UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the quarterly period ended September 30,
2010





Commission
file number:  0-19771





ACORN
ENERGY, INC.


(Exact
name of registrant as specified in its charter)





Delaware
            
            22-2786081(State
      or other jurisdiction of
            
            (I.R.S.
      Employerincorporation
      or organization)
            
            Identification
      No.)4
      West Rockland Road
              Montchanin,
      Delaware
            
            19710(Address
      of principal executive offices)
            
            (Zip
      Code)





(302)
656-1708


(Registrant’s
telephone number, including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90
days.


Yes xNo  o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


Yes oNo  o




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




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





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes oNo  x





Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.





Class
            
            Outstanding
      at November 5, 2010Common
      Stock, $0.01 par value per share
            
            16,116,005
      shares









ACORN
ENERGY, INC.


Quarterly
Report on Form 10-Q


for
the Quarterly Period Ended September 30, 2010





TABLE
OF CONTENTS




PART
      I.  Financial InformationItem
      1.
                                                Financial
      StatementsUnaudited
      Condensed Consolidated Financial Statements:Condensed
      Consolidated Balance Sheetsas
      of December 31, 2009 and September 30, 2010
                                                1Condensed
      Consolidated Statements of Operationsfor
      the three and nine month periods ended September 30, 2009 and
      2010
                                                2Condensed
      Consolidated Statement of Changes in Equityfor
      the nine month period ended September 30, 2010
                                                3Condensed
      Consolidated Statements of Cash Flowsfor
      the nine month periods ended September 30, 2009 and 2010
                                                4Notes
      to Condensed Consolidated Financial Statements
                                                6Item
      2.
                                                Management’s
      Discussion and Analysis of Financial Conditionand
      Results of Operations
                                                23Item
      4.
                                                Controls
      and Procedures
                                                35PART
      II. Other InformationItem
      1.
                                                Legal
      Proceedings
                                                36Item
      6.
                                                Exhibits
                                                37Signatures
                                                
                                                38





Certain
statements contained in this report are forward-looking in nature. These
statements are generally identified by the inclusion of phrases such as “we
expect”, “we anticipate”, “we believe”, “we estimate” and other phrases of
similar meaning. Whether such statements ultimately prove to be accurate depends
upon a variety of factors that may affect our business and operations. Many of
these factors are described in our most recent Annual Report on Form 10-K as
filed with Securities and Exchange Commission.













ACORN
ENERGY, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


(unaudited)




ASSETS
                  
                  As
      of
                    December
      31,
                    2009
                  
                  
                  As
      of
                    September
      30,
                    2010Current
      assets:Cash
      and cash equivalents
                  
                  $
                  11,208
                  
                  
                  $
                  4,966Restricted
      deposits
                  
                  
                  1,627
                  
                  
                  
                  1,579Accounts
      receivable, net
                  
                  
                  3,541
                  
                  
                  
                  7,262Unbilled
      revenue and work-in-process
                  
                  
                  4,113
                  
                  
                  
                  5,901Inventory
                  
                  
                  1,848
                  
                  
                  
                  4,305Other
      current assets
                  
                  
                  2,317
                  
                  
                  
                  3,236Total
      current assets
                  
                  
                  24,654
                  
                  
                  
                  27,249Property
      and equipment, net
                  
                  
                  3,357
                  
                  
                  
                  11,495Other
      investments and loans to equity investees
                  
                  
                  2,796
                  
                  
                  
                  2,937Funds
      in respect of employee termination benefits
                  
                  
                  2,074
                  
                  
                  
                  2,330Restricted
      deposits
                  
                  
                  611
                  
                  
                  
                  713Intangible
      assets, net
                  
                  
                  8,194
                  
                  
                  
                  13,891Goodwill
                  
                  
                  6,679
                  
                  
                  
                  14,363Deferred
      taxes
                  
                  
                  227
                  
                  
                  
                  269Other
      assets
                  
                  
                  143
                  
                  
                  
                  669Total
      assets
                  
                  $
                  48,735
                  
                  
                  $
                  73,916LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Short-term
      bank credit and current maturities of long-term bank debt
                  
                  $
                  430
                  
                  
                  $
                  1,648Accounts
      payable
                  
                  
                  1,607
                  
                  
                  
                  3,972Accrued
      payroll, payroll taxes and social benefits
                  
                  
                  1,409
                  
                  
                  
                  2,104Advances
      from customers
                  
                  
                  1,924
                  
                  
                  
                  3,625Other
      current liabilities
                  
                  
                  3,064
                  
                  
                  
                  6,562Total
      current liabilities
                  
                  
                  8,434
                  
                  
                  
                  17,911Liability
      for employee termination benefits
                  
                  
                  3,129
                  
                  
                  
                  3,539Long-term
      debt
                  
                  
                  405
                  
                  
                  
                  319Other
      long-term liabilities
                  
                  
                  669
                  
                  
                  
                  310Total
      long-term liabilities
                  
                  
                  4,203
                  
                  
                  
                  4,168Stockholders’
      Equity:Acorn
      Energy, Inc. stockholdersCommon
      stock - $0.01 par value per share:
                    Authorized
      – 30,000,000 shares; Issued –13,248,813 and 16,917,925
                    shares
      at December 31, 2009 and September 30, 2010, respectively
                  
                  
                  132
                  
                  
                  
                  169Additional
      paid-in capital
                  
                  
                  58,373
                  
                  
                  
                  78,270Warrants
                  
                  
                  290
                  
                  
                  
                  274Accumulated
      deficit
                  
                  
                  (23,343
                  )
                  
                  
                  (33,747
                  )Treasury
      stock, at cost –1,275,081 and 801,920 shares at December 31,
                    2009
      and September 30, 2010, respectively
                  
                  
                  (4,827
                  )
                  
                  
                  (3,036
                  )Accumulated
      other comprehensive income
                  
                  
                  152
                  
                  
                  
                  492Total
      Acorn Energy, Inc. stockholders’ equity
                  
                  
                  30,777
                  
                  
                  
                  42,422Non-controlling
      interests
                  
                  
                  5,321
                  
                  
                  
                  9,415Total
      stockholders’ equity
                  
                  
                  36,098
                  
                  
                  
                  51,837Total
      liabilities and stockholders’ equity
                  
                  $
                  48,735
                  
                  
                  $
                  73,916





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




1




ACORN
ENERGY, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


(IN
THOUSANDS, EXCEPT NET LOSS PER SHARE DATA)








Nine
      months ended
                            September
      30,
                          
                          
                          Three
      months ended
                            September
      30,2009
                          
                          
                          2010
                          
                          
                          2009
                          
                          
                          2010Revenues:Catalytic
      regeneration
                          
                          $
                          12,761
                          
                          
                          $
                          14,812
                          
                          
                          $
                          2,824
                          
                          
                          $
                          5,479Projects
                          
                          
                          6,156
                          
                          
                          
                          8,447
                          
                          
                          
                          2,154
                          
                          
                          
                          3,189Software
      license and services
                          
                          
                          3,487
                          
                          
                          
                          2,758
                          
                          
                          
                          1,385
                          
                          
                          
                          1,091Smart
      grid distribution products and services
                          
                          
                          --
                          
                          
                          
                          1,188
                          
                          
                          
                          --
                          
                          
                          
                          671Other
                          
                          
                          317
                          
                          
                          
                          360
                          
                          
                          
                          100
                          
                          
                          
                          15722,721
                          
                          
                          
                          27,565
                          
                          
                          
                          6,463
                          
                          
                          
                          10,587Cost
      of sales:Catalytic
      regeneration
                          
                          
                          8,592
                          
                          
                          
                          10,109
                          
                          
                          
                          2,126
                          
                          
                          
                          4,563Projects
                          
                          
                          3,566
                          
                          
                          
                          4,632
                          
                          
                          
                          1,215
                          
                          
                          
                          1,815Software
      license and services
                          
                          
                          599
                          
                          
                          
                          531
                          
                          
                          
                          183
                          
                          
                          
                          151Smart
      grid distribution products and services
                          
                          
                          --
                          
                          
                          
                          512
                          
                          
                          
                          --
                          
                          
                          
                          321Other
                          
                          
                          234
                          
                          
                          
                          249
                          
                          
                          
                          78
                          
                          
                          
                          8412,991
                          
                          
                          
                          16,033
                          
                          
                          
                          3,602
                          
                          
                          
                          6,934Gross
      profit
                          
                          
                          9,730
                          
                          
                          
                          11,532
                          
                          
                          
                          2,861
                          
                          
                          
                          3,653Operating
      expenses:Research
      and development expenses, net of SRED credits of
                            $1,016
      in the nine months ended September 30, 2009
                          
                          
                          76
                          
                          
                          
                          2,428
                          
                          
                          
                          424
                          
                          
                          
                          886Dividends
      received from EnerTech
                          
                          
                          --
                          
                          
                          
                          (135
                          )
                          
                          
                          --
                          
                          
                          
                          --Selling,
      general and administrative expenses
                          
                          
                          13,372
                          
                          
                          
                          21,352
                          
                          
                          
                          4,565
                          
                          
                          
                          7,466Total
      operating expenses
                          
                          
                          13,448
                          
                          
                          
                          23,645
                          
                          
                          
                          4,989
                          
                          
                          
                          8,352Operating
      loss
                          
                          
                          (3,718
                          )
                          
                          
                          (12,113
                          )
                          
                          
                          (2,128
                          )
                          
                          
                          (4,699
                          )Finance
      income (expense), net
                          
                          
                          213
                          
                          
                          
                          (174
                          )
                          
                          
                          297
                          
                          
                          
                          131Gain
      on investment in GridSense
                          
                          
                          --
                          
                          
                          
                          1,327
                          
                          
                          
                          --
                          
                          
                          
                          --Gain
      on sale of Comverge shares
                          
                          
                          1,403
                          
                          
                          
                          --
                          
                          
                          
                          176
                          
                          
                          
                          --Loss
      before taxes on income
                          
                          
                          (2,102
                          )
                          
                          
                          (10,960
                          )
                          
                          
                          (1,655
                          )
                          
                          
                          (4,568
                          )Tax
      benefit (expense) on income
                          
                          
                          72
                          
                          
                          
                          (570
                          )
                          
                          
                          72
                          
                          
                          
                          (372
                          )Loss
      from operations of the Company and its consolidated
                            subsidiaries
                          
                          
                          (2,030
                          )
                          
                          
                          (11,530
                          )
                          
                          
                          (1,583
                          )
                          
                          
                          (4,940
                          )Share
      in losses of GridSense
                          
                          
                          (129
                          )
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --Share
      in income of Paketeria
                          
                          
                          263
                          
                          
                          
                          --
                          
                          
                          
                          263
                          
                          
                          
                          --Net
      loss
                          
                          
                          (1,896
                          )
                          
                          
                          (11,530
                          )
                          
                          
                          (1,320
                          )
                          
                          
                          (4,940
                          )Net
      (income) loss attributable to non-controlling interests
                          
                          
                          (48
                          )
                          
                          
                          688
                          
                          
                          
                          96
                          
                          
                          
                          373Net
      loss attributable to Acorn Energy Inc.
                          
                          $
                          (1,944
                          )
                          
                          $
                          (10,842
                          )
                          
                          $
                          (1,224
                          )
                          
                          $
                          (4,567
                          )Basic
      and diluted earnings per share attributable to Acorn
      Energy  Inc.:Net
      loss per share attributable to
                            Acorn
      Energy Inc.  – basic and diluted
                          
                          $
                          (0.17
                          )
                          
                          $
                          (0.75
                          )
                          
                          $
                          (0.11
                          )
                          
                          $
                          (0.29
                          )Weighted
      average number of shares outstanding attributable to
                            Acorn
      Energy Inc. – basic and diluted
                          
                          
                          11,365
                          
                          
                          
                          14,475
                          
                          
                          
                          11,186
                          
                          
                          
                          15,721





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




2




ACORN
ENERGY, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF
CHANGESIN EQUITY (UNAUDITED)


(IN
THOUSANDS)




Acorn
      Energy, Inc. StockholdersNumber
      of Shares
                      
                      
                      Common
      Stock
                      
                      
                      Additional
      Paid-In Capital
                      
                      
                      Warrants
                      
                      
                      Accumulated
      Deficit
                      
                      
                      Treasury
      Stock
                      
                      
                      Accumulated
      Other Comprehensive Income
                      
                      
                      Total
      Acorn Energy, Inc. Stockholders’ Equity
                      
                      
                      Non-controlling
      interests
                      
                      
                      Total
      EquityBalances
      as of December 31, 2009
                      
                      
                      13,249
                      
                      
                      $
                      132
                      
                      
                      $
                      58,373
                      
                      
                      $
                      290
                      
                      
                      $
                      (23,343
                      )
                      
                      $
                      (4,827
                      )
                      
                      $
                      152
                      
                      
                      $
                      30,777
                      
                      
                      $
                      5,321
                      
                      
                      $
                      36,098Net
      loss
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      (10,842
                      )
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      (10,842
                      )
                      
                      
                      (688
                      )
                      
                      
                      (11,530
                      )Differences
      from translation of subsidiaries’ financial statements
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      340
                      
                      
                      
                      340
                      
                      
                      
                      14
                      
                      
                      
                      354Comprehensive
      loss
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      (10,502
                      )
                      
                      
                      (674
                      )
                      
                      
                      (11,176
                      )Issuance
      by CoaLogix of CoaLogix shares to non-controlling interests (see Note
      5)
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      587
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      587
                      
                      
                      
                      2,423
                      
                      
                      
                      3,010Shares
      issued in capital raise, net of transaction costs (see Note 8
      (a))
                      
                      
                      2,232
                      
                      
                      
                      22
                      
                      
                      
                      11,445
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      11,467
                      
                      
                      
                      --
                      
                      
                      
                      11,467Shares
      issued in acquisition of Decision Dynamics (see Note 4(a))
                      
                      
                      1,000
                      
                      
                      
                      10
                      
                      
                      
                      5,630
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      5,640
                      
                      
                      
                      --
                      
                      
                      
                      5,640Shares
      issued in acquisition of GridSense (see Note 4(b))
                      
                      
                      356
                      
                      
                      
                      4
                      
                      
                      
                      1,863
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      1,867
                      
                      
                      
                      --
                      
                      
                      
                      1,867Non-controlling
      interests created in USSI consolidation (see Note 4(c))
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      3,600
                      
                      
                      
                      3,600Adjustment
      of non-controlling interests following exercise of USSI options(see
      Note 4(c)(i))
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      1,904
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      1,904
                      
                      
                      
                      (1,904
                      )
                      
                      
                      --Issuance
      of treasury shares in exercise of USSI option (see Note
    8(c))
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      (2,229
                      )
                      
                      
                      --
                      
                      
                      
                      438
                      
                      
                      
                      1,791
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --Other
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      48
                      
                      
                      
                      48Stock
      option compensation
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      462
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      462
                      
                      
                      
                      --
                      
                      
                      
                      462Stock
      option compensation of subsidiaries
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      601
                      
                      
                      
                      601Exercise
      of options and warrants
                      
                      
                      81
                      
                      
                      
                      1
                      
                      
                      
                      235
                      
                      
                      
                      (16
                      )
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      220
                      
                      
                      
                      --
                      
                      
                      
                      220Balances
      as of September 30, 2010
                      
                      
                      16,918
                      
                      
                      $
                      169
                      
                      
                      $
                      78,270
                      
                      
                      $
                      274
                      
                      
                      $
                      (33,747
                      )
                      
                      $
                      (3,036
                      )
                      
                      $
                      492
                      
                      
                      $
                      42,422
                      
                      
                      $
                      9,415
                      
                      
                      $
                      51,837




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




3





ACORN
ENERGY, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


(dollars
in thousands)





Nine
      months ended
                        September
      30,2009
                      
                      
                      2010Cash
      flows provided by (used in) operating activities:Net
      loss
                      
                      $
                      (1,896
                      )
                      
                      $
                      (11,530
                      )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and
      amortization
                      
                      
                      1,359
                      
                      
                      
                      1,723Share
      in losses of
      GridSense
                      
                      
                      129
                      
                      
                      
                      --Share
      in income of
      Paketeria
                      
                      
                      (263
                      )
                      
                      
                      --Exchange
      rate adjustment on restricted
      deposits
                      
                      
                      (32
                      )
                      
                      
                      --Exchange
      rate adjustment on amounts funded for employee termination benefits net
                        of
      exchange adjustment on liability for employee termination
      benefits
                      
                      
                      11
                      
                      
                      
                      28Increase
      in liability for employee termination
      benefits
                      
                      
                      203
                      
                      
                      
                      316Stock-based
      compensation
                      
                      
                      1,141
                      
                      
                      
                      1,063Impairments
                      
                      
                      80
                      
                      
                      
                      --Gain
      on investment in
      GridSense
                      
                      
                      --
                      
                      
                      
                      (1,327
                      )Gain
      on sale of Comverge
      shares
                      
                      
                      (1,403
                      )
                      
                      
                      --Other
                      
                      
                      --
                      
                      
                      
                      33Change
      in operating assets and liabilities:Increase
      in accounts receivable, unbilled work-in process, other current
      and
                        other
      assets
                      
                      
                      (1,148
                      )
                      
                      
                      (4,896
                      )Increase
      in
      inventory
                      
                      
                      (1,345
                      )
                      
                      
                      (1,566
                      )Increase
      (decrease) in accounts payable, accrued payroll, payroll taxes and social
      benefits, advances from  customers, other current liabilitiesand
      other liabilities
                      
                      
                      (977
                      )
                      
                      
                      4,239Net
      cash used in operating
      activities
                      
                      
                      (4,141
                      )
                      
                      
                      (11,917
                      )Cash
      flows provided by (used in) investing activities:Proceeds
      from sale of Comverge shares and covered calls
                      
                      
                      3,990
                      
                      
                      
                      --Investment
      in
      EnerTech
                      
                      
                      (1,000
                      )
                      
                      
                      (900
                      )Restricted
      deposits
                      
                      
                      (670
                      )
                      
                      
                      (1,225
                      )Release
      of restricted
      deposits
                      
                      
                      2,468
                      
                      
                      
                      1,172Loan
      to GridSense prior to
      acquisition
                      
                      
                      --
                      
                      
                      
                      (200
                      )Amounts
      funded for employee termination
      benefits
                      
                      
                      (159
                      )
                      
                      
                      (190
                      )Acquisitions
      of property and
      equipment
                      
                      
                      (983
                      )
                      
                      
                      (8,401
                      )Acquisitions
      of
      license
                      
                      
                      --
                      
                      
                      
                      (82
                      )Acquisition
      of USSI, net of cash acquired (See Schedule A)
                      
                      
                      --
                      
                      
                      
                      7Acquisition
      of Decision Dynamics, net of cash acquired (See Schedule
B)
                      
                      
                      --
                      
                      
                      
                      1,021Acquisition
      of GridSense, net of cash acquired (See Schedule C)
                      
                      
                      --
                      
                      
                      
                      (1,352
                      )Acquisition
      of OMI (See Schedule
      D)
                      
                      
                      --
                      
                      
                      
                      --Net
      cash provided by (used in) investing
      activities
                      
                      
                      3,646
                      
                      
                      
                      (10,150
                      )Cash
      flows provided by (used in) financing activities:Proceeds
      from capital raise, net of transaction
      costs
                      
                      
                      --
                      
                      
                      
                      11,467Issuance
      of shares to non-controlling interests in consolidated
      subsidiary
                      
                      
                      1,991
                      
                      
                      
                      3,010Proceeds
      from option and warrant
      exercises
                      
                      
                      97
                      
                      
                      
                      220Short-term
      debt borrowings,
      net
                      
                      
                      379
                      
                      
                      
                      1,161Repayment
      of notes payable due to former shareholders of Coreworx
                      
                      
                      (3,400
                      )
                      
                      
                      --Repayments
      of long-term
      debt
                      
                      
                      (4
                      )
                      
                      
                      (159
                      )Other
                      
                      
                      --
                      
                      
                      
                      50Purchase
      of additional shares of
      DSIT
                      
                      
                      (294
                      )
                      
                      
                      --Purchase
      of treasury
      shares
                      
                      
                      (1,108
                      )
                      
                      
                      --Net
      cash provided by (used in) financing
      activities
                      
                      
                      (2,339
                      )
                      
                      
                      15,749Effect
      of exchange rate changes on cash and cash equivalents
                      
                      
                      (290
                      )
                      
                      
                      76Net
      decrease in cash and cash
      equivalents
                      
                      
                      (3,124
                      )
                      
                      
                      (6,242
                      )Cash
      and cash equivalents at beginning of
      period
                      
                      
                      15,142
                      
                      
                      
                      11,208Cash
      and cash equivalents at end of
      period
                      
                      $
                      12,018
                      
                      
                      $
                      4,966


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




4




ACORN
ENERGY, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


(dollars in
thousands)





Non-cash
      items:Intangibles
      acquired by Coreworx in consideration for future royalties
                    
                    $
                    99Adjustment
      of additional paid-in-capital and non-controlling interests from
                      investment
      in CoaLogix by non-controlling interests
                    
                    $
                    445
                    
                    
                    $
                    587Adjustment
      of additional paid-in-capital and non-controlling interests from the
                      exercise
      of an option by Acorn in USSI
                    
                    
                    
                    
                    
                    $
                    1,904Value
      of Acorn shares issued in the acquisition of Decision
    Dynamics
                    
                    
                    
                    
                    
                    $
                    5,640Value
      of Acorn shares issued in the acquisition of GridSense
                    
                    
                    
                    
                    
                    $
                    1,867Value
      of treasury shares issued in the exercise of an option to invest in
      USSI
                    
                    
                    
                    
                    
                    $
                    2,229Schedule
      A:Assets/liabilities
      acquired in the acquisition of USSI:Other
      current assets
                    
                    
                    
                    
                    
                    $
                    (55
                    )Property
      and equipment
                    
                    
                    
                    
                    
                    
                    (56
                    )Intangibles
                    
                    
                    
                    
                    
                    
                    (2,565
                    )Goodwill
                    
                    
                    
                    
                    
                    
                    (1,402
                    )Current
      liabilities
                    
                    
                    
                    
                    
                    
                    285Prior
      year investment in USSI
                    
                    
                    
                    
                    
                    
                    200Non-controlling
      interests
                    
                    
                    
                    
                    
                    
                    3,600$
                    7Schedule
      B:Assets/liabilities
      acquired in the acquisition of Decision Dynamics:Other
      current assets
                    
                    
                    
                    
                    
                    $
                    (1,149
                    )Property
      and equipment
                    
                    
                    
                    
                    
                    
                    (339
                    )Intangibles
                    
                    
                    
                    
                    
                    
                    (1,248
                    )Goodwill
                    
                    
                    
                    
                    
                    
                    (2,476
                    )Current
      liabilities
                    
                    
                    
                    
                    
                    
                    593Value
      of Acorn shares issued in the acquisition of Decision
    Dynamics
                    
                    
                    
                    
                    
                    
                    5,640$
                    1,021Schedule
      C:Assets/liabilities
      acquired in the acquisition of GridSense:Inventory
                    
                    
                    
                    
                    
                    $
                    (833
                    )Other
      current assets
                    
                    
                    
                    
                    
                    
                    (482
                    )Property
      and equipment
                    
                    
                    
                    
                    
                    
                    (71
                    )Other
      assets
                    
                    
                    
                    
                    
                    
                    (370
                    )Intangibles
                    
                    
                    
                    
                    
                    
                    (2,314
                    )Goodwill
                    
                    
                    
                    
                    
                    
                    (3,655
                    )Current
      liabilities
                    
                    
                    
                    
                    
                    
                    2,003Short
      term and long-term debt
                    
                    
                    
                    
                    
                    
                    113Gain
      on step-up of investment
                    
                    
                    
                    
                    
                    
                    1,327Consideration
      paid – see Note 4(b) for detail
                    
                    
                    
                    
                    
                    
                    4,406Less
      cash included in consideration paid
                    
                    
                    
                    
                    
                    
                    (1,476
                    )$
                    (1,352
                    )Schedule
      D:Assets/liabilities
      acquired in the acquisition of OMI:Other
      current assets
                    
                    
                    
                    
                    
                    $
                    (39
                    )Property
      and equipment
                    
                    
                    
                    
                    
                    
                    (41
                    )Intangibles
                    
                    
                    
                    
                    
                    
                    (322
                    )Current
      liabilities
                    
                    
                    
                    
                    
                    
                    402$
                    --




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




5




ACORN
ENERGY, INC. AND SUBSIDIARIES


Notes to Consolidated Financial
Statements(unaudited)


(dollars
in thousands)





Note
1: Basis of Presentation




The
accompanying unaudited condensed consolidated financial statements of Acorn
Energy, Inc. and its subsidiaries (the “Company”) have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete consolidated financial statements. In the opinion
of management, all adjustments considered necessary for a fair presentation have
been included.  Operating results for the nine-month period ended
September 30, 2010 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2010. These unaudited consolidated
financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2009.




Note
2: Recent Authoritative Guidance




In
March 2010, the Financial Accounting Standard Board (“FASB”) ratified a
consensus of the Emerging Issues Task Force related to the milestone method of
revenue recognition. The consensus will codify a method of revenue recognition
that has been common practice. Under this method, contingent consideration from
research and development activities that is earned upon the achievement of a
substantive milestone is recognized in its entirety in the period in which the
milestone is achieved. This guidance is effective for annual periods beginning
on or after June 15, 2010 but may be early adopted as of the beginning of
an annual period. The Company is currently evaluating the effect that this
guidance will have on its consolidated financial position, results of operations
and cash flows.




In
September 2009, the FASB issued authoritative guidance regarding
multiple-deliverable revenue arrangements. This guidance addresses how to
measure and allocate consideration to one or more units of accounting.
Specifically, the guidance requires that consideration be allocated among
multiple deliverables based on relative selling prices. The guidance establishes
a selling price hierarchy of (1) vendor-specific objective evidence,
(2) third-party evidence and (3) estimated selling price. This
guidance is effective for annual periods beginning on or after June 15,
2010 but may be early adopted as of the beginning of an annual period. The
Company is currently evaluating the effect that this guidance will have on its
consolidated financial position, results of operations and cash
flows.




Note
3: Inventory





As
      of
                  December
      31,
                  2009
                
                
                As
      of
                  September
      30,
                  2010Raw
      materials
                
                $
                550
                
                
                $
                1,195Work-in-process
                
                
                1,298
                
                
                
                2,350Finished
      goods
                
                
                --
                
                
                
                760$
                1,848
                
                
                $
                4,305




6





Note
4: Acquisitions




(a)
            Acquisition
      of Decision Dynamics Technology
Ltd.





On April
30, 2010, the Company's Coreworx subsidiary completed the acquisition of all of
the issued and outstanding common shares of Decision Dynamics Technology Ltd.,
a Canadian corporation (“Decision Dynamics”), in consideration for issuance
of 1,000,000 shares of the Company's common stock to the stockholders of
Decision Dynamics in accordance with terms of a previously announced agreement
that the Company entered into on March 2, 2010 with Coreworx and Decision
Dynamics.  Decision Dynamics is a provider of capital project controls and
cost management software for normal operations and capital projects in the
energy industry and, until completion of the acquisition by Coreworx, had been a
TSX Venture Exchange-traded company.





The
acquisition was structured as a plan of arrangement under the Canada Business
Corporations Act and was subject to approval by the holders of at least
two-thirds of the outstanding common shares and options of Decision Dynamics,
each voting as a separate class, which was obtained at a meeting held on April
27, 2010.  The acquisition was also approved on April 29, 2010 by the
Court of Queen's Bench of Alberta, which conducted a hearing upon the fairness
of the terms of the transaction.





Of the
Company's shares issued in connection with completion of the acquisition,
approximately 340,000 were escrowed at closing, with one-half released 90 days
after the date of closing (July 29, 2010) and the balance to be released 180
days after the date of closing (October 27, 2010).  Subject to such escrow,
the shares issued to the Decision Dynamics stockholders are freely tradable
under US federal securities laws.  The issuance of the Company’s common
stock to the Decision Dynamics stockholders was made without registration under
the Securities Act of 1933, as amended, in reliance upon Section 3(a)
(10).




The
transaction is accounted for as a purchase business combination. Decision
Dynamics’ results from operations for the period from acquisition (April 30,
2010) to September 30, 2010 have been included in the Company’s consolidated
statement of operations.




The
purchase price of $5,640 represents the market value of the 1,000,000 shares of
Acorn common stock issued to the former stockholders of Decision Dynamics (based
on the closing price of Acorn shares on the date of the transaction in
accordance with generally accepted accounting principles).




The
assets and liabilities of Decision Dynamics are required to be adjusted to their
fair values.  The fair value of Decision Dynamics is allocated to
identifiable tangible and intangible assets and liabilities assumed based on
their fair values as of the date of the completion of the transaction. Based
upon a third-party valuation of intangible assets as of that date, the Company
has allocated the $5,640 purchase price to assets and liabilities as
follows:





Cash
                        
                        $
                        1,021Other
      current assets
                        
                        
                        1,149Property
      and equipment
                        
                        
                        339Intangible
      assets
                        
                        
                        1,248Goodwill
                        
                        
                        2,476Total
      assets acquired
                        
                        
                        6,233Current
      liabilities
                        
                        
                        (593
                        )Fair
      value acquired
                        
                        $
                        5,640




7




Intangible
assets with estimated useful lives are amortized over that period. The acquired
intangible assets with useful lives include approximately $367 for the estimated
market value of Decision Dynamics’ customer contracts and relationships
(estimated useful life of eight years) and approximately $881 for the estimated
market value of Decision Dynamics’ software (estimated useful life of 12 years).
The goodwill of $2,476 will not be amortized for financial statement purposes in
accordance with generally accepted accounting principles. The intangible assets
and the goodwill acquired were assigned to the Company’s Coreworx segment. (See
Note 15(a) – Subsequent Events.)




(b)
            Acquisition
      of GridSense





Under the
terms of a Share Sale Agreement entered into by and among the Company, GridSense
Pty Ltd.  (“GridSense”), the GridSense stockholders and certain note
holders of GridSense on May 12, 2010, the Company acquired the outstanding
GridSense shares that were not owned by it (69.86%).





The total
purchase price of $4,406 is comprised of the following: (1) the market value of
the 206,995 shares of Acorn common stock issued to the former stockholders of
GridSense ($1,085 - based on the market price of Acorn shares on the date of the
transaction in accordance with generally accepted accounting principles); (2)
the $882 of cash paid and the market value of the 149,201 shares of Acorn common
stock issued ($782) for the purchase of the promissory notes; (3) $594 of cash
that was provided to GridSense at closing to pay a stockholder loan; (4) an
earn-out which is estimated to be $287 (see below) and is recorded as a
liability in Other current liabilities; and (5) $750 of loans provided to
GridSense in 2009 ($550) and in 2010 ($200) in contemplation of the acquisition
and accrued interest ($26) on those loans.





Under the
Share Sale Agreement, the Company agreed to pay an earn-out to the stockholders
of GridSense as part of the consideration for their shares.  To the
extent that GridSense’s sales for the period April 1, 2010 through March 31,
2011 exceed $4,384, the Company will pay the GridSense stockholders an amount
equal to 50% of that excess, up to $2,435, multiplied by 69.86% (representing
their ownership interest in GridSense) for a maximum earn-out payment of
$1,701.  The Company has the option of paying any earn-out in cash
and/or shares of its common stock and initially estimated this amount to be
$287, which is included in the purchase price above. As at September 30, 2010,
the Company has reduced its estimate of the earn-out to $200, with the $87
adjustment being recorded against selling, general and administrative expense
(SG&A).




In
connection with the acquisition of GridSense, the Company recorded a gain of
$1,327 on the step-up of the Company’s previous carrying value of its investment
in GridSense to fair value in accordance with generally accepted accounting
principles for step acquisitions.




The
transaction is accounted for as a purchase business combination. GridSense’s
results from operations for the period from acquisition (May 12, 2010) to
September 30, 2010 have been included in the Company’s consolidated statement of
operations.




In
accordance with generally accepted accounting principles, the fair value of
GridSense is allocated to GridSense’s identifiable tangible and intangible
assets and liabilities assumed based on their fair values as of the date of the
completion of the transaction. Based upon a third-party valuation of intangible
assets as of that date, the Company has allocated the $5,733 of fair value to
assets and liabilities as follows:





8





Cash
                      
                      $
                      124Inventory
                      
                      
                      833Other
      current assets
                      
                      
                      482Property
      and equipment
                      
                      
                      71Other
      assets
                      
                      
                      370Intangible
      assets
                      
                      
                      2,314Goodwill
                      
                      
                      3,655Total
      assets acquired
                      
                      
                      7,849Current
      liabilities
                      
                      
                      (2,003
                      )Short
      and long-term debt
                      
                      
                      (113
                      )Fair
      value acquired
                      
                      $
                      5,733





Total
      purchase price
                  
                  $
                  4,406Previous
      carrying value of investment
                  
                  
                  -Gain
      on step-up of fair value of prior ownership interest
                  
                  
                  1,327$
                  5,733





Intangible
assets with estimated useful lives are amortized over that period. The acquired
intangible assets with useful lives include approximately $1,793 for the
estimated market value of GridSense technologies, (weighted average estimated
useful life of 11 years), $253 for the estimated market values of acquired
customer relationships (estimated useful life of 10 years), $187 for the
estimated market value of the GridSense trade name (estimated useful life of 15
years) and $81 for the estimated market value on non-compete agreements
(estimated useful life of three years). The goodwill will not be amortized for
financial statement purposes in accordance with generally accepted accounting
principles. The intangible assets and the goodwill acquired were assigned to the
Company’s new GridSense segment.





(c)
US Sensor Systems Inc. (USSI)





(i) Acorn
Investment and Option Agreements





On
February 23, 2010, following its $200 investment in USSI common stock in
November 2009 (in which the Company acquired 50,917 shares of USSI representing
approximately 11.5% of USSI’s capital (10% fully diluted), the Company entered
into an option agreement with USSI and a related option agreement with certain
stockholders of USSI (the “Option Agreements”).




Under the
terms of the Option Agreements, the Company acquired an additional 254,854
shares of USSI’s common stock for a purchase price of $800 as
follows:




·
              The
      Company acquired 95,469 of these shares under the option in consideration
      for payment of $300 following exercise of the option immediately after the
      signing of the Option Agreements. Of the $500 the Company initially paid
      to USSI with respect to the acquisition of shares and options, the Company
      allocated $100 of the purchase price to the value of the options received
      with the remaining $400 being allocated to the initial investment in USSI.
      The Company determined the fair value of USSI to be
  $4,100.


·
            The
      Company acquired 63,646 of these shares in consideration for payment of
      $200 following the exercise of the option on May 23,
  2010.




9






·
              The
      Company acquired an additional 95,469 shares in consideration for payment
      of $300 by exercising the option in part ($40) on June 14, 2010 and the
      balance ($260) on August 23, 2010.


On August
23, 2010, the Company acquired 516,378 shares of USSI common stock held by
certain USSI stockholders in consideration for payment to them of 473,161
treasury shares of the Company’s common stock.




The
purchase price for these shares was made in the Company’s common stock which was
priced on the basis of the average of the daily volume weighted average of the
Company’s common stock for the 20 trading days ending on August 18,
2010.  The shares of the Company’s common stock issued to the USSI
stockholders in consideration for their shares are restricted securities under
Securities Act of 1933 and are subject to a lock-up by certificate
legend.  The shares will be released from the lock-up over a one year
period, with 25% being released each three months.




Under the
Option Agreements, the Company has the right to acquire 1,693,391 additional
shares of USSI’s common stock from USSI on or before November 30, 2010 in
consideration for payment of $1,500 (see Note 15(c) – Subsequent Events).
If the Company exercises this option, it would have the right to acquire
1,693,391 additional shares of common stock from USSI on or before May 30, 2011
in consideration for payment of $1,500.




If the
Company purchases all of the USSI common stock it is entitled to purchase under
the Option Agreements, the Company would hold USSI shares representing
approximately 87.4% of USSI’s capitalization (approximately 84.0% fully
diluted).




The
Company currently owns 821,879 shares of USSI’s common stock which represents
approximately 57.6% of USSI’s capitalization (approximately 50.5% fully
diluted). Accordingly, the Company recorded an adjustment of $1,904 to the
non-controlling interests balance initially recorded with respect to the
Company’s investment in USSI to reflect the updated balance of the
non-controlling interests share in USSI to $1,696.





(ii) USSI
as a Consolidated Variable Interest Entity





As a
result of the above-mentioned investments and option agreements, USSI is a
variable interest entity by virtue of the Company's initial $500 investment and
the call options that can give the Company control of USSI within a short period
of time and that may be considered "in-the-money".  USSI was dependent upon
the Company exercising its options under the Option Agreements for it cash
requirements.   The Company considered several factors to determine
whether it or another stockholder is the primary beneficiary of the activities
of USSI, including the existence of the Company's options in USSI and the
likelihood of the Company's exercising those options as well as the level of
control and influence the Company has in USSI and USSI's dependence on the
Company's exercising its options in order to finance its
operations.  Based on those factors, the Company determined that it is
most closely associated with USSI and is therefore the primary
beneficiary.  Accordingly, the financial results of USSI are included
in the Company’s consolidated financial statements effective February 23, 2010
and all amounts pertaining to other stockholders’ interests in USSI are reported
as non-controlling interests in subsidiaries. USSI is presented as the Company’s
new Energy and Security Sensor System segment.




The
transaction is accounted for as a purchase business combination. USSI’s results
from operations for the period from acquisition (February 23, 2010) to September
30, 2010 have been included in the Company’s consolidated statement of
operations.




10




In
accordance with generally accepted accounting principles, the $4,100 of initial
fair value of USSI is allocated to USSI’s identifiable tangible and intangible
assets and liabilities assumed based on their fair values as of the date of the
completion of the transaction. The Company has received third-party valuation of
intangible assets as of that date, for the purposes of allocating the purchase
price to assets and liabilities and has allocated the purchase price as
follows:





Cash
                      
                      $
                      307Other
      current assets
                      
                      
                      37Property
      and equipment
                      
                      
                      56Other
      assets
                      
                      
                      18Intangible
      assets
                      
                      
                      2,565Goodwill
                      
                      
                      1,402Total
      assets acquired
                      
                      
                      4,385Current
      liabilities
                      
                      
                      (285
                      )Fair
      value acquired
                      
                      $
                      4,100





The
third-party valuation of intangible assets with estimated useful lives are
amortized over that period. The acquired intangible assets with useful lives are
comprised of approximately $2,565 for the estimated fair market value of USSI's
sensor technologies (estimated useful life of 20 years). The goodwill will not
be amortized for financial statement purposes in accordance with applicable
accounting principles. The intangible assets and the goodwill acquired were
assigned to the Company’s new Energy and Security Sensor System
segment.




(d)
On-Line Monitoring Inc.





On May
20, 2010, GridSense acquired the assets of On-Line Monitoring Inc. (“OMI”), a
manufacturer of on-line substation monitoring equipment based in Exton,
PA.




Under the
terms of the Asset Purchase Agreement, GridSense acquired all the assets
(including receivables, inventory, fixed assets and intellectual property) and
assumed certain liabilities of OMI as defined. The net liabilities assumed by
GridSense in the transaction were $352. In addition, GridSense agreed to pay to
the seller of OMI an incremental sales payment equal to the dollar amount of
orders received for OMI products for the period from July 1, 2010 to June 30,
2011 which is in excess of $450. In accordance with the Asset Purchase
Agreement, the incremental sales payment can be no more than $200 and is payable
in either cash or shares of the Company’s common stock at the discretion of
GridSense. The Company estimates the incremental sales payment to be $50, and
accordingly, the purchase price of OMI is $402.




The
transaction is accounted for as a purchase business combination. Accordingly,
OMI’s results from operations for the period from acquisition (May 23, 2010) to
September 30, 2010 have been included in the Company’s consolidated statement of
operations.




11




In
accordance with generally accepted accounting principles, the purchase price of
$402 of OMI is allocated to identifiable tangible and intangible assets and
liabilities assumed based on their fair values as of the date of the completion
of the transaction. The Company has allocated the purchase price as
follows:





Accounts
      receivable
                      
                      $
                      16Inventory
                      
                      
                      23Property
      and equipment
                      
                      
                      41Intangible
      assets
                      
                      
                      322Total
      assets acquired
                      
                      
                      402Current
      liabilities
                      
                      
                      (352
                      )Estimated
      earn-out payment
                      
                      
                      (50
                      )Total
      liabilities acquired
                      
                      $
                      (402
                      )





The
acquired intangible assets with estimated useful lives is comprised of
approximately $222 for the estimated fair market value of OMI’s intellectual
property (estimated useful life of five years) and $100 for non-compete
agreements to certain employees (estimated useful life of three years). The
intangible assets resulting from the acquisition are not deductible for income
tax purposes. The intangible assets acquired were assigned to the Company’s new
GridSense segment.





(e)
Pro Forma Information




The
following are certain unaudited pro forma information assuming that the
acquisition of Decision Dynamics occurred on January 1, 2010 and 2009,
respectively. The unaudited pro forma financial information is not necessarily
indicative of the combined results that would have been attained had the
acquisition of Decision Dynamics occurred as of January 1, 2010 and 2009,
respectively, nor is it necessarily indicative of future results.




Pro forma
information with respect to GridSense, USSI and OMI are not included in the
table below as they are not material.





Nine
      months ended September 30, 2010
                  
                  
                  Nine
      months ended September 30, 2009
                  
                  
                  Three
      months ended September 30, 2009In
      thousands (except per share data)Results
      of Operations
                  
                  (unaudited)
                  
                  
                  (unaudited)
                  
                  
                  (unaudited)Sales
                  
                  $
                  28,049
                  
                  
                  $
                  25,055
                  
                  
                  $
                  6,899Net
      loss*
                  
                  $
                  (12,256
                  )
                  
                  $
                  (3,038
                  )
                  
                  $
                  (1,818
                  )Net
      loss per share – basic and diluted
                  
                  $
                  (0.82
                  )
                  
                  $
                  (0.25
                  )
                  
                  $
                  (0.15
                  )
  *
                Net
      loss during the nine month period ended September 30, 2010 includes
      approximately $406 of costs recorded on Decision Dynamics books with
      respect to Coreworx’ acquisition of
it.





Note
5:  CoaLogix





On April 8, 2009, the Company entered
into a Common Stock Purchase Agreement (the “Purchase Agreement”) with the
Company’s CoaLogix Inc. subsidiary, EnerTech Capital Partners III L.P.
(“EnerTech”) and certain members of CoaLogix’ senior management pursuant to
which each of the Company and EnerTech agreed to purchase from CoaLogix 781,111
shares of common stock for a purchase price of $5,624, and certain members of
CoaLogix’ senior management agreed to purchase 36,111 shares of common stock of
CoaLogix for an aggregate purchase price of $260 for a total of
$11,508.  The Purchase Agreement provides that the Company, EnerTech
and senior management will purchase such shares of common stock in stages as
funding is needed by CoaLogix for plant expansion, technology development, legal
expenses and computer software.  Following completion of all the
stages of the stock purchase under the Purchase Agreement, the Company would own
approximately 72.3% of CoaLogix.




12





Through December 31, 2009, the Company
funded $2,747 of its $5,624 commitment under the Purchase Agreement and its
interest in CoaLogix was diluted to approximately 77.4%. In the first nine
months of 2010, CoaLogix issued capital calls of $5,887 of which the Company's
share was $2,877, which capital calls were funded by the Company, EnerTech and
CoaLogix’ senior management. At September 30, 2010, the Company’s interest in
CoaLogix was diluted to approximately 72.3%.





In accordance with applicable
accounting principles, the Company recorded an increase of $587 in additional
paid-in-capital as a result of the $3,010 investment by non-controlling
interests in 2010.





Note
6: Non-Controlling Interests





The
composition of the net income (loss) attributable to non-controlling interests
(“NCI”) is as follows:


Nine
      months ended
                                            September
      30,
                                          
                                          
                                          Three
      months ended
                                            September
      30,2009
                                          
                                          
                                          2010
                                          
                                          
                                          2009
                                          
                                          
                                          2010Net
      loss attributable to NCI in CoaLogix
                                          
                                          $
                                          (73
                                          )
                                          
                                          $
                                          (284
                                          )
                                          
                                          $
                                          (151
                                          )
                                          
                                          $
                                          (243
                                          )Net
      income attributable to NCI in DSIT
                                          
                                          
                                          121
                                          
                                          
                                          
                                          187
                                          
                                          
                                          
                                          55
                                          
                                          
                                          
                                          77Net
      loss attributable to NCI in USSI
                                          
                                          
                                          --
                                          
                                          
                                          
                                          (591
                                          )
                                          
                                          
                                          --
                                          
                                          
                                          
                                          (207
                                          )Net
      income (loss) attributable to NCI
                                          
                                          $
                                          48
                                          
                                          
                                          $
                                          (688
                                          )
                                          
                                          $
                                          (96
                                          )
                                          
                                          $
                                          (373
                                          )




13





Note
7:  Goodwill and Other Intangible Assets




The
changes in the carrying amounts of goodwill from December 31, 2009 to
September 30, 2010 were as follows:




CoaLogix
      segment
                        
                        
                        Naval
      & RT Solutions segment
                        
                        
                        Coreworx
      segment*
                        
                        
                        GridSense
      segment
                        
                        
                        USSI
      segment
                        
                        
                        TotalBalance
      as of December 31, 2009
                        
                        $
                        3,714
                        
                        
                        $
                        534
                        
                        
                        $
                        2,431
                        
                        
                        $
                        --
                        
                        
                        $
                        --
                        
                        
                        $
                        6,679Goodwill
      recorded in the acquisition of USSI (see
                          Note
      4(c)(ii))
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        1,402
                        
                        
                        
                        1,402Goodwill
      recorded in the acquisition of Decision
                          Dynamics
      (see Note 4(a))
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        2,476
                        
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        2,476Goodwill
      recorded in the acquisition of GridSense
                          (see
      Note 4(b))
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        --
                        
                        
                        
                        3,655
                        
                        
                        
                        --
                        
                        
                        
                        3,655Translation
      adjustment
                        
                        
                        --
                        
                        
                        
                        16
                        
                        
                        
                        21
                        
                        
                        
                        114
                        
                        
                        
                        --
                        
                        
                        
                        151Balance
      as of September 30, 2010
                        
                        $
                        3,714
                        
                        
                        $
                        550
                        
                        
                        $
                        4,928
                        
                        
                        $
                        3,769
                        
                        
                        $
                        1,402
                        
                        
                        $
                        14,363




* See
Note 15(a) – Subsequent Events




The
changes in the carrying amounts and accumulated amortization of intangible
assets from December 31, 2009 to September 30, 2010 were as
follows:




CoaLogix
      segment
                                                            
                                                            
                                                            Naval
      & RT
                                                              Solutions
      segment
                                                            
                                                            
                                                            Coreworx
      Segment***
                                                            
                                                            
                                                            GridSense
      segment
                                                            
                                                            
                                                            USSI
      segmentSCR
      Technologies**
                                                            
                                                            
                                                            Naval
                                                              Technologies
                                                            
                                                            
                                                            Software
      and Customer Relationships
                                                            
                                                            
                                                            Software
      and Customer Relationships
                                                            
                                                            
                                                            Sensor
                                                              TechnologiesCost
                                                            
                                                            
                                                            A.A.*
                                                            
                                                            
                                                            Cost
                                                            
                                                            
                                                            A.A.*
                                                            
                                                            
                                                            Cost
                                                            
                                                            
                                                            A.A.*
                                                            
                                                            
                                                            Cost
                                                            
                                                            
                                                            A.A.*
                                                            
                                                            
                                                            Cost
                                                            
                                                            
                                                            A.A.*
                                                            
                                                            
                                                            TotalBalance
      as of December 31, 2009
                                                            
                                                            $
                                                            5,511
                                                            
                                                            
                                                            $
                                                            (1,184
                                                            )
                                                            
                                                            $
                                                            527
                                                            
                                                            
                                                            $
                                                            (128
                                                            )
                                                            
                                                            $
                                                            3,841
                                                            
                                                            
                                                            $
                                                            (373
                                                            )
                                                            
                                                            $
                                                            --
                                                            
                                                            
                                                            $
                                                            --
                                                            
                                                            
                                                            $
                                                            --
                                                            
                                                            
                                                            $
                                                            --
                                                            
                                                            
                                                            $
                                                            8,194Acquisition
      of
      license
                                                            
                                                            
                                                            82
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            82Intangibles
      recorded in the acquisition of USSI (see Note 4(c)(ii))
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            2,565
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            2,565Intangibles
      recorded in the acquisition of Decision Dynamics (see Note
      4(a))
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            1,248
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            1,248Intangibles
      recorded in the acquisition of GridSense (see Note 4(b))
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            2,314
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            2,314Intangibles
      recorded in the acquisition of OMI (see Note 4(d))
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            322
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            322Amortization
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            (414
                                                            )
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            (49
                                                            )
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            (273
                                                            )
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            (133
                                                            )
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            (75
                                                            )
                                                            
                                                            
                                                            (944
                                                            )Cumulative
      translation adjustment
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            15
                                                            
                                                            
                                                            
                                                            (6
                                                            )
                                                            
                                                            
                                                            66
                                                            
                                                            
                                                            
                                                            (8
                                                            )
                                                            
                                                            
                                                            48
                                                            
                                                            
                                                            
                                                            (5
                                                            )
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            --
                                                            
                                                            
                                                            
                                                            110Balance
      as of September 30, 2010
                                                            
                                                            $
                                                            5,593
                                                            
                                                            
                                                            $
                                                            (1,598
                                                            )
                                                            
                                                            $
                                                            542
                                                            
                                                            
                                                            $
                                                            (183
                                                            )
                                                            
                                                            $
                                                            5,155
                                                            
                                                            
                                                            $
                                                            (654
                                                            )
                                                            
                                                            $
                                                            2,684
                                                            
                                                            
                                                            $
                                                            (138
                                                            )
                                                            
                                                            $
                                                            2,565
                                                            
                                                            
                                                            $
                                                            (75
                                                            )
                                                            
                                                            $
                                                            13,891




*    Accumulated
amortization


**   SCR
Technologies includes regeneration, rejuvenation, on-site cleaning and licensed
technologies.


*** See
Note 15(a) – Subsequent Events




14




In April
2010, CoaLogix signed an agreement to acquire a license to use certain
technology developed by a third-party for $82. CoaLogix is amortizing the
license over its estimated useful life of 115 months. Under the license
agreement, CoaLogix is required to pay the greater of (1) royalties to the
third-party of 2% of certain sales defined in the agreement or (2) minimum
annual royalties of $5, $5, $10, $20, $30 $40 and $50 for the periods ending
September 30, 2010 through 2016 and thereafter. The license agreement may be
terminated by CoaLogix at any time with 60 days written notice.




All
intangible assets are being amortized over their estimated useful lives, which
were estimated to be ten years for SCR Technologies, seven years for Naval
Technologies, 14 years for software and customer relationships in the Coreworx
segment, 10 years for software and customer relationships in the GridSense
segment and twenty years for Sensor Technologies. Amortization expense for each
of the nine months ended September 30, 2009 and 2010 amounted to $805 and $944,
respectively.  Amortization expense with respect to intangible assets
is estimated to be $1,523, $1,479, $1,423, $1,385 and $1,304 for each of the
years ending September 30, 2011 through 2015.





Note
8:  Stockholders’ Equity




(a)
Capital Raise




On March
8, 2010, the Company completed a registered direct offering through a placement
agent of 2,231,818 shares of its common stock pursuant to separate subscription
agreements between the Company and each of the investors at $5.50 per share to
certain accredited investors for gross proceeds of approximately
$12,275.




The
aggregate net proceeds from the Offering, after deducting the placement agent’s
fee and the offering expenses payable by the Company in connection with the
offering, was $11,467.




(b)
Authorized Shares




At the
annual meeting of stockholders on June 10, 2010, the Company’s stockholders
approved an amendment to its Certificate of Incorporation to increase the number
of authorized shares of capital stock from 20,000,000 shares to 30,000,000
shares, all of which shall be Common Stock.  The increase in authorized
shares was effected pursuant to a Certificate of Amendment to the Certificate of
Incorporation filed with the Secretary of State of the State of Delaware on, and
effective as of, June 15, 2010.




(c)
Treasury Shares




As
indicated in Note 4(c), the Company used 473,161 of its treasury shares to
acquire shares of USSI. The treasury shares had a basis of $1,791 and a value of
$2,229 on the date of the transfer. In accordance with generally accepted
accounting principles, the Company recorded an adjustment of $438 to retained
earnings as a result of the transfer of the treasury shares.





Note
9:  Stock Options and Warrants




(a) Acorn
Stock Options





A summary
of stock option activity for the nine months ended September 30, 2010 is as
follows:




15





Number
      of Options (in shares)
                  
                  
                  Weighted
      Average Exercise Price
                  
                  Weighted
                    Average
                    Remaining
                    Contractual
                    Life
                  
                  Aggregate
      Intrinsic ValueOutstanding
      at December 31, 2009
                  
                  
                  1,745,165
                  
                  
                  $
                  3.52Granted*
                  
                  
                  220,000
                  
                  
                  $
                  5.89Exercised
                  
                  
                  (67,500
                  )
                  
                  $
                  2.36Forfeited
      or expired
                  
                  
                  --Outstanding
      at September 30, 2010
                  
                  
                  1,897,665
                  
                  
                  $
                  3.84
                  
                  3.5
      years
                  
                  $
                  2,604Exercisable
      at  September 30, 2010
                  
                  
                  1,504,121
                  
                  
                  $
                  3.60
                  
                  3.6
      years
                  
                  $
                  2,306





*  25,000
options granted in the three months ended September 30, 2010





The
weighted average grant date fair value of the 220,000 stock options granted
during the first nine months of 2010 was $3.81 per share. The fair value of the
options granted was estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted average
assumptions:





Volatility
                68%Expected term
      (years)
                6.4Risk
      free interest rate
                3.0%Expected
      dividend yield
                None





At the
Company’s Annual Meeting of Stockholders on June 10, 2010, the
Company’s stockholders approved an amendment to its 2006 Stock Incentive
Plan (the “Plan”) to increase the aggregate number of shares of common stock
which may be awarded under the Plan from 665,000 to 1,665,000 and the aggregate
number of shares which may be awarded pursuant to incentive stock options by
800,000 to 1,000,000.   As a result of the approval of the amendment,
1,008,000 shares are available for new awards under the Plan, of which 800,000
may be granted as incentive stock options.





(b)
Stock-based compensation expense





Total
stock-based compensation expense included in the Company’s statements of
operations for the three and nine months ended September 30, 2009 and 2010,
respectively, was:








Nine
      months ended September 30,
                    
                    
                    Three
      months ended September 30,2009
                    
                    
                    2010
                    
                    
                    2009
                    
                    
                    2010Cost
      of sales
                    
                    $
                    101
                    
                    
                    $
                    18
                    
                    
                    $
                    3
                    
                    
                    $
                    9Research
      and development expense
                    
                    
                    76
                    
                    
                    
                    91
                    
                    
                    
                    36
                    
                    
                    
                    29Selling,
      general and   administrative expenses
                    
                    
                    964
                    
                    
                    
                    954
                    
                    
                    
                    336
                    
                    
                    
                    329Total
      stock based compensation expense
                    
                    $
                    1,141
                    
                    
                    $
                    1,063
                    
                    
                    $
                    375
                    
                    
                    $
                    367





16





(c)
Warrants





A summary
of stock warrants activity for the nine months ended September 30, 2010 is as
follows:





Number
      of Warrants (in shares)
                  
                  
                  Weighted
      Average Exercise Price
                  
                  Weighted
                    Average
                    Remaining
                    Contractual
                    LifeOutstanding
      at December 31, 2009
                  
                  
                  246,904
                  
                  
                  $
                  4.50
                  
                  2.3
      yearsGranted
                  
                  
                  --Exercised
                  
                  
                  (13,598
                  )Forfeited
      or expired
                  
                  
                  --Outstanding
      and exercisable at
                    September
      30, 2010
                  
                  
                  233,306
                  
                  
                  $
                  4.50
                  
                  1.5
      years





Note
10: Warranty Provision





The
following table summarizes the changes in accrued warranty liability from the
period from December 31, 2009 to September 30, 2010:





Gross
      Carrying AmountBalance
      at December 31, 2009
                  
                  $
                  284Warranties
      issued
                  
                  
                  135Adjustment
      of provision
                  
                  
                  20Warranty
      claims
                  
                  
                  --Balance
      at  September 30, 2010*
                  
                  $
                  439


* $298 of
the warranty provision is included in Other Current Liabilities and $141 in
Other Liabilities at September 30, 2010.





The
Company’s warranty provision is based upon the Company’s estimate of costs to be
incurred during the warranty period.





Note
11: Fair Value Measurement





Financial
items measured at fair value are classified in the table below in accordance
with the hierarchy established in applicable accounting principles.




17





As
      at September 30, 2010Level
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3
                  
                  
                  TotalCash
      and cash equivalents
                  
                  $
                  4,966
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  4,966Restricted
      deposits – current and non-current
                  
                  
                  2,292
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  2,292Derivative
      assets
                  
                  
                  101
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  101Total
                  
                  $
                  7,359
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  7,359





As
      at December 31, 2009Level
      1
                  
                  
                  Level
      2
                  
                  
                  Level
      3
                  
                  
                  TotalCash
      and cash equivalents
                  
                  $
                  11,208
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  11,208Restricted
      deposits – current and non-current
                  
                  
                  2,238
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  2,238Derivative
      liabilities
                  
                  
                  (5
                  )
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  (5
                  )Total
                  
                  $
                  13,441
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  13,441





Derivative
assets and liabilities that are classified in Level 1 consist of forward
contracts for the purchase of New Israeli Shekels for which market prices are
readily available. Unrealized gains or losses from forward contracts are
recorded in Finance expense, net.





Note
12:  Other Investments




(a)
            EnerTech





In March
2010, the Company received a distribution of $135 from EnerTech relating to the
Company’s investment in EnerTech. The distribution is recorded as dividends
received from EnerTech in the Company's Consolidated Statement of
Operations.





In the
first nine months of 2010, the Company received capital calls of $900 from
EnerTech relating to the Company’s investment in EnerTech. The Company funded
the capital calls in April 2010 ($500) and September 2010 ($400). The Company
has currently funded $3,050 of its $5,000 investment commitment in
EnerTech.





(b)
            Coreworx





In July
2010, the Company converted approximately $11,712 of loans and accrued interest
due from Coreworx to equity receiving an additional 51,714,125 common shares of
Coreworx. The Company’s holdings in Coreworx both before and after the
conversion were 100%.




18





Note
13: Segment Information




The Company currently operates in five
operating segments:




·
              The
      Company’s CoaLogix segment provides SCR (Selective Catalytic Reduction)
      catalyst and management services through the Company’s CoaLogix
      subsidiary. SCR systems are used by coal-fired power plants to reduce
      nitrogen oxides (NOx) emissions.


·
              Naval
      and RT Solutions whose activities are focused on the following areas –
      sonar and acoustic related solutions for energy, defense and commercial
      markets and other real-time and embedded hardware & software
      development and production. Naval and RT Solutions activities are provided
      through the Company’s DSIT Solutions Ltd. subsidiary.


·
              The
      Company’s Coreworx segment (formerly known as the Energy Infrastructure
      Software segment) provides software for integrated project information and
      cost control solutions in the energy exploration and power generation
      markets. The software is used primarily for management of large capital
      projects. The software and solutions are provided by the Company's
      Coreworx subsidiary and by Decision Dynamics which was acquired by
      Coreworx in April 2010 (see Note 4(a)). As Decision Dynamics was acquired
      in April 2010, Coreworx segment information for the three and nine month
      period ended September 30, 2010 is not comparable to the three and nine
      month periods ended September 30, 2009. (See Note 15(a) – Subsequent
      Events.)


·
              The
      Company’s GridSense segment provides Smart Grid Distribution Automation
      products and services.  As these activities were acquired in May
      2010 (see Note 4(b)), there are no comparative results reported for these
      activities for the three and nine month periods ended September 30, 2009.
      The Company’s GridSense segment also includes the activities of OMI which
      was acquired in May 2010 (see Note 4(d)).


·
              The
      Company’s USSI segment provides Energy and Security Sensor Systems
      services.  USSI was effectively acquired in February 2010 (see
      Note 4(c)). USSI's primary focus is to develop and produce fiber optic
      sensing systems for the energy and security markets.  As these
      activities were effectively acquired in February 2010, there are no
      comparative results reported for these activities for the three and nine
      month periods ended September 30, 2009.


Other operations include various
operations in DSIT that do not meet the quantitative thresholds under applicable
accounting principles.




19










CoaLogix
                          
                          
                          Naval and RT Solutions
                          
                          
                          Coreworx*
                          
                          
                          GridSense
                          
                          
                          USSI
                          
                          
                          Other
                          
                          
                          TotalNine
      months ended September 30, 2010:Revenues
      from external customers
                          
                          $
                          14,812
                          
                          
                          $
                          7,675
                          
                          
                          $
                          2,758
                          
                          
                          $
                          1,188
                          
                          
                          $
                          192
                          
                          
                          $
                          940
                          
                          
                          $
                          27,565Intersegment
      revenues
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --Segment
      gross profit
                          
                          
                          4,703
                          
                          
                          
                          3,537
                          
                          
                          
                          2,227
                          
                          
                          
                          676
                          
                          
                          
                          47
                          
                          
                          
                          342
                          
                          
                          
                          11,532Stock
      compensation expense
                          
                          
                          333
                          
                          
                          
                          --
                          
                          
                          
                          288
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          621Depreciation
      and amortization expense
                          
                          
                          865
                          
                          
                          
                          130
                          
                          
                          
                          326
                          
                          
                          
                          147
                          
                          
                          
                          96
                          
                          
                          
                          18
                          
                          
                          
                          1,582Segment
      income (loss) before income taxes
                          
                          
                          (1,093
                          )
                          
                          
                          1,538
                          
                          
                          
                          (7,621
                          )
                          
                          
                          (1,078
                          )
                          
                          
                          (737
                          )
                          
                          
                          45
                          
                          
                          
                          (8,946
                          )Nine
      months ended September 30, 2009:Revenues
      from external customers
                          
                          
                          12,761
                          
                          
                          
                          5,541
                          
                          
                          
                          3,487
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          932
                          
                          
                          
                          22,721Intersegment
      revenues
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --Segment
      gross profit
                          
                          
                          4,169
                          
                          
                          
                          2,368
                          
                          
                          
                          2,888
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          305
                          
                          
                          
                          9,730Stock
      compensation expense
                          
                          
                          378
                          
                          
                          
                          2
                          
                          
                          
                          171
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          551Depreciation
      and amortization expense
                          
                          
                          922
                          
                          
                          
                          140
                          
                          
                          
                          275
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          20
                          
                          
                          
                          1,357Segment
      income (loss) before income taxes
                          
                          
                          (295
                          )
                          
                          
                          605
                          
                          
                          
                          (1,115
                          )
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          22
                          
                          
                          
                          (783
                          )Three
      months ended September 30, 2010:Revenues
      from external customers
                          
                          
                          5,479
                          
                          
                          
                          2,861
                          
                          
                          
                          1,091
                          
                          
                          
                          671
                          
                          
                          
                          160
                          
                          
                          
                          325
                          
                          
                          
                          10,587Intersegment
      revenues
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --Segment
      gross profit
                          
                          
                          916
                          
                          
                          
                          1,281
                          
                          
                          
                          940
                          
                          
                          
                          349
                          
                          
                          
                          37
                          
                          
                          
                          130
                          
                          
                          
                          3,653Stock
      compensation expense
                          
                          
                          119
                          
                          
                          
                          --
                          
                          
                          
                          92
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          211Depreciation
      and amortization expense
                          
                          
                          276
                          
                          
                          
                          42
                          
                          
                          
                          69
                          
                          
                          
                          84
                          
                          
                          
                          32
                          
                          
                          
                          6
                          
                          
                          
                          509Segment
      income (loss) before income taxes
                          
                          
                          (889
                          )
                          
                          
                          568
                          
                          
                          
                          (2,417
                          )
                          
                          
                          (759
                          )
                          
                          
                          (301
                          )
                          
                          
                          41
                          
                          
                          
                          (3,757
                          )Three
      months ended September 30, 2009:Revenues
      from external customers
                          
                          
                          2,824
                          
                          
                          
                          1,905
                          
                          
                          
                          1,385
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          349
                          
                          
                          
                          6,463Intersegment
      revenues
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --Segment
      gross profit
                          
                          
                          698
                          
                          
                          
                          819
                          
                          
                          
                          1,202
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          142
                          
                          
                          
                          2,861Stock
      compensation expense
                          
                          
                          148
                          
                          
                          
                          --
                          
                          
                          
                          60
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          208Depreciation
      and amortization expense
                          
                          
                          309
                          
                          
                          
                          47
                          
                          
                          
                          102
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          6
                          
                          
                          
                          464Segment
      income (loss) before income taxes
                          
                          
                          (828
                          )
                          
                          
                          192
                          
                          
                          
                          (512
                          )
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          43
                          
                          
                          
                          (1,105
                          )





*  See
Note 15(a) – Subsequent Events




20




Reconciliation
of Segment Income (Loss) to Consolidated Net Income





Nine
      months ended
                    September
      30,
                  
                  
                  Three
      months ended
                    September
      30,2009
                  
                  
                  2010
                  
                  
                  2009
                  
                  
                  2010Total
      loss for reportable segments
                  
                  $
                  (805
                  )
                  
                  $
                  (8,991
                  )
                  
                  
                  (1,148
                  )
                  
                  $
                  (3,798
                  )Other
      operational segment income
                  
                  
                  22
                  
                  
                  
                  45
                  
                  
                  
                  43
                  
                  
                  
                  41Total
      operating loss
                  
                  
                  (783
                  )
                  
                  
                  (8,946
                  )
                  
                  
                  (1,105
                  )
                  
                  
                  (3,757
                  )Share
      of losses in GridSense
                  
                  
                  (129
                  )
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --Share
      of income in Paketeria
                  
                  
                  263
                  
                  
                  
                  --
                  
                  
                  
                  263
                  
                  
                  
                  --Non-controlling
      interests
                  
                  
                  (48
                  )
                  
                  
                  688
                  
                  
                  
                  96
                  
                  
                  
                  373Impairments
                  
                  
                  (80
                  )
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  --Gain
      on investment in GridSense
                  
                  
                  --
                  
                  
                  
                  1,327
                  
                  
                  
                  --
                  
                  
                  
                  --Gain
      on sale of Comverge shares
                  
                  
                  1,403
                  
                  
                  
                  --
                  
                  
                  
                  176
                  
                  
                  
                  --Dividends
      received
                  
                  
                  --
                  
                  
                  
                  135
                  
                  
                  
                  --
                  
                  
                  
                  --Income
      tax expense*
                  
                  
                  72
                  
                  
                  
                  (570
                  )
                  
                  
                  72
                  
                  
                  
                  (372
                  )Net
      loss of corporate headquarters and
      other
                    unallocated
      costs**
                  
                  
                  (2,642
                  )
                  
                  
                  (3,476
                  )
                  
                  
                  (726
                  )
                  
                  
                  (811
                  )Net
      income (loss) attributable to
                    Acorn
      Energy Inc.
                  
                  $
                  (1,944
                  )
                  
                  $
                  (10,842
                  )
                  
                  $
                  (1,224
                  )
                  
                  $
                  (4,567
                  )





*    Tax
expense relates primarily to DSIT's consolidated net income.





**Includes stock
compensation expense of $591 and $462 for the nine month periods ending
September 30, 2009 and 2010, respectively. Includes stock compensation expense
of $168 and $163 for the three-month periods ending September 30, 2009 and 2010,
respectively.





Note
14: Lawsuit by Environmental Energy Services, Inc.





In
connection with the lawsuit brought by Environmental Energy Services, Inc.
(“EES”) against CoaLogix Inc. and CoaLogix’ CEO William McMahon, on May 11,
2010, CoaLogix, Mr. McMahon and EES entered into a Settlement and Release
Agreement (the “Settlement Agreement”) providing for EES’ agreement to dismiss
its suit against CoaLogix and Mr. McMahon with prejudice following the payment
by CoaLogix to EES of an undisclosed sum. Under the terms of the Settlement
Agreement the amount paid to EES by CoaLogix is to remain
confidential.  CoaLogix paid such sum of money to EES on May 11, 2010,
and EES dismissed its suit with prejudice.  In addition, EES and
CoaLogix together with Mr. McMahon agreed to mutually release one another from
claims related to the EES suit.





Note
15: Subsequent Events





(a)
            Coreworx





On
November 9, 2010, the Company entered into a letter of intent with Coreworx (the
“Letter of Intent”) for the Company to sell all of its common stock in Coreworx
to a management buyout group consisting of Coreworx’ management and certain
employees and other investors.  Under the terms of the Letter of
Intent:





i.
              Coreworx’
      remaining indebtedness owed to the Company of approximately $5,436 will be
      reduced by $1,436 to $4,000 in consideration of the Company receiving at
      closing 10% of the outstanding shares of common stock of Coreworx (“New
      Coreworx Shares”).


ii.
            The
      Company will receive at closing warrants to acquire that number of
      additional shares of common stock of Coreworx equal to the number of New
      Coreworx Shares.




21






iii.
              The
      debt of $4,000 owed by Coreworx to the Company (the “Coreworx Debt”) will
      be non-interest bearing and the first payment will be due January 31,
      2012.


iv.
              The
      Coreworx Debt will be repaid in an amount equal to 4% of Coreworx’ gross
      revenues commencing at the date of closing and payments for the period
      commencing on the closing date through December 31, 2011 will be paid in
      12 equal monthly installments starting on January 31, 2012 and on the last
      day of each of the following 11 months.


v.
              The
      payments of the Coreworx Debt for revenue periods subsequent to Coreworx’
      2011 fiscal year will be payable on a quarterly basis within 45 days
      following the end of Coreworx’ fiscal quarter-end
  periods.


vi.
              Following
      repayment of the Coreworx Debt, Coreworx will pay to the Company a royalty
      fee (the “Royalty”) equal to 4% of Coreworx’ gross revenues up to a
      maximum amount of $20,000.


vii.
              The
      Royalty will be paid on a quarterly basis within 45 days following the end
      of Coreworx’ fiscal quarter-end periods.


viii.
            Coreworx
      will pay the Company a restructuring fee of $40 on or before July 1,
      2011.





Repayment
of the Coreworx Debt will be secured by a security interest in Coreworx’
intellectual property on a pari passu basis with the
other holders of Coreworx’ common stock following closing which will necessitate
the Company releasing its present security interest in Coreworx’ other personal
property and intangibles at closing.





The
Letter of Intent is binding, and is conditional upon, among other things,
execution and delivery of the definitive transaction documents, Coreworx raising
capital of a minimum of CDN$3,000 on or before November 30, 2010 and approval of
the transaction documents by the Company’s Board of Directors.  Upon
satisfaction of such conditions, closing is to occur on or before December 15,
2010.





In
connection with the sale of the Company’s shares of common stock of Coreworx,
the Company has determined that a material impairment of the Company’s goodwill
and other intangible assets related to Coreworx will be taken by December 31,
2010.  The Company estimates the pre-tax, non-cash charges relating to
the foregoing impairment will be approximately $9,429, which represents the
current book value of the goodwill and other intangible assets related to
Coreworx (see Note 7).  The impairment charges are not expected to
result in future cash expenditures. Coreworx losses will be presented as a Loss
from Discontinued Operations in future periods.





(b)  Registration
Statement





On
September 16 2010, the Company filed with the Securities and Exchange Commission
a registration statement on Form S-3 which registers a shelf for offer and sale
from time to time the securities referenced in the registration statement in one
or more offerings with an aggregate offering price of up to $20 million. Such
registration statement was deemed effective on October 27, 2010.





(c)  Change
of USSI Option Terms




Under the
Option Agreements signed on February 23, 2010 with USSI (see Note 4(c)(i)), the
Company had the right to acquire 1,693,391 additional shares of USSI’s common
stock from USSI on or before November 30, 2010 in consideration for payment of
$1,500.  On November 4, 2010, the Option Agreements were amended such
that the Company may exercise options on a monthly basis (November 30, 2010,
December 30, 2010, January 31, 2011, February 28, 2011, March 30, 2011 and May
1, 2011) with a payment of $250 per exercise. Upon each exercise, the Company
would receive 282,232 shares of USSI for each of the first five options
exercised and 282,231for the last exercise option. The options can only be
exercised sequentially, and if the Company does not exercise a particular
option, all subsequent options expire.




22





ACORN
ENERGY, INC. AND SUBSIDIARIES


Management’s
Discussion and Analysis of


Financial
Condition and Results of Operations





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




The
following discussion includes statements that are forward-looking in nature.
Whether such statements ultimately prove to be accurate depends upon a variety
of factors that may affect our business and operations.  Certain of
these factors are discussed in this report and in our Annual Report on Form 10-K
for the year ended December 31, 2009.





REVENUES
BY COMPANY





The
following table shows, for the periods indicated, the dollar amount (in
thousands) of the consolidated revenues attributable to each of our consolidated
companies.




The
financial results of GridSense are included in our consolidated financial
statements effective May 12, 2010. The financial results of Decision Dynamics
are included in our Coreworx results effective April 30, 2010. The financial
results of USSI are included in our consolidated financial statements effective
February 23, 2010. Accordingly, there are no comparative results reported for
these activities for the three and nine month periods ended September 30,
2009.





Nine
      months ended
                      September
      30,
                    
                    
                    Three
      months ended
                      September
      30,2009
                    
                    
                    2010
                    
                    
                    2009
                    
                    
                    2010CoaLogix
                    
                    $
                    12,761
                    
                    
                    $
                    14,812
                    
                    
                    $
                    2,824
                    
                    
                    $
                    5,479DSIT
      Solutions
                    
                    
                    6,473
                    
                    
                    
                    8,615
                    
                    
                    
                    2,254
                    
                    
                    
                    3,186Coreworx
                    
                    
                    3,487
                    
                    
                    
                    2,758
                    
                    
                    
                    1,385
                    
                    
                    
                    1,091GridSense
                    
                    
                    --
                    
                    
                    
                    1,188
                    
                    
                    
                    --
                    
                    
                    
                    671USSI
                    
                    
                    --
                    
                    
                    
                    192
                    
                    
                    
                    --
                    
                    
                    
                    160Total
                    
                    $
                    22,721
                    
                    
                    $
                    27,565
                    
                    
                    $
                    6,463
                    
                    
                    $
                    10,587





BACKLOG





As of
September 30, 2010, our backlog of work to be completed was as follows (amounts
in millions of U.S. dollars):




Backlog
      at September 30, 2010CoaLogix
                  
                  $
                  9.3DSIT
      Solutions
                  
                  
                  8.4GridSense
                  
                  
                  0.3USSI
                  
                  
                  0.4Total
                  
                  $
                  18.4





23





RECENT
DEVELOPMENTS





Coreworx





On
November 9, 2010, we entered into a letter of intent with Coreworx (the “Letter
of Intent”) for us to sell all of our common stock in Coreworx to a management
buyout group consisting of Coreworx’ management and certain employees and other
investors.  Under the terms of the Letter of
Intent:  Coreworx’ remaining indebtedness owed to us of approximately
$5.4 million will be reduced by approximately $1.4 million to $4.0 million in
consideration of Acorn receiving at closing 10% of the outstanding shares of
common stock of Coreworx (“New Coreworx Shares”); we will receive at closing
warrants to acquire that number of additional shares of common stock of Coreworx
equal to the number of New Coreworx Shares; the debt of $4.0 million owed by
Coreworx to Acorn (the “Coreworx Debt”) will be non-interest bearing, and the
first payment will be due January 31, 2012; the Coreworx Debt will be repaid in
an amount equal to 4% of Coreworx’ gross revenues commencing at the date of
closing, and payments for the period commencing on the closing date through
December 31, 2011 will be paid in 12 equal monthly installments starting on
January 31, 2012 and on the last day of each of the following 11 months; the
payments of the Coreworx Debt for revenue periods subsequent to Coreworx’ 2011
fiscal year will be payable on a quarterly basis within 45 days following the
end of Coreworx’ fiscal quarter-end periods; following repayment of the Coreworx
Debt, Coreworx will pay us a royalty fee (the “Royalty”) equal to 4% of
Coreworx’ gross revenues up to a maximum amount of $20 million; the Royalty will
be paid on a quarterly basis within 45 days following the end of Coreworx’
fiscal quarter-end periods; and Coreworx will pay us a restructuring fee of
$40,000 on or before July 1, 2011.





Repayment
of the Coreworx Debt will be secured by a security interest in Coreworx’
intellectual property on a pari passu basis with the
other holders of Coreworx’ common stock following closing which will necessitate
Acorn releasing its present security interest in Coreworx’ other personal
property and intangibles at closing.





The
Letter of Intent is binding, and is conditional upon, among other things,
execution and delivery of the definitive transaction documents, Coreworx raising
capital of a minimum of CDN$3 million on or before November 30, 2010 and
approval of the transaction documents by our Board of Directors.  Upon
satisfaction of such conditions, closing is to occur on or before December 15,
2010.





In
connection with the sale of our shares of common stock of Coreworx, we have
determined that a material impairment of our goodwill and other intangible
assets related to Coreworx will be taken by December 31, 2010.  We
estimate the pre-tax, non-cash charges relating to the foregoing impairment will
be approximately $9.4 million, which represents the current book value of the
goodwill and other intangible assets related to Coreworx.  The
impairment charges are not expected to result in future cash expenditures.
Coreworx losses will be presented as a Loss from Discontinued Operations in
future periods.





Revenue
Guidance




Following
the recent decision to sell our interests in Coreworx, whose revenues were
included in our adjusted revenue guidance range of $40 to $44 million for the
year ending December 31, 2010, we accordingly revise that guidance to exclude
the revenues of Coreworx as the operations of Coreworx are deemed to be a
discontinued operation. We are currently revising the adjusted revenue guidance
to a revenue range of $37 to $39 million for 2010 to account for the exclusion
of Coreworx from our guidance.




24





Change
of USSI Option Terms




Under the
Option Agreements signed on February 23, 2010 with USSI, we had the right to
acquire 1,693,391 additional shares of USSI’s common stock from USSI on or
before November 30, 2010 in consideration for payment of $1.5
million.  On November 4, 2010, the Option Agreements were amended such
that we may exercise options on a monthly basis (November 30, 2010, December 30,
2010, January 31, 2011, February 28, 2011, March 30, 2011 and May 1, 2011) with
a payment of $250,000 per exercise. Upon each exercise, we would receive 282,232
shares of USSI for each of the first five options exercised and 282,231 for the
last exercise option. The options can only be exercised sequentially, and if the
Company does not exercise a particular option, all subsequent options
expire.





OVERVIEW
AND TREND INFORMATION





During
the 2010 period included in this report, we had operations in five reportable
segments:




·
              Catalyst
      regeneration technologies and management services for SCR systems which
      are provided through our CoaLogix subsidiary.


·
              Sonar
      and acoustic related solutions for energy, defense and commercial markets
      and other real-time embedded hardware & software development is
      reported in our Naval and RT Solutions segment whose activities are
      conducted through our DSIT subsidiary.


·
              Software
      for integrated project information and cost control solutions for energy
      exploration and power generation markets provided through our Coreworx
      subsidiary. The reported operations of Coreworx include the operations of
      Decision Dynamics Inc. which was acquired by Coreworx in April 2010. See
      Recent Developments – Coreworx.


·
              Smart
      grid distribution automation products and services provided through our
      GridSense subsidiary which was acquired in May 2010.


·
              Energy
      and security sensor systems services which is provided by USSI which was
      effectively acquired by us in February 2010.


Accordingly,
our results for the three and nine month periods ending September 30,
2010  are not comparable to the three and nine month periods ending
September 30, 2009 with respect to Coreworx’, GridSense’s and USSI’s
results.




The
following analysis should be read together with the segment information provided
in Note 13 to the interim unaudited consolidated financial statements included
in this quarterly report.





CoaLogix




Our CoaLogix segment reported increased
revenues in the first nine months of 2010 as compared to the first nine months
of 2009 as well as increased gross profits. Gross margin, however, decreased
slightly during the first nine months of 2010 as compared to the first nine
months of 2009 as margins were negatively affected by certain start-up related
delays in bringing on-line CoaLogix’ new facility at Steele Creek Road in
Charlotte, North Carolina in August 2010. Third quarter 2010 revenues nearly
doubled in comparison to third quarter 2009 revenues, however, third quarter
2010 gross margin was less that third quarter 2009 gross margin due to the
previously mentioned effect of the opening of CoaLogix’ Steele Creek facility in
the third quarter of 2010.




25




Revenues of $14.8 million represent an
increase of approximately $2.1 million or 16% in the first nine months of 2010
as compared to the first nine months of 2009. During the third quarter of 2009,
revenue related jobs were re-scheduled to the fourth quarter of 2009, also
causing corresponding shift in revenue between these periods.  As a
result, third quarter 2010 revenues of $5.5 million reflected an increase of
$2.7 million or 94% compared to third quarter 2009 revenues of $2.8
million.  Third quarter 2010 revenues also reflected a $0.6 million or
13% increase over second quarter 2010 revenues. CoaLogix expects fourth quarter
revenues to increase further over third quarter revenues as the Steele Creek
facility is operational for the full quarter significantly increasing capacity
and as efficiency is increased following a debugging of production line start-up
issues.  In addition to directing its resources to processing modules
for revenue, some of CoaLogix' processing resources were directed to processing
its own inventory of modules which increased by approximately $1.0 million in
the first nine months of 2010. CoaLogix processing of its own inventory of
modules slowed during the third quarter as more plant capacity was utilized for
revenue related projects.





With increased revenues, gross profit
in the first nine months of 2010 increased by approximately $0.5 million, or
13%, over 2009 gross profit. The increase in gross profit was due to the
increase in revenues as gross margin decreased slightly from 33% for the 2009
period to 32% in the 2010 period. Gross margin in the third quarter was
significantly impacted by startup activities and related increased resources
associated with the opening of the Steele Creek facility. CoaLogix expects the
gross margin in future periods to recover to previous levels as the Steele Creek
facility becomes optimized and increases its capacity.





During the first nine months of 2010,
CoaLogix recorded approximately $5.8 million of selling, general and
administrative (SG&A) expense as compared to $4.4 million recorded during
the first nine months of 2009. The increase in CoaLogix SG&A expense is
attributable to increased overhead costs resulting from the company’s growth,
which includes new staff hires and expenses associated with the Steele Creek
facility prior to commencement of August start up.   Additional
SG&A expense growth is attributable to a provision recorded in the second
quarter for the settlement of the lawsuit with EES.





On July 22, 2010, the subsidiaries of
CoaLogix executed an amendment of its credit facility which extended and
increased its credit availability to a $4 million formula based line-of-credit,
a $1 million non-formula based line-of-credit and $1 million non-formula based
letter of credit. The credit facility expires June 30, 2011 and carries an
interest rate of the greater of 1.50% above prime rate or 5.50% on the formula
line of credit and the greater of 2.00% above prime rate or 6.00% on the
non-formula line of credit. The maximum amount of outstanding credit under the
facility is $5 million.





During
the quarter, CoaLogix received new orders totaling $5.9 million and at the end
of September 2010 had a backlog of $9.3 million.  CoaLogix expects
revenues in the fourth quarter of 2010 to accelerate as CoaLogix anticipates
being at near full capacity at both of its processing facilities.





In April
2009, we entered into an agreement with CoaLogix, EnerTech and certain members
of CoaLogix’ senior management pursuant to which Acorn and EnerTech each agreed
to invest $5.6 million, and certain members of CoaLogix’ senior management
agreed to invest an aggregate of approximately $260,000, in
CoaLogix.  Through September 30, 2010, CoaLogix received the entire
$11.5 million (including the $5.6 million from Acorn) investment commitment from
Acorn, EnerTech and CoaLogix' senior management, including $5.9 million invested
($2.9 million by Acorn) in 2010.  Proceeds of the investment were used
by CoaLogix primarily for development of CoaLogix’ new Steele Creek facility,
technology development, legal expenses and computer software.




26




DSIT
Solutions


DSIT
reported significantly increased revenues in the first nine months of 2010 as
compared to the first nine months of 2009 as well as significantly increased
gross profit, gross margin and net income. DSIT's revenues of $8.6 million for
the first nine months of 2010 represents an increase of approximately $2.1
million or 33% as compared to the first nine months of 2009. Third quarter 2010
revenues also reflected increases compared to third quarter 2009 revenues of
$2.3 million ($0.9 million or 41%) and second quarter 2010 revenues ($0.4
million or 13%). The increase in revenues was primarily due to increased
revenues in our Naval and RT Solutions segment which reported nine month 2010
revenues of $7.7 million compared to $5.5 million in the first nine months of
2009 and $2.9 million in the third quarter of 2010 compared to $1.9 million in
the third quarter of 2009. The increase in revenues was primarily due to the
revenues recorded from the $4.4 million AquaShield DDS order received at the end
of 2009 as well as the revenues from the recently announced orders totaling more
than $6 million received from an Asian country for its underwater sonar systems.
The combined value of the contracts is more than $6 million.





DSIT's gross profit in the first nine
months of 2010 increased by approximately $1.2 million or 45% over the gross
profit in the first nine months of 2009. Gross margins also increased in the
first nine months of 2010 to 45% as compared to 41% in the first nine months of
2009. The increase in gross profit was attributable to the increased margins on
projects as the current mix of projects has higher margins than those in 2009,
particularly the Naval and RT Solutions' AquaShield DDS projects.





In 2010,
DSIT increased its net income to $1.2 million as compared to $0.7 million in the
first nine months of 2009 (an increase of 76%) due to the increased gross profit
($1.2 million) which more than offset the increased general and administrative
costs ($0.4 million) and income tax expense ($0.4 million).





At December 31, 2009, DSIT had a
backlog of approximately $7.6 million. During the first nine months of 2010, we
received new orders totaling approximately $9.4 million and at the end of
September 2010 had a backlog of approximately $8.4 million. Based on our backlog, and
pending orders, we expect that DSIT's revenues for the remainder of 2010 and
first quarters of 2011 will be at least that of our third quarter 2010
revenue.





Coreworx




Coreworx’
revenues of $2.8 million (which includes approximately $0.4 million attributable
to Decision Dynamics which was acquired in April 2010) in the first nine months
of 2010 represents a decrease of $0.7 million or 21% from Coreworx’ first nine
months 2009 revenues of $3.5 million. The decrease in revenues is mainly due to
lower license fee revenues which were partially offset by the above-mentioned
revenues from Decision Dynamics, as professional services and maintenance fees
were relatively stable in 2010 compared with 2009.




Coreworx’
gross profit in the first nine months of 2010 was $2.2 million (of which $0.3
million was attributable to Decision Dynamics) compared to 2009 first nine
months profit of $2.9 million – a decrease of 23%.  The decrease in
Coreworx’ gross profit in 2010 was primarily attributable to the decrease in
revenues as Coreworx’ gross margin decreased slightly from 83% in the first nine
months of 2009 to 81% in the first nine months of 2010. Gross profit and margin
in 2010 were negatively impacted by a one-time charge to expense in the first
quarter of 2010.




Coreworx'
net loss of $7.6 million in the first nine months of 2010 was $6.5 million
greater than its net loss in the first nine months of 2009 due in part to the
approximately $0.8 million of loss attributable to Decision Dynamics activities
in the period since Coreworx’ acquisition and due to lower gross profit ($1.0
million) on reduced sales. The balance of Coreworx’ increased loss was caused by
a combination of factors. Coreworx’ results were negatively impacted by the
change in the value of the Canadian dollar during the nine month period ended
September 30, 2009 compared to the nine month period ended September 30, 2010.
The average exchange rate of the Canadian dollar during the 2010 period was
approximately 13% greater than the average exchange rate of the Canadian dollar
during the 2009 period.  As most of Coreworx’ costs are denominated in
Canadian dollars, this change in the value of the Canadian dollar caused an
increase in Coreworx’ reported costs in U.S. dollars. In addition, Coreworx had
increased development costs related to additional developer, architect, product
management and quality assurance personnel in the development of new products,
as well as increased selling and marketing costs as it expanded its sales force
to penetrate new markets and costs related to the acquisition of Decision
Dynamics.




27




During
the first nine months of 2010, Acorn lent Coreworx nearly $6.5 million to
finance its working capital needs. In addition, in the second quarter of 2010,
Coreworx borrowed against a credit facility ($0.3 million) which it arranged
with a major commercial bank in Canada during the second quarter of 2010 secured
by its refundable SR&ED tax credits and is guaranteed by Acorn. The loan is
repayable in the fourth quarter of 2010 to coincide with the expected receipt of
SR&ED credits from the Canada Revenue Agency and the Ontario Ministry of
Revenue tax authorities.





On
November 9, 2010, we entered into a Letter of Intent with Coreworx to sell all
of our common stock in Coreworx to a management buyout group.  The
terms of the Letter of Intent are described in “Recent Developments” under
“Coreworx.”





GridSense





In
accordance with applicable accounting standards, we began consolidating the
results of GridSense beginning May 12, 2010, the date we acquired the
outstanding GridSense shares not previously owned by us (see Note 4(b) to the
interim unaudited consolidated financial statements included in this quarterly
report).  Prior to that date we accounted for our GridSense investment
using the equity method. As our investment in GridSense was reduced to zero in
2009, we recorded no equity income or loss in GridSense during the period in
2010 prior to May 12, 2010.




In
addition, we recorded a gain of $1.3 million on the step-up of the previous
carrying value of our investment in GridSense to fair value in accordance with
generally accepted accounting principles for step acquisitions.




In May
2010, GridSense acquired the assets of On-Line Monitoring Inc. (“OMI”), a
manufacturer of on-line substation monitoring equipment based in Exton,
PA.  OMI is recognized as a leader in the monitoring of transformer
bushings and offers products that provide continuous online testing and
measurement of critical substation assets.  OMI’s capabilities complement
those of GridSense, especially the Transformer IQ.  In addition to
expanding GridSense’s product offering, OMI will add critical know-how and
technology for the development of new products.




During
the period following our acquisition, we reported revenues of $1.2 million and a
net loss of $1.1 million with respect to GridSense. Subsequent to our
acquisition of GridSense, we transferred $1.8 million to help the company meet
its working capital obligations and to carry out its  growth strategy
which involves expansion of the sales and marketing organization and the
commercialization of certain capabilities in its offering
range.  During the quarter, the company made key additions to its
sales organization including an executive manager who will oversee the marketing
and sales activities in N. America.  The expanded sales organization
will enable the company to better support existing customers and to have greater
reach in the market.




While
GridSense’s sales pipeline is strong, its sales since our acquisition have not
improved as expected primarily due to overall weakness in utility spending and
delays in projects that are dependent on federal grants.  GridSense is
expected to continue to require working capital support while it works on
increasing its sales. A number of GridSense’s utility customers have been
awarded such grants and the company expects to benefit from these grants as
projects move forward in deployment. Acorn continues to provide funds for
GridSense’s working capital needs and expects to do so in the near future. We
have no assurance that GridSense will increase its sales and be able to reduce
its need for additional financing to support its working capital needs for the
balance of 2010 and beyond. This support may be in the form of a new bank line,
new investment by others, additional investment by Acorn, or a combination of
the above. There is no assurance that such support will be available from such
sources in sufficient amounts, in a timely manner and on acceptable
terms.  The availability and amount of any additional investment from
us in GridSense may be limited by the working capital needs of our corporate
activities and other operating companies.




28




USSI





In
accordance with applicable accounting standards, we began consolidating the
results of USSI beginning February 23, 2010, the date we entered into the Option
Agreements with USSI and certain stockholders of USSI.  We recorded
approximately $0.2 million of revenues during this period and a net loss of
approximately $0.7 million (prior to adjusting for attribution to
non-controlling interests) with respect to USSI results. USSI continues to
submit proposals and await responses for numerous projects related to its
fiber-optic sensor systems for the energy market (4D Seismic products) and the
security markets and is in final negotiations with customers on several of these
proposals. Since February 23, 2010, USSI has received approximately $0.6 million
in new orders including a $0.3 million order from Penn State Electro-Optics
Center for Phase II of the Harbor Sentinel project, which calls for the
development and testing of a prototype harbor security system being designed to
protect 360 U.S. ports and harbors and a $0.2 million order to develop a custom
down-hole fiber optic sensor for Octave Reservoir Technologies.





Corporate





At our
annual meeting of stockholders on June 10, 2010, our stockholders approved an
amendment to our Certificate of Incorporation to increase the number of
authorized shares of capital stock from 20,000,000 shares to 30,000,000 shares,
all of which are Common Stock.  In addition, our stockholders also approved
an amendment to our 2006 Stock Incentive Plan (the “Plan”) to increase the
aggregate number of shares of common stock which may be awarded under the Plan
from 665,000 to 1,665,000 and the aggregate number of shares which may be
awarded pursuant to incentive stock options by 800,000 to 1,000,000.  
As a result of the approval of the amendment, 1,008,000 shares are available for
new awards under the Plan, of which 800,000 may be granted as incentive stock
options.





In March
2010, we raised approximately $11.5 million (after transaction costs) in a
registered direct offering. In the first nine months of 2009, we invested
an additional $2.9 million in CoaLogix, expended $1.7 million in completing our
acquisition of GridSense, increased our investment in USSI ($0.8 million in
cash) and funded capital calls of $0.9 million from EnerTech. In addition,
during the year of 2010, we provided approximately $6.5 million of working
capital to Coreworx as well as approximately $1.8 million of working capital
support to GridSense following our acquisition of GridSense.





On
September 16 2010, we filed with the Securities and Exchange Commission a
registration statement on Form S-3 which registers a shelf for offer and sale
from time to time the securities referenced in the registration statement in one
or more offerings with an aggregate offering price of up to $20 million. Such
registration statement was deemed effective on October 27, 2010.





As of
November 1, 2010, we had approximately $2.0 million in unrestricted cash and
restricted cash of $0.6 million which we expect to be released by the end of
2010. We continue to have significant corporate cash expenses. Our current
cash and the expected release of restricted cash deposits and possible
repatriation of positive cash flows from CoaLogix or DSIT is expected to be
sufficient to support our corporate cash expenses for the next twelve months.
Our expected cash will allow us to exercise only some of the USSI options and
may limit our ability to provide working capital to GridSense should it need it.
We have taken steps to streamline corporate expenses such as payroll and at the
same time are seeking ways to raise additional capital. Such steps may include
the sale of our stock, the issuance of debt or convertible debt, the sale or
partial sales of one or more of our investments, or a combination of the
above.




Corporate
general and administrative expense in the first nine months of 2010 reflected a
$1.0 million increase to $3.6 million as compared to $2.6 million of expense in
the first nine months of 2009.  The increase in corporate general and
administrative expense in 2010 is due primarily to bonuses recorded in the first
quarter of 2010 combined with increased professional fees (primarily associated
with the SEC inquiry, registered direct offering and our acquisitions),
increased investor relations costs and corporate personnel. Third quarter
corporate general and administrative expense reflected a decrease of $0.1
million as compared to the second quarter of 2010. We expect our corporate
general and administrative costs to begin to decrease in the fourth quarter of
2010 and into 2011 as we begin to benefit from our cost cutting
measures.




29





Results
of Operations




The
following table sets forth certain information with respect to the consolidated
results of operations of the Company for the nine and three month periods ended
September 30, 2009 and 2010, including the percentage of total revenues during
each period attributable to selected components of the operations statement data
and for the period to period percentage changes in such
components.  For segment data see Note 13 to the Unaudited
Consolidated Financial Statements included in this quarterly
report.




The
financial results of GridSense are included in our consolidated financial
statements effective May 12, 2010. The financial results of Decision Dynamics
are included in our Coreworx results effective April 30, 2010. The financial
results of USSI are included in our consolidated financial statements effective
February 23, 2010. Accordingly, there are no comparative results reported for
these activities for the three and nine month periods ended September 30,
2009.





Nine
      months ended September 30,
                                                    
                                                    Three
      months ended September 30,2009
                                                    
                                                    2010
                                                    
                                                    Change
                                                    
                                                    2009
                                                    
                                                    2010
                                                    
                                                    Change($,000)
                                                    
                                                    %
      of sales
                                                    
                                                    ($,000)
                                                    
                                                    %
      of sales
                                                    
                                                    From
                                                      2009
      to 2010
                                                    
                                                    ($,000)
                                                    
                                                    %
      of sales
                                                    
                                                    ($,000)
                                                    
                                                    %
      of sales
                                                    
                                                    From
                                                      2009
      to 2010Sales
                                                    $22,721
                                                    
                                                    100%
                                                    
                                                    $27,565
                                                    
                                                    100%
                                                    
                                                    21%
                                                    
                                                    $6,463
                                                    
                                                    100%
                                                    
                                                    $10,587
                                                    
                                                    100%
                                                    
                                                    64%Cost
      of sales
                                                    12,991
                                                    
                                                    57
                                                    
                                                    16,033
                                                    
                                                    58
                                                    
                                                    23
                                                    
                                                    3,602
                                                    
                                                    56
                                                    
                                                    6,934
                                                    
                                                    65
                                                    
                                                    93Gross
      profit
                                                    9,730
                                                    
                                                    43
                                                    
                                                    11,532
                                                    
                                                    42
                                                    
                                                    19
                                                    
                                                    2,861
                                                    
                                                    44
                                                    
                                                    3,653
                                                    
                                                    35
                                                    
                                                    28R&D
      expenses, net
                                                    76
                                                    
                                                    0
                                                    
                                                    2,428
                                                    
                                                    9
                                                    
                                                    3,095
                                                    
                                                    424
                                                    
                                                    7
                                                    
                                                    886
                                                    
                                                    8
                                                    
                                                    109Dividends
      from EnerTech
                                                    --
                                                    
                                                    --
                                                    
                                                    (135)
                                                    
                                                    0
                                                    
                                                    
                                                    
                                                    --
                                                    
                                                    --
                                                    
                                                    --SG&A
      expenses
                                                    13,372
                                                    
                                                    59
                                                    
                                                    21,352
                                                    
                                                    77
                                                    
                                                    60
                                                    
                                                    4,565
                                                    
                                                    71
                                                    
                                                    7,466
                                                    
                                                    71
                                                    
                                                    64Operating
      loss
                                                    (3,718)
                                                    
                                                    (16)
                                                    
                                                    (12,113)
                                                    
                                                    (44)
                                                    
                                                    226
                                                    
                                                    (2,128)
                                                    
                                                    (33)
                                                    
                                                    (4,699)
                                                    
                                                    (44)
                                                    
                                                    121Finance
      income (expense), net
                                                    213
                                                    
                                                    1
                                                    
                                                    (174)
                                                    
                                                    (1)
                                                    
                                                    (182)
                                                    
                                                    297
                                                    
                                                    5
                                                    
                                                    131
                                                    
                                                    1
                                                    
                                                    (56)Gain
      on investment in GridSense
                                                    --
                                                    
                                                    --
                                                    
                                                    1,327
                                                    
                                                    5
                                                    
                                                    
                                                    
                                                    --
                                                    
                                                    --
                                                    
                                                    --Gain
      on sale of Comverge shares
                                                    1,403
                                                    
                                                    6
                                                    
                                                    --
                                                    
                                                    --
                                                    
                                                    (100)
                                                    
                                                    176
                                                    
                                                    3
                                                    
                                                    --
                                                    
                                                    
                                                    
                                                    (100)Income
      before taxes on income
                                                    (2,102)
                                                    
                                                    (9)
                                                    
                                                    (10,960)
                                                    
                                                    (40)
                                                    
                                                    421
                                                    
                                                    (1,655)
                                                    
                                                    (26)
                                                    
                                                    (4,568)
                                                    
                                                    (43)
                                                    
                                                    176Taxes
      on income
                                                    72
                                                    
                                                    0
                                                    
                                                    (570)
                                                    
                                                    (2)
                                                    
                                                    (892)
                                                    
                                                    72
                                                    
                                                    1
                                                    
                                                    (372)
                                                    
                                                    (4)
                                                    
                                                    (617)Loss
      from operations of the Company and its consolidated
      subsidiaries
                                                    (2,030)
                                                    
                                                    (9)
                                                    
                                                    (11,530)
                                                    
                                                    (42)
                                                    
                                                    468
                                                    
                                                    (1,583)
                                                    
                                                    (24)
                                                    
                                                    (4,940)
                                                    
                                                    (47)
                                                    
                                                    212Share
      of losses in GridSense
                                                    (129)
                                                    
                                                    (1)
                                                    
                                                    --
                                                    
                                                    
                                                    
                                                    (100)
                                                    
                                                    --
                                                    
                                                    --
                                                    
                                                    --Share
      of income in Paketeria
                                                    263
                                                    
                                                    1
                                                    
                                                    --
                                                    
                                                    
                                                    
                                                    (100)
                                                    
                                                    263
                                                    
                                                    4
                                                    
                                                    --
                                                    
                                                    
                                                    
                                                    (100)Net
      loss
                                                    (1,896)
                                                    
                                                    (8)
                                                    
                                                    (11,530)
                                                    
                                                    (42)
                                                    
                                                    508
                                                    
                                                    (1,320)
                                                    
                                                    (20)
                                                    
                                                    (4,940)
                                                    
                                                    (47)
                                                    
                                                    274Net
      (income) loss attributable to  non-controlling
      interests
                                                    (48)
                                                    
                                                    0
                                                    
                                                    688
                                                    
                                                    2
                                                    
                                                    (1,533)
                                                    
                                                    96
                                                    
                                                    1
                                                    
                                                    373
                                                    
                                                    4
                                                    
                                                    289Net
      loss attributable to Acorn Energy Inc.
                                                    $(1,944)
                                                    
                                                    (9)
                                                    
                                                    $(10,842)
                                                    
                                                    (39)
                                                    
                                                    458
                                                    
                                                    $(1,224)
                                                    
                                                    (19)
                                                    
                                                    $(4,567)
                                                    
                                                    (43)
                                                    
                                                    273





Revenues.  Revenues
in the first nine months of 2010 increased by $4.8 million or 21% from $22.7
million in the first nine months of 2009 to $27.6 million in the first nine
months of 2010. The increased revenues are primarily attributable to increased
revenues at CoaLogix ($2.1 million) and DSIT ($2.1 million) combined with the
revenues of $1.2 million from GridSense which was acquired by us during 2010.
Those increases were partially offset by the decrease in Coreworx revenues ($0.7
million) which include $0.4 million of DDY revenues which was acquired by
Coreworx in 2010.





CoaLogix’
2010 revenues increased by $2.1 million (16%) to $14.8 million compared to $12.8
million of revenues for the first nine months of 2009. CoaLogix increased
revenues was primarily attributable to processing more of its own inventory in
the first nine months of 2009 compared to the first nine months of 2010. DSIT’s
2010 revenues increased $2.1 million (33%) to $8.6 million. DSIT's increased
revenue was primarily due to revenues recorded from the $4.4 million AquaShield
DDS order received at the end of 2009 and additional non-DDS naval solution
projects received in 2010. Coreworx’ revenues decreased by $0.7 million (21%) to
$2.8 million. The $2.8 million of Coreworx revenues includes $0.4 million of
reported Decision Dynamics’ revenues since our acquisition in April 2010. The
decrease in Coreworx’ revenues from the first nine months of 2009 was primarily
due to  lower license revenues as new license orders did not
materialize in 2010.




30





Gross profit.Gross profit in
the first nine months of 2010 increased by $1.8 million (19%) as compared to the
first nine months of 2009. The increase is partially attributable to gross
profit of $0.7 million and $0.3 million from GridSense and Decision Dynamics,
respectively.  In addition, gross profit at CoaLogix increased by $0.5
million (13%) in the first nine months of 2010 compared to the first nine months
of 2009. The increase in CoaLogix’ gross profit is attributable to an increase
in CoaLogix' revenues resulting from the increased capacity it’s recently opened
Steele Creek facility. CoaLogix gross margin decreased slightly from 33% to 32%
due mostly to startup activities and related increased resources associated with
the opening of the Steele Creek facility.  DSIT's first nine months of
2010 gross profit increased by $1.2 million (45%) over first nine months 2009
gross profit. The increase in DSIT's gross profit was attributable to the
reported increased revenues as well as increased margins which improved from 41%
in 2009 to 45% in 2010. DSIT's increased gross margins in 2010 was due to
greater revenues reported on higher margin projects such as its AquaShield DDS
worked on in 2010. Coreworx’ gross profit decreased $0.7 million (23%) as
compared to the same period in 2009. The $2.2 million of Coreworx’ gross profit
for the first half of 2010 includes $0.3 million of reported Decision Dynamics’
gross profit since our acquisition. Coreworx’ gross margin decreased slightly
from 83% to 81% over the periods.




Research and development (“R&D”)
expenses. R& D expenses increased from $0.1 million in the first nine
months of 2009 to $2.4 million of expense in the first nine months of 2010.
R&D expenses in 2010 include increased development costs in Coreworx with
respect to its new suite of products. In addition, in 2009, we recorded a
benefit of approximately $1.0 million from R&D expense following the
approval of a claim by Coreworx for scientific and development tax credit
refunds for a prior period from the Canada Revenue Agency of the Ontario
Ministry of Revenue.




Selling, general and administrative
expenses(“SG&A”).SG&A costs in the first nine months of 2010
increased by $8.0 million as compared to the first nine months of 2009. The
increased SG&A costs are partly attributable to the $0.6 million, $1.4
million and $0.7 million of SG&A expenses reported by USSI, GridSense and
Decision Dynamics - our newly acquired subsidiaries. CoaLogix’ SG&A costs in
the first nine months of 2010 increased by $1.4 million as compared to the first
nine months of 2009 reflecting increased overhead costs resulting from the
company’s growth and a provision recorded for the settlement of the suit with
EES. Coreworx’ SG&A costs increased by $3.3 million in the first nine months
of 2010 of which $1.2 million was attributable to Decision Dynamics’ SG&A
expenses and the balance due primarily to increased selling and marketing costs
as the company has expanded its sales force to penetrate new markets as well as
for costs related to the acquisition of Decision Dynamics. Coreworx’ SG&A
costs were also negatively impacted by the increased value of the Canadian
dollar in 2010 as compared to 2009 which increased the reported costs of
Coreworx in U.S. dollars. DSIT’s SG&A increased $0.4 million primarily as a
result of increased salary costs and non-recurring provisions recorded
associated with salary adjustments. Corporate general and administrative costs
increased by $1.0 million due to $0.3 million of bonuses recorded in the first
half combined with increased administrative and salary costs and professional
and investor relation fees.




Net loss.We had a
net loss of $10.8 million in the first nine months of 2010 compared with net
loss of $1.9 million in the first nine months of 2009. Our loss in 2010 was
primarily due to Coreworx’ losses of $7.6 million, CoaLogix losses of $1.1
million, GridSense and USSI losses since our acquisition of $1.1 million and
$0.7 million, respectively and corporate expenses of $3.6 million, partially
offset by net income from our DSIT subsidiary of $1.2 million, $0.7 million of
non-controlling interests’ share in our losses and a gain of $1.3 million we
recorded with respect to the step-up of the previous carrying value of our
investment in GridSense to fair value in accordance with generally accepted
accounting principles for step acquisitions.




31




Liquidity
and Capital Resources




As of
September 30, 2010, we had working capital of $9.4 million, including $5.0
million of non-restricted cash and cash equivalents. Our working capital
includes restricted deposits of approximately $1.6 million of which we expect
$0.6 million to be released by the end of 2010.  Net cash decreased
during the nine months ended September 30, 2010 by $6.2 million, of which
approximately $12.1 million was used in operating activities, $10.1 million was
used in investing activities and $15.9 million was provided from financing
activities.




The
primary use of cash in operating activities during the first nine months of 2010
was the approximately $7.5 million, $1.7 million and $0.6 million used by
Coreworx, GridSense and USSI in their respective operations combined with the
$2.6 million of cash used in our corporate operating activities. This was
partially offset by the $0.2 million of cash provided by operating activities
from our DSIT subsidiary. Our CoaLogix subsidiary had a slight positive cash
flow from operations during the nine months ended September 30,
2010.




Cash used
in investment activities during the first nine months of 2010 was $10.1
million.  Our primary uses of cash during the first nine months of
2010 were (1) $8.4 million used for the acquisition of property and equipment
(primarily at CoaLogix for its new Steele Creek facility), (2) approximately
$1.4 million used in the acquisition of GridSense (net of cash acquired), and
(3) $0.9 million used to fund a capital call at EnerTech. These uses of cash
were partially offset by the approximate $1.0 million of cash received in our
acquisition of Decision Dynamics which was acquired for Acorn common
stock.




Net cash
of $15.8 million was provided by financing activities. Cash provided by
financing activities was primarily from our recent sale of shares ($11.5 million
net of transaction costs), from the issuance of shares to non-controlling
interests in CoaLogix ($3.0 million) and net proceeds from the utilization of
credit lines ($1.2 million).




On
September 30, 2010, the subsidiaries of CoaLogix had a $2 million formula based
line-of-credit available to it for utilization from a bank.  On July
22, 2010, the subsidiaries of CoaLogix executed an amendment of its credit
facility which extended and increased its credit availability to a $4 million
formula based line-of-credit, a $1 million non-formula based line-of-credit and
$1 million non-formula based letter of credit. The credit facility expires June
30, 2011 and carries an interest rate of the greater of 1.50% above prime rate
or 5.50% on the formula line of credit and the greater of 2.00% above prime rate
or 6.00% on the non-formula line of credit. The maximum amount of outstanding
credit under the facility is $5 million.   At September 30, 2010,
CoaLogix was utilizing $200,000 of the formula based line-of-credit.  The
line-of-credit is used to finance CoaLogix’ working capital and to finance its
growth and is subject to certain financial covenants. CoaLogix was in compliance
with its financial covenants at September 30, 2010. We believe that CoaLogix
will have sufficient liquidity to finance its operating activities and bank
financing over the next 12 months.




In April
2009, Acorn, EnerTech and certain members of CoaLogix’ senior management agreed
to invest approximately $11.5 million in CoaLogix.  In 2010, the
entire $11.5 million ($5.9 million in 2010) had been invested including $5.0
million from Acorn ($2.9 million in 2010).




In
September 2010, DSIT finalized documentation to receive an additional NIS 2.0
million (approximately $545,000) line of credit at another Israeli bank. At
September 30, 2010, DSIT had a total of NIS 4.0 million (approximately $1.1
million) of Israeli credit lines available to it by two Israeli banks of which
approximately $0.9 million was then being used. The lines-of-credit at both
banks are subject to certain financial covenants. DSIT was in compliance with
its financial covenants at September 30, 2010. In addition, DSIT also has a term
loan of approximately NIS 1.6 million (approximately $450,000) which is payable
in monthly payments through December 31, 2013.  We believe that DSIT
will have sufficient liquidity to finance its activities from cash flow from its
own operations over the next 12 months.  This is based on continued
utilization of its lines of credit and expected continued improvement of
operating results stemming from anticipated growth in sales.




32




During the first nine months of 2010,
Acorn lent Coreworx nearly $6.5 million to finance its working capital needs. In
addition, in the second quarter of 2010, Coreworx borrowed against a credit
facility ($0.3 million) which it arranged with a major commercial bank in Canada
during the second quarter of 2010 secured by its refundable SR&ED tax
credits and is guaranteed by Acorn. The loan is repayable in the fourth quarter
of 2010 to coincide with the expected receipt of SR&ED credits from the
Canada Revenue Agency and the Ontario Ministry of Revenue tax authorities. In
October 2010, Acorn decided to stop providing funds for Coreworx’ working
capital needs.On November 9, 2010, we entered into a Letter of Intent
with Coreworx to sell all of our common stock in Coreworx to a management buyout
group.  The terms of the Letter of Intent are described in “Recent
Developments” under “Coreworx.”




Since our
acquisition of GridSense in May 2010, Acorn has lent GridSense $1.8 million to
finance its working capital needs and carry out its growth strategy. GridSense
is expected to continue to require working capital support while it works on
increasing its sales so that it can become cash flow neutral. We have no
assurance that GridSense will increase its sales and be able to reduce its need
for additional financing to support its working capital needs for the balance of
2010 and beyond. This support may be in the form of a new bank line, new
investment by others, additional investment by Acorn, or a combination of the
above. There is no assurance that such support will be available from such
sources in sufficient amounts, in a timely manner and on acceptable
terms.  The availability and amount of any additional investment from
us in GridSense may be limited by the working capital needs of our corporate
activities and other operating companies.




USSI
currently has no other sources of financing other than its internally generated
sales and the funds from the exercise of our options. As of October 31, 2010,
USSI has cash on hand of approximately $85,000. Our next option (exercise price
of $250,000) expires on November 30, 2010. If we do not exercise this option
and/or subsequent options, we have no assurance that USSI will not need
additional financing from time-to-time to finance its working capital needs.
This support may be in the form of a bank line or new investment by others, or a
combination of the above. There is no assurance that such support will be
available from such sources in sufficient amounts, in a timely manner and on
acceptable terms.  The amount of any additional investment from us in
USSI may be limited by the working capital needs of our corporate activities and
other operating companies.




As of
November 1, 2010, the Company’s corporate operations had a total of
approximately $2.6 million in cash and cash equivalents (including the $0.6
million deposited in an account as a security for a guarantee for DSIT),
reflecting a $0.3 million decrease from the balance as of September 30, 2010.
The decrease from September 30, 2010 primarily reflects corporate operating
costs during the period.




Our
current cash and the expected release of restricted cash deposits and possible
repatriation of positive cash flows from CoaLogix or DSIT is expected to be
sufficient to support our corporate cash expenses for the next twelve months.
Our expected cash will allow us to exercise only some of the USSI options and
may limit our ability to provide working capital to GridSense should it need it.
We have taken steps to streamline corporate expenses such as payroll and at the
same time are seeking ways to raise additional capital. Such steps may include
the sale of our stock, the issuance of debt or convertible debt, the sale or
partial sales of one or more of our investments, or a combination of the
above.





33








Contractual
Obligations and Commitments




Our
contractual obligations and commitments at September 30, 2010 principally
include obligations associated with our outstanding indebtedness, future minimum
operating lease obligations and potential severance obligations, investment and
purchase commitments and are set forth in the table below. The table below
includes contractual obligations and commitments of Coreworx. We have entered
into a Letter of Intent with Coreworx to sell all of our common stock in
Coreworx to a management buyout group.  The terms of the Letter of
Intent are described in “Recent Developments” under “Coreworx.”





Cash
      Payments Due During Year Ending September 30,(amounts in thousands)Contractual Obligations
                      
                      Total
                      
                      
                      2011
                      
                      
                      
                      2012-2013
                      
                      
                      
                      2014-2015
                      
                      
                      2016 and thereafterLong-term
      bank debt and utilized
                        lines-of-creditaaaa
                      
                      $
                      1,917
                      
                      
                      $
                      1,598
                      
                      
                      $
                      280
                      
                      
                      $
                      39
                      
                      
                      $
                      --Operating
      leases
                      
                      
                      5,551
                      
                      
                      
                      1,697
                      
                      
                      
                      1,987
                      
                      
                      
                      1,021
                      
                      
                      
                      846Potential
      severance obligations (1)
                      
                      
                      3,742
                      
                      
                      
                      204
                      
                      
                      
                      --
                      
                      
                      
                      1,099
                      
                      
                      
                      2,439Investment
      in EnerTech(2)
                      
                      
                      1,950
                      
                      
                      
                      1,950
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --Purchase
      commitments
                      
                      
                      114
                      
                      
                      
                      114
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --Royalties
      (3)
                      
                      
                      155
                      
                      
                      
                      5
                      
                      
                      
                      30
                      
                      
                      
                      70
                      
                      
                      
                      50Total
      contractual cash obligations
                      
                      $
                      13,429
                      
                      
                      $
                      5,568
                      
                      
                      $
                      2,297
                      
                      
                      $
                      2,229
                      
                      
                      $
                      3,335


We expect
to finance these contractual commitments from cash on hand and cash generated
from operations.




(1) Under
Israeli law and labor agreements, DSIT is required to make severance payments to
dismissed employees and to employees leaving employment under certain other
circumstances. The obligation for severance pay benefits, as determined by the
Israeli Severance Pay Law, is based upon length of service and ending salary.
These obligations are substantially covered by regular deposits with recognized
severance pay and pension funds and by the purchase of insurance
policies.  As of September 30, 2010, we accrued a total of $3.5
million for potential severance obligations of which approximately $2.3 million
was funded with cash to insurance companies.




(2) In
August 2007, we committed to invest up to $5 million over a ten-year period in
EnerTech, a proposed $250 million venture capital fund targeting early and
expansion stage energy and clean energy technology companies that can enhance
the profits of the producers and consumers of energy.




Our
obligation under this commitment is presented as an obligation due in the next
12 months, though it is uncertain as to when actual payments may be made.
Through September 30, 2010, we have funded capital calls
of  approximately $3.1 million to EnerTech.




(3) In
April 2010, CoaLogix signed an agreement to acquire a license to use certain
technology developed by a third-party. Under the license agreement, CoaLogix is
required to pay the greater of (i) royalties to the third-party of 2% of certain
sales defined in the agreement or (ii) minimum annual royalties
of  $5, $10, $20, $30 $40 and $50 for the periods ending September 30,
2011 through 2016 and thereafter. The agreement may be terminated by CoaLogix at
any time. The above table includes only the minimum annual royalty payment and
assumes the minimal payment through September 2016 though the agreement does not
have an expiration date.




34




Item
4.  Controls and Procedures




Evaluation
of Disclosure Controls and Procedures




As of the
end of the period covered by this Report, we carried out an evaluation, under
the supervision and with the participation of our management, including the
Chief Executive Officer and the Chief Financial Officer, of the design and
operation of our disclosure controls and procedures (as such term is defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act’)). Based on this evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective at the reasonable assurance level at end of the period covered by
this report to ensure that the information required to be disclosed by us in the
reports we file or submit under the Exchange Act is (i) accumulated and
communicated to our management (including our Chief Executive Officer and Chief
Financial Officer) in a timely manner, and (ii) recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and
forms.





Changes
in Internal Coltrol Over Financial Reporting




There was
no change in our internal control over financial reporting (as such term is
defined in Rule 13a-15(f) under the Exchange Act) during the period covered by
this report that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.




35




PART
II – OTHER INFORMATION




Item
1. Legal Proceedings





SCR-Tech
LLC v Evonik Energy Services LLC et al.


District
of Connecticut, Case No. 3:08 CV 1237 (RNC)





As
reported previously in our Quarterly Reports on Form 10-Q and Annual Reports on
Form 10-K filed since November 13, 2008, on July 30, 2008, SCR-Tech LLC
(“SCR-Tech”), a subsidiary of CoaLogix, filed suit in Mecklenburg County, North
Carolina, Superior Court against Evonik Energy Services LLC (“Evonik LLC”),
Hans-Ulrich Hartenstein and Brigitte Hartenstein (the “Hartensteins”), and three
of Evonik LLC’s German parent companies: Evonik Energy Services GmbH, Evonik
Steag GmbH and Evonik Industries AG (the “German Defendants”).  The
Hartensteins, Evonik LLC and the German Defendants are collectively referred to
as the “Evonik Defendants.”





On
February 25, 2010, the Evonik Defendants filed motions for summary judgment on
the non-existence of SCR-Tech’s trade secrets or confidential information,
statutes of limitation, release and lack of standing and a motion requesting
that the court stay discovery.  SCR-Tech filed responses to these
motions.  The court, after hearing argument on these motions, issued
its order dated July 12, 2010 denying the Evonik Defendants’ motions for summary
judgment on statutes of limitation, release and lack of standing, and with
respect to the motion for summary judgment on non-existence of trade secrets or
confidential information the court held such motion in abeyance pending
completion of limited discovery as directed by the court.  Such
limited discovery is to be taken until December 6, 2010, and such discovery is
presently in process.





In the
answers filed by the Evonik Defendants, the Evonik Defendants have asserted
counterclaims against SCR-Tech with unspecified amounts of
damages.  CoaLogix believes that such counterclaims are without merit,
and that any award of any material amount with respect to such counterclaims is
remote.  Therefore, no accrual for any contingency relating to such
counterclaims has been made nor can the range of any possible loss due to such
counterclaims be reasonably estimated at this time.





36





Item
6. Exhibits.





31.1
                  
                  Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.#31.2
                  
                  Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.#32.1
                  
                  Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.#32.2
                  
                  Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.#





#  This
exhibit is filed or furnished herewith.




37





SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by its principal financial
officer thereunto duly authorized.





ACORN
      ENERGY, INC.Dated:  November
      10, 2010
              By:
              /s/ Michael
      BarthMichael
      BarthChief
      Financial Officer





38