**SECURITIES
          AND EXCHANGE COMMISSION**
 **WASHINGTON,
          D.C. 20549**
 
 **AMENDMENT
          NO. 2 ON** **FORM
          10-K/A TO**
 
 **FORM
          10-K**
 
 
 **ANNUAL
          REPORT PURSUANT TO SECTION 13 OR 15(d)**
 **OF
          THE SECURITIES EXCHANGE ACT OF 1934**
 
 For
          the
          fiscal year ended December 31, 2004
  **Commission
          file number: 0-19771**
  **DATA
          SYSTEMS & SOFTWARE INC.**
 **(Exact
          name of registrant as specified in charter)**
  **Delaware**
                
                **22-2786081**(State
                    or other jurisdiction of
                    incorporation or organization)
                
                (I.R.S.
                    Employer Identification No.)
 
 
 **200
          Route 17, Mahwah, New Jersey 07430**
 (Address
          of principal executive offices)  (Zip
          Code)
  **(201)
          529-2026**
 Registrant’s
          telephone number, including area code
  **Securities
          registered pursuant to Section 12(b) of the Act: None**
  **Securities
          registered pursuant to Section 12(g) of the Act:**
 **Common
          Stock, par value $.01 per share**
 **Common
          Stock Purchase Rights**
 **(Title
          of Class)**
  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 if disclosure of delinquent filers pursuant to Item 405 of
          Regulation S-K is not contained herein, and will not be contained, to the
          best
          of registrant’s knowledge, in definitive proxy or information statements
          incorporated by reference in Part III of this Form 10-K or any amendment
          to this
          Form 10-K. / /
  The
          aggregate market value of the common stock held by non-affiliates of the
          registrant at June 30, 2004 was approximately $13.3 million. The aggregate
          market value was calculated by using the closing price of the stock on
          that date
          on the Nasdaq SmallCap Market.
  Number
          of
          shares outstanding of the registrant’s common stock, as of March 28, 2005:
          8,116,691.
  **DOCUMENTS
          INCORPORATED BY REFERENCE:**
  None.
 
 
 Explanatory
            Note
 
 This
            Amendment No. 2 to the Registrant's Annual Report on Form 10-K for the
            fiscal
            year ended December 31, 2004 is being filed in order to insert a conformed
            signature that was accidentally omitted from the Report of Independent
            Auditors
            included with the Comverge, Inc. and Subsidiaries Consolidated Financial
            Statements. Other than the insertion of the signature there has been
            no change
            to the financial statements previously supplied.









**PART
            IV**
 
  **ITEM
            15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**
  **(a)(1)** **List of Financial Statements of the Registrant**
  Report
            of
            Kesselman and Kesselman
 Report
            of
            KPMG LLP
 Consolidated
            Balance Sheets as of December 31, 2003 and 2004
 Consolidated
            Statements of Operations for the years ended December 31, 2002, 2003
            and
            2004
 Consolidated
            Statements of Changes in Shareholders’ Equity for the years ended December 31,
            2002,
 2003
            and
            2004
 Consolidated
            Statements of Cash Flows for the years ended December 31, 2002, 2003
            and
            2004
 Notes
            to
            Consolidated Financial Statements
  **(a)(2)
            List of Financial Statement Schedules**
  Separate
            Financial Statements of 50 Percent or Less Owned Persons:
 
 Consolidated
            Financial Statements of Comverge, Inc.:
 
 Report
            of
            PricewaterhouseCoopers LLP
 Consolidated
            Balance Sheets as of December 31, 2004 and 2003
 Consolidated
            Statements of Operations for the years ended December 31, 2004 and
            2003
 Consolidated Statement of Changes in Shareholders’ Equity for the years ended
            December 31, 2004
 and
            2003.
 Consolidated
            Statements of Cash Flows for the years ended December 31, 2004 and
            2003
 Notes
            to
            Consolidated Financial Statements
  **(a)(3)
            List of Exhibits**
 
 No.3.1
                  Certificate
                      of Incorporation of the Registrant, with amendments thereto
                      (incorporated
                      herein by reference to Exhibit 3.1 to the Registrant’s Registration
                      Statement on Form S-1 (File No. 33-70482) (the “1993 Registration
                      Statement”)).3.2
                  By-laws
                      of the Registrant (incorporated herein by reference to Exhibit
                      3.2 to the
                      Registrant’s Registration Statement on Form S-1 (File No. 33-44027) (the
                      “1992 Registration Statement”)).3.3
                  Amendments
                      to the By-laws of the Registrant adopted December 27, 1994
                      (incorporated
                      herein by reference to Exhibit 3.3 of the Registrant’s Current Report on
                      Form 8-K dated January 10, 1995).4.1
                  Specimen
                      certificate for the Common Stock (incorporated herein by reference
                      to
                      Exhibit 4.2 to the 1992 Registration Statement).4.2
                  Warrant
                      to Purchase Common Stock of the Registrant, dated October 12,
                      1999
                      (incorporated herein by reference to Exhibit 4.4 to the Registrant’s
                      Annual Report on Form 10-K for the year ended December 31,
                      2000 (the “2000
                      10-K”)).4.3
                  Securities
                      Purchase Agreement, dated as of June 11, 2002, by and among
                      the
                      Registrant, Databit, Inc. and Laurus Master Fund, Ltd. (“Laurus”)
                      (including the forms of convertible note and warrant) (incorporated
                      herein
                      by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
                      8-K dated June 11, 2002).4.4
                  Purchase
                      and Security Agreement, dated as of December 4, 2002, made
                      by and between
                      Comverge (“Comverge”) and Laurus (incorporated herein by reference to
                      Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December
                      5, 2002 (the “December 2002 8-K”)).
  -10-
 4.5
                  Convertible
                      Note, dated December 4, 2002, made by and among Comverge, Laurus
                      and, as
                      to Articles III and V only, the Registrant (incorporated herein
                      by
                      reference to Exhibit 10.2 to the December 2002 8-K).4.6
                  Common
                      Stock Purchase Warrant, dated December 5, 2002, issued by the
                      Registrant
                      to Laurus (incorporated herein by reference to Exhibit 10.3
                      to the
                      December 2002 8-K).4.7
                  Registration
                      Rights Agreement, dated as of December 4, 2002, by and between
                      the
                      Registrant and Laurus (incorporated herein by reference to
                      Exhibit 10.4 to
                      the December 2002 8-K).10.1
                  Employment
                      Agreement between the Registrant and George Morgenstern, dated
                      as of
                      January 1, 1997 (incorporated herein by reference to Exhibit
                      10.1 to the
                      Registrant’s Annual Report on Form 10-K for the year ended December 31,
                      1997 (the “1997 10-K”)).*10.2
                  Employment
                      Agreement between the Registrant and Yacov Kaufman, dated as
                      of January 1,
                      1999 (incorporated herein by reference to Exhibit 10.22 of
                      the Registrants
                      Annual Report on Form 10-K for the year ended December 31,
                      1999 (the “1999
                      10-K”)).*10.3
                  1991
                      Stock Option Plan (incorporated herein by reference to Exhibit
                      10.4 to the
                      1992 Registration Statement).***10.4
                  1994
                      Stock Incentive Plan, as amended.*10.5
                  1994
                      Stock Option Plan for Outside Directors, as amended (incorporated
                      herein
                      by reference to Exhibit 10.5 to the Registrant’s Form 10-K for the year
                      ended December 31, 1995 (the “1995 10-K”)).***10.6
                  1995
                      Stock Option Plan for Non-management Employees, as amended.10.7
                  Agreement
                      dated January 26, 2002, between the Registrant and Bounty Investors
                      LLC
                      (incorporated herein by reference to Exhibit 10.12 to the 2000
                      10-K).10.8
                  Lease
                      Agreement, dated February 5, 2002, between Duke-Weeks Realty
                      Limited
                      Partnership and Comverge, (incorporated herein by reference
                      to Exhibit
                      10.13 to the 2000 10-K).10.9
                  Stock
                      Option Agreements, dated as of October 1, 1999, between Powercom
                      Control
                      Systems Ltd. and George Morgenstern, Yacov Kaufman and Harvey
                      E. Eisenberg
                      (and related promissory notes) (incorporated herein by reference
                      to
                      Exhibit 10.14 to the 2000 10-K).*10.10
                  Share
                      Purchase Agreement, dated as of November 29, 2001, by and among
                      the
                      Registrant, Decision Systems Israel Ltd., Endan IT Solutions
                      Ltd., Kardan
                      Communications Ltd., Neuwirth Investments
                      Ltd., Jacob Neuwirth (Noy) and Adv. Yossi Avraham, as Trustee
                      for Meir
                      Givon (incorporatedhereinby
                      reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
                      dated December 13, 2001).
 
 -11-
  
 10.11
                  Registration
                      Rights Agreement, dated as of December 13, 2002, by and among
                      the
                      Registrant, Kardan Communications Ltd. and Adv. Yossi Avraham,
                      as Trustee
                      for Meir Givon (incorporated herein by reference to Exhibit
                      10.2 to the
                      Registrant’s Current Report on Form 8-K dated December 13,
                      2002).10.12
                  Employment
                      Agreement, dated as of September 1, 2002, by and between Comverge
                      and
                      Robert M. Chiste (incorporated
                      herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report
                      on Form 10-Q for the quarter ended September 30,
                      2002).*10.13
                  Restricted
                      Stock Purchase Agreement, dated as of September 1, 2002, by
                      and between
                      the Registrant and Robert M. Chiste (incorporated
                      herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report
                      on Form 10-Q for the quarter ended September 30,
                      2002).*10.14
                  Option
                      Agreement, dated as of September 1, 2002, by and between Comverge
                      and
                      Robert M. Chiste (incorporated
                      herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report
                      on Form 10-Q for the quarter ended September 30,
                      2002).*10.15
                  Contract
                      for Asset Management Services between the Registrant and Malley
                      Associates
                      Capital Management, Inc. (incorporated herein by reference
                      to Exhibit 10.1
                      to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
                      March 31, 2002).10.16
                  Employment
                      Agreement dated as of March 30, 2002 between Comverge and Joseph
                      D.
                      Esteves (incorporated
                      herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report
                      on Form 10-Q for the quarter ended June 30, 2002).*10.17
                  Agreement,
                      dated as of January 31, 2002, between Comverge and Bank Leumi
                      USA
                      (incorporated herein by reference to Exhibit 10.21 to the Registrant’s
                      Annual Report on Form 10-K for the year ended December 31,
                      2001 (the “2001
                      10-K”).10.18
                  $6,000,000
                      Term Note of Comverge dated as of January 31, 2002, payable
                      to Bank Leumi
                      USA(incorporated
                      herein by reference to Exhibit 10.22 to the 2001 10-K).10.19
                  First
                      Amendment to Employment Agreement, dated as of May 17, 2002,
                      by and
                      between the Registrant and George Morgenstern(incorporated
                      herein by reference to Exhibit 10.23 to the 2001 10-K).*10.20
                  Agreement,
                      dated as of January 31, 2003, between Comverge and Bank Leumi
                      USA
                      (including form of $6,000,000 Term Noteof
                      Comverge dated as of January 31, 2003, payable to Bank Leumi
                      USA)(incorporated herein by reference to Exhibit 10.24 to the Registrant’s
                      Annual Report on Form 10-K for the year ended December 31,
                      2002 (the “2002
                      10-K”).10.21
                  Agreement,
                      dated as of February 25, 2003, between the Registrant and J.P.
                      Turner
                      & Company, L.L.C. (incorporated herein by reference to Exhibit
                      10.25
                      to the 2002 10-K).10.22
                  Second
                      Amendment to Employment Agreement, dated as of March 12, 2002,
                      between the
                      Registrant and George Morgenstern (incorporated herein by reference
                      to
                      Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
                      quarter ended March 31, 2002).*10.23
                  Amendment
                      to Employment Agreement, dated as of June 1, 2002, between
                      the Registrant
                      and Yacov Kaufman (incorporated herein by reference to Exhibit
                      10.1 to the
                      Registrant’s Quarterly Report on Form 10-Q for the quarter ended September
                      30, 2002).*10.24
                  Guaranty,
                      dated December 4, 2002, made by the Registrant in favor of
                      Laurus
                      (incorporated herein by reference to Exhibit 10.5 to theDecember
                      2002 8-K).10.25
                  Preferred
                      Stock Purchase Agreement, dated as of April 7, 2003, by and
                      among
                      Comverge, the Registrant and the other investors named therein
                      (incorporated herein by reference to Exhibit 10.29 to the 2002
                      10-K).10.26
                  Investors’
                      Rights Agreement, dated as of April 7, 2003, by and among Comverge,
                      the
                      Registrant and the investors and Comverge management named
                      therein
                      (incorporated herein by reference to Exhibit 10.30 to the 2002
                      10-K).10.27
                  Co-Sale
                      and First Refusal Agreement, dated as of April 7, 2003, by
                      and among
                      Comverge, the Registrant and the investors and stockholders
                      named therein
                      (incorporated herein by reference to Exhibit 10.31 to the 2002
                      10-K).10.28
                  Voting
                      Agreement, dated as of April 7, 2003, by and among Comverge,
                      the
                      Registrant and the other investors named therein (incorporated
                      herein by
                      reference to Exhibit 10.32 to the 2002
                      10-K).
  -12-
 10.29
                  Letter
                      Agreement, dated as of April 1, 2003, by and between the Registrant
                      and
                      Laurus (incorporated herein by reference to Exhibit 10.33 to
                      the 2002
                      10-K).10.30
                  Employment
                      Agreement dated as of August 19, 2004 and effective as of January
                      1,
                      2004by
                      and between the Registrant and Shlomie Morgenstern(incorporated
                      herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report
                      on Form 10-Q for the quarter ended September 30, 2004).*10.31
                  Restricted
                      Stock Award Agreement dated as of August 19, 2004, by and between
                      the
                      Registrant and Shlomie Morgenstern (incorporated herein by
                      reference to
                      Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the
                      quarter ended September 30, 2004).*10.32
                  Stock
                      Option Agreement dated as of August 19, 2004, by and between
                      Shlomie
                      Morgenstern and the Registrant (incorporated herein by reference
                      to
                      Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the
                      quarter ended September 30, 2004).*10.33
                  Second
                      Amended and Restated Co-Sale And First Refusal Agreement dated
                      as of
                      October 26, 2004, by and among Comverge, Inc., the Registrant
                      and other
                      persons party thereto (incorporated herein by reference to
                      Exhibit 10.4 to
                      the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
                      September 30, 2004).**10.34
                  Third
                      Amendment to Employment Agreement, dated as of December 30,
                      2004, between
                      the Registrant and George Morgenstern.***10.35
                  Form
                      of Stock Option Agreement to employees under the 1994 Stock
                      Incentive
                      Plan.**10.36
                  Form
                      of Stock Option Agreement under the 1994 Stock Option Plan
                      for Outside
                      Directors.**10.37
                  Form
                      of Stock Option Agreement under the 1995 Stock Option Plan
                      for
                      Nonmanagement Employees.**10.38
                  Stock
                      Option Agreement dated as of December 30, 2004 by and between
                      George
                      Morgenstern and the Registrant.***10.39
                  Stock
                      Option Agreement dated as of December 30, 2004 by and between
                      Yacov
                      Kaufman and the Registrant.***10.40
                  Stock
                      Option Agreement dated as of December 30, 2004 by and between
                      Sheldon
                      Krause and the Registrant.*14.1
                  Code
                      of Ethics of the Registrant (incorporated herein by reference
                      to Exhibit
                      14.1 to the Registrant’s Annual Report on Form 10-K for the year ended
                      December 31, 2003).**21.1
                  List
                      of subsidiaries.**23.1
                  Consent
                      of KPMG LLP.**23.2
                  Consent
                      of Kesselman & Kesselman CPA.**23.3
                  Consent
                      ofPricewaterhouseCoopers
                      LLP.#31.1
                  Certification
                      pursuant to Section 302 of the Sarbanes-Oxley Act of
                      2002.#31.2
                  Certification
                      pursuant to Section 302 of the Sarbanes-Oxley Act of
                      2002.#32.1
                  Certification
                      pursuant to Section 906 of the Sarbanes-Oxley Act of
                      2002.#32.2
                  Certification
                      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.
 **
            This
            Exhibit was previously filed with the Registrants 2004 Annual Report
            on Form
            10-K filed on April 14, 2005.
 ***
            This
            Exhibit was previously filed with the Registrants Amendment No. 1 on
            Form 10-K/A
            filed on May 2, 2005.
 #   This
            Exhibit is filed or furnished herewith.
 -13-


**SIGNATURES**
 
 Pursuant
          to the requirements of Section 13 or 15(d) of the Securities Exchange Act
          of
          1934, the Registrant has duly caused this Amendment No. 2 to its Annual
          Report
          on Form 10-K for the fiscal year ended December 31, 2004 to be signed on
          its
          behalf by the undersigned, thereunto duly authorized, in the Township of
          Mahwah,
          State of New Jersey, on March 10, 2006.
   Data
                      Systems & Software Inc.By:
                  /s/ Michael
                    BarthMichael
                    BarthChief
                      Financial Officer




**Comverge,
          Inc. and Subsidiaries**
 **Consolidated
          Financial Statements**
 **December
          31, 2004 and 2003**
  
 **Comverge,
              Inc. and Subsidiaries**
 **Index**
 **December
              31, 2004 and 2003**
 **Page(s)****Report
                      of Independent Auditors**
                  1**Consolidated
                      Financial Statements**Consolidated
                      Balance Sheets
                  2Consolidated
                      Statements of Operations
                  3Consolidated
                      Statements of Changes in Shareholders' Deficit
                  4Consolidated
                      Statements of Cash Flows
                  5Notes
                      to Consolidated Financial Statements
                  6-21
 **Report
          of Independent Auditors**
  To
          Board
          of Directors and Shareholders of
 Comverge,
          Inc.
  In
          our
          opinion, the accompanying consolidated
          balance sheets and the related consolidated statements of operations,
          shareholders’ deficit and cash flows present fairly, in all material respects,
          the financial position of Comverge, Inc. and its subsidiaries at December
          31,
          2004 and 2003, and the results of their operations and their cash
          flows for the years then ended **** in
          conformity with accounting principles generally accepted in the United
          States of
          America. These financial statements are the responsibility of the Company’s
          management. Our responsibility is to express an opinion on these financial
          statements based on our audits. We conducted our audits of these statements
          in
          accordance with auditing standards generally accepted in the United States
          of
          America. Those standards require that we plan and perform the audit to
          obtain
          reasonable assurance about whether the financial statements are free of
          material
          misstatement. An audit includes examining, on a test basis, evidence supporting
          the amounts and disclosures in the financial statements, assessing the
          accounting principles used and significant estimates made by management,
          and
          evaluating the overall financial statement presentation. We believe that
          our
          audits provide a reasonable basis for our opinion.
  /s/
          PriceWaterhouseCoopers LLP
 Atlanta,
          Georgia
 March
          30,
          2005
  
 **Comverge,
            Inc. and Subsidiaries**
 **Consolidated
            Balance Sheets**
 **December
            31, 2004 and 2003**
 *(in
                      thousands of dollars, except per share data)***2004**
                  
                  **2003****Assets**Current
                      assetsCash
                      and cash equivalents
                  
                  $
                  8,761
                  
                  $
                  4,570Accounts
                      receivable
                  
                  
                  4,620
                  
                  
                  3,021Inventory
                  
                  
                  2,102
                  
                  
                  3,404Other
                      current assets
                  
                  
                  1,057
                  
                  
                  524Total
                      current assets
                  
                  
                  16,540
                  
                  
                  11,519Property
                      and equipment, net
                  
                  
                  5,342
                  
                  
                  2,097Goodwill
                      and other intangible assets
                  
                  
                  726
                  
                  
                  993Prepaid
                      employee termination benefits
                  
                  
                  336
                  
                  
                  375Other
                      assets
                  
                  
                  1,017
                  
                  
                  37Total
                      assets
                  
                  $
                  23,961
                  
                  $
                  15,021**Liabilities
                      and Shareholders' Deficit**Current
                      liabilitiesAccounts
                      payable
                  
                  $
                  2,225
                  
                  $
                  2,793Deferred
                      revenue
                  
                  
                  1,963
                  
                  
                  371Accrued
                      expenses
                  
                  
                  986
                  
                  
                  467Other
                      current liabilities
                  
                  
                  468
                  
                  
                  505Total
                      current liabilities
                  
                  
                  5,642
                  
                  
                  4,136Long-term
                      liabilitiesLong-term
                      trade payable
                  
                  
                  1,362
                  
                  
                  -Long-term
                      bank debt
                  
                  
                  -
                  
                  
                  1,346Liability
                      for employee termination benefits
                  
                  
                  559
                  
                  
                  644Other
                      liabilities
                  
                  
                  290
                  
                  
                  172Total
                      long-term liabilities
                  
                  
                  2,211
                  
                  
                  2,162Commitments
                      and Contingencies (Note 10)Convertible
                      Preferred StockSeries
                      A, $.001 par value per share, authorized 10,402,000
                      shares;issued
                      and outstanding 10,401,146 and 8,945,350 shares atDecember
                      31, 2004 and 2003, respectively; net of offering costsof
                      $238 and $218; liquidation preference of $32,516 and
                      $27,995at
                      December 31, 2004 and 2003, respectively
                  
                  
                  21,438
                  
                  
                  18,425Series
                      A-2, $.001 par value per share, authorized 36,076 shares;issued
                      and outstanding 36,076 shares at December 31, 2004and
                      2003; liquidation preference of $147 and $150 atDecember
                      31, 2004 and 2003, respectively
                  
                  
                  100
                  
                  
                  100Series
                      B, $.001 par value per share, authorized 7,875,377 shares;issued
                      and outstanding 5,640,878 and 0 shares at December 31,2004
                      and 2003, respectively; net of offering costs of $31;
                      liquidationpreference
                      of $20,449
                  
                  
                  13,568
                  
                  
                  -35,106
                  
                  
                  18,525Shareholders'
                      DeficitCommon
                      stock $.001 par value per shareAuthorized
                      28,185,739 shares; issued and outstanding5,903,598
                      and 5,814,748 shares at December 31, 2004and
                      2003, respectively
                  
                  
                  6
                  
                  
                  6Additional
                      paid-in capital
                  
                  
                  19,105
                  
                  
                  19,013Deferred
                      compensation
                  
                  
                  (30
                  )
                  
                  -Accumulated
                      deficit
                  
                  
                  (38,079
                  )
                  
                  (28,821
                  )Total
                      shareholders' deficit
                  
                  
                  (18,998
                  )
                  
                  (9,802
                  )Total
                      liabilities and shareholders' deficit
                  
                  $
                  23,961
                  
                  $
                  15,021
 The
              accompanying notes are an integral part of these financial
              statements.
  2
  **Comverge,
            Inc. and Subsidiaries**
 **Consolidated
            Statements of Operations**
 **Year
            Ended December 31, 2004 and 2003**
 *(in
                        thousands of dollars)***2004**
                    
                    **2003**RevenueProduct
                    
                    $
                    13,028
                    
                    $
                    12,592Service
                    
                    
                    5,131
                    
                    
                    3,050Total
                        revenue
                    
                    
                    18,159
                    
                    
                    15,642Cost
                        of revenueProduct
                    
                    
                    9,478
                    
                    
                    9,763Service
                    
                    
                    1,078
                    
                    
                    875Total
                        cost of revenue
                    
                    
                    10,556
                    
                    
                    10,638Gross
                        profit
                    
                    
                    7,603
                    
                    
                    5,004General
                        and administrative expenses
                    
                    
                    7,382
                    
                    
                    7,777Marketing
                        and selling expenses
                    
                    
                    7,335
                    
                    
                    4,177Depreciation
                        and amortization
                    
                    
                    869
                    
                    
                    1,166Research
                        and development expenses
                    
                    
                    1,046
                    
                    
                    615Operating
                        loss
                    
                    
                    (9,029
                    )
                    
                    (8,731
                    )Interest
                        and other expense, net
                    
                    
                    229
                    
                    
                    586Net
                        loss
                    
                    $
                    (9,258
                    )
                    $
                    (9,317
                    )
  The
            accompanying notes are an integral part of these
            financial statements.
  3
 **Comverge,
            Inc. and Subsidiaries**
 **Consolidated
            Statements of Changes in Shareholders’ Deficit**
 **Year
            Ended December 31, 2004 and 2003**
 *(in
                            thousands of dollars, except share data)*
                        
                        
                        
                        
                        
                        **Additional****Number
                            of**
                        
                        **Common**
                        
                        **Paid-in**
                        
                        **Deferred**
                        
                        **Accumulated****Shares**
                        
                        **Stock**
                        
                        **Capital**
                        
                        **Compensation**
                        
                        **Deficit**
                        
                        **Total****Balances
                            at December 31, 2002**
                        
                        
                        4,937,748
                        
                        $
                        5
                        
                        $
                        8,631
                        
                        $
                        -
                        
                        $
                        (19,504
                        )
                        $
                        (10,868
                        )Issuance
                            of common stock
                        
                        
                        877,000
                        
                        
                        1
                        
                        
                        509
                        
                        
                        -
                        
                        
                        -
                        
                        
                        510Contribution
                            of debt by affiliated investor
                        
                        
                        -
                        
                        
                        -
                        
                        
                        9,673
                        
                        
                        -
                        
                        
                        -
                        
                        
                        9,673Executive
                            compensation payable byaffiliated
                            investor
                        
                        
                        -
                        
                        
                        -
                        
                        
                        200
                        
                        
                        -
                        
                        
                        -
                        
                        
                        200Net
                            loss
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        (9,317
                        )
                        
                        (9,317
                        )**Balances
                            at December 31, 2003**
                        
                        
                        5,814,748
                        
                        
                        6
                        
                        
                        19,013
                        
                        
                        -
                        
                        
                        (28,821
                        )
                        
                        (9,802
                        )Issuance
                            of common stock
                        
                        
                        4,052
                        
                        
                        -
                        
                        
                        5
                        
                        
                        -
                        
                        
                        -
                        
                        
                        5Repurchase
                            of common stock
                        
                        
                        (8,000
                        )
                        
                        -
                        
                        
                        (14
                        )
                        
                        -
                        
                        
                        -
                        
                        
                        (14
                        )Deferred
                            compensation
                        
                        
                        -
                        
                        
                        -
                        
                        
                        30
                        
                        
                        (30
                        )
                        
                        -
                        
                        
                        -Issuance
                            of common stock withseries
                            B financing
                        
                        
                        92,798
                        
                        
                        -
                        
                        
                        34
                        
                        
                        -
                        
                        
                        -
                        
                        
                        34Shareholder
                            loans
                        
                        
                        -
                        
                        
                        -
                        
                        
                        37
                        
                        
                        -
                        
                        
                        -
                        
                        
                        37Net
                            loss
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        -
                        
                        
                        (9,258
                        )
                        
                        (9,258
                        )**Balances
                            at December 31, 2004**
                        
                        
                        5,903,598
                        
                        $
                        6
                        
                        $
                        19,105
                        
                        $
                        (30
                        )
                        $
                        (38,079
                        )
                        $
                        (18,998
                        )
  The
              accompanying notes are an integral part of these
              financial statements.
  4
  **Comverge,
              Inc. and Subsidiaries**
 **Consolidated
              Statements of Changes in Shareholders’ Deficit**
 **Year
              Ended December 31, 2004 and 2003**
 *(in
                        thousands of dollars)***2004**
                    
                    **2003****Cash
                        flows from operating activities**Net
                        Income/(loss)
                    
                    $
                    (9,258
                    )
                    $
                    (9,317
                    )Adjustments
                        to reconcile net loss to net cash used in operating
                        activitiesDepreciation
                        and amortization
                    
                    
                    1,212
                    
                    
                    1,166Executive
                        compensation payable by affiliate investor
                    
                    
                    -
                    
                    
                    200Loss
                        on disposal of property and equipment
                    
                    
                    69
                    
                    
                    62Provision
                        for inventory
                    
                    
                    45
                    
                    
                    -Changes
                        in operating assets and liabilitiesAccounts
                        receivable
                    
                    
                    (1,599
                    )
                    
                    579Inventories
                    
                    
                    1,256
                    
                    
                    (1,364
                    )Prepaid
                        expenses and other assets
                    
                    
                    (1,474
                    )
                    
                    (286
                    )Accounts
                        payable
                    
                    
                    (568
                    )
                    
                    1,596Accrued
                        expenses and other liabilities
                    
                    
                    1,774
                    
                    
                    114Deferred
                        revenue
                    
                    
                    1,592
                    
                    
                    117Net
                        cash used in operating activities
                    
                    
                    (6,951
                    )
                    
                    (7,133
                    )**Cash
                        flows investing activities**Purchases
                        of property and equipment
                    
                    
                    (4,156
                    )
                    
                    (1,485
                    )Funding
                        of termination benefits
                    
                    
                    -
                    
                    
                    (69
                    )Net
                        cash used in investing activities
                    
                    
                    (4,156
                    )
                    
                    (1,554
                    )**Cash
                        flows from financing activities**Proceeds
                        from exercise of stock options
                    
                    
                    5
                    
                    
                    -Repurchace
                        of common stock
                    
                    
                    (14
                    )
                    
                    -Proceeds
                        from Series A Preferred Stock issuance,net
                        of $20 and $218 of issuance costs, respectively
                    
                    
                    3,014
                    
                    
                    18,425Proceeds
                        from Series A-1 Preferred Stock issuance
                    
                    
                    -
                    
                    
                    2,000Repurchace
                        of Series A-1 Preferred Stock
                    
                    
                    -
                    
                    
                    (2,000
                    )Proceeds
                        from A-2 Preferred Stock issuance
                    
                    
                    -
                    
                    
                    100Proceeds
                        from Series B Preferred Stock issuance,net
                        of $31 of issuance costs
                    
                    
                    13,602
                    
                    
                    -Repayments
                        of long-term debt
                    
                    
                    (1,346
                    )
                    
                    (8,200
                    )Proceeds
                        from repayment of shareholder loans
                    
                    
                    37
                    
                    
                    -Borrowings
                        under credit facility
                    
                    
                    -
                    
                    
                    2,822Net
                        cash provided by financing activities
                    
                    
                    15,298
                    
                    
                    13,147Net
                        change in cash
                    
                    
                    4,191
                    
                    
                    4,460Cash
                        and cash equivalents at beginning of year
                    
                    
                    4,570
                    
                    
                    110Cash
                        and cash equivalents at end of year
                    
                    $
                    8,761
                    
                    $
                    4,570**Supplemental
                        disclosure of noncash investing and****financing
                        activities**Cash
                        paid for interest
                    
                    $
                    91
                    
                    $
                    190Recording
                        of asset retirement obligation
                    
                    $
                    102
                    
                    $
                    -Increase
                        in fixed assets resulting from transfer of inventory
                    
                    $
                    686
                    
                    $
                    685Affiliated
                        investor contribution of debt to paid-in-capital
                    
                    $
                    -
                    
                    $
                    9,673Assets/liabilities
                        acquired in acquisition:Property
                        and equipment
                    
                    $
                    -
                    
                    $
                    (472
                    )Identified
                        intangible
                    
                    $
                    -
                    
                    $
                    (104
                    )Other
                        current liabilities
                    
                    $
                    -
                    
                    $
                    66Issuance
                        of shares in respect of acquisition
                    
                    $
                    -
                    
                    $
                    510
  The
              accompanying notes are an integral part of these
              financial statements.
 5
 **Comverge,
              Inc. and Subsidiaries**
 **Notes
              to Consolidated Financial Statements**
 **December
              31, 2004 and 2003**
 ***(All
              notes in thousands of dollars, except per share data)***
 **1.**
                  **Description
                    of Business and Summary of Significant Accounting Policies**
  **Description
          of Business**
 Comverge,
          Inc., a Delaware corporation, and its subsidiaries (collectively, “We”
or
          the "Company"), provides (i) Energy intelligence systems, comprised of
          hardware,
          software and installation services, to utilities and other energy customers
          and
          (ii) On-call capacity relief to electricity generators and transmitters
          (Note
          14). Prior to April 2003, the Company was a wholly-owned subsidiary of
          Data
          Systems & Software, Inc. (“DSSI”). In April 2003 and continuing thereafter,
          the Company completed a series of equity financings totaling $35,410 (Note
          11).
          DSSI remained the Company’s largest shareholder owning approximately 25 percent
          and 41 percent of the Company’s issued and outstanding voting equity at December
          31, 2004 and 2003, respectively.
  **Liquidity**
 The
          Company has experienced losses since inception and expects to generate
          additional losses in the foreseeable future. During 2004, the Company raised
          additional financing and management believes this, along with available
          borrowing capacity, will be sufficient to meet the operating needs of the
          Company over the next twelve months. Additional financing may be required
          to
          help the Company continue to develop its Enterprise business (Note
          14).
  **Use
          of Estimates in Preparation of Financial Statements**
 The
          preparation of financial statements in conformity with accounting principles
          generally accepted in the United States of America requires management
          to make
          estimates and assumptions that affect the reported amounts of assets and
          liabilities and the disclosure of contingent assets and liabilities as
          of the
          date of the financial statements, and the reported amounts of revenues
          and
          expenses during the reporting periods. Actual results could differ from
          those
          estimates.
  **Foreign
          Currency Translations**
 The
          currency of the primary economic environment in which the operations of
          the
          Company are conducted is the United States Dollar ("dollar"). Accordingly,
          Comverge and its subsidiaries use the dollar as their functional currency.
          All
          exchange gains and losses denominated in nondollar currencies are presented
          on a
          net basis in operating expense in the consolidated statement of operations
          when
          they arise. Foreign currency loss amounted to $4 and
          $15
          for the years ended December 31, 2004 and 2003, respectively.
  **Principles
          of Consolidation and Presentation**
 The
          consolidated financial statements of the Company include the accounts of
          its
          subsidiaries. The consolidated financial statements have been prepared
          in
          conformity with accounting principles generally accepted in the United
          States of
          America. All intercompany balances and transactions have been eliminated.
  **Cash
          and Cash Equivalents**
 The
          company considers all highly liquid investments with a remaining maturity
          of
          three months or less to be cash equivalents. Cash and cash equivalents
          consist
          of cash and demand deposits in banks and short-term investments.
  6
 **Comverge,
            Inc. and Subsidiaries**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2004 and 2003**
 ***(All
            notes in thousands of dollars, except per share data)***
 **Allowance
          for Doubtful Accounts**
 The
          allowance for doubtful accounts is based on specific identification of
          accounts
          considered to be doubtful of collection as well as historical experience.
          As of
          December 31, 2004 and 2003 there were no accounts identified as doubtful
          of
          collection.
  **Inventory**
 Inventories
          are stated at the lower of cost or market. Inventory cost is determined
          on the
          basis of specific identification based on acquisition cost, and due provision
          is
          made to reduce all slow-moving, obsolete, or unusable inventories to their
          estimated useful or scrap values.
  **Property
          and Equipment**
 Property
          and equipment are presented at the lesser of cost or fair value at the
          date of
          acquisition. Depreciation is calculated using the straight-line method
          over the
          estimated useful lives of the depreciable assets. In the case of installed
          assets that are part of long-term contracts, the assets are depreciated
          over the
          shorter of the useful life or the expected life of the contract. Leasehold
          improvements are depreciated over the shorter of the lease term or useful
          life.
          Improvements are capitalized while repairs and maintenance are expensed
          as
          incurred.
  In
          accordance with Statement on Financial Accounting Standards (SFAS) No.
          143,
          Accounting for Asset Retirement Obligations, the Company recognizes the
          fair
          value of liabilities for asset retirement obligations in the period in
          which it
          is incurred if a reasonable estimate of fair value can be made. Any associated
          asset retirement costs are capitalized as part of the carrying amount of
          the
          long-lived asset and recognized as depreciation expense over the assets
          useful
          life. As part of the Company’s Enterprise business (Note 14), the Company
          installs hardware at the places of residence of select utility customers’ homes.
          At the request of the homeowner, the Company is obligated to remove this
          hardware. Accordingly, in 2004,
          the Company recognized an asset retirement obligation liability and an
          associated increase in the value of long-lived assets of $102. In 2003,
          the
          estimated cost of these obligations was immaterial. As such, there was
          no
          obligation recognized.
  **Goodwill
          and Intangibles**
 Goodwill
          represents the excess of cost over the fair value of the net tangible
          assets of subsidiaries acquired in purchase transactions. Goodwill is not
          being
          amortized in accordance with SFAS 142, *Goodwill
          and Other Intangible Assets* .
          In
          accordance with SFAS 142, goodwill and other indefinite-lived intangible
          assets
          are tested for impairment on at least an annual basis, on December 31 of
          each
          year. Based on the Company’s most recent impairment test, there has been no
          impairment loss recognized for goodwill.
  The
          costs
          of licensed technology are presented at their fair value at acquisition
          date.
          These costs are amortized on a straight-line basis over the term of the
          license,
          generally five years.
  The
          costs
          of registered patents and patents pending acquired from third parties are
          presented at their fair value at acquisition date. In addition, registration
          costs and fees for patents are capitalized. Registered patents costs are
          amortized over the estimated remaining useful life of the patents, from
          four to
          fourteen years. Costs for patents pending are not amortized until they
          are
          issued.
  7
 **Comverge,
            Inc. and Subsidiaries**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2004 and 2003**
 ***(All
            notes in thousands of dollars, except per share
            data)***
  **Revenue
          Recognition**
 In
          accordance with Staff Accounting Bulletin (SAB) 104, *Revenue
          Recognition* ,
          the
          Company recognizes revenues when the following criteria have been met:
          delivery
          has occurred, the price is fixed and determinable, collection is probable,
          and
          persuasive evidence of an arrangement exists.
  In
          accordance with Emerging Issues Task Force (EITF) 00-21, *Accounting
          for Revenue Arrangements With Multiple Deliverables,* the
          Company assesses revenue arrangements to determine when multiple deliverables
          exist in order to determine if separate accounting is required for these
          deliverables separately per EITF 00-21.
  Revenue
          from time-and-materials service contracts and other services are recognized
          as
          services are provided. Revenue from maintenance contracts is recognized
          on a
          straight-line basis over the life of the contract.
  In
          accordance with SAB 104, the Company defers revenues and associated costs
          of
          revenues related to certain long term contracts until such time as the
          contract
          price is fixed and determinable. These contracts require the Company to
          provide
          capacity through our load curtailment solutions to electricity generators,
          and
          require a measurement and verification of capacity provided on an annual
          basis
          in order to determine final contract consideration for a given year. For
          the
          year ended December 31, 2004, the Company deferred $1,713 of revenues and
          $281
          of corresponding costs of revenues.
  In
          accordance with EITF issue 00-10, *Accounting
          for Shipping and Handling Fees and Costs* ,
          the
          Company reports shipping and handling revenues and their associated costs
          in
          Revenue and Cost of Revenue, respectively.
  **Warranty
          Provision**
 Comverge
          generally warrants its products against certain manufacturing and other
          defects.
          These product warranties are provided for specific periods of time and/or
          usage
          of the product depending on the nature of the product, the geographic location
          of its sale and other factors. As of December 31, 2004 and
          2003
          the Company had accrued $161 and $152, respectively, for estimated product
          warranty costs, which was included in other current liabilities. The accrued
          product warranty costs were based primarily on estimated costs to satisfy
          a
          customer warranty claim. Warranty claims expense for the years ended December
          31, 2004 and 2003 were $91 and $20, respectively.
  **2004**
                  
                  **2003**Warranty
                      provision at beginning of period
                  
                  $
                  152
                  
                  $
                  52Accruals
                      for warranties issued during the period
                  
                  
                  100
                  
                  
                  100Warranty
                      settlements during the period
                  
                  
                  (91
                  )
                  
                  (20
                  )Changes
                      in liability for pre-existing warrantiesduring
                      the period, including expirations
                  
                  
                  -
                  
                  
                  20Warranty
                      provision at the end of period
                  
                  $
                  161
                  
                  $
                  152
  8
   **Comverge,
            Inc. and Subsidiaries**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2004 and 2003**
 ***(All
            notes in thousands of dollars, except per share
            data)***
  **Advertising
          Expenses**
 Advertising
          costs are expensed as incurred. Advertising expense amounted to $2,816
          and
          $813 for the
          years ended December 31, 2004 and 2003, respectively.
  **Research
          and Development Expenses**
 Research
          and development costs are expensed as incurred.
  **Stock-Based
          Compensation**
 The
          Company accounts for employee and director stock-based compensation in
          accordance with Accounting Principles Board Opinion No. 25, *Accounting
          for Stock Issued to Employees,* and
          related interpretations. In accordance therewith, the Company records
          compensation expense on fixed stock options and restricted common stock
          granted
          to employees and directors at the date of grant if the current market price
          of
          the Company’s common stock exceeds the exercise price of the options and
          restricted common stock. Compensation expense on variable stock option
          grants is
          estimated until the measurement date. Deferred compensation is amortized
          to
          compensation expense over the vesting period of the underlying options.
          The
          Company complies with the disclosure provisions of SFAS
          123 , *Accounting
          for Stock-Based Compensation* (“SFAS
          123”). As such, the Company provides pro forma net income disclosures for
          employee and director stock option grants as if the fair-value-based method
          defined in SFAS 123 had been applied. The Company’s stock-based employee
          compensation plan is described more fully in Note 12.
  Total
          stock-based compensation expense determined under the fair-value method
          for all
          awards was $35 and $52 for the years ended December 31, 2004 and 2003,
          respectively. See the pro forma net loss reconciliation in the table
          below.
  **Fiscal
                      year ended****December
                      31,**
                  
                  **December
                      31,****2004**
                  
                  **2003**(In
                      thousands, except for share numbers)Net
                      loss as reported
                  
                  $
                  (9,258
                  )
                  $
                  (9,317
                  )Add:Stock-based
                      employee compensationexpense
                      included in reported net incomenet
                      of related tax effects
                  
                  
                  -
                  
                  
                  -Deduct:Total
                      stock-based employee compensationexpense
                      determined under fair value method-based
                      methods for all awards, net of tax effects
                  
                  
                  (35
                  )
                  
                  (52
                  )Pro
                      forma net loss
                  
                  $
                  (9,293
                  )
                  $
                  (9,369
                  )
 The
          Company accounts for stock-based compensation issued to consultants on
          a fair
          value basis in accordance with SFAS 123 and EITF Issue No. 96-18, *Accounting
          for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
          or
          in Conjunction with Selling, Goods or Services.*
  **Income
          Taxes**
 Deferred
          income taxes reflect the net tax effects of temporary differences between
          the
          carrying amounts of assets and liabilities for financial reporting purposes
          and
          the amounts used for income tax purposes, as well as operating loss, capital
          loss and tax credit carry forwards. Deferred tax assets and liabilities
          are
          classified as current or noncurrent based on the classification of the
          related
          assets or liabilities for financial reporting, or according to the expected
          reversal dates of the specific temporary differences, if not related to
          an asset
          or liability for financial reporting. Valuation allowances are established
          against deferred tax assets if it is more likely than not that they will
          not be
          realized.
  9
 **Comverge,
            Inc. and Subsidiaries**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2004 and 2003**
 ***(All
            notes in thousands of dollars, except per share
            data)***
  Income
          taxes associated with the undistributed earnings of a subsidiary are provided
          for in accordance with Accounting Principals Board Opinion No. 23, when
          the
          Company has sufficient evidence that the subsidiary has invested or will
          invest
          the undistributed earnings indefinitely. If it is determined that the
          undistributed earnings of a subsidiary will be remitted in the foreseeable
          future, all taxes related to the remittance of such undistributed earnings
          are
          provided for in the current period as income tax expense.
  **Impairment
          of Long-Lived Assets**
 The
          Company evaluates the recoverability of its long-lived assets and certain
          identifiable intangible assets in accordance with SFAS 144, *Accounting
          for the Impairment or Disposal of Ling-Lived Assets.* SFAS 144
          requires recognition of impairment in the event the net book value of such
          assets exceeds the future undiscounted cash flows attributable to such
          assets.
          If impairment is indicated, the carrying amount of the asset is written
          down to
          fair value. The Company has identified no such impairments.
  **Significant
          Risks and Uncertainties**
 The
          Company’s operations are subject to certain risks and uncertainties including,
          but not limited to; a history of unprofitability and the inability to fund
          its
          operations and capital requirements with free cash flow, the continued
          ability
          to obtain financing on commercially reasonable terms, operating results
          that are
          often volatile and difficult to predict, the ability to develop new products
          and
          the market’s acceptance of those products, a highly competitive marketplace, the
          reliance on strategic relationships as distribution channels to market
          products,
          the use of technology licensed from third parties, the potential of product
          defects, the commoditization of products and resulting pricing pressures,
          lengthy sales cycles of our utility customers, the ability to manage growth,
          possible disruption in commercial activities due to terrorist activity
          and armed
          conflict, delays in product development and related release schedules,
          the
          ability to protect intellectual property and the need to retain key personnel.
          Additionally, the Company has a significant share of a market that is presently
          very small, making it difficult to achieve internal growth absent a significant
          market expansion. Any of these factors could impair our ability to expand
          our
          operations or to generate significant revenues and cash flows from those
          markets
          in which we operate. As a result of the above and other factors, the Company’s
          financial condition can vary significantly from year to year.
  **Impact
          of Recent Accounting Pronouncements**
 On
          December 16, 2004, the FASB issued SFAS 123 (revised 2004) (“SFAS 123(R)”), *Share-Based
          Payment* ,
          which
          is a revision of SFAS 123. SFAS 123(R) supersedes APB 25, and amends SFAS
          95, *Statement
          of Cash Flows* .
          Generally, the approach in SFAS 123(R) is similar to the approach described
          in
          SFAS 123. However, SFAS 123(R) requires all share-based payments to employees,
          including grants of employee stock options, to be recognized in the income
          statement based on their fair values. Pro forma disclosure is no longer
          an
          alternative. As permitted by SFAS 123, the Company currently accounts for
          share-based payments to employees using APB 25’s intrinsic value method and, as
          such, recognizes no compensation cost on grants of employee stock options
          when
          the exercise price of an option is at or below the fair market value of
          the
          underlying stock. Accordingly, the adoption of SFAS 123(R) could have a
          significant impact on the Company’s results of operations, although it will have
          no impact on its overall financial position. The impact of adoption of
          SFAS
          123(R) cannot be predicted at this time because it will depend on levels
          of
          share-based payments granted in the future.
  10
  **Comverge,
            Inc. and Subsidiaries**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2004 and 2003**
 ***(All
            notes in thousands of dollars, except per share
            data)***
  The
          Company expects to adopt SFAS 123(R) on January 1, 2006. SFAS 123(R) permits
          the
          Company to adopt its requirements using one of two methods:
  ·
                A
                    “modified prospective” method in which compensation cost is recognized
                    beginning with the January 1, 2006 adoption date (a) based on
                    the
                    requirements of SFAS 123(R) for all share-based payments granted
                    after
                    January 1, 2006 and (b) based on the requirements of SFAS 123
                    for all
                    awards granted to employees prior to January 1, 2006 that remain
                    unvested
                    on the adoption date.
  ·
                A
                    “modified retrospective” method which includes the requirements of the
                    modified prospective method described above, but also permits
                    entities to
                    restate based on the amounts previously recognized under SFAS
                    123 for
                    purposes of pro forma disclosures either (a) all prior periods
                    presented
                    or (b) prior interim periods of the year of
                    adoption.
  The
          Company plans to adopt SFAS 123(R) using the modified prospective
          method.
  **2.**
                **Acquisitions**
  On
          April
          7, 2003, the Company acquired from an unrelated company, Sixth Dimension,
          Inc.
          (“6D”), certain property and equipment and technological know-how (software)
          relating to its iNET software platform in exchange for 877,000 of its common
          shares (the “Acquisition”). The Acquisition was accounted for using the purchase
          method of accounting. The Company acquired a
          business including property and equipment, intellectual property, certain
          contracts with customers and all of 6D’s employees. In consideration of the
          Company’s acquisition, certain 6D investors purchased $3,750 of the Company’s
          Series A Preferred Stock. 6D is an early stage Internet-based software
          company,
          whose iNET platform enables a broad range of energy services including:
          upstream
          facility metering, monitoring, and control; performance-based operations
          and
          proactive maintenance; economic demand response and active load curtailment;
          aggregated distributed generation; power reliability and quality monitoring;
          and
          other real-time capital equipment analysis using a low-cost, robust, software
          for service delivery. The iNET platform adds to Comverge's product offering,
          technology for upstream monitoring and control of capital assets, by combining
          real-time, internet-based, data warehousing capabilities with the analytical
          and
          metering capabilities of the Company’s PowerCAMP software
          applications.
  The
          purchase price of
          the
          acquired assets was $510, determined by an independent appraisal of the
          value of
          the Company’s common shares issued in respect of the Acquisition as of the
          Acquisition date. As a result of the Acquisition, the Company recorded
          an
          intangible asset, the iNET software, of $104. This asset will be amortized
          on a
          straight line basis over three years from the Acquisition date.
  11
  **Comverge,
            Inc. and Subsidiaries**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2004 and 2003**
 ***(All
            notes in thousands of dollars, except per share
            data)***
  **3.**
                **Property
                  and Equipment**
  Property
          and equipment, at December 31, 2004 and 2003
          consisted of the following:
  **Estimated****Useful
                      Life****(in
                      years)**
                  
                  **2004**
                  
                  **2003**Load
                      control equipment
                  
                  
                  3-10
                  
                  $
                  4,775
                  
                  $
                  973Computer
                      hardware and software
                  
                  
                  3
                  
                  
                  1,259
                  
                  
                  1,807Office
                      furniture and equipment
                  
                  
                  5-7
                  
                  
                  1,660
                  
                  
                  1,657Leasehold
                      improvements
                  
                  
                  Term
                      of lease
                  
                  
                  177
                  
                  
                  1037,871
                  
                  
                  4,540Accumulated
                      depreciation
                  
                  
                  
                  
                  
                  2,529
                  
                  
                  2,443Property
                      and equipment, net
                  
                  
                  
                  
                  $
                  5,342
                  
                  $
                  2,097
 Depreciation
          in respect of property and equipment amounted to $946 and $831 for and
          the years
          ended December 31, 2004 and 2003, respectively.
  **4.**
                **Goodwill
                  and Intangible Assets**
  T he
          Company’s goodwill balance as of both December 31, 2004 and 2003 was $499, which
          is recorded as part of the Solutions segment (Note 14).
  Intangible
          assets and accumulated amortization as of December 31, 2004 and 2003 consisted
          of the following:
  **Estimated****Useful
                      Life****(in
                      years)**
                  
                  **2004**
                  
                  **2003**Technological
                      Know-How
                  
                  
                  5
                  
                  $
                  1,436
                  
                  $
                  1,436Acquired
                      Software
                  
                  
                  3
                  
                  
                  104
                  
                  
                  104Patents
                  
                  
                  4-14
                  
                  
                  287
                  
                  
                  2871,827
                  
                  
                  1,827Accumulated
                      amortization
                  
                  
                  
                  
                  
                  1,600
                  
                  
                  1,333Identified
                      intangible assets with finite lives, net
                  $
                  227
                  
                  $
                  494
  12
  **Comverge,
              Inc. and Subsidiaries**
 **Notes
              to Consolidated Financial Statements**
 **December
              31, 2004 and 2003**
 ***(All
              notes in thousands of dollars, except per share
              data)***
  The
            Company uses the straight line method of computing amortization expense.
            Amortization expense for the years ended December 31, 2004 and 2003 was
            $266 and
            $335, respectively. Estimated amortization expense for the next five
            years is as
            follows:
  **Year
                        Ending December 31,**2005
                    $
                    502006
                    
                    242007
                    
                    152008
                    
                    152009
                    
                    15Thereafter
                    
                    108
 **5.**
                **Other
                  Assets**
  Other
          assets at December 31, 2004 and 2003 consisted of the following:
  **2004**
                  
                  
                  **2003**Long-term
                      inventory
                  
                  $
                  975
                  
                  
                  $
                  -Other
                  
                  
                  42
                  
                  
                  
                  37Total
                      other assets
                  
                  $
                  1,017
                  
                  
                  $
                  37
 The
          inventory balance of $975 as of December 31, 2004, represents certain finished
          goods inventory not anticipated to be sold during the next twelve months
          primarily due to the necessary completion in 2005 of certain firmware to
          be
          integrated into the products. The inventory was obtained pursuant to a
          purchase
          agreement with the vendor that provides for extended payment terms (Note
          7).
 
 **6.**
                **Long-Term
                  Debt**
  On
          April
          7, 2003, in connection with a private equity financing, the Company entered
          into
          a $6,500 credit facility (“Credit Facility”) with a major United States
          commercial bank. The Credit Facility consists of a three-year term loan
          (“Term
          Loan”) of $1,500 bearing interest at the prime rate and a $5,000, three year,
          revolving credit facility (“Revolving Facility”) bearing interest between
          prime+1.5 percent and prime+2.0 percent per annum. Initial borrowings were
          used
          to refinance certain debt. The Term Loan was secured by cash collateral
          in a
          like amount pledged by DSSI and was repaid by the Company in December 2003.
          Interest paid on this Term Loan totaled $45 in 2003. The Revolving Facility
          is
          secured by virtually all of the assets of the Company including the Company’s
          intellectual property. On
          September 24, 2004, the Company modified the Credit Facility to (i) increase
          the
          revolving line credit amount to $7,000, (ii) increase the letter of credit
          sublimit to $3,000 and (iii) extend the maturity date of the Revolving
          Facility
          to September 15, 2007. Borrowings under the Revolving Facility can be requested,
          from time to time, up to an amount that, based on a formula, includes 80
          percent
          of eligible receivables and eligible inventory limited to the lesser of
          (i) 25
          percent of FMV, (ii) 80 percent of net orderly liquidation value or (iii)
          $500.
          At December 31, 2004 and 2003 the Company had $0 and $1,346, respectively,
          of
          borrowings under the Revolving Facility.
  13
 **Comverge,
            Inc. and Subsidiaries**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2004 and 2003**
 ***(All
            notes in thousands of dollars, except per share
            data)***
  As
          of
          December 31, 2004, the Company had unutilized borrowing availability under
          its
          Revolving Facility of approximately $3,000.
  **7.**
                **Long-Term
                  Trade Payable**
  At
          December 31, 2004, the Company owed a trade vendor $1,362 in consideration
          of
          certain inventory obtained pursuant to a purchase agreement executed in
          September of 2003 (Note 5). Pursuant to an amendment to the terms of the
          purchase agreement in September 2004, the due date of this trade obligation
          was
          extended to March 30, 2006. The amount owed bears no interest and is not
          secured
          by any assets of the Company.
  **8.**
                **Liability
                  for Employer Termination Benefits**
  Under
          Israeli law and labor agreements, one of the Company’s subsidiaries, Comverge
          Control Systems, is required to make severance and pension payments to
          dismissed
          employees and to employees leaving employment in certain other circumstances.
          The obligation for severance pay benefits, as determined by the Israeli
          Severance Pay Law, is based upon length of service and last salary. These
          obligations are substantially covered by regular deposits with recognized
          severance pay and pension funds and by the purchase of insurance policies.
          The
          pension plans are multi-employer and independent of the Company. Pension
          and
          severance costs for the
          years
          ended December 31, 2004 and 2003 was $143 and $217, respectively, and is
          included in general and administrative expenses.
  **9.**
                **Income
                  Taxes**
  The
          Company has Federal, state, and foreign net operating losses of approximately
          $25,196, $15,601 and $3,036, respectively, at December 31, 2004. The Federal
          net
          operating loss carryforwards begin expiring in 2019 and state net operating
          loss
          carryforwards begin expiring in 2006. During year ended December 31, 2003,
          certain substantial changes in the Company’s ownership, as defined in the
          provisions of the Internal Revenue Code, resulted in a limitation on the
          utilization of a significant portion of the Federal and state net operating
          losses on an annual basis.
  At
          December 31, 2004, the Company has provided a valuation allowance for the
          full
          amount of its net deferred tax asset since realization of any future tax
          benefit
          cannot be sufficiently assured.
  A
          reconciliation of income tax expense (benefit) at the statutory federal
          income
          tax rate and income taxes as reflected in the consolidated financial statements
          is as follows:
  **2004**
                  
                  **2003**Federal
                      income tax at statutory federal rate
                  
                  
                  34.0%
                  
                  
                  34.0%State
                      income tax expense
                  
                  
                  4.0%
                  
                  
                  4.0%Other
                  
                  
                  (1.4
                      %)
                  
                  
                  (0.4%)Valuation
                      allowance
                  
                  
                  (36.6%)
                  
                  
                  (37.6%)Effective
                      tax rate
                  
                  
                  0%
                  
                  
                  0%
  14
 **Comverge,
              Inc. and Subsidiaries**
 **Notes
              to Consolidated Financial Statements**
 **December
              31, 2004 and 2003**
 ***(All
              notes in thousands of dollars, except per share
              data)***
 Deferred
          tax assets (liabilities) consist of the following:
 **2004**
                  
                  **2003**Deferred
                      tax assetsNet
                      operating loss carryforwards
                  
                  $
                  10,283
                  
                  $
                  7,981Other
                  
                  
                  1,161
                  
                  
                  735Deferred
                      tax liabilitiesOther
                  
                  
                  (171
                  )
                  
                  (185
                  )11,273
                  
                  
                  8,531Valuation
                      allowance
                  
                  
                  (11,273
                  )
                  
                  (8,531
                  )Net
                      deferred tax assets (liabilities)
                  
                  $
                  -
                  
                  $
                  -
 **10.**
                **Commitments
                  and Contingencies**
  (a)
          Leases of Property and Equipment
  Rental
          and leasing expenses for the
          years
          ended December 31, 2004 and 2003 was $624 and $532, respectively. Future
          minimum
          rental payments and lease payments on noncancelable operating leases as
          of
          December 31, 2004 are as follows:
 *(in
            thousands of dollars)*
 **Year
                      Ending December 31,**2005
                  
                  $
                  4692006
                  
                  
                  3132007
                  
                  
                  1812008
                  
                  
                  1762009
                  
                  
                  166Thereafter
                  
                  
                  14
  (b)
          Employee Retirement Savings Plan
  The
          Company sponsors a tax deferred retirement savings plan that permits eligible
          U.S. employees to contribute varying percentages of their compensation
          up to the
          limit allowed by the Internal Revenue Service. This plan also provides
          for
          discretionary Company contributions. No discretionary contributions were
          made
          for the years ended December 31, 2004 or 2003.
  (c)
          Royalties
  The
          Company is committed to pay royalties to the Government of Israel on proceeds
          from the sale of certain products in which the Government of Israel participated
          in the research and development by way of grants. Royalties are currently
          payable at a rate of 4.5 percent of the annual sales of the product. The
          amount
          payable as royalties is limited to the amount of the original grant of
          $595. The
          net amount due in respect of these grants amounted to approximately $418
          at
          December 31, 2004.
  15
  **Comverge,
            Inc. and Subsidiaries**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2004 and 2003**
 ***(All
            notes in thousands of dollars, except per share
            data)***
  **11.**
                **Shareholders'
                  Deficit**
  **Contribution
          of DSSI debt to paid-in-capital**
 In
          April
          of 2003, by agreement, and in consideration of the sale of the Company’s Series
          A and A-1 preferred shares and the placement of a New Credit Facility,
          DSSI and
          its affiliated companies (other than the Company) contributed accrued management
          fees and the principal amount of loans, advances and accrued interest thereon
          in
          the amount of $9,673 to paid in capital.
  **Common
          Stock**
 Holders
          of the Company’s common stock are entitled to dividends if and when declared by
          the board of directors. The holders of common stock, voting as a separate
          class,
          are entitled to elect two members of the Board of Directors at each meeting
          or
          pursuant to each consent of the Corporation’s stockholders for the election of
          directors, and to remove from office such directors and to fill any vacancy
          caused by the resignation, death or removal of such directors.
  **Convertible
          Preferred Stock**
 During
          2003, the Company sold to investors (i) 8,945,350 shares of its Series
          A
          Convertible Preferred Stock (“Series A Preferred”) for $18,643, (ii) 721,527
          shares of its Series A-1 Convertible Preferred Stock (“Series A-1 Preferred”)
          for $2,000 and (iii) 36,076 of its Series A-2 Convertible Preferred Stock
          (“Series A-2 Preferred”) for $100. The Company repurchased its Series A-1
          Preferred in 2003, pursuant to a put right of an investor for $2,000 plus
          accrued dividends of $74 which dividends were recognized as a financial
          expense
          in 2003.
  During
          2004, the Company sold to investors (i) 1,455,796 of its Series A Preferred
          for
          $3,034 and (ii) 5,640,878 shares of its Series B Convertible Preferred
          Stock
          (“Series B Preferred”) for $13,633. As part of the Series B Preferred
          transaction, the Company issued 92,798 shares of common stock for no monetary
          consideration to one of the investors. The fair value of these shares,
          based on
          an independent third party valuation, is $34. Accordingly, the Company
          made a
          pro rata allocation of the total consideration received to the Series B
          Preferred and the common stock, resulting in $13,599 allocated to the Series
          B
          Preferred and $34 to the common stock.
  The
          rights, preferences and privileges attached to the Series A Preferred,
          Series
          A-2 Preferred and Series B Preferred (Collectively, the “Preferred Stock”) are
          as follows:
  (a)
          Conversion
  The
          Preferred Stock is convertible into the Company’s common stock initially on a
          one-for-one basis subject to adjustment for the achievement of certain
          performance criteria. Conversion is mandatory (i)
          in
          the event that the holders of at least a majority of the then-outstanding
          shares
          of Preferred Stock consent to such conversion or (ii) upon the closing
          of a
          firmly underwritten public offering of shares of common stock of the Company
          at
          a per share price not less than five times the original per-share purchase
          price
          of the Preferred Stock. The
          holders of Preferred Stock have no mandatory redemption rights.
  (b)
          Board
          of Directors
  The
          holders of Preferred Stock, voting as a separate class, shall be entitled
          to
          elect three members of the Board of Directors at each meeting or pursuant
          to
          each consent of the Corporation’s stockholders for the election of directors,
          and to remove from office such directors and to fill any vacancy caused
          by the
          resignation, death or removal of such directors. After
          December 31, 2004, the board can be increased by no more than two additional
          seats based on a majority vote of the then members of the board. The additional
          two seats shall be filled by outside directors, who shall be selected by
          a
          majority of the other members of the Board of Directors, including the
          affirmative vote of at least two of the directors designated by the holders
          of
          Preferred Stock.
  16
 **Comverge,
            Inc. and Subsidiaries**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2004 and 2003**
 ***(All
            notes in thousands of dollars, except per share
            data)***
  (c)
          Dividends
  In
          the
          event the Company declares and pays any dividend on its common stock other
          than
          stock or other dividends payable solely in shares of common stock, the
          Company
          must also pay to the holders of Preferred Stock the dividends that would
          have
          been payable had all of the outstanding Preferred Stock been converted
          to common
          stock immediately prior to the record date of the dividend.
  The
          holders of shares of Preferred Stock, on a pari passu basis and in preference
          to
          the holders of any shares of any other class of capital stock of the Company,
          shall be entitled to receive, when, as and if declared by the Board of
          Directors, but only out of funds legally available therefore, dividends
          at the
          rate of 8 percent per annum based, in each case, on the original Preferred
          Stock
          issue price. Dividends are noncumulative.
  (d)
          Voting
  The
          Preferred Stock shall vote together with all other classes and series of
          stock
          of the Company as a single class on all actions to be taken by the stockholders
          of the Company.
  (e)
          Liquidation Preferences
  Upon
          any
          liquidation, dissolution or winding up of the Company, whether voluntary
          or
          involuntary, the holders of shares of Series A Preferred and the Series
          B
          Preferred shall be entitled to be paid, on a pari passu basis, before any
          distribution or payment is made upon the Series A-2 Preferred Stock or
          on the
          common stock an amount equal to 1.5 times the original Series A issue price
          per
          share or original Series B price per share, respectively, plus all declared
          and
          unpaid dividends. After payment to the holders of Series A Preferred and
          the
          Series B Preferred of the full amounts to which they are entitled the holders
          of
          Series A-2 Preferred Stock shall be entitled to be paid, before any distribution
          or payment is made upon the common stock, an amount equal to 1.5 times
          the
          original Series A-2 issue price per share plus all declared but unpaid
          dividends. After the preferential payments have been made in full, any
          additional remaining assets shall be distributed ratably to the holders
          of
          Preferred Stock (on an as-converted basis) and common stock until such
          holders
          of Preferred Stock have received, inclusive of their liquidation amount,
          an
          amount equal to 5 times their original issue price per share. After payment
          of
          all preferential amounts, the entire remaining assets of the Company legally
          available for distribution, if any, shall be distributed ratably among
          the
          holders of its common stock.
  Unless
          otherwise agreed by holders of at least 66 2/3 percent of the then-outstanding
          shares of Preferred Stock, a liquidation, dissolution or winding up of
          the
          Company shall also include (i) the acquisition or sale of the Company unless
          the
          Company’s stockholders of record as constituted immediately prior to such
          acquisition or sale will, immediately after such acquisition or sale hold
          at
          least 50 percent of the voting power of the surviving or acquiring entity
          or
          (ii) a sale, lease or other conveyance or disposition of all or
          substantially all of the assets of the Company, including a sale of all
          or
          substantially all of the assets of the Company’s subsidiaries, if such assets
          constitute substantially all of the assets of the Company and such subsidiaries
          taken as a whole.
  17
 **Comverge,
            Inc. and Subsidiaries**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2004 and 2003**
 ***(All
            notes in thousands of dollars, except per share
            data)***
  (f)
          Anti-dilution Rights
  The
          conversion prices of Preferred Stock are subject to broad-based weighted
          average
          anti-dilution adjustments to reduce dilution in the event that the Company
          issues additional equity securities (other than Board approved employee
          incentives, including stock options) at a purchase price less than the
          then-applicable conversion price of the Series A Preferred, Series A-2
          Preferred
          and Series B Preferred, respectively. The conversion price is also subject
          to
          proportional adjustment for stock splits, stock dividends, recapitalizations
          and
          the like.
  (g)
          Protective Provisions
  For
          so
          long as at least 100,000 shares of Preferred Stock remain outstanding,
          consent
          of the holders of at least 60% of the then outstanding Preferred Stock
          shall be
          required to (i) alter or change the rights, preferences or privileges of
          the
          Preferred Stock, (ii) create (by reclassification or otherwise) any new
          class or
          series of shares having rights, preferences or privileges senior to or
          on a
          parity with the Preferred Stock, (iii) amend or waive any provision of
          the
          Company’s Articles of Incorporation or Bylaws, (iv) increase or decrease the
          authorized number of shares of common or Preferred Stock, (v) redeem any
          shares
          of common stock (other than pursuant to equity incentive agreements with
          service
          providers giving the Company the right to repurchase shares upon the termination
          of services), (vi) consummate any merger, other corporate reorganization,
          sale
          of control, or any transaction in which all or substantially all of the
          assets
          of the Company are sold, (vii) increase or decrease the authorized size of
          the Company’s Board of Directors or the Compensation Committee of the Board of
          Directors, (viii) pay or declare any dividend on any shares of common or
          Preferred Stock, (ix) liquidate or dissolve the Company, (x) increase the
          number
          of shares reserved for issuance under the Option Plan, (xi) issue any shares
          of
          capital stock of the Company or options to acquire capital stock of the
          Company
          under the Option Plan, unless such issuance is approved by the Board of
          Directors and the Compensation Committee of the Board of Directors, or
          (xii)
          authorize or incur any additional indebtedness in excess of $500 (other
          than the
          revolving Credit Facility), unless such incurrence of indebtedness is approved
          by the Board of Directors, including at least two of the directors designated
          by
          the holders of Preferred Stock.
  **12.**
                **Stock
                  Option Plan**
  The
          Company's stock option plan provides for the granting to officers, directors
          and
          other key employees of options to purchase shares of common stock at not
          less
          than 85 percent of the estimated fair value of the Company’s common stock on the
          date of grant. The purchase price must be paid in cash. At December 31, 2004,
          the
          Company had 2,600,996 issued and outstanding options under the various
          plans of
          which 78,491 options had been exercised by optionees. Options expire between
          five years and ten years from the date of the grant. The options generally
          vest
          over a two to four year period from the date of the grant. At December
          31, 2004,
          1,260,244 options were available for grant under the various plans.
  18
  **Comverge,
            Inc. and Subsidiaries**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2004 and 2003**
 ***(All
            notes in thousands of dollars, except per share
            data)***
  A
          summary
          status of the Company's option plans as of December 31, 2004 and 2003,
          as well
          as changes during the year then ended, is presented below:
 
 **2004**
                    
                    
                    **2003****Weighted**
                    
                    
                    
                    
                    
                    **Weighted****Number
                        of**
                    
                    
                    **Average**
                    
                    
                    **Number
                        of**
                    
                    
                    **Average****Options**
                    
                    
                    **Exercise**
                    
                    
                    **Options**
                    
                    
                    **Exercise****(in
                        Shares)**
                    
                    
                    **Price**
                    
                    
                    **(in
                        Shares)**
                    
                    
                    **Price****Outstanding
                        at beginning of year**
                    
                    
                    2,216,049
                    
                    $
                    1.20
                    
                    
                    943,530
                    
                    $
                    1.20Granted
                    
                    
                    980,525
                    
                    $
                    0.44
                    
                    
                    1,278,800
                    
                    $
                    1.20Exercised
                    
                    
                    (4,052
                    )
                    $
                    1.27
                    
                    
                    -
                    
                    $
                    1.20Forfeited
                    
                    
                    (591,526
                    )
                    $
                    1.06
                    
                    
                    (6,281
                    )
                    $
                    1.20**Outstanding
                        at end of year**
                    
                    
                    2,600,996
                    
                    $
                    0.95
                    
                    
                    2,216,049
                    
                    $
                    1.20Exercisable
                        at end of year
                    
                    
                    1,260,078
                    
                    $
                    1.13
                    
                    
                    921,094
                    
                    $
                    1.16
  **Outstanding
                          as of December 31, 2004****Average****Remaining****Number**
                      
                      **Contractual**
                      
                      **Number****Exercise
                          Prices**
                      
                      **Outstanding**
                      
                      **Life**
                      
                      **Exercisable****(In
                          Shares)**
                      
                      **(In
                          Years)**
                      
                      **(In
                          Shares)**$0.29
                      
                      
                      818,700
                      
                      
                      6.72
                      
                      
                      193,948$1.20
                      
                      
                      1,695,059
                      
                      
                      4.42
                      
                      
                      978,894$1.31
                      
                      
                      52,587
                      
                      
                      6.87
                      
                      
                      52,587$2.00
                      
                      
                      10,191
                      
                      
                      1.01
                      
                      
                      10,191$4.00
                      
                      
                      24,459
                      
                      
                      1.24
                      
                      
                      24,4592,600,996
                      
                      
                      5.15
                      
                      
                      1,260,098
 The
          weighted average grant-date fair value of 980,525 and 1,278,800 options
          granted
          during 2004 and 2003, respectively, was zero. The Company utilized the
          Black-Scholes option pricing model to estimate fair value, utilizing the
          following assumptions for the respective years (all in weighted averages):
  **2004**
                  
                  **2003**Risk-free
                      interest rate
                  
                  
                  3.50
                  %
                  
                  5.38
                  %Expected
                      life of options, in years
                  
                  
                  5.0
                  
                  
                  5.0Expected
                      annual volatility
                  
                  
                  0
                  %
                  
                  0
                  %Expected
                      dividend yield
                  
                  
                  None
                  
                  
                  None
 During
          2002, the Company repriced certain incentive stock options of ten employees.
          One
          of these employee’s options were repriced, pursuant to his employment agreement,
          from $4.00 to $1.20 per share. The Company also repriced certain incentive
          stock
          options of ten employees (including the aforementioned employee) who held
          certain anti-dilution options from $1.94 to $1.31 per share. As a result
          of
          these repricings, the options are accounted for as variable awards with
          a
          compensation charge recognized for periodic changes in the intrinsic value
          of
          the option until the award expires, is exercised, or is forfeited. No
          compensation charge was recognized during 2004 or 2003 related to these
          repriced
          option grants since the fair market value of the common stock was below
          the
          exercise prices. During 2004, the Company incurred $30 in deferred compensation
          related to option grants which will be recognized into expense over the
          vesting
          period of the awards
  19
 **Comverge,
            Inc. and Subsidiaries**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2004 and 2003**
 ***(All
            notes in thousands of dollars, except per share
            data)***
  **13.**
                **Major
                  Customers**
  During
          the year ended December 31, 2004, the Company had two customers which accounted
          for 15.4% and 10.7% of the Company’s total revenue. The total accounts
          receivable from these customers were $256 and $129, respectively, at December
          31, 2004. During the year ended December 31, 2003, the Company had one
          customer
          which accounted for 18.5% of the Company’s total revenue. The total accounts
          receivable from this customer was $172 at December 31, 2003. No other customer
          accounted for more than 10 percent of the Company’s total revenue in 2004 or
          2003.
  **14.**
                **Segment
                  Information**
  We
          have two
          operating segments by which we evaluate our business and for which we have
          discrete financial information available. These operating segments are
          (1)
          Solutions sales, consisting of energy intelligence systems comprised of
          hardware
          and software sold to utilities and other customers and (2) Enterprise sales,
          consisting of long-term, turnkey contracts to provide capacity relief to
          electricity generators and transmitters. In evaluating financial performance,
          we
          focus on operating income as a measure of a segment’s profit or loss. Operating
          income for this purpose is income before interest, taxes and allocation
          of
          certain corporate expenses. Operating income
          is
          significant as it includes the revenue and related costs that apply to
          the
          individual segments. We do not utilize total assets as a measure of a segment’s
          performance. Total assets are reviewed at the enterprise level and thus
          are not
          included in our segment disclosure.
  Capital
          requirements of our Enterprise segment are significant and consist of hardware
          devices and control equipment that allow us to provide energy capacity
          to our
          generation and transmission customers during periods of peak electricity
          demand.
  The
          following table includes financial information for 2004 and 2003 related
          to our
          segments. The information presented below may not be indicative of results
          if
          the segments were independent organizations.
  **For
                      the Year Ended 2004****Solutions**
                  
                  **Enterprise**
                  
                  **Total**External
                      revenues
                  
                  $
                  17,002
                  
                  $
                  1,157
                  
                  $
                  18,159Operating
                      loss
                  
                  
                  (6,905
                  )
                  
                  (2,124
                  )
                  
                  (9,029
                  )Identifiable
                      long term assets
                  
                  
                  724
                  
                  
                  4,618
                  
                  
                  5,342Depreciation
                      expense
                  
                  
                  589
                  
                  
                  357
                  
                  
                  946Capital
                      expenditures
                  
                  
                  434
                  
                  
                  3,722
                  
                  
                  4,156Net
                      loss
                  
                  
                  (7,595
                  )
                  
                  (1,663
                  )
                  
                  (9,258
                  )
  20
  **Comverge,
            Inc. and Subsidiaries**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2004 and 2003**
 ***(All
            notes in thousands of dollars, except per share
            data)***
  **For
                      the Year Ended 2003****Solutions**
                  
                  **Enterprise**
                  
                  **Total**External
                      revenues
                  
                  $
                  15,394
                  
                  $
                  248
                  
                  $
                  15,642Operating
                      loss
                  
                  
                  (8,234
                  )
                  
                  (497
                  )
                  
                  (8,731
                  )Identificable
                      long term assets
                  
                  
                  704
                  
                  
                  1,393
                  
                  
                  2,097Depreciation
                      expense
                  
                  
                  778
                  
                  
                  53
                  
                  
                  831Capital
                      expenditures
                  
                  
                  312
                  
                  
                  1,173
                  
                  
                  1,485Net
                      loss
                  
                  
                  (9,184
                  )
                  
                  (133
                  )
                  
                  (9,317
                  )
 **15.**
                **Related
                  Party Transactions and Balances**
  An
          affiliate of DSSI charged the Company’s Israeli subsidiary, Comverge Control
          Systems, $138 and
          $138
          in 2004 and 2003, respectively, in consideration of it providing office
          space
          and certain accounting and administrative services which amounts are included
          in
          general and administrative expense. Also, DSSI paid a cash bonus of $200
          to an
          executive officer of the Company in January 2004 related to performance
          metrics
          achieved during 2003. This amount was recognized in the Company’s Statement of
          Operations as compensation expense in 2003. Because the Company had no
          obligation to reimburse DSSI for such bonus payment, it is classified on
          the
          Company’s balance sheet as a contribution to paid-in-capital. Additionally, in
          January of 2003, DSSI granted the Company's Chief Executive Officer a restricted
          stock grant of 50,000 shares of common stock of DSSI. Also, in 2003, the
          Company
          purchased $100 of computers and other equipment from an affiliate of DSSI
          of
          which $62 is recorded in property and equipment and $38 is recorded as
          a general
          and administrative expense.
  Prior
          to
          April 2003, DSSI charged the Company $130 in consideration of certain management
          fees and interest on advances and loans made by DSSI to the Company and
          included
          in selling and administrative services. Such amount was classified on the
          Company’s balance sheet as a liability to DSSI. By agreement, in April 2003,
          such amount was contributed to the Company’s paid in capital (Note 11). Also by
          agreement, subsequent to April 2003, no management fees are payable to
          DSSI.
  The
          Company extended loans of $10 each to both the Chief Executive Officer
          and Chief
          Financial Officer of DSSI. The loans had an initial maturity date of January
          3,
          2002, and were extended at that time to mature on January 3, 2004. The
          loans
          bear interest at 4.25 percent per annum. The balance of the loans and accrued
          interest at December 31, 2003 were $26. The loans were repaid in
          2004.
  The
          Company has 4,637 stock options outstanding and issued to an executive
          officer
          of an affiliated company.
  21