergy Ventures, LLC, the private equity
investment unit of Cinergy Corp. Prior to becoming the Managing Director, Ms.
Ferguson was Vice President and Chief Financial Officer of Cinergys Power
Technology and Infrastructure Services business unit, which was responsible for
investments in non-regulated domestic energy infrastructure services
businesses. Ms. Ferguson has also held management positions in finance,
accounting, information technology, and investor relations at Cinergy Corp.
Besides Electric City, Ms. Ferguson is the Chairman of the Board of Reliant
Services, Inc. 40




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##### Table of Contents



Robert J. Manning has been one of our directors since May 2000 and
Chairman of our Board of Directors since January 2001. Mr. Manning is a
co-founder and a member of Groupe Manning LLC. From April 1997 until his
retirement in January 2000, Mr. Manning served as executive vice president of
Unicom Corporation and its largest subsidiary, Commonwealth Edison Company,
where his responsibilities included managing the sale of Commonwealth Edisons
fossil generating fleet. During his thirty-five year career at Unicom, Mr.
Manning was involved in all aspects of electric generation, consumer service
and transmission and distribution operations. Gerald A. Pientka has been one of our directors since May 2000. Mr.
Pientka is currently, and has been since September 2003, a Principal of Verus
Partners, a real estate development company located in Chicago, Illinois.
Prior to this, from May 1999 through March 2003, Mr. Pientka was President of
Higgins Development Partners, LLC (the successor to Walsh, Higgins & Company),
a national real estate development company controlled by the Pritzker family
interest. From May 1992 until May 1999, Mr. Pientka served as President of
Walsh, Higgins & Company. Mr. Pientka is also a member of Leaf Mountain
Company, LLC, who is an investor in our Series A Convertible Preferred Stock. Michael S. Stelter is one of our co-founders and has been one of our
directors since our incorporation in June 1998. Currently, Mr. Stelter is
employed by and a part owner of Switchboard Apparatus, Inc., which was divested
by Electric City effective May 31, 2003. Since our organization as a limited
liability company in December 1997, through May 2003, Mr. Stelter served as our
Vice President of Switchgear Sales. Mr. Stelter was our Corporate Secretary
from June 1998 until October 2000. From 1986 until May 1999, Mr. Stelter
served as Vice President of Marino Electric. Robert D. Wagner, Jr. has been one of our directors since October 2001 and
is an appointee of the holders of our Series A Convertible Preferred Stock.
Mr. Wagner is currently a principal of Rivington Capital Advisors, LLC, which
provides advisory services and private equity and debt placements for
independent oil and gas producers. Mr. Wagner served as Managing Director of
the corporate finance group of Arthur Andersen LLP from May 1999 until his
retirement in April 2001. From June 1998 through May 1999, Mr. Wagner served as
Managing Director of M2 Capital. From April 1989 through June 1998, Mr. Wagner

served as Managing Director for Bankers Trust/BT Alex Brown. Board Committees Our board of directors currently has the following committees:  
    
    The Audit Committee oversees and monitors our financial reporting
process and internal control system, reviews and evaluates the audit
performed by our outside auditors and reports any substantive issues
found during the audit to the Board. The Audit Committee is also
directly responsible for the appointment, compensation and oversight of
the work of our independent auditors. In addition, the committee also
reviews and approves all transactions with affiliated parties and
performs such other duties as are specified in the Audit Committee
Charter, as amended from time to time. The members of the audit
committee are Messrs. Bukovski, Pientka, and Wagner, each of whom is
independent
as defined under Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act.
Our Board of 41




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##### Table of Contents



Directors has determined that Mr. Bukovski qualify as an
audit committee financial expert as defined in Item 410(e) of SEC
Regulation S-B.
    
    Compensation Committee. The Compensation Committee is responsible
for establishing, administering and reviewing compensation programs for
the Companys executive and senior management, subject to approval of
the Board as a whole. The members of the compensation committee are
Messrs. Manning, Pientka, and Wagner. Code of Ethics The Company has adopted a Code of Ethics for its Chief Executive Officer
and its Chief Financial Officer. A copy of the Code of Ethics is filed as
Exhibit 14 to this Annual Report on Form 10-KSB. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires the
Companys officers and directors, and persons who own more than 10% of a
registered class of the Companys equity securities, to file with the
Securities Exchange Commission and the American Stock Exchange reports of
ownership of Company securities and changes in reported ownership. Officers,
directors and greater than 10% shareholders are required by SEC rules to
furnish the Company with copies of all Section 16(a) reports filed. Based solely upon a review of the reports furnished to the Company, or
written representations from reporting persons that all reportable transactions
were reported, the Company believes that during 2003 the Companys officers,
directors and greater than 10% owners timely filed all reports they were
required to file under Section 16(a), except that: Mr. Marino was late in
reporting three transactions; Mr. Kiphart was late in reporting one
transaction; Mr. Stelter was late in reporting six transactions. 
 Item 10. Executive Compensation Summary Compensation Table The following table summarizes the total compensation paid or awarded to
each of our executive officers and to other officers whose total compensation
exceeded $100,000 during the fiscal year ended December 31, 2003. 42




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Long TermAnnual Compensation
    
    CompensationSecuritiesYear
    
    
    
    
    
    
    
    
    
    Other Annual
    
    UnderlyingName and Principal Position
    
    Ended
    
    Salary ($)
    
    Bonus ($)
    
    Compensation ($)
    
    Options (#)John P. Mitola (1)
    
    12/31/03
    
    $
    233,844
    
    
    
    
    
    
    $
    10,152
    (5)
    
    
    750,000our chief executive officer
    
    12/31/02
    
    $
    345,900
    
    
    
    
    
    
    $
    5,325
    (5)
    
    
    12/31/01
    
    $
    350,000
    
    
    
    
    
    
    $
    14,370
    (5)
    
    
    Jeffrey R. Mistarz (2)
    
    12/31/03
    
    $
    159,070
    
    
    
    
    
    
    $
    8,312
    (6)
    
    
    400,000our chief financial
    
    12/31/02
    
    $
    172,308
    
    
    
    
    
    
    $
    7,945
    (6)
    
    
    officer and treasurer
    
    12/31/01
    
    $
    175,000
    
    
    
    
    
    
    $
    7,657
    (6)
    
    
    William A. Karambelas (3)
    
    12/31/03
    
    $
    176,394
    
    
    
    
    
    
    $
    1,616
    (7)
    
    
    our senior vice president
    
    12/31/02
    
    $
    202,789
    
    
    
    
    
    
    $
    1,575
    (7)
    
    
    of sales
    
    12/31/01
    
    $
    167,197
    
    
    
    
    
    
    $
    110
    (7)
    
    
    150,000Denis Enberg (4)
    
    12/31/03
    
    $
    160,417
    
    
    
    
    
    
    $
    759
    (8)
    
    
    our senior vice president
    
    12/31/02
    
    $
    175,000
    
    
    
    
    
    
    $
    948
    (8)
    
    
    of engineering
    
    12/31/01
    
    $
    119,283
    
    
    
    
    
    
    $
    79
    (8)
    
    
    200,000
   (1)
    
    Mr. Mitola entered into an employment agreement with us on November 18,
1999 for a term of three years, which became effective on January 3, 2000
and ended on December 31, 2002. Effective as of January 1, 2000, options
with an exercise price of $7.00 per share that vested over the term of the
agreement were granted to Mr. Mitola pursuant to his employment agreement.Effective January 1, 2003, we entered into a new employment agreement with
Mr. Mitola for a three-year period ending on December 31,
2005. Under the new
employment agreement, we granted to Mr. Mitola an option to purchase 750,000
shares of our common stock with an exercise price of $0.845 per share, which
vest 250,000 shares each on December 31, 2003, 2004 and 2005. Mr. Mitola
and other management employees of the Company voluntarily reduced their
salaries during all of 2003.(2)
    
    Mr. Mistarz entered into an employment agreement with us effective
January 14, 2000 for a term of three years beginning on January 1, 2000
and ending on December 31, 2002. As part of the employment agreement, Mr.
Mistarz was granted options with an exercise price of $7.00 per share that
vested over the term of the agreement.Effective January 1, 2003, we entered into a new employment agreement with
Mr. Mistarz for a three-year period ending on December 31, 2005. The new
agreement provides Mr. Mistarz with options to purchase 400,000 shares of
our common stock with an exercise price of $1.00 per share, which vest
133,334 shares on December 31, 2003 and 133,333 shares each on December 31,
2004 and 2005. Mr. Mistarz and other management employees of the Company
voluntarily reduced their salaries during all of 2003.(3)
    
    Mr. Karambelas employment with the Company became effective on April 1,
2001. Mr. Karambelas is not an executive officer of the Company but is
included for purposes of compensation disclosure. As part of Mr.
Karambelas offer of employment, he was granted options with an exercise
price of $7.00 per share that vest over a four-year period. Mr.
Karambelas was notified in December of 2003 that his employment with the
Company would be restructured early in 2004 as a result of the elimination
of his position.(4)
    
    Mr. Enbergs employment with the Company became effective upon the
acquisition of Great Lakes Controlled Energy on June 1, 2001. Mr. Enberg
is not an executive officer of the Company but is included for
compensation disclosure. As part of Mr. Enbergs offer of employment he
was granted options with an exercise price of $7.00 that vest over a six
year period. Mr. Enberg and other management employees of the Company
voluntarily reduced their salaries during all of 2003. 43




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##### Table of Contents



(5)
    
    This represents a monthly auto allowance of $550 and the cost of life
insurance and long-term disability insurance for Mr. Mitola.(6)
    
    This represents the cost of life insurance and long-term disability
insurance for Mr. Mistarz.(7)
    
    This represents the cost of long-term disability insurance for Mr.
Karambelas.(8)
    
    This represents the cost of long-term disability insurance for Mr.
Enberg. Employment Agreements Effective January 3, 2000, we entered into an employment agreement with
John Mitola, our chief executive officer, for a three-year period ending on
December 31, 2002. The agreement provided for a base salary of $350,000 per
year and a discretionary bonus of up to forty percent (40%) of his annual
salary payable if we met or exceeded the terms of our annual business plan.
The agreement also provided for a monthly automobile allowance of $550.00 and
the reimbursement of Mr. Mitolas business-related cellular phone calls. Under the employment agreement, we granted to Mr. Mitola an option to
purchase 1,000,000 shares of our common stock at $7.00 per share, which vested
and became exercisable with respect to 333,334 shares on December 31, 2000,
333,333 shares on December 31, 2001 and 333,333 shares on December 31, 2002.
Mr. Mitola has piggyback registration rights with respect to all shares of our
stock obtained through the exercise of these options but has waived such rights
with respect to registrations undertaken on behalf of the holders of our
Preferred Stock. Effective January 1, 2003, we entered into a new employment agreement with
John Mitola for a three-year period ending on December 31, 2005. The new
agreement, which is structured to place more emphasis on achieving important
corporate milestones, reduced Mr. Mitolas base salary to $250,000 per year,
but provides for a discretionary bonus of up to one hundred percent of his
annual salary payable if he meets or exceeds certain annual goals as
established by the Board of Directors, and a guaranteed bonus of $250,000 upon
the achievement of two consecutive calendar quarters of positive net income by
the Company (such net income to be that as reflected in the Companys quarterly
reports filed with the Securities and Exchange Commission). The agreement also
provides for a monthly automobile allowance of $550.00 and the reimbursement of
Mr. Mitolas business-related expenses. Under the new employment agreement, we granted to Mr. Mitola an option to
purchase 750,000 shares of our common stock at a price per share of $0.845,
which is equal to the average closing price of the Companys common stock as
measured over the thirty (30) trading day period prior to the effective date of
the contract. The option granted vests in amounts of 250,000 shares on each
December 31st of 2003, 2004 and 2005. The employment agreement imposes on Mr. Mitola non-competition,
non-solicitation and confidentiality obligations. On January 14, 2000, we entered into an employment agreement with Jeffrey
Mistarz, our chief financial officer and treasurer, for a term of three years
commencing on January 1, 2000 and ending on December 31, 2002. The agreement
provided for a salary of $175,000 per 44




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##### Table of Contents



year and a discretionary bonus payable if Mr. Mistarz attained established
performance goals agreed upon by Mr. Mistarz and our chief executive officer. Under the employment agreement, we granted to Mr. Mistarz an option to
purchase 200,000 shares of our common stock at $7.00 per share which vested
with respect to 66,667 shares on December 31, 2000, 66,667 shares on December
31, 2001 and with respect to 66,666 shares on December 31, 2002. Upon vesting,
the options become exercisable over a three-year period beginning on the
vesting date. Effective January 1, 2003, we entered into a new employment agreement with
Mr. Mistarz for a three-year period ending on December 31, 2005. The new
agreement provides for an annual base salary of $175,000 through December 31,
2003, increasing to $210,000 effective January 1, 2004 through December 31,
2005. In addition, Mr. Mistarz is eligible to participate in an annual bonus
plan with certain other management employees. The new agreement provides Mr.
Mistarz with options to purchase 400,000 shares of our common stock at a price
of $1.00 per share, which options vest 133,334 shares on December 31, 2003 and
133,333 shares each on December 31, 2004 and 2005. The employment agreement imposes on Mr. Mistarz non-competition,
non-solicitation and confidentiality obligations. 2003 Option Grants The following table sets forth information regarding stock option grants
made to each of the above named executive and principal officers during the
fiscal year ended December 31, 2003. Percent ofNumber of
    
    TotalShares
    
    OptionsUnderlying
    
    Granted to
    
    ExerciseOptions
    
    Employees in
    
    Price
    
    ExpirationName
    
    Granted (#)
    
    Period
    
    ($/Share)
    
    DateJohn P. Mitola
    
    
    750,000
    
    
    
    64.1
    %
    
    $
    0.845
    
    
    
    12/31/2012Jeffrey R. Mistarz
    
    
    400,000
    
    
    
    34.2
    %
    
    $
    1.00
    
    
    
    12/31/2012William A. Karambelas
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    Denis Enberg
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    
 Option Values The following table sets forth information regarding the number and value
of unexercised options held by each of the above named executive and principal
officers as of December 31, 45




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##### Table of Contents



2003. None of our named executive or principal officers hold any stock
appreciation rights and none of them exercised any options during the fiscal
year ended December 31, 2003. Number of Shares
    
    Value of Unexercised In-the-Underlying Unexercised Options at
    
    Money Options atDecember 31, 2003 (#)
    
    December 31, 2003 ($)Name
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableJohn P. Mitola
    
    
    1,250,000
    
    
    
    500,000
    
    
    $
    378,750
    
    
    $
    757,500Jeffrey R. Mistarz
    
    
    311,112
    
    
    
    288,888
    
    
    $
    181,334
    
    
    $
    362,666William A. Karambelas
    
    
    75,000
    
    
    
    75,000
    
    
    $
    0
    
    
    $

    0Denis Enberg
    
    
    66,668
    
    
    
    133,332
    
    
    $
    0
    
    
    $
    0
 Stock Options and Incentive Compensation During the Companys annual meeting of shareholders held on August 30,
2001, our shareholders approved the adoption of the 2001 Stock Incentive Plan
(the Plan), which provides that up to 800,000 shares of the Companys common
stock, par value $0.0001 (Common Stock) may be issued under the Plan to
certain employees of the Company or any of its subsidiaries and to consultants
and directors who are not employees. In addition, the Plan provides for an
additional number of shares of Common Stock to be reserved for issuance under
the Plan on January 1 of each succeeding year, beginning January 1, 2002, in an
amount equal to the lesser of (i) 5% of the number of outstanding shares of
Common Stock, or (ii) 500,000 shares. The awards to be granted under the Plan
may be incentive stock options eligible for favored treatment under Section 422
of the Internal Revenue code of 1986, as amended from time to time, or
non-qualified options that are not eligible for such treatment or stock of the
Company, which may be subject to contingencies or restrictions, as well as
grants of stock appreciation rights or grants of shares of Common Stock.
Approximately 27 employees, officers and directors of the Company are currently
eligible to participate in the Plan. The exercise price for any incentive stock option (ISO) may not be less
than 100% of the fair market value of the stock on the date the option is
granted, except that with respect to a participant who owns more than 10% of
the Common Stock the exercise price must be not less than 110% of fair market
value. The exercise price of any non-qualified option shall be in the sole
discretion of the Committee or Board. The aggregate fair market value of the
shares that may be subject to any ISO granted to any participant may not exceed
$100,000 on the date of grant. There is no comparable limitation with respect
to non-qualified stock options. The term of all options granted under the Plan shall be determined by the
Committee or Board in their sole discretion, provided, however, that the term
of each ISO shall not exceed 10 years from the date of grant thereof and,
further provided, that if, at the time an ISO is granted, the optionee owns (or
is deemed to own under Section 424(d) of the Code) stock possessing more than
10% of the total combined voting power of all classes of stock of the Company,
of any of its Subsidiaries or of a Parent, the term of the ISO shall not exceed
five years from the date of grant.
The right of exercise will be cumulative, so that shares that are not purchased
in one year may be 46




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##### Table of Contents



purchased in a subsequent year. The options
may not be assigned. Upon exercise of any option, in whole or in part, payment
in full is required (unless the applicable award contract permits installment
payments or cashless exercise) for the number of shares purchased. Payment may
be made in cash, by delivery of shares of the Common Stock of equivalent fair
market value or by any other form of legal consideration that is acceptable to
the Board. In addition to the ISOs and non-qualified options, the Plan permits the
Committee, consistent with the purposes of the Plan, to grant shares of Common
Stock and/or stock appreciation rights to non-employee directors and such
employees (including officers and directors who are employees) of, or
consultants to, the Company or any of its Subsidiaries, as the Committee may
determine, in its sole discretion. The grant may require the holder to pay such
price per share therefore, if any, as the Committee may determine. Such shares
may be subject to such contingencies and restrictions as the Committee may
determine. If an employees employment is terminated by reason of death, disability
or retirement, either the employee or his or her beneficiary will have the
right for eighteen months to exercise the option to the extent the option was
exercisable on the date of death or disability, but in no event after the date
the award would otherwise have expired. If a Plan participants relationship
with the Company is terminated for any reason other than death, disability or
retirement and other than for cause or without the Companys consent (in which
case the option shall terminate immediately), he or she may, for a period of
one year, exercise the option to the extent that it was exercisable on the date
of termination, but in no event after the date the award would otherwise have
expired. The Plan is administered by the Board, which is authorized to interpret
the Plan, to prescribe, amend and rescind rules and regulations relating to the
Plan and to determine the employees to whom, and the time, terms and conditions
under which, options are to be granted. The Board is also authorized to adjust
the number of shares available under the Plan, the number of shares subject to
outstanding options and the option prices to take into account the Companys
capitalization by reason of a stock dividend, recapitalization, merger,
consolidation, stock split, combination or exchange of shares or other similar
event. The Board may amend, suspend or terminate the Plan in any respect at any
time. However, no amendment may (i) adversely affect the rights of a
participant under an award theretofore granted without the consent of such
participant, (ii) increase the number of shares reserved for option under the
Plan, (iii) modify the requirements for participation in the Plan, or (iv)
modify the Plan in any way that would require stockholder approval under the
rules and regulations under the Exchange Act or the rules of any stock exchange
or market on which the Common Stock is listed. Under current Federal law, no taxable income will be recognized by the
recipient of an incentive stock option within the meaning of Section 422 of the
Code upon either the grant or exercise of the incentive stock option (provided
the exercise occurs while the participant is an employee of the Company or
within three months after termination of employment), nor will a deduction be
allowed the Company by reason of the grant or exercise, provided the employee
does not dispose of the shares issued upon exercise within two years from the
date the option was granted and within one year from the date the shares were
issued. If the recipient fails to satisfy these holding period requirements,
the difference between the amounts realized upon disposition of the
shares and the adjusted basis of the shares is includible as compensation in
the recipients gross income and the Company will be entitled to a deduction in
that amount. 47




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##### Table of Contents



Under current law, the holder of a non-qualified stock option is taxed at
the time of exercise on the difference between the exercise price and the fair
market value of the shares on the date of exercise. Upon disposition of the
stock, the stockholder is taxed upon the difference between the basis of the
stock (which is equal to the fair market value at the time the option was
exercised) and the amount realized upon the disposition. A grant of shares of Common Stock that is subject to no vesting
restrictions will result in taxable income for federal income tax purposes to
the recipient at the time of grant in an amount equal to the fair market value
of the shares awarded. The Company would be entitled to a corresponding
deduction at that time for the amount included in the recipients income. Generally, a grant of shares of Common Stock under the Plan subject to
vesting and transfer restrictions will not result in taxable income to the
recipient for federal income tax purposes or a tax deduction to the Company in
the year of the grant. The value of the shares will generally be taxable to the
recipient as compensation income in the years in which the restriction on the
shares lapse. Such value will be the fair market value of the shares on the
dates the restrictions terminate. Any recipient, however, may elect pursuant to
Section 83(b) of the Code to treat the fair market value of the shares on the
date of such grant as compensation income in the year of the grant of
restricted shares, provided the recipient makes the election within 30 days
after the date of the grant. In any case, the Company will receive a deduction
for federal income tax purposes corresponding in amount to the amount of
compensation included in the recipients income in the year in which that
amount is so included. As of December 31, 2003, there were 1,800,000 shares of Common Stock
reserved under the Plan. The Company granted options to purchase 1,150,000
under the plan during 2003, and options to purchase 1,150,000 shares were
outstanding under the Plan as of December 31, 2003. Only the directors
options described below were granted outside of the plan during 2002 or 2003.
No grants of shares or stock appreciation rights have been made under the Plan. Director Compensation Effective April 1, 2000, the Company adopted a stock option plan for all
independent directors, which is separate and distinct from the 2001 Stock
Incentive Plan described above. The directors stock option plan provides that
eligible directors receive an initial option grant upon being appointed to our
Board of Directors to purchase 75,000 shares of our common stock at a price
equal to the greater of the closing price of our common stock on the grant
date, or $1.00. These options have a term of ten years and vest in three equal
amounts, beginning on the grant date and at the beginning of each of the next
two calendar years following the grant, assuming the individual is still a
member of the Board of Directors on such anniversary date. Mr. Kushman
received options pursuant to this provision of our directors option plan,
which he assigned to Cinergy Ventures II, LLC. Eligible directors are also granted additional options to purchase 25,000
shares of our common stock on the anniversary of their appointment to the Board
if they are still a member of the Board of Directors on such anniversary date.
These options have an exercise price equal to
the greater of the closing price of our common stock on the grant date, or
$1.00. These options also have a term of ten years and vest in three equal
amounts, beginning on the grant date and at 48




---



##### Table of Contents



the beginning of each of the next two calendar years following the grant,
assuming the individual is still a member of the Board of Directors on such
anniversary date. Messrs. Asplund, Brace, Manning, Pientka and Wagner received
options pursuant to this provision of our directors option plan. The Company granted options to purchase 200,000 shares under the
directors stock option plan during 2003, and options to purchase 983,335
shares were outstanding under this plan as of December 31, 2003. Directors who are also employees of the Company receive no additional
compensation for their services as directors. Directors who are not employees
of the Company (excluding founder-directors), in addition to stock options, are
reimbursed for travel expenses and other out-of-pocket costs incurred in
connection with their attendance at such meetings. 
 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The following tables list certain information, as of March 26, 2004,
regarding the beneficial ownership of our outstanding common stock by (1) each
of our directors and named executive officers, the persons known to us to
beneficially own greater than 5% of each class of our voting securities and our
directors and executive officers, as a group. Beneficial ownership is
determined in accordance with the rules of the SEC. Except as otherwise noted,
(1) the persons or entities named have sole voting and investment power with
respect to all shares shown as beneficially owned by them and (2) the address
of each person listed in the following table (unless otherwise noted) is c/o
Electric City Corp., 1280 Landmeier Road, Elk Grove Village, Illinois
60007-2410. Common Stock: Common SharesIssuable Upon
    
    Common Shares
    
    Common SharesConversion of
    
    Issuable Upon
    
    Issuable UponCommon Shares
    
    Preferred
    
    Exercise of
    
    Exercise ofName
    
    Directly Held
    
    Stock (1)
    
    Warrants
    
    Options (2)
    
    Total
    
    %Directors, Executive Officers and
5% HoldersDavid Asplund
    
    
    4,574
    
    
    
    293,440
    
    
    
    152,143
    (3)
    
    
    91,667
    
    
    
    541,824
    
    
    
    1.307
    %Frederic F. Brace
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    116,667
    
    
    
    116,667
    
    
    
    *John Bukovski
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    25,000
    
    
    
    *Cinergy Ventures II (4)
    
    
    73,199
    
    
    
    3,008,500
    
    
    
    834,375
    (5)
    
    
    50,000
    (6)
    
    
    3,966,074
    
    
    
    8.850
    %DYDX Consulting LLC (7)
    
    
    2,491,954
    (8)
    
    
    
    
    
    
    
    
    
    
    947,546
    (9)
    
    
    3,439,500
    
    
    
    8.215
    %Felicia Ferguson
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    *Richard P. Kiphart (10)
    
    
    563,594
    
    
    
    7,094,380
    
    
    
    1,259,178
    (11)
    
    
    
    
    
    
    8,917,152
    
    
    
    18.097
    %Nikolas Konstant
    
    
    2,491,954
    (8)
    
    
    
    
    
    
    
    
    
    
    947,546
    (9)
    
    
    3,439,500
    
    
    
    8.215
    %Kevin Kushman (22)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6)
    
    
    
    
    
    
    *Leaf Mountain Company, LLC (12)
    
    
    495,122
    
    
    
    2,076,400
    
    
    
    421,875
    
    
    
    
    
    
    
    2,993,397
    
    
    
    6.894
    %Robert J. Manning
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    141,667
    
    
    
    143,667
    
    
    
    *Joseph C. Marino
    
    
    6,615,016
    (13)
    
    
    
    
    
    
    
    
    
    
    2,150,000
    (14)
    
    
    8,765,016
    
    
    
    20.350
    %Jeffrey R. Mistarz
    
    
    9,200
    
    
    
    
    
    
    
    
    
    
    
    311,112
    
    
    
    142,533
    
    
    
    *John P. Mitola
    
    
    9,750
    (25)
    
    
    
    
    
    
    
    
    
    
    1,250,000
    
    
    
    1,259,750
    
    
    
    2.987
    %
 49




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##### Table of Contents



Common SharesIssuable Upon
    
    Common Shares
    
    Common SharesConversion of
    
    Issuable Upon
    
    Issuable UponCommon Shares
    
    Preferred
    
    Exercise of
    
    Exercise ofName
    
    Directly Held
    
    Stock (1)
    
    Warrants
    
    Options (2)
    
    Total
    
    %CIT Capital Securities, Inc. (16)
    
    
    80,217
    
    
    
    3,228,200
    
    
    
    4,064,830
    
    
    
    
    
    
    
    7,373,247
    
    
    
    15,292
    %Newcourt Capital USA, Inc. (16)
    
    
    80,217
    
    
    
    3,228,200
    
    
    
    4,064,830
    (17)
    
    
    
    
    
    
    7,373,247
    
    
    
    15,292
    %Gerald A. Pientka (18)
    
    
    22,000
    
    
    
    
    
    
    
    
    
    
    
    133,333
    
    
    
    155,333
    
    
    
    *Pino Manufacturing, LLC (13)
    
    
    6,224,352
    
    
    
    
    
    
    
    
    
    
    
    1,700,000
    
    
    
    7,924,352
    
    
    
    18.592
    %Security Benefit Group
    
    
    6,000,000
    
    
    
    
    
    
    
    1,750,000
    
    
    
    
    
    
    
    7,750,000
    
    
    
    18.162
    %SF Capital Partners Ltd. (19)
    
    
    528,556
    
    
    
    2,347,580
    
    
    
    
    (20)
    
    
    
    
    
    
    2,876,136
    
    
    
    6.647
    %Michael S. Stelter
    
    
    1,044,252
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,044,252
    
    
    
    2.552
    %Robert D. Wagner, Jr.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    116,667
    
    
    
    116,667
    
    
    
    *All directors and executive officers as
a group (10 persons)**
    
    
    1,091,776
    
    
    
    293,440
    
    
    
    152,143
    
    
    
    2,186,113
    
    
    
    3,723,472
    
    
    
    8.549
    %
   *
    
    Denotes beneficial ownership of less than 1%.**
    
    Eliminates duplication Series E Convertible Preferred Stock(21): Series A SharesIssuable UponSeries E Shares
    
    Exercise ofName
    
    Directly Held
    
    Warrants
    
    Total
    
    % of ClassDirectors, Executive Officers and
5% HoldersDavid Asplund
    
    
    2,934
    
    
    
    
    
    
    
    2,934
    
    
    
    1.394
    %Augustine Fund, L.P.
    
    
    14,540
    
    
    
    
    
    
    
    14,540
    
    
    
    6.909
    %Frederic F. Brace
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    John Bukovski
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cinergy Ventures II (4)
    
    
    30,085
    
    
    
    
    
    
    
    30,085
    
    
    
    14,295
    %Felicia Ferguson
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Richard P. Kiphart (10)
    
    
    70,944
    
    
    
    
    
    
    
    70,944
    
    
    
    33.710
    %Kevin Kushman
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Leaf Mountain Company, LLC (12)
    
    
    20,746
    
    
    
    
    
    
    
    20,746
    
    
    
    9.858
    %Robert J. Manning
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Jeffrey R. Mistarz
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    John P. Mitola
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    CIT Capital Securities, Inc. (17)
    
    
    32,282
    
    
    
    
    
    
    
    32,282
    
    
    
    15.339
    %Newcourt Capital USA, Inc. (17)
    
    
    32,282
    
    
    
    
    
    
    
    32,282
    
    
    
    15.339
    %Gerald A. Pientka (19)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    SF Capital Partners Ltd. (20)
    
    
    23,476
    
    
    
    
    
    
    
    23,476
    
    
    
    11.155
    %Michael S. Stelter
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Robert D. Wagner, Jr.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    All directors and executive officers as
a group (10 persons)**
    
    
    2,934
    
    
    
    
    
    
    
    2,934
    
    
    
    1.394
    %
   *
    
    Denotes beneficial ownership of less than 1%.**
    
    Eliminates duplication  (1)
    
    Represents shares of common stock issuable upon conversion of the Series
E Convertible Preferred Stock.(2)
    
    Represents options to purchase common stock exercisable within 60 days.(3)
    
    Includes common shares issuable upon exercise of a warrant to purchase 94
 shares of Series E Convertible Preferred Stock, which would be convertible
into 9,400 shares of common stock. 50




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##### Table of Contents



(4)
    
    Cinergy Technologies, Inc. is a wholly-owned subsidiary of Cinergy Corp.
and is also the sole member of Cinergy Ventures II, LLC. The business
address of Cinergy Ventures II, LLC is 139 East Fourth Street, Cincinnati,
Ohio 45202.(5)
    
    Includes common shares issuable upon exercise of a warrant to purchase
1,500 shares of Series E Convertible Preferred Stock, would be convertible
into 150,000 shares of common stock.(6)
    
    Reflects stock options awarded to Kevin Kushman, a director of the
Company, pursuant to the Directors Stock Option Program. The policies of
Cinergy Ventures II, who is Mr. Kushmans employer, provide that director
compensation be paid to the company rather than to the individual.(7)
    
    The business address of DYDX Consulting, LLC (DYDX) is 221 N. LaSalle
Street, Suite 3900, Chicago, Illinois 60601.(8)
    
    Includes 2,491,954 shares held of record by DYDX. Mr. Konstant holds a
100% membership interest in DYDX and, in such capacity, has sole voting
and investment power with respect to the shares of common stock held by
DYDX and, therefore, is deemed to be the beneficial owner of these shares.(9)
    
    Includes options to acquire 947,546 shares of common stock at $1.10 per
share held by DYDX.(10)
    
    The business address of Mr. Kiphart is c/o William Blair & Company, LLC,
222 W. Adams Street, Chicago, Illinois 60606.(11)
    
    Includes common shares issuable upon exercise of a warrant to purchase
1,312 shares of Series E Convertible Preferred Stock, which would be
convertible into 131,200 shares of common stock.(12)
    
    The business address of Leaf Mountain Company, LLC is 190 South LaSalle
Street, Suite 1700, Chicago, IL 60603.(13)
    
    Includes 6,224,352 shares held of record by Pino Manufacturing, LLC
(Pino). Mr. Marino holds a 100% membership interest in Pino and, in such
capacity, has sole voting and investment power with respect to the shares
of common stock held by Pino and, therefore, is deemed to be the
beneficial owner of these shares.(14)
    
    Includes options to acquire 1,700,000 shares of common stock at $1.10 per
share held by Pino. In addition, Mr. Marino holds options to acquire
450,000 shares of common stock at $3.50 per share, which he received as
our Chairman prior to his resignation in December 2000.(15)
    
    In December 2002, Mr. Mitola gifted approximately 40,000 shares of
Electric City Common Stock to his wife and children now held in accounts
in which Mr. Mitola does not own or control.(16)
    
    CIT Capital Securities, Inc. (formerly named Newcourt Capital Securities,
Inc.) is a wholly owned subsidiary of Newcourt Capital USA, Inc.
Accordingly, Newcourt Capital USA is deemed to be the beneficial owner of
 shares held by CIT Capital Securities. The business address of Newcourt
Capital USA, Inc. is 1211 Avenue of the Americas, 22nd Floor, New York,
New York 10036.(17)
    
    Includes warrants to acquire 3,314,830 shares of common stock at an
initial exercise price of $1.00 per share held by CIT Capital Securities,
Inc.(18)
    
    Mr. Gerald Pientka, who is one of our directors, is also a member of Leaf
Mountain Company, LLC.(19)
    
    SF Capital Partners, Ltd. is a British Virgin Island company. Staro Asset
Management, L.L.C., a Wisconsin limited liability company, acts as
investment manager and has sole power to direct the management of SF
Capital Partners. Through Staro Asset Management, Mr. Michael A. Roth and
Brian J. Stark possess sole voting and dispositive power over all shares
owned by SF Capital Partners. The business address for Staro Asset
Management, LLC is 3600 South Lake Drive, St. Francis, WI 53235.(20)
    
    SF Capital owns warrants to purchase 624,188 shares of common stock and a
warrant to purchase 750 shares of Series E Convertible Preferred Stock,
which would be convertible into 75,000 shares of common stock. These
warrants contain provisions known as exercise caps which prohibit the
holder of the warrants (and its affiliates) from exercising such warrants
to the extent that giving effect to such exercise, such holder would
beneficially own in excess of 4.999% and 9.999% of the Companys
outstanding common stock, as the case may be. The holder can waive the
4.999% limit, but such waiver will not become effective until the 61st day
after such notice is delivered to the Company, and these limits will not
restrict the number of shares of Common Stock which a holder may receive
or beneficially own in order to determine the amount of securities or
other consideration that such holder may receive in the event of a merger
or other business combination or reclassification involving the Company.
The table set forth above reflects the operation of such exercise caps in
that we have not included 717,188 shares of common stock issuable pursuant
to such warrants as SF Capital has
advised us that it does not beneficially own such shares due to the fact
that it cannot exercise its right to 51




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##### Table of Contents



purchase these shares at this time. In the absence of such caps, SF Capital
would be able to purchase all the shares issuable upon exercise of these
warrants and would have a beneficial ownership percentage of 8.169%.(21)
    
    The Series E Convertible Preferred Stock has the right to elect up to
four directors depending on the number of shares of Series E Convertible
Preferred Stock outstanding at any time (as adjusted for stock splits,
stock combinations and the like) as follows:  
    
    for so long as at least 90,000 shares of Series E Convertible
Preferred Stock remain issued and outstanding, holders of Series E
Convertible Preferred Stock, voting as a single class, will be entitled
to elect four directors;  
    
    for so long as at least 65,000 but less than 90,000 shares of
Series E Convertible Preferred Stock remain issued and outstanding,
holders of Series E Convertible Preferred Stock, voting as a single
class, will be entitled to elect three directors;  
    
    for so long as at least 45,000 but less than 65,000 shares of
Series E Convertible Preferred Stock remain issued and outstanding, the
holders of Series E Convertible Preferred Stock, voting as a single
class, will be entitled to elect two directors; and  
    
    for so long as at least 20,000 but less than 45,000 shares of Series
E Convertible Preferred Stock remain issued and outstanding, the
holders of Series E Convertible Preferred Stock, voting as a single
class, shall be entitled to elect one director.  Except for the election of directors or as otherwise provided by law, the
Series E Convertible Preferred Stock is entitled to vote with the holders of
our Common Stock on an as-converted basis on all matters on which our
holders of Common Stock are entitled to vote. However, if less than 20,000
 shares of Series E Convertible Preferred Stock remain issued and
outstanding, unless otherwise provided by law, each holder of record of
Series E Convertible Preferred Stock has the right to vote on an
as-converted basis together with the holders of Common Stock on all matters
on which holders of Common Stock are entitled to vote, including the
election of directors.Our board of directors has fixed by resolution the number of directors at
12. As of February 29, 2004, the holders of our Series E Convertible
Preferred Stock had appointed three of the four directors they are entitled
to appoint. At our Annual Meeting of Stockholders held on September 24,
2003, our six director nominees were elected by a majority of the votes
cast. There are currently three vacancies on our board of directors, of
which one is reserved for appointment by the holders of our Series E
Convertible Preferred Stock.Holders of Series E Convertible Preferred Stock also have the following
approval rights with respect to certain actions of the Company:  
    
    For so long as any shares of Series E Convertible Preferred Stock
remain issued and outstanding we cannot, without approval of at least
75% of the shares of Series E Convertible Preferred Stock then
outstanding:  -
    
    enter into any agreement that would restrict our ability to
perform under the Series E Securities Purchase Agreement;-
    
    amend our Certificate of Incorporation or bylaws in any way
that could adversely affect, alter or change the rights, powers or
preferences of the Series E Convertible Preferred Stock;-
    
    engage in any transaction that would impair or reduce the
rights, powers or preferences of the Series E Convertible Preferred
Stock as a class;-
    
    sell control of the Company or sell all or substantially all
of the assets of the Company or merge with or into another company,
or liquidate the Company (provided that if less than 45,000 shares
of the Series E Convertible Preferred Stock are then outstanding and
the then holders of Series E Convertible Preferred Stock refused to
consent to such a transaction, we may at our option, in connection
with
consummating such transactions, redeem all, but not less than all, of
such Series E Convertible 52




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##### Table of Contents



Preferred Stock at a redemption price per share equal to the amount
the Series E Convertible Preferred Stock would receive upon a
liquidation); or-
    
    change the authorized number of directors of our Board of
Directors.  
    
    For so long as at least 90,000 shares of Series E Convertible
Preferred Stock remain issued and outstanding we cannot, without the
approval of at least 66-2/3% of the shares of Series E Convertible
Preferred Stock then outstanding:  -
    
    authorize or issue any capital stock with rights senior to or
equal to the Series E Convertible Preferred Stock or securities
convertible or exchangeable into such capital stock;-
    
    - amend or alter any outstanding options, rights or warrants
in a manner that reduces or that has the effect of reducing the per
share exercise price for any outstanding options, rights or
warrants;-
    
    authorize or issue any debt securities of the Company or any
of its subsidiaries, other than debt under the existing revolving
lines of credit as of March 12, 2004 or the replacement thereof on
substantially similar terms, except that we may issue additional
debt up to $1,000,000 in the aggregate in the ordinary course of
business and may incur trade payables in the ordinary course of
business;-
    
    purchase, redeem, or otherwise acquire any of the Companys
capital stock, other than the redemption of the Series E Convertible
Preferred Stock;-
    
    enter into an acquisition, sale, merger, joint venture,
consolidation or reorganization involving the Company or any of its
subsidiaries;-
    
    sell or lease assets of the Company or any of its
subsidiaries, except in the ordinary course of business;-
    
    declare or pay any cash dividends or make any distributions
on any of our capital stock, other than on the Series E Convertible
Preferred Stock;-
    
    authorize the payment of, or pay to any individual employee
of the Company, cash compensation in excess of $500,000 per annum;
or-
    
    enter into any transaction (or series of transactions),
including loans, with any employee, officer or director of the
Company or to or with his, her or its affiliates or family members
(other than with respect to payment of compensation to actual
full-time employees in the ordinary course of business) involving
$50,000 or more per year individually or $250,000 or more per year
in the aggregate.  
    
    For so long as at least 130,000 shares of Series E Convertible
Preferred Stock remain issued and outstanding we cannot, without the
approval of the holders representing 66-2/3% of the shares of Series E
Convertible Preferred Stock then outstanding:  -
    
    terminate or newly appoint the chief executive officer or
president of the Company;-
    
    approve any annual capital expense budget if such budget
provides for annual capital expenditures by the Company and its
subsidiaries in excess of $1,000,000 in the aggregate in any year;
or-
    
    approve the incurrence of any single capital expenditure (or
series of related capital expenditures) in excess of $500,000.  (22)
    
    Effective March 1, 2004, Mr. Kushman took a new position at Cinergy and
resigned from our Board of Directors. He was replaced by Ms. Felicia
Ferguson. Securities Under Equity Compensation Plans 53




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##### Table of Contents



The following information reflects certain information about our equity
compensation plans as of December 31, 2003: Equity Compensation Plan Information(a)
    
    (b)
    
    (c)Number of securitiesremaining availablefor future issuanceNumber of
    
    
    
    
    
    under equitysecurities to be
    
    
    
    
    
    compensation plansissued upon
    
    Weighted-average
    
    (excludingexercise of
    
    exercise price of
    
    securitiesoutstanding options,
    
    outstanding options,
    
    reflected in columnPlan Category
    
    warrants and rights
    
    warrants and rights
    
    (a))Equity compensation plans approved
by security holders
    
    
    1,766,667
    
    
    $
    1.07
    
    
    
    33,333Equity compensation plans not
approved by security holders
    
    
    8,455,514
    
    
    $
    3.95
    
    
    
    Total
    
    
    10,222,181
    
    
    $
    3.45
    
    
    
    33,333
 
 Item 12. Certain Relationships And Related Transactions Our wholly-owned subsidiary, Great Lakes Controlled Energy Corporation
(Great Lakes), leases its office and warehouse facility in Elk Grove Village,
Illinois from Eugene Borucki and Denis Enberg, the former owners of Great Lakes
who are currently officers of our Company. We paid $120,000 and $70,000 during
2002 and 2001, respectively, in lease payments. The lease commenced with the
purchase of Great Lakes in June 2001 and expires in June 2004. On June 3, 2003, the Company entered into an asset purchase agreement with
Hoppensteadt Acquisition Corp., whereby Hoppensteadt acquired all of the
assets, except for certain receivables and cash, and assumed all of the
liabilities, except for bank debt, of the Company Power Management segment as
of May 31, 2003, in exchange for $929,032 in cash. Hoppensteadt Acquisition
Corp. is owned by a group of investors that includes Michael Stelter, one of
our directors. Mr. Stelter holds a minority position in Hoppensteadt
Acquisition Corp. 54




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##### Table of Contents



Item 13. Exhibits and Reports on Form 8-K (a) Exhibits EXHIBITS ExhibitNumber
    
    Description of Exhibit2.1(1)
    
    Agreement and Plan of Merger, dated June 5, 1998, by and between Electric City
Corp. and Pice Products Corporation2.2(2)
    
    Agreement and Plan of Merger, dated August 31, 2000, by and among Electric
City Corp., Electric City Acquisition, a wholly owned subsidiary of the
Company, Switchboard Apparatus, Inc., Dale Hoppensteadt, George Miller and
Helmut Hoppe.2.5(5)
    
    Agreement and Plan of Merger, dated June 7, 2001, by and among Electric City
Corp., Electric City Great Lakes Acquisition Corporation, a wholly owned
subsidiary of the Company, Great Lakes Controlled Energy Corporation, Eugene
Borucki and Denis Enberg.3.1(1)
    
    Certificate of Incorporation3.2(1)
    
    By-laws3.3(9)
    
    Certificate of Amendment to Certificate of Incorporation dated August 30, 2001.3.4(9)
    
    Bylaws, as amended3.5(12)
    
    Certificate of Amendment to Certificate of Incorporation, dated July 31, 2002.3.6(12)
    
    Charter of Audit Committee, as restated.4.3(3)
    
    Certificate of Designation of the Relative Rights and Preferences of the
Series B Convertible Preferred Stock of Electric City Corp.4.6(4)
    
    Specimen Stock Certificate4.7(5)
    
    Registration Rights Agreement dated April 18, 2001 by and between Electric
City Corp. and Newcourt Securities, Inc.4.8(5)
    
    Securities Purchase Agreement dated July 31, 2001 between Electric City Corp.
and Newcourt Capital USA, Inc., Duke Capital Partners, LLC, Morgan Stanley
Dean Witter Equity Funding, Inc., Originators Investment Plan, L.P. and EP
Power Finance, L.L.C.4.9(5)
    
    Investor Rights Agreement, dated as of July 31, 2001 made by and among
Electric City Corp. and Newcourt Capital USA, Inc., Duke Capital Partners,
LLC, Morgan Stanley Dean Witter Equity Funding, Inc., Originators Investment
Plan, L.P. and EP Power Finance, L.L.C.4.10(5)
    
    Stockholders Agreement, dated as of July 31, 2001 made by and among Electric
City Corp. and Newcourt Capital USA, Inc., Duke Capital Partners, LLC, Morgan
Stanley Dean Witter Equity Funding, Inc., Originators Investment Plan, L.P.
and EP Power Finance, L.L.C.4.11(5)
    
    Stock Trading Agreement, dated as of July 31, 2001 made by and among Electric
City Corp. and Newcourt Capital USA, Inc., Duke Capital Partners, LLC, Morgan
Stanley Dean Witter Equity Funding, Inc., Originators Investment Plan, L.P.
and EP Power Finance, L.L.C.
 55




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit4.12(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 Electric
City Corp. dated August 30, 2001.4.13(8)
    
    Securities Purchase Agreement dated November 29, 2001 between Electric City
Corp. and Leaf Mountain Company, LLC.4.14(8)
    
    Consent and Amendment of Securities Purchase Agreement, Stock Trading
Agreement, Stockholders Agreement and Investor Rights Agreement dated November
29, 2001 between Newcourt Capital Securities, Inc., Newcourt Capital USA,
Inc., Duke Capital Partners, LLC, Morgan Stanley Dean Witter Equity Funding,
Inc., Originators Investment Plan, L.P., EP Power Finance, L.L.C., Electric
City Corp. and Leaf Mountain Company, LLC.4.15(8)
    
    Joinder to Investor Rights Agreement, Stockholders Agreement and Stock Trading
Agreement dated November 29, 2001 between Electric City Corp. and Leaf
Mountain Company, LLC.4.16(10)
    
    Securities Purchase Agreement dated as of May 31, 2002 between Electric City
Corp. and Richard Kiphart.4.17(10)
    
    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 Electric
City Corp. dated June 3, 2002.4.18(10)
    
    Certificate of Correction Filed to Correct a Certain Error in the 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 Electric City
Corp. dated June 11, 20024.19(10)
    
    Consent and Amendment, dated as of June 4, 2002, By and Among Electric City
Corp., Newcourt Capital USA, Inc., EP Power Finance, L.L.C., Morgan Stanley
Dean Witter Equity Funding, Inc., Originators Investment Plan, L.P., Duke
Capital Partners, LLC, Leaf Mountain Company, LLC, Newcourt Capital
Securities, Inc., and Richard P. Kiphart.4.20(10)
    
    Joinder and First Amendment to Stockholders Agreement, dated as of June 4,
2002, By and Among Electric City Corp., Newcourt Capital USA, Inc., EP Power
Finance, L.L.C., Morgan Stanley Dean Witter Equity Funding, Inc., Originators
Investment Plan, L.P., Duke Capital Partners, LLC, Leaf Mountain Company, LLC,
and Richard P. Kiphart.4.21(10)
    
    Joinder and First Amendment to Investors Rights Agreement, dated as of June 4,
2002, By and Among Electric City Corp., Newcourt Capital USA, Inc., Newcourt
Capital Securities, Inc., EP Power Finance, L.L.C., Morgan Stanley Dean Witter
Equity Funding, Inc., Originators Investment Plan, L.P., Duke Capital
Partners, LLC, Leaf Mountain Company, LLC, and Richard P. Kiphart.4.22(10)
    
    Stock Trading Agreement, dated as of June 4, 2002, between Electric City Corp.
and Richard P. Kiphart.4.23(6)
    
    2001 Stock Incentive Plan
 56




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit4.24(12)
    
    Securities Purchase Agreement dated December 16, 2002, between Electric City
Corp. and Munder Power Plus Fund, A Series of the Munder Funds, Inc.4.25(12)
    
    Stock Trading Agreement dated December 16, 2002, between Electric City Corp.
and Munder Power Plus Fund, A Series of the Munder Funds, Inc.4.26(12)
    
    Securities Purchase Agreement dated February 27, 2003, between Electric City
Corp. and SF Capital Partners4.27(12)
    
    Stock Trading Agreement dated February 27, 2003, between Electric City Corp.
and SF Capital Partners4.28(13)
    
    Securities Purchase Agreement dated April 17, 2003, between Electric City
Corp. and Munder Power Plus Fund, A Series of the Munder Funds, Inc.4.29(13)
    
    Acknowledgment and Amendment to Stock Trading Agreement dated April 17, 2003,
between Electric City Corp. and Munder Power Plus Fund, A Series of the Munder
Funds, Inc.4.30(13)
    
    Securities Purchase Agreement dated April 23, 2003, between Electric City
Corp. and Richard P. Kiphart4.31(13)
    
    Stock Trading Agreement dated April 23, 2003, between Electric City Corp. and
Richard P. Kiphart4.32(14)
    
    Stock Trading Agreement dated May 31, 2003 between Dale Hoppensteadt and
Electric City Corp.4.33(14)
    
    Securities Purchase Agreement dated June 27, 2003, between Electric City Corp.
and Cinergy Ventures II, LLC, Mr. Richard Kiphart, SF Capital Partners, John
Thomas Hurvis Revocable Trust and Mr. David Asplund4.34(15)
    
    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 Electric
City Corp.4.35(15)
    
    Stock Trading Agreement dated June 27, 2003, between Electric City Corp. and
Cinergy Ventures II, LLC, Mr. Richard Kiphart, SF Capital Partners, John
Thomas Hurvis Revocable Trust and Mr. David Asplund4.36(16)
    
    Registration Rights Agreement dated September 11, 2003 by and between Electric
City Corp. and Laurus Master Fund, Ltd.4.37(16)
    
    Registration Rights Agreement dated September 11, 2003 by and between Electric
City Corp. and Laurus Master Fund, Ltd.4.38(15)
    
    Joinder and Second Amendment To Investor Rights Agreement by and among
Electric City Corp., Newcourt Capital USA Inc., Newcourt Capital Securities,
Inc., EP Power Finance L.L.C., Morgan Stanley Dean Witter Equity Funding,
Inc., Originators Investment Plan, L.P., Duke Capital Partners, LLC, Leaf
Mountain Company, LLC, Richard P. Kiphart, Cinergy Ventures II, LLC, SF
Capital Partners, John Thomas Hurvis Revocable Trust and David R. Asplund.
 57




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit4.39(20)
    
    Joinder to Stockholders Agreement dated as of December 19, 2003 by and among
Electric City Corp., Augustine Fund LP, Technology Transformation Venture
Fund, LP and John Donohue.4.40(20)
    
    Joinder to Investor Rights Agreement dated as of December 19, 2003 by and
among Electric City Corp., Augustine Fund LP, Technology Transformation
Venture Fund, LP and John Donohue.4.41(20)
    
    Joinder to Stock Trading Agreement dated as of December 19, 2003 by and among
Electric City Corp., Augustine Fund LP, Technology Transformation Venture
Fund, LP and John Donohue.4.42(20)
    
    Warrant Certificate to Purchase 50,000 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to Jason Diamond.4.43(20)
    
    Warrant Certificate to Purchase 27,000 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to William Ritger4.44(20)
    
    Warrant Certificate to Purchase 15,000 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to Stockbroker.com4.45(20)
    
    Warrant Certificate to Purchase 5,000 shares of Common Stock Par Value $0.0001
Per Share, of Electric City Corp. issued to Engle Group4.46(20)
    
    Warrant Certificate to Purchase 50,000 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to R&R Investments4.47(20)
    
    Warrant Certificate to Purchase 50,000 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to Barretto Pacific
Corporation4.48(20)
    
    Warrant Certificate to Purchase 50,000 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to Wall & Broad Equities4.49(20)
    
    Warrant Certificate to Purchase 20,000 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to Gregory Hawkins4.50(20)
    
    Warrant Certificate to Purchase 160,000 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to TheStockPage.com4.51(20)
    
    Warrant Certificate to Purchase 40,000 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to Henning Capital Ltd.4.52(20)
    
    Warrant Certificate to Purchase 50,000 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to Wall & Broad Equities4.53(20)
    
    Warrant Certificate to Purchase 10,000 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to Catalina Capital
Management4.54(20)
    
    Warrant Certificate to Purchase 100,000 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to Utica Properties4.55(21)
    
    Warrant Certificate to Purchase 442,750 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to UMBTRU for benefit of
Security Equity Fund, Mid Cap Value Series
 58




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit4.56(21)
    
    Warrant Certificate to Purchase 350,000 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to UMBTRU for benefit of SBL
Fund, Series V4.57(21)
    
    Warrant Certificate to Purchase 311,500 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to UMBTRU for benefit of
Security Mid Cap Growth Fund4.58(21)
    
    Warrant Certificate to Purchase 645,750 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to UMBTRU for benefit of SBL
Fund, Series J4.59(21)
    
    Certificate Of Designations, Preferences And Relative, Participating, Optional
And Other Special Rights Of Preferred Stock And Qualifications, Limitations
And Restrictions Thereof Of Series E Convertible Preferred Stock Of Electric
City Corp.4.60(21)
    
    Amended and Restated Investor Rights Agreement, dated as of March 19, 2004
made by and among Electric City Corp. and Newcourt Capital USA Inc., CIT
Capital Securities, Inc., Morgan Stanley Dean Witter Equity Funding, Inc.,
Originators Investment Plan, L.P., Cinergy Ventures II, LLC, Leaf Mountain
Company, LLC, SF Capital Partners, Ltd., Richard Kiphart, David P. Asplund,
John Thomas Hurvis Revocable Trust, John Donohue, Augustine Fund, LP, And
Technology Transformation Venture Fund, LP4.61(21)
    
    Amended And Restated Stockholders Agreement dated as of March 19, 2004 made by
and among Electric City Corp., Newcourt Capital USA Inc., Morgan Stanley Dean
Witter Equity Funding, Inc., Originators Investment Plan, L.P., Cinergy
Ventures II, LLC, Leaf Mountain Company, LLC, Richard Kiphart, David P.
Asplund, John Thomas Hurvis Revocable Trust, John Donohue, Augustine Fund, LP,
And Technology Transformation Venture Fund, LP4.62(21)
    
    Amended And Restated Stock Trading Agreement dated as of March 19, 2004 made
by and among Electric City Corp., Newcourt Capital USA Inc., CIT Capital
Securities, Inc., Morgan Stanley Dean Witter Equity Funding, Inc., Originators
Investment Plan, L.P., Cinergy Ventures II, LLC, Leaf Mountain Company, LLC,
SF Capital Partners, Ltd., Richard Kiphart, David P. Asplund, John Thomas
Hurvis Revocable Trust, John Donohue, Augustine Fund, LP, And Technology
Transformation Venture Fund, LP10.1(1)
    
    Sales, Distribution and Patent License Agreement, dated January 1, 1998, by
and between Giorgio Reverberi and Joseph C. Marino10.2(1)
    
    Sublicense Agreement, dated June 24, 1998, by and between the Electric City
Corp. and Joseph C. Marino10.21(3)
    
    Warrant to Purchase Shares of Common Stock issued by Electric City Corp. in
favor of Augustine Fund, L.P.10.35(5)
    
    Warrant Certificate to Purchase 3,314,830 Shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to Newcourt Securities, Inc.10.36(5)
    
    Commercial Building Lease Dated June 7, 2001, by and between Electric City
Corp. and Eugene Borucki and Denis Enberg.
 59




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit10.37(7)
    
    Warrant Certificate to Purchase 750,000 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to Newcourt Capital USA, Inc.10.38(7)
    
    Warrant Certificate to Purchase 712,500 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to Morgan Stanley Dean Witter
Equity Funding, Inc.10.39(7)
    
    Warrant Certificate to Purchase 37,500 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to Originators Investment
Plan, L.P.10.40(7)
    
    Warrant Certificate to Purchase 750,000 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to Duke Capital Partners,
LLC.10.41(7)
    
    Warrant Certificate to Purchase 750,000 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to EP Power Finance, L.L.C.10.47(8)
    
    Warrant Certificate to Purchase 421,876 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to Leaf Mountain Company,
LLC.10.52(10)
    
    Warrant Certificate to Purchase 281,250 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to Richard Kiphart.10.53(10)
    
    Warrant Certificates to Purchase 25,000 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to each of Thomas Duszynski,
Brian Porter, John Porter and David R. Asplund, replacing a Warrant
Certificate to Purchase 100,000 shares of Common tock Par Value $0.0001 Per
Share, of Electric City Corp. previously issued to Delano Group Securities.10.63(11)
    
    Amendment of contract between Electric City Corp. and the Stockpage, dated
June 18, 2002.10.64(11)
    
    Fourth Amendment To The Warrant To Purchase Common Stock Of Electric City
Corp. dated June 18, 2002 by and between Electric City Corp. and the
Stockpage.10.65(12)
    
    Warrant Certificate to Purchase 300,000 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to Munder Power Plus Fund, A
Series of the Munder Funds, Inc.10.66(12)
    
    Warrant Certificate to Purchase 50,000 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to Capstone Investments.10.67(12)
    
    Warrant Certificate to Purchase 300,000 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to SF Capital Partners.10.68(12)
    
    Warrant Certificate to Purchase 50,000 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to Capstone Investments.10.69(12)
    
    Employment Agreement, dated as of January 13, 2003, between the Company and
John Mitola10.70(13)
    
    Warrant Certificate to Purchase 75,000 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to Munder Power Plus Fund, A
Series of the Munder Funds, Inc.10.71(13)
    
    Warrant Certificate to Purchase 125,974 shares of Common Stock Par Value
$0.0001 Per Share, of Electric City Corp. issued to Richard P. Kiphart
 60




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ExhibitNumber
    
    Description of Exhibit10.72(13)
    
    Employment Agreement, effective January 1, 2003, between the Company and
Jeffrey Mistarz10.73(14)
    
    Asset Purchase Agreement dated June 3, 2003, by and among Electric City Corp.,
Switchboard Apparatus, Inc., and Hoppensteadt Acquisition Corp.10.74(14)
    
    Strategic Alliance, Co-Marketing and Licensing Agreement dated May 31, 2003 by
and between Hoppensteadt Acquisition Corp. and Electric City Corp.10.75(15)
    
    Form of Series D Convertible Preferred Stock Warrant issued by Electric City
in favor of Cinergy Ventures II, LLC, Mr. Richard Kiphart, SF Capital
Partners, John Thomas Hurvis Revocable Trust and Mr. David Asplund10.76(15)
    
    Form of Common Stock Warrant issued by Electric City in favor of Cinergy
Ventures II, LLC, Mr. Richard Kiphart, SF Capital Partners, John Thomas Hurvis
Revocable Trust and Mr. David Asplund10.77(16)
    
    Securities Purchase Agreement dated September 11, 2003 between Electric City
Corp. and Laurus Master Fund, Ltd.10.78(16)
    
    Convertible Term Note dated September 11, 2003, made by Electric City Corp. in
favor of Laurus Master Fund, Ltd.10.79(16)
    
    Security Agreement dated September 11, 2003 by and between Electric City Corp.
and Laurus Master Fund, Ltd.10.80(16)
    
    Common Stock Purchase Warrant dated September 11, 2003 issued by Electric City
Corp. in favor of Laurus Master Fund, Ltd.10.81(16)
    
    Form of Secured Convertible Revolving Note dated September 11, 2003, made by
Electric City Corp. in favor of Laurus Master Fund, Ltd.10.82(16)
    
    Security Agreement dated September 11, 2003 by and between Electric City Corp.
and Laurus Master Fund, Ltd.10.83(16)
    
    Common Stock Purchase Warrant dated September 11, 2003 issued by Electric City
Corp. in favor of Laurus Master Fund, Ltd.10.84(18)
    
    Amended And Restated Mortgage, Assignment Of Leases and Rents, And Security
Agreement dated September 30, 2003 by Electric City Corp. and American
Chartered Bank.10.85(18)
    
    Mortgage Note made and entered into on the 30th day of September 2003, by and
among American Chartered Bank and Electric City Corp., and Great Lakes
Controlled Energy Corporation.10.86(18)
    
    Assignment of Leases and Rents by Electric City Corp. in favor of American
Chartered Bank, dated September 30, 2003.10.87(21)
    
    Securities Purchase Agreement dated March 19, 2004, between Electric City
Corp. and Security Equity Fund, Mid Cap Value Series, SBL Fund, Series V,
Security Mid Cap Growth And SBL Fund, Series J10.88(21)
    
    Redemption and Exchange Agreement dated March 19, 2004, by and among Electric
City Corp. 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.
 61




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ExhibitNumber
    
    Description of ExhibitAsplund, John Thomas Hurvis Revocable Trust, John Donohue, Augustine Fund,
LP, And Technology Transformation Venture Fund, LP14*
    
    Code Of Ethics For Chief Executive Officer And Chief Financial Officer Of
Electric City Corp.21(17)
    
    List of subsidiaries24
    
    Power of Attorney (included on signature page hereto)31.1*
    
    Certification Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 200231.2*
    
    Certification Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 200232.1*
    
    Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To
Section 906 Of The Sarbanes-Oxley Act Of 200232.2*
    
    Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To
Section 906 Of The Sarbanes-Oxley Act Of 200299.1*
    
    Electric City Corp. Insider Trading Policy and Guidelines with Respect to
Certain Transactions in Company Securities
 * Filed herewith  (1)
    
    Incorporated herein by reference to Electric City Corp.s registration
statement on Form 10SB filed on September 9, 1999 (No. 000-2791).(2)
    
    Incorporated herein by reference to Electric City Corp.s Current Report
on Form 8K dated August 31, 2000 and filed with the SEC on September 14,
2000 (No. 0-2791).(3)
    
    Incorporated herein by reference to Electric City Corps Current Report
on Form 8-K dated October 17, 2000 filed with the SEC on November 30, 2000
(No. 0-2791).(4)
    
    Incorporated herein by reference to Electric City Corps Current Report
on Form 8-A filed with the SEC on December 8, 2000 (No. 0-2791).(5)
    
    Incorporated herein by reference to Electric City Corps Quarterly Report
on Form 10-QSB for the period ended June 30, 2001, filed with the SEC on
August 13, 2001 (No. 0-2791).(6)
    
    Incorporated herein by reference to the Companys definitive Proxy
Statement for the 2000 Annual Meeting of Stockholders, filed August 14,
2001 (No. 0-2791)(7)
    
    Incorporated herein by reference to Electric City Corps Amendment No. 1
to Registration Statement on Form SB-2 filed September 27, 2001 (No.
333-67642).(8)
    
    Incorporated herein by reference to Electric City Corps Post-Effective
Amendment No. 1 to Registration Statement on Form SB-2 filed December 7,
2001 (No. 333-67642).(9)
    
    Incorporated herein by reference to Electric City Corps Annual Report on
Form10-KSB for the year ended December 31, 2001, filed April 15, 2002 (No.
0-2791).(10)
    
    Incorporated herein by reference to Electric City Corps Post-Effective
Amendment No. 2 to Registration Statement on Form SB-2 filed on April 24,
2002 (No. 333-67642).(11)
    
    Incorporated herein by reference to Electric City Corps Post-Effective
Amendment No. 3 to Registration Statement on Form SB-2 filed July 16, 2002
(No. 333-67642). 62




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##### Table of Contents



(12)
    
    Incorporated herein by reference to Electric City Corps Quarterly Report
on Form 10-QSB for the period ended June 30, 2002, filed with the SEC on
August 14, 2002 (No. 0-2791).(13)
    
    Incorporated herein by reference to Electric City Corps Annual Report on
Form10-KSB for the year ended December 31, 2002, filed March 31, 2003 (No.
0-2791).(14)
    
    Incorporated herein by reference to Electric City Corps registration
statement on Form S-3 filed May 8, 2003 (No. 333-105084).(15)
    
    Incorporated herein by reference to Electric City Corps Current Report
on Form 8-K dated June 3, 2003 filed with the SEC on June 5, 2003 (No.
0-2791).(16)
    
    Incorporated herein by reference to Electric City Corps Current Report
on Form 8-K dated June 27, 2003 filed with the SEC on July 2, 2003 (No.
0-2791).(17)
    
    Incorporated herein by reference to Electric City Corps Current Report
on Form 8-K dated September 11, 2003 filed with the SEC on September 16,
2003 (No. 0-2791).(18)
    
    Incorporated herein by reference to Electric City Corps registration
statement on Form SB-2 filed October 20, 2003 (No. 333-109835).(19)
    
    Incorporated herein by reference to Electric City Corps Quarterly Report
on Form 10-QSB for the period ended September 30, 2003, filed with the SEC
on November 11, 2003 (No. 0-2791).(20)
    
    Incorporated herein by reference to Electric City Corps post-effective
amendment to its registration statement on Form S-3/A filed February 19,
2004 (No. 333-105084).(21)
    
    Incorporated herein by reference to Electric City Corps Current Report
on Form 8-K dated March 19, 2004 filed with the SEC on March 23, 2004 (No.
0-2791).(b)
    
    We filed the following report on Form 8-K during the last quarter of the
period covered by this report.  
    
    We filed a Current Report on Form 8-K on November 13, 2003,
pursuant to Items 9 and 12, in which we incorporated a press release
that we filed on November 13, 2003, announcing our results for the
three-month and nine-month periods ended September 30, 2003. 63




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Item 14. Principal Accountant Fees and Services. The following table summarizes the total fees paid to our principal
accounting firm, BDO Seidman, LLP for professional services provided during the
twelve-month periods ended December 31, 2003 and December 31, 2002: Twelve months ended December 31,
    
    2003
    
    2002Audit fees (1)
    
    $
    80,638
    
    
    $
    92,705Audit-related fees (2)
    
    
    20,000
    
    
    
    12,560Tax fees (3)
    
    
    5,800
    
    
    
    5,650All other fees (4)
    
    
    
    
    
    
    Total
    
    $
    106,438
    
    
    $
    110,915
  (1)
    
    Audit fees consist of fees for professional services rendered for
the audit of our consolidated financial statements and review of
financial statements included in our quarterly reports and services
normally provided by the independent auditor in connection with
statutory and regulatory filings or engagements.(2)
    
    Audit-related fees are fees billed for assurance and related
services that are reasonably related to the performance of the audit or
review of our financial statements, but not included in item 1 above.
These services included the review of various registration statements
filed during 2003 and 2002 and filings related to the sale of our Power
Management business.(3)
    
    Tax services fees consist of professional fees billed for products
and services rendered by BDO Seidman, LLP for tax compliance, tax
advice and tax planning.(4)
    
    All other fees consist of fees billed by BDO Seidman, LLP for
services other than those listed in categories 1 thru 4 above. All of the fees listed above were approved by our audit committee prior to
their performance. 64




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. ELECTRIC CITY CORP.By:
    
    /s/ John P. MitolaJohn P. Mitola
Chief Executive Officer
 March 29, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the registrant in the capacities and on the dates indicated. Signature
    
    Date/s/ John P. Mitola
     John P. Mitola
     Chief Executive Officer & Director (principal      executive
officer)
    
    March 29, 2004/s/ Jeffrey R. Mistarz
     Jeffrey R. Mistarz
     Chief Financial Officer (principal financial and      accounting
officer)
    
    March 29, 2004
 65




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##### Table of Contents



POWER OF ATTORNEY The undersigned hereby constitutes and appoints John Mitola and Jeffrey
Mistarz, and each of them, as his true and lawful attorneys-in-fact and agents,
jointly and severally, with full power of substitution and resubstitution, for
and in his stead, in any and all capacities, to sign on his behalf this Form
10-KSB, and to file the same, with all exhibits thereto, and all other
documents in connection therewith, with the Securities and Exchange Commission
and granting unto said attorneys-in-fact and agents, and each of them, jointly
and severally, the full power and authority to do and perform each and every
act and thing necessary or advisable to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, jointly or severally, or their or
his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof. Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Signature
    
    Title
    
    Date/s/ John Mitola
John Mitola
    
    Chief Executive Officer
    
    January 28, 2004/s/ Jeffrey Mistarz
Jeffrey Mistarz
    
    Chief Financial Officer & Treasurer
    
    January 28, 2004/s/ Robert Manning
Robert Manning
    
    Chairman of the Board
    
    January 28, 2004/s/ David Asplund
David Asplund
    
    Director
    
    January 28, 2004/s/ Frederic Brace
Frederic Brace
    
    Director
    
    January 28, 2004/s/ John Bukovski
John Bukovski
    
    Director
    
    February 8, 2004/s/ Gerald Pientka
Gerald Pientka
    
    Director
    
    January 28, 2004/s/ Michael Stelter
Michael Stelter
    
    Director
    
    January 28, 2004/s/ Robert Wagner, Jr.
Robert Wagner, Jr.
    
    Director
    
    January 28, 2004
 66




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##### Table of Contents



Report of Independent Certified Public Accountants

Electric City Corp.
Elk Grove Village, Illinois

We have audited the accompanying consolidated balance sheets of Electric City
Corp. as of December 31, 2003 and 2002, and the related consolidated statements
of operations, stockholders equity and cash flows for the years then ended.
These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Electric City
Corp. at December 31, 2003 and 2002, and the consolidated results of its
operations and cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States.

|                                                               |  |                     
|-------------------------------------------------------------- |  | --------------------
|Chicago, Illinois                                              |  | /s/ BDO SEIDMAN, LLP
|February 9, 2004
except Note 19, which
is as of March 19, 2004 |  |                     

F-1



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|                                                                  |                                                                                                                                          |      |           |           |  |   |           |           |  | 
|----------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------- | ---- | --------- | --------- |  | - | --------- | --------- |  | 
|Electric City Corp.                                              
|                                                                 
|Consolidated Balance Sheets                                      
|                                                                 
|December 31,                                                      |                                                                                                                                          | 2003 |           | 2002     
|                                                                  |                                                                                                                                          |      |           |          
|Assets                                                            |                                                                                                                                          |      |           |           |  |   |           |          
|Current Assets                                                    |                                                                                                                                          |      |           |           |  |   |           |          
|                                                                  | Cash and cash equivalents                                                                                                                |      | $         | 2,467,023 |  |   | $         | 1,555,904 | 
|                                                                  | Accounts receivable, less allowance for doubtful accounts of
$326,000 and $410,000 at December 31, 2003 and 2002,
respectively (Note 17) |      |           | 1,450,811 |  |   |           | 2,681,772 | 
|                                                                  | Inventories (Note 4)                                                                                                                     |      |           | 1,200,146 |  |   |           | 2,596,218 | 
|                                                                  | Prepaid expenses and other                                                                                                               |      |           | 203,870   |  |   |           | 116,210   | 
|                                                                  |                                                                                                                                          |      |           |           |  |   |           |           | 
|Total Current Assets                                              |                                                                                                                                          |      | 5,321,850 |           |  |   | 6,950,104 |          
|Net Property and Equipment(Note 5)                                |                                                                                                                                          |      | 1,132,592 |           |  |   | 1,539,919 |          
|Deferred Financing Costs,net of amortization of $203,616 (Note 9) |                                                                                                                                          |      | 482,612   |           |  |   |          |          
|Cost in Excess of Assets Acquired                                 |                                                                                                                                          |      | 416,573   |           |  |   | 416,573   |          
|Other Assets                                                      |                                                                                                                                          |      |          |           |  |   | 1,955     |          
|                                                                  |                                                                                                                                          |      |           |           |  |   |           |           | 
|                                                                  |                                                                                                                                          | $    | 7,353,627 |           |  | $ | 8,908,551 |          
|                                                                  |                                                                                                                                          |      |           |           |  |   |           |           | 

See accompanying notes to consolidated financial statements.

F-2



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|                                                                                                                        |                                                                                                                                                        |                                                                                                              |                                                                                                                                                                                                                                  |             |   |        |           |             |        |        | 
|----------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | - | ------ | --------- | ----------- | ------ | ------ | 
|Electric City Corp.                                                                                                    
|                                                                                                                       
|Consolidated Balance Sheets                                                                                            
|                                                                                                                       
|December 31,                                                                                                            |                                                                                                                                                        | 2003                                                                                                         |                                                                                                                                                                                                                                  | 2002       
|                                                                                                                        |                                                                                                                                                        |                                                                                                              |                                                                                                                                                                                                                                  |            
|Liabilities and Stockholders Equity                                                                                    |                                                                                                                                                        |                                                                                                              |                                                                                                                                                                                                                                  |             |   |        |           |            
|Current Liabilities                                                                                                     |                                                                                                                                                        |                                                                                                              |                                                                                                                                                                                                                                  |             |   |        |           |            
|                                                                                                                        | Line of credit (Note 8)                                                                                                                                |                                                                                                              | $                                                                                                                                                                                                                                |            |   |        | $         | 500,000     |       
|                                                                                                                        | Current maturities of long-term debt (Notes 9 and 10)                                                                                                  |                                                                                                              |                                                                                                                                                                                                                                  | 536,809     |   |        |           | 148,531     |       
|                                                                                                                        | Accounts payable                                                                                                                                       |                                                                                                              |                                                                                                                                                                                                                                  | 1,298,821   |   |        |           | 1,732,719   |       
|                                                                                                                        | Accrued expenses (Note 6)                                                                                                                              |                                                                                                              |                                                                                                                                                                                                                                  | 541,588     |   |        |           | 972,584     |       
|                                                                                                                        | Deferred revenue                                                                                                                                       |                                                                                                              |                                                                                                                                                                                                                                  | 383,308     |   |        |           | 50,000      |       
|                                                                                                                        | Customer deposits                                                                                                                                      |                                                                                                              |                                                                                                                                                                                                                                  | 511,167     |   |        |           |            |       
|                                                                                                                        |                                                                                                                                                        |                                                                                                              |                                                                                                                                                                                                                                  |             |   |        |           |             |       
|Total Current Liabilities                                                                                               |                                                                                                                                                        |                                                                                                              | 3,271,693                                                                                                                                                                                                                        |             |   |        | 3,403,834 |            
|                                                                                                                        |                                                                                                                                                        |                                                                                                              |                                                                                                                                                                                                                                  |             |   |        |           |             |       
|Deferred Revenue                                                                                                        |                                                                                                                                                        |                                                                                                              | 229,166                                                                                                                                                                                                                          |             |   |        | 279,166   |            
|Long-Term Debt,less current maturities net of unamortized
discount of $241,775 as of December 31, 2003 (Notes 9 and 10) |                                                                                                                                                        |                                                                                                              | 811,836                                                                                                                                                                                                                          |             |   |        | 941,260   |            
|                                                                                                                        |                                                                                                                                                        |                                                                                                              |                                                                                                                                                                                                                                  |             |   |        |           |             |       
|Commitments(Note 13)                                                                                                    |                                                                                                                                                        |                                                                                                              |                                                                                                                                                                                                                                  |             |   |        |           |            
|Stockholders Equity(Notes 14, 15 and 16)                                                                               |                                                                                                                                                        |                                                                                                              |                                                                                                                                                                                                                                  |             |   |        |           |            
|                                                                                                                        | Preferred stock, $.01 par value; 5,000,000 shares authorized,                                                                                          |                                                                                                              |                                                                                                                                                                                                                                  |             |   |        |           |             |       
|                                                                                                                        |                                                                                                                                                        |                                                                                                              | Series A 2,396,590 and 2,171,192 issued and outstanding
as of December 31, 2003 and December 31, 2002,
respectively (liquidation value of $47,932,000 and
$43,424,000 at December 31, 2003 and December 31,
2002, respectively) |             |   | 23,966 |           |             |        | 21,712 | 
|                                                                                                                        |                                                                                                                                                        |                                                                                                              | Series C  233,614 and 211,643 issued and outstanding as of
December 31, 2003 and December 31, 2002, respectively
(liquidation value of $4,672,000 and $4,233,000 at
December 31, 2003 and December 31, 2002, respectively)      |             |   | 2,336  |           |             |        | 2,116  | 
|                                                                                                                        |                                                                                                                                                        |                                                                                                              | Series D  157,769 and 0 issued and outstanding as of
December 31, 2003 and December 31, 2002, respectively
(liquidation value of $3,155,000 and $0 at December
31, 2003 and December 31, 2002, respectively)                    |             |   | 1,578  |           |             |        |       | 
|                                                                                                                        | Common stock, $.0001 par value; 120,000,000 shares authorized,
34,342,022 issued as of December 31, 2003 and 32,283,335
issued as of December 31, 2002 |                                                                                                              |                                                                                                                                                                                                                                  | 3,436       |   |        |           | 3,229       |       
|                                                                                                                        | Additional paid-in capital                                                                                                                             |                                                                                                              |                                                                                                                                                                                                                                  | 51,376,137  |   |        |           | 47,150,313  |       
|                                                                                                                        | Accumulated deficit                                                                                                                                    |                                                                                                              |                                                                                                                                                                                                                                  | (48,366,521 | ) |        |           | (42,884,579 | )     
|                                                                                                                        |                                                                                                                                                        |                                                                                                              |                                                                                                                                                                                                                                  |             |   |        |           |             |       
|                                                                                                                        |                                                                                                                                                        |                                                                                                              | 3,040,932                                                                                                                                                                                                                        |             |   |        | 4,292,791 |            
|                                                                                                                        |                                                                                                                                                        | Less treasury stock, at cost, 0 and 1,000 shares as of
December 31, 2003 and December 31, 2002, respectively |                                                                                                                                                                                                                                  |             |  |        |           |             | (8,500 | )     
|                                                                                                                        |                                                                                                                                                        |                                                                                                              |                                                                                                                                                                                                                                  |             |   |        |           |             |       
|Total Stockholders Equity                                                                                              |                                                                                                                                                        |                                                                                                              | 3,040,932                                                                                                                                                                                                                        |             |   |        | 4,284,291 |            
|                                                                                                                        |                                                                                                                                                        |                                                                                                              |                                                                                                                                                                                                                                  |             |   |        |           |             |       
|                                                                                                                        |                                                                                                                                                        | $                                                                                                            | 7,353,627                                                                                                                                                                                                                        |             |   | $      | 8,908,551 |            
|                                                                                                                        |                                                                                                                                                        |                                                                                                              |                                                                                                                                                                                                                                  |             |   |        |           |             |       

See accompanying notes to consolidated financial statements.

F-3



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|                                                                                                          |                                              |   |              |            |              |   |             |            |  
|--------------------------------------------------------------------------------------------------------- | -------------------------------------------- | - | ------------ | ---------- | ------------ | - | ----------- | ---------- | -
|Electric City Corp.                                                                                      
|                                                                                                         
|Consolidated Statements of Operations                                                                    
|                                                                                                         
|                                                                                                          |                                              |   | Year ended   |            | Year ended  
|                                                                                                          |                                              |   | December 31, |            | December 31,
|                                                                                                          |                                              |   | 2003         |            | 2002        
|                                                                                                          |                                              |   |              |            |             
|Revenue                                                                                                   |                                              | $ | 4,631,833    |            |              | $ | 5,534,522   |           
|                                                                                                          |                                              |   |              |            |              |   |             |           
|Expenses                                                                                                  |                                              |   |              |            |              |   |             |           
|                                                                                                          | Cost of sales                                |   |              | 4,441,687  |              |   |             | 5,339,352  |  
|                                                                                                          | Selling, general and administrative          |   |              | 4,290,078  |              |   |             | 6,043,585  |  
|                                                                                                          | Impairment loss                              |   |              |           |              |   |             | 108,000    |  
|                                                                                                          |                                              |   |              |            |              |   |             |           
|                                                                                                          |                                              |   | 8,731,765    |            |              |   | 11,490,937  |           
|                                                                                                          |                                              |   |              |            |              |   |             |           
|Operating loss                                                                                            |                                              |   | (4,099,932   | )          |              |   | (5,956,415  | )         
|                                                                                                          |                                              |   |              |            |              |   |             |           
|Other Income (Expense)                                                                                    |                                              |   |              |            |              |   |             |           
|                                                                                                          | Interest income                              |   |              | 10,329     |              |   |             | 23,275     |  
|                                                                                                          | Interest expense                             |   |              | (365,688   | )            |   |             | (56,890    | )
|                                                                                                          |                                              |   |              |            |              |   |             |           
|Total other income (expense)                                                                              |                                              |   | (355,359     | )          |              |   | (33,615     | )         
|                                                                                                          |                                              |   |              |            |              |   |             |           
|Loss from continuing operations before discontinued operations
and cumulative effect of accounting change |                                              |   | (4,455,291   | )          |              |   | (5,990,030  | )         
|Discontinued Operations:                                                                                  |                                              |   |              |            |              |   |             |           
|                                                                                                          | Loss from operation of discontinued business |   |              | (262,503   | )            |   |             | (1,017,897 | )
|                                                                                                          | Loss on disposal of switchgear business      |   |              | (764,148   | )            |   |             |           |  
|                                                                                                          |                                              |   |              |            |              |   |             |           
|                                                                                                          | Loss from discontinued operations            |   |              | (1,026,651 | )            |   |             | (1,017,897 | )
|Net loss before cumulative effect of accounting change                                                    |                                              |   | (5,481,942   | )          |              |   | (7,007,927  | )         
|Cumulative effect of accounting change                                                                    |                                              |   |             |            |              |   | (4,103,872  | )         
|                                                                                                          |                                              |   |              |            |              |   |             |           
|Net Loss after cumulative effect of accounting change                                                     |                                              |   | (5,481,942   | )          |              |   | (11,111,799 | )         
|                                                                                                          |                                              |   |              |            |              |   |             |           
|Preferred Stock Dividends                                                                                 |                                              |   | (4,817,917   | )          |              |   | (4,111,107  | )         
|                                                                                                          |                                              |   |              |            |              |   |             |           
|Net Loss Available to Common Shareholders                                                                 |                                              | $ | (10,299,859  | )          |              | $ | (15,222,906 | )         
|                                                                                                          |                                              |   |              |            |              |   |             |           
|Basic and diluted loss per common share from
continuing operations                                        |                                              | $ | (0.27        | )          |              | $ | (0.33       | )         
|Discontinued operations                                                                                   |                                              |   | (0.03        | )          |              |   | (0.03       | )         
|Cumulative effect of accounting change                                                                    |                                              |   |             |            |              |   | (0.13       | )         
|Basic and Diluted Loss Per Common Share                                                                   |                                              | $ | (0.30        | )          |              | $ | (0.49       | )         
|                                                                                                          |                                              |   |              |            |              |   |             |           
|Weighted Average Common Shares Outstanding                                                                |                                              |   | 33,761,489   |            |              |   | 31,213,165  |           
|                                                                                                          |                                              |   |              |            |              |   |             |           

See accompanying notes to consolidated financial statements.

F-4



---



##### Table of Contents





|                                                |                                                                                               |  |            |           |        |   |           |     |           |  |           |         |  |   |        |       | 
|----------------------------------------------- | --------------------------------------------------------------------------------------------- |  | ---------- | --------- | ------ | - | --------- | --- | --------- |  | --------- | ------- |  | - | ------ | ----- | 
|Electric
City Corp.                            
|                                               
|Consolidated Statements of Stockholders Equity
|                                               
|                                                |                                                                                               |  | Common     |           | Common |   | Preferred |     | Preferred
|                                                |                                                                                               |  | Shares     |           | Stock  |   | Shares    |     | Stock    
|                                                |                                                                                               |  |            |           |        |   |           |     |          
|Balance,December 31, 2001                       |                                                                                               |  | 31,113,842 |           |        | $ | 3,112     |     |           |  | 1,966,993 |         |  | $ | 19,670 |      
|                                                | Issuance of Series C Convertible Preferred Stock for
cash (net of offering costs of $119,743) |  |            |          |        |   |           |    |           |  |           |        |  |   |        |      | 
|                                                | Issuance of common stock to purchasers of
Series C Convertible Preferred Stock                |  |            | 30,082    |        |   |           | 3   |           |  |           |        |  |   |        |      | 
|                                                | Issuance of common stock (net of offering costs
of $80,000)                                   |  |            | 1,086,957 |        |   |           | 109 |           |  |           |        |  |   |        |      | 
|                                                | Cumulative dividends on Preferred Stock                                                       |  |            |          |        |   |           |    |           |  |           |        |  |   |        |      | 
|                                                | Satisfaction of accrued dividends through the issuance
of preferred stock                     |  |            |          |        |   |           |    |           |  |           | 204,199 |  |   |        | 2,042 | 
|                                                | Short-swing profit contribution                                                               |  |            |          |        |   |           |    |           |  |           |        |  |   |        |      | 
|                                                | Warrants issued in exchange for services received                                             |  |            |          |        |   |           |    |           |  |           |        |  |   |        |      | 
|                                                | Exercise of warrant in exchange for services received                                         |  |            | 52,454    |        |   |           | 5   |           |  |           |        |  |   |        |      | 
|                                                | Net loss for the year ended December 31, 2002                                                 |  |            |          |        |   |           |    |           |  |           |        |  |   |        |      | 
|Balance,December 31, 2002                       |                                                                                               |  | 32,283,335 |           |        | $ | 3,229     |     |           |  | 2,171,192 |         |  | $ | 21,712 |      
|                                                |                                                                                               |  |            |           |        |   |           |     |           |  |           |         |  |   |        |      
|                                                | Issuance of common stock (net of offering costs of
$154,790)                                  |  |            | 1,815,125 |        |   |           | 182 |           |  |           |        |  |   |        |      | 
|                                                | Issuance of Series D Convertible Preferred Stock for
cash (net of offering costs of $142,672) |  |            |          |        |   |           |    |           |  |           |        |  |   |        |      | 
|                                                | Issuance of common stock to purchasers of
Series D Convertible Preferred Stock                |  |            | 22,562    |        |   |           | 2   |           |  |           |        |  |   |        |      | 
|                                                | Cumulative dividends on Preferred Stock                                                       |  |            |          |        |   |           |    |           |  |           |        |  |   |        |      | 
|                                                | Satisfaction of accrued dividends through the issuance
of preferred stock                     |  |            |          |        |   |           |    |           |  |           | 225,398 |  |   |        | 2,254 | 
|                                                | Warrants issued in connection with convertible debt
issuance
and line of credit               |  |            |          |        |   |           |    |           |  |           |        |  |   |        |      | 
|                                                | Value of beneficial conversion feature on convertible debt                                    |  |            |          |        |   |           |    |           |  |           |        |  |   |        |      | 
|                                                | Conversion of term note                                                                       |  |            | 25,000    |        |   |           | 3   |           |  |           |        |  |   |        |      | 
|                                                | Exercise of warrants                                                                          |  |            | 197,000   |        |   |           | 20  |           |  |           |        |  |   |        |      | 
|                                                | Warrants issued in exchange for services received                                             |  |            |          |        |   |           |    |           |  |           |        |  |   |        |      | 
|                                                | Short-swing profit contribution                                                               |  |            |          |        |   |           |    |           |  |           |        |  |   |        |      | 
|                                                | Retirement of shares held in treasury                                                         |  |            | (1,000    | )      |   |           |    |           |  |           |        |  |   |        |      | 
|                                                | Net loss for the year ended December 31, 2003                                                 |  |            |          |        |   |           |    |           |  |           |        |  |   |        |      | 
|                                                |                                                                                               |  |            |           |        |   |           |     |           |  |           |         |  |   |        |      
|Balance,December 31, 2003                       |                                                                                               |  | 34,342,022 |           |        | $ | 3,436     |     |           |  | 2,396,590 |         |  | $ | 23,966 |      
|                                                |                                                                                               |  |            |           |        |   |           |     |           |  |           |         |  |   |        |      

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                          |                                                                                               |  |           |         |           |   |           |       |           |  |         |         |  |   |       |       | 
|------------------------- | --------------------------------------------------------------------------------------------- |  | --------- | ------- | --------- | - | --------- | ----- | --------- |  | ------- | ------- |  | - | ----- | ----- | 
|                          |                                                                                               |  | Series C  |         | Series C  |   | Series D  |       | Series D 
|                          |                                                                                               |  | Preferred |         | Preferred |   | Preferred |       | Preferred
|                          |                                                                                               |  | Shares    |         | Stock     |   | Shares    |       | Stock    
|                          |                                                                                               |  |           |         |           |   |           |       |          
|Balance,December 31, 2001 |                                                                                               |  |          |         |           | $ |          |       |           |  |        |         |  | $ |      |      
|                          | Issuance of Series C Convertible Preferred Stock for
cash (net of offering costs of $119,743) |  |           | 200,000 |           |   |           | 2,000 |           |  |         |        |  |   |       |      | 
|                          | Issuance of common stock to purchasers of
Series C Convertible Preferred Stock                |  |           |        |           |   |           |      |           |  |         |        |  |   |       |      | 
|                          | Issuance of common stock (net of offering costs
of $80,000)                                   |  |           |        |           |   |           |      |           |  |         |        |  |   |       |      | 
|                          | Cumulative dividends on Preferred Stock                                                       |  |           |        |           |   |           |      |           |  |         |        |  |   |       |      | 
|                          | Satisfaction of accrued dividends through the issuance
of preferred stock                     |  |           | 11,643  |           |   |           | 116   |           |  |         |        |  |   |       |      | 
|                          | Short-swing profit contribution                                                               |  |           |        |           |   |           |      |           |  |         |        |  |   |       |      | 
|                          | Warrants issued in exchange for services received                                             |  |           |        |           |   |           |      |           |  |         |        |  |   |       |      | 
|                          | Exercise of warrant in exchange for services received                                         |  |           |        |           |   |           |      |           |  |         |        |  |   |       |      | 
|                          | Net loss for the year ended December 31, 2002                                                 |  |           |        |           |   |           |      |           |  |         |        |  |   |       |      | 
|Balance,December 31, 2002 |                                                                                               |  | 211,643   |         |           | $ | 2,116     |       |           |  |        |         |  | $ |      |      
|                          |                                                                                               |  |           |         |           |   |           |       |           |  |         |         |  |   |       |      
|                          | Issuance of common stock (net of offering costs of
$154,790)                                  |  |           |        |           |   |           |      |           |  |         |        |  |   |       |      | 
|                          | Issuance of Series D Convertible Preferred Stock for
cash (net of offering costs of $142,672) |  |           |        |           |   |           |      |           |  |         | 150,000 |  |   |       | 1,500 | 
|                          | Issuance of common stock to purchasers of
Series D Convertible Preferred Stock                |  |           |        |           |   |           |      |           |  |         |        |  |   |       |      | 
|                          | Cumulative dividends on Preferred Stock                                                       |  |           |        |           |   |           |      |           |  |         |        |  |   |       |      | 
|                          | Satisfaction of accrued dividends through the issuance
of preferred stock                     |  |           | 21,971  |           |   |           | 220   |           |  |         | 7,769   |  |   |       | 78    | 
|                          | Warrants issued in connection with convertible debt
issuance
and line of credit               |  |           |        |           |   |           |      |           |  |         |        |  |   |       |      | 
|                          | Value of beneficial conversion feature on convertible debt                                    |  |           |        |           |   |           |      |           |  |         |        |  |   |       |      | 
|                          | Conversion of term note                                                                       |  |           |        |           |   |           |      |           |  |         |        |  |   |       |      | 
|                          | Exercise of warrants                                                                          |  |           |        |           |   |           |      |           |  |         |        |  |   |       |      | 
|                          | Warrants issued in exchange for services received                                             |  |           |        |           |   |           |      |           |  |         |        |  |   |       |      | 
|                          | Short-swing profit contribution                                                               |  |           |        |           |   |           |      |           |  |         |        |  |   |       |      | 
|                          | Retirement of shares held in treasury                                                         |  |           |        |           |   |           |      |           |  |         |        |  |   |       |      | 
|                          | Net loss for the year ended December 31, 2003                                                 |  |           |        |           |   |           |      |           |  |         |        |  |   |       |      | 
|                          |                                                                                               |  |           |         |           |   |           |       |           |  |         |         |  |   |       |      
|Balance,December 31, 2003 |                                                                                               |  | 233,614   |         |           | $ | 2,336     |       |           |  | 157,769 |         |  | $ | 1,578 |      
|                          |                                                                                               |  |           |         |           |   |           |       |           |  |         |         |  |   |       |      

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                          |                                                                                               |   |            |            |             |   |             |             |               |   |        |       |       |   |            |             |  
|------------------------- | --------------------------------------------------------------------------------------------- | - | ---------- | ---------- | ----------- | - | ----------- | ----------- | ------------- | - | ------ | ----- | ----- | - | ---------- | ----------- | -
|                          |                                                                                               |   | Additional |            |             |   |             |             |               |   |        |       | Total
|                          |                                                                                               |   | Paid-in    |            | Accumulated |   | Treasury    |             | Stockholders
|                          |                                                                                               |   | Capital    |            | Deficit     |   | Stock       |             | Equity       
|                          |                                                                                               |   |            |            |             |   |             |             |              
|Balance,December 31, 2001 |                                                                                               | $ | 44,215,331 |            |             | $ | (31,772,780 | )           |               | $ | (8,500 | )     |       | $ | 12,456,833 |            
|                          | Issuance of Series C Convertible Preferred Stock for
cash (net of offering costs of $119,743) |   |            | 1,878,257  |             |   |             |            |               |   |        |      |       |   |            | 1,880,257   |  
|                          | Issuance of common stock to purchasers of
Series C Convertible Preferred Stock                |   |            | (3         | )           |   |             |            |               |   |        |      |       |   |            |            |  
|                          | Issuance of common stock (net of offering costs
of $80,000)                                   |   |            | 919,891    |             |   |             |            |               |   |        |      |       |   |            | 920,000     |  
|                          | Cumulative dividends on Preferred Stock                                                       |   |            | (2,158,418 | )           |   |             |            |               |   |        |      |       |   |            | (2,158,418  | )
|                          | Satisfaction of accrued dividends through the issuance
of preferred stock                     |   |            | 2,156,260  |             |   |             |            |               |   |        |      |       |   |            | 2,158,418   |  
|                          | Short-swing profit contribution                                                               |   |            | 1,300      |             |   |             |            |               |   |        |      |       |   |            | 1,300       |  
|                          | Warrants issued in exchange for services received                                             |   |            | 80,000     |             |   |             |            |               |   |        |      |       |   |            | 80,000      |  
|                          | Exercise of warrant in exchange for services received                                         |   |            | 57,695     |             |   |             |            |               |   |        |      |       |   |            | 57,700      |  
|                          | Net loss for the year ended December 31, 2002                                                 |   |            |           |             |   |             | (11,111,799 | )             |   |        |      |       |   |            | (11,111,799 | )
|Balance,December 31, 2002 |                                                                                               | $ | 47,150,313 |            |             | $ | (42,884,579 | )           |               | $ | (8,500 | )     |       | $ | 4,284,291  |            
|                          |                                                                                               |   |            |            |             |   |             |             |               |   |        |       |       |   |            |            
|                          | Issuance of common stock (net of offering costs of
$154,790)                                  |   |            | 1,514,944  |             |   |             |            |               |   |        |      |       |   |            | 1,515,126   |  
|                          | Issuance of Series D Convertible Preferred Stock for
cash (net of offering costs of $142,672) |   |            | 1,355,828  |             |   |             |            |               |   |        |      |       |   |            | 1,357,328   |  
|                          | Issuance of common stock to purchasers of
Series D Convertible Preferred Stock                |   |            | (2         | )           |   |             |            |               |   |        |      |       |   |            |            |  
|                          | Cumulative dividends on Preferred Stock                                                       |   |            | (2,551,379 | )           |   |             |            |               |   |        |      |       |   |            | (2,551,379  | )
|                          | Satisfaction of accrued dividends through the issuance
of preferred stock                     |   |            | 2,548,827  |             |   |             |            |               |   |        |      |       |   |            | 2,551,379   |  
|                          | Warrants issued in connection with convertible debt
issuance
and line of credit               |   |            | 541,400    |             |   |             |            |               |   |        |      |       |   |            | 541,400     |  
|                          | Value of beneficial conversion feature on convertible debt                                    |   |            | 180,381    |             |   |             |            |               |   |        |      |       |   |            | 180,381     |  
|                          | Conversion of term note                                                                       |   |            | 52,997     |             |   |             |            |               |   |        |      |       |   |            | 53,000      |  
|                          | Exercise of warrants                                                                          |   |            | 196,980    |             |   |             |            |               |   |        |      |       |   |            | 197,000     |  
|                          | Warrants issued in exchange for services received                                             |   |            | 393,550    |             |   |             |            |               |   |        |      |       |   |            | 393,550     |  
|                          | Short-swing profit contribution                                                               |   |            | 798        |             |   |             |            |               |   |        |      |       |   |            | 798         |  
|                          | Retirement of shares held in treasury                                                         |   |            | (8,500     | )           |   |             |            |               |   |        | 8,500 |       |   |            |            |  
|                          | Net loss for the year ended December 31, 2003                                                 |   |            |           |             |   |             | (5,481,942  | )             |   |        |      |       |   |            | (5,481,942  | )
|                          |                                                                                               |   |            |            |             |   |             |             |               |   |        |       |       |   |            |            
|Balance,December 31, 2003 |                                                                                               | $ | 51,376,137 |            |             | $ | (48,366,521 | )           |               | $ |       |       |       | $ | 3,040,932  |            
|                          |                                                                                               |   |            |            |             |   |             |             |               |   |        |       |       |   |            |            

See accompanying notes to consolidated financial statements.

F-5



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##### Table of Contents



|                                                    |                                                                                                        |                                                                   |                      |            |              |          |              |             |           |          |  
|--------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------- | -------------------- | ---------- | ------------ | -------- | ------------ | ----------- | --------- | -------- | -
|Electric City Corp.                                
|                                                   
|Statements of Cash Flows                           
|                                                   
|                                                    |                                                                                                        |                                                                   |                      |            | Year ended   |          | Year ended  
|                                                    |                                                                                                        |                                                                   |                      |            | December 31, |          | December 31,
|                                                    |                                                                                                        |                                                                   |                      |            | 2003         |          | 2002        
|                                                    |                                                                                                        |                                                                   |                      |            |              |          |             
|Cash Flows From Operating Activities                |                                                                                                        |                                                                   |                      |            |              |          |              |            
|                                                    | Net loss                                                                                               |                                                                   | $                    | (5,481,942 | )            |          | $            | (11,111,799 | )        
|                                                    | Adjustments to reconcile net loss to net cash used in
operating activities, net of assets disposed of: |                                                                   |                      |            |              |          |              |             |          
|                                                    |                                                                                                        | Cumulative effect of accounting change                            |                      |            |             |          |              |             | 4,103,872 |         
|                                                    |                                                                                                        | Provision for (recovery on) bad debts                             |                      |            | (66,632      | )        |              |             | 343,160   |         
|                                                    |                                                                                                        | Depreciation and amortization                                     |                      |            | 110,632      |          |              |             | 232,051   |         
|                                                    |                                                                                                        | Amortization of deferred financing costs                          |                      |            | 203,616      |          |              |             |          |         
|                                                    |                                                                                                        | Amortization of original issue discount                           |                      |            | 102,006      |          |              |             |          |         
|                                                    |                                                                                                        | Issuance of shares and warrants in exchange for
services received |                      |            | 393,550      |          |              |             | 137,700   |         
|                                                    |                                                                                                        | Accrued interest converted to common stock                        |                      |            | 654          |          |              |             |          |         
|                                                    |                                                                                                        | Impairment of goodwill                                            |                      |            |             |          |              |             | 108,000   |         
|                                                    |                                                                                                        | Loss on disposal of discontinued operations                       |                      |            | 764,148      |          |              |             |          |         
|                                                    |                                                                                                        | Loss on disposal of fixed assets                                  |                      |            |             |          |              |             | 3,151     |         
|                                                    |                                                                                                        | Changes in assets and liabilities, net of dispositions            |                      |            |              |          |              |             |           |         
|                                                    |                                                                                                        |                                                                   | Accounts receivable  |            |              | (22,101  | )            |             |           | (252,138 | )
|                                                    |                                                                                                        |                                                                   | Inventories          |            |              | 713,689  |              |             |           | (941,584 | )
|                                                    |                                                                                                        |                                                                   | Other current assets |            |              | (87,660  | )            |             |           | 12,639   |  
|                                                    |                                                                                                        |                                                                   | Accounts payable     |            |              | 74,346   |              |             |           | 416,867  |  
|                                                    |                                                                                                        |                                                                   | Accrued liabilities  |            |              | (328,898 | )            |             |           | 555,167  |  
|                                                    |                                                                                                        |                                                                   | Deferred revenue     |            |              | 283,308  |              |             |           | (487,597 | )
|                                                    |                                                                                                        |                                                                   | Customer deposits    |            |              | 511,167  |              |             |           |         |  
|                                                    |                                                                                                        |                                                                   |                      |            |              |          |              |            
|Net cash used in operating activities               |                                                                                                        |                                                                   | (2,830,117           | )          |              |          | (6,880,511   | )          
|                                                    |                                                                                                        |                                                                   |                      |            |              |          |              |            
|Cash Flows From Investing Activities                |                                                                                                        |                                                                   |                      |            |              |          |              |            
|                                                    | Sale of discontinued operations                                                                        |                                                                   |                      | 929,032    |              |          |              |            |          
|                                                    | Proceeds from sale of fixed assets                                                                     |                                                                   |                      |           |              |          |              | 10,500      |          
|                                                    | Purchase of property and equipment                                                                     |                                                                   |                      | (32,304    | )            |          |              | (17,487     | )        
|                                                    |                                                                                                        |                                                                   |                      |            |              |          |              |            
|Net cash provided by (used in) investing activities |                                                                                                        |                                                                   | 896,728              |            |              |          | (6,987       | )          
|                                                    |                                                                                                        |                                                                   |                      |            |              |          |              |            
|Cash Flows From Financing Activities                |                                                                                                        |                                                                   |                      |            |              |          |              |            
|                                                    | Payment of amounts due sellers                                                                         |                                                                   |                      |           |              |          |              | (219,067    | )        
|                                                    | Borrowings (payments) on line of credit                                                                |                                                                   |                      | (500,000   | )            |          |              | 500,000     |          
|                                                    | Proceeds from long-term debt                                                                           |                                                                   |                      | 1,010,000  |              |          |              | 1,135,000   |          
|                                                    | Payments on long-term debt                                                                             |                                                                   |                      | (427,514   | )            |          |              | (1,260,161  | )        

See accompanying notes to consolidated financial statements.

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|                                                     |                                                                    |   |              |           |              |   |            |           |  
|---------------------------------------------------- | ------------------------------------------------------------------ | - | ------------ | --------- | ------------ | - | ---------- | --------- | -
|Electric City Corp.                                 
|                                                    
|Statements of Cash Flows                            
|                                                    
|                                                     |                                                                    |   | Year ended   |           | Year ended  
|                                                     |                                                                    |   | December 31, |           | December 31,
|                                                     |                                                                    |   | 2003         |           | 2002        
|                                                     |                                                                    |   |              |           |             
|                                                     | Proceeds from issuance of preferred stock                          |   | $            | 1,500,000 |              |   | $          | 2,000,000 |  
|                                                     | Proceeds from issuance of common stock                             |   |              | 1,669,914 |              |   |            | 1,000,000 |  
|                                                     | Issuance costs related to stock issuances                          |   |              | (297,462  | )            |   |            | (199,743  | )
|                                                     | Cash paid for deferred financing costs                             |   |              | (308,228  | )            |   |            |          |  
|                                                     | Proceeds from exercise of warrants                                 |   |              | 197,000   |              |   |            |          |  
|                                                     | Short-swing profit contribution                                    |   |              | 798       |              |   |            | 1,300     |  
|                                                     |                                                                    |   |              |           |              |   |            |          
|Net cash provided by financing activities            |                                                                    |   | 2,844,508    |           |              |   | 2,957,329  |          
|                                                     |                                                                    |   |              |           |              |   |            |          
|Net Increase (Decrease) in Cash and Cash Equivalents |                                                                    |   | 911,119      |           |              |   | (3,930,169 | )        
|Cash and Cash Equivalents,at beginning of period     |                                                                    |   | 1,555,904    |           |              |   | 5,486,073  |          
|                                                     |                                                                    |   |              |           |              |   |            |          
|Cash and Cash Equivalents,at end of period           |                                                                    | $ | 2,467,023    |           |              | $ | 1,555,904  |          
|                                                     |                                                                    |   |              |           |              |   |            |          
|Supplemental Disclosures of Cash Flow Information    |                                                                    |   |              |           |              |   |            |          
|                                                     | Cash paid during the period for interest  continuing
operations   |   | $            | 44,000    |              |   | $          | 52,000    |  
|                                                     | Cash paid during the period for interest  discontinued
operations |   |              | 9,000     |              |   |            | 22,000    |  

See accompanying notes to consolidated financial statements.

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|                                                                       |                                                                                                                                                                                                             |  |              |           |              |  |   |           | 
|---------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ------------ |  | - | --------- | 
|Electric City Corp.                                                   
|                                                                      
|Statements of Cash Flows                                              
|                                                                      
|                                                                       |                                                                                                                                                                                                             |  | Year ended   |           | Year ended  
|                                                                       |                                                                                                                                                                                                             |  | December 31, |           | December 31,
|                                                                       |                                                                                                                                                                                                             |  | 2003         |           | 2002        
|                                                                       |                                                                                                                                                                                                             |  |              |           |             
|Supplemental Disclosures of Noncash Investing and Financing Activities |                                                                                                                                                                                                             |  |              |           |              |  |   |          
|                                                                       | Stock, warrants and options issued in
exchange for services received                                                                                                                                        |  | $            | 393,550   |              |  | $ | 137,700   | 
|                                                                       | Accrual satisfied through the issuance of
common stock                                                                                                                                                      |  |              | 654       |              |  |   |          | 
|                                                                       | Satisfaction of accrued dividends on Series A Preferred
Stock through the issuance of 225,398 and 204,199
shares of Series A Preferred stock during the years
ended December 31, 2003 and 2002 respectively |  |              | 2,253,978 |              |  |   | 2,041,992 | 
|                                                                       | Satisfaction of accrued dividends on Series C Preferred
Stock through the issuance of 21,971 and 11,643
shares of Series C Preferred stock during the years
ended December 31, 2003 and 2002 respectively   |  |              | 219,712   |              |  |   | 116,426   | 
|                                                                       | Satisfaction of accrued dividends on Series D Preferred
Stock through the issuance of 7,769 shares of
Series D Preferred stock during the year ended
December 31, 2003                                      |  |              | 77,689    |              |  |   |          | 
|                                                                       | Conversion of convertible debt to common stock                                                                                                                                                              |  |              | 52,346    |              |  |   |          | 

See accompanying notes to consolidated financial statements.

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##### Table of Contents



Electric City Corp.
Notes to Consolidated Financial Statements

Note 1  Description of Business

Electric City Corp. (the Company), a Delaware corporation, is a
developer, manufacturer and integrator of energy savings technologies and
building automation systems as well as an independent developer of scalable,
negative power systems. The Company is made up of two separate companies, each
comprising a distinct business segment: Electric City Corp. comprises the
energy technology segment and Great Lakes Controlled Energy Corporation
comprises the control and automation segment. The two companies operate out of
separate facilities, both located in Elk Grove Village, Illinois, a suburb of
Chicago. Negative power system development is considered part of the energy
technology segment.

Note 2 - Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Electric
City Corp. and its wholly owned subsidiary, Great Lakes Controlled Energy
Corporation. All significant intercompany balances and transactions have been
eliminated.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.

Concentration of Risk

The Companys customers are primarily distributors of its EnergySaver
product line, building owners, general contractors and electrical contractors.
During the year ended December 31, 2003 four customers accounted for 26%, 15%,
12% and 10% of the Companys consolidated revenue, respectively. Four
customers accounted for 22%, 16%, 11% and 10% of the Companys consolidated
revenue, respectively, during the year ended December 31, 2002. Of the four
customers accounting for more than 10% of the Companys consolidated sales in
2002, only one also accounted for more than 10% of consolidated sales in 2003.

The Company purchases its raw materials from a variety of suppliers and
continues to seek out alternate suppliers for critical components so that it
can be assured that its manufacturing processes will not be interrupted by the
inability of a single supplier to deliver product. During the year ended
December 31, 2003, one supplier accounted for 44% of the Companys total
material purchases. This supplier is a significant supplier to both Electric
City and Great Lakes Controlled Energy. During the year ended December 31,
2002, two suppliers accounted for approximately 17% and 14% of the Companys
total material purchases, respectively.

The Company maintains cash and cash equivalents in accounts with a
financial institution in excess of the amount insured by the Federal Deposit
Insurance Corporation. The Company monitors the financial

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Electric City Corp.
Notes to Consolidated Financial Statements

stability of this institution regularly and management does not believe there
is significant credit risk associated with deposits in excess of federally
insured amounts.

Allowance for Doubtful Accounts

The Company records an allowance for doubtful accounts based on
specifically identified amounts that it believes to be uncollectible. If
actual collections experience changes, revisions to the allowance may be
required. After all attempts to collect a receivable have failed, the
receivable is written off against the allowance. Based on the information
available to us, we believe our allowance for doubtful accounts is adequate.
However, actual write-offs might exceed the recorded allowance.

Inventories

Inventories are stated at the lower of FIFO cost or market.

Properties & Equipment

Property and equipment are stated at cost. For financial reporting
purposes depreciation is computed over the estimated useful lives of the assets
by the straight-line method over the following lives:

|                         |  |             
|------------------------ |  | ------------
|Buildings                |  | 39 years    
|Computer equipment       |  | 3 years     
|Office Equipment         |  | 5 years     
|Furniture                |  | 5 - 10 years
|Manufacturing equipment  |  | 3 - 5 years 
|Transportation equipment |  | 3 years     

Cost in Excess of Assets Acquired

Goodwill represents the purchase price in excess of the fair value of
assets acquired in business combinations. Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, requires the
Company to assess goodwill for impairment at least annually in the absence of
an indicator of possible impairment and immediately upon an indicator of
possible impairment. If it is determined that the fair values are less than
the carrying amount of goodwill recorded on its Consolidated Balance Sheet, the
Company must recognize an impairment in its financial statements. With the
adoption of SFAS 142, goodwill is no longer amortized. The Company had made
acquisitions in the past that included a significant amount of goodwill and
other intangible assets. Under generally accepted accounting principles in
effect through December 31, 2001, these assets were amortized over their
estimated useful lives, and were tested periodically to determine if they were
recoverable from operating earnings on an undiscounted basis over their useful
lives. Effective in 2002, goodwill is no longer amortized but is subject to an
annual (or under certain circumstances more frequent) impairment test based on
its estimated fair value. Other intangible assets that meet certain criteria
will continue to be amortized over their useful lives and will also be subject
to an impairment test based on undiscounted cash flows. Estimated fair value is
less than values based on undiscounted operating earnings because fair value
estimates include a discount factor in valuing future cash flows. There are
many assumptions and estimates underlying the determination of an impairment
loss. Another estimate using different but still reasonable assumptions could
produce a significantly different result.

On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets effective
for fiscal years beginning after December 15, 2001. In accordance with SFAS
No. 142, the Company completed its transitional impairment testing of

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Electric City Corp.
Notes to Consolidated Financial Statements

intangible assets during the second quarter of fiscal 2002. The impairment
testing was performed in two steps: first, determining whether there was an
impairment, based upon the fair value of a reporting unit as compared to its
carrying value, and second, if there was an impairment, the determination of
the impairment loss by comparing the implied fair value of goodwill with the
carrying amount of that goodwill. Subsequent to the first quarter of fiscal
2002, with the assistance of a third-party valuation firm, the Company
finalized the testing of goodwill subject to SFAS 142. Using conservative, but
realistic, assumptions to model its power management business and building
control and automation business, it determined that the carrying value of the
power management business was greater than the derived fair value, indicating
an impairment in the recorded goodwill. To determine fair value, the Company
relied on a discounted cash flow analysis. For goodwill valuation purposes
only, the revised fair value of this unit was allocated to the assets and
liabilities of the reporting unit to arrive at an implied fair value of
goodwill, based upon known facts and circumstances, as if the acquisition
occurred currently. The testing resulted in a write-down of recorded goodwill
in the amount of $4,103,872, which was recorded as a cumulative effect of a
change in an accounting principle. As part of the 2002 year-end assessment of
the fair value of its goodwill the Company determined that the carrying value
of the goodwill associated with the building automation and control business
exceeded the fair value by $108,000. This difference between the carrying
value and the estimated fair value of the goodwill was recorded as an
impairment loss in 2002. As part of its 2003 year-end assessment, the Company
updated its long-term projections for the building automation and controls
business and estimated the fair value based on the discounted current value of
the expected future cash flows. The Company then compared the implied fair
value of the goodwill to its carrying value and determined that the value of
the goodwill was not impaired. It is possible that upon completion of future
impairment tests, as the result of changes in facts or circumstances, the
Company may have to take additional charges to recognize a further write-down
of the value of our acquisitions to their estimated fair values.

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Electric City Corp.
Notes to Consolidated Financial Statements

The changes in the carrying amount of goodwill during 2003 by reportable
segment are summarized as follows:

|                                          |  |            |   |             |  |          |          |   |  |   |          |  
|----------------------------------------- |  | ---------- | - | ----------- |  | -------- | -------- | - |  | - | -------- | -
|                                          |  |            |   |             |  | Building |          |   |  |  
|                                          |  | Energy     |   | Automation  |  |          |          |  
|                                          |  | Technology |   | Controls(1) |  | Total   
|                                          |  |            |   |             |  |         
|Balance as of
December 31, 2001           |  | $          |  |             |  | $        | 519,573  |   |  | $ | 519,573  |  
|Adjustment to initial
purchase
accounting |  |            |  |             |  |          | 5,000    |   |  |   | 5,000    |  
|Impairment losses                         |  |            |  |             |  |          | (108,000 | ) |  |   | (108,000 | )
|                                          |  |            |   |             |  |          |          |   |  |   |          |  
|Balance as of
December 31, 2002           |  |            |  |             |  |          | 416,573  |   |  |   | 416,573  |  
|Impairment losses                         |  |            |  |             |  |          |         |   |  |   |         |  
|                                          |  |            |   |             |  |          |          |   |  |   |          |  
|Balance as of
December 31, 2003           |  | $          |  |             |  | $        | 416,573  |   |  | $ | 416,573  |  
|                                          |  |            |   |             |  |          |          |   |  |   |          |  

(1) Includes goodwill resulting from the acquisition of Great Lakes
Controlled Energy.

Impairment of Long-Lived Assets

The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those items. Our cash flow
estimates are based on historical results adjusted to reflect our best estimate
of future market and operating conditions. The net carrying value of assets not
recoverable is reduced to fair value. Our estimates of fair value represent our
best estimate based on industry trends and reference to market rates and
transactions.

Revenue Recognition

The Company recognizes revenue when all four of the following criteria are
met: (i) persuasive evidence has been received that an arrangement exists; (ii)
delivery of the products and/or services has occurred; (iii) the selling price
is fixed or determinable; and (iv) collectibility is reasonably assured. In
addition, the Company follows the provisions of the Securities and Exchange
Commissions Staff Accounting Bulletin No. 104, Revenue Recognition, which sets
forth guidelines in the timing of revenue recognition based upon factors such
as passage of title, installation, payments and customer acceptance. Any
amounts received prior to satisfying the Companys revenue recognition criteria
is recorded as deferred revenue in the accompanying balance sheet.

Revenues on long-term contracts are recorded under the percentage of
completion, cost-to-cost method of accounting. Any anticipated losses on
contracts are charged to operations as soon as they are determinable and all
contract related profits are deferred until completion of the contract.

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Electric City Corp.
Notes to Consolidated Financial Statements

Billings in excess of costs on long-term jobs of $96,724 and $81,222 are
included in accounts receivable at December 31, 2003 and 2002, respectively.
Costs in excess of billings on long-term jobs of $280,140 and $0 are included
in deferred revenue at December 31, 2003 and 2002, respectively.

Under certain long-term contracts, customers typically withhold payment on
approximately 10% of billings (retainage) until completion of the job.
$260,442 and $161,394 of retainage is included in accounts receivable at
December 31, 2003 and 2002. $229,812 of the retainage at December 31, 2003 is
expected to be collected during to fiscal 2004.

Shipping and Handling Costs

The Company classifies freight costs billed to customers as revenue.
Costs related to freight are classified as cost of sales.

Research and Development Costs

Research and development costs are charged to operations when incurred and
are included in selling, general and administrative expenses. Total research
and development costs charged to operations were $70,000 and $65,000 for the
periods ended December 31, 2003 and December 31, 2002, respectively.

Advertising, Marketing and Promotional Costs

Expenditures on advertising, marketing and promotions are charged to
operations in the period incurred and totaled $19,000 and $33,000 for the
periods ended December 31, 2003, and December 31, 2002, respectively.

Income Taxes

Income taxes are accounted for under the asset and liability method.
Deferred income taxes are recognized for the tax consequences in future years
of the differences between the tax basis of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable earnings. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount more likely than not to
be realized.

Net Loss Per Share

The Company computes loss per share under Statement of Financial
Accounting Standards No. 128, Earnings Per Share. The statement requires
presentation of two amounts; basic and diluted loss per share. Basic loss per
share is computed by dividing the loss available to common stockholders by the
weighted average common shares outstanding. Dilutive earnings per share would
include all common stock equivalents unless anti-dilutive. The Company has not
included the outstanding options, warrants, or convertible preferred stock as
common stock equivalents because the effect would be antidilutive.

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Electric City Corp.
Notes to Consolidated Financial Statements

The following table sets forth the weighted average shares issuable upon
exercise of outstanding options and warrants and conversion of preferred stock
that is not included in the basic and diluted net loss per share available to
common stockholders:

|                                                                       |  |      |            |      |  |  |            | 
|---------------------------------------------------------------------- |  | ---- | ---------- | ---- |  |  | ---------- | 
|December 31,                                                           |  | 2003 |            | 2002
|                                                                       |  |      |            |     
|Weighted average shares issuable upon
exercise of outstanding options  |  |      | 10,291,351 |      |  |  | 9,227,761  | 
|Weighted average shares issuable upon
exercise of outstanding warrants |  |      | 9,211,143  |      |  |  | 11,247,819 | 
|Weighted average shares issuable upon
conversion of preferred stock    |  |      | 25,532,617 |      |  |  | 21,464,327 | 
|Weighted average shares issuable upon
conversion of term loan          |  |      | 142,274    |      |  |  |           | 
|                                                                       |  |      |            |      |  |  |            | 
|Total                                                                  |  |      | 45,177,385 |      |  |  | 41,949,291 | 
|                                                                       |  |      |            |      |  |  |            | 

Financial Instruments

The carrying amounts reported in the consolidated balance sheets for cash,
accounts receivable, accounts payable and accrued expenses approximate fair
value because of the short-term nature of these amounts. The Companys
long-term debt approximates fair value based on instruments with similar terms.

Stock-based Compensation

At December 31, 2003, the Company has a stock-based compensation plan,
which is described in Note 16. The Company applies and intends to continue to
apply the recognition and intrinsic value measurement principles of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for such plan. No
stock-based compensation expense was reflected in the 2003 or 2002 net loss as
all options granted during those years had an exercise price equal to or
greater than the market value of the underlying common stock on the date of the
grant. The following table illustrates the effect on the net loss and earnings
per share if the Company had applied the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based
compensation:

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Electric City Corp.
Notes to Consolidated Financial Statements

|                                                                                                           |                                 |      |            |       |   |   |             |       |  
|---------------------------------------------------------------------------------------------------------- | ------------------------------- | ---- | ---------- | ----- | - | - | ----------- | ----- | -
|Year ended December 31,                                                                                    |                                 | 2003 |            | 2002 
|                                                                                                           |                                 |      |            |      
|Net Loss, as reported                                                                                      |                                 | $    | (5,482,000 | )     |   | $ | (11,112,000 | )    
|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 1 |                                 |      | (889,000   | )     |   |   | (1,990,000  | )    
|                                                                                                           |                                 |      |            |       |   |   |             |      
|Pro forma net loss                                                                                         |                                 | $    | (6,371,000 | )     |   | $ | (13,102,000 | )    
|Net loss per share                                                                                         |                                 |      |            |       |   |   |             |      
|                                                                                                           | Basic and diluted  as reported |      | $          | (0.31 | ) |   | $           | (0.49 | )
|                                                                                                           | Basic and diluted  pro forma   |      | $          | (0.33 | ) |   | $           | (0.55 | )
|                                                                                                           |                                 |      |            |       |   |   |             |      



|1 All awards refer to awards granted, modified, or settled in fiscal periods beginning after
December 15, 1994  that is, awards for which the fair value was required to be measured and
disclosed under Statement 123.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Warranty Obligations

The Company warrants to the purchasers of its EnergySaver line of products
that the product will be free of defects in material and workmanship for one
year from the date of installation. The Company records the estimated cost that
may be incurred under its warranties at the time the product revenue is
recognized based upon the relationship between historical and anticipated
warranty costs and sales volumes. The Company periodically assesses the
adequacy of its recorded warranty liability and adjusts the amounts as
necessary. While the Company believes that its estimated liability for product
warranties is adequate and that the judgment applied is appropriate, the
estimated liability for product warranties could differ materially from actual
future warranty costs. See Note 7 for additional information about the
Companys warranty liability.

Deferred Financing Costs

The costs related to the issuance of the convertible line of credit and
the convertible term loan, including lender fees, legal fees, due diligence
costs, escrow agent fees and commissions, have all been recorded as deferred
financing costs and are being amortized over the term of the loan using the
effective interest method.

Recent Accounting Pronouncements

In January 2003, FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities(FIN 46). In general, a variable interest entity
is a corporation, partnership, trust or any other legal structure used for
business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated

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Electric City Corp.
Notes to Consolidated Financial Statements

financial support from other parties. The consolidation requirements of
FIN 46 apply immediately to variable interest entities created after January
31, 2003. The Company adopted the provisions of FIN 46 effective February 1,
2003 and such adoption did not have a material impact on its consolidated
financial statements since it currently has no variable interest entities. In
December 2003, the FASB issued FIN 46R with respect to variable interest
entities created before January 31, 2003, which among other things, revised the
implementation date to the first fiscal year or interim period ending after
March 15, 2004, with the exception of Special Purpose Entities (SPE). The
consolidation requirements apply to all SPEs in the first fiscal year or
interim period ending after December 15, 2003. The Company adopted the
provisions of FIN 46R effective December 31, 2003 and such adoption did not
have a material impact on its consolidated financial statements since it
currently has no SPEs.

In April 2003, FASB issued Statement of Financial Accounting Standards No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities(SFAS 149). SFAS 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS 133. SFAS 149 is
effective for contracts and hedging relationships entered into or modified
after June 30, 2003. The Company adopted the provisions of SFAS 149 effective
June 30, 2003 and such adoption did not have a material impact on its
consolidated financial statements since the Company has not entered into any
derivative or hedging transactions.

In May 2003, FASB issued Statement of Financial Accounting Standards No.
150, Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity(SFAS 150). SFAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both debt and equity and requires an issuer to classify the
following instruments as liabilities in its balance sheet:



| |  |  | a financial instrument issued in the form of shares that is
mandatorily redeemable and embodies an unconditional obligation that
requires the issuer to redeem it by transferring its assets at a
specified or determinable date or upon an event that is certain to
occur;                                                                                                                                                                 
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a financial instrument, other than an outstanding share, that embodies
an obligation to repurchase the issuers equity shares, or is indexed
to such an obligation, and requires the issuer to settle the
obligation by transferring assets; and                                                                                                                                                                                            
|
| |  |  | a financial instrument that embodies an unconditional obligation that
the issuer must settle by issuing a variable number of its equity
shares if the monetary value of the obligation is based solely or
predominantly on (1) a fixed monetary amount, (2) variations in
something other than the fair value of the issuers equity shares, or
(3) variations inversely related to changes in the fair value of the
issuers equity shares.

In November 2003, FASB issued FASB Staff Position No. 150-3 (FSS 150-3)
which deferred the effective dates for applying certain provisions of SFAS 150
related to mandatorily redeemable financial instruments of certain non-public
entities and certain mandatorily redeemable non-controlling interests for
public and non-public companies. For public entities, SFAS 150 is effective for
mandatorily redeemable financial instruments entered into or modified after May
31, 2003 and is effective for all other financial instruments as of the first
interim period beginning after June 15, 2003. For mandatorily redeemable
non-controlling interests that would not have to be classified as liabilities
by a subsidiary under the exception in paragraph 9 of SFAS 150, but would be
classified as liabilities by the parent, the classification and

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Electric City Corp.
Notes to Consolidated Financial Statements

measurement provisions of SFAS 150 are deferred indefinitely. The
measurement provisions of SFAS 150 are also deferred indefinitely for other
mandatorily redeemable non-controlling interests that were issued before
November 4, 2003. For those instruments, the measurement guidance for
redeemable shares and non-controlling interests in other literature shall apply
during the deferral period. The adoption of FAS 150 did not have a material
impact on the consolidated financial statements of the Company.

On December 17, 2003, the Staff of the SEC issued Staff Accounting
Bulletin No. 104 (SAB 104), Revenue Recognition, which supercedes SAB 101,
Revenue Recognition in Financial Statements. SAB 104s primary purpose is to
rescind accounting guidance contained in SAB 101 related to multiple element
revenue arrangements, superceded as a result of the issuance of EITF 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables. Additionally,
SAB 104 rescinds the SECs Revenue Recognition in Financial Statements
Frequently Asked Questions and Answers (the FAQ) issued with SAB 101 that had
been codified in SEC Topic 13, Revenue Recognition. Selected portions of the
FAQ have been incorporated into SAB 104. The adoption of SAB 104 did not
materially affect our revenue recognition policies, nor our results of
operations, financial position or cash flows.

Note 3  Discontinued Operations

The Company adopted Statement of Financial Accounting Standards No. 144
(SFAS 144) at the beginning of 2002. Among other things, SFAS 144 requires
that the results of operations and related disposal costs as well as the gain
or loss on the disposal of a business unit be presented on the statement of
operations as a separate component of income before extraordinary items for all
periods presented.

On June 3, 2003, the Company entered into an asset purchase agreement with
Hoppensteadt Acquisition Corp., whereby Hoppensteadt acquired all of the
assets, except for certain receivables and cash, and assumed all of the
liabilities, except for bank debt, of the Company Power Management segment as
of May 31, 2003, in exchange for $929,032 in cash. Hoppensteadt Acquisition
Corp. is owned by a group of investors that includes former managers of the
Companys Power Management segment.

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Electric City Corp.
Notes to Consolidated Financial Statements

The assets and liabilities of the discontinued operations that are
included in the Companys consolidated assets and liabilities are as follows:

|                                 |                           |      |   |      |  |   |           |           | 
|-------------------------------- | ------------------------- | ---- | - | ---- |  | - | --------- | --------- | 
|December 31,                     |                           | 2003 |   | 2002
|                                 |                           |      |   |     
|Accounts receivable              |                           | $    |  |      |  | $ | 1,303,658 |          
|Other current assets             |                           |      |  |      |  |   | 787,198   |          
|                                 |                           |      |   |      |  |   |           |          
|                                 | Total current assets      |      |   |     |  |   |           | 2,090,856 | 
|Net property plant and equipment |                           |      |  |      |  |   | 382,103   |          
|Other assets                     |                           |      |   |      |  |   | 1,955     |          
|                                 |                           |      |   |      |  |   |           |          
|Total assets                     |                           |      |   |      |  |   | 2,474,914 |          
|Accounts payable                 |                           |      |  |      |  |   | 992,000   |          
|Accrued expense                  |                           |      |  |      |  |   | 48,875    |          
|                                 |                           |      |   |      |  |   |           |          
|                                 | Total current liabilities |      |   |     |  |   |           | 1,040,875 | 
|                                 |                           |      |   |      |  |   |           |          
|Total liabilities                |                           | $    |  |      |  | $ | 1,040,875 |          
|                                 |                           |      |   |      |  |   |           |          

The revenue and loss related to discontinued operations were as follows:

|                       |  |      |           |      |  |  |            |  
|---------------------- |  | ---- | --------- | ---- |  |  | ---------- | -
|Year ended December 31 |  | 2003 |           | 2002
|                       |  |      |           |     
|Revenue                |  | $    | 2,484,336 |      |  |  | 6,231,750  |  
|Net Loss               |  |      | (262,503  | )    |  |  | (1,017,897 | )
|                       |  |      |           |      |  |  |            |  

Note 4  Inventories

Inventories consisted of the following:

|                |  |      |           |      |  |   |           | 
|--------------- |  | ---- | --------- | ---- |  | - | --------- | 
|December 31,    |  | 2003 |           | 2002
|                |  |      |           |     
|Raw materials   |  | $    | 496,906   |      |  | $ | 1,488,886 | 
|Work in process |  |      | 12,817    |      |  |   | 29,857    | 
|Finished goods  |  |      | 690,423   |      |  |   | 1,077,475 | 
|                |  |      |           |      |  |   |           | 
|                |  | $    | 1,200,146 |      |  | $ | 2,596,218 | 
|                |  |      |           |      |  |   |           | 

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##### Table of Contents



Electric City Corp.
Notes to Consolidated Financial Statements

Note 5  Property and Equipment

Property and equipment consist of the following:

|                              |  |      |           |      |  |   |           | 
|----------------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|December 31,                  |  | 2003 |           | 2002
|                              |  |      |           |     
|Land                          |  | $    | 205,000   |      |  | $ | 205,000   | 
|Building                      |  |      | 984,396   |      |  |   | 1,048,381 | 
|Furniture                     |  |      | 60,365    |      |  |   | 111,030   | 
|Manufacturing equipment       |  |      | 34,620    |      |  |   | 588,607   | 
|Office equipment              |  |      | 194,534   |      |  |   | 191,523   | 
|Transportation equipment      |  |      | 37,676    |      |  |   | 67,260    | 
|                              |  |      |           |      |  |   |           | 
|                              |  |      | 1,516,591 |      |  |   | 2,211,801 | 
|Less accumulated depreciation |  |      | 383,999   |      |  |   | 671,882   | 
|                              |  |      |           |      |  |   |           | 
|                              |  | $    | 1,132,592 |      |  | $ | 1,539,919 | 
|                              |  |      |           |      |  |   |           | 

Note 6  Accrued Expenses

Accrued expenses are comprised of the following:

|                  |  |      |         |      |  |   |         | 
|----------------- |  | ---- | ------- | ---- |  | - | ------- | 
|December 31,      |  | 2003 |         | 2002
|                  |  |      |         |     
|Compensation      |  | $    | 60,706  |      |  | $ | 108,342 | 
|Contract Labor    |  |      | 108,723 |      |  |   | 438,698 | 
|Interest          |  |      | 19,937  |      |  |   | 6,252   | 
|Insurance         |  |      |        |      |  |   | 11,070  | 
|Professional fees |  |      | 44,963  |      |  |   |        | 
|Real estate taxes |  |      | 74,506  |      |  |   | 73,726  | 
|Commissions       |  |      | 45,743  |      |  |   | 98,890  | 
|Sales tax payable |  |      | 41,562  |      |  |   | 59,635  | 
|Accrued royalties |  |      | 6,300   |      |  |   | 5,400   | 
|Warranty reserve  |  |      | 121,702 |      |  |   | 107,127 | 
|Other             |  |      | 17,446  |      |  |   | 63,444  | 
|                  |  |      |         |      |  |   |         | 
|                  |  | $    | 541,588 |      |  | $ | 972,584 | 
|                  |  |      |         |      |  |   |         | 

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##### Table of Contents



Electric City Corp.
Notes to Consolidated Financial Statements

Note 7  Warranty Liability

Changes in the Companys warranty liability are as follows:

|                           |  |      |         |      |  |   |         |  
|-------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|December 31,               |  | 2003 |         | 2002
|                           |  |      |         |     
|Balance, beginning of year |  | $    | 107,127 |      |  | $ | 60,394  |  
|Warranties issued          |  |      | 55,500  |      |  |   | 82,000  |  
|Settlements                |  |      | (40,925 | )    |  |   | (35,267 | )
|                           |  |      |         |      |  |   |         |  
|Balance, end of year       |  | $    | 121,702 |      |  | $ | 107,127 |  
|                           |  |      |         |      |  |   |         |  

Note 8  Line of Credit

On September 11, 2003 the Company closed on a new credit facility with
Laurus Master Fund. The new facility included a $1,000,000 convertible term
loan and a $2,000,000 convertible revolving line of credit. The credit line
replaced an expiring credit line the Company had with American Chartered Bank.
The Laurus revolving credit facility provides for borrowings of up to the
lesser of (i) $2 million or (ii) 90% of the Companys eligible accounts
receivable. As of December 31, 2003 eligible receivables would support
borrowings of approximately $985,000 under the facility. The Company has not
borrowed under the revolving facility. The revolving credit facility has a
term of two years and accrues interest on outstanding balances at the rate of
prime (4.00% as of December 31, 2003) plus 1.75%. The Company has the option
of paying interest and principal, or prepaying all or a portion of the advances
under each secured convertible revolving note with shares of its common stock
at the fixed conversion price of $2.12 per share, provided that the closing
price of its common stock is greater than $2.43 per share for the 11 trading
days immediately preceding the payment date and that the shares are registered
with the Securities and Exchange Commission. As amounts are drawn on this
line-of-credit, to the extent the current market price exceeds the fixed
conversion price, additional interest expense will be recognized for this
beneficial conversion feature. In addition, Laurus has the option to convert
all or a portion of the advances under any secured convertible revolving note
into shares of the Companys common stock at any time, subject to certain
limitations, at a fixed conversion price of $2.12 per share. The revolving
credit facility is secured by a blanket lien on all of the Companys assets,
except for its real estate. In conjunction with the revolving credit facility,
Laurus was paid a fee of $100,000 and received a five year warrant to purchase
up to 280,000 shares of the Companys common stock at prices ranging from $2.54
per share to $3.18 per share. These warrants were valued at $320,000 using a
modified Black-Scholes option pricing model. In addition, the Company issued a
one-year warrant to purchase 50,000 shares of common stock to Wall & Broad
Equities as part of its commission for this transaction. These warrants were
valued at $58,000 using a modified Black-Scholes option pricing model. The
value of the warrants have been recorded as capitalized costs of financing and
are being amortized using the effective interest method. All stock
conversion prices and exercise prices are subject to adjustment for stock
splits, stock dividends or similar events.

As of December 31, 2002, the Company had outstanding borrowings of
$500,000 on a revolving line of credit from American Chartered Bank. This line
of credit provided for borrowings of up to $2,000,000 based on eligible
accounts receivable, carried an interest rate of prime plus 1/4% (4.25% as of
December 31, 2002) and was secured by our accounts receivable.

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##### Table of Contents



Electric City Corp.
Notes to Consolidated Financial Statements

Note 9  Convertible Term Loan

On September 11, 2003, the Company entered into a convertible Term Loan
with Laurus Master Fund. The Term Loan has a term of two years and accrues
interest at the greater of prime (4.00% as of December 31, 2003) plus 1.75%, or
6%. Interest on the Term Loan will be due monthly in arrears and the loan will
amortize at the rate of $50,000 per month beginning February 1, 2004, if not
offset by the conversion of all or a portion of the loan prior to the due date
of the amortization payment. The Company has the option of paying scheduled
interest and principal, or prepaying all or a portion of the Term Loan with
shares of its common stock at the fixed conversion price of $2.12 per share
(which was equal to 103% of the recent market price of our common stock at the
time when the Loan was funded), provided that the closing price of the common
stock is greater than $2.43 per share for the 11 trading days immediately
preceding the payment date and that the shares are registered with the
Securities and Exchange Commission. Laurus also has the option to convert all
or a portion of the Term Loan into shares of the Companys common stock at any
time, subject to certain limitations, at a fixed conversion price of $2.12 per
share. The Term Loan is secured by a blanket lien on all of the Companys
assets, except for its real estate. In conjunction with the Term Loan, Laurus
was paid a fee of $50,000 and received a five year warrant to purchase up to
140,000 shares of the Companys common stock at prices ranging from $2.44 per
share to $3.07 per share. The warrants were valued at $163,400 using a
modified Black-Scholes option pricing model. The value of these warrants was
recorded as a discount to the term note and will be amortized over the term of
the loan using the effective interest method.

The Term Loan is considered to have a beneficial conversion feature since
the fair market value of the common stock issuable upon conversion of the Term
Loan exceeded the value allocated to the Term Loan on the date of issuance. On
the date of issuance, the Term Loan was convertible into 471,698 shares of
common stock, which at the then current market price of $2.05 per share was
worth $966,981. The difference between the market value of the shares issuable
upon conversion and the value allocated to the Term Loan of $180,381 is
considered to be the value of the beneficial conversion feature. The value of
the beneficial conversion feature has also been recorded as a discount to the
term note and will be amortized over the term of the loan using the effective
interest method.

On November 26, 2003, Laurus converted $52,346 of principal and $654 of
accrued interest into 25,000 shares of the Companys common stock. The
conversion was offset against the scheduled principal payments for February and
March of 2004. During January 2004, Laurus converted $270,864 of principal and
$4,736 of accrued interest into 130,000 of the Companys common stock. The
January conversions were offset against principal payments scheduled for March
through August 2004.

Note 10  Long Term Debt

The Companys long term debt consists of the following:

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Electric City Corp.
Notes to Consolidated Financial Statements

|                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                  |      |           |      |  |   |           |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ---- | --------- | ---- |  | - | --------- | ------- | 
|December 31,                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                  | 2003 |           | 2002
|                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                  |      |           |     
|Mortgage note to American Chartered Bank, prime (4.00%)
plus 1⁄2%, payable in monthly installments of $3,000,
plus interest until January 2005. A final payment of
$595,000 is due in February 2005. This note is
collateralized by the building and land                                                                                                                                                                                     |                                                                  | $    | 634,000   |      |  | $ | 714,000   |        
|Convertible term note to Laurus Master Fund (less debt discount
of $241,775), interest rate equal to the greater of the
prime rate (4.00%) plus 1.75%, or 6.00%, payable in
monthly installments of $50,000 plus interest beginning
in February 2004, if not converted to common stock prior
to the payment due date. The note is collateralized by a
general lien on all of the Companys assets, other than
its real estate. (see Note 9) |                                                                  |      | 705,879   |      |  |   |          |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                            | Term note to American Chartered Bank, repaid in full
during 2003 |      |           |     |  |   |           | 340,500 | 
|Various other notes                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                  |      | 8,766     |      |  |   | 35,291    |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                  |      |           |      |  |   |           |        
|Total long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                  |      | 1,348,645 |      |  |   | 1,089,791 |        
|Less current portion                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                  |      | 536,809   |      |  |   | 148,531   |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                  |      |           |      |  |   |           |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                  | $    | 811,836   |      |  | $ | 941,260   |        
|                                                                                                                                                                                                                                                                                                                                                                                                                                            |                                                                  |      |           |      |  |   |           |        

The aggregate amounts of long-term debt maturing in each of the next five years
as of December 31, 2003, are as follows:

|     |  |   |          
|---- |  | - | ---------
|2004 |  | $ | 536,809  
|2005 |  |   | 1,051,451
|2006 |  |   | 2,160    
|2007 |  |   |         
|2008 |  |   |         
|     |  |   |          
|     |  | $ | 1,590,420
|     |  |   |          

Note 11  Lease Commitments

The Company leases a facility in Elk Grove Village, Illinois from the two
former owners of Great Lakes Controlled Energy Corporation, both of whom are
currently employees of the Company. Total rent expense for this facility
amounted to $120,000 for each of the years ended December 31, 2003 and December
31, 2002.

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##### Table of Contents



Electric City Corp.
Notes to Consolidated Financial Statements

Future minimum rentals to be paid by the Company as of December 31, 2003
are as follows:

|                         |  |         |        |           |  |       |   |  |  |   |        | 
|------------------------ |  | ------- | ------ | --------- |  | ----- | - |  |  | - | ------ | 
|                         |  | Related |        | Unrelated |  |       |   | 
|Year ending December 31, |  | Party   |        | Party     |  | Total
|                         |  |         |        |           |  |      
|2004                     |  | $       | 50,000 |           |  | $     |  |  |  | $ | 50,000 | 
|2005                     |  |         |       |           |  |       |  |  |  |   |       | 
|2006                     |  |         |       |           |  |       |  |  |  |   |       | 
|2007                     |  |         |       |           |  |       |  |  |  |   |       | 
|                         |  |         |        |           |  |       |   |  |  |   |        | 
|Total                    |  | $       | 50,000 |           |  | $     |  |  |  | $ | 50,000 | 
|                         |  |         |        |           |  |       |   |  |  |   |        | 

Note 12 Income Taxes

The composition of income tax expense (benefit) is as follows:

|                         |                               |      |   |            |   |   |   |            |  
|------------------------ | ----------------------------- | ---- | - | ---------- | - | - | - | ---------- | -
|Year ended December 31   |                               | 2003 |   | 2002      
|                         |                               |      |   |           
|Deferred                 |                               |      |   |            |   |   |   |           
|                         | Federal                       |      | $ | (1,558,000 | ) |   | $ | (3,145,000 | )
|                         | State                         |      |   | (275,000   | ) |   |   | (555,000   | )
|                         | Change in valuation allowance |      |   | 1,833,000  |   |   |   | 3,700,000  |  
|                         |                               |      |   |            |   |   |   |           
|Benefit for income taxes |                               | $    |  |            |   | $ |  |           
|                         |                               |      |   |            |   |   |   |           

Significant components of the Companys deferred tax asset are as follows:

|                             |                          |      |   |             |   |   |   |             |  
|---------------------------- | ------------------------ | ---- | - | ----------- | - | - | - | ----------- | -
|December 31                  |                          | 2003 |   | 2002       
|                             |                          |      |   |            
|                             | Net operating loss       |      | $ | 16,486,000  |   |   | $ | 13,607,000  |  
|                             | Goodwill                 |      |   |            |   |   |   | 998,000     |  
|                             |                          |      |   |             |   |   |   |             |  
|                             | Other                    |      |   | 147,000     |   |   |   | 195,000     |  
|                             |                          |      |   |             |   |   |   |             |  
|                             | Less valuation allowance |      |   | (16,633,000 | ) |   |   | (14,800,000 | )
|                             |                          |      |   |             |   |   |   |             |  
|Total net deferred tax asset |                          | $    |  |             |   | $ |  |            
|                             |                          |      |   |             |   |   |   |             |  

The Company has recorded a valuation allowance equaling the deferred tax
asset due to the uncertainty of its realization in the future. At December 31,
2003, the Company has U.S. federal net operating loss carryforwards available
to offset future taxable income of approximately $42,271,000, which expire in
the years 2018 through 2023.

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##### Table of Contents



Electric City Corp.
Notes to Consolidated Financial Statements

The reconciliation of income tax expense (benefit) to the amount computed
by applying the federal statutory rate is as follows:

|                                                                                                                            |  |      |            |      |  |   |            |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|Year ended December 31,                                                                                                     |  | 2003 |            | 2002
|                                                                                                                            |  |      |            |     
|Income tax (benefit) at federal statutory rate                                                                              |  | $    | (1,864,000 | )    |  | $ | (3,778,000 | )
|State taxes (net of federal tax benefit)                                                                                    |  |      | (275,000   | )    |  |   | (561,000   | )
|Other nondeductible expenses (primarily
nondeductible goodwill impairment in
2002 and warrants issued for services in
2003) |  |      | 144,000    |      |  |   | 639,000    |  
|Other                                                                                                                       |  |      | 162,000    |      |  |   |           |  
|Increase in valuation allowance                                                                                             |  |      | 1,833,000  |      |  |   | 3,700,000  |  
|                                                                                                                            |  |      |            |      |  |   |            |  
|Income tax expense (benefit)                                                                                                |  | $    |           |      |  | $ |           |  
|                                                                                                                            |  |      |            |      |  |   |            |  

Note 13 - Commitments



|a) |  | Pursuant to the Consolidated Agreement dated January 8, 2001, among the
Company Giorgio Reverberi (Reverberi), the owner of the patent relating
to the EnergySaver, and Joseph Marino, former Chairman and CEO of Electric
City (who assigned the rights to the Company), the Company agreed to pay
Reverberi a royalty of $200 for each EnergySaver unit made by or for the
Company and sold by the Company. Mr. Marino is also paid a royalty of
$100 for each unit sold by the Company. The term of the license granted
to the Company expires when the last of Reverberis patents expires, which
the Company expect to be in November, 2017. The license may be terminated
by Reverberi if the Company materially breaches its terms and fails to
cure the breach within 180 days after Reverberi gives the Company written
notice of the breach. Approximately $65,000 and $99,000 of expense was
incurred under the agreement for the years ended December 31, 2003 and
2002, respectively. The Company has accrued $6,300 and $5,400 in
royalties payable at December 31, 2003 and 2002, respectively.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|b) |  | The Company entered into employment agreements with certain officers and
employees expiring in 2003 through 2005. Total future commitments under
these agreements are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|                         |  |   |          
|------------------------ |  | - | ---------
|Year ending December 31, |  |   |          
|                         |  |   |          
|2004                     |  | $ | 576,667  
|2005                     |  |   | 460,000  
|                         |  |   |          
|Total                    |  | $ | 1,036,667
|                         |  |   |          

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Electric City Corp.
Notes to Consolidated Financial Statements

Note 14  Equity Transactions



|a) |  | During 2002 the Company extended the life of warrants to purchase 200,000
shares of the Companys common stock at an exercise price of $2.00 per
share in exchange for consulting services provided to the Company. As a
result, these warrants were revalued, resulting in an additional expense
of $80,000 during the year ended December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|b) |  | On May 7, 2002, the Company issued 52,454 shares of its common stock
pursuant to the exercise of stock options with an exercise price of $1.10.
The Company received consulting services as consideration for this
exercise.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|c) |  | On June 4, 2002, the Company entered into a securities purchase agreement
with Richard Kiphart under which the Company received $2,000,000 in gross
proceeds for the issuance of a package of securities that included 200,000
shares of Series C Convertible Preferred Stock, 30,082 shares of common
stock, warrants to purchase 50,000 shares of the Series C Convertible
Preferred Stock initially exercisable at a price of $10.00 per share and
warrants to purchase 281,250 shares of the Companys common stock
initially exercisable at a price of $1.00 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | The Series C Convertible Preferred Stock carries a dividend rate of 10% per
year, which is payable during the first three years following issuance at
the Companys option, in cash or additional shares of Series C Convertible
Preferred Stock. After three years all dividends must be paid in cash and
the dividend rate will increase 1⁄2% every six months until it reaches 15%
per year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | The Series C Convertible Preferred Stock is convertible at any time into
shares of the Companys common stock at the conversion rate of ten shares of
common stock for each share of Series C Convertible Preferred Stock. Shares
of Series C Convertible Preferred Stock have, subject to certain exceptions,
anti-dilution protection that will automatically adjust the conversion price
of the Series C Convertible Preferred Stock to the price per share of any
common stock the Company issues, or is deemed to have issued, if that price
per share is less than the then existing conversion price for the Series C
Convertible Preferred Stock. (Such conversion price is currently $1.00 per
share of common stock.) The Series C Convertible Preferred Stock is also
subject to other customary anti-dilution provisions with respect to stock
splits, stock dividends, stock combinations, reorganizations, mergers,
consolidations, special distributions, sales of all or substantially all of
the Companys assets and similar events.
|  
|   |  | The Series C Convertible Preferred Stock shares with the Series A
Convertible Preferred Stock have a liquidation preference over all other
classes of the Companys equity. The holders of the Series C Convertible
Preferred Stock also share with the holders of the Series A Convertible
Preferred Stock special approval rights over certain matters, including but
not limited to, mergers and acquisitions, the issuance of additional debt or
equity securities, the sale of assets outside the normal course of business,
the payment of dividends, the hiring or firing of our Chief Executive
Officer or President, significant capital expenditures, and amendments to
the Companys Certificate of Incorporation and/or by-laws that in any way
that could adversely affect the rights of the holders of the Series A and/or
Series C Convertible Preferred Stock. The Series C Preferred does not have
the right to vote for directors.                                                                                                  

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Electric City Corp.
Notes to Consolidated Financial Statements



|   |  | Proceeds from the transaction were allocated to the Series C Convertible
Preferred Stock, the common stock and warrants issued as part of the
transaction based on their relative fair values. The Series C Convertible
Preferred Stock contained a beneficial conversion feature as a result of its
initial conversion price, which was lower than the market value of the
Companys common stock on the date of issue. The value of this beneficial
conversion feature was determined based on the value allocated to the Series
C Convertible Preferred Stock, along with the discount to the market value
of the common stock on the date of issuance. The value of the beneficial
conversion feature is deemed to be equivalent to a non-cash preferred stock
dividend. The Company recorded the deemed dividend on the date of issuance
by offsetting charges and credits to additional paid-in capital in the
amount of $1,444,697, without any effect on total stockholders equity. The
deemed dividend increases the loss applicable to common shareholders in the
calculation of the basic and diluted net loss per common share for the year
ended December 31, 2002.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|d) |  | On December 16, 2002, the Company entered into a securities purchase
agreement with the Munder Power Plus Fund (Munder), whereby the Company
issued, in exchange for $1,000,000 in gross proceeds, a package of
securities that included 1,086,957 shares of its common stock and a five
year warrant to purchase 300,000 additional shares of its common stock at
an initial exercise price of $0.92 per share. The Company is required to
reduce the exercise price on the warrant to $0.75 per share if on the date
that the Company files its Report 10-KSB for fiscal year 2003 with the
Securities and Exchange Commission (i) the Companys consolidated revenue
reported in such 10-KSB is less than $25 million and (ii) the closing
price of the Companys Common Stock on such date of filing is less than
$2.00 per share.                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | The holders of the Series A Convertible Preferred stock and the Series C
Convertible Preferred stock waived their rights to adjust the conversion
price of their preferred shares and the exercise price on their warrants as
a result of the issuance price of the common stock and the exercise price of
the warrant issued in this transaction. Also, as a condition to the sale the
Company agreed to file a registration statement with the Securities and
Exchange Commission for the resale of Munders shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | The Company issued a three-year warrant to purchase 50,000 shares of its
common stock at $1.00 per share to Capstone Investments as part of the
commission on this transaction.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|e) |  | During the year ended December 31, 2002, the Company satisfied the
accrued dividend on its preferred stock of $2,158,418 though the issuance
of 204,199 shares of its Series A Preferred stock and 11,643 shares of its
Series C Preferred stock. Since these shares of preferred stock were
convertible into common stock at a price below the market price on the
dates of issuance, the Company was required to recognize deemed dividends
of $495,589 on the shares issued in satisfaction of the Series A Preferred
dividend and $12,403 on the shares issued in satisfaction of the Series C
Preferred dividend. These deemed dividends were calculated as the
difference between (1) the market value of the common shares into which
the Series A shares were convertible on the dates of issuance and (2) the
accrued dividend obligation on the outstanding preferred stock.                                                                                                                                                                                                                                                                                          
|  
|f) |  | During the year ended December 31, 2002, two of our stockholders who are
subject to Section 16 of the Securities Exchange Act of 1934
unintentionally violated Section 16(b) of the Act by selling and then
repurchasing shares of the Companys common stock during a six-month
period (a short-swing profit). Pursuant to the Act, the shareholders are
required to turn over the short-swing profits,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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##### Table of Contents



Electric City Corp.
Notes to Consolidated Financial Statements



|   |  | which totaled $2,098 to the Company. The Company received $1,300 from one
of the shareholders during 2002, and $798 was received from the other
shareholder during 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|g) |  | On February 27, 2003, the Company entered into a securities purchase
agreement with the SF Capital Partners, Ltd. (SF), whereby the Company
issued, in exchange for $1,000,000 in gross proceeds, a package of
securities that included 1,086,957 shares of its common stock and a five
year warrant to purchase 300,000 additional shares of its common stock at
an initial exercise price of $0.92 per share. The Company is required to
reduce the exercise price on the warrant to $0.75 per share if on the date
that the Company files its Report 10-KSB for fiscal year 2003 with the
Securities and Exchange Commission (i) its consolidated revenue reported
in such 10-KSB is less than $25 million and (ii) the closing price of its
Common Stock on such date of filing is less than $2.00 per share.                                                                                                                              
|  
|   |  | The holders of the Series A and the Series C Convertible Preferred Stock
waived their rights of first offer on the transaction and their right to
adjust the conversion price of their preferred shares and the exercise price
on their warrants as a result of the issuance price of the common stock and
the exercise price of the warrant issued in this transaction. The Munder
Power Plus Fund also had a right of first offer with respect to this
transaction. In exchange for its agreement to waive this right, the Company
gave Munder a 30 day option to purchase securities under the same terms as
those offered to SF (see note (h) below). Munder elected to exercise this
option during the option period with respect to an investment of $250,000.
Also, as a condition to the sale to SF the Company agreed to file a
registration statement with the Securities and Exchange Commission for the
registration of these shares.
|  
|h) |  | On April 17, 2003, the Company entered into a securities purchase
agreement with the Munder Power Plus Fund (Munder), whereby the Company
issued in exchange for $250,000 in gross proceeds, a package of securities
that included 271,739 shares of its common stock and a five year warrant
to purchase 75,000 additional shares of its common stock at an initial
exercise price of $0.92 per share. The Company is required to reduce the
exercise price on the warrant to $0.75 per share if on the date that the
Company files its Report 10-KSB for fiscal year 2003 with the Securities
and Exchange Commission (i) its consolidated revenue reported in such
10-KSB is less than $25 million and (ii) the closing price of its Common
Stock on such date of filing is less than $2.00 per share.                                                                                                                                      
|  
|   |  | On April 23, 2003, the Company entered into a securities purchase agreement
with Mr. Richard Kiphart, whereby the Company issued, in exchange for
$419,914 in gross proceeds, a package of securities that included 456,429
shares of its common stock and a five year warrant to purchase 125,974
additional shares of its common stock at an initial exercise price of $0.92
per share. The Company is required to reduce the exercise price on the
warrant to $0.75 per share if on the date that the Company files its Report
10-KSB for fiscal year 2003 with the Securities and Exchange Commission (i)
its consolidated revenue reported in such 10-KSB is less than $25 million
and (ii) the closing price of its Common Stock on such date of filing is
less than $2.00 per share.                                                                                                                                                      
|  
|   |  | The holders of the Series A and the Series C Convertible Preferred Stock
waived their rights of first offer on the transaction and their right to
adjust the conversion price of their preferred shares and the exercise price
on their warrants as a result of the issuance price of the common stock and
the exercise price of the warrant issued in this transaction. Also, as a
condition to the sale to Mr. Kiphart                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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##### Table of Contents



Electric City Corp.
Notes to Consolidated Financial Statements



|   |  | the Company agreed to file a registration statement with the Securities and
Exchange Commission for the registration of these shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|i) |  | On June 27, 2003, the Company entered into a securities purchase
agreement with a group of investors that included Cinergy Ventures II,
LLC, Mr. Richard Kiphart, SF Capital Partners, Ltd., John Thomas Hurvis
Revocable Trust and Mr. David Asplund, whereby the Company issued, in
exchange for $1,500,000 in gross proceeds, a package of securities that
included 150,000 shares of its Series D Convertible Preferred Stock (the
Series D Preferred), 22,562 shares of its Common Stock, one year
warrants to purchase 37,500 additional shares of its Series D Preferred
(the Series D Warrants) and four year warrants to purchase 210,938
additional shares of its Common Stock (the Common Stock Warrants).                                                                                                                                                                                                                                                
|  
|   |  | The Series D Preferred carries a dividend rate of 10% per year, which is
payable during the first three years following issuance, at the Companys
option, in cash or additional shares of Series D Preferred. After three
years all dividends must be paid in cash and the dividend rate will increase
1⁄2% every six months until it reaches 15% per year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | The Series D Preferred is convertible at any time into shares of its common
stock at the conversion rate of ten shares of common stock for each share of
Series D Preferred. Shares of Series D Preferred have, subject to certain
exceptions, anti-dilution protection that will automatically adjust the
conversion price of the Series D Preferred to the price per share of any
common stock the Company issues, or is deemed to have issued, if that price
per share is less than the then existing conversion price for the Series D
Preferred (which is currently $1.00 per share). The Series D Preferred is
also subject to other customary anti-dilution provisions with respect to
stock splits, stock dividends, stock combinations, reorganizations, mergers,
consolidations, special distributions, sales of all or substantially all of
its assets and similar events.                                                                                      
|  
|   |  | The Series D Preferred shares with the Series A Convertible Preferred Stock
and the Series C Convertible Preferred Stock have a liquidation preference
over all other classes of equity. The holders of the Series D Preferred
also share with the holders of the Series A Convertible Preferred Stock and
the Series C Convertible Preferred Stock special approval rights over
certain matters, including but not limited to, the issuance of equity
securities which would be senior to or on a parity with the Series D
Preferred Stock, purchases and redemptions of equity securities (except as
otherwise required by the terms of the Series A Preferred, Series C
Preferred and Series D Preferred), payment of dividends and amendment of its
Certificate of Incorporation and/or by-laws that in any way could adversely
affect the rights of the holders of the Series D Preferred Stock. The
Series D Preferred does not have the right to vote for directors.
|  
|   |  | The Series D Warrants are initially exercisable at $10.00 per share and have
a term of one year from the date of issuance. The Common Stock Warrants are
initially exercisable at $1.00 per share and have a term of four years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | In addition, the parties executed a stock trading agreement that imposes
certain trading restrictions from time to time on the investors with respect
to the Common Stock issued or issuable as part of the transaction. Also,
the investors executed a joinder and second amendment to the Investor Rights
Agreement among the Company and the holders of the outstanding Series A
Preferred and Series C Preferred pursuant to which the investors became
parties to such Investor Rights Agreement. Under                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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##### Table of Contents



Electric City Corp.
Notes to Consolidated Financial Statements



|   |  | the Investor Rights Agreement, the parties thereto (other than the Company)
have certain rights to demand that the Company file a registration statement
with the Securities and Exchange Commission for the resale of their shares
of Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Delano Group Securities, LLC acted as placement agent for the Company with
respect to the transaction and was paid a placement agent fee of $120,000.
Delano Group Securities, LLC is controlled by Mr. David Asplund, one of the
investors in the transaction and one of the Companys directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | Proceeds from the transaction were allocated to the Series D Convertible
Preferred Stock, the common stock and warrants issued as part of the
Transaction based on their relative fair values. The Series D Convertible
Preferred Stock contained a beneficial conversion feature as a result of its
initial conversion price, which was lower than the market value of the
Companys common stock on the date of issue. The value of this beneficial
conversion feature was determined based on the value allocated to the Series
D Convertible Preferred Stock, along with the discount to the market value
of the common stock on the date of issuance. The value of the beneficial
conversion feature is deemed to be equivalent to a non-cash preferred stock
dividend. The Company recorded the deemed dividend on the date of issuance
by offsetting charges and credits to additional paid-in capital in the
amount of $386,984, without any effect on total stockholders equity. The
deemed dividend increases the loss applicable to common shareholders in the
calculation of the basic and diluted net loss per common share for the year
ended December 31, 2003.
|  
|j) |  | On July 23, 2003, the Board of Directors approved the retirement of 1,000
shares of common stock held in its treasury, which are now deemed
authorized but unissued shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|k) |  | During the year ended December 31, 2002, the Company satisfied the
accrued dividend on its preferred stock of $2,551,379 though the issuance
of 225,398 shares of its Series A Preferred stock, 21,971 shares of its
Series C Preferred stock and 7,769 shares of its Series D Preferred stock.
Since these shares of preferred stock were convertible into common stock
at a price below the market price on the dates of issuance, the Company
was required to recognize deemed dividends of $1,627,985 on the shares
issued in satisfaction of the Series A Preferred dividend, $158,691 on the
shares issued in satisfaction of the Series C Preferred dividend and
$92,878 on the shares issued in satisfaction of the Series D Preferred
dividend. These deemed dividends were calculated as the difference
between (1) the market value of the common shares into which the preferred
shares were convertible on the dates of issuance and (2) the accrued
dividend obligation on the outstanding preferred stock.                                                                                                                                                     
|  
|l) |  | The Company had outstanding warrants to purchase 9,369,867 and 8,012,955
shares of its common stock as of December 31, 2003 and 2002, respectively,
at an exercise price of between $0.92 per share and $6.56 per share.
These warrants expire between April 2004 and September 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|m) |  | As of December 31, 2002 the Company had an outstanding warrant to
purchase 50,000 shares of its Series C Convertible Preferred stock at an
exercise price of $10.00 per share. This warrant expired unexercised on
June 4, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|n) |  | As of December 31, 2003 the Company had outstanding warrants to purchase
37,500 shares of its Series D Convertible Preferred stock at an exercise
price of $10.00 per share. These warrants will expire on June 27, 2004,
if not exercised prior to that date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F-29



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##### Table of Contents



Electric City Corp.
Notes to Consolidated Financial Statements



|o) |  | During fiscal 2003, the Company issued warrants to purchase 647,000
shares of its Common Stock to consultants as compensation for services
received. As the fair market value of these services was not readily
determinable, these services were valued based on the fair market value of
the warrants at the time of issuance, which ranged from $0.29 to $1.42 per
warrant. These warrants had terms ranging from one to three years and
exercise prices ranging from $1.00 to $2.10. The Company recognized total
expense of $393,550 relating to the issuance of these warrants.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|p) |  | During fiscal 2003, the Company received proceeds of $197,000 in
connection with the exercise of 197,000 warrants, resulting in the
issuance of 197,000 shares of the Companys Common Stock.                                                                                                                                                                                                                                                                                                                                                                                        

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##### Table of Contents



Electric City Corp.
Notes to Consolidated Financial Statements

Note 15  Dividends

Dividends are comprised of the following:

|                                                                                                                                                                  |  |      |           |      |  |   |           | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|Year ended December 31,                                                                                                                                           |  | 2003 |           | 2002
|                                                                                                                                                                  |  |      |           |     
|Accrual of Dividend on Series A Convertible
Preferred (see note 14e and 14k)                                                                                      |  | $    | 2,253,978 |      |  | $ | 2,041,992 | 
|Deemed dividend associated with beneficial
conversion price on shares issuable in
satisfaction of Series A Convertible Preferred
dividend (see notes 14e and 14k) |  |      | 1,627,985 |      |  |   | 495,589   | 
|Deemed dividend associated
with beneficial conversion feature of Series C
Convertible Preferred Stock dividend (see note
14c)                                     |  |      |          |      |  |   | 1,444,697 | 
|Accrual of Series C Preferred dividend (see
note 14e and 14k)                                                                                                     |  |      | 219,712   |      |  |   | 116,426   | 
|Deemed dividend associated with beneficial
conversion price on shares issued in
satisfaction of Series C Preferred dividend
(see note 14e and 14k)                |  |      | 158,691   |      |  |   | 12,403    | 
|Deemed dividend associated
with beneficial conversion feature of Series D
Convertible Preferred Stock dividend (see note
14i)                                     |  |      | 386,984   |      |  |   |          | 
|Accrual of Series D Preferred dividend (see
note 14k)                                                                                                             |  |      | 77,689    |      |  |   |          | 
|Deemed dividend associated with beneficial
conversion price on shares issued in
satisfaction of Series D Preferred dividend
(see note 14k)                        |  |      | 92,878    |      |  |   |          | 
|                                                                                                                                                                  |  |      |           |      |  |   |           | 
|Total                                                                                                                                                             |  | $    | 4,817,917 |      |  | $ | 4,111,107 | 
|                                                                                                                                                                  |  |      |           |      |  |   |           | 

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##### Table of Contents



Electric City Corp.
Notes to Consolidated Financial Statements Note 16  Stock Options On August 30, 2001, the Companys shareholders approved the adoption of
the 2001 Stock Incentive Plan (the Plan), which provides that up to 800,000
shares of the Companys common stock may be delivered under the Plan to certain
employees of the Company or any of its subsidiaries and to consultants and
directors who are not employees. In addition, the Plan provides for an
additional number of shares of the Companys common stock to be reserved for
issuance under the plan on January 1st of each succeeding year, beginning
January 1, 2002, in an amount equal to the lesser of (i) 5% of the number of
outstanding shares of Common Stock, or (ii) 500,000 shares. The awards to be
granted under the Plan may be incentive stock options or non-qualified stock
options. The exercise price for any incentive stock option (ISO) may not be
less than 100% of the fair market value of the stock on the date the option is
granted, except that with respect to a participant who owns more than 10% of
the common stock the exercise price must be not less than 110% of fair market
value. The exercise price of any non-qualified option shall be in the sole
discretion of the Compensation Committee or the Board. The aggregate fair
market value of the shares that may be subject to any ISO granted to any
participant may not exceed $100,000 on the date of grant. There is no
comparable limitation with respect to non-qualified stock options. The term of
all options granted under the Plan will be determined by the Compensation
Committee or the Board in their sole discretion, provided, however, that the
term of each ISO shall not exceed 10 years from the date of grant thereof. In addition to the ISOs and non-qualified options, the Plan permits the
Compensation Committee, consistent with the purposes of the Plan, to grant
stock appreciation rights and/or shares of Common Stock to non-employee
directors and such employees (including officers and directors who are
employees) of, or consultants to, the Company or any of its Subsidiaries, as
the Committee may determine, in its sole discretion. The Plan is administered by the Board, which is authorized to interpret
the Plan, to prescribe, amend and rescind rules and regulations relating to the
Plan and to determine the employees to whom, and the time, terms and conditions
under which, options are to be granted. The Board may also amend, suspend or
terminate the Plan in any respect at any time. However, no amendment may (i)
adversely affect the rights of a participant under an award theretofore granted
without the consent of such participant, (ii) increase the number of shares
reserved for option under the Plan, (iii) modify the requirements for
participation in the Plan, or (iv) modify the Plan, in any way that would
require stockholder approval under the rules and regulations under the Exchange
Act or the rules of any stock exchange or market on which the Common Stock is
listed. As of December 31, 2003, there were approximately 26 employees of the
Company eligible to participate in the Plan, and 1,800,000 shares of Common
Stock reserved under the Plan. Effective April 1, 2000, the Company adopted a stock option plan for all
independent directors, which is separate and distinct from the 2001 Stock
Incentive Plan described above. The directors stock option plan provides that
eligible directors receive an initial option grant to purchase 75,000 shares
upon being appointed to our Board of Directors and additional grants to
purchase 25,000 shares on each anniversary of their appointment to the board.
These options have exercise prices equal to the greater of the closing
price of our common stock on the grant date, or $1.00, terms of ten years
and vest in three equal amounts, beginning on the grant date and at the
beginning of each of the next two calendar years following the grant F-32




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##### Table of Contents



Electric City Corp.
Notes to Consolidated Financial Statements During 2002, certain directors, officers and key employees of the Company
were granted options to acquire 400,000 shares of common stock at exercise
prices ranging from $1.00 to $1.34 per share. These options vest over periods
through November 2005. Of the options granted in 2002, 208,333 were forfeited
during 2003. During 2003, certain directors, officers and key employees of the Company
were granted options to acquire 1,370,000 shares of common stock at exercise
prices ranging from $0.84 to $2.51 per share. These options vest over periods
through December 2005. The following table summarizes the options granted, exercised and
outstanding as of December 31, 2003: WeightedExercise
    
    AveragePrice Per
    
    ExerciseShares
    
    Share
    
    PriceOutstanding at December 31, 2001
    
    
    9,819,634
    
    
    $
    1.10-$12.99
    
    
    $
    4.12Granted
    
    
    400,000
    
    
    $
    1.00-$1.34
    
    
    $
    1.10Exercised
    
    
    (52,454
    )
    
    $
    1.10-$1.10
    
    
    $
    1.10Forfeited
    
    
    (973,332
    )
    
    $
    1.75-$7.75
    
    
    $
    6.18Outstanding at December 31, 2002
    
    
    9,193,848
    
    
    $
    1.00-$12.99
    
    
    $
    3.78Granted
    
    
    1,370,000
    
    
    $
    0.84-$2.51
    
    
    $
    0.99Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (341,667
    )
    
    $
    1.00-$8.00
    
    
    $
    2.88Outstanding at December 31, 2003
    
    
    10,222,181
    
    
    $
    0.84-$12.99
    
    
    $
    3.45Options exercisable at
December 31, 2003
    
    
    8,850,189
    
    
    $
    0.84-$12.99
    
    
    $
    3.54Options exercisable at
December 31, 2002
    
    
    7,910,103
    
    
    $
    1.00-$12.99
    
    
    $
    3.63
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##### Table of Contents



Electric City Corp.
Notes to Consolidated Financial Statements The weighted-average, grant-date fair value of stock options granted to
employees during the year, and the weighted-average significant assumptions
used to determine those fair values, using a modified Black-Scholes option
pricing model for stock options under Statement of Financial Accounting
Standards No. 123, are as follows: Year ended December 31,
    
    2003
    
    2002Weighted average fair value per options granted
    
    $
    0.57
    
    
    $
    0.79Significant assumptions (weighted average):Risk-free interest rate at grant date
    
    
    1.13
    %
    
    
    1.71
    %Expected stock price volatility
    
    
    73
    %
    
    
    92
    %Expected dividend payout
    
    
    
    
    
    
    Expected option life (years)
    
    
    8.8
    
    
    
    9.4Expected option life (years)
 The following table summarizes information about stock options outstanding at
December 31, 2003: Options Outstanding
    
    Options ExercisableWeightedNumber
    
    Average
    
    Weighted
    
    Number
    
    WeightedOutstanding at
    
    Remaining
    
    Average
    
    Exercisable at
    
    AverageDecember 31,
    
    Contractual
    
    Exercise
    
    December 31,
    
    ExerciseExercise Price
    
    2003
    
    Life
    
    Price
    
    2003
    
    Price$0.84 - $2.00
    
    
    6,097,547
    
    
    5.8 years
    
    $
    1.16
    
    
    
    5,172,551
    
    
    $
    1.20$2.01 - $4.00
    
    
    183,334
    
    
    7.5 years
    
    
    3.30
    
    
    
    150,002
    
    
    
    3.48$4.01  $6.00
    
    
    175,000
    
    
    6.3 years
    
    
    4.53
    
    
    
    175,000
    
    
    
    4.53$6.01  $8.00
    
    
    3,714,000
    
    
    6.3 years
    
    
    7.09
    
    
    
    3,300,336
    
    
    
    7.08$8.01 - $10.00
    
    
    52,000
    
    
    6.1 years
    
    
    9.00
    
    
    
    52,000
    
    
    
    9.00$10.01 - $13.00
    
    
    300
    
    
    7.2 years
    
    
    12.99
    
    
    
    300
    
    
    
    12.9910,222,181
    
    
    6.0 years
    
    $
    3.45
    
    
    
    8,850,189
    
    
    $
    3.54
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##### Table of Contents



Electric City Corp.
Notes to Consolidated Financial Statements Note 17  Related Parties  Related party transactions, other than those disclosed in Notes 11 and 13
consist of the following:a)
    
    On January 5, 2000, the Company entered into a distributor agreement with
Electric City of Southern California L.L.C., of which Joseph Marino is a
member, which provides for an initial term of 10 years. Mr. Marino is one
of the Companys founders and its former Chairman and CEO. The agreement
grants to Electric City of Southern California a distribution territory
which extends from Monterey to Fresno to the northern edge of Death
Valley, south to the southern border of California. This agreement
provides for terms which members of the Companys board believe are
substantially similar to those of other distributor agreements and as
favorable to the Company as if negotiated with an unaffiliated third
party. Approximately $0 and $59,000 due from Electric City of Southern
California is included in accounts receivable at December 31, 2003, and
December 31, 2002, respectively. Note 18  Business Segment Information The Company organizes and manages its business in two distinct segments:
the Energy Technology segment, and the Building Control and Automation segment.
In classifying its operational entities into a particular segment, the Company
segregated its businesses with similar economic characteristics, products and
services, production processes, customers, and methods of distribution into
distinct operating groups. The Energy Technology segment designs, manufactures and markets energy
saving technologies, primarily to commercial and industrial customers. The
principal products produced and marketed by this segment are the EnergySaver,
the Global Commander and negative power systems under the trade name, Virtual
Negawatt Power Plan or VNPP. This segment is headquartered, and most of
its operations are located, in Elk Grove Village, Illinois. The Building Control and Automation segment, which is comprised of our
Great Lakes Controlled Energy subsidiary, provides integration of building and
environmental control systems for commercial and industrial customers. Great
Lakes Controlled Energy is headquartered in, and operates out of its own leased
facility, located in Elk Grove Village, Illinois. Prior to fiscal year 2003, the Companys reportable segments included the
Power Management segment, which designed, manufactured and marketed a wide
range of commercial and industrial switching gear and distribution panels.
Effective May 31, 2003, the Company divested this segment, accordingly, the net
assets and operating results have been separately reported as discontinued
operations. Prior year segment information has been restated to reflect
corporate costs previously allocated to the Power Management segment, which
will continue despite the divestiture of the segment. F-35




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Electric City Corp.
Notes to Consolidated Financial Statements An analysis and reconciliation of the Companys business segment
information to the respective information in the consolidated financial
statements is as follows: Year ended December 31,
    
    2003
    
    2002Revenues:Energy Technology
    
    $
    2,064,097
    
    
    $
    3,090,005Building Control and Automation
    
    
    2,618,486
    
    
    
    2,925,384Intercompany sales  Energy Technology
    
    
    (36,940
    )
    
    
    (37,343
    )Intercompany sales  Building Control
and Automation
    
    
    (13,810
    )
    
    
    (443,524
    )Total
    
    
    4,631,833
    
    
    
    5,534,522Operating Loss:Energy Technology
    
    
    (1,975,441
    )
    
    
    (3,222,689
    )Building Control and Automation(1)
    
    
    (550,595
    )
    
    
    (840,195
    )Corporate
    
    
    (1,573,896
    )
    
    
    (1,893,531
    )Total
    
    
    (4,099,932
    )
    
    
    (5,956,415
    )Interest Expense, net
    
    
    (355,359
    )
    
    
    (33,615
    )Loss from continuing operations
    
    
    (4,455,291
    )
    
    
    (5,990,030
    )Depreciation and Amortization:Energy Technology
    
    
    47,425
    
    
    
    76,367Building Control and Automation
    
    
    10,103
    
    
    
    7,284Power Management
    
    
    53,104
    
    
    
    148,400Total
    
    
    110,632
    
    
    
    232,051Capital Additions:Energy Technology
    
    
    19,474
    
    
    
    8,829Building Control and Automation
    
    
    12,830
    
    
    
    6,316Power Management
    
    
    
    
    
    
    2,342Total
    
    
    32,304
    
    
    
    17,487Total Assets:Energy Technology
    
    
    5,824,080
    
    
    
    4,999,300Building Control and Automation
    
    
    1,529,547
    
    
    
    1,028,839Power Management
    
    
    
    
    
    
    2,880,412Total
    
    $
    7,353,627
    
    
    $
    8,908,551
 (1) 2002 operating loss includes a $108,000 impairment loss F-36




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Electric City Corp.
Notes to Consolidated Financial Statements Note 19  Subsequent Event On March 19, 2004, the Company entered into a securities purchase agreement
with a group of four mutual funds managed by Security Benefit Group, Inc.
(Security Benefit), whereby the Company issued to such purchasers, in
exchange for $11,000,000 in gross proceeds, a package of securities that
included 5,000,000 shares of the Companys common stock and 5 year warrants to
purchase 1,750,000 additional shares of common stock at $2.42 per share (the
Common Stock Warrants). The exercise price under the Common Stock Warrants
is subject to adjustment if the Company issues shares of common stock at a
price below the lower of the exercise price or the market price at the time,
subject to certain exceptions. Also on March 19, 2004, the Company entered into a Redemption and Exchange
Agreement with the holders of its outstanding Series A Convertible Preferred
Stock, Series C Convertible Preferred Stock and Series D Convertible Preferred
Stock (collectively, the Existing Preferred Stock) under which the Company
agreed to redeem 538,462 shares of Existing Preferred Stock at a price of $13
per share (the Redemption) and to exchange shares of its newly authorized
Series E Convertible Preferred Stock (the Series E Preferred) for all
remaining outstanding shares of Existing Preferred Stock (the Exchange) on a
1 for 10 basis (one share of Series E Preferred exchanged for 10 shares of
Existing Preferred Stock). The Company used $7 million of the proceeds from
the issuance of securities to Security Benefit to accomplish the Redemption,
which closed on March 22, 2004. Under the Redemption and Exchange transaction, the Company redeemed 538,462
shares of its outstanding Existing Preferred Stock which were convertible into
5,384,620 shares of common stock, at a price equivalent to $1.30 per common
share, and exchanged 210,451 shares of the new Series E Preferred) for the
remaining 2,104,509 outstanding shares of the Existing Preferred Stock. All of
the Existing Preferred Stock has been cancelled. The Series E Preferred has
substantially the same rights as the shares of Existing Preferred Stock that it
replaced, including:  
    
    special approval rights in respect of certain actions by the
Company, including any issuance of shares of capital stock by the
Company that would have the right to receive dividends or the right to
participate in any distribution upon liquidation which was senior to or
equal to the rights of the Series E Preferred (other than issuances to
pay dividends on the preferred and under certain other limited
exceptions such as conversion of outstanding convertible securities)
and any acquisition, sale, merger, joint venture, consolidation or
reorganization involving the Company or any of its subsidiaries;
    
    a conversion price equivalent to $1.00 per common share;
    
    the right to elect up to four directors;
    
    the right to vote with the holders of common stock on an as
converted basis on all matters on which holders of our common stock
are entitled to vote, except with respect to the election of directors
or as otherwise provided by law;
    
    a right of first offer on the sale of equity by the Company in a
private transaction; and
    
    anti-dilution protection that would adjust the conversion price in
the event we issue equity at a price which is less than the conversion
price . F-37




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Electric City Corp.
Notes to Consolidated Financial Statements

The Exchange was effected on a 1 for 10 basis: whereas each share of the
Existing Preferred Stock was convertible into 10 shares of Common Stock and had
a liquidation preference of $20 per share, each share of the Series E Preferred
is convertible into 100 shares of Common Stock and has a liquidation preference
of $200 per share. As part of the Exchange, all outstanding warrants to
purchase shares of Series D Convertible Preferred Stock were exchanged for
similar warrants to purchase shares of Series E Preferred. Such Series E
warrants issued are exercisable for an aggregate of 3,750 shares of Series E
Preferred at a price of $100 per share. They replaced warrants exercisable for
37,500 shares of Series D Preferred at an exercise price of $10 per share.

In addition, the Existing Preferred Stock carried a dividend rate of 10%
payable at the Companys election in cash or in additional shares of preferred
stock during the first three years following issuance. After the third
anniversary of issuance we were required to pay all dividends in cash and the
dividend rate increased by 1/2% every six months until it reached 15%, where
it would remain until the shares were converted or redeemed. The Series E
Preferred carries a 6% dividend that is payable at the Companys election in
cash or additional shares of Series E Preferred for as long as the shares
remain outstanding.

The following table summarizes the change in outstanding shares that resulted
from this series of transactions:

Number of Shares (1)Change inCommonConversions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shareof Preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    EquivalentsStock and
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ResultingTerm Loan
    
    Outstanding
    
    Sale to
    
    
    
    
    
    
    
    
    
    from Sale andAs of
    
    Prior to
    
    Prior to
    
    Security
    
    Redemption &
    
    After
    
    Redemption &12/31/2003
    
    Transactions
    
    Transactions
    
    Benefit
    
    Exchange
    
    Transactions
    
    ExchangeSeries A Preferred
    
    
    23,965,900
    
    
    
    (1,450,000)
    (2)
    
    
    22,515,900
    
    
    
    
    
    
    
    (22,515,900
    )
    
    
    0
    
    
    
    (22,515,900
    )Series C Preferred
    
    
    2,336,140
    
    
    
    0
    
    
    
    2,336,140
    
    
    
    
    
    
    
    (2,336,140
    )
    
    
    0
    
    
    
    (2,336,140
    )Series D Preferred
    
    
    1,577,690
    
    
    
    0
    
    
    
    1,577,690
    
    
    
    
    
    
    
    (1,577,690
    )
    
    
    0
    
    
    
    (1,577,690
    )Series E Preferred
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    
    
    
    
    21,045,100
    
    
    
    21,045,100
    
    
    
    21,045,10027,879,730
    
    
    
    (1,450,000
    )
    
    
    26,429,730
    
    
    
    
    
    
    
    (5,384,630
    )
    
    
    21,045,100
    
    
    
    (5,384,630
    )Common stock
    
    
    34,342,022
    
    
    
    1,580,000
    (3)
    
    
    35,922,022
    
    
    
    5,000,000
    
    
    
    0
    
    
    
    40,922,022
    
    
    
    5,000,000Warrants topurchase commonstock
    
    
    9,744,867
    
    
    
    0
    
    
    
    9,744,867
    (4)
    
    
    1,750,000
    (5)
    
    
    0
    
    
    
    11,494,867
    (6)
    
    
    1,750,000
   (1)
    
    All shares presented on an as converted basis(2)
    
    145,000 shares of Series A Preferred Stock were converted into
Common Stock in February and March 2004 prior to the Transactions(3)
    
    Includes 130,000 shares issued in January 2004 upon conversion of
Convertible Term Debt(4)
    
    Includes warrants to purchase Series D Preferred, which are
convertible into 375,000 shares of common stock(5)
    
    Five year warrants to purchase common stock at $2.42 per share in
cash As part of the Redemption and Exchange, the preferred stockholders agreed to
amend and restate their existing stock trading agreements, effectively
replacing them with a new three year agreement containing volume and price
limitations which become effective on September 8, 2004 after the original
expiration date of September 7, 2004. The Investor Rights Agreement and the
Stockholders Agreement among the Company, the preferred stockholders and
certain other parties were also amended and restated as part of the Redemption
and Exchange, principally to reflect the changes in the outstanding preferred
stock resulting from the transactions. F-38




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##### Table of Contents



Electric City Corp.
Notes to Consolidated Financial Statements The Company has agreed to file a registration statement to register the shares
of common stock issued to the Security Benefit purchasers and the shares
issuable under their Common Stock Warrants within 45 days of the closing and to
use its best efforts to have the registration statement declared effective
within 120 days of the closing. Morgan Kegan & Company, Inc. acted as placement agent for the Company with
respect to the transaction and was paid a placement agent fee of $660,000. The Company expects to retain approximately $3.3 million of the proceeds from
the Common Stock sale after the Redemption and all offering costs. These funds
will be used for general corporate purposes. F-39