**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,
                2008





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 x  No  ̈




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  ̈ Accelerated filer  ̈ Non-accelerated filer  ̈ 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  ̈  No 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 13, 2008Common
                Stock, $0.01 par value per share
            
            11,677,157
                shares








**ACORN
      ENERGY, INC.**


**Quarterly
      Report on Form 10-Q**


**for
      the Quarterly Period Ended September 30, 2008**





**TABLE
      OF CONTENTS**





**PART
                I. Financial Information**Item
                1.
            Financial
                StatementsUnaudited
                Consolidated Financial Statements:Consolidated
                Balance Sheetsas
                of December 31, 2007 and September 30, 2008
            1Consolidated
                Statements of Operationsfor
                the nine and three month periods ended September 30, 2007 and
                2008
            2Consolidated
                Statement of Changes in Shareholders’ Equityfor
                the nine month period ended September 30, 2008
            3Consolidated
                Statements of Cash Flowsfor
                the nine month periods ended September 30, 2007 and 2008
            4Notes
                to Consolidated Financial Statements
            7Item
                2.
            Management’s
                Discussion and Analysis of Financial Conditionand
                Results of Operations
            21Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            32Item
                4.
            Controls
                and Procedures
            32**PART
                II. Other Information**Item
                1.
            Legal
                Proceedings
            33Item
                1A.
            Risk
                Factors
            35Item
                5.
            Other
                Information
            36Item 6.
            Exhibits
            38**Signatures**
            39




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 and in Part II, Item 1A of this
      Quarterly Report..





**ACORN
      ENERGY, INC. AND SUBSIDIARIES**


**Consolidated
      Balance Sheets**


(in
      thousands, except share and per share data)





**As of December 31,**
              **2007**
            
            **As of September**
              **30, 2008**(unaudited)ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            19,644
            
            $
            14,435Restricted
                cash
            
            
            —
            
            
            2,397Accounts
                receivable, net
            
            
            1,775
            
            
            3,788Unbilled
                work-in-process
            
            
            1,784
            
            
            1,527Inventory
            
            
            119
            
            
            802Other
                current assets
            
            
            1,391
            
            
            2,370Total
                current assets
            
            
            24,713
            
            
            25,319Property
                and equipment, net
            
            
            1,335
            
            
            2,554Available
                for sale - Investment in Comverge
            
            
            55,538
            
            
            2,312Investment
                in GridSense
            
            
            —
            
            
            861Investment
                in Paketeria
            
            
            1,439
            
            
            —Other
                investments
            
            
            668
            
            
            1,150Funds
                in respect of employee termination benefits
            
            
            1,607
            
            
            1,808Restricted
                cash
            
            
            1,517
            
            
            557Other
                intangible assets, net
            
            
            5,987
            
            
            10,674Goodwill
            
            
            3,945
            
            
            8,632Other
                assets
            
            
            218
            
            
            309Total
                assets
            
            $
            96,967
            
            $
            54,176LIABILITIES
                AND SHAREHOLDERS’ EQUITYCurrent
                liabilities:Short-term
                bank credit
            
            $
            590
            
            $
            523Current
                maturities of long-term debt
            
            
            171
            
            
            28Convertible
                debt, net
            
            
            4,237
            
            
            —Trade
                accounts payable
            
            
            910
            
            
            1,609Accrued
                payroll, payroll taxes and social benefits
            
            
            1,118
            
            
            942Notes
                payable to former debenture holders of Coreworx
            
            
            —
            
            
            3,400Other
                current liabilities
            
            
            3,844
            
            
            4,007Total
                current liabilities
            
            
            10,870
            
            
            10,509Long-term
                liabilities:Long-term
                debt
            
            
            12
            
            
            —Liability
                for employee termination benefits
            
            
            2,397
            
            
            2,866Deferred
                taxes
            
            
            16,038
            
            
            29Other
                liabilities
            
            
            325
            
            
            422Total
                long-term liabilities
            
            
            18,772
            
            
            3,317Minority
                interests
            
            
            —
            
            
            1,939Shareholders’
                equity:Common
                stock - $0.01 par value per share:Authorized
                – 20,000,000 shares; Issued –11,134,795 shares and 12,454,528 at December
                31, 2007 and September 30, 2008
            
            
            111
            
            
            124Additional
                paid-in capital
            
            
            49,306
            
            
            54,318Warrants
            
            
            1,330
            
            
            1,020Accumulated
                deficit
            
            
            (9,692
            )
            
            (13,502
            )Treasury
                stock, at cost – 777,371 shares for December 31, 2007 and September 30,
                2008, respectively
            
            
            (3,592
            )
            
            (3,592
            )Accumulated
                other comprehensive income
            
            
            29,862
            
            
            43Total
                shareholders’ equity
            
            
            67,325
            
            
            38,411Total
                liabilities and shareholders’ equity
            
            $
            96,967
            
            $
            54,176




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


1




**ACORN
      ENERGY, INC. AND SUBSIDIARIES**


**Consolidated
      Statements of Operations** (unaudited)


(in
      thousands, except per share data)




**Nine months ended**
              **September 30,**
            
            **Three months ended**
              **September 30,****2007**
            
            **2008**
            
            **2007**
            
            **2008**SalesProjects
            
            $
            2,699
            
            $
            5,959
            
            $
            1,413
            
            $
            1,918Catalytic
                regeneration services
            
            
            —
            
            
            5,441
            
            
            —
            
            
            1,840Software
                license and services
            
            
            —
            
            
            767
            
            
            —
            
            
            767Other
            
            
            616
            
            
            363
            
            
            182
            
            
            1033,315
            
            
            12,530
            
            
            1,595
            
            
            4,628Cost
                of salesProjects
            
            
            1,976
            
            
            4,091
            
            
            977
            
            
            1,314Catalytic
                regeneration services
            
            
            —
            
            
            4,573
            
            
            —
            
            
            2,075Software
                license and services
            
            
            —
            
            
            257
            
            
            —
            
            
            257Other
            
            
            525
            
            
            282
            
            
            145
            
            
            852,501
            
            
            9,203
            
            
            1,122
            
            
            3,731Gross
                profit
            
            
            814
            
            
            3,327
            
            
            473
            
            
            897Operating
                expenses:Research
                and development expenses
            
            
            310
            
            
            510
            
            
            77
            
            
            402Acquired
                in-process research and development
            
            
            —
            
            
            551
            
            
            —
            
            
            551Selling,
                general and administrative expenses
            
            
            3,012
            
            
            8,094
            
            
            1,153
            
            
            3,401Impairment
                of loans to Paketeria loans and investment to Local Power
            
            
            —
            
            
            3,000
            
            
            —
            
            
            2,454Total
                operating expenses
            
            
            3,322
            
            
            12,155
            
            
            1,230
            
            
            6,808Operating
                loss
            
            
            (2,508
            )
            
            (8,828
            )
            
            (757
            )
            
            (5,911
            )Gain
                on early redemption of convertible debentures
            
            
            —
            
            
            1,259
            
            
            —
            
            
            —Finance
                expense, net
            
            
            (729
            )
            
            (2,950
            )
            
            (358
            )
            
            (50
            )Gain
                on public offering of Comverge
            
            
            16,169
            
            
            —
            
            
            —
            
            
            —Gain
                on sale of Comverge shares
            
            
            —
            
            
            8,861
            
            
            —
            
            
            3,079Gain
                (loss) on outside investment in Company’s equity investments,
                net
            
            
            (37
            )
            
            7
            
            
            (37
            )
            
            7Income
                (loss) before taxes on income
            
            
            12,895
            
            
            (1,651
            )
            
            (1,152
            )
            
            (2,875
            )Taxes
                on income
            
            
            (9
            )
            
            (689
            )
            
            (4
            )
            
            (691
            )Income
                (loss) from operations of the Company and its consolidated
                subsidiaries
            
            
            12,886
            
            
            (2,340
            )
            
            (1,156
            )
            
            (3,566
            )Minority
                interests
            
            
            —
            
            
            284
            
            
            —
            
            
            204Share
                in losses of GridSense
            
            
            —
            
            
            (194
            )
            
            —
            
            
            (60
            )Share
                in losses of Paketeria
            
            
            (828
            )
            
            (1,560
            )
            
            (440
            )
            
            (899
            )Net
                income (loss)
            
            $
            12,058
            
            $
            (3,810
            )
            $
            (1,596
            )
            $
            (4,321
            )Basic
                and diluted earnings per share:Net
                income (loss) per share – basic
            
            $
            1.24
            
            $
            (0.34
            )
            $
            (0.16
            )
            $
            (0.37
            )Net
                income (loss) per share – diluted
            
            $
            1.15
            
            $
            (0.34
            )
            $
            (0.16
            )
            $
            (0.37
            )Weighted
                average number of shares outstanding – basic
            
            
            9,723
            
            
            11,285
            
            
            10,063
            
            
            11,538Weighted
                average number of shares outstanding – diluted
            
            
            11,823
            
            
            11,285
            
            
            10,063
            
            
            11,538




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


2




**ACORN
      ENERGY, INC. AND SUBSIDIARIES**


**Consolidated
      Statement of Changes in Shareholders’ Equity** (unaudited)


(in
      thousands)





Number
              of
              Shares
            
            Common
              Stock
            
            Additional
              Paid-In
              Capital
            
            Warrants
            
            Accumulated
              Deficit
            
            Treasury
              Stock
            
            Accumulated
              Other
              Comprehensive
              Income (Loss)
            
            TotalBalances
                as of December 31, 2007
            
            
            11,135
            
            $
            111
            
            $
            49,306
            
            $
            1,330
            
            $
            (9,692
            )
            $
            (3,592
            )
            $
            29,862
            
            $
            67,325Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (3,810
            )
            
            —
            
            
            —
            
            
            (3,810
            )FAS
                115 adjustment on Comverge shares, net of deferred taxes
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (29,831
            )
            
            (29,831
            )Differences
                from translation of financial statements of subsidiaries and equity
                investees
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            12
            
            
            12Comprehensive
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (33,629
            )Intrinsic
                value of beneficial conversion feature of convertible debentures
                at
                extinguishment
            
            
            —
            
            
            —
            
            
            (1,259
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,259
            )Exercise
                of options and warrants
            
            
            252
            
            
            2
            
            
            1,072
            
            
            (310
            )
            
            —
            
            
            —
            
            
            —
            
            
            764Conversion
                of Debentures
            
            
            780
            
            
            8
            
            
            2,955
            
            
            —
            
            
            —
            
            
            —
            
            
            
            
            
            2,963Shares
                issued in acquisition of Coreworx
            
            
            288
            
            
            3
            
            
            1,230
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,233Stock
                option compensation
            
            
            —
            
            
            —
            
            
            638
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            638Stock
                option compensation of subsidiary
            
            
            —
            
            
            —
            
            
            376
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            376Balances
                as of September 30, 2008
            
            
            12,455
            
            $
            124
            
            $
            54,318
            
            $
            1,020
            
            $
            (13,502
            )
            $
            (3,592
            )
            $
            43
            
            $
            38,411




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


3


**ACORN
      ENERGY, INC. AND SUBSIDIARIES**


**Consolidated
      Statements of Cash Flows** (unaudited)


(dollars
      in thousands)





**Nine months ended**
              **September 30,****2007**
            
            **2008**Cash
                flows provided by (used in) operating activities:Net
                income (loss)
            
            $
            12,058
            
            $
            (3,810
            )Adjustments
                to reconcile net income to net cashused
                in operating activities (see Schedule A):
            
            
            (13,909
            )
            
            (455
            )Net
                cash used in operating activities
            
            
            (1,851
            )
            
            (4,265
            )Cash
                flows provided by (used in) investing activities:Proceeds
                from sale of Comverge shares
            
            
            —
            
            
            15,355Investment
                in GridSense
            
            
            —
            
            
            (1,153
            )Investment
                in EnerTech
            
            
            —
            
            
            (750
            )Investment
                in and loans to Local Power Inc.
            
            
            (268
            )
            
            (250
            )Restricted
                cash
            
            
            —
            
            
            (1,437
            )Loans
                provided to Paketeria
            
            
            (1,154
            )
            
            (2,551
            )Loan
                provided to GridSense
            
            
            —
            
            
            (736
            )Loan
                provided to EES
            
            
            —
            
            
            (200
            )Transaction
                costs in 2007 acquisition of SCR Tech
            
            
            —
            
            
            (956
            )Amounts
                funded for employee termination benefits
            
            
            (160
            )
            
            (229
            )Utilization
                of employee termination benefits
            
            
            89
            
            
            28Acquisition
                of license
            
            
            —
            
            
            (2,000
            )Acquisitions
                of property and equipment
            
            
            (214
            )
            
            (1,327
            )Loan
                and accrued interest to Coreworx in contemplation of
                acquisition
            
            
            —
            
            
            (1,563
            )Acquisition
                of Coreworx net of cash acquired (see Schedule B)
            
            
            —
            
            
            (2,466
            )Net
                cash used in investing activities
            
            
            (1,707
            )
            
            (235
            )Cash
                flows provided by (used in) financing activities:Short-term
                debt borrowings (repayments), net
            
            
            (368
            )
            
            (67
            )Proceeds
                from long-term debt
            
            
            107
            
            
            —Proceeds
                from convertible debentures with warrants net of transaction
                costs
            
            
            5,840
            
            
            —Redemption
                of convertible debentures
            
            
            —
            
            
            (3,443
            )Repayments
                of long-term debt
            
            
            (89
            )
            
            (189
            )Repayment
                of related party note payable
            
            
            (300
            )
            
            —Issuance
                of shares to minority shareholders in consolidated
                subsidiary
            
            
            —
            
            
            2,226Proceeds
                from employee stock option and warrant exercises
            
            
            1,043
            
            
            764Net
                cash provided (used in) by financing activities
            
            
            6,233
            
            
            (709
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            2,675
            
            
            (5,209
            )Cash
                and cash equivalents at beginning of period
            
            
            1,521
            
            
            19,644Cash
                and cash equivalents at end of period
            
            $
            4,196
            
            $
            14,435




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


4


**ACORN
      ENERGY, INC. AND SUBSIDIARIES**


**Consolidated
      Statements of Cash Flows** (unaudited)


(dollars
      in thousands)





**Nine months ended**
              **September 30,**Schedule A:
            
            
            **2007**
            
            
            **2008**Adjustments
                to reconcile net income to net cash used in operating
                activities:Depreciation
                and amortization
            
            $
            118
            
            $
            888Acquired
                in-process research and development
            
            
            —
            
            
            551Impairment
                of software license
            
            
            23
            
            
            —Impairment
                of loans to Paketeria
            
            
            —
            
            
            2,454Impairment
                of investment and loans to Local Power
            
            
            —
            
            
            546Share
                in losses of Paketeria
            
            
            779
            
            
            1,535Share
                in losses of GridSense
            
            
            —
            
            
            194Increase
                (decrease) in liability for employee termination benefits
            
            
            (167
            )
            
            469Deferred
                income taxes
            
            
            —
            
            
            893Amortization
                of stock-based deferred compensation
            
            
            615
            
            
            1,014Amortization
                of beneficial conversion feature, debt origination costs and value
                of
                warrants in private placement of Debentures
            
            
            418
            
            
            3,064Gain
                on public offering of investment in Comverge
            
            
            (16,169
            )
            
            —Gain
                on sale of Comverge shares
            
            
            —
            
            
            (8,861
            )Loss
                (gain) on outside investment in Company’s equity investments,
                net
            
            
            37
            
            
            (7
            )Gain
                on early redemption of Debentures
            
            
            —
            
            
            (1,259
            )Minority
                interests
            
            
            —
            
            
            (284
            )Exchange
                loss on loans to Paketeria and Gridsense
            
            
            —
            
            
            129Other
            
            
            (6
            )
            
            2Change
                in operating assets and liabilities:Decrease
                in accounts receivable, unbilled work-in process and other current
                and
                other assets
            
            
            (504
            )
            
            (2,240
            )Increase
                in inventory
            
            
            —
            
            
            (683
            )Increase
                in accounts payable and other liabilities
            
            
            947
            
            
            1,140Net
                adjustment to reconcile net income to net cash used in operating
                activities
            
            $
            (13,909
            )
            $
            (455
            )Schedule
                B:Assets/liabilities
                acquired in the acquisition of Coreworx:Other
                current assets
            
            
            
            
            $
            (605
            )Property
                and equipment
            
            
            
            
            
            (183
            )Intangibles
            
            
            
            
            
            (3,509
            )Goodwill
            
            
            
            
            
            (4,478
            )Current
                liabilities
            
            
            
            
            
            668Due
                to Acorn
            
            
            
            
            
            1,559Value
                of Acorn stock issued in acquisition
            
            
            
            
            
            1,233Notes
                issued to former debenture holders of Coreworx
            
            
            
            
            
            3,400In-process
                research and development
            
            
            
            
            
            (551
            )$
            (2,466
            )




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


5


**Nine months ended**
                **September 30,****2007**
              
              **2008**Non-cash items:Accrued
                  expenses in respect of private placement of common stock and convertible
                  debentures
              
              $
              83Increase
                  (decrease) of deferred tax liability with respect to change in
                  market
                  value of Comverge shares
              
              $
              21,522
              
              $
              (16,902
              )Increase
                  in goodwill with respect to finalizing purchase price
                  allocation
              
              
              
              
              $
              209Reduction
                  in intangibles acquired with respect to finalizing purchase price
                  allocation
              
              
              
              
              $
              250Reduction
                  in value of put option with respect to finalizing purchase price
                  allocation
              
              
              
              
              $
              41Non-cash
                  financing and investing itemsUnrealized
                  gain (loss) from Comverge shares
              
              $
              77,204
              
              $
              (46,733
              )Conversion
                  of loans and notes receivable and accrued interest due from Paketeria
                  to
                  investment in Paketeria
              
              $
              1,190Value
                  of beneficial conversion feature upon issuance of convertible
                  debentures
              
              $
              2,570Adjustment
                  of retained earnings and other current liabilities with respect
                  to the
                  adoption of FIN 48
              
              $
              305Conversion
                  of Debentures to common stock and additional
                  paid-in-capital
              
              
              
              
              $
              2,963




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


6


**ACORN
      ENERGY, INC. AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements** (unaudited)


(dollars
      in thousands)




**Note
      1: Basis of Presentation**




The
      accompanying unaudited 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,
      2008 are not necessarily indicative of the results that may be expected for
      the
      year ending December 31, 2008. 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, 2007. **** Certain
      reclassifications have been made to the Company’s prior years’ consolidated
      financial statements to conform to the current year’s consolidated financial
      statement presentation.




**Note
      2: New Accounting Standards**





In
      December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
      141(R)”) and SFAS No. 160, “Non-controlling Interests in Consolidated Financial
      Statements” (“SFAS 160”). SFAS 141(R) requires the acquiring entity in a
      business combination to record all assets acquired and liabilities assumed
      at
      their respective acquisition-date fair values and changes other practices under
      SFAS 141. SFAS 141(R) also requires additional disclosure of information
      surrounding a business combination, such that users of the entity’s financial
      statements can fully understand the nature and financial impact of the business
      combination. SFAS 160 requires entities to report non-controlling (minority)
      interests in subsidiaries as equity in the consolidated financial statements.
      The Company is required to adopt SFAS 141(R) and SFAS 160 simultaneously in
      its
      fiscal year beginning January 1, 2009. The provisions of SFAS 141(R) will only
      impact the Company if it is party to a business combination after the
      pronouncement has been adopted. The Company is currently evaluating the effects,
      if any, that SFAS 160 may have on its financial position, results of operations
      and cash flows.




In
      June
      2006, the Emerging Issues Task Force (EITF), reached a consensus on Issue No.
      06-01, “Accounting for Consideration Given by a Service Provider to
      Manufacturers or Resellers of Equipment Necessary for an End-Customer to Receive
      Service from the Service Provider” (EITF No. 06-01). EITF 06-01 provides
      guidance on the accounting for consideration given to third party manufacturers
      or resellers of equipment which is required by the end-customer in order to
      utilize the service from the service provider. EITF 06-01 is effective January
      1, 2008 for the Company. The adoption of EITF 06-01 did not have a material
      impact on the Company’s results of operations and financial
      position.





In
      June
      2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue No.
      07-03, "Accounting for Nonrefundable Advance Payments for Goods or Services
      Received to Be Used in Future Research and Development Activities" (EITF No.
      07-03). EITF No. 07-03 requires that nonrefundable advance payments for goods
      or
      services that will be used or rendered for future research and development
      activities be deferred and amortized over the period that the goods are
      delivered or the related services are performed, subject to an assessment of
      recoverability. The provisions of EITF 07-03 are effective January 1, 2008
      for
      the Company. The adoption of EITF 07-03 did not have a material impact on the
      Company’s results of operations and financial position.




7




In
      December 2007, the FASB reached a consensus on EITF Issue No. 07-01, "Accounting
      for Collaborative Arrangements" ("EITF 07-01"). EITF 07-01 defines collaborative
      arrangements and establishes reporting requirements for transactions between
      participants in a collaborative arrangement and between participants in the
      arrangement and third parties. EITF 07-01 also establishes the appropriate
      income statement presentation and classification for joint operating activities
      and payments between participants, as well as the sufficiency of the disclosures
      related to these arrangements. EITF 07-01 is effective for fiscal years
      beginning after December 15, 2008 (January 1, 2009, for the Company). The
      Company does not expect the adoption of EITF 07-01 to have a material impact
      on
      its results of operations and financial position.




**Note
      3: Investment in Comverge Inc. (Comverge)**




During
      the nine months ended September 30, 2008, the Company sold 1,261,165 of its
      1,763,665 Comverge shares held at the beginning of 2008. The Company received
      proceeds of $15,355 from the sales and recorded a pre-tax gain of
      $8,861.




The
      Company’s remaining 502,500 Comverge shares are accounted for as
“available-for-sale” under SFAS 115 “Accounting for Certain Investments in Debt
      and Equity Securities”. Accordingly, the Company reflected its investment in
      Comverge based on Comverge’s share price of $4.60 at September 30, 2008 which
      resulted in a reduction of the carrying value to reflect a fair market value
      of
      $2,312. In addition, the Company adjusted the previously recorded deferred
      tax
      liability associated with the Comverge shares to zero. The net reduction of
      $29,831 was recorded to Accumulated Other Comprehensive Income.




**Note
      4: Acquisition of Coreworx Inc. (Coreworx)**




On
      August
      13, 2008, the Company entered into and closed an agreement for the acquisition
      of all of the outstanding capital stock of Coreworx, Inc. (“Coreworx”). Coreworx
      is headquartered in Kitchener, Ontario, Canada, and is engaged in the design
      and
      delivery of project collaboration solutions for large capital projects. 
The acquisition of Coreworx was completed pursuant to a Securities Purchase
      Agreement (the “Purchase Agreement”), dated August 13, 2008, by and among the
      Company, former debenture holders in Coreworx and former shareholders in
      Coreworx.




Prior
      to
      and in contemplation of the completion of the acquisition, the Company lent
      Coreworx $1,500 which bore interest at 12% per year.




Immediately
      prior to the purchase of the Coreworx shares, the Company contributed to the
      capital of Coreworx $2,500 in cash and $3,400 aggregate principal amount of
      its
      8% one-year promissory notes. The cash and notes were delivered by Coreworx
      to
      the holders of Coreworx’s debentures in full payment and satisfaction of all
      principal and accrued interest outstanding on such debentures.




In
      consideration for the Coreworx shares, the Company issued 287,500 shares of
      its
      Common Stock. Under the Purchase Agreement, a portion of these shares will
      be
      held in escrow until one year after the closing.




As
      a
      result of the transaction, Coreworx is a wholly-owned subsidiary of the Company
      and will be presented as the Company’s Energy Infrastructure Software segment.
      In connection with the transaction, the Company agreed to implement an option
      plan for Coreworx employees for up to 20% of the outstanding Coreworx
      shares.




In
      accordance with FASB Statement No. 141, Business Combinations, the assets and
      liabilities of Coreworx are required to be adjusted to their fair values. The
      estimated purchase price of $7,326 is the sum of the following: (i) $2,500
      representing the cash consideration for the shares of Coreworx, (ii) $3,400
      representing the principal amount of 8% one-year promissory notes (iii) $1,233
      representing the market value of the 287,500 shares of Acorn common stock issued
      to the former shareholders of Coreworx (based on the average market price of
      Acorn shares on the date of the announcement of the transaction and for the
      two
      days before and after the announcement in accordance with EITF 99-12
“Determination of the Measurement Date for the Market Price of Acquirer
      Securities Issued in a Purchase Business Combination”) and (iv) $193 of
      estimated transaction costs.




8




A
      contingent payment of one-half of the expected net receipt (less fees) by
      Coreworx of monies due from the Canada Revenue Agency or the Ontario Ministry
      of
      Revenue in connection with Coreworx’s 2007 scientific research and experimental
      development tax credit refund claim or Ontario innovation tax credit refund
      claim for 2007 (collectively, the “SRED Claim”) during the six months
      immediately following the closing date, is not included in the purchase price
      as
      the receipt of the SRED Claim within the six months following the closing date
      is less than beyond a reasonable doubt.




The
      final
      purchase price will be dependent upon the actual amount of the SRED refund
      (if
      any) and the actual transaction costs.




The
      transaction is accounted for as a purchase business combination. Coreworx’s
      results from operations for the period from acquisition to September 30, 2008
      have been included in the Company’s consolidated statement of
      operations.




Under
      the
      purchase method of accounting, the total consideration of $7,326 is allocated
      to
      Coreworx’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 is in the process of obtaining third-party valuation of intangible
      assets as of August 13, 2008, for the purposes of allocating the purchase price
      to assets and liabilities and has preliminarily allocated the purchase price
      as
      follows:





Cash
            
            $
            227Other
                current assets
            
            
            605Property
                and equipment
            
            
            183In
                process research and development ( expensed immediately)
            
            
            551Intangible
                assets
            
            
            3,509Goodwill
            
            
            4,478Total
                assets acquired
            
            
            9,553Current
                liabilities
            
            
            (668
            )Non-current
                liabilities (intercompany debt eliminated in
                consolidation)
            
            
            (1,559
            )Net
                assets acquired
            
            $
            7,326




In-process
      research and development, represents Coreworx’s research and development
      projects that had not reached technological feasibility and had no alternative
      future use when acquired. The Company tentatively estimates that approximately
      $551 of the purchase price may represent purchased in-process technology. This
      is a preliminary estimate that is subject to change.





Intangible
      assets with estimable useful lives are amortized over that period. The acquired
      intangible assets with estimable useful lives include approximately $881 for
      the
      estimated fair market value of Coreworx’s customer contracts and relationships
      (estimated useful life of 10 years) and approximately $2,628 for the estimated
      fair market value of Coreworx’s software (estimated useful life of 16 years).
      Any adjustment to the estimated purchase price of $7,326 would result in a
      similar adjustment to the estimated goodwill generated by the
      transaction.




The
      intangible assets represent the preliminary allocation of the fair value of
      intangible assets acquired (weighted average useful life of 14.5 years). Both
      the goodwill and the intangibles resulting from the acquisition are not
      deductible for income tax purposes. The goodwill will not be amortized for
      financial statement purposes in accordance with SFAS No. 142, “Goodwill and
      Other Intangible Assets”. The intangible assets and the goodwill acquired were
      assigned to the Company’s new Energy Infrastructure Software (“EIS”) segment.




9




The
      following are certain unaudited pro forma combined income data assuming that
      the
      acquisition of Coreworx occurred on January 1, 2008 and 2007, respectively.
      The
      unaudited pro forma financial information is not necessarily indicative of
      the
      combined results that would have been attained had the acquisitions of Coreworx
      occurred as of January 1, 2008 and 2007, respectively, nor is it necessarily
      indicative of future results.





Nine
              months
              ended
              September
              30, 2008
            
            Nine
              months
              ended
              September
              30, 2007
            
            Three
              months
              ended
              September
              30, 2008
            
            Three
              months
              ended
              September
              30, 2007In thousands (except
                per share data)**Results
                of Operations**
            
            
            (unaudited
            )
            
            (unaudited
            )
            
            (unaudited
            )
            
            (unaudited
            )Sales
            
            $
            13,997
            
            $
            5,399
            
            $
            5,345
            
            $
            2,481Net
                income (loss)
            
            $
            (7,959
            )
            $
            6,566
            
            $
            (5,885
            )
            $
            (1,765
            )Net
                income (loss) per share - basic
            
            $
            (0.69
            )
            $
            0.66
            
            $
            (0.50
            )
            $
            (0.17
            )Net
                income (loss) per share - diluted
            
            $
            (0.69
            )
            $
            0.46
            
            $
            (0.50
            )
            $
            (0.17
            )




**Note
      5: Investment in GridSense Systems Inc. (GridSense)**




On
      January 2, 2008, the Company participated in a private placement financing
      of
      total gross proceeds of C$1,700 (approximately $1,700) for GridSense Systems
      Inc. (CDNX: GSN.V )
      (“GridSense”). The placement consisted of 24,285,714 units at $0.07 per unit,
      each unit being comprised of one common share and one share purchase warrant.
      Each warrant entitled the holder to acquire an additional common share at $0.10
      per share until July 2, 2008.




The
      Company was the lead investor in the placement acquiring 15,714,285 shares
      and
      15,714,285 warrants for C$1,100 (approximately $1,100) plus transaction costs
      of
      approximately $53. The 15,714,285 shares acquired by the Company in the
      placement represent approximately 24.5% of GridSense's issued and outstanding
      shares. The Company did not exercise any of the 15,714,285 warrants it acquired
      in the placement and they expired on July 2, 2008. Also in January 2008,
      GridSense issued 3,000,000 of its shares in an acquisition. The GridSense
      issuance diluted the Company’s holdings in GridSense to approximately 23.4%. The
      Company recorded a loss of $75 on the dilution.




The
      Company’s accounts for its investment in GridSense using the equity method in
      accordance with APB Opinion No. 18, “The Equity Method of Accounting for
      Investments in Common Stock”. The Company records its share of income or loss in
      GridSense with a lag of three months as it is not able to receive timely
      financial information. In the first nine months of 2008, the Company recorded
      a
      loss of $126 representing the Company’s weighted average of approximately 23.6%
      share of GridSense’s losses for the period from January 2, 2008 to June 30,
      2008. In the third quarter of 2008, the Company recorded a loss of $14
      representing the Company’s 23.4% share of GridSense’s losses for the period from
      April 1, 2008 to June 30, 2008.




Based
      on
      an independent appraisal, the Company has allocated the $1,153 investment in
      GridSense as follows:




10




·
            $761
                to the value of technologies acquired. The acquired technologies
                are to be
                amortized using the straight-line method over ten years.


·
            $73
                to the value of the customer relationships and $61 to the value of
                the
                tradename at the date of the investment. The value of the customer
                relationships and the tradename are to be amortized using the
                straight-line method over a weighted average 12.5 year period.


·
            $25
                to the value of the warrants acquired.


·
            $233
                to non-amortizing goodwill.





All
      the
      above components of the Company’s investment are not reflected separately as
      such in the consolidated balance sheet of the Company, but are reflected as
      components of the Company’s investment in GridSense. In addition to the
      Company’s share of losses in GridSense for the period from January 2, 2008 to
      June 30, 2008, the Company recorded amortization with respect to the identified
      amortizable intangibles noted above. The Company’s share of losses in Gridsense
      is comprised of the following:





Nine months
              ended
              September 30,
              2008
            
            Three months
              ended
              September 30,
              2008Equity loss in
                GridSense for the period from January 2, 2008 –June 30,
                2008
            
            $
            126
            
            $
            14Amortization
                expense associated with acquired technologies, customer relationships
                and
                trademarks and write-off of option value
            
            
            68
            
            
            46Share
                of losses in GridSense
            
            $
            194
            
            $
            60





In
      July
      2008, the Company lent GridSense C$750 ($736 at the then exchange rate) under
      a
      secured promissory note which bears interest at 8% and was initially due on
      October 30, 2008. The maturity date of the loan has been extended to January
      31,
      2009 with no other changes in terms. The note is secured by all the assets
      of
      GridSense’s principal operating subsidiary. The principal balance at September
      30, 2008 of $722 is included in Other Current Assets.




**Note
      6: Investment in Paketeria AG (Paketeria)**




At
      June
      30, 2008, the Company owned approximately 31% of Paketeria’s outstanding
      shares.




During
      the six months ended June 30, 2008, the Company lent Paketeria €1,030 ($1,488
      based upon current exchange rates) on a series of promissory notes. The
      promissory notes were to bear interest at the rate of 8.0% and were due on
      the
      earlier of December 31, 2008 or upon the completion of any transaction in which
      Paketeria raised funds through any equity and/or debt financing. In addition,
      the Company received warrants to purchase 6,866 shares of Paketeria. The amount
      lent to Paketeria was allocated to the loan and the warrants received based
      on
      the relative fair values at time of issuance. The Company allocated $1,561
      to
      the loan portion and $63 to the value of the warrants.




In
      July
      2008, Paketeria received a €100 investment in a private equity investment. The
      Company’s holdings in Paketeria were diluted to 31.3% and recorded a gain of
      $82.




On
      August 26, 2008, the Company entered into a Loan Agreement with Paketeria
      to provide Paketeria with Additional Interim Financing of €600 ($867 based upon
      current exchange rates). Under the Loan Agreement, the loans advanced to
      Paketeria during the period from January 1, 2008 to June 30, 2008 plus accrued
      interest were combined with the Additional Interim Financing to a single
      Combined Loan of €1,662 ($2,401 at current exchange rates). The Combined Loan
      bears interest at 12% per year and is due on March 31, 2009. The Combined Loan
      and any accrued interest are subordinate to the rights of any unsubordinated
      creditors of Paketeria. If the Combined Loan and accrued interest are not paid
      at the due date, Acorn is entitled to convert the outstanding principal and
      accrued interest into new Common Shares of Paketeria to be issued at a valuation
      of €2.31 ($3.34 at current exchange rates) per share. In addition, Paketeria
      granted warrants to Acorn to acquire Paketeria shares. The warrants are
      exercisable at €7.71 ($11.14 at current exchange rates) per share to acquire the
      number of Paketeria shares derived by dividing the Combined Loan’s outstanding
      principal plus accrued interest by €7.71. The warrant may only be exercised to
      the extent the conversion right is not exercised. The warrants granted in
      connection with the Combined Loan replaced the warrants received with the series
      of promissory notes. No value was attributed to the warrants received from
      the
      Combined Loan as the value was determined to be immaterial.




11




Contemporaneously
      with the execution of the Loan Agreement, Paketeria shareholders owning more
      than 75% of Paketeria’s common stock executed a Shareholder Agreement
      acknowledging the terms of the Loan Agreement and acknowledging the execution
      of
      a Consultancy Agreement with an advisor for Paketeria in which the parties
      to
      the Shareholder Agreement, including the Company, granted a warrant to the
      consultant to immediately purchase up to 5% of Paketeria’s common stock from the
      parties to the Shareholder Agreement at a price of €7.71 per share. In addition,
      the parties to the Shareholder Agreement, including the Company, granted a
      warrant to the consultant to purchase an additional 5% of Paketeria’s common
      stock from the parties to the Shareholder Agreement upon the successful closing
      of an additional Paketeria financing of no less than €3,000 that is completed no
      later than March 15, 2009. The warrants expire on August 26, 2011.




Following
      the marked deterioration of Paketeria’s cash flows and its decision to change
      its business model and
      the
      Company’s doubts as to Peketeria’s ability to continue as a going
      concern, the
      Company ceased amortizing intangibles associated with its investment in
      Paketeria and recorded an impairment of all unamortized balances of the
      non-compete agreement, franchise agreements, brand name and goodwill. In
      addition, at the end of third quarter of 2008, the Company recorded a doubtful
      account provision of $2,454 with respect to the Company’s loan and accrued
      interest balances with Paketeria as Paketeria’s ability to repay the loan is in
      doubt.




The
      Company’s share of losses in Paketeria is comprised of the
      following:





Nine
              months
              ended
              September
              30, 2008
            
            Nine
              months
              ended
              September
              30, 2007
            
            Three
              months
              ended
              September
              30, 2008
            
            Three
              months
              ended
              September
              30, 2007Equity loss in
                Paketeria
            
            $
            (992
            )
            $
            (660
            )
            $
            (400
            )
            $
            (367
            )Amortization
                expense associated with acquired non-compete and franchise
                agreements
            
            
            (76
            )
            
            (121
            )
            
            (18
            )
            
            (58
            )Impairment
                of non-compete and franchise agreements, option value, brand name
                and
                goodwill
            
            
            (467
            )
            
            —
            
            
            (467
            )
            
            —Stock
                compensation expense
            
            
            (25
            )
            
            (47
            )
            
            (14
            )
            
            (15
            )Share
                of losses in Paketeria
            
            $
            (1,560
            )
            $
            (828
            )
            $
            (899
            )
            $
            (440
            )




The
      activity in the Company’s investment in Paketeria during the period from January
      1, 2008 to September 30, 2008 is as follows:




12




Investment
                balance as of December 31, 2007
            
            $
            1,439Net
                adjustment of investment with respect to non-cash gains in connection
                with
                outside investments
            
            
            82Amortization
                of acquired non-compete and franchise agreements
            
            
            (76
            )Cumulative
                translation adjustment
            
            
            14Company’s
                share of Paketeria losses – period from January 1, 2008 to September 30,
                2008
            
            
            (992
            )Investment
                balance prior to impairment
            
            
            467Impairment
                of non-compete and franchise agreements, option value, brand name
                and
                goodwill
            
            
            (467
            )Investment
                balance as at September 30, 2008
            
            $
            —




**Note
      7: Goodwill and Other Intangible Assets**




On
      August
      13, 2008, the Company acquired Coreworx (see Note 4) in a transaction accounted
      for as a purchase business combination. In accordance with FAS 142, the Company
      tentatively recorded goodwill of $ 4,478
      and
      intangibles of $3,509 based on a preliminary allocation of the purchase
      price.




There
      were no impairments of goodwill recorded during the nine-month period ended
      September 30, 2008. Upon finalizing the purchase price allocation of the
      Company’s additional investment in DSIT in November 2007, the Company recorded
      an increase in goodwill of $209 along with a decrease in acquired intangibles
      of
      $250. The Company’s goodwill is related to both its SCR segment ($3,714) and its
      RT Solutions segment ($440). As a result of the adjustment of the purchase
      price
      allocation, the amount allocated to the put option associated with the
      additional investment in DSIT was reduced by $41.




On
      May 9,
      2008, the Company’s CoaLogix, Inc. (“CoaLogix”) subsidiary entered into a
      strategic alliance and license agreement with Solucorp Industries, Ltd.
      (“Solucorp”) pursuant to which CoaLogix obtained exclusive, worldwide
      commercialization and marketing rights to Solucorp’s IFS-2C technology for use
      in applications which remove heavy metals, such as mercury, from power plants.
      The agreement has a term of ten years, with an option in favor of CoaLogix
      to
      renew for an additional five-year period. In consideration for its rights under
      the agreement, CoaLogix paid an upfront license fee of $2,000 and agreed to
      pay
      royalties on net sales of, and to share a portion of any royalties received
      in
      respect of, licensed product with Solucorp based on specified formula.




The
      changes in the carrying amounts and accumulated amortization of intangible
      assets from December 31, 2007 to September 30, 2008 were as follows:




Cost
            
            Accumulated Amortization
            
            NetSegment
            
            December
              31, 2007
            
            September
              30, 2008
            
            December
              31, 2007
            
            September
              30, 2008
            
            December
              31, 2007
            
            September
              30, 2008SCR
            
            $
            5,511
            
            $
            7,511
            
            $
            (81
            )
            $
            (573
            )
            $
            5,430
            
            $
            6,938RT
                Solutions
            
            
            557
            
            
            307
            
            
            —
            
            
            (37
            )
            
            557
            
            
            270EIS
            
            
            —
            
            
            3,509
            
            
            —
            
            
            (31
            )
            
            —
            
            
            3,478$
            6,068
            
            $
            11,327
            
            $
            (81
            )
            $
            (641
            )
            $
            5,987
            
            $
            10,686




All
      intangible assets are being amortized over their estimated useful lives, which
      were estimated to be ten years for SCR ,
      seven
      years for RT Solutions and 14.5 years for EIS intangibles. A mortization
      expense for each of the nine months ended September 30, 2007 and 2008 amounted
      to $14 and $560, respectively. Amortization
      expense with respect to intangible assets is estimated to be $1,047 per year
      for
      each of the years ending September 30, 2009 through 2013.




13




**Note
      8: Other Investments**




In
      July
      2008, the Company received a capital call of $750 from EnerTech Capital Partners
      III L.P. (EnerTech). The Company funded the capital call in August 2008. The
      Company’s current investment in EnerTech is $1,150.




During
      the second quarter of 2008, the Company recorded an impairment charge of $268
      with respect to the Company’s investment in Local Power Inc, (Local Power). The
      charge is included in selling, marketing and general administrative expense
      in
      the second quarter.




During
      2008, the Company lent Local Power $250 on a promissory note. This amount is
      in
      addition to $25 advanced to Local Power in 2007. The Company has taken a
      provision against the loan due to questionable collectibility.




**Note
      9: Other Assets**




At
      September 30, 2008, Other Assets includes $200 on a convertible promissory
      note
      evidencing a loan made by CoaLogix to Environmental Energy Services, Inc.
      (“EES”) in contemplation of the acquisition by CoaLogix of the assets of EES.
      CoaLogix did not enter into a definitive agreement with EES by the target date
      provided for in the convertible promissory note and does not intend to proceed
      with the acquisition. The note bears interest at the rate of 11% per year and
      the note is due February 28, 2011. During the nine month period ended September
      30, 2008, the Company recorded interest income of $12 with respect to the
      promissory note which is also included in Other Assets.




**Note
      10: Redemption of Convertible Redeemable Subordinated Debentures**




On
      January 29, 2008 the Company completed the redemption of all of its outstanding
      10% Convertible Redeemable Subordinated Debentures due March 2011. Subsequent
      to
      the Company’s announcement of redemption, the holders of the debentures elected
      to convert approximately $2,963 into approximately 780,000 shares of the
      Company’s common stock, at a conversion price of $3.80 per share. The remaining
      $3,443 principal amount of Debentures was redeemed in accordance with the notice
      of redemption. As a result of the early redemption of the Debentures, the
      remaining balance of unamortized beneficial conversion features, warrants and
      debt origination costs of $3,064 was written off to interest expense in the
      first quarter of 2008. In accordance with applicable accounting standards,
      the
      Company recorded a non-cash gain of $1,259 on the redemption of the Debentures
      from the reacquisition of the beneficial conversion feature.




**Note
      11: Minority Interests**




On
      February 29, 2008, the Company entered into a Common Stock Purchase Agreement
      (the “Stock Purchase Agreement”) with the Company’s wholly-owned CoaLogix Inc.
      subsidiary and EnerTech Capital Partners III L.P. (“EnerTech”) pursuant to which
      EnerTech purchased from CoaLogix a 15% interest in CoaLogix for $1,948. The
      Company owns 85% of CoaLogix following the transaction and EnerTech’s interest
      in CoaLogix was reflected in the Company’s Consolidated Balance Sheets as
      Minority Interests. The Company recorded an immaterial gain as a result of
      the
      investment by EnerTech. During the second quarter of 2008, EnerTech invested
      an
      additional $278 in CoaLogix as its 15% share of an aggregate $1,850 additional
      investment made by the Company and Enertech in CoaLogix. The minority interest’s
      share of CoaLogix’s net loss for the nine and three month periods ending
      September 30, 2008 was $284 and $204, respectively.




In
      connection with completing the transaction under the Stock Purchase Agreement,
      the Company, CoaLogix, EnerTech and the senior management of CoaLogix entered
      into a Stockholders’ Agreement dated as of February 29, 2008 (the “Stockholders’
Agreement”). Under the Stockholders’ Agreement, EnerTech is entitled to a
      designate a member of the Board of Directors of CoaLogix. In addition, the
      Stockholders’ Agreement provides the parties with rights of first refusal and
      co-sale in connection with proposed transfers of their CoaLogix stock.




14




Pursuant
      to the Stockholders’ Agreement, EnerTech also has a right to purchase additional
      stock to maintain its percentage interest in CoaLogix in the event of certain
      dilutive transactions. The right may be exercised until such time as the
      Company’s ownership in CoaLogix is reduced to 75% or CoaLogix completes an
      initial public offering.




**Note
      12: Stock Options and Warrants**




(a)
      Acorn
      Stock Options





A
      summary
      of stock option activity for the nine months ended September 30, 2008 is as
      follows:





Number of
              Options (in
              shares)
            
            Weighted
              Average
              Exercise
              Price
            
            Weighted
              Average
              Remaining
              Contractual
              Life
            
            Aggregate
              Intrinsic
              ValueOutstanding at December 31,
                2007
            
            
            1,684,000
            
            $
            3.09
            
            
            3.1
                yearsGranted
                at market price
            
            
            285,000
            
            
            5.21Exercised
            
            
            (50,000
            )
            
            2.17
            
            
            
            
            $
            136Forfeited
                or expired
            
            
            (25,000
            )Outstanding
                at September 30, 2008
            
            
            1,894,000
            
            
            3.40
            
            
            3.6
                years
            
            $
            1,558Exercisable
                at September 30, 2008
            
            
            1,412,831
            
            $
            3.07
            
            
            2.4
                years
            
            $
            1,469





The
      weighted average grant date fair value of the 285,000 stock options granted
      during the first nine months of 2008 was $3.35 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
            74%Expected term (years)
            5.7 yearsRisk free interest rate
            2.5%Expected dividend yield
            0.0%





In the third quarter of 2008, the Company modified the exercise price of
      50,000 options previously granted to a consultant of the Company from $4.95
      to
      $3.70. As a result of the modification, the Company recorded an expense of
      $13
      representing the incremental value of the modification in Selling, General
      and
      Administrative expense.




(b)
      CoaLogix Stock Option Plan





In
      April
      2008, the Company approved the CoaLogix Inc. 2008 Stock Option Plan (the “Plan”)
      for its CoaLogix subsidiary to be administrated by the board members of
      CoaLogix. In July 2008, the Plan was amended to reflect a 25 for 1 stock split.
      The grants and exercise prices noted below reflect the stock split




In
      April
      2008, CoaLogix granted options to purchase 349,275 of its ordinary shares,
      to
      senior management and employees of CoaLogix under the Plan. In July 2008, an
      additional 9,200 options were granted to non-senior management employees. The
      April 2008 and July 2008 options were granted with an exercise price of $5.05
      per share and are exercisable for a period of ten years. The options vest over
      a
      four year period from the date of grant. Upon exercise of all the options in
      the
      Plan, the Company’s holdings in CoaLogix will be diluted from 85% to
      approximately 76%.




15




During
      the nine and three month periods ended September 30, 2008, $376 and $199,
      respectively was recorded as stock compensation expense with respect to the
      abovementioned options ($122 and $57, respectively in Cost of Sales – Catalytic
      Regeneration Services and $254 and $120, respectively in Selling, Marketing,
      General and Administrative expenses).





The
      purpose of the Plan is to provide incentives to key employees of CoaLogix to
      further the growth, development and financial success of CoaLogix.





(c)
      Stock-based compensation expense




Total
      stock-based compensation expense included in the Company’s statements of
      operations for the nine months ended September 30, 2007 and 2008, respectively,
      was:




Nine
              months
              ended
              September
              30, 2007
            
            Nine
              months
              ended
              September
              30, 2008
            
            Three
              months
              ended
              September
              30, 2007
            
            Three
              months
              ended
              September
              30, 2008Cost of
                sales
            
            $
            22
            
            $
            122
            
            $
            —
            
            $
            65Selling,
                general and administrative expenses
            
            
            543
            
            
            867
            
            
            191
            
            
            326Share
                of losses in Paketeria
            
            
            49
            
            
            25
            
            
            17
            
            
            13Total
                stock based compensation expense
            
            $
            614
            
            $
            1,014
            
            $
            208
            
            $
            404





(d)
      Warrants





A
      summary
      of stock warrants activity for the nine months ended September 30, 2008 is
      as
      follows:





Number of
              Warrants (in
              shares)
            
            Weighted
              Average
              Exercise
              Price
            
            Weighted
              Average
              Remaining
              Contractual
              LifeOutstanding at December 31, 2007
            
            
            986,506
            
            
            3.89
            
            
            4.0
                yearsGranted
            
            
            —Exercised
            
            
            (202,483
            )Forfeited
                or expired
            
            
            —Outstanding
                and exercisable atSeptember
                30, 2008
            
            
            784,023
            
            
            4.06
            
            
            3.3
                years





**Note
      13: Warranty Provision**





The
      following table summarizes the changes in accrued warranty liability from the
      period from December 31, 2007 to September 30, 2008:





Gross Carrying
              AmountBalance
                at December 31, 2007
            
            $
            107Warranties
                issued and adjustment of provision
            
            
            81Warranty
                claims
            
            
            (4
            )Balance
                at September 30, 2008*
            
            $
            184




*
      $9 of the warranty provision is included in other
      current liabilities and $175 in other liabilities at September 30,
      2008




16




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




**Note
      14: Fair Value Measurement**




In
      September 2006, the FASB issued SFAS 157 which defines fair value, establishes
      a
      framework for measuring fair value in generally accepted accounting principles
      and expands disclosures about fair-value measurements. The Company adopted
      SFAS
      157 effective January 1, 2008 for all financial assets and liabilities and
      any
      other assets and liabilities that are recognized or disclosed at fair value
      on a
      recurring basis. Although the adoption of SFAS 157 did not materially impact
      the
      Company’s financial condition, results of operations or cash flows, the Company
      is required to provide additional disclosures within its condensed consolidated
      financial statements.




SFAS
      157
      defines fair value as the price that would be received to sell an asset or
      paid
      to transfer the liability (an exit price) in an orderly transaction between
      market participants and also establishes a fair value hierarchy which requires
      an entity to maximize the use of observable inputs and minimize the use of
      unobservable inputs when measuring fair value. The fair value hierarchy within
      SFAS 157 distinguishes between three levels of inputs that may be utilized
      when
      measuring fair value including level 1 inputs (using quoted prices in active
      markets for identical assets or liabilities), level 2 inputs (using inputs
      other
      than level 1 prices such as quoted prices for similar assets and liabilities
      in
      active markets or inputs that are observable for the asset or liability) and
      level 3 inputs (unobservable inputs supported by little or no market activity
      based on the company’s own assumptions used to measure assets and liabilities).
      A financial asset’s or liability’s classification within the above hierarchy is
      determined based on the lowest level input that is significant to the fair
      value
      measurement.




The
      Company also adopted FAS 159, “The Fair Value Option for Financial Assets and
      Financial Liabilities” (“SFAS 159”). This standard permits entities to choose to
      measure many financial assets and financial liabilities at fair value.
      Unrealized gains and losses on items for which the fair value option has been
      elected are reported in earnings. SFAS 159 is effective for fiscal years after
      November 15, 2007. The Company did not elect to apply the fair value option
      available under SFAS 159 for any of its eligible instruments.




Financial
      assets and liabilities measured at fair value on a recurring basis as at
      September 30, 2008 consisted of the following:





Level 1
            
            Level 2
            
            TotalAvailable
                for sale securities
            
            $
            2,312
            
            
            —
            
            $
            2,312




17




Marketable
      securities that are classified in Level 1 consist of available-for-sale
      securities for which market prices are readily available. Unrealized gains
      or
      losses from available-for-sale securities are recorded in Accumulated Other
      Comprehensive Income.




**Note
      15: Segment Information**




The
      Company’s current operations are based upon three operating
      segments:




·
            RT
                Solutions whose activities are focused on two areas - naval solutions
                and
                other real-time and embedded hardware & software development. RT
                Solutions activities are provided through the Company’s DSIT Solutions
                Ltd. subsidiary.




·
            SCR
                (Selective Catalytic Reduction) Catalyst and Management Services
                conducted
                through the Company’s CoaLogix subsidiary provides catalyst regeneration
                technologies and management services for SCR systems used by coal-fired
                power plants to reduce nitrogen oxides (NOx) emissions. As these
                activities were acquired in November 2007, there are no comparative
                results reported for these activities for the three and nine month
                periods
                ended September 30, 2007.




·
            Energy
                Infrastructure Software (EIS) services are provided through the Company’s
                recently acquired Coreworx subsidiary (see Note 4). Coreworx is engaged
                in
                the design and delivery of project collaboration solutions for large
                capital projects. As these activities were acquired in August 2008,
                there
                are no comparative results reported for these activities for the
                three and
                nine month periods ended September 30,
                2007.




Other
      operations include various operations in Israel that do not meet the
      quantitative thresholds of SFAS No. 131.





**RT Solutions**
            
            **SCR**
            
            **EIS*******
            
            **Other**
            
            **Total**Nine months ended September
                30, 2008:Revenues
                from external customers
            
            $
            5,340
            
            $
            5,441
            
            $
            767
            
            $
            982
            
            $
            12,530Intersegment
                revenues
            
            
            70
            
            
            —
            
            
            —
            
            
            —
            
            
            70Segment
                gross profit
            
            
            1,749
            
            
            868
            
            
            510
            
            
            200
            
            
            3,327Segment
                income (loss)
            
            
            165
            
            
            (1,772
            )
            
            (310
            )
            
            (106
            )
            
            (2,023
            )Nine
                months ended September 30, 2007:Revenues
                from external customers
            
            
            2,380
            
            
            —
            
            
            —
            
            
            935
            
            
            3,315Intersegment
                revenues
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Segment
                gross profit
            
            
            750
            
            
            —
            
            
            —
            
            
            64
            
            
            814Segment
                loss
            
            
            (146
            )
            
            —
            
            
            —
            
            
            (470
            )
            
            (616
            )Three
                months ended September 30, 2008:Revenues
                from external customers
            
            
            1,745
            
            
            1,840
            
            
            767
            
            
            276
            
            
            4,628Intersegment
                revenues
            
            
            54
            
            
            —
            
            
            —
            
            
            —
            
            
            54Segment
                gross profit (loss)
            
            
            568
            
            
            (234
            )
            
            510
            
            
            53
            
            
            897Segment
                loss
            
            
            (24
            )
            
            (1,361
            )
            
            (310
            )
            
            (64
            )
            
            (1,759
            )Three
                months ended September 30, 2007:Revenues
                from external customers
            
            
            1,248
            
            
            —
            
            
            —
            
            
            347
            
            
            1,595Intersegment
                revenues
            
            
            
            
            
            —
            
            
            —
            
            
            
            
            
            —Segment
                gross profit (loss)
            
            
            459
            
            
            —
            
            
            —
            
            
            14
            
            
            473Segment
                income (loss)
            
            
            65
            
            
            —
            
            
            —
            
            
            (99
            )
            
            (34
            )




18




***** For
      the
      EIS segment, the results shown for the three and nine month periods ended
      September 30, 2008 reflects the operations of Coreworx from August 13, 2008,
      the
      date of its acquisition by the Company, through September 30, 2008.





**Reconciliation
      of Segment Income (Loss) to Consolidated Net Income**





Nine months ended
              September 30,
            
            Three months ended
              September 30,2007
            
            2008
            
            2007
            
            2008Total
                income (loss) for reportable segments
            
            $
            (146
            )
            $
            (1,917
            )
            $
            65
            
            $
            (1,695
            )Other
                operational segment loss
            
            
            (470
            )
            
            (106
            )
            
            (99
            )
            
            (64
            )Total
                operating loss
            
            
            (616
            )
            
            (2,023
            )
            
            (34
            )
            
            (1,759
            )Share
                of losses in Paketeria
            
            
            (828
            )
            
            (1,560
            )
            
            (440
            )
            
            (899
            )Share
                of losses in GridSense
            
            
            —
            
            
            (194
            )
            
            —
            
            
            (60
            )Acquired
                in-process research and development
            
            
            —
            
            
            (551
            )
            
            —
            
            
            (551
            )Impairment
                of loans to Paketeria loans and investment to Local Power*
            
            
            —
            
            
            (3,000
            )
            
            —
            
            
            (2,454
            )Minority
                interests
            
            
            —
            
            
            284
            
            
            —
            
            
            204Gain
                on sale of Comverge shares
            
            
            —
            
            
            8,861
            
            
            —
            
            
            3,079Gain
                recorded on Comverge public offering
            
            
            16,169
            
            
            —
            
            
            —
            
            
            —Gain
                (loss) on outside investment in Company’s equity investments,
                net
            
            
            (37
            )
            
            7
            
            
            (37
            )
            
            7Gain
                on early redemption of Debentures
            
            
            —
            
            
            1,259
            
            
            —
            
            
            —Interest
                expense recorded with respect to the private placement of
                Debentures
            
            
            (409
            )
            
            (3,064
            )
            
            (208
            )
            
            —Income
                tax expense
            
            
            (9
            )
            
            (689
            )
            
            (4
            )
            
            (691
            )Net
                loss of corporate headquarters and other unallocated
                costs*
            
            
            (2,212
            )
            
            (3,140
            )
            
            (873
            )
            
            (1,197
            )Total
                consolidated net income
            
            $
            12,058
            
            $
            (3,810
            )
            $
            (1,596
            )
            $
            (4,321
            )




***** The
      $2,454 loss recorded in the three months ended September 30, 2008 was with
      respect to the impairment of the loans to Paketeria (see Note 6).




**Note
      16: Income Taxes**





During
      the second quarter of 2008, the Company received an exemption of income taxes
      from the State of Delaware. Thus, effective for the period beginning with the
      Company’s transition to Delaware in March 2006, the Company’s effective income
      tax rate on domestic earnings is 34%.




**Note
      1** **7:
      Legal Proceedings**





On
      August
      13, 2008, EES filed suit against CoaLogix and its CEO in the United States
      District Court for the District of Connecticut alleging claims for tortuous
      interference with contract, fraudulent misrepresentation, conversion, unfair
      trade practices and unjust enrichment. EES’ claims arise largely out of a series
      of business relationships that existed between EES, CoaLogix and Solucorp.
      The
      suit seeks unspecified damages in addition to disgorgement of all revenues
      CoaLogix has earned from its dealings with Solucorp. CoaLogix denies any
      liability and intends to vigorously defend this lawsuit in the event that a
      favorable settlement is not reached. No provision has been recorded with respect
      to the suit against CoaLogix and its CEO.




19




**Note
      1** **8:
      Subsequent Events**





**Value
      of the Company’s Investment in Comverge**





As
      of
      November 10, 2008, the total market value of the Company’s remaining 502,500
      Comverge shares was approximately $2.4 million based on a November 10, 2008
      closing market price of $4.71 per share.




**Share
      Repurchase Program**





On
      October 6, 2008, the Company announced that its Board of Directors had
      authorized a share repurchase program of up to 1,000,000 shares of its common
      stock. The share repurchase program will be implemented at management’s
      discretion from time to time. Through November 12, 2008, the Company has
      repurchased 34,000 shares of its common stock at an average price of $2.42
      per
      share.




**GridSense**





On
      October 18, 2008, GridSense and certain of its significant shareholders,
      including the Company, entered into agreements to privatize the operations
      of
      GridSense in a corporation organized in Australia. If and when the proposed
      privatization is completed, the Company would own approximately 39.1% of the
      outstanding shares of privatized GridSense as compared to the 23.4% interest
      the
      Company maintains in the publicly held GridSense. In addition, the privatized
      GridSense will assume all indebtedness owed to the Company by the public
      GridSense. The privatization is subject to regulatory approval in Canada and
      approval by a majority of GridSense’s disinterested public shareholders.
      GridSense will be seeking approval of its shareholders at a meeting of the
      shareholders which it plans to hold before the end of 2008.





**Coreworx**





Coreworx
      currently anticipates that sales for 2009 will be below the levels forecasted
      at
      the time of its acquisition. Coreworx is in the process of revising its
      operating plans for 2009 in order to reduce its costs and expenses. Coreworx
      believes that under the revised plan, it will be able to reduce its operating
      losses and minimize its need for additional liquidity from Acorn or other
      sources. However, it is expected that Coreworx will require additional working
      capital support in order to effectuate the revised plan and finance its
      operations in 2009. This support may be in the form of a bank line, new
      investment by others, additional investment by Acorn, or a combination of the
      above. Coreworx is exploring bank financing and possible new investment, but
      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 the Company may be limited by
      the
      working capital needs of its corporate activities and other operating companies.




Based
      upon analysis of the revised operating plan for Coreworx for 2009 and future
      periods and other information relating to Coreworx’s business and prospects,
      including the global economic slowdown and crisis in the credit markets and
      its
      possible effect on Coreworx’s customers, the Company will evaluate the goodwill
      and intangibles recorded upon acquisition for possible impairment. Such
      impairment could have a material adverse effect on the Company’s results of
      operations and financial condition.




**CoaLogix
      Financing**




In
      October 2008, CoaLogix signed an agreement with Square 1 Bank for a $500 term
      loan and a $2,000 formula based line-of-credit. The term loan is for a period
      of
      36 months and bears interest at prime plus 1.5%. The line-of-credit is for
      a
      period of one year and bears interest at prime plus 0.75%. Both the term loan
      and the line-of-credit are to finance CoaLogix’s working capital and to finance
      its growth and are subject to certain financial covenants.


20


**ACORN
      ENERGY, INC.**


**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, 2007.





**Recent
      Developments**





***DC
      Circuit Court Vacates Clean Air Interstate Rule***




On
      July
      11, 2008, the District of Columbia Court of Appeals issued an opinion in the
      State of North Carolina v. Environmental Protection Agency in which the
      court vacated the Environmental Protection Agency’s (EPA) Clean Air Interstate
      Rule (CAIR) and the associated Federal Implementation Plan.




The
      EPA
      adopted CAIR in March 2005 to provide a federal framework to limit the emission
      of sulfur dioxide (SO 2 )
      and
      nitrogen oxides (NOx). The rule required 28 eastern states and the District
      of
      Columbia to permanently cap SO 2 and NOx,
      thereby significantly reducing emissions in the affected states.




Under
      CAIR, the affected states had to achieve required emission reductions using
      one
      of two compliance options:    (1) meet the state’s emission budget by
      requiring power plants to participate in an EPA-administered interstate
      cap-and-trade system that caps emissions in two stages, or (2) meet an
      individual state emissions budget that is administered through measures of
      the
      state’s choosing.  The EPA-administered interstate cap-and-trade system did
      not establish quotas on individual states with respect to SO2 or NOx, but
      instead created a regional framework with regional caps.  CAIR was to be
      phased in under a two part plan, with a Phase I cap for NOx and SO2 beginning
      in
      2009 and 2010, respectively, and Phase II beginning with respect to both
      pollutants in 2015.




Although
      the court’s ruling eliminated the CAIR program, including the related
      SO2 and NOx cap-and-trade programs, the court noted that, in the absence of
      CAIR, the NOx SIP Call program will continue. In addition state allowances
      for
      NOx under the Clean Air Act remain in effect. However, by striking down CAIR
      and
      the cap-and-trade regime, the CAIR-promulgated annual NOx allowances have been
      eliminated, leaving the validity of the states’ regulations regarding these
      allowances in question. The EPA has announced that it is reviewing the decision
      and analyzing its effects. It is unclear when new regulation will be proposed
      or
      adopted or if legislation to revamp the Clean Air Act may overtake or supersede
      new regulatory action.




Subsequently,
      petition for review of the July 11, 2008 decision were filed by the Utility
      Air
      Group and the National Mining Association, stating that the court erred in
      vacating NOx trading programs claiming it was inconsistent with a prior court
      ruling on NOx trading programs in 2000. Environmental advocates have also
      petitioned the court to reconsider the remedy of vacating the rule, and have
      asked that the court entertain other options such as keeping the program in
      place and directing the EPA to improve it. Additionally, in a procedural order,
      the U.S. court of Appeals for the D.C. Circuit has asked the parties seeking
      en
      banc review of the July 11, 2008 vacatur of CAIR to file additional responses
      on
      two questions, whether any party is seeking vacatur of CAIR and whether the
      court should stay its earlier mandate until the EPA develops a revised rule..
      While the D.C Circuit’s order would vacate the air emissions program, the
      procedural order suggests that there may be a possibility that the program
      might
      remain in force for several more years.





21




***CoaLogix***




In
      October 2008, CoaLogix signed an agreement with Square 1 Bank for a $500,000
      term loan and a $2 million formula based line-of-credit. The term loan is for
      a
      period of 36 months and bears interest at prime plus 1.5%. The line-of-credit
      is
      for a period of one year and bears interest at prime plus 0.75%. Both the term
      loan and the line-of-credit are to finance CoaLogix’s working capital and to
      finance its growth and are subject to certain financial covenants.




***Coreworx
      acquisition***




On
      August
      13, 2008, we entered into and closed an agreement for the acquisition of all
      of
      the outstanding capital stock of Coreworx, Inc. (“Coreworx”). Coreworx is
      headquartered in Kitchener, Ontario, Canada, and is engaged in the design and
      delivery of project collaboration solutions for large capital projects. 
The acquisition of Coreworx was completed pursuant to a Securities Purchase
      Agreement (the “Purchase Agreement”), dated August 13, 2008, by and among us,
      former debenture holders in Coreworx and former shareholders in
      Coreworx.




Prior
      to
      and in contemplation of the completion of the acquisition, we lent Coreworx
      $1,500 which bore interest at 12% per year.




Immediately
      prior to the purchase of the Coreworx shares, we contributed to the capital
      of
      Coreworx $2,500 in cash and $3,400 aggregate principal amount of its 8% one-year
      promissory notes. The cash and notes were delivered by Coreworx to the holders
      of Coreworx’s debentures in full payment and satisfaction of all principal and
      accrued interest outstanding on such debentures.




In
      consideration for the Coreworx shares, we issued 287,500 shares of our Common
      Stock. Under the Purchase Agreement, a portion of these shares will be held
      in
      escrow until one year after the closing.




As
      a
      result of the transaction, Coreworx is a wholly-owned subsidiary of ours and
      will be presented as our Energy Infrastructure Software segment. In connection
      with the transaction, we agreed to implement an option plan for Coreworx
      employees for up to 20% of the outstanding Coreworx
      shares.




A
      contingent payment of one-half of the expected net receipt (less fees) by
      Coreworx of monies due from the Canada Revenue Agency or the Ontario Ministry
      of
      Revenue in connection with Coreworx’s 2007 scientific research and experimental
      development tax credit refund claim or Ontario innovation tax credit refund
      claim for 2007 (collectively, the “SRED Claim”) during the six months
      immediately following the closing date, is not included in the purchase price
      as
      the receipt of the SRED Claim within the six months following the closing date
      is less than beyond a reasonable doubt.




The
      final
      purchase price will be dependent upon the actual amount of the SRED refund
      (if
      any) and the actual transaction costs.





Coreworx
      currently anticipates that sales for 2009 will be below the levels forecasted
      at
      the time of our acquisition. Coreworx is in the process of revising its
      operating plans for 2009 in order to reduce its costs and expenses. Coreworx
      believes that under the revised plan, it will be able to reduce its operating
      losses and minimize its need for additional liquidity from Acorn or other
      sources. However, it is expected that Coreworx will require additional working
      capital support in order to effectuate the revised plan and finance its
      operations in 2009. This support may be in the form of a bank line, new
      investment by others, additional investment by Acorn, or a combination of the
      above. Coreworx is exploring bank financing and possible new investment, but
      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 may be limited by the working
      capital needs of our corporate activities and other operating companies.




22




Based
        upon
        analysis of the revised operating plan for Coreworx for 2009 and future periods
        and other information relating to Coreworx’s business and prospects,
        including the global economic slowdown and crisis in the credit markets and
        its
        possible effect on Coreworx’s customers, we will evaluate the goodwill and
        intangibles recorded upon acquisition for possible impairment. Such impairment
        could have a material adverse effect on the Company’s results of operations and
        financial condition.


***Comverge***




During
      the third quarter of 2008, we sold 503,798 of our Comverge shares for
      approximately $5.7 million and recorded a pre-tax gain of approximately $3.1
      million. On September 30, 2008 we held 502,500 common shares of Comverge. During
      the period from October 1, 2008 to November 12, 2008, we did not sell any
      additional Comverge shares. As of November 12, 2008, the total market value
      of
      our remaining Comverge shares was approximately $2.4 million based on a November
      10, 2008 closing market price of $4.71 per share.




***Paketeria***




In
      2008,
      we provided Paketeria with approximately $2.6 million of loans in order to
      provide it with additional temporary financing to help it support its operations
      until it is able to raise funds through the sale by existing shareholders of
      shares through the escrow arrangement from Paketeria’s listing on the Frankfurt
      Stock Exchange (further described on page F-20 of our Annual Report on Form
      10-K) or other sources.




Paketeria
      has changed its business model from a franchise concept to a partnering concept
      with Volksbank in Germany. This change of focus will cause Paketeria to incur
      significant expenditures. We have decided that we can no longer provide any
      additional financing to Paketeria to help it support its operations until it
      can
      raise funds from other sources. As a result, we have significant doubt as to
      Paketeria’s ability to repay its debt to us and its ability to continue as a
      going concern. We have accordingly, taken a loss provision on our loans to
      Paketeria and reduced our investment balance in Paketeria to zero.




***GridSense***




On
      January 2, 2008, we participated in a transaction where we were the lead
      investor in a private placement by GridSense Systems Inc. (“GridSense”),
      acquiring 15,714,285 shares and 15,714,285 warrants for C$1.1 million
      (approximately $1.1 million). The warrants acquired expired in July 2008. The
      15,714,285 shares acquired by us in the placement represented approximately
      24.5% of GridSense's issued and outstanding shares at the time. Our holdings
      in
      GridSense were subsequently diluted to approximately 23.4% as a result of a
      transaction by GridSense. In July 2008, we provided GridSense with a C$750,000
      loan ($736,000). The loan bears interest at a rate of 8% per year was initially
      due on October 30, 2008. The due date of the loan has been extended to January
      31, 2009. The loan is secured by a security interest in all the assets of
      GridSense’s principal operating subsidiary.




On
      October 18, 2008, GridSense and certain of its significant shareholders,
      including Acorn, entered into agreements to privatize the operations of
      GridSense in a corporation organized in Australia. If and when the proposed
      privatization is completed, we would own approximately 39.1% of the outstanding
      shares of GridSense as compared to the 23.4% interest we maintain in the
      publicly held GridSense. In addition, the privatized GridSense will assume
      all
      indebtedness owed to us by the public GridSense. The privatization is subject
      to
      regulatory approval in Canada and approval by a majority of GridSense’s
      disinterested public shareholders. GridSense will be seeking approval of its
      shareholders at a meeting of the shareholders which it plans to hold before
      the
      end of 2008.




23




***Share
      Repurchase Program***





On
      October 6, 2008, our Board of Directors authorized a share repurchase program
      of
      up to 1,000,000 shares of our common stock. The share repurchase program will
      be
      implemented at management’s discretion from time to time. Through November 12,
      2008, we repurchased 34,000 shares of our common stock at an average price
      of
      $2.42 per share.




**Overview
      and Trend Information**





Acorn
      Energy is a holding company that specializes in acquiring and accelerating
      the
      growth of emerging ventures that promise improvement in the economic and
      environmental efficiency of the energy sector. We aim to acquire primarily
      controlling positions in companies led by promising entrepreneurs and we add
      value by supporting those companies with financing, branding, positioning,
      strategy and business development.




Through
      our majority-owned operating subsidiaries we provide the following
      services:







·
            **RT
                Solutions**.
                Real time software consulting and development services provided through
                the Company’s DSIT subsidiary, with a focus on port security for strategic
                energy installations.





·
            **SCR
                Catalyst and Management Services**for coal-fired power plants that use selective catalytic reduction
                (“SCR”)
                systems to reduce nitrogen oxide (“NOx”) emissions, provided through
                CoaLogix and its subsidiary SCR-Tech LLC. These services include
                SCR
                catalyst management, cleaning and regeneration as well as consulting
                services to help power plant operators to optimize efficiency and
                reduce
                overall NOx compliance costs.





·
            **Energy
                Infrastructure Software**services are provided through our recently acquired Coreworx subsidiary.
                Coreworxprovides
                unique solutions for engineering, procurement and construction companies
                that manage capital projects.





Our
      equity affiliates and entities in which we own significant equity interests
      are
      engaged in the following activities:





·
            **Comverge
                Inc.**Provides energy intelligence solutions for utilities and energy companies
                through demand response.





·
            **GridSense
                Systems Inc.**Provides remote monitoring and control systems to electric utilities
                and
                industrial facilities worldwide.





·
            **Paketeria
                AG**.
                Owner and franchiser of a full-service franchise chain in Germany
                that
                combines eight services (post and parcels, electricity, eBay dropshop,
                mobile telephones, copying, printing, photo processing and printer
                cartridge refilling) in one store.





·
            **Local
                Power, Inc**.
                Provides consultation services for community choice aggregation.




During
      the 2008 periods included in this report, we had operations in three reportable
      segments: providing
      catalyst regeneration technologies and management services for SCR systems
      through our CoaLogix subsidiary, Energy Infrastructure Software (“EIS”) services
      provided through our recently acquired Coreworx subsidiary and
      RT
      Solutions which is conducted through our DSIT subsidiary. The
      following analysis should be read together with the segment information provided
      in Note 15 to the interim unaudited consolidated financial statements included
      in this quarterly report, which information is hereby incorporated by reference
      into this Item 2.





24




*RT
      Solutions*




Our
      RT
      Solutions segment reported significantly increased revenues in 2008 as compared
      to 2007 (for both the three and nine months ended September 30). The increase
      in
      revenues was the result of the acquisition of the following projects:




·
            A
                NIS 30 million (approximately $8.0 million at September 30, 2008)
                order
                for a sonar and underwater acoustic system for the Israeli Ministry
                of
                Defense, and




·
            An
                order to supply what we believe to be the world’s first underwater
                surveillance system to protect a strategic coastal energy installation.
                This order was received in mid- 2007 and the project was successfully
                completed in the second quarter of
                2008.




·
            A
                number of significant embedded hardware and software RT projects
                for which
                we received over $2 million of orders in the first nine months of
                2008.




Our
      increased revenues are a direct result of our progress in those projects.




Our
      continued growth in sales projected for the fourth quarter of 2008 and into
      2009
      is expected to come primarily from our naval solutions projects with sales
      from
      our embedded hardware and software development projects. We project continued
      growth based on our abovementioned contract with the Israeli MOD for which
      we
      currently have a backlog of approximately $4.3 million and we anticipate
      receiving in the fourth quarter of 2008 and the beginning of 2009 a number
      of
      significant naval solutions contracts for additional underwater surveillance
      systems to protect strategic coastal energy installations.





*CoaLogix/SCR*




In
      the
      first nine months of 2008, SCR-Tech secured new contracts from major U.S.
      companies representing more than triple its entire 2007 sales.  At the end
      of the third quarter, CoaLogix had a backlog of approximately $14.4 million
      (up
      from approximately $12.5 million and the end of the second quarter) which we
      expect to realize over the next 2 years. CoaLogix has recently completed a
      program to expand its facilities to meet increased demand.




As
      noted in “Recent Developments”, in July 2008, the District of Columbia Court of
      Appeals issued an opinion in the State of North Carolina v. Environmental
      Protection Agency in which the court vacated the EPA’s Clean Air Interstate
      Rule (CAIR) and the associated Federal Implementation Plan. The court’s ruling
      may mean less regeneration activity in the short term for CoaLogix. 
However, we believe that the long-term trend is for increasing and more
      stringent environmental regulation our customers and that the long-term
      prospects for the regeneration business remain good. In addition, we believe
      that the new uncertain regulatory landscape creates additional opportunities
      for
      CoaLogix’s SCR management services.




Revenues
      increased significantly in the third quarter of 2008 as compared to the
      relatively low revenues in second quarter of 2008. Revenues and margins for
      the
      second and third quarters are generally lower than those of first and fourth
      quarters due to seasonal factors since power plants do not schedule service
      of
      their catalyst systems during the spring and summer ozone months.




*Coreworx*





Coreworx
      expects to continue to incur operating losses for the balance of 2008. Coreworx
      also anticipates that sales for 2009 will be below the levels forecasted at
      the
      time of our acquisition. Coreworx is in the process of revising its operating
      plans for 2009 in order to reduce its costs and expenses. Coreworx believes
      that
      under the revised plan, it will be able to reduce its operating losses and
      minimize its need for additional liquidity from Acorn or other sources. However,
      it is expected that Coreworx will require additional working capital support
      in
      order to effectuate the revised plan and finance its operations in 2009. This
      support may be in the form of a bank line, new investment by others, additional
      investment by Acorn, or a combination of the above. Coreworx is exploring bank
      financing and possible new investment, but 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 may be limited by the working capital needs of our corporate
      activities and other operating companies.




25




Based
      upon
      analysis of the revised operating plan for Coreworx for 2009 and future periods
      and other information relating to Coreworx’s business and prospects,
      including the global economic slowdown and crisis in the credit markets and
      its
      possible effect on Coreworx’s customers, we will evaluate the goodwill and
      intangibles recorded upon acquisition for possible impairment. Such impairment
      could have a material adverse effect on the Company’s results of operations and
      financial condition.




*Paketeria*





In
      December 2007, Paketeria’s shares were listed under the symbol “AOSTYL” on the
      Open Market (Freiverkehr) of the Frankfurt Stock Exchange and became eligible
      for trading. In connection with the listing and the escrow arrangements,
      Paketeria’s shareholders, including Acorn agreed to lock up certain of their
      shares for up to one year from the listing date. Under the lock-up agreement,
      shareholders may not offer, pledge, allot, sell or otherwise transfer or dispose
      of directly or indirectly any shares of Paketeria. There is currently a limited
      market for Paketeria’s shares on this market. From the listing date to November
      1, 2008, 935 shares of Paketeria were sold by the German investment bank
      responsible for the initial listing.





Thus
      far
      in 2008, we have provided Paketeria with approximately $2.6 million of loans
      in
      order to provide it with additional temporary financing to help it support
      its
      operations until it is able to raise funds from other sources. The loans are
      to
      be repaid by March 31, 2009. If the loans are not repaid, we are entitled to
      convert the loans and any unpaid accrued interest into equity of Paketeria
      at
      the rate of €2.31
      ($3.34 at current exchange rates) per share. In addition, Paketeria
      granted warrants to Acorn to acquire Paketeria shares. The warrants are
      exercisable at €7.71 ($11.14 at current exchange rates) per share to acquire the
      number of Paketeria shares derived by dividing the Combined Loan’s outstanding
      principal plus accrued interest by €7.71 .
      The
      warrant may only be exercised to the extent the loan is not
      converted.





Paketeria
      has changed its business model from a franchise concept to a partnering concept
      with Volksbank in Germany. This change of focus will cause Paketeria to incur
      significant expenditures. We have decided that we will no longer provide any
      additional financing to Paketeria to help it support its operations until it
      can
      raise funds from other sources. As a result, we have significant doubt as to
      Paketeria’s ability to repay its debt to us and its ability to continue as a
      going concern. We have, accordingly, taken a loss provision on our loans to
      Paketeria and reduced our investment balance in Paketeria to zero.





Paketeria
      continues to look for additional outside equity or debt financing to finance
      its
      expansion.




*GridSense*




We
      acquired our interest in GridSense by participating as the lead investor in
      their January 2008 private placement. In the private placement, we acquired
      15,714,285 shares for C$1.1 million (approximately $1.1 million) plus
      transaction costs. The 15,714,285 shares we acquired represents approximately
      25% of GridSense's issued and outstanding shares. Our holdings in GridSense
      were
      diluted to approximately 24% following the first quarter acquisition by
      GridSense of Transformer Contracting, Inc. in which they issued an additional
      3,000,000 shares.




26




In
      July
      2008, we lent GridSense C$750,000 ($736,000 at the then exchange rate) under
      a
      secured promissory note which bears interest at 8% and is currently due on
      January 31, 2009. The note is secured by all the assets of GridSense’s principal
      operating subsidiary.





We
      account for our GridSense investment the equity method and, as such, we record
      approximately 24% of its income/loss in our consolidated results. We record
      our
      share of income or loss in GridSense with a lag of three months as we are not
      able to receive timely financial information. In the third quarter of 2008,
      we
      recorded a loss of $126,000 representing our approximate 24% share of
      GridSense’s losses for the period from January 2, 2008 to June 30, 2008. We also
      recorded $69,000 as our share of losses in GridSense which represents the
      amortization of certain intangible assets acquired by us in our initial
      investment and the write-off of an option to acquire additional GridSense shares
      which expired. We will record our share of GridSense’s third quarter results in
      the fourth quarter of 2008.




*Corporate*




As
      noted
      above in “Recent Developments”, on October 6, 2008, our Board of Directors
      authorized a share repurchase program of up to 1,000,000 shares of our common
      stock. The share repurchase program will be implemented at management’s
      discretion from time to time. Through November 12, 2008, we repurchased 34,000
      shares of our common stock at an average price of $2.42 per share.




At
      the
      end of October 2008, we had corporate debt of $3.4 million related to our
      acquisition of Coreworx and approximately $13,0 million in unrestricted cash.
      In
      addition, we have restricted cash of $2.5 million of which we expect a
      significant portion to be released in the first quarter of 2009. We continue
      to
      have significant corporate cash expenses and will continue to expend in the
      future, significant amounts of funds on professional fees and other costs in
      connection with our strategy to seek out and invest in companies that fit our
      target business model. We have begun to implement cost-cutting measures with
      respect to our corporate expenses, most of which will not come into effect
      until
      2009.




**Results
      of Operations**




The
      following table sets forth certain information with respect to the consolidated
      results of operations of the Company for the three and nine months ended
      September 30, 2007 and 2008, 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. Our results
      for the three and nine months ended September 30, 2008 include the results
      of
      our newly acquired SCR-Tech and Coreworx subsidiaries. As such, results for
      the
      three and nine months ended September 30, 2008 may not be comparable to the
      results for the three and nine months ended September 30, 2007 without negating
      the effect of SCR-Tech’s and Coreworx’s results.




Nine months ended September 30,
            
            Three months ended September 30,2007
            
            2008
            
            Change
            
            2007
            
            2008
            
            Change($,000)
            
            % of
              sales
            
            ($,000)
            
            % of
              sales
            
            From
              2007 to
              2008
            
            ($,000)
            
            % of
              sales
            
            ($,000)
            
            % of
              sales
            
            From
              2007 to
              2008Sales
            
            $
            3,315
            
            
            *100*
            *%*
            $
            12,530
            
            
            *100*
            *%*
            
            *278*
            *%*
            $
            1,595
            
            
            *100*
            *%*
            $
            4,628
            
            
            *100*
            *%*
            
            *190*Cost
                of sales
            
            
            2,501
            
            
            *75*
            
            
            9,203
            
            
            *73*
            
            
            *268*
            
            
            1,122
            
            
            *70*
            
            
            3,731
            
            
            *81*
            
            
            *233*Gross
                profit
            
            
            814
            
            
            *25*
            
            
            3,327
            
            
            *27*
            
            
            *309*
            
            
            473
            
            
            *30*
            
            
            897
            
            
            *19*
            
            
            *90*R&D
                expenses
            
            
            310
            
            
            *9*
            
            
            510
            
            
            *4*
            
            
            *65*
            
            
            77
            
            
            *5*
            
            
            402
            
            
            *9*
            
            
            *422*Acquired
                IPR&D
            
            
            —
            
            
            
            
            
            551
            
            
            *4*
            
            
            
            
            
            —
            
            
            
            
            
            551
            
            
            *12*SG&A
                expenses
            
            
            3,012
            
            
            *91*
            
            
            8,094
            
            
            *65*
            
            
            *169*
            
            
            1,153
            
            
            *72*
            
            
            3,401
            
            
            *73*
            
            
            *195*Impairment
                of loans and investments
            
            
            —
            
            
            
            
            
            3,000
            
            
            *24*
            
            
            
            
            
            —
            
            
            
            
            
            2,454
            
            
            *53*Operating
                loss
            
            
            (2,508
            )
            
            *(76*
            *)*
            
            (8,828
            )
            
            *(70*
            *)*
            
            *252*
            
            
            (757
            )
            
            *(47*
            *)*
            
            (5,911
            )
            
            *(128*
            *)*
            
            *681*Gain
                on early redemption of Debentures
            
            
            —
            
            
            *—*
            
            
            1,259
            
            
            *10*
            
            
            
            
            
            —
            
            
            *—*
            
            
            —Finance
                expense, net
            
            
            (729
            )
            
            *(22*
            *)*
            
            (2,950
            )
            
            *(24*
            *)*
            
            *305*
            
            
            (358
            )
            
            *(22*
            *)*
            
            (50
            )
            
            *(1*
            *)*
            
            *(86*
            *)*Gain
                on public offering of Comverge
            
            
            16,169
            
            
            *488*
            
            
            —
            
            
            
            
            
            
            
            
            —
            
            
            *—*
            
            
            —Gain
                on sale of Comverge shares
            
            
            —
            
            
            *—*
            
            
            8,861
            
            
            *71*
            
            
            
            
            
            —
            
            
            *—*
            
            
            3,079
            
            
            *67*Gain
                (loss) on outside investment in Company’s equity investments,
                net
            
            
            (37
            )
            
            *(1*
            *)*
            
            7
            
            
            *0*
            
            
            *(119*
            *)*
            
            (37
            )
            
            *(2*
            *)*
            
            7
            
            
            *0*
            
            
            *(119*
            *)*Income
                before taxes on income
            
            
            12,895
            
            
            *389*
            
            
            (1,651
            )
            
            *(13*
            *)*
            
            *(113*
            *)*
            
            (1,152
            )
            
            *(72*
            *)*
            
            (2,875
            )
            
            *(62*
            *)*
            
            *150*Taxes
                on income
            
            
            (9
            )
            
            *0*
            
            
            (689
            )
            
            *(5*
            *)*
            
            
            
            
            (4
            )
            
            *0*
            
            
            (691
            )
            
            *(15*
            *)*Income
                (loss) from operations of the Company and its consolidated
                subsidiaries
            
            
            12,886
            
            
            *389*
            
            
            (2,340
            )
            
            *(19*
            *)*
            
            *(118*
            *)*
            
            (1,156
            )
            
            *(72*
            *)*
            
            (3,566
            )
            
            *(77*
            *)*
            
            *208*Minority
                interests
            
            
            —
            
            
            
            
            
            284
            
            
            *2*
            
            
            
            
            
            —
            
            
            *—*
            
            
            204
            
            
            *4*Share
                of losses in GridSense
            
            
            —
            
            
            
            
            
            (194
            )
            
            *(2*
            *)*
            
            
            
            
            —
            
            
            *—*
            
            
            (60
            )
            
            *(1*
            *)*Share
                in losses in Paketeria
            
            
            (828
            )
            
            *(25*
            *)*
            
            (1,560
            )
            
            *(13*
            *)*
            
            *89*
            
            
            (440
            )
            
            *(28*
            *)*
            
            (899
            )
            
            *(20*
            *)*
            
            *105*Net
                income
            
            $
            12,058
            
            
            *364*
            
            $
            (3,810
            )
            
            *(31*
            *)*
            
            *(132*
            *)*
            $
            (1,596
            )
            
            *(100*
            *)*
            $
            (4,321
            )
            
            *(94*
            *)*
            
            *171*




27




*Sales.* Sales in
      the first nine months of 2008 increased by $9.2 million or 278% to $12.5 million
      from $3.3 million in the first nine months of 2007. The increase in sales is
      attributable to the inclusion of $5.4 million of the sales of CoaLogix which
      we
      acquired at the end of 2007 in the first nine months of 2008 which were not
      included in our consolidated results in 2007 as well as sales of $0.8 million
      from our recently acquired Coreworx subsidiary. In addition, the DSIT sales
      of
      $6.3 million in the first nine months of 2008 represents a $3.0 million or
      91%
      increase over sales from the first nine months of 2007. Sales in the third
      quarter of 2008 increased by $3.0 million, or 190% to $4.6 million from $1.6
      million in the third quarter of 2007. The increase in third quarter 2008 sales
      is also attributable to CoaLogix and Coreworx sales of $1.8 million and $0.8
      million, respectively, which were not included in our 2007 consolidated results,
      combined with an increase in DSIT sales of $0.4 million. The increase in DSIT
      sales for both the three and nine months ended September 30, 2008 was almost
      entirely attributable to an increase in RT Solutions segment sales which was
      primarily due to two naval projects being performed by DSIT which began in
      the
      third quarter of 2007. The $4.6 million of sales in the third quarter of 2008
      represents an increase of approximately $1.0 million or 28% from sales in the
      second quarter of 2008. The quarter-to-quarter increase in sales is due almost
      entirely to the sales recorded in Coreworx combined with a $0.5 million increase
      in CoaLogix sales, partially offset by a quarter-to-quarter decrease of $0.2
      million in DSIT sales. The change in sales at CoaLogix was due to seasonal
      factors since power plants do not schedule service of their catalyst systems
      during the spring and summer ozone months, with the second quarter generally
      being the slowest period.





*Gross
      profit.* Gross
      profits in the first nine months of 2008 increased by $2.5 million or 313%,
      to
      $3.4 million from $0.8 million in the first nine months of 2007. The increase
      in
      gross profits is attributable to the inclusion of CoaLogix and Coreworx gross
      profits of $0.9 and $0.5 million, respectively, in the first nine months of
      2008
      combined with an increase in DSIT gross profits to $2.0 million which increased
      by $1.2 million or 143% from $0.8 million in 2007.




Gross
      profits in the third quarter of 2008 increased by approximately $0.5 million
      or
      97%, as compared to the $0.5 million of gross profits in third quarter of 2007.
      The increase in third quarter 2008 gross profit was also solely due to the
      inclusion in 2008 of Coreworx gross profits of $0.5 million. DSIT’s increased
      gross profit of $0.2 million during the third quarter was offset by the negative
      gross profit of $0.2 million recorded by CoaLogix. The increase in DSIT gross
      profit was attributable to the aforementioned increase in RT Solutions segment
      sales. CoaLogix’s reduced gross profit was caused by lower regeneration volumes
      due to seasonal factors since power plants do not schedule service of their
      catalyst systems during the spring and summer ozone months. In addition,
      CoaLogix completed some projects during the third quarter that resulted in
      negative margins.  This was caused by longer than expected times to
      complete these projects and by higher costs of the raw materials and chemicals
      due to the product mix.




28




Our
      gross
      margins also increased to 27% in the first nine months of 2008 compared to
      25%
      in the first nine months of 2007. The increased gross margins were the result
      of
      CoaLogix and Coreworx’s gross margins of 29% and 66%, respectively, which were
      not included in 2007 results. In addition, during the period, DSIT’s increased
      its gross margin to 31% as compared to 2007’s 25%. DSIT’s increased gross
      margins were due to higher margin projects being performed during the 2008
      as
      compared to 2007.




*Acquired
      in-process research and development (“IPR&D”).* IPR&D, represents Coreworx’s research and development projects that had not
      reached technological feasibility and had no alternative future use when
      acquired. We have tentatively estimated that approximately $551,000 of the
      purchase price of Coreworx may represent purchased in-process technology. This
      is a preliminary estimate that is subject to change.




*Selling,
      general and administrative expenses (“SG&A”).* SG&A
      in the first nine months of
      2008
      increased by $5.1 million as compared to the first nine months of 2007. A
      portion of the increase was attributable to the inclusion of CoaLogix’s and
      Coreworx’s SG&A costs of $2.5 and $0.4 million, respectively. DSIT’s
      SG&A increased by approximately $0.6 million compared to the first nine
      months of 2007. During that period, senior management of DSIT waived
      approximately $0.2 million of liabilities DSIT had to them in order to shore
      up
      its results and maintain its working relationship with its banks. In addition,
      DSIT’s costs have increased due to the weakness of the US dollar during 2008 as
      compared to 2007.  Corporate
      SG&A expense also increased by approximately $1.6 million during 2008 as
      compared to 2007. The increase in corporate SG&A is due to increased
      professional fees and salaries reflecting a higher level of corporate activity
      due to our M&A activity.




*Impairment
      of loans to Paketeria loans and investment to Local Power.* In the
      third quarter, we recorded a loss provision on our loans to Paketeria of $2.5
      million due to Paketeria’s increasing operating difficulties and our doubts as
      to its ability to repay its debt to us and its ability to continue as a going
      concern. Earlier in 2008, we took a cumulative charge of $0.5 million with
      respect to our investment and loans to Local Power.




*Gain
      on early redemption of Debenture* .
      In
      accordance with applicable accounting standards, we recorded a non-cash gain
      of
      approximately $1.3 million in connection with the January 2008 redemption of
      our
      Convertible Debentures.




*Finance
      income (expense), net.* The
      increase in finance expense in the first nine months of 2008 compared with
      the
      first nine months of 2007 is due primarily to the non-cash interest expense
      of
      $3.1 million recorded with respect to the write-off of the remaining balances
      of
      debt origination costs, warrants value and beneficial conversion features in
      the
      early redemption of our convertible debentures. This was partially offset by
      interest income earned on the proceeds of the sale of Comverge
      shares.




*Gain
      on public offering of Comverge* .
      In
      April 2007, Comverge completed its initial public offering. As a result of the
      Comverge offering, the Company recorded an increase in its investment in
      Comverge and recorded a non-cash gain of $16.2 million in “Gain on public
      offering of Comverge”.




*Gain
      on sale of Comverge shares* .
      During
      the first nine months of 2008, we sold 1,261,165 of the 1,763,665 Comverge
      shares we held at the beginning of 2008. We received proceeds of $15.4 million
      from the sales and recorded a pre-tax gain of $8.9 million.




*Taxes
      on income.* In
      the
      third quarter of 2008, we recorded a non-cash expense of $0.9 million with
      respect to the elimination of deferred tax assets from our balance sheet due
      to
      the reduction in the value of Comverge shares.




*Share
      of losses in GridSense.* We
      record
      our share of income or loss in GridSense with a lag of three months as we are
      not able to receive timely financial information. We will record our share
      of
      GridSense’s third quarter results in the fourth quarter of 2008. In the first
      nine months of 2008, we recorded a loss of $126,000 representing our approximate
      24% share of GridSense’s losses for the first six months of 2008. In addition,
      we also recognized additional losses totaling $69,000 with respect to
      amortization related to acquired technologies, customer relationships and
      trademarks and the value of expiring warrants.




29




*Share
      of losses in Paketeria.* In
      the
      first nine months of 2008, we recorded a loss of $1.6 million of which
      approximately $1.0 million represents our approximate 31% share of Paketeria’s
      losses for the period and approximately $0.1 million representing amortization
      expense associated with acquired intangibles and approximately $0.5 million
      representing the impairment of the balance of our investment. As a result of
      these losses, our investment in Paketeria has been reduced to zero and we will
      cease recording losses in Paketeria.




**Liquidity
      and Capital Resources** ****




As
      of
      September 30, 2008, we had working capital of $14.8 million, including $14.4
      million of cash and cash equivalents not including restricted cash of $3.0
      million (of which we expect approximately $2.3 million to be released by the
      first quarter of 2009). Net cash used in the nine months ended September 30,
      2008 was $5.2 million, of which $4.2 million was used in operating activities.
      The primary use of cash in operating activities during the first nine months
      of
      2008 was our corporate cash operating expenditures of approximately $2.3 million
      and the $1.3 million used by Coreworx since our acquisition .




Cash
      used
      in investing activities were primarily due to our acquisition of Coreworx ($2.5
      million), $5.1 million of loans made to Paketeria, GridSense, Coreworx (in
      contemplation of our acquisition) and others, $2.0 million used for the
      acquisition of license technology by our CoaLogix subsidiary, $1.3 million
      used
      for acquisitions of property and equipment, $1.9 million used to fund our
      investment in GridSense and EnerTech, $1.0 million with respect to an additional
      deposit in an Israeli bank as a guarantee for a project being performed by
      DSIT,
      approximately $0.4 million of additional restricted cash deposits and $1.0
      million of costs related to our November 2007 acquisition of SCR Tech. These
      amounts were offset by the proceeds of $15.4 million from the sale of our
      Comverge shares during the nine months ended September 30, 2008.




Net
      cash
      of $0.7 million was used in financing activities, primarily from the redemption
      of our debentures ($3.4 million) and repayment of short and long-term borrowings
      ($0.2 million). This use of cash was partially offset by the $2.2 million
      investment made by Enertech in CoaLogix and the $0.8 million of proceeds from
      the exercise of warrants and employee stock options.




As
      of
      November 1, 2008, the Company’s corporate operations had a total of
      approximately $13.0 million in cash and cash equivalents (not including the
      $2.5
      million deposited in an account as a security for a guarantee for DSIT),
      reflecting a $0.9 million decrease from the balance as of September 30, 2008.
      The decrease from September 30, 2008 includes $500,000 that was transferred
      to
      our Coreworx subsidiary for working capital.




We
      believe that the cash available and the cash potentially available from any
      sales of our holdings in Comverge will provide more than sufficient liquidity
      to
      finance Acorn’s activities for the foreseeable future and for the next 12 months
      in particular.





At
      September 30, 2008, DSIT had approximately $585,000 in Israeli credit lines
      available to DSIT by an Israeli bank, of which $677,000 was then being used.
      DSIT had additional funds in the same bank which the bank had the right to
      offset against the line of credit being used. As such, the net line of credit
      being used by DSIT on September 30, 2008 was approximately
      $514,000.




As
      noted
      above in “Recent Developments”, in October 2008, CoaLogix signed an agreement
      with Square 1 Bank for a $500,000 term loan and a $2 million formula based
      line-of-credit. The term loan is for a period of 36 months and bears interest
      at
      prime plus 1.5%. The line-of-credit is for a period of one year and bears
      interest at prime plus 0.75%. Both the term loan and the line-of-credit are
      to
      finance CoaLogix’s working capital and to finance its growth and are subject to
      certain financial covenants.




30




Coreworx
      currently anticipates that sales for 2009 will be below the levels forecasted
      at
      the time of our acquisition. Coreworx is in the process of revising its
      operating plans for 2009 in order to reduce its costs and expenses. Coreworx
      believes that under the revised plan, it will be able to reduce its operating
      losses and minimize its need for additional liquidity from Acorn or other
      sources. However, it is expected that Coreworx will require additional working
      capital support in order to effectuate the revised plan and finance its
      operations in 2009. This support may be in the form of a bank line, new
      investment by others, additional investment by Acorn, or a combination of the
      above. Coreworx is exploring bank financing and possible new investment, but
      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 may be limited by the working
      capital needs of our corporate activities and other operating companies.




**Contractual
      Obligations and Commitments**




Our
      contractual obligations and commitments at September 30, 2008 principally
      include obligations associated with our outstanding indebtedness, future minimum
      operating lease obligations and potential severance obligations to Israeli
      employees and are set forth in the table below.


Cash
                    Payments Due During Year Ending
                  September
                    30,(amounts
                    in thousands)Contractual Obligations
                
                Total
                
                2009
                
                2010-
                  2011
                
                2012-
                  2013
                
                2014 and
                  thereafterDebt
                
                $
                3,428
                
                $
                3,428
                
                $
                —
                
                $
                —
                
                $
                —Operating
                    leases
                
                
                3,774
                
                
                1,500
                
                
                1,684
                
                
                584
                
                
                6Potential
                    severance obligations to Israeli employees (1)
                
                
                2,866
                
                
                —
                
                
                —
                
                
                —
                
                
                2,866Investment
                    in EnerTech Capital Partners III L.P. (2)
                
                
                3,850
                
                
                3,850
                
                
                —
                
                
                —
                
                
                —Purchase
                    commitments
                
                
                191
                
                
                191
                
                
                —
                
                
                —
                
                
                —Total
                    contractual cash obligations
                
                $
                14,109
                
                $
                8,969
                
                $
                1,684
                
                $
                584
                
                $
                2,872




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, 2008, we accrued a total of $2.9 million for potential severance
      obligations of which approximately $1.8 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 Capital Partners III L.P. (“EnerTech III”), 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 a current liability, though
      it
      is uncertain as to when actual payments may be made. To date, we have received
      and funded a capital call of $1,150,000 to EnerTech III.


31




**Item
      3.**  **Quantitative and Qualitative Disclosures About Market Risk**




In
      the
      normal course of business, we are exposed to fluctuations in interest rates
      on
      lines-of-credit incurred to finance our operations in Israel, whose utilization
      at September 30, 2008 stood at approximately $677,000. Our non-US dollar
      monetary assets and liabilities (net liability of approximately $0.7 million)
      in
      Israel are exposed to fluctuations in exchange rates. In addition, our non-US
      dollar monetary assets and liabilities (net liability of approximately $0.5
      million) in Canada at our Coreworx subsidiary are also exposed to fluctuations
      in exchange rates. Furthermore, $2.2 million and $0.8 million of our backlog
      of
      projects are contracts and orders that are denominated in NIS and linked to
      an
      Israeli Ministry of Defense Index, and denominated in NIS, respectively.




We
      do not
      employ specific strategies, such as the use of derivative instruments or
      hedging, to manage our interest rate or foreign currency exchange rate
      exposures. Our DSIT subsidiary is examining ways to reduce its foreign currency
      exposure risks.




**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.


32




**PART
      II – OTHER INFORMATION**




**Item
      1.**  **Legal
      Proceedings**


***Environmental
      Energy Services, Inc. v. CoaLogix, Inc.***


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





On
      August
      13, 2008, Environmental Energy Services (“EES”) filed suit against CoaLogix and
      William McMahon, the president and chief executive officer of CoaLogix, in
      the
      United States District Court for the District of Connecticut alleging claims
      for
      tortuous interference with contract, fraudulent misrepresentation, conversion,
      unfair trade practices and unjust enrichment. EES’ claims arise largely out of a
      series of business relationships that existed between EES, CoaLogix and Solucorp
      Industries, Ltd. (“Solucorp”). Beginning in 2005, EES acquired a license to
      distribute certain Solucorp technology related to the reduction of mercury
      emissions. Subsequently, in the fall of 2007, CoaLogix entered into separate
      and
      independent business relationships with both Solucorp and EES. While CoaLogix’s
      relationship with Solucorp matured into a joint venture, a business relationship
      with EES, after further investigation and due diligence, was ultimately deemed
      inadvisable. EES initially alleged that CoaLogix and its CEO utilized
      confidential information obtained during negotiations with EES in order to
      improperly seek out and broker a deal with Solucorp in violation of EES’
contractual rights. On October 10, 2008, CoaLogix and its CEO filed a motion
      to
      have the case transferred to the Western District of North Carolina.
      Simultaneously, CoaLogix and its CEO filed motions to extend all deadlines
      in
      the case until such time as the court has ruled on the motion to transfer venue.
      Thereafter, on October 22, 2008, EES filed an Amended Complaint dropping
      CoaLogix’s CEO as a defendant and removing its claim for fraudulent
      misrepresentation. The Amended Complaint seeks unspecified damages in addition
      to disgorgement of all revenues CoaLogix has earned from its dealings with
      Solucorp. CoaLogix denies any liability and intends to vigorously defend this
      lawsuit in the event that a favorable settlement is not reached. Further,
      CoaLogix contends that its cost of defense, together with any ultimate judgment,
      is the responsibility of SoluCorp due to an indemnification agreement between
      the companies. SoluCorp has agreed to assume the cost of defense, but has not
      made a commitment regarding any ultimate judgment.





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


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





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”). Subsequent to the initial filing, the case was designated as a
      complex business matter and transferred to the North Carolina Business
      Court.





SCR-Tech’s
      claims arise largely from the Hartensteins’ previous employment as officers of
      SCR-Tech and the Confidentiality and Invention Assignment Agreement signed
      by
      the Hartensteins upon termination of their employment with SCR-Tech. Shortly
      after leaving SCR-Tech in late 2005, the Hartensteins accepted positions as
      officers of Evonik LLC f/k/a Steag LLC. Evonik LLC then announced that it would
      be opening a catalyst regeneration facility in Kings Mountain, North Carolina.
      SCR-Tech subsequently became concerned that the Hartensteins were acting in
      contravention of their confidentiality agreement. After Evonik LLC refused
      to
      engage in meaningful discussions regarding SCR-Tech’s concerns, SCR-Tech filed
      suit alleging claims for breach of contract, tortious interference with
      contract, misappropriation of trade secrets, breach of fiduciary duty and
      usurpation of corporate opportunity. SCR-Tech’s claims against the German
      Defendants stem from Evonik LLC’s admission that its parent entities knew of the
      Hartensteins’ contractual obligations to SCR-Tech and, nevertheless, directed
      the actions which have been in contravention of those obligations.




33




Subsequent
      to the filing of this lawsuit, the Hartensteins filed a motion to dismiss
      SCR-Tech’s claims related to breach of fiduciary duty and usurpation of
      corporate opportunity. This motion is currently pending before the court.
      Additionally, Evonik LLC has filed a counterclaim against SCR-Tech, for
      unspecified damages, alleging trade libel, abuse of process and unfair and
      deceptive trade practices. SCR-Tech vehemently denies the allegations of Evonik
      LLC’s counterclaim and will vigorously defend against them.




**Item
      1A Risk Factors**





We
      may
      from time to time make written or oral statements that contain forward-looking
      information. However, our actual results may differ materially from our
      expectations, statements or projections due to various factors. Many of these
      factors are described under “Risk Factors” in our Annual Report of Form 10-K.
      With respect to our newly acquired Coreworx subsidiary, the following risks
      and
      uncertainties could cause actual results to differ from our expectations,
      statements or projections.





·
            **Operating
                Losses; Need for Additional Working Capital**.
                Coreworx expects to continue to incur operating losses for the balance
                of
                2008. Coreworx also anticipates that sales for 2009 will be below
                the
                levels forecasted at the time of our acquisition. Coreworx is in
                the
                process of revising its operating plans for 2009 in order to reduce
                its
                costs and expenses. Coreworx believes that under the revised plan,
                it will
                be able to reduce its operating losses and minimize its need for
                additional liquidity from Acorn or other sources. However, it is
                expected
                that Coreworx will require additional working capital support in
                order to
                effectuate the revised plan and finance its operations in 2009. This
                support may be in the form of a bank line, new investment by others,
                additional investment by Acorn, or a combination of the above. Coreworx
                is
                exploring bank financing and possible new investment, but there is
                no
                assurance that such support will be available from such sources in
                sufficient amounts, in a timely manner and on acceptable terms.





·
            **Economic
                Conditions; Credit Crisis**.
                The current economic conditions and limited availability of credit
                may
                affect capital projects and budgets of Coreworx
                customers. This may result in deferral of projects, which would have
                an
                adverse impact on our ability to achieve planned
                sales.





·
            **Customer
                Concentration.**Coreworx
                currently relies on a small number of customers for its revenue.
                During
                the nine months ended September 30, 2008, seven customers accounted
                for all of its sales. The loss of any of these major customers or a
                major reduction in their level of purchases would likely have a material
                adverse effect on Coreworx.





·
            **Competition.**The
                market for project management collaboration software is highly
                competitive. Coreworx competes with products such as Open Text’s Open
                Text, EMC’s Documentum, Autodesk’s Buzzsaw, IBM’s FileNet and Microsoft’s
                Sharepoint. Although Coreworx believes that the Coreworx suite offers
                features and functionality for engineering management of large-scale
                capital projects that these other products do not offer, Coreworx
                may not
                have sufficient development and marketing resources to compete effectively
                with these larger competitors.





·
            **Need
                to Continue Product Enhancement.**Coreworx
                needs to continue to upgrade the Coreworx suite to add features demanded
                by the market. Coreworx is in the process of completing and enhancing
                the
                integration of the Coreworx suite with Microsoft Sharepoint, a widely
                used
                collaboration tool and expects to complete the integration by the
                end of
                2009. A failure to complete integration on a timely basis would have
                a
                negative impact on Coreworx’s sales, particularly to potential new
                customers.





34




**Item
      5.**  **Other
      Information**





On
      September 15, 2008, Acorn and CoaLogix entered into an employment agreement
      with
      Mr. Joe B. Cogdell, Jr., pursuant to which Mr. Cogdell will serve as Vice
      President, General Counsel and Secretary of each of such companies commencing
      January 5, 2009 (the “Effective Date”). The employment agreement is summarized
      below, which summary is qualified by reference to the full agreement included
      as
      an exhibit to this Quarterly Report on Form 10-Q.





Mr.
      Cogdell’s initial base salary will be $300,000 per annum. He is eligible to
      receive an annual bonus of up to 30% of his base salary, based upon the
      attainment of performance goals. The agreement has no fixed term, and the
      employment is on an “at-will” basis.





In
      anticipation of entering into the employment agreement and as contemplated
      by
      the terms thereof, on July 30, 2008 CoaLogix granted Mr. Cogdell a ten-year
      non-qualified stock option under the CoaLogix 2008 Stock Option Plan to purchase
      18,400 shares of CoaLogix common stock at an exercise price equal to fair market
      value on the date of grant, vesting over the initial four-year period of
      employment. In addition, CoaLogix granted Mr. Cogdell an award under the
      CoaLogix and Subsidiaries Capital Appreciation Rights Plan (“CARS Plan”),
      entitling Mr. Cogdell to a 2.5% participation in any Aggregate Award Pool,
      as
      defined in the CARS Plan. Under the employment agreement, Acorn agreed to grant
      Mr. Cogdell on the Effective Date a stock option (designated as an incentive
      stock option to the extent possible) under the Acorn 2006 Stock Incentive Plan
      to purchase up to 120,000 shares of Acorn common stock at an exercise price
      equal to fair market value on the Effective Date, vesting over the initial
      four-year period after the Effective Date. Under the employment agreement,
      Mr.
      Cogdell will also have the right to participate in any future financing of
      CoaLogix at the same level and priority as Acorn.





Mr.
      Cogdell is also entitled to the employee benefits generally made available
      to
      other senior executives, officer’s liability and legal malpractice insurance, as
      well as bar and legal association dues and continuing legal education
      programs.




If
      Mr.
      Cogdell’s employment is terminated as a result of an “involuntary termination”
without “cause,” Mr. Cogdell will be entitled to receive, as severance, (i) an
      amount in cash equal to twice his “annual compensation” (determined by reference
      to base salary and bonus) (the “Cash Severance Amount”) payable over 24 months
      and (ii) for up to 18 months post-termination, CoaLogix-subsidized COBRA
      premiums for continuing participation by Mr. Cogdell and his eligible dependents
      in the companies’ group health plans such that Mr. Cogdell is required to pay no
      more than an active employee. If, however, any such termination occurs during
      a
“change of control period” (generally defined to mean the period from
      announcement of a “change of control” to the expiration of 24 months following
      the “change of control” or the announcement thereof, whichever is later), the
      Cash Severance Amount will be payable in one lump sum and the employee benefits
      obligation will be increased such that CoaLogix will be fully responsible for
      the cost thereof and the benefits will be broadened to include health, dental
      and life insurance coverage to the extent Mr. Cogdell and his eligible
      dependents participated in the same prior to the “change of control.”


Mr.
      Cogdell is not entitled to severance under the employment agreement in the
      event
      his employment is terminated for “cause” or due to voluntary resignation, death
      or “disability.” Any obligation regarding severance under those circumstances
      would require separate agreement.





Under
      the
      employment agreement, Mr. Cogdell is subject to non-solicitation and non-compete
      covenants, which continue for 18 months after termination of his
      employment.





35





Acorn
      and
      CoaLogix have entered into an agreement regarding certain aspects of their
      joint
      employment of Mr. Cogdell including allocation of the costs of employment,
      bonus
      determinations, termination and severance issues and indemnities. Mr. Cogdell’s
      compensation is anticipated to be initially apportioned 50/50 between Acorn
      and
      CoaLogix, subject to periodic review.





A
      law
      firm of which Mr. Cogdell is a partner has from time to time provided legal
      services to CoaLogix.


36




**Item
      6.**  **Exhibits.**





4.1
            
            Form
                of Repayment Note issued to Coreworx debenture holders in connection
                with
                the acquisition of Coreworx (incorporated herein by reference to
                Exhibit
                4.1 to Amendment No. 1 to the Registrant’s Current Report on Form 8-K/A
                filed October 28, 2008).10.1
            
            CoaLogix
                Inc. 2008 Stock Option Plan.*10.2
            
            Forms
                of Option Agreements under the CoaLogix 2008 Stock Option
                Plan*10.3
            
            CoaLogix
                Inc. and Subsidiaries Capital Appreciation Rights
                Plan.*10.4
            
            Form
                of Participation Agreement under the CoaLogix Inc. and Subsidiaries
                Capital Appreciation Rights Plan.*10.5
            
            Employment
                Agreement among the Registrant, CoaLogix and Joe B. Cogdell, Jr.
                dated
                September 15, 2008*10.6
            
            Letter
                Agreement between the Registrant and CoaLogix dated September 15,
                2008
                related to the employment of Joe B. Cogdell, Jr.*10.7
            
            Securities
                Purchase Agreement dated as of August 13, 2008, by and among Coreworx
                Inc., the debenture holders of Coreworx, the shareholders of Coreworx
                and
                the Registrant. (incorporated herein by reference to Exhibit 10.1
                to
                Amendment No. 1 to the Registrant’s Current Report on Form 8-K/A filed
                October 28, 2008).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 includes a management contract, compensatory plan or arrangement in
      which one or more directors or executive officers of the Registrant
      participate.


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 13, 2008By:
            /s/
                Michael BarthMichael
                BarthChief
                Financial Officer


38