UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549





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, 2009
            Commission file number:  0-19771







ACORN ENERGY,
INC.


(Exact
name of registrant as specified in charter)




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





302-656-1707


Registrant’s
telephone number, including area code







Securities
registered pursuant to Section 12(b) of the Act:





Title of Class
                  Name of Each Exchange on Which
      RegisteredCommon
      Stock, par value $.01 per share
                  The
      NASDAQ Global
Market





Securities
      registered pursuant to Section 12(g) of the Act:
              None




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes  ̈  No
x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange
Act.     Yes  ̈  No
x




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.     Yes x  No
 ̈




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




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




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




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


Yes  ̈ No
x




As of
last day of the second fiscal quarter of 2009, the aggregate market value of the
registrant’s common stock held by non-affiliates of the registrant was
approximately $30.4 million based on the closing sale price on that date as
reported on the NASDAQ Global Market. As of March 15, 2010 there were 14,219,148
shares of Common Stock, $0.01 par value per share, outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE:




None.








TABLE
OF CONTENTS




PAGEPART
      IItem
      1.
                BUSINESS
                1Item
      1A.
                RISK
      FACTORS
                15Item
      2.
                PROPERTIES
                33Item
      3.
                LEGAL
      PROCEEDINGS
                34Item
      4.
                RESERVED
                35PART
      IIItem
      5.
                MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
                36Item
      6.
                SELECTED
      FINANCIAL DATA
                36Item
      7.
                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                38Item
      7A.
                QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                59Item
      8.
                FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
                59Item
      9.
                CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
                59Item
      9A(T)
                CONTROLS
      AND PROCEDURES
                59Item
      9B.
                OTHER
      INFORMATION
                59PART
      IIIItem
      10.
                DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                60Item
      11.
                EXECUTIVE
      COMPENSATION
                64Item
      12.
                SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
                76Item
      13.
                CERTAIN
      RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
    INDEPENDENCE
                78Item
      14.
                PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
                79PART
      IVItem
      15.
                EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
                80





Certain
statements contained in this report are forward-looking in
nature.  These statements can be identified by the use of
forward-looking terminology such as “believes”, “expects”, “may”, “will”,
“should” or “anticipates”, or the negatives thereof, or comparable terminology,
or by discussions of strategy.  You are cautioned that our business
and operations are subject to a variety of risks and uncertainties and,
consequently, our actual results may materially differ from those projected by
any forward-looking statements.  Certain of such risks and
uncertainties are discussed below under the heading “Item 1A.  Risk
Factors.”





AquaShieldTM is a trademark of
our DSIT Solutions Ltd. subsidiary.  CoaLogixTM and MetalliFixTM are trademarks of
our CoaLogix subsidiary. CoreworxTM is a trademark of
our Coreworx subsidiary.







PART
I




ITEM
      1.
            BUSINESS




OVERVIEW




Acorn
Energy (the “Company”) is a holding company focused on improving the efficiency
and environmental impact of the energy infrastructure, fossil fuel and nuclear
industries. Our operating companies leverage advanced technologies to transform
the existing energy infrastructure. We aim to acquire primarily controlling
positions in companies led by promising entrepreneurs, and we add value by
supporting those companies with financing, branding, positioning, and strategy
and business development.





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





SCR Catalyst and Management Services.We provide selective catalytic reduction (“SCR”) catalyst and management
services for coal-fired power plants through our CoaLogix Inc. ("CoaLogix")
subsidiary.  These services include SCR catalyst management, cleaning
and regeneration as well as consulting services to help power plant operators
optimize efficiency and reduce overall nitrogen oxides (“NOx”) compliance costs
through CoaLogix’s SCR-Tech LLC subsidiary.




·      Naval and RT
Solutions.  We provide sonar and acoustic related solutions for
energy, defense and commercial markets with a focus on underwater site security
for strategic energy installations and other real-time and embedded hardware and
software development and production through our DSIT Solutions Ltd. ("DSIT")
subsidiary.




·      Energy Infrastructure Software (EIS)
Services.We provide energy infrastructure software services through our
Coreworx Inc. (“Coreworx”) subsidiary. Coreworx is a leading provider of
integrated project collaboration and advanced document management solutions for
the architecture, engineering and construction markets, particularly for large
capital projects in the energy industry.




Entities
in which we own equity interests are engaged in the following
activities:





·      GridSense Pty Ltd. ("GridSense")provides remote monitoring and control systems to electric utilities and
industrial facilities worldwide.




·      U.S. Sensor Systems, Inc.
("USSI") develops and
produces fiber optic sensing systems for the energy and defense markets (See
“Recent Developments”).




During
2009, we had operations in three reportable segments: providing catalyst
regeneration technologies and management services for SCR systems through our
CoaLogix subsidiary (our CoaLogix segment); providing sonar and acoustic related
solutions and other real-time and embedded hardware and software development and
production for energy, defense and commercial markets through our DSIT
subsidiary (our Naval & RT Solutions segment); and providing integrated
project collaboration and advanced document management solutions for the
architecture, engineering and construction markets through our Coreworx
subsidiary (our EIS segment). Our “Other” segment represents IT and consulting
activities at our DSIT subsidiary.




-1-


REVENUES
BY COMPANY





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





Year ended
                    December 31,
                  
                  
                  Three monthsendedDecember 31,2008
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009CoaLogix
                  
                  $
                  10,099
                  
                  
                  $
                  18,099
                  
                  
                  $
                  4,658
                  
                  
                  $
                  5,338DSIT
      Solutions
                  
                  
                  8,267
                  
                  
                  
                  9,219
                  
                  
                  
                  1,945
                  
                  
                  
                  2,746Coreworx
                  
                  
                  2,330
                  
                  
                  
                  3,999
                  
                  
                  
                  1,563
                  
                  
                  
                  512Total
                  
                  $
                  20,696
                  
                  
                  $
                  31,317
                  
                  
                  $
                  8,166
                  
                  
                  $
                  8,596




COALOGIX




Through
SCR-Tech, which is 100% owned by our 77% owned CoaLogix subsidiary, we offer a
variety of services for coal-fired power plants that use SCR systems to reduce
nitrogen oxides (“NOx”) emissions.  NOx emissions are contributors to
ground-level ozone (smog), particulate matter and acid rain.These services include
SCR catalyst management, cleaning and regeneration, as well as consulting
services to help power plant operators optimize efficiency and reduce overall
NOx compliance costs.





Coal-fired
power plants, in particular, continue to be a primary target for NOx reduction,
and selective catalytic reduction remains the most widely used technology by
plant operators to control NOx.  With NOx removal efficiencies of up
to 95%, SCR systems (also referred to as SCR reactors) are considered to be the
most effective NOx reduction solution, and we expect it to remain the dominant
technology choice for coal-fired power plants to meet increasingly stringent
U.S. air quality regulations.





The
average useful life of SCR catalyst used at coal-fired power plants is
approximately 24,000 hours (equivalent to three years of year-round
operation).  Until 2003, the only solution in the U.S. for restoring
activity and NOx reduction performance was to replace spent catalyst with costly
new catalyst.  Since 2003, SCR-Tech has offered U.S. power plant
operators a more cost-effective alternative in the form of catalyst
regeneration.





Regulatory
Drivers




The 1990
Clean Air Act Amendments were implemented to improve air quality in the U.S.,
and are enforced by the U.S. Environmental Protection Agency
(“EPA”).  Under the Clean Air Act, the EPA limits how much of a
pollutant can be in the air anywhere in the United States, with each state
responsible for developing individual state implementation plans (“SIPs”) to
meet the EPA’s set limits for various pollutants.  Emissions of NOx
from coal-fired power plants are included in the EPA’s criteria pollutants for
which limits have been established.  Operators of large power plants,
particularly in the Eastern half of the U.S., have been required to
significantly reduce their NOx emissions.




-2-


The
original regulatory driver of SCR-Tech’s business was the EPA’s NOx SIP Call
program which was designed to mitigate the regional transport of NOx and
required energy producers and other industries operating large power plants in
the Eastern half of the U.S. to reduce their NOx emissions substantially and to
maintain them at reduced levels particularly during the five-month “ozone
season” (May 1-September 30) in 19 Midwestern and Eastern states and the
District of Columbia. This program has resulted in a dramatic increase in the
number of SCR system installations at coal-fired power plants for the removal of
NOx.




The Clean
Air Interstate Rule (“CAIR”) is another regulatory driver of our SCR service
business. Phase I caps on NOx emissions took effect January 1, 2009, and are
designed to permanently cap and achieve substantial reductions in emissions of
NOx across 28 Eastern states and the District of Columbia that we believe will
further increase the size of our addressable market.  By 2015, CAIR is
expected to significantly reduce NOx emissions in these states from 2003 levels
by plants utilizing a cap-and-trade approach.  This rule builds on the
NOx SIP Call with the objective of further mitigating air pollution moving
across state boundaries, and is designed to cut NOx emissions from power plants
significantly with the 2009 Phase I caps and by the implementation of Phase II
caps in 2015.  CAIR’s Phase I caps require year-round SCR system
operation for many power plants (with increased NOx reduction required during
ozone season) to meet the more stringent requirements.  With
year-round operation of SCRs needed by many power plants to comply with CAIR,
coal-fired power plant operators will be required to replenish the catalyst used
in SCR systems with new or regenerated catalyst on a much more frequent
basis.




On July
11, 2008, the D.C. Court of Appeals vacated CAIR and the associated Federal
Implementation Plan.  On December 23, 2008, the court subsequently
re-instated CAIR to give the EPA an opportunity to fix flaws found by the court
in its previous decision.  The court did not provide a time limit for
the EPA to complete the changes.  The changes required by the court do
not affect SCR usage or required emission caps or limits.




Market
for SCR Catalyst and Management Services




Coal-fired
plants represent approximately 50% of U.S. power generating capacity, and we
believe they will continue to play an important role in the U.S. electricity
generation market in the years ahead.  Department of Energy (DOE)
projections indicate that coal-fired electric power generation will grow
gradually through 2035. The recent growth in SCR system installations in
coal-fired power plants driven by the NOx SIP Call and CAIR has resulted in a
large and growing U.S. market for SCR catalyst and management
services.  Based upon the substantial number of SCR systems that
commenced operation between 2000 and 2006 combined with the CAIR Phase I caps
which began on January 1, 2009, we expect the market for catalyst replenishment
to increase dramatically, and result in a total addressable market for catalyst
cleaning and regeneration estimated in excess of $100 million by
2011.





By
offering customers more economical ways to operate and maintain their SCR units,
along with a lower cost regeneration alternative to purchasing new catalyst, we
believe SCR-Tech has the potential to play a significant role in the growing
U.S. market for SCR catalyst and management services.




-3-


SCR-Tech’s
Service Offerings




Catalyst
Cleaning, Rejuvenation and Regeneration




We offer
proprietary and patented processes that can improve the NOx removal efficiency
and restore the useful life of installed SCR catalyst, providing a compelling
economic alternative to catalyst replacement.  SCR-Tech’s processes
are capable of not only physically cleaning and rejuvenating the most severely
plugged, blinded or poisoned catalyst, but of also chemically reactivating
deactivated catalyst.  Depending upon the state of the installed
catalyst, SCR-Tech offers several alternatives for restoring its NOx removal
efficiency and extending its life. The chemicals and raw materials used in the
cleaning and regeneration processes are commonly and readily
available.




SCR-Tech’s
regeneration process has several advantages over purchasing new catalyst by (i)
offering cost savings, (ii) eliminating or reducing environmental related
disposal issues, (iii) enhancing catalyst activity and (iv) reducing sulfur
dioxide conversion.




SCR
and Catalyst Management




We
provide a broad array of customized SCR and catalyst management services,
including guidance on effective SCR and catalyst management strategies, with the
objective of assisting plant operators in optimizing the operation and
performance of their SCR systems while reducing their operation and maintenance
costs and achieving cost-effective NOx compliance.  All SCR and
catalyst management services are offered as either a complete package or “a la
carte,” allowing the flexibility to select and combine various services on an
as-needed basis tailored to the individual SCR system.




Customers




Our SCR
catalyst and management services business currently primarily serves the U.S.
coal-fired power generation market.  Our customer base ranges from
large investor-owned utilities and independent power producers to smaller
municipal power generators.  As part of an ongoing growth and revenue
diversification strategy, SCR-Tech continues to actively target SCR operators at
coal-fired power plants throughout the United States, and the Eastern U.S. in
particular, to further expand its customer base and broaden its reach in the
marketplace.  In 2009, two customers represented approximately 36% of
SCR-Tech’s revenue, and one of those customers, Alleghany Energy, comprised
14.0% of Acorn’s sales for 2009 and the loss of Alleghany Energy as a customer
would have a material adverse effect on Acorn and its subsidiaries taken as a
whole.  In 2008, three customers represented approximately 75% of
SCR-Tech’s revenue.





Competition




We are
aware of one company, Evonik Energy Services LLC (“Evonik LLC”), which entered
the U.S. catalyst regeneration market beginning in 2008, and has a regeneration
facility in North Carolina.  Evonik LLC, based in Charlotte, North
Carolina, is a subsidiary of a large German company, Evonik Steag GmbH. We are
currently involved in litigation with Evonik LLC.  See Item 3. Legal
Proceedings. Another company, Enerfab Inc. provides catalyst management, and
also cleans and rejuvenates catalyst but does not regenerate catalyst (which
involves reactivating catalyst with chemicals to restore the catalyst to its
maximum efficiency).  In addition, new catalyst replacement is the
primary competition for SCR-Tech’s regeneration process when a replenishment of
catalyst activity is necessary. The basis of competition is often price as many
projects are subject to competitive bidding. Quality and service can also be
competitive factors.




-4-


Production
Facilities




SCR-Tech’s
business operations are located in Charlotte, North Carolina in a 126,000 square
foot production facility for the cleaning and regeneration of SCR
catalyst.





In
anticipation of CoaLogix’s need to increase production capacity in order to
satisfy expected increased orders from customers, in April 2009 we entered into
an agreement with EnerTech and CoaLogix senior management to invest
approximately $11.5 million in CoaLogix. To date, $5.6 million has been invested
by EnerTech, CoaLogix senior management and us in CoaLogix under the
agreement.





In
September 2009, we announced that SCR-Tech entered into an agreement to lease
approximately 7.3 acres of land in Charlotte, North Carolina together with a
building containing approximately 143,500 square feet of office and warehouse
space. SCR-Tech entered into this lease to provide it with additional space for
manufacturing, warehousing, research and development and
administration.  SCR-Tech is initially leasing 98,460 square feet
through August 31, 2010, and will lease the balance of the 45,040 square feet on
or before September 1, 2010. SCR-Tech is in the process of upfitting the space,
and anticipates such upfit to be completed around mid-2010. We believe that our
current production facility together with the new production facility (when
ready) will provide sufficient capacity for cleaning and regeneration activities
for the near future.





Intellectual
Property




We use a
combination of patents, trade secrets, contracts, copyrights and trademarks to
protect the proprietary aspects of our core technologies, technological advances
and innovations, including our cleaning and regeneration processes and other
know-how, and we work to actively maintain protection of our proprietary
technologies and processes over time through follow-on patent filings associated
with technology and process improvements that we continually develop. A
significant portion of our know-how is protected as trade secrets and supported
through contractual agreements with our employees, suppliers, partners and
customers.




We either
own (exclusively or jointly) or hold exclusive license rights from third parties
for six U.S. patents, three Canadian patents, one German patent and six
pending U.S. applications. We anticipate that when our early patents
expire, we will rely on subsequently filed and additional patents along with
trade secrets and other know-how to protect the foundation technology and
cleaning and regeneration processes. We plan to continue to file new patent
applications as we gain knowledge and experience with our various processes and
service offerings.





NAVAL
& RT SOLUTIONS – DSIT SOLUTIONS LTD.




DSIT
Solutions is a globally-oriented company based in Israel with expertise in sonar
and acoustics and development capabilities in the areas of real-time and
embedded systems.  Based on these capabilities, we offer a full range
of sonar and acoustic-related solutions to strategic energy installations as
well as defense and homeland security markets. In addition, based on expertise
in fields such as signal acquisition and processing applications, communication
technologies, computerized vision for the semiconductor industry and command,
control and communication management (“C3”) we provide wide ranging solutions to
both governmental and commercial customers.


-5-


Products
and Services




DSIT’s
Naval and RT Solutions activities are focused on two areas – sonar and acoustic
solutions for naval and security markets and other real-time and embedded
hardware and software development and production.




Naval
Solutions.  Our naval solutions include a full range of sonar
and acoustic-related solutions to the strategic energy installation, defense and
homeland security markets.  These solutions include:




·      AquaShieldTM
Diver Detection Sonar (“DDS”) – DSIT has developed an innovative, cost-effective
DDS system, the AquaShieldTM, that provides critical coastal and offshore
protection of sites through long-range detection, tracking, and warning of
unauthorized divers and swimmer delivery vehicles (“SDVs”) for rapid deployment
and effective response.  Our AquaShieldTM DDS system is fully automatic
and customizable, and requires intervention of a security person only for
decision and response to the threat.  The DDS sensors can be
integrated with other sensors into a comprehensive command and control
(“C&C”) system to provide a complete tactical picture both above and below
the water for more intelligent evaluation of and effective response to
threats.




·      Harbor
Surveillance System (“HSS”) – DSIT has developed an integrated HSS that
incorporates DDS sensors with above-water surveillance sensors to create a
comprehensive above and below water security system to coastal and offshore
sites such as energy terminals, offshore rigs, nuclear power plants and
ports.  The system reliably detects, intercepts, and warns of
intruders such as divers, swimmers, SDVs, submersibles, small surface vessels
and mines.




·      Mobile
Acoustic Range (“MAR”) – The MAR accurately measures a submarine’s or surface
vessel’s radiated noise; thus enabling navies and shipyards to monitor and
control the radiated noise and to silence their ships and
submarines.  By continuously tracking the measured vessel and
transmitting the data to a measurement ship, the MAR system enables real time
radiated noise processing, analysis and display.  The system also
includes a platform database for measurement results management and provides
playback and post analysis capability.




·      Generic
Sonar Simulator (“GSS”) – DSIT has developed a GSS for the rapid and
comprehensive training of anti-submarine warfare (“ASW”), submarine, and mine
detection sonar operators.  This advanced, low cost, PC-based training
simulator is designed for all levels of sonar operators from beginners to the
most experienced, including ship ASW/attack teams.  The simulator
includes all aspects of sonar operation, with emphasis on training in weak
target detection in the presence of noise and reverberation, torpedo detection,
audio listening and classification.




·      Underwater
Acoustic Signal Analysis System ("UASA") – DSIT’s UASA system processes and
analyzes all types of acoustic signals radiated by various sources and received
by naval sonar systems (submarine, surface and air platforms, fixed bottom
moored sonar systems, etc.).




Other
Real-Time and Embedded Solutions




Additional
areas of development and production in real-time and embedded hardware and
software include:




-6-


·      Applications
- DSIT specializes in Weapon/ C&C Operating Consoles for unique air and
naval applications, designed through synergistic interaction with the
end-user.  Weapon/C&C Consoles utilize Human-Machine Interface
(“HMI”) prototyping supported on a variety of platforms as an integral part of
the HMI definition and refinement process.  Weapon/C&C Console
specific applications driven by HMI include signal processing and data fusion
and tracking.




·      Computerized
Vision for the Semiconductor Industry - DSIT has been cooperating with global
leaders of state-of-the-art semiconductor wafer inspection systems in developing
cutting edge technologies to enable the semiconductor industry to detect defects
in manufacture.  DSIT develops and manufactures hardware and embedded
software for computerized vision systems, and we supply this multi-disciplinary
field in the integration of digital and analog technologies, image processing
and intricate logic development.




·      Modems
and data links - DSIT’s PCMCIA Soft Modem card is a state of the art modem and
an example of the advanced technology DSIT has achieved in performance and
miniaturization of complex technologies.  The design simplicity and
flexibility allows customers to easily define and create a range of
applications, and to design the card into a variety of OEM products, using the
same, or slightly modified, hardware.  The on-board processor enables
and manages transfer of data over radio networks using different radio
systems.




·      Sonar
Building Blocks – based on our sonar capabilities and development of the DDS,
DSIT has developed a number of generic building blocks of sonar systems such as
Signal Processing Systems and Sonar Power Amplifiers (SPA). Some customers
designing and building their own sonar systems have purchased these building
blocks from us.




Customers
and Markets




All of
this segment’s operations (excluding sales and product delivery, set-up and
service) take place in Israel. In 2008, approximately 15% of this segment's
revenues were derived from outside of Israel.  In 2009, approximately
43% of DSIT’s revenues were derived from outside of Israel. We expect this trend
of increasing sales generated from outside of Israel to continue in
2010.  DSIT is continuing to invest considerable effort to penetrate
European, Asian, U.S. and other markets in order to broaden its geographic sales
base with respect to its sonar technology solutions. We have created significant
customer relationships with some of Israel’s largest companies in its defense
and electronics industries.





The
global war on terror has shifted the focus of governments and Homeland Security
agencies to invest in situational awareness equipment to better protect their
national infrastructure. For example, in March 2009, the U.S. Nuclear Regulatory
Commission ("NRC") amended the security requirements for nuclear power reactors
to require detection and assessment systems at all licensed U.S. nuclear power
plants. In addition, commercial enterprises are also increasingly aware of the
need to protect critical coastal and waterfront infrastructures. These critical
infrastructures include naval ports, oil terminals, off-shore oil and gas rigs,
liquid natural gas plants and terminals, nuclear plants, coal terminals and
desalination plants.  We believe there will be a growing demand by
governmental agencies and commercial owners of these facilities for products and
services such as our naval solutions described above.





We
believe that in 2010, increased awareness as to the susceptibility of strategic
coastal waterfront energy installations worldwide will result in increased
orders of our AquaShieldTM DDS  systems.  Furthermore, we
have entered into a cooperation agreement with a U.S. based integrator to help
us penetrate the U.S. market, particularly with respect to recent NRC security
requirements.




-7-


Three
customers accounted for 83% of segment sales in 2009 (38%, 32% and 13%,
respectively) while in 2008, two customers accounted for 60% (49% and 11%,
respectively) of segment sales.  The loss of any one or more of these
customers would have a material adverse effect on this segment.




Competition




Our Naval
& RT Solutions segment faces competition from several competitors, large and
small, operating in worldwide markets, (such as Sonardyne International Ltd.,
C-Tech Development Corp. and the Kongsberg group of companies) with
substantially greater financial and marketing resources, particularly with
respect to our Naval solutions. We believe that our wide range of experience and
long-term relationships with large businesses as well as the strategic
partnerships that we are developing will enable us to compete successfully and
obtain future business.




Intellectual
Property




DSIT
rigorously attempts to protect its proprietary know-how, proprietary
technologies, processes and other intellectual property.




DSIT's
systems are heavily based on software implementing advanced acoustic signal
processing algorithms. The foundation of the systems and DSIT's competitive edge
lies in these algorithms. Our strategy is to identify these key intellectual
property elements developed by us in order to protect them in a timely and
effective manner, and to continually use such intellectual property to our
competitive advantage in the marketplace.




We keep
the detailed description of these core algorithms as proprietary information and
accordingly they are not disclosed to the public or to customers. We use
contractual measures such as non-disclosure agreements and special contract
terms to protect this intellectual and proprietary information. It is uncommon
for companies such as ours to rely on patents, as the patent itself may disclose
critical information.




A
significant portion of our know-how is protected as commercial secrets and
supported through contractual agreements with our employees, suppliers, partners
and customers.




Facilities




DSIT’s
activities are conducted in approximately 18,000 square feet of office space in
the Tel Aviv metropolitan area under a lease that expires in August 2012. We
believe that DSIT’s current premises are sufficient to handle the anticipated
increase in sales for the near future.




ENERGY INFRASTRUCTURE SOFTWARE SERVICES– COREWORX INC.




We
acquired Coreworx, which is based in Kitchener, Ontario, Canada on August 13,
2008, and we currently own 100% of Coreworx.  Coreworx is an Ontario,
Canada corporation. Coreworx provides software that manages project information
and work processes on an international scale to increase efficiency and reduce
risks for owners and operators (“O/O”) and engineering and construction
contractors (“E&C”) involved with major capital projects
(“MCPs”).





Coreworx
considers MCPs to be those that are more than $500 million in cost with a high
level of complexity due to sophisticated engineering and design, international
collaboration and often a higher level of regulation than is required for
general building, such as projects involving offshore oil and gas, nuclear,
hydroelectric and biochemical.  The execution of a MCP can take from
three to seven or more years and the capital costs run from half a billion
dollars to tens of billions of dollars. Due to the scale, large number of
stakeholders involved, and the complexity of MCPs, project information control
and work process management are crucial to managing project execution
risk.




-8-


Products
& Benefits





Coreworx
offers a variety of products in a secure web-based enterprise class software
platform that provide information control and work process automation for the
engineering, procurement, and construction phases of a global MCP.





During
the construction of a typical MCP, multiple revisions of tens of thousands of
documents and drawings will be exchanged by thousands of team members every
month around the globe.  With Coreworx, our customers are able to
control and manage thousands of document-centric work processes and benefit
specifically from improved control thereby mitigating commercial risk and
reducing costs.





Coreworx’s
nuclear product is being used to manage licensing of new nuclear plants and
return to service current fossil and nuclear plants.





Customers
and Markets





Market
Drivers and Trends





MCP
activity is usually found within the following broad sectors: industrial and
manufacturing; mining; oil and gas; power and utilities (generation and
transmission); commercial and retail; and public
infrastructure.  Coreworx is focused on sales to large E&Cs and
O/Os that execute MCPs in the oil and gas, mining and power generation sectors
primarily in North America and Australia. Coreworx is also pursuing growing
Latin and South America markets using local partners to advance
opportunities.





Prior to
the recent global economic downturn, spending for MCPs by governments,
quasigovernmental entities, and private enterprise was on the rise in response
to the global economic expansion.  With the recent world economic
downturn, marginal projects were shelved, and only well-funded owners are
proceeding with MCPs.





Presently,
as markets have begun to stabilize, commodity and construction material prices
have also begun to stabilize and projects are being resumed in a more favorable
cost environment. Over the long term, MCP spending in target sectors is expected
to grow in line with global economic development and population growth in order
to service the energy and commodity demands these forces create.





Information
Technology Use in Major Capital Projects





O/Os,
E&Cs, their subcontractors and suppliers have historically been late
adopters of business process automation technology.  Coreworx
recognized the need for project information control in MCPs, and developed its
Coreworx software in 2005 to assist E&Cs and O/Os in meeting the challenges
involved with MCPs, including cost overruns involving rework, project schedule
delays, and compliance with contract terms and applicable
regulations.




-9-


Oil
and Gas





The oil
and gas sector continues to attract a large volume of capital investment
resulting in initiation of MCPs.  Analyst Wood Mackenzie expects
national oil companies to spend more than $100 billion per year over the next
five years developing MCPs. Global oil & gas exploration and production
spending in 2009 amounted to $400 billion, based on Barclays Capital annual
survey of 357 oil & gas companies. For 2010, the same survey found an
increase in planned spending to $439 billion.





Mining





Weakened
commodity prices, credit tightness and rising project costs applied downward
pressure to mining projects in 2009 compared to the boom growth of previous
years. However, markets and commodities prices have begun to stabilize and
project activity is resuming as mining output in turn feeds other necessary
projects. Many of the world’s largest mining companies are based in resource
rich Latin America, Australia and Canada. In Canada alone, 136 projects worth
more $53 billion have begun construction or are expected to begin between June
2009 and December 2010, according to Industrial Info Resources. Western
Australia is also a significant area of mining MCP activity, and the country is
the world’s second largest uranium producer after Canada, giving it a favorable
position in supplying nuclear power projects around the world.





Power
Generation





Continuing
demand for electricity and the growth of developing economies in addition to
refurbishment of aging existing infrastructure and development of renewable
energy sources have lead to global increases in capital spending on new power
generation and transmission projects.  The International Energy Agency
estimates that world nuclear capacity must grow 80% beyond current capacity by
2030, not only to meet growing electricity demand but also climate change
regulations, and that $13.6 trillion must be spent on power generation projects
between 2008 and 2030.  In North America, 295 Canadian power projects
worth more than $41 billion have begun construction or are expected to begin
construction between June 2009 and December 2010, according to Industrial Info
Resources. The Edison Electric Institute estimates that spending by U.S. power
utilities will exceed $250 billion between 2009 and 2011.





Total
Addressable Market





There are
presently approximately 3,500 MCPs in the oil and gas, mining and power
generation sectors either under construction or in the front-end engineering
design stage with an estimated approximate value of $3.8 trillion.  Of
such MCPs we believe that the total addressable market for software such as
Coreworx is approximately $2 billion.





Customers





Coreworx
software is currently in use by global customers in 35 countries on more than
400 capital projects with tens of thousands of users.In the year ended
December 31, 2009, Coreworx was dependent upon a few major customers such as
USEC, Fluor Corporation, Chevron Corporation), J. Ray McDermott, Inc. and Husky
Energy.




-10-


Competition





Many
other vendors are attempting to address the MCP needs that are addressed by
Coreworx from a variety of functional backgrounds such as plant design or
project management.  Most of our competitors are software companies
that offer products that we believe address some, but not all, aspects of MCP
information control addressed by Coreworx; however, a small number of companies
such as Aconex, McLaren Engineering and Organice are viewed by our customers as
direct competitors.  Price is often a competitive determinant as many
projects are awarded based on competitive bidding. Functionality and service can
also be competitive factors.





Locations





Coreworx’
corporate office is located at 22 Frederick Street, in Kitchener, Ontario,
Canada in approximately 8,600 square feet of office space under a lease that
expires in December 2010.  We believe we will have to take more space
in 2010 and 2011 to meet our near term growth expectations.





Intellectual
Property





We use a
combination of proprietary source code, trade secrets, and contracts with our
employees, OEM suppliers, partners and customers, and trademarks to protect the
proprietary aspects of our core technologies, technological advances and
innovations and know-how.  We work actively to maintain protection of
our proprietary technologies and processes over time and process improvements
that we continually develop.





GRID
MONITORING SOLUTIONS - GRIDSENSE PTY LTD.




In 2009
we owned approximately 31% of GridSense Pty Ltd. (GridSense), and accounted for
our investment under the equity method.





GridSense
develops and markets remote monitoring systems to electric utilities and
industrial facilities worldwide.  These systems, used in a myriad of
utility applications including outage management, power quality monitoring,
system planning, trouble shooting and proactive maintenance, condition
monitoring, and providing network operators with the intelligence to better and
more efficiently operate grid operations.





Due to
increasing stresses on the system, an old and aging infrastructure and greater
demands for power quality and reliability of supply, utilities are striving to
modernize their electrical infrastructures with "SmartGrid"
initiatives.  Cost-effective and easily deployable, GridSense
solutions provide critical components of the future grid.


GridSense's
patented solutions allow end-users to cost effectively monitor the power quality
and reliability parameters of electric transmission and distribution systems in
applications where competitive offerings are non-existent or
cost-prohibitive.  GridSense has developed a range of offerings that
addresses all the critical points of the electricity delivery system, including
distribution and transmission lines, substations and transformers, and the point
of electricity consumption.


GridSense
is headquartered in Sydney, Australia and operates from offices in the U.S. and
Australia and has utility customers throughout the world, including the
Americas, Asia, Australia, Africa, and the UK.




-11-


GridSense
Offerings & Solutions





GridSense
has a range of commercially proven offerings sold to customers worldwide. The
success of GridSense's offerings is based on being able to provide identifiable
and quantifiable value to its utility customers by minimizing inconveniences and
productivity losses for their consumers, optimizing operations of existing
assets, reducing costs of identifying and rectifying outages and disturbances on
their networks, and providing them with the requisite information to make better
capital expenditure decisions. GridSense’s offerings include:





·      LineTrackerTM Systems
- The LineTrackerTM
provides real-time monitoring of electricity grids and captures important
operational, maintenance, planning and regulatory reporting information such as
current, temperature and power factor.  The LineTrackerTM
provides all these applications at a fraction of the cost of alternative
solutions in the market.





·      PowerMonic
Systems - The PowerMonic range of outdoor power analyzers and analytical
software allows electric utilities to monitor and investigate power quality
problems in homes, offices, factories, and key points on the electricity
distribution infrastructure.





·      Transformer
IQ – The Transformer IQ is a comprehensive monitoring system that consolidates
all transformer monitoring functions onto a single platform using
industry-proven hardware, and allows utilities to effectively predict nearly all
the failure modes known to occur to transformers.





Customers
and Markets





Within
Australia where GridSense has an established sales team and support
infrastructure, GridSense sells the PowerMonic, LineTracker and Transformer IQ
range of products directly to electric utilities and industrial
customers.  Outside of Australia, GridSense utilizes a network of
resellers, including rental companies, electrical engineering firms,
distributors, independent manufacturers’ representatives and
agents.  By leveraging off this indirect sales network, GridSense has
expanded into international territories with effectiveness while minimizing the
risk and financial burden of maintaining a direct sales
organization.





Strategically
important markets outside of Australia include North America, UK and South
Africa.  In North America, sales activity has experienced promising
growth in the last several years.  GridSense continues to generate new
orders with new customers as well as repeat orders from existing
customers.  With only a handful of customers just five years ago,
GridSense now has over 200 customers in the U.S. and
Canada.  GridSense has activities in other international markets but
continues a measured and disciplined approach toward expansion.





Production
Facilities and Locations





GridSense
is headquartered in Sydney, Australia in an 8,000 square foot leased facility
and has a 2,950 square foot leased facility in Sacramento, California, both of
which GridSense management deems sufficient to meet its needs for the
foreseeable future.  GridSense has successfully outsourced many
production aspects to external parties.  The transfer of production to
accredited contract manufacturers has reduced the Company’s fixed manufacturing
overhead and freed up resources to focus on quality assurance and
service.




-12-


Competition





The
industry in which GridSense operates is characterized by intense competition
from both large, established companies as well as smaller companies with
specialized offerings.  To avoid direct competition, GridSense focuses
on robust niches where it can offer a differentiated product based on superior
cost and performance.  As GridSense grows and penetrates markets where
larger companies have been established, it may experience more
competition.  GridSense is in a field where electronics and
software/firmware dominate. This fast changing area may generate new methods of
detecting and monitoring disturbances.  GridSense closely monitors
trends and changes in technologies and customer demand that could adversely
impact its competitiveness and overall success. Price, quality and experience
are the primary competitive factors.





Intellectual
Property





GridSense
invests heavily in product development and research in order to maintain its
competitiveness in the marketplace.  Keeping proprietary information
safe from unauthorized use or disclosure is therefore an important
objective.  In order to protect its proprietary know-how and
technology, GridSense uses a combination of patents, trade secrets, contracts,
copyrights and trademarks.  However, some of GridSense’s know-how and
technology may not be patentable.  To protect its rights, GridSense
requires employees, consultants, advisors and collaborators to enter into
confidentiality agreements.  While these agreements will provide some
level of protection, they cannot provide absolute assurance that GridSense’s
trade secrets, know-how or other proprietary information are fully
safeguarded.  Whenever intellectual property is developed internally
or acquired, GridSense will evaluate and determine the optimal mix of controls
to protect itself.





U.S.
SENSOR SYSTEMS INC.




U.S.
Sensor Systems Inc. ("USSI") is a Delaware corporation based in Northridge,
California. In November, 2009 and February, 2010, we acquired an aggregate of
approximately 10% of USSI with options that can increase our holdings to
approximately 84% by May 2011.





USSI's
primary focus is to develop and produce fiber optic sensing systems for the
energy and defense markets.  USSI’s fiber optic sensor systems are
being designed to replace the legacy expensive, unreliable, and bulky electronic
sensors currently in widespread use today with small, low cost, ultra-reliable,
and inherently-safe fiber optic sensors.  USSI’s new fiber optic
sensing systems provide its users with a competitive advantage over those
relying on existing sensor technology.  Primary product lines for
which USSI is currently developing products include downhole fiber optic sensor
systems for oilfield 4D seismic reservoir monitoring, fiber optic perimeter
security systems (including commercial and military), and fiber optic
pipeline/coal mine monitoring systems.  USSI’s systems are currently
being installed for evaluation by companies in North America, Asia, and Eastern
Europe.




-13-


BACKLOG




As of
December 31, 2009, our backlog of work to be completed and the amounts expected
to be completed in 2010 were as follows (amounts in millions of U.S.
dollars):




Backlog at
                    December
                    31, 2009
                
                
                Amount
                    expected
                    to be
                    completed
                    in 2010CoaLogix
                
                $
                9.2
                
                
                $
                8.3DSIT
      Solutions
                
                
                7.6
                
                
                
                6.5Coreworx
                
                
                1.1
                
                
                
                1.1Total
                
                $
                17.9
                
                
                $
                15.9




RESEARCH
AND DEVELOPMENT EXPENSE




Research
and development expense recorded for the years ended December 31, 2008 and 2009
for each of our consolidated subsidiaries is as follows (amounts in thousands of
U.S. dollars):




Years ended December 31,2008
                  
                  
                  2009CoaLogix
                  
                  
                  —
                  
                  
                  
                  86DSIT
      Solutions
                  
                  
                  237
                  
                  
                  
                  457Coreworx
                  
                  
                  932
                  *
                  
                  
                  26
                  **Total
                  
                  $
                  1,169
                  
                  
                  $
                  569




*   Coreworx
was acquired on August 13, 2008. Accordingly, the research and development
expense recorded with respect to Coreworx relates only to the period after its
acquisition.




**   In
2009, the amount recorded is net of credits of $1,016.




EMPLOYEES




At
December 31, 2009, we employed a total of 190 employees, including 166 full-time
employees.  We consider our relationship with our employees to be
satisfactory.




A
breakdown of our full-time employees by geographic location can be seen
below:




Employee count at December 31, 2009U.S
                    
                    
                    Canada
                    
                    
                    Israel
                    
                    
                    TotalCoaLogix
                    
                    
                    59
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    59DSIT
      Solutions
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    50
                    
                    
                    
                    50Coreworx
                    
                    
                    8
                    
                    
                    
                    48
                    
                    
                    
                    —
                    
                    
                    
                    56Acorn
                    
                    
                    1
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1Total
                    
                    
                    68
                    
                    
                    
                    48
                    
                    
                    
                    50
                    
                    
                    
                    166




-14-


A
breakdown of our full-time employees by activity can be seen below:




Employee count at December 31, 2009Production,
                    Engineering
                    and
                    Technical
                    Support
                  
                  
                  Marketing
                    and Sales
                  
                  
                  Management,
                    Administrative
                    and Finance
                  
                  
                  TotalCoaLogix
                  
                  
                  46
                  
                  
                  
                  3
                  
                  
                  
                  10
                  
                  
                  
                  59DSIT
      Solutions
                  
                  
                  40
                  
                  
                  
                  2
                  
                  
                  
                  8
                  
                  
                  
                  50Coreworx
                  
                  
                  37
                  
                  
                  
                  13
                  
                  
                  
                  6
                  
                  
                  
                  56Acorn
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1
                  
                  
                  
                  1Total
                  
                  
                  123
                  
                  
                  
                  18
                  
                  
                  
                  25
                  
                  
                  
                  166




We have
no collective bargaining agreements with any of our
employees.  However, with regard to our Israeli activities, certain
provisions of the collective bargaining agreements between the Israeli Histadrut
(General Federation of Labor in Israel) and the Israeli Coordination Bureau of
Economic Organizations (including the Industrialists Association) are applicable
by order of the Israeli Ministry of Labor.  These provisions mainly
concern the length of the workday, contributions to a pension fund, insurance
for work-related accidents, procedures for dismissing employees, determination
of severance pay and other conditions of employment.  We generally
provide our Israeli employees with benefits and working conditions beyond the
required minimums.  Israeli law generally requires severance pay upon
the retirement or death of an employee or termination of employment without due
cause.  Furthermore, Israeli employees and employers are required to
pay specified amounts to the National Insurance Institute, which administers
Israel’s social security programs.  The payments to the National
Insurance Institute include health tax and are approximately 5% of wages (up to
a specified amount), of which the employee contributes approximately 70% and the
employer approximately 30%.




ADDITIONAL
FINANCIAL INFORMATION




For
additional financial information regarding our operating segments, foreign and
domestic operations and sales, see “Item 7.  Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and Note 21 to
our Consolidated Financial Statements included in this Annual
Report.




ITEM
1A.       RISK FACTORS




We may
from time to time make written or oral statements that contain forward-looking
information.  However, our actual results may differ materially from
our expectations, statements or projections.  The following risks and
uncertainties could cause actual results to differ from our expectations,
statements or projections.




GENERAL
FACTORS




The
ongoing crisis in global credit and financial markets could materially and
adversely affect our business and results of operations.





The ongoing global financial crisis may
limit our ability to access the capital markets at a time when we would like, or
need, to raise capital, which could have an impact on our ability to react to
changing economic and business conditions. Accordingly, if the global financial
crisis and current economic downturn continue or worsen, our business, results
of operations and financial condition could be materially and adversely
affected.




-15-


We
have a history of operating losses and have used increasing amounts of cash for
operations and to fund our acquisitions and investments.




We have a
history of operating losses, and have used significant amounts of cash to fund
our operating activities over the years.  In 2008 and 2009, we had
operating losses of $12.4 million and $8.2 million,
respectively.  Cash used in operations in 2008 and 2009 was $3.3
million and $5.4 million, respectively.




In
addition, we continue to pursue additional acquisitions and investment
opportunities and may need to support the financing needs of our
subsidiaries.  Following our recent capital raise (see “Recent
Developments”), we currently have enough cash on hand to fund our operations for
the next 12 months. However, we may need additional funds to finance future
investment and acquisition activity we wish to undertake.  We do not
know if such funds will be available if needed on terms that we consider
acceptable.  We may have to limit or adjust our investment/acquisition
strategy or sell some of our assets in order to continue to pursue our corporate
goals.




We
depend on key management for the success of our business.




Our
success is largely dependent on the skills, experience and efforts of our senior
management team and other key personnel.  In particular, our success
depends on the continued efforts of John A. Moore, our CEO, William J. McMahon,
CEO of CoaLogix/SCR-Tech, Benny Sela, CEO of DSIT, Ray Simonson, CEO of Coreworx
and other key management level employees.  The loss of the services of
any of these key employees could materially harm our business, financial
condition, future results and cash flow.  We do not maintain “key
person” life insurance policies on any of our employees other than for our CEO,
John A. Moore. Although to date we have been successful in retaining the
services of senior management and have entered into employment agreements with
them, members of our senior management may terminate their employment agreements
without cause and with various notice periods.  We may also not be
able to locate or employ on acceptable terms qualified replacements for our
senior management or key employees if their services were no longer
available.




Loss
of the services of a few key employees could harm our operations.




We depend
on key technical employees and sales personnel.  The loss of certain
personnel could diminish our ability to develop and maintain relationships with
customers and potential customers.  The loss of certain technical
personnel could harm our ability to meet development and implementation
schedules.  The loss of key sales personnel could have a negative
effect on sales to certain current customers.  Most of our significant
employees are bound by confidentiality and non-competition
agreements.  Our future success also depends on our continuing ability
to identify, hire, train and retain other highly qualified technical and
managerial personnel.  If we fail to attract or retain highly
qualified technical and managerial personnel in the future, our business could
be disrupted.




Our
awards of stock options to employees may not have their intended
effect.




A portion
of our total compensation program for our executive officers and key personnel
has historically included the award of options to buy our common shares or the
common stock of our subsidiaries. If the price of our common stock performs
poorly, such performance may adversely affect our ability to retain or attract
critical personnel. In addition, any changes made to our stock option policies,
or to any other of our compensation practices, which are made necessary by
governmental regulations or competitive pressures could affect our ability to
retain and motivate existing personnel and recruit new personnel.




-16-


Compliance
with changing regulation of corporate governance, public disclosure and
financial accounting standards may result in additional expenses and affect our
reported results of operations.




Keeping
informed of, and in compliance with, changing laws, regulations and standards
relating to corporate governance, public disclosure and accounting standards,
including the Sarbanes-Oxley Act, as well as new and proposed SEC regulations
and accounting standards, has required an increased amount of management
attention and external resources.  Compliance with such requirements
may result in increased general and administrative expenses and an increased
allocation of management time and attention to compliance
activities.




We
may not be able to successfully integrate companies which we may invest in or
acquire in the future, which could materially and adversely affect our business,
financial condition, future results and cash flow.




On March
2, 2010, Coreworx and Acorn Energy entered into a definitive agreement for
Coreworx to acquire Decision Dynamics Technology Ltd. (see “Recent
Developments”), and we plan to close on our acquisition of GridSense in the
second quarter of 2010. Any failure to effectively integrate Decision Dynamics
or GridSense’s management into our controls, systems and procedures could
materially adversely affect our business, results of operations and financial
condition.




Our
strategy is to continue to expand in the future, including through
acquisitions.  Integrating acquisitions is often costly, and we may
not be able to successfully integrate our acquired companies with our existing
operations without substantial costs, delays or other adverse operational or
financial consequences.  Integrating our acquired companies involves a
number of risks that could materially and adversely affect our business,
including:




·
            failure
      of the acquired companies to achieve the results we
  expect;




·
            inability
      to retain key personnel of the acquired
  companies;




·
            dilution
      of existing stockholders;




·
            potential
      disruption of our ongoing business activities and distraction of our
      management;




·
            difficulties
      in retaining business relationships with suppliers and customers of the
      acquired companies;




·
            difficulties
      in coordinating and integrating overall business strategies, sales and
      marketing, and research and development efforts;
  and




·
            the
      difficulty of establishing and maintaining uniform standards, controls,
      procedures and policies, including accounting controls and
      procedures.




If any of
our acquired companies suffers customer dissatisfaction or performance problems,
the same could adversely affect the reputation of our group of companies and
could materially and adversely affect our business, financial condition, future
results and cash flow.




Moreover,
any significant acquisition could require substantial use of our capital and may
require significant debt or equity financing.  We cannot provide any
assurance as to the availability or terms of any such financing or its effect on
our liquidity and capital resources.




-17-


We
incur substantial costs as a result of being a public company.




As a
public company, we incur significant legal, accounting, and other expenses in
connection with our reporting requirements.  Both the Sarbanes-Oxley
Act of 2002 and the rules subsequently implemented by the Securities and
Exchange Commission ("SEC") and NASDAQ, have required changes in corporate
governance practices of public companies.  These rules and regulations
have already increased our legal and financial compliance costs and the amount
of time and effort we devote to compliance activities.  We expect
these rules and regulations to further increase our legal and financial
compliance costs and to make compliance and other activities more time-consuming
and costly.  We continue to regularly monitor and evaluate
developments with respect to these new rules with our legal counsel, but we
cannot predict or estimate the amount of additional costs we may incur or the
timing of such costs.




We
are currently involved in litigation and may in the future may become involved
in litigation that may materially adversely affect us




We are
currently parties to two litigation matters which are described under “Item 3.
Legal Proceedings.” Also, from time to time in the ordinary course of our
business, we may become involved in various legal proceedings, including
commercial, product liability, employment, class action and other litigation and
claims, as well as governmental and other regulatory investigations and
proceedings. Such matters can be time-consuming, divert management’s attention
and resources and cause us to incur significant expenses. Furthermore, because
litigation is inherently unpredictable, the results of any such actions may have
a material adverse effect on our business, operations or financial
condition.




Goodwill
recorded in connection with our acquisitions is subject to mandatory annual
impairment evaluations and as a result, we could be required to write off some
or all of this goodwill, which may adversely affect our financial condition and
results of operations.




In
accordance with applicable accounting principles, goodwill is not amortized but
is reviewed annually or more frequently for impairment and other intangibles are
also reviewed at least annually or more frequently, if certain conditions exist.
Any reduction in or impairment of the value of goodwill will result in a charge
against earnings which could materially adversely affect our reported results of
operations and financial position in future periods.




The
financial soundness of our customers could affect our business and operating
results.




As a
result of the disruptions in the financial markets and other macro-economic
challenges currently affecting the economy of the United States and other parts
of the world, our customers may experience cash flow concerns. As a result, if
customers’ operating and financial performance deteriorates, or if they are
unable to make scheduled payments or obtain credit, customers may not be able to
pay, or may delay payment of, accounts receivable owed to us. Any inability of
current and/or potential customers to pay us for services may adversely affect
our financial condition, results of operations and cash flows.




-18-


While
we have not reported any material weaknesses in internal controls over financial
reporting in the past, we cannot assure you that material weaknesses will not be
identified in the future. If our internal control over financial reporting or
disclosure controls and procedures are not effective, there may be errors in our
financial statements that could require a restatement or our filings may not be
timely and investors may lose confidence in our reported financial
information.




Section 404
of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of
our internal control over financial reporting as of the end of each year, and to
include a management report assessing the effectiveness of our internal control
over financial reporting in each Annual Report on Form 10-K.




Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our internal control over financial reporting will prevent
all errors and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control
system’s objectives will be met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. Over time, controls may
become inadequate because changes in conditions or deterioration in the degree
of compliance with policies or procedures may occur. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.




As
a result, we cannot assure you that significant deficiencies or material
weaknesses in our internal control over financial reporting will not be
identified in the future. Any failure to maintain or implement required new or
improved controls, or any difficulties we encounter in their implementation,
could result in significant deficiencies or material weaknesses, cause us to
fail to timely meet our periodic reporting obligations, or result in material
misstatements in our financial statements. Any such failure could also adversely
affect the results of periodic management evaluations regarding disclosure
controls and the effectiveness of our internal control over financial reporting
required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules
promulgated thereunder. The existence of a material weakness could result in
errors in our financial statements that could result in a restatement of
financial statements, cause us to fail to timely meet our reporting obligations
and cause investors to lose confidence in our reported financial
information.




If
we are unable to protect our intellectual property, or our intellectual property
protection efforts are unsuccessful, others may duplicate our
technology.




Our
operating companies rely on a combination of patents, trademarks, copyrights,
trade secret laws and restrictions on disclosure to protect our intellectual
property rights.  Our ability to compete effectively will depend, in
part, on our ability to protect our proprietary technology, systems designs and
manufacturing processes.  The ability of others to use our
intellectual property could allow them to duplicate the benefits of our products
and reduce our competitive advantage.  We do not know whether any of
our pending patent applications will issue or, in the case of patents issued,
that the claims allowed are or will be sufficiently broad to protect our
technology or processes.  Further, a patent issued covering one use of
our technology may not be broad enough to cover uses of that technology in other
business areas.  Even if all our patent applications are issued and
are sufficiently broad, they may be challenged or invalidated or our competitors
may independently develop or patent technologies or processes that are
equivalent or superior to ours. We could incur substantial costs in prosecuting
patent and other intellectual property infringement suits and defending the
validity of our patents and other intellectual property.  While we
have attempted to safeguard and maintain our property rights, we do not know
whether we have been or will be completely successful in doing
so.  These actions could place our patents, trademarks and other
intellectual property rights at risk and could result in the loss of patent,
trademark or other intellectual property rights protection for the products,
systems and services on which our business strategy partly depends.




We rely,
to a significant degree, on contractual provisions to protect our trade secrets
and proprietary knowledge.  These trade secrets cannot be protected by
patent protection.  These agreements may be breached, and we may not
have adequate remedies for any breach.  Our trade secrets may also be
known without breach of such agreements or may be independently developed by
competitors.




-19-


Third
parties may claim that we are infringing their intellectual property, and we
could suffer significant litigation or licensing expenses or be prevented from
selling products and services if these claims are successful.  We also
may incur significant expenses in affirmatively protecting our intellectual
property rights.




In recent
years, there has been significant litigation involving patents and other
intellectual property rights in many technology-related industries and we
believe that the industries that certain of our subsidiaries operate have a
significant amount of patent activity.  Third parties may claim that
the technology or intellectual property that we incorporate into or use to
develop, manufacture or provide our current and future products, systems or
services infringe, induce or contribute to the infringement of their
intellectual property rights, and we may be found to infringe, induce or
contribute to the infringement of those intellectual property rights and may be
required to obtain a license to use those rights.  We may also be
required to engage in costly efforts to design our products, systems and
services around the intellectual property rights of others.  The
intellectual property rights of others may cover some of our technology,
products, systems and services.  In addition, the scope and validity
of any particular third party patent may be subject to significant
uncertainty.




Litigation
regarding patents or other intellectual property rights is costly and time
consuming, and could divert the attention of our management and key personnel
from our business operations.  The complexity of the technology
involved and the uncertainty of intellectual property litigation increase these
risks.  Claims of intellectual property infringement might also
require us to enter into costly royalty or license agreements or to indemnify
our customers.  However, we may not be able to obtain royalty or
license agreements on terms acceptable to us or at all.  Any inability
on our part to obtain needed licenses could delay or prevent the development,
manufacture and sale of our products, systems or services.  We may
also be subject to significant damages or injunctions against development,
manufacture and sale of our products, systems or services.




We also
may be required to incur significant time and expense in pursuing claims against
companies we believe are infringing or have misappropriated our intellectual
property rights. We are currently pursuing one such claim as described under
“Item 3 – Legal Proceedings” and may find it necessary to commence such
litigation in the future to protect our rights and future business
opportunities.  We can offer no assurance as to the outcome of any
such litigation.




Concentrations
of credit risk




Financial
instruments, which potentially subject us to concentrations of credit risk,
consist principally of cash and cash equivalents and trade
receivables.  The counterparty to a majority of our cash equivalent
deposits is a money market of a major financial institution which invests only
in U.S. Treasury bills. We do not believe there is significant risk of
non-performance by this counterparty.  Approximately 56% of the trade
accounts receivable at December 31, 2009 was due from four customers that pay
their trade receivables over usual credit periods.  Credit risk with
respect to the balance of trade receivables is generally diversified due to the
number of entities comprising our customer base.




-20-


RISKS
RELATED TO COALOGIX




SCR-Tech
has incurred significant net losses since inception and may never achieve
sustained profitability.




SCR-Tech
has incurred net losses of $2.7 million and $1.4 million for the years ended
December 31, 2009 and 2008, respectively.   We believe that
SCR-Tech will improve its operating results in 2010; however, we can provide no
assurance that SCR-Tech will generate sufficient revenues to allow it to become
profitable or to sustain profitability.




The
size of the market for SCR-Tech’s business is uncertain.




SCR-Tech
offers SCR catalyst cleaning, rejuvenation and regeneration, as well as SCR
system management and consulting services.  The size and growth rate
for this market will ultimately be determined by a number of factors, including
environmental regulations, the growth in the use of SCR systems to reduce NOx
and other pollutants, the length of operation of SCR systems, the adoption of
regeneration versus replacement, the expansion of warranty coverage from SCR
catalyst OEMs, the cost of new SCR catalyst, and other factors, most of which
are beyond the control of SCR-Tech.  There is limited historical
evidence in the United States as to the cycle of replacement, cleaning and
regeneration of SCR catalyst so as to accurately estimate the potential growth
of the business.  In addition, the number of times a catalyst can be
regenerated is unknown, which also may affect the demand for regeneration in
lieu of purchasing new catalyst.  Any delay in the development of the
market could significantly and adversely affect our results of operations and
financial condition.




SCR-Tech
may be subject to vigorous competition with very large competitors that have
substantially greater resources and operating histories.




We are
aware of one company, Evonik Energy Services, LLC, formerly known as Steag
(“Evonik LLC”), which entered the U.S. catalyst regeneration market in
2008.  Evonik LLC has currently built a regeneration facility in North
Carolina.  Evonik LLC, based in Kings Mountain, North Carolina, is a
subsidiary of a German power producer, Evonik Steag GmbH (“Evonik
GmbH”).  Evonik GmbH is very large and has substantially greater
resources than SCR-Tech or us.  Competition from Evonik may have a
material adverse effect on our operations, including a potential reduction in
operating margins and a loss of potential business.




We are
also aware of at least one other company, Enerfab, Inc. that provides SCR
catalyst management, rejuvenation and cleaning services.  We are aware
of certain companies, including Cormetech and Babcock-Hitachi, who have
indicated an interest in offering catalyst cleaning and regeneration, and it is
possible that manufacturers of new catalyst and other companies may enter the
business of SCR catalyst regeneration.  There also are a number of SCR
catalyst manufacturers with substantial parent companies that may seek to
maintain market share by significantly reducing prices of new SCR catalyst which
will put pressure on our operating margins.  These companies include
Cormetech Inc. (owned by Mitsubishi Heavy Industries and Corning, Inc.),
Argillon Group (owned by Johnson Matthey), CERAM, Haldor-Topsoe, Inc. and
Babcock-Hitachi.  Further, if the SCR catalyst regeneration market
expands as we expect, additional competitors could emerge.  In
addition, if our intellectual property protection is weakened, competition could
more easily develop.




-21-


SCR-Tech’s
lawsuit against Evonik Energy Services LLC, et al. may not be successful, and
the counterclaims of Evonik Energy Services LLC against SCR-Tech may be
successful.  We will incur significant expenses in pursuing our
lawsuit against Evonik and in defending against Evonik’s
counterclaims.




SCR-Tech’s
lawsuit against Evonik Energy Services, LLC and other defendants as described in
Item 3, Legal Proceedings, is associated with certain significant
risks.  The lawsuit will require the time and attention of senior
management of SCR-Tech, and could divert attention from other business
matters.  Expenses of the lawsuit may cause a diversion of significant
funds needed by SCR-Tech to fund operations for other aspects of the
business.




Due to
the nature of litigation, it is not possible to predict the outcome of the
lawsuit.  We anticipate that the Evonik LLC defendants will vigorously
defend themselves, and that Evonik LLC will vigorously pursue its counterclaims
against SCR-Tech.  In the event SCR-Tech is unsuccessful in the
lawsuit and Evonik LLC prevails in its counterclaims, Evonik LLC may be awarded
substantial damages against SCR-Tech. SCR-Tech has not reserved funds for any
loss contingency or legal fees associated with this litigation. In addition, if
SCR-Tech is unsuccessful, Evonik LLC will remain a competitor of
SCR-Tech.




CoaLogix
may not prevail in the lawsuit filed against it by Environmental Energy Systems,
Inc.




The
lawsuit brought by Environmental Energy Services, Inc. (“EES”) against CoaLogix
is associated with certain significant risks. The lawsuit will require the time
and attention of senior management of CoaLogix, and could divert attention from
other business matters.  Expenses of the lawsuit have and may continue
to cause a diversion of significant funds needed by CoaLogix to fund operations
for other aspects of the business.




Due to
the nature of litigation, it is not possible to predict the outcome of the
lawsuit.  In the event CoaLogix is unsuccessful in defending the
lawsuit and EES prevails in its claims, EES may be awarded substantial damages
against CoaLogix including costs, interest and attorneys’ fees. CoaLogix has not
reserved funds for any loss contingency or legal fees associated with this
litigation.




SCR-Tech’s
business is subject to customer concentration.




SCR-Tech offers SCR catalyst cleaning,
rejuvenation and regeneration, as well as SCR system management and consulting
services to coal-fired power plants.  Some of the utilities operating
these plants are exceptionally large and operate a number of such power
plants.  Thus, one or more large utilities could provide a very large
order or orders to SCR-Tech which likely would result in one or two such
utilities providing most of the orders and revenues for SCR-Tech for a
particular quarterly or annual period.  During 2009, two customers
represented about 36% of CoaLogix’ revenue. During 2008, three customers
represented about 75% of CoaLogix’ revenue. Although large orders are beneficial
to SCR-Tech by providing a large and consistent source of orders and revenues
without the additional cost associated with marketing to a larger number of
smaller customers, SCR-Tech is dependent on a relatively small number of large
utilities for its business.  The loss of one of these customers would
have a much greater adverse effect on SCR-Tech than the loss of a smaller
customer.  This may also result in significant swings in orders and
revenues on a quarterly basis as well as impacting on our cash
flows.




-22-


SCR-Tech’s
business may be impacted by changes in government regulation and environmental
legislation.




Our business is significantly dependent
on the nature and level of government regulation of emissions.  For
instance, the Environmental Protection Agency’s (EPA) Clean Air Interstate Rule
(CAIR) was vacated by the District of Columbia Court of Appeals in July 2008,
and was subsequently re-instated in December 2008 by the same court just days
before the vacature became effective. We expect the EPA to revise CAIR or
replace it with other clean air regulations, but we cannot at this time to
predict the nature of such revisions or replacement regulations. Without
government regulation of coal-fired power generation, SCR catalyst would not be
used by utilities, there would be no need for utilities to acquire, clean or
regenerate SCR catalyst, and SCR-Tech would have no business
purpose.  Further, changes in or adverse interpretations of
governmental accounting or rate-based emissions regulations also could have a
material adverse effect on our business.  Although government
regulation of emissions has become increasingly stringent in recent years, the
growing costs associated with such regulations and the economic downturn in the
U.S. may limit the level of increase and scope of emissions requirements, which
could limit the potential growth of our target markets.  Any easing,
delay or deferral of governmental emissions requirements or the growth rate of
such requirements could have a material adverse effect on our
business.




In
addition, the coal industry is subject to regular enactment of new or amended
federal, state and local environmental and health and safety statutes,
regulations and ballot initiatives, as well as judicial decisions interpreting
these requirements. These requirements may impose substantial capital and
operating costs and operational limitations on us and may adversely affect our
business. The requirements may also affect our customers’ decisions to utilize
our services which may materially adversely affect our business.




SCR-Tech’s
business is subject to potential seasonality.




Prior to the January 1, 2009 effective
date of Phase I of CAIR, some utilities and IPPs operated their SCR units only
during the “ozone season” (May 1 — September 30). Because of this,
SCR-Tech’s business was more limited than if SCR units were required to operate
on a continual basis.  During non-ozone season periods, most operators
had limited (if any) requirements to run their SCR systems.  Given
that Phase I of CAIR effectively requires operators run their SCR systems on a
continual basis beginning January 1, 2009, we expect less concentration of
SCR-Tech’s business during the ozone season each year. However, utilities and
IPPs may continue to schedule outages and down time for maintenance during
periods beyond our control, resulting in seasonality of SCR-Tech’s business.
These potential fluctuations in revenues and cash flow during a year may be
significant and could materially impact our quarterly earnings and cash
flow.  This may have a material adverse effect on the perception of
our business and the market price for Acorn's common stock.




SCR-Tech
does not own its regeneration facilities and it is subject to risks inherent in
leasing the site of its operations.




SCR-Tech does not own its regeneration
site; instead it leases it from Clariant Corporation, the U.S. subsidiary of a
Switzerland-based public company (“Clariant”).  Although we believe
the lease terms are favorable, the dependence on Clariant and the site could
subject SCR-Tech to increased risk in the event Clariant experiences financial
setbacks or loses its right to operate the site.  This risk is
heightened because the site is a Federal Superfund site (under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”), which
increases the risks that the site ultimately could be shut down or that Clariant
will be financially unable to continue its ownership of the site.  It
may be difficult to relocate to another site on a timely or cost-effective
basis, and SCR-Tech’s business could be negatively impacted by any problems with
continuing to conduct its operations at its current site.




-23-


Furthermore,
SCR-Tech does not own its second regeneration site which is under construction;
instead it leases it from Fat Boy Trading Company (Fat Boy), an independent
owner of the site.  The dependence of SCR-Tech on Fat Boy at the
second site could subject SCR-Tech to increased risk in the event Fat Boy
experiences financial setbacks or is unable to operate the site under the terms
of the lease.




SCR-Tech
could be subject to environmental risks as a result of the operation of its
business and the location of its facilities.




The operation of SCR-Tech’s business
and the nature of its assets create various environmental
risks.  SCR-Tech leases its site for operations at a property listed
on the National Priority List as a Federal Superfund site (the Clariant
site).  Five CERCLA Areas (those areas of concern identified under the
CERCLA program) are identified on the property, and while SCR-Tech does not
lease any property identified as a CERCLA Area, one such CERCLA Area has
resulted in contamination of groundwater flowing underneath one of the buildings
leased by SCR-Tech.  Although SCR-Tech has indemnification from
Clariant for any environmental liability arising prior to the operation of
SCR-Tech’s business at the site, we can provide no assurance that such
indemnification will be sufficient or that SCR-Tech would be protected from an
environmental claim from the nature of the site.  In addition, the
operation of SCR-Tech’s business involves removal of hazardous wastes from
catalyst and the use of significant chemical materials.  As a result,
SCR-Tech could be subject to potential liability resulting from such
operations.  To date, neither Acorn nor SCR-Tech has been identified
as a potential responsible party to such environmental risks, nor have any
amounts been recorded to accrue for these potential exposures.




We
will be required to make significant capital expenditures to expand SCR-Tech’s
production facilities or for other purposes; we may require additional capital
for such purposes.




In order to meet anticipated demand for
increased orders for SCR regeneration services in 2010 and beyond, we expect to
incur substantial capital expenditure costs over the next year to construct a
second SCR regeneration plant at the Fat Boy site.  Because of
necessary permitting, site search, time for construction and equipment
purchases, we can provide no assurance that SCR-Tech could meet the demands from
a rapid increase in orders in a timely manner.  Any failure to timely
fulfill such orders could have an adverse impact on SCR-Tech’s
business.




If we incur the expected capital
expenditures to expand the capacity of SCR-Tech, but the market does not develop
as we expect or increased competition results in loss of significant business,
we may not generate enough additional revenue from such
expenses.  This could adversely impact our results of operations and
financial position.  Moreover, other unanticipated expenses for
SCR-Tech, such as litigation or other costs for protecting intellectual property
rights or as a result of a significant corporate transaction could result in the
need for additional capital.  These additional funding requirements
may be significant, and funds may not be available when required or may be
available only on terms unsatisfactory to us.




Our cash requirements will depend on
many factors, including but not limited to the market acceptance of our product
and service offerings, the ability of SCR-Tech to generate significant cash
flow, the rate of expansion of our sales and marketing activities, the rate of
expansion of our production capacity, our ability to manage selling, general and
administrative expenditures and the timing and extent of SCR-Tech related
research and development projects.




-24-


In addition, we continue to actively
pursue possible business opportunities, including but not limited to, mergers,
acquisitions or other strategic arrangements.  Such strategic
opportunities could require the use of additional cash, or could require
additional equity or debt financing.  The nature and amount of any
such financing or the use of any capital in any such transaction cannot be
predicted and will depend on the terms and conditions of the particular
transaction.




Certain
of SCR-Tech’s capital equipment are unique to our business and would be
difficult and expensive to repair or replace.




Certain of the capital equipment used
in the services performed by SCR-Tech has been developed and made specifically
for us and would be difficult to repair or replace if it were to become damaged
or stop working.  In addition, certain of our equipment is not readily
available from multiple vendors.  Consequently, any damage to or
breakdown of our equipment at a time when we are regenerating large amounts of
SCR catalyst at SCR-Tech may have a material adverse impact on our
business.




SCR-Tech
is dependent on third parties to perform certain testing required to confirm
successful regeneration.




In connection with the regeneration of
SCR catalyst, SCR-Tech generally must have an independent company provide
testing services to determine the level of success of
regeneration.  Currently there are a limited number of companies
providing this service.  If SCR-Tech is unable to obtain this service
on a cost-effective basis, SCR-Tech may not be able to perform its regeneration
services. In addition, if the testing cannot be completed in a timely manner,
there may be a slowdown of operations which can negatively impact the
profitability and financial condition of the Company.




Significant
price increases in key materials may reduce SCR-Tech’s gross margins and
profitability of regeneration of SCR Catalyst.




The prices of various chemicals used to
regenerate SCR catalyst can be volatile.  If the long-term costs of
these materials were to increase significantly, we would attempt to reduce
material usage or find substitute materials.  If these efforts were
not successful or if these cost increases could not be reflected in our price to
customers, then our gross margins and profitability of regenerating SCR Catalyst
would be reduced and our ability to operate SCR-Tech profitably could be
compromised.




There
are risks associated with our purchase of used SCR catalyst.




SCR-Tech’s primary business involves
the cleaning and regenerating of customer-owned SCR catalyst.  In
certain instances, however, SCR-Tech may purchase used or “spent” catalyst from
utilities for regeneration, as when, for example, a utility wishes to avoid the
costs and potential hazardous waste issues associated with the disposal of used
or “spent” catalyst.  SCR-Tech may purchase SCR catalyst for a nominal
sum and then regenerate such catalyst for immediate sale, or may purchase spent
SCR catalyst on an opportunistic basis for future regeneration and
sale.  The purchase of spent SCR catalyst involves potential risks to
SCR-Tech.  For example, spent SCR catalyst includes significant
hazardous waste, and unlike the regeneration of customer-owned SCR catalyst, the
purchase of spent SCR catalyst requires SCR-Tech to take ownership or “title” to
the SCR catalyst, which may potentially increase SCR-Tech’s environmental risk
exposure.  Furthermore, if SCR-Tech cannot find a customer to purchase
the regenerated catalyst, then SCR-Tech must either store the spent catalyst,
subject to the inherent risk of holding catalyst which has not been regenerated
and contains hazardous waste, or incur significant costs to dispose of the spent
catalyst in a manner which complies with the strict requirements of applicable
environmental laws.  In addition, the sale of SCR catalyst may expose
SCR-Tech to risks not inherent in the cleaning and regeneration of SCR catalyst,
including product liability claims.  It is unclear as to the amount of
SCR catalyst which SCR-Tech may purchase, but it is possible such purchases
ultimately may be substantial, and may significantly increase the risk profile
of SCR-Tech’s business.




-25-


Many
of the risks of our business have only limited insurance coverage and many of
our business risks are uninsurable.




Our business operations are subject to
potential environmental, product liability, employee and other
risks.  Although we have insurance to cover some of these risks, the
amount of this insurance is limited and includes numerous exceptions and
limitations to coverage.  Further, no insurance is available to cover
certain types of risks, such as acts of God, war, terrorism, major economic and
business disruptions and similar events.  In the event we were to
suffer a significant environmental, product liability, employee or other claim
in excess of our insurance or a loss or damages relating to an uninsurable risk,
our financial condition could be negatively impacted.  In addition,
the cost of our insurance has increased substantially in recent years and may
prove to be prohibitively expensive, thus making it impractical to obtain
insurance.  This may result in the need to abandon certain business
activities or subject ourselves to the risks of uninsured
operations.




New
technologies could be developed which make SCR catalyst obsolete.




SCR-Tech’s
business is dependent upon the needs of coal-fired power plants to replace or
regenerate SCR catalyst.  It is possible that at some point in the
future new technology may be developed which replaces SCR catalyst as the
preferred solution for removing NOx from the power plant exhaust.  In
such event, SCR-Tech’s business would be materially and adversely
affected.




RISKS
RELATED TO DSIT SOLUTIONS




Failure
to accurately forecast costs of fixed-priced contracts could reduce our
margins.




When working on a fixed-price basis, we
undertake to deliver software or integrated hardware/software solutions to a
customer’s specifications or requirements for a particular
project.  The profits from these projects are primarily determined by
our success in correctly estimating and thereafter controlling project
costs.  Costs may in fact vary substantially as a result of various
factors, including underestimating costs, difficulties with new technologies and
economic and other changes that may occur during the term of the
contract.  If, for any reason, our costs are substantially higher than
expected, we may incur losses on fixed-price contracts.




Hostilities
in the Middle East region may slow down the Israeli hi-tech market and may harm
our Israeli operations; our Israeli operations may be negatively affected by the
obligations of our personnel to perform military service.




Our
software consulting and development services segment is currently conducted in
Israel.  Accordingly, political, economic and military conditions in
Israel may directly affect DSIT.  Any increase in hostilities in the
Middle East involving Israel could weaken the Israeli hi-tech market, which may
result in a significant deterioration of the results of our Israeli
operations.  In addition, an increase in hostilities in Israel could
cause serious disruption to our Israeli operations if acts associated with such
hostilities result in any serious damage to our offices or those of our
customers or harm to our personnel.




-26-


Exchange
rate fluctuations could increase the cost of our Israeli
operations.




A
majority of DSIT’s sales are based on contracts or orders which are in U.S
dollars or are in New Israeli Shekels (“NIS”) linked to the U.S.
dollar.  At the same time, most of DSIT’s expenses are denominated in
NIS (primarily labor costs) and are not linked to any foreign
currency.  While the dollar value of the revenues of our operations in
Israel will increase if the dollar is devalued in relation to the NIS, the net
effect of such devaluation is that DSIT’s costs in dollar terms increase more
than our revenues.




The
translation of the balance sheets of our Israeli operations from NIS into U.S.
dollars is sensitive to changes in foreign currency exchange
rates.  These translation gains or losses are recorded either as
cumulative translation adjustments (“CTA”) within stockholders’ equity, or
foreign exchange gains or losses in the statement of operations.  In
2009 the NIS strengthened in relation to the U.S. dollar by 0.7%.




As of
December 31, 2009, a 10% weakening of the U.S. dollar against the NIS would have
increased stockholders’ equity by approximately $0.5 million (arising from a CTA
adjustment of approximately $0.3 million and net exchange gains of approximately
$0.2 million).  These hypothetical changes are based on adjusting the
December 31, 2009 exchange rates by 10%.




DSIT
currently enters into forward contracts to try to mitigate its exposures to
exchange rate fluctuations, however, we can provide no assurance that such
controls will be implemented successfully.




We
are substantially dependent on a small number of customers and the loss of one
or more of these customers may cause revenues and cash flow to
decline.




In 2009,
60% of DSIT’s revenues were concentrated in two customers. Both of these
customers are expected to continue to make up a significant portion of DSIT’s
revenues and cash flow for 2010. A significant reduction of future orders or
delay in milestone payments from any of these customers could have a material
adverse effect on the performance of DSIT.




We
are dependent on meeting milestones to provide cash flow for
operations.




Our
present operations, as we are currently structured, place a great reliance on
our meeting project milestones in order to generate cash flow to finance our
operations.  Should we encounter difficulties in meeting significant
project milestones, resulting cash flow difficulties could have a material
adverse effect on our operations.




If
we are unable to keep pace with rapid technological change, our results of
operations, financial condition and cash flows may suffer.




Some of
our solutions are characterized by rapidly changing technologies and industry
standards and technological obsolescence.  Our competitiveness and
future success depends on our ability to keep pace with changing technologies
and industry standards on a timely and cost-effective basis.  A
fundamental shift in technologies could have a material adverse effect on our
competitive position.  Our failure to react to changes in existing
technologies could materially delay our development of new products, which could
result in technological obsolescence, decreased revenues, and/or a loss of
market share to competitors.  To the extent that we fail to keep pace
with technological change, our revenues and financial condition could be
materially adversely affected.




-27-


We
must at times provide significant guarantees in order to secure
projects.




Some of
the projects we perform require significant performance and/or bank guarantees.
In DSIT’s current financial condition, it may not always be able to supply such
guarantees without financial assistance from Acorn.  If Acorn needs to
provide financial guarantees for DSIT, Acorn may not have sufficient funds
available to it to invest in other emerging ventures or take advantage of
opportunities available to us in a timely manner.




We
are dependent on a number of suppliers who provide us with components for some
of our products.




A number
of our suppliers provide us with major components for some of our products for
our Naval & RT solutions. Some of these components are long-lead items. If
for some reason, the suppliers cannot provide us with the component when we need
it and we cannot easily find substitute suppliers on similar terms, we may have
increased costs and/or delays in delivering a product to a customer and incur
penalties and lose customer confidence. In addition, project delays can also
slow down revenue recognition and our financial condition could be materially
adversely affected. While we are constantly attempting to develop secondary and
tertiary suppliers for these components, we can provide no assurance that we
will be successful in doing so on terms acceptable to us.




We
are dependent on one bank for most of our financing needs and we may not be able
to obtain necessary financing to continue growing the Company.




While DSIT has recently received a
term-loan of NIS 2 million (approximately $530,000) and has lines-of-credit of
NIS 2 million, DSIT needs additional financing from time to time due to the
timing of large milestone payments and the need to set aside cash deposits as
security for some of its projects. Due to historical losses, DSIT has found it
difficult to find a suitable secondary bank to support its financing needs. If
we cannot increase our sources of financing, we may not be able to sustain our
recent growth and invest in expanding our portfolio of products.




We
are a relatively small company with limited resources compared to some of our
current and potential competitors, which may hinder our ability to compete
effectively.




Some of our current and potential
competitors have longer operating histories, significantly greater resources and
broader name recognition than we have. As a result, these competitors may have
greater credibility with our existing and potential customers. They also may be
able to adopt more aggressive pricing policies and devote greater resources to
the development, promotion and sale of their products than we can to ours, which
would allow them to respond more quickly than us to new or emerging technologies
or changes in customer requirements.




RISKS
RELATED TO COREWORX





Coreworx
has incurred significant net losses since inception and may never achieve
sustained profitability.




Coreworx
has incurred net losses of C$5.3 and C$3.5 million for the years ended December
31, 2008 and 2009, respectively.  We believe that Coreworx will reduce
its losses in 2010; however, we can provide no assurance that Coreworx will
generate sufficient revenues to allow it to become profitable or to sustain
profitability.




-28-


Coreworx
may need additional financing




Cash used
in operations in 2008 and 2009 was C$5.7 million and C$2.9 million,
respectively. Coreworx will continue to require additional working capital
support in order to finance its operations in 2010. This support may be in the
form of a bank line, new investment by others, additional investment by Acorn,
or a combination of the above. Since January 1, 2010, we have lent Coreworx $2.2
million. We have no assurance that such additional support will be available in
sufficient amounts, in a timely manner and on acceptable terms.  The
availability and amount of any additional investment from Acorn may be limited
by the working capital needs of our corporate activities and other operating
companies.




Current
and future competitors could have a significant impact on our ability to
generate future revenue and profits





The
market for project management collaboration software is highly competitive.
Coreworxcompetes
with products from major software companies. We expect competition to increase
and intensify in the future as the pace of technological change and adaptation
quickens and as additional companies enter into each of our markets. We may not
be able to compete effectively with current competitors and potential entrants
into our marketplace. We could lose market share if our current or prospective
competitors introduce new competitive products, add new functionality to
existing products, acquire competitive products, reduce prices or form strategic
alliances with other companies. If other businesses were to engage in aggressive
pricing policies with respect to competing products, or if the dynamics in our
marketplace resulted in increasing bargaining power by the consumers of our
products and services, we would need to lower the prices we charge for the
products we offer. This could result in lower revenues or reduced margins,
either of which may materially and adversely affect our business and operating
results.




Our
products and services may not gain market acceptance or competitors may
introduce offerings that surpass those of Coreworx.





The
primary market for our software and services is rapidly evolving which means
that the level of acceptance of products and services that have been released
recently or that are planned for future release by the marketplace is not
certain. If the markets for our products and services fail to develop, develop
more slowly than expected or become subject to intense competition, our business
will suffer. As a result, we may be unable to: (i) successfully market our
current products and services, (ii) develop new software products, services
and enhancements to current products and services, (iii) complete customer
installations on a timely basis, or (iv) complete products and services
currently under development. If our products and services are not accepted by
our customers or by other businesses in the marketplace, our business and
operating results will be materially affected. In addition, we can provide no
assurance that Coreworx will be successful in deriving significant revenue
growth through its current strategy and marketing initiatives.




Our
investment in our current research and development efforts may not be
effective.




The
development of software products is a costly, complex and time-consuming
process, and the investment in software product development often involves a
long gestation period until a “return” is achieved on such an investment. We
make and will continue to make significant investments in software research and
development and related product opportunities. Investments in new technology and
processes are inherently speculative. Accelerated product introductions and
short product life cycles require high levels of expenditures for research and
development. These expenditures may adversely affect our operating results if
they are not offset by revenue increases. We believe that we must continue to
dedicate a significant amount of resources to our research and development
efforts in order to maintain our competitive position. However, significant
revenue from new product and service investments may not be achieved for a
number of years, if at all. Moreover, new products and services may not be
profitable, and even if they are profitable, operating margins for new products
and businesses may not be as high as the margins we have experienced for our
current or historical products and services.


-29-




The
demand for our products depends in large part on continued growth in the
industries into which they are sold. A market decline in any of these industries
could have a material negative impact on our results of operations.




Our
growth is dependent, in part, on capital projects initiated by our customers and
potential customers. Any industry downturns that adversely affect our customers
or their customers, including increases in bankruptcies in relevant industries,
could adversely affect end-user demand for our customers’ products, which would
adversely affect demand for our products.




Growth in
demand in the markets we serve has in the past and may in the future fluctuate
significantly based on numerous factors, including capital spending levels of
our current and potential customers, consumer spending, energy and commodity
prices and general economic conditions.




The rate,
or extent to which, the industries we serve will grow, if at all, is uncertain.
The industries we serve are currently experiencing a decline in general economic
conditions, which could result in slower growth or a decline in demand for our
products, which could have a material negative impact on our business, financial
condition and results of operations.





If
the Canadian dollar significantly strengthens relative to the U.S. dollar,
future operating results will be negatively affected.





Coreworx
currently derives over 80% of its revenue in U.S. dollars.  At the
same time, most of Coreworx’ expenses are denominated in Canadian
dollars.  A decline in the value of the U.S. dollar will have a major
impact on Coreworx’ profitability as it increases Coreworx’ costs in U.S.
dollars.





The
translation of the balance sheets of Coreworx’ operations from C$ into U.S.
dollars is sensitive to changes in foreign currency exchange
rates.  These translation gains or losses are recorded either as CTA
within stockholders’ equity, or foreign exchange gains or losses in the
statement of operations.  In 2009 the Canadian dollar strengthened in
relation to the U.S. dollar by 13.8%.




As of
December 31, 2009, a 10% weakening of the U.S. dollar against the Canadian
dollar would have increased stockholders’ equity by approximately $0.6 million
(arising from a CTA adjustment of approximately $0.6 million).  These
hypothetical changes are based on adjusting the December 31, 2009 exchange rates
by 10%.




While
Coreworx has in the past been successful in reducing the impact of fluctuations
in the exchange rate through currency management, there is no assurance that
Coreworx will be able to successfully manage these exposures in the future. Any
significant change in foreign exchange rates may adversely affect our revenue,
earnings and other financial measures.





Revenue
from the renewal of maintenance contracts on our older software sales may
decline.





Coreworx has historically enjoyed a
high retention rate across its various product lines. As Coreworx’ products age,
these retention rates may not be sustained unless Coreworx is successful in
providing its customers with more advanced functionality and the levels of
support that they require.




-30-


The
loss of licenses to use or sell third party software or the lack of support or
enhancement of such software could adversely affect Coreworx
business.





Coreworx
depends on the sale and support of third party software for a significant
component of its primary software product. There can be no assurance that these
third party products will be available on commercially reasonable terms or that
they will be appropriately supported, maintained or enhanced by the licensors.
While Coreworx would make its best efforts to mitigate the impact of the loss of
the ability to use, sell and support third party software, there is no assurance
that Coreworx would be successful or that the terms for their use will remain
economically feasible. The inability to use the third party software could have
a material adverse affect on our business.





The
loss of one or more of our significant customers or a decline in demand from one
or more of these customers could have a material negative impact on net
sales.





In 2009,
93% of Coreworx’ revenue was the result of sales to five customers. In addition,
in any given quarter, license sales from individual transactions can be
material and in some cases the related sales cycles can be long. As a result,
Coreworx’ revenue, cash flows and earnings can fluctuate materially from quarter
to quarter due to the timing of significant license agreements. The loss or a
decline in demand from one or more of these customers could have a material
negative impact on Coreworx’ results of operations and revenues, cash flows and
earnings.





Our
future revenues depend on our ability to enhance our existing products and
develop new products.





Coreworx
needs to continue to upgrade the Coreworx suite to add features demanded by the
market. Coreworx is in the process of completing and enhancing its Coreworx
suite with functionality in the areas of interface management, contract
management and developing a nuclear industry solution that addresses project
execution and information control requirements for major refurbishment, power
uprate and new build projects and expects to complete the integration by the end
of the second quarter of 2010. A failure to complete updates of these offerings
on a timely basis could have a negative impact on Coreworx’ sales, particularly
to potential new customers.




Coreworx’
future success will depend upon its ability to enhance its current products, to
keep pace with technological developments and respond to end-user requirements.
We can provide no assurance that we will be successful in developing or
marketing new products or product enhancements, or that we can avoid significant
delays in development in the future, any of which could have a material adverse
effect on the our business, results of operations and financial condition. Our
ability to continue to compete successfully will depend in large measure on our
ability to maintain a technically competent research and development staff and
adapt to technological changes and advances in the industry, including providing
for the continued compatibility of our software products with evolving computer
hardware and software platforms and operating environments. We can provide no
assurance that we will be successful in these efforts.





Our
products may contain defects that could harm our reputation, be costly to
correct, delay revenues, and expose us to warranty claims and
litigation.





Our
products are highly complex and sophisticated and, from time to time, may
contain design defects or software errors that are difficult to detect and
correct. Errors may be found in new software products or improvements to
existing products after commencement of shipments to our customers. If these
defects are discovered, we may not be able to successfully correct such errors
in a timely manner. In addition, despite the extensive tests we conduct on all
our products, we may not be able to fully simulate the environment in which our
products will operate and, as a result, we may be unable to adequately detect
the design defects or software errors which may become apparent only after the
products are installed in an end-user’s network. The occurrence of errors and
failures in our products could result in the delay or the denial of market
acceptance of our products; alleviating such errors and failures may require us
to make significant expenditure of our resources. The harm to our reputation
resulting from product errors and failures may be materially damaging. Since we
regularly provide a warranty with our products, the financial impact of
fulfilling warranty obligations may be significant in the future. Our agreements
with our strategic partners and end-users typically contain provisions designed
to limit our exposure to claims. These agreements usually contain terms such as
the exclusion of all implied warranties and the limitation of the availability
of consequential or incidental damages. However, such provisions may not
effectively protect us against claims and the attendant liabilities and costs
associated with such claims. Although we maintain errors and omissions insurance
coverage and comprehensive liability insurance coverage, such coverage may not
be adequate to cover all such claims. Accordingly, any such claim could
negatively affect our financial condition.




-31-


The
sales cycle for our products is long which may result in significant
fluctuations in license revenue being recognized from quarter to
quarter.





The
decision by a customer to purchase our products often involves a comprehensive
implementation process across our customers’ network or networks. As a result,
licenses of these products may entail a significant commitment of resources by
prospective customers, accompanied by the attendant risks and delays frequently
associated with significant expenditures and lengthy sales cycle and
implementation procedures. Given the significant investment and commitment of
resources required by an organization to implement our software, our sales cycle
may be longer compared to companies in other industries. It may in some cases
take several months, or even several quarters, for marketing opportunities to
materialize into sales. If a customer’s decision to license our software is
delayed or if the installation of our products takes longer than originally
anticipated, the date on which we may recognize revenue from these licenses
would be delayed. Such delays could cause volatility in our reported revenues
from period to period.




RISKS
RELATED TO OUR SECURITIES




Our
stock price is highly volatile.




The
market price of our common stock has fluctuated substantially in the past and is
likely to continue to be highly volatile and subject to wide fluctuations. Since
January 1, 2009 our common stock has traded at prices as low as $1.35 and as
high as $8.06 per share. Fluctuations in our stock price may continue to
occur in response to various factors, many of which we cannot control,
including:




·
            general
      economic and political conditions and specific conditions in the markets
      we address, including the continued volatility in the energy industry and
      the general economy;


·
            quarter-to-quarter
      variations in our operating
results;


·
            announcements
      of changes in our senior
management;


·
            the
      gain or loss of one or more significant customers or
      suppliers;


·
            announcements
      of technological innovations or new products by our competitors, customers
      or us;


·
            the
      gain or loss of market share in any of our
  markets;


·
            changes
      in accounting rules;


·
            changes
      in investor perceptions; or


·
            changes
      in expectations relating to our products, plans and strategic position or
      those of our competitors or
customers.


-32-


In
addition, the market prices of securities of energy related companies have been
and remain volatile. This volatility has significantly affected the market
prices of securities of many companies for reasons frequently unrelated to the
operating performance of the specific companies.




Our
share price may decline due to the large number of shares of our common stock
eligible for future sale in the public market including shares underlying
warrants and options.




Almost
all of our outstanding shares of common stock are, or could upon exercise of
options or warrants would become, eligible for sale in the public market as
described below.  Sales of a substantial number of shares of our
common stock in the public market, or the possibility of these sales, may
adversely affect our stock price.




As of
March 15, 2010, 14,219,148 shares of our common stock were issued and
outstanding.  As of that date we had 233,306 warrants outstanding and
exercisable with an exercise price of $4.50 and 1,421,831 options outstanding
and exercisable with a weighted average exercise price of $3.52 per share, which
if exercised would result in the issuance of additional shares of our common
stock.  In addition to the options noted above, at March 15, 2010,
280,834 options are outstanding, but have not yet vested and are not yet
exercisable.




In
addition, we expect to issue approximately 1.2 million additional shares in
connection with our pending acquisitions of GridSense and Decision Dynamics,
660,000 of which will be freely tradable upon issuance, 440,000 within six
months of issuance and the balance one year after issuance.




ITEM
      2.
            PROPERTIES




Our
corporate activities are conducted in office space in Wilmington,
Delaware.  The annual rent is approximately $18,000 under a lease that
expires in June 2010.




SCR-Tech
leases approximately 126,000 square feet of office, production, laboratory and
warehouse space in Charlotte, North Carolina.  The annual rent is
approximately $644,000.  This lease expires on June 30, 2012, with two
options to renew for five years each. In September 2009, SCR-Tech entered
into an agreement to lease approximately 7.3 acres of land in Charlotte, North
Carolina together with a building containing approximately 143,500 square feet
of office and warehouse space. SCR-Tech entered into this lease in order to
begin operating a second manufacturing, warehousing and research and development
facility.  SCR-Tech is initially leasing 98,460 square feet through
August 31, 2010, and will lease the balance of the 45,040 square feet on or
before September 1, 2010.  Lease payments on the initial 98,460 square
feet and the balance of 45,040 square feet are abated until June 2010 and March
2011, respectively. Annual rent after the abatement period is approximately
$399,000.




Our DSIT
subsidiary’s activities are conducted in approximately 17,000 square feet
of office space in the Tel Aviv, Israel metropolitan area under a lease that
expires in August 2012.  The annual rent is approximately $236,000.
DSIT's lease calls for a rent-free period for January and February
2010.





Our
Coreworx subsidiary’s activities are conducted in approximately 8,600 square
feet of office space in Kitchener, Ontario, Canada under a lease that expires in
December 2010.  The annual rent is approximately $180,000. In
addition, Coreworx maintains sales offices for operations in Calgary, Alberta,
and Houston, Texas.




-33-




ITEM
      3.
            LEGAL
      PROCEEDINGS




Lawsuit
filed by SCR-Tech against Evonik Energy Services, LLC and Others





In
August, 2008 SCR-Tech filed suit (the “Evonik Lawsuit”) in Superior Court,
Mecklenburg County, North Carolina against Evonik LLC, Evonik Energy Services
GmbH, Evonik Steag GmbH, Evonik Industries AG, Hans-Ulrich Hartenstein and
Brigitte Hartenstein (collectively, the “Evonik Defendants”).  Evonik
Energy Services GmbH, Evonik Steag GmbH, and Evonik Industries AG are
collectively hereinafter sometimes referred to as the “Evonik German
Entities”.  Hans-Ulrich Hartenstein (“H.Hartenstein”) is the president
of Evonik LLC, and Brigitte Hartenstein (“B.Hartenstein”) is the chief financial
officer of Evonik LLC.  Prior to joining Evonik LLC H.Hartenstein
served as  president of SCR-Tech and B.Hartenstein served as chief
financial officer of SCR-Tech.




In the lawsuit, SCR-Tech has alleged,
among other things, that H.Hartenstein and B.Hartenstein materially breached
confidentiality agreements which they entered into with SCR-Tech, Evonik LLC
tortiously interfered with the contractual obligations of H.Hartenstein and
B.Hartenstein under confidentiality agreements, the Evonik Defendants
misappropriated SCR-Tech’s catalyst regeneration trade
secrets,  H.Hartenstein and B.Hartenstein impermissibly disclosed
SCR-Tech’s trade secrets and Evonik LLC impermissibly acquired, disclosed or
used SCR-Tech’s catalyst regeneration trade secrets.  SCR-Tech has
requested damages against each of the Evonik Defendants in an amount in excess
of $10,000 to be determined at the time of trial plus interest, costs and
attorney’ fees.




Evonik LLC filed an answer and
counterclaim against SCR-Tech in October, 2008.  In its answer, Evonik
LLC denies any liability to SCR-Tech and has denied wrong
doing.  Evonik LLC’s answer contains counterclaims against SCR-Tech to
the effect, among other things, that SCR-Tech defamed Evonik LLC, and as a
result of such defamation Evonik LLC’s standing, business goodwill and
reputation have been damaged.  In connection with such counterclaims,
Evonik LLC alleges that it has been damaged in each case in an amount in excess
of $10,000 and it is entitled to treble damages and punitive damages in addition
to its costs, interest and reasonable attorney’ fees.  We believe the
counter-claims to be without merit.




On
February 25, 2010, the Evonik Defendants filed two separate dispositive motions
and a request to delay discovery until the court has ruled on such motions. The
Evonik Defendants have moved for summary judgment on the grounds that, among
other things, SCR-Tech’s claimed trade secrets and confidential information are
non-existent and SCR-Tech lacks the requisite standing to maintain the lawsuits.
SCR-Tech is currently in the process of preparing responses to these
motions.




Due to the complexity of the matters
involved in the lawsuit and the fact that some of the defendants are located in
Germany, it is not possible to predict the length of time it will take for the
lawsuit to be resolved either by settlement or trial.  As of March 15,
2010, no meaningful settlement talks have occurred nor have any been
scheduled.




Lawsuit filed by Environmental Energy
Services, Inc. against CoaLogix




In
August, 2008, CoaLogix and its CEO, William McMahon, were sued in U.S. District
Court, District of Connecticut, by Environmental Energy Systems, Inc.
(“EES”).  In its complaint, EES has alleged that CoaLogix and Mr.
McMahon improperly acquired knowledge of IFS-2C through their dealings with EES
in connection with a letter of intent entered into by CoaLogix and EES,
tortiously interfered with EES’s business relationship with Solucorp Industries,
Ltd., and engaged in unfair and deceptive trade practices, and Solucorp’s
license of IFS-2C to CoaLogix is invalid.  EES’s complaint requests
that all of CoaLogix’s revenues relating to IFS-2C (i.e. MetalliFix) be awarded
to EES, and EES has also requested unspecified damages together with attorney
fees, court costs and interest be assessed against CoaLogix and awarded to
EES.


-34-


CoaLogix
and Mr. McMahon deny liability to EES, and contend that EES’ allegations are
without merit. The discovery and mediation phases of the litigation have
concluded, and CoaLogix and Mr. McMahon are in the process of preparing a motion
for summary judgment to dismiss the lawsuit on the grounds that, among other
things, EES has failed to establish tortious conduct and any basis for EES
having been damaged.




Due to
the complexity of the matters involved in the lawsuit, it is not possible to
predict the length of time it will take for the lawsuit to be resolved either by
settlement or trial.




ITEM
      4.
            RESERVED


-35-




PART
II




ITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES




Our
common stock is currently traded on the NASDAQ Global Market under the symbol
“ACFN”.  The following table sets forth, for the periods indicated,
the high and low reported sales prices per share of our common stock on
NASDAQ.




High
                
                
                Low2008:First
      Quarter
                
                $
                5.80
                
                
                $
                4.20Second
      Quarter
                
                
                6.56
                
                
                
                4.25Third
      Quarter
                
                
                5.41
                
                
                
                3.48Fourth
      Quarter
                
                $
                3.50
                
                
                $
                1.352009:First
      Quarter
                
                $
                2.55
                
                
                $
                1.56Second
      Quarter
                
                
                2.99
                
                
                
                2.26Third
      Quarter
                
                
                5.81
                
                
                
                2.67Fourth
      Quarter
                
                
                8.06
                
                
                
                5.29




As of
March 15, 2010, the last reported sales price of our common stock on the Nasdaq
Global Market was $6.17, there were 77 record holders of our common stock and we
estimate that there were approximately 2,200 beneficial owners of our common
stock.




We paid
no dividends in 2008 or 2009, and do not intend to pay any dividends in
2010.




Issuer
Purchases of Equity Securities




On
October 6, 2008, we announced that our Board of Directors had authorized a share
repurchase program of up to 1,000,000 shares of our common stock. The share
repurchase program will be implemented at management’s discretion from time to
time. To date, an aggregate of 497,710 shares have been purchased. We last
purchased shares under the program in July 2009 and currently have no plans to
make additional purchases.




ITEM
      6.
            SELECTED
      FINANCIAL DATA




The
selected consolidated statement of operations data for the years ended December
31, 2008 and 2009 and consolidated balance sheet data as of December 31, 2008
and 2009 has been derived from our audited Consolidated Financial Statements
included in this Annual Report.  The selected consolidated statement
of operations data for the years ended December 31, 2005, 2006 and 2007 and the
selected consolidated balance sheet data as of December 31, 2005, 2006 and 2007
has been derived from our audited consolidated financial statements not included
herein.




This data
should be read in conjunction with our Consolidated Financial Statements and
related notes included herein and “Item 7.  Management’s Discussion
and Analysis of Financial Condition and Results of Operations.”


-36-


Selected
Consolidated Statement of Operations Data:




For the Years Ended December 31,2005
              
              
              2006
              
              
              2007
              
              
              2008
              
              
              2009(in thousands, except per share data)Revenues
              
              $
              4,187
              
              
              $
              4,117
              
              
              $
              5,660
              
              
              $
              20,696
              
              
              $
              31,317Cost
      of sales
              
              
              2,945
              
              
              
              2,763
              
              
              
              4,248
              
              
              
              14,163
              
              
              
              17,765Gross
      profit
              
              
              1,242
              
              
              
              1,354
              
              
              
              1,412
              
              
              
              6,533
              
              
              
              13,552Research
      and development expenses (net of  SRED credits of $1,016 in
      2009)
              
              
              53
              
              
              
              324
              
              
              
              415
              
              
              
              1,169
              
              
              
              569Acquired
      in-process research and development
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              2,444
              
              
              
              —Selling,
      general and administrative expenses
              
              
              3,464
              
              
              
              4,618
              
              
              
              5,278
              
              
              
              11,667
              
              
              
              18,517Impairments
              
              
              —
              
              
              
              40
              
              
              
              112
              
              
              
              3,664
              
              
              
              2,692Operating
      loss
              
              
              (2,275
              )
              
              
              (3,628
              )
              
              
              (4,393
              )
              
              
              (12,411
              )
              
              
              (8,226
              )Finance
      expense, net
              
              
              (12
              )
              
              
              (30
              )
              
              
              (1,585
              )
              
              
              (3,031
              )
              
              
              (231
              )Gain
      on early redemption of Convertible Debentures
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,259
              
              
              
              —Gain
      on Comverge IPO
              
              
              —
              
              
              
              —
              
              
              
              16,169
              
              
              
              —
              
              
              
              —Gain
      on sale of shares in Comverge
              
              
              —
              
              
              
              —
              
              
              
              23,124
              
              
              
              8,861
              
              
              
              1,403Gain
      (loss) on private placement of equity investments
              
              
              —
              
              
              
              —
              
              
              
              (37
              )
              
              
              7
              
              
              
              —Other
      income, net
              
              
              —
              
              
              
              330
              
              
              
              —
              
              
              
              —
              
              
              
              —Income
      (loss) from operations before taxes on income
              
              
              (2,287
              )
              
              
              (3,328
              )
              
              
              33,278
              
              
              
              (5,315
              )
              
              
              (7,054
              )Income
      tax benefit (expense)
              
              
              37
              
              
              
              (183
              )
              
              
              445
              
              
              
              (342
              )
              
              
              744Income
      (loss) from operations of the Company and itsconsolidated
      subsidiaries
              
              
              (2,250
              )
              
              
              (3,511
              )
              
              
              33,723
              
              
              
              (5,657
              )
              
              
              (6,310
              )Share
      of losses in Comverge
              
              
              (380
              )
              
              
              (210
              )
              
              
              —
              
              
              
              —
              
              
              
              —Share
      of income (losses) in Paketeria
              
              
              —
              
              
              
              (424
              )
              
              
              (1,206
              )
              
              
              (1,560
              )
              
              
              263Share
      of losses in GridSense
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (926
              )
              
              
              (129
              )Income
      (loss) from continuing operations
              
              
              (2,630
              )
              
              
              (4,145
              )
              
              
              32,517
              
              
              
              (8,143
              )
              
              
              (6,176
              )Gain
      (loss) on sale of discontinued operations and contract settlement (in
      2006), net of income taxes
              
              
              541
              
              
              
              (2,069
              )
              
              
              —
              
              
              
              —
              
              
              
              —Income
      from discontinued operations , net of income taxes
              
              
              844
              
              
              
              
              
              
              
              —
              
              
              
              —
              
              
              
              —Net
      income (loss).
              
              
              (1,245
              )
              
              
              (6,214
              )
              
              
              —
              
              
              
              (8,143
              )
              
              
              (6,176
              )Net
      (income) loss attributable to non-controlling interests
              
              
              (73
              )
              
              
              78
              
              
              
              —
              
              
              
              248
              
              
              
              420Net
      income (loss) attributable to Acorn Energy, Inc
    shareholders.
              
              $
              (1,318
              )
              
              $
              (6,136
              )
              
              $
              32,517
              
              
              $
              (7,895
              )
              
              $
              (5,756
              )Basic
      net income (loss) per share attributable to Acorn Energy, Inc.
      shareholders:Income
      (loss) from continuing operations.
              
              $
              (0.26
              )
              
              $
              (0.48
              )
              
              $
              3.30
              
              
              $
              (0.69
              )
              
              $
              (0.50
              )Discontinued
      operations .
              
              
              0.10
              
              
              
              (0.23
              )
              
              
              —
              
              
              
              —
              
              
              
              —Net
      income (loss) per share attributable to Acorn Energy Inc.
      shareholders
              
              $
              (0.16
              )
              
              $
              (0.71
              )
              
              $
              3.30
              
              
              $
              (0.69
              )
              
              $
              (0.50
              )Weighted
      average number of shares outstanding attributable to Acorn Energy Inc
      shareholders
              
              
              8,117
              
              
              
              8,689
              
              
              
              9,848
              
              
              
              11,374
              
              
              
              11,445Diluted
      net income (loss) per share attributable to Acorn Energy Inc.
      shareholders:Income
      (loss) from continuing operations attributable to Acorn Energy Inc.
      shareholders
              
              $
              (0.26
              )
              
              $
              (0.48
              )
              
              $
              2.80
              
              
              $
              (0.69
              )
              
              $
              (0.50
              )Discontinued
      operations
              
              
              0.10
              
              
              
              (0.23
              )
              
              
              —
              
              
              
              —
              
              
              
              —Net
      income (loss) per share
              
              $
              (0.16
              )
              
              $
              (0.71
              )
              
              $
              2.80
              
              
              $
              (0.69
              )
              
              $
              (0.50
              )Weighted
      average number of shares outstanding attributable to Acorn Energy Inc.
      shareholders
              
              
              8,117
              
              
              
              8,689
              
              
              
              12,177
              
              
              
              11,374
              
              
              
              11,445


-37-


Selected
Consolidated Balance Sheet Data:




As of December 31,2005
              
              
              2006
              
              
              2007
              
              
              2008
              
              
              2009(in thousands)Working
      capital
              
              $
              1,458
              
              
              $
              259
              
              
              $
              13,843
              
              
              $
              13,838
              
              
              $
              16,220Total
      assets
              
              
              10,173
              
              
              
              7,258
              
              
              
              96,967
              
              
              
              51,055
              
              
              
              48,735Short-term
      and long-term debt
              
              
              365
              
              
              
              788
              
              
              
              5,010
              
              
              
              3,845
              
              
              
              835Total
      Acorn Energy, Inc. shareholders’ equity (deficit)
              
              
              820
              
              
              
              (461
              )
              
              
              67,325
              
              
              
              33,448
              
              
              
              30,777Non-controlling
      interests
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              2,675
              
              
              
              5,321Total
      equity (deficit)
              
              
              820
              
              
              
              (461
              )
              
              
              67,325
              
              
              
              36,123
              
              
              
              36,098




ITEM
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS




RECENT
DEVELOPMENTS




GridSense




On
November 4, 2009 we entered into a binding letter of intent with GridSense Pty
Ltd and the principal stockholders of GridSense to acquire all of the
outstanding shares of GridSense that the Company does not already own. 
This letter of intent has expired, but the parties are proceeding to consummate
the transaction on substantially the same terms as set forth in the letter of
intent.  We currently own 15,714,285 shares of GridSense representing
approximately 31% of GridSense’s outstanding shares.  Immediately
prior to the completion of the acquisition, we intend to convert a GridSense
promissory note in the principal amount of approximately $730,000 plus accrued
interest into approximately 8,861,096 GridSense shares which, after giving
effect to other simultaneous issuances of GridSense shares, would result in us
owning 24,575,381 shares of GridSense representing approximately 41% of
GridSense’s outstanding shares.





Under the
terms of the transaction, we would acquire the outstanding GridSense shares that
are not owned by us in consideration for approximately 55,000 shares of the
Company’s common stock. Under the letter of intent these shares were at the time
valued at $5.91 per share which was the volume weighted average of our common
stock for the 20 trading days preceding October 16, 2009.  In
addition, we would acquire $1,128,339 principal amount of promissory notes of
GridSense at a price equal to the principal amount plus accrued
interest.  Under the letter of intent, 50% of the purchase price of
the notes would be paid in cash and 50% would be paid in shares of our
common stock, valued at $5.91 per share, which would result in the issuance
of approximately 150,000 shares of our common stock. In addition, we have agreed
to provide to GridSense at closing with approximately $600,000 to be used to pay
a shareholder loan.





Under the
letter of intent, we have also agreed to pay an earn-out to the shareholders of
GridSense as part of the consideration for their shares.  To the
extent that GridSense’s sales for the period April 1, 2010 through March 31,
2011 exceed $4,383,720, we would pay the GridSense shareholders an amount equal
to 50% of that excess, up to $2,435,400, multiplied by 59.54% (representing
their ownership interest in GridSense) for a maximum earn-out of
$1,449,799.  We have the option of paying any earn-out in cash and/or
shares of our common stock.  If we use shares as all or part of the
payment, each share would be valued as the volume weighted average price of our
common stock on the 20 trading days preceding the date of the issuance of the
auditor’s report relating to the Company’s 2010 financial
statements.


-38-


The
shares of common stock which are issued in consideration for acquiring the debt,
including any shares issued in payment of the earn-out, would be subject to
an escrow for possible indemnity claims and a lock-up, with 50% of the shares
released after six months and the balance one year after
issuance.  The shares of common stock which are issued in
consideration for acquiring Gridsense’s shares would be subject to
restrictive legends providing that 50% of the shares will be released after six
months and the balance released one year after issuance.





When we
signed the letter of intent, we loaned GridSense $550,000 which accrues interest
at 8% per annum and is due in October 2011.  On March 4, 2010 we loaned
GridSense an additional $200,000 at 8% interest per annum that is due in March,
2012.  If the transaction to acquire GridSense does not close or is
terminated, the Company may declare the unpaid principal and accrued interest on
those notes (as well as $730,000 of principal amount of GridSense notes that the
Company holds plus accrued interest) immediately due and payable and the Company
has the right to convert such indebtedness into shares of
GridSense.





If the
GridSense acquisition is completed, the Company has agreed to provide GridSense
with up to $1,800,000 in working capital which may be in the form of debt or
equity.





Definitive
documentation for the GridSense acquisition is being prepared and the
transaction is expected to close by the end of April 2010.




DSIT




In
December 2009, DSIT was awarded a contract to supply its AquaShieldTM Diver
Detection Sonar (DDS) systems for the protection of several coastal and offshore
installations. The contract value is just over $4.4 million. The AquaShieldTM
underwater security systems are intended for permanent installation to provide
underwater intruder detection.




US
Sensor Systems




On
February 23, 2010, we entered into an option agreement with US Sensor Systems
Inc., or USSI, a company which designs, integrates, manufactures, and sells
fiber optic sensing systems and solutions for the energy, defense and security
markets, and a related option agreement with certain stockholders of
USSI.  We currently own 146,386 shares of USSI’s common stock which we
purchased for $500,000 and which represents approximately 10.0% of USSI’s fully
diluted capitalization.





Under the
terms of the option agreement with USSI, we have the right to acquire up to an
additional 159,115 shares of USSI’s common stock for a purchase price of
$500,000.  We have the right to acquire 63,646 of these shares under
the option in consideration for payment of $200,000 on or before May 31,
2010.  If we exercise this installment, we have the right to acquire
the remaining 95,469 shares under the option on or before August 27, 2010 in
consideration for payment of $300,000.





Under our
agreement with certain of USSI’s stockholders, we have the right to acquire
516,378 shares of USSI common stock held by such stockholders in consideration
for payment to them of $2,111,986  on or before August 27,
2010.  The purchase price is payable in Acorn common stock which shall
be priced on the basis of the volume weighted average of Acorn's common stock on
the 20 trading days ending on the day that is five days preceding the date that
we exercise its option to acquire the shares of the USSI
stockholders.  The shares of common stock that are issued to the USSI
stockholders in consideration for their shares would be restricted securities
under Securities Act of 1933 and would be subject to a lock-up which would be
released over a one year period, with 25% being released each three months. If
we exercise the options described in this and in the preceding paragraph, we
would own common stock of USSI representing approximately 51% of USSI’s fully
diluted capitalization.


-39-


Under the
agreement with USSI, if we exercise the options to acquire USSI’s common stock
described in the two preceding paragraphs, we would have the right to acquire
1,693,391 additional shares of USSI’s common stock from USSI on or before
November 30, 2010 in consideration for payment of $1,500,000.  If we
exercise this option, we have the right to acquire 1,693,391 additional shares
of common stock from USSI on or before May 30, 2011 in consideration for payment
of $1,500,000.





If we
purchase all of the USSI common stock we are entitled to purchase under the
agreements, we would hold USSI shares representing approximately 84% of USSI’s
fully diluted capitalization.




Contemplated
Acquisition of Decision Dynamics




On March
2, 2010, we entered into a definitive agreement pursuant to which our
wholly-owned Coreworx subsidiary would acquire all of the issued and outstanding
common stock of Decision Dynamics Technology Ltd., a Canadian corporation
(“Decision Dynamics”).  Decision Dynamics, a TSX Venture Exchange-traded
company, is a leading provider of capital project controls and cost management
software for normal operations and capital projects in the energy
industry.




As
contemplated by the definitive agreement, Coreworx would acquire all of the
issued and outstanding securities of Decision Dynamics in consideration for
issuance of 1,000,000 shares of Acorn Energy common stock to the Decision
Dynamics shareholders.  The acquisition is structured as a plan of
arrangement under the Canada Business Corporations Act and is subject to the
satisfaction of a number of closing conditions, including approval by the
holders of at least two-thirds of the outstanding common shares and options of
Decision Dynamics, each voting as a separate class, the approval of the Court of
Queen's Bench of Alberta and other regulatory approvals. The acquisition will be
submitted to Decision Dynamics’ shareholders and option holders for approval at
a special meeting which is expected to be held in April 2010. The Board of
Directors of Decision Dynamics has unanimously recommended that Decision
Dynamics’ shareholders and option holders vote in favor of the acquisition.
Irrevocable support agreements in favor of the transaction have been agreed to
by persons holding approximately 51% of the outstanding shares and 94% of the
outstanding stock options.




Of our
shares to be issued in the transaction, at least 340,000 are to be escrowed at
closing, with one-half to be released 90 days after the date of closing and the
balance to be released 180 days after the date of closing.  We anticipate
that the shares that we issue to the Decision Dynamics shareholders will be
freely tradable under US federal securities laws.




Under the
agreement, Decision Dynamics agreed not to solicit any other sale, business
combination or similar transaction. The agreement provides that if Decision
Dynamics receives an unsolicited alternative proposal with a higher transaction
value from a third party and we fail to match such proposal, Decision Dynamics
may be permitted to agree to the third party proposal, subject to payment to us
of a break-up fee in the amount of C$250,000 plus our transaction
costs.




Subject
to obtaining the required approvals, the transaction is expected to close in
April 2010.




Corporate




In
January 2010, Acorn appointed David T. Beatson as Vice President and Chief
Technology Officer. His responsibilities will include building relations with
major energy companies and academic institutions as well as strengthening and
expanding the technology portfolio of Acorn Energy.


-40-




Capital
Raise




On March
8, 2010, we entered into a Placement Agency Agreement with Merriman Curhan Ford
& Co. related to a registered direct offering of up to 2,213,818 shares of
our common stock (the “Offering”). Under the terms of the transaction and
pursuant to separate subscription agreements  between us and each of
the investors, we sold the common stock at $5.50 per share to certain accredited
investors for gross proceeds of approximately $12,275,000. The closing of the
Offering took place on March 11, 2010.




The
aggregate net proceeds from the Offering, after deducting the placement agent’s
fee and the estimated offering expenses payable by us in connection with the
Offering, are expected to be approximately $11.5 million.




SEC
Inquiry Regarding Comverge Share Transactions




Acorn and
its Chairman and Chief Executive Officer, John A. Moore, have received subpoenas
from the staff of the SEC for information about their transactions in the shares
of Comverge, Inc. from January 1, 2008 through October 31, 2008. The SEC staff
has advised the Company that issuance of the subpoenas should not be construed
as an indication by the SEC staff that any violation of the law has occurred,
nor should it be considered a reflection upon any person, entity or
security.




The
Company believes that all of its and Mr. Moore’s transactions in Comverge shares
were made in full compliance with all laws. The Company and Mr. Moore have
responded to the SEC staff and are committed to responding fully to any
inquiries of the SEC staff.  In the course of responding to the SEC
staff's inquiry, the Company's counsel has not identified any information
indicating that the transactions in Comverge stock by the Company or Mr. Moore
were in violation of any applicable laws.




OVERVIEW
AND TREND INFORMATION




The
following discussion includes statements that are forward-looking in
nature.  Whether such statements ultimately prove to be accurate
depends upon a variety of factors that may affect our business and
operations.  Certain of these factors are discussed in “Item
1A.  Risk Factors.”




We
operate in three reportable segments: CoaLogix, Naval and RT Solutions and
EIS.  We acquired our interest in Coreworx which comprises our EIS
segment on August 13, 2008; our results for 2008 include Coreworx’ results only
for the period following the acquisition date.




The
following analysis should be read together with the segment information provided
in Note 21 to our Consolidated Financial Statements included in this
report.




CoaLogix




In
December 2008, CoaLogix completed its expansion to its SCR-Tech regeneration
facility. The expansion increased the overall efficiency of the facility and
approximately doubled its throughput capacity. This expansion will enable
SCR-Tech to meet the growing demands of the catalyst and catalyst regeneration
markets.


-41-


CoaLogix
revenues in 2009 were $18.1 million compared to 2008 revenues of $10.1 million.
The increase in CoaLogix's revenues in 2009 compared to 2008 is due to increased
penetration in the growing regeneration market. CoaLogix revenues in the fourth
quarter of 2009 of $5.3 million represent a 15% increase over fourth quarter
2008 revenues of $4.7 million and an 89% increase in third quarter 2009 revenues
of $2.8 million. The year-on-year increase in revenues was attributable largely
to increased production volume facilitated by the plant
expansion.  The increase from third quarter 2009 revenues was due
primarily to seasonal factors since power plants typically do not schedule
service of the catalyst systems during the spring and summer ozone months.
During that time, CoaLogix increased its inventory of SCR modules available for
sale by processing them during these periods of excess production
capacity.




CoaLogix
gross profit in 2009 was $6.3 million compared to 2008 gross profit of $2.5
million. The increase in CoaLogix gross profit in 2009 was attributable to both
the increase in revenues combined with increased efficiencies in production.
Gross margins increased from 24% in 2008 to 35% in 2009. Gross margins in 2008
were negatively impacted due to certain projects being performed with negative
margins caused by longer than expected times to complete these projects and by
higher costs of the raw materials due to the product mix.




CoaLogix
gross profit in the fourth quarter of 2009 was $2.1 million representing a $0.5
million (34%) increase over the gross profit of $1.6 million recorded by
CoaLogix in the fourth quarter of 2008. CoaLogix gross profit in the fourth
quarter of 2009 also represented a $1.4 million increase in gross profit
compared to the third quarter of 2009.The increase in CoaLogix
fourth quarter gross profit for 2009 over 2008 was attributable to increased
sales combined with improved efficiencies. The increase in CoaLogix fourth
quarter 2009 gross profit compared to the third quarter of 2009 was attributable
to the increase in sales ($2.5 million) combined with third quarter gross profit
being negatively impacted due to seasonal factors since power plants typically
do not schedule service of the catalyst systems during the spring and summer
ozone months.




In April
2009, we entered into the Purchase Agreement with CoaLogix, EnerTech Capital
Partners III L.P. (“EnerTech”) and certain members of CoaLogix’s senior
management pursuant to which Acorn and EnerTech each agreed to purchase from
CoaLogix 781,111 shares of common stock for a purchase price of $5.6 million,
and certain members of CoaLogix’s senior management agreed to purchase 36,111
shares of common stock of CoaLogix for an aggregate purchase price of
approximately $260,000. Proceeds of the sale of the common stock will be used by
CoaLogix for plant expansion, technology development, legal expenses and
computer software. To date, CoaLogix has received approximately $5.6 million of
the total $11.5 million commitment by Acorn, EnerTech and management. A majority
of the expenditures to date has been for technology development and legal costs
associated with pending legal actions to which CoaLogix is a party (Item 3.
Legal Proceedings), with a portion also being used as a security deposit for
guarantees provided the CoaLogix. In the coming year, CoaLogix expects to invest
significant portions of the remaining funds ($5.9 million) in developing its new
facilities and legal fees with respect to the abovementioned legal
actions.




During
2009, CoaLogix engaged an outside firm to assist CoaLogix with the determination
of the economic viability of MetalliFix. On December 18, 2009, the outside firm
issued its assessment that MetalliFix is not economically viable and not
competitive with other commercial products for mercury control that are
currently available. On December 30, 2009, the management of CoaLogix determined
that a material impairment of MetalliFix had occurred. Accordingly, CoaLogix
recorded an impairment charge of the remaining unamortized balance of the
Solucorp license ($1.7 million) as well as associated assets (chemicals - $0.4
million and prepaid chemicals - $0.3 million).




In 2010,
we expect CoaLogix to improve on its 2009 results based upon on its year-end
backlog for SCR services of $9.2 million and anticipated new orders combined
with the expected increased capacity from its second facility expected to begin
operations in the end of the second quarter of 2010.


-42-


DSIT
Solutions




In 2009,
DSIT continued to focus on marketing and developing its Naval solutions
products; particularly its products related to underwater security for energy
and other strategic sites. Revenue of our DSIT subsidiary increased by $0.8
million, or 10%, from $8.4 million in 2008 to $9.2 million in 2009. The increase
was due to increased revenue in the Naval and RT Solutions segment while Other
revenue remained stable. Fourth quarter 2009 revenue for DSIT was $2.7 million
reflecting a $0.7 million increase (36%) over fourth quarter 2008 revenue of
$2.0 million.




Gross
profit in DSIT in 2009 was $4.0 million which reflects an increase of $1.2
million or 41% from $2.9 million in 2008. DSIT’s gross profit of $1.3 million
during the fourth quarter of 2009 represented a $0.6 million increase over
DSIT’s gross profit in the fourth quarter of 2008. The increase in gross profit
was attributable to both increased revenue and increased gross
margins.




DSIT’s
improved its gross margin to 44% in 2009 as compared to 34% in 2008. DSIT’s
increased gross margins were due to a shifting of focus to higher margin Naval
projects in 2009.





Naval
& RT Solutions




During
2008 and 2009, revenues from our Naval & RT solutions in our DSIT subsidiary
were $7.2 million and $8.0 million, respectively, accounting for approximately
85% and 87% of DSIT’s revenues for 2008 and 2009, respectively. The balance of
DSIT’s revenues of $1.2 million for each of the years ending December 31, 2008
and 2009, were derived from DSIT’s other IT and consulting
activities.




Segment
revenues increased by $0.8 million or 11% in 2009 as compared to
2008.  The increase in sales was the result of revenue recorded from
the sale of DSIT's AquaShieldTM DDS systems to an undisclosed EMEA customer which
was partially offset by a decrease in revenues recorded in other real-time and
embedded hardware and software projects.




Segment
gross profit also increased (from $2.4 million in 2008 to $3.5 million in 2009)
as a result of the increased sales and change in revenue mix which was
concentrated in higher margin Naval projects. The change in revenue mix to
higher margin Naval projects increased our segment gross margin from 35% in 2008
to 44% in 2009.




We
anticipate continued growth in sales in 2010, particularly from our acoustic and
sonar solutions projects with our embedded hardware and software development
projects expected to remain relatively stable.  At end of 2009, we
have received $4.4 million of new orders for our AquaShieldTM DDS. DSIT recorded
net income of $1.3 million in 2009 ($0.5 million in 2008) and expects 2010 to be
profitable as well.




Coreworx




Coreworx, which we acquired on August
13, 2008, had sales in 2009 of C$4.6 million compared to full year 2008 sales of
C$4.4 million.  The increase in Coreworx’ sales in 2009 compared to
2008 was principally due to new license sales. Coreworx’ gross profit in 2009
was C$3.8 million compared to 2008 gross profit of C$3.7
million.  Coreworx gross margin was relatively stable in 2009 compared
to 2008.





Coreworx generally sells its software
on a per-seat license basis.  Coreworx’ profit margin depends upon the
customer’s requirements for a particular project and the resources Coreworx has
to devote to such project.


-43-


In June 2009, Acorn lent $1.0 million
to Coreworx to support its development of a new project information software for
the nuclear power plant industry. During the second half of 2009, Coreworx
continued its increased focus on providing its software solutions to the nuclear
power industry. Coreworx is planning to deliver a nuclear industry solution that
addresses project execution and information control requirements for major
refurbishment, modifications to the original plant design to increase the
maximum capacity output at which the plant can operate and new build projects.
The nuclear industry solution will address regulatory compliance, document
traceability, and work processes that utilize best practices in managing major
capital projects. Market conditions that Coreworx believes will drive nuclear
solutions as a growing source of revenue include: an increasing world-wide
energy demand, an aging North American nuclear infrastructure, and public
pressure to provide clean-air electricity sources that reduce dependency on
overseas supplies of fossil fuel. In December 2009, Coreworx received its first
order for its nuclear industry solution from Babcock & Wilcox Nuclear Power
Generation, Inc. ("B&W").  B&W will employ Coreworx support
software in the development, licensing and delivery of the innovative new
B&W mPower nuclear reactor.





In the
period from January 1, 2010 to March 15, 2010, Acorn lent an additional $2.2
million to Coreworx for its product development and for working capital.
Coreworx will require additional working capital support to accelerate its
nuclear and contract management product offerings in order to achieve market
readiness in mid 2010. This support may be in the form of a bank line, new
investment by others, additional loans or investment by Acorn, or a combination
of the above. There is no assurance that such support will be available from
such sources in sufficient amounts, in a timely manner and on acceptable terms.
The availability and amount of any additional funding to Coreworx from us may be
limited by the working capital needs of our corporate activities and other
operating companies.





In 2010, we expect Coreworx to improve
on its 2009 results based upon several factors which include the launching of an
aggressive marketing program, hiring of additional sales staff, realization of
its 2009 Latin American development program, offering more products and
cross-selling opportunities attributable to the planned Decision Dynamics
Technology Ltd. (“DDY”) acquisition (See “Recent Developments”). In 2010,
Coreworx plans to significantly invest in its marketing activities including
trade show and industry association participation, integrated web and email
marketing, additional lead generation activities and analyst relations. By
February, 2010 Coreworx had more than doubled its sales force from 2009
including sales coverage specifically for the nuclear industry in North America
and Australian based sales coverage. For the second half of 2010, Coreworx plans
to develop a channel of business partners in the Latin American region and
expects to begin generating revenue from this channel in the latter half of
2010. In addition, beginning in the first quarter of 2010, Coreworx plans to
introduce a net new product line each quarter effectively tripling its overall
target market.





Corporate




At the
end of 2008, we began an effort to streamline our corporate costs. Towards that
end, we have took several steps in order to conserve our corporate cash
including hiring in-house counsel, reducing personnel, consulting and marketing
costs. The result of those steps can be seen in the decrease in our corporate
administrative expenses (excluding non-cash stock compensation expense) which
were reduced from $3.4 million in 2008 to $2.7 million in 2009. We believe our
corporate administrative expenses in 2010 will increase as we have recently
hired a CTO to build relations with major energy companies and academic
institutions as well as to strengthen and expand our technology portfolio. We
expect to continue to have significant corporate expenses and will continue to
expend in the future, significant amounts of funds on professional fees and
other costs in connection with our strategy to seek out and invest in companies
that fit our target business model.


-44-


CRITICAL
ACCOUNTING POLICIES




The SEC
defines “critical accounting policies” as those that require application of
management’s most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain and may change in subsequent periods.




The
following discussion of critical accounting policies represents our attempt to
report on those accounting policies, which we believe are critical to our
consolidated financial statements and other financial disclosure.  It
is not intended to be a comprehensive list of all of our significant accounting
policies, which are more fully described in Note 2 of the Notes to the
Consolidated Financial Statements included in this Annual Report.  In
many cases, the accounting treatment of a particular transaction is specifically
dictated by generally accepted accounting principles, with no need for
management’s judgment in their application.  There are also areas in
which the selection of an available alternative policy would not produce a
materially different result.




We have
identified the following as critical accounting policies affecting our Company:
principles of consolidation and investments in associated companies; business
combinations, impairments in goodwill and intangible assets, revenue
recognition, foreign currency transactions and stock-based
compensation.




Principles
of Consolidation and Investments in Associated Companies




Our
consolidated financial statements include the accounts of all majority-owned
subsidiaries.  All intercompany balances and transactions have been
eliminated.




Investments
in other entities are accounted for using the equity method or cost basis
depending upon the level of ownership and/or our ability to exercise significant
influence over the operating and financial policies of the
investee.  Investments of this nature are recorded at original cost
and adjusted periodically to recognize our proportionate share of the investee’s
net income or losses after the date of investment.  When net losses
from an investment accounted for under the equity method exceed its carrying
amount, the investment balance is reduced to zero and additional losses are not
recorded.  We resume accounting for the investment under the equity
method when the entity subsequently reports net income and our share of that net
income exceeds the share of net losses not recognized during the period the
equity method was suspended.  Investments are written down only when
there is clear evidence that a decline in value that is other than temporary has
occurred. During 2009, we took equity losses of $129,000 in our investment in
GridSense, which reduced our investment in GridSense down to zero. We also
recorded an impairment of $80,000 in our investment in EnerTech which is
accounted for under the cost method. Our investment in USSI is also accounted
for under the cost method.




Business
combination accounting




We have
acquired a number of businesses during the last several years, and we may
acquire additional businesses in the future.  Business combination
accounting, often referred to as purchase accounting, requires us to determine
the fair value of all assets acquired, including identifiable intangible assets,
and liabilities assumed.  The cost of the acquisition is allocated to
the assets acquired and liabilities assumed in amounts equal to the estimated
fair value of each asset and liability, and any remaining acquisition cost is
classified as an amortizable intangible asset, a non-amortizable intangible
asset or goodwill.  This allocation process requires extensive use of
estimates and assumptions, including estimates of future cash flows to be
generated by the acquired assets.  Certain identifiable intangible
assets, such as customer lists and covenants not to compete, are amortized based
on the pattern in which the economic benefits of the intangible assets are
consumed over the intangible asset’s estimated useful life.  The
estimated useful life of our amortizable identifiable intangible assets ranges
from seven to sixteen years.  Goodwill is not
amortized.  Accordingly, the acquisition cost allocation has had, and
will continue to have, a significant impact on our current operating
results.


-45-




Goodwill
and Intangibles




As a
result of our various acquisitions, we have recorded goodwill and various
amortizable intangible assets. We also sometimes acquire specific intangibles
such as our acquisition in 2008 of a license agreement with Solucorp Industries
Ltd.




Our
goodwill at December 31, 2009 was approximately $6.7 million. Our goodwill is
allocated to our segments as follows: CoaLogix – approximately $3.7 million,
Naval & RT Solutions – approximately $0.5 million and EIS – approximately
$2.4 million.




We
determine whether the carrying value of recorded goodwill is impaired on an
annual basis or more frequently if indicators of potential impairment exist. The
first step of the impairment review process compares the fair value of the
reporting unit in which the goodwill resides to the carrying value of that
reporting unit. The second step measures the amount of impairment loss, if any,
by comparing the implied fair value of the reporting unit goodwill with its
carrying amount.




The
determination of whether or not goodwill has become impaired involves a
significant level of judgment in the assumptions underlying the approach used to
determine the value of our reporting units. Fair values are determined either by
using a discounted cash flow methodology or by using a combination of a
discounted cash flow methodology. The discounted cash flow methodology is based
on projections of the amounts and timing of future revenues and cash flows,
assumed discount rates and other assumptions as deemed appropriate. We consider
factors such as historical performance, anticipated market conditions, operating
expense trends and capital expenditure requirements. Additionally, the
discounted cash flows analysis takes into consideration cash expenditures for
further product development. With respect to the goodwill in our EIS segment
(Coreworx), it was assumed the most of the existing debt by Coreworx to Acorn
would not be repaid and would be converted to equity. Changes in our strategy
and/or market conditions could significantly impact these judgments and require
adjustments to recorded amounts of goodwill.




We
perform our annual impairment tests in the fourth quarter. We determined that
none of our reporting units were impaired as a result of our annual tests in
2009.




Our
intangible assets that have finite useful lives recorded at fair value at the
time of the acquisition, and are carried at such value less accumulated
amortization. Our intangible assets at December 31, 2009 consisted of SCR
Technologies in our CoaLogix segment ($4.3 million, net of accumulated
amortization), Naval Technologies in our Naval & RT Solutions segment ($0.4
million, net of accumulated amortization) and Software and Customer
Relationships in our EIS segment ($3.1 million and $0.3 million, respectively,
net of accumulated amortization). We amortize these intangible assets on a
straight-line basis over their estimated useful lives.




During
2009, CoaLogix engaged an outside firm to assist CoaLogix with the determination
of the economic viability of the technology associated with the license acquired
from Solucorp. In December 2009, the outside firm issued its assessment that the
technology was not economically viable and not competitive with other commercial
products for mercury control that are currently available. On December 30, 2009,
the management of CoaLogix determined that a material impairment of the license
had occurred. Accordingly, CoaLogix recorded an impairment charge of the
remaining unamortized balance of the Solucorp license ($1.7 million) as well as
associated assets (chemicals - $0.4 million and prepaid chemicals - $0.3
million).


-46-


Revenue
Recognition




In the
year ended December 31, 2009, we recorded approximately $18.1 million of
revenues representing approximately 58% of our consolidated revenues in our
CoaLogix subsidiary. Revenues related to SCR catalyst regeneration and cleaning
services are recognized when the service is completed for each catalyst
module.  Customer acceptance is not required for regeneration and
cleaning services in that CoaLogix’s contracts currently provide that services
are completed upon receipt of testing by independent third parties confirming
compliance with contract requirements.




From time
to time, CoaLogix purchases spent catalyst modules for its inventory.  In
the event that a customer purchases spent catalyst modules and enters a service
contract for regeneration with CoaLogix, revenues are recognized when the
service is completed for each catalyst module.




Costs
associated with performing SCR catalyst regeneration and cleaning services are
expensed as incurred because of the close correlation between the costs
incurred, the extent of performance achieved and the revenue
recognized.  In the situation where revenue is deferred due to
collectability uncertainties, CoaLogix does not defer costs due to the
uncertainties related to payment for such services. In the situation where
revenue is deferred due to the non completion of regeneration services, the
Company defers the related costs as deferred costs.




Revenue
from time-and-materials service contracts, maintenance agreements and other
services is recognized as services are provided.




In the
year ended December 31, 2009, we recorded approximately $9.2 million of revenues
representing approximately 29% of our consolidated revenues in our DSIT
subsidiary.  In 2009, DSIT derived approximately $7.7 million or 84%
of its revenues from fixed-price type contracts.  Fixed-price type
contracts require the accurate estimation of the cost, scope and duration of
each engagement.  Revenue and the related costs for these projects are
recognized for a particular period, using the percentage-of-completion method as
costs (primarily direct labor) are incurred, with revisions to estimates
reflected in the period in which changes become known.  If we do not
accurately estimate the resources required or the scope of work to be performed,
or do not manage our projects properly within the planned periods of time or
satisfy our obligations under the contracts, then future revenue and consulting
margins may be significantly and negatively affected and losses on existing
contracts may need to be recognized.  Any such resulting changes in
revenues and reductions in margins or contract losses could be material to our
results of operations.




At
Coreworx, we recognize revenues in accordance with applicable revenue
recognition guidance relating to software. Coreworx’ revenues of approximately
$4.0 million represents approximately 13% of our consolidated revenues for the
year ended December 31, 2009.




We
record revenue when persuasive evidence of an arrangement exists, there are no
significant uncertainties surrounding product acceptance, the fees are fixed or
determinable and collection is considered probable.  Our application
of applicable accounting principles requires judgment, including whether a
software arrangement includes multiple elements, and if so, whether
vendor-specific objective evidence (“VSOE”) of fair value exists for those
elements. We use the residual method to recognize revenue on delivered elements
when a license agreement includes one or more elements to be delivered at a
future date if evidence of the fair value of all undelivered elements exists. If
an undelivered element for the arrangement exists under the license arrangement,
revenue related to the undelivered element is deferred based on VSOE of the fair
value of the undelivered element.  Revenues derived from
multiple-element software sale arrangements are recognized in earnings based on
the relative fair values of the individual elements.


-47-


Our
multiple-element sales arrangements include arrangements where software licenses
and the associated post-contract customer support (“PCS”) are sold
together.  We have established VSOE of the fair value of the
undelivered PCS element based on the contracted price for renewal PCS included
in the original multiple element sales arrangement, as substantiated by
contractual terms and our PCS renewal experience.  If VSOE of fair
value does not exist for all undelivered elements, all revenue is deferred until
sufficient evidence exists or all elements have been delivered.




If the
revenue recognition criteria above are not satisfied, amounts received from
customers are classified as deferred revenue on the balance sheet until such
time as the revenue recognition criteria are met.




Foreign
Currency Transactions




The
currency of the primary economic environment in which our corporate headquarters
and our U.S. subsidiaries operate is the United States dollar
(“dollar”).  Accordingly, the Company and all of its U.S. subsidiaries
use the dollar as their functional currency.




Coreworx’s,
functional currency is the Canadian dollar (C$) and DSIT’s functional currency
is the New Israeli Shekel (“NIS”). In the year ended December 31, 2009, 29% of
our consolidated revenues (40% in the year ended December 31, 2008) came from
our DSIT subsidiary while 13% and 11% of our consolidated revenue in the years
ended December 31, 2009 and 2008, respectively, came from our Coreworx
subsidiary. Their financial statements have been translated using the exchange
rates in effect at the balance sheet date.  Statements of operations
amounts have been translated using the exchange rate at date of
transaction.  All exchange gains and losses denominated in
non-functional currencies are reflected in finance expense, net in the
consolidated statement of operations when they arise.




Stock-based
Compensation




We
recognize share-based compensation expense based on the fair value recognition
provision of applicable accounting principles, using the Black-Scholes option
valuation method.  Accordingly, we are required to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award and to recognize that cost over the
period during which an employee is required to provide service in exchange for
the award.  Under the Black-Scholes method, we make assumptions with
respect to the expected lives of the options that have been granted and are
outstanding, the expected volatility and the dividend yield percentage of our
common stock and the risk-free interest rate at the respective dates of
grant.




The
expected volatility factor used to value stock options in 2009 was based on the
historical volatility of the market price of the Company’s common stock over a
period equal to the estimated weighted average life of the
options.  For the expected term of the option, we used an estimate of
the expected option life based on historical experience. The risk-free interest
rate used is based upon U.S. Treasury yields for a period consistent with the
expected term of the options.  Historically, we have not paid
dividends and we do not anticipate paying dividends in the foreseeable future;
accordingly, our expected dividend rate is zero.  We recognize this
expense on an accelerated basis over the requisite service
period.  Due to the numerous assumptions involved in calculating
share-based compensation expense, the expense recognized in our consolidated
financial statements may differ significantly from the value realized by
employees on exercise of the share-based instruments.  In accordance
with the prescribed methodology, we do not adjust our recognized compensation
expense to reflect these differences.  Recognition of share-based
compensation expense had, and will likely continue to have, a material effect on
our selling, general and administrative and other items within our consolidated
statements of operations and also may have a material effect on our deferred
income taxes and additional paid-in capital line items within our consolidated
balance sheets.  We are also required to use judgment in estimating
the amount of stock-based awards that are expected to be
forfeited.  If actual forfeitures differ significantly from the
original estimate, stock-based compensation expense and our results of
operations could be materially impacted.


-48-


For each
of the years ended December 31, 2009 and 2008, we incurred stock compensation
expense of approximately $1.4 million. The 2009 and 2008 expense includes $0.7
million of stock compensation expense recorded in each year with respect to
stock option grants in our CoaLogix and Coreworx subsidiaries.




See Note
17 to the consolidated financial statements for the assumptions used to
calculate the fair value of share-based employee compensation.


-49-


RESULTS
OF OPERATIONS




The
following table sets forth selected consolidated statement of operations data as
a percentage of our total sales:




Year
      ended December 31,2005
                
                
                2006
                
                
                2007
                
                
                2008
                
                
                2009Revenues
                
                
                100
                %
                
                
                100
                %
                
                
                100
                %
                
                
                100
                %
                
                
                100
                %Cost
      of sales
                
                
                70
                
                
                
                67
                
                
                
                75
                
                
                
                68
                
                
                
                57Gross
      profit
                
                
                30
                
                
                
                33
                
                
                
                25
                
                
                
                32
                
                
                
                43Research
      and development expenses
                
                
                1
                
                
                
                8
                
                
                
                7
                
                
                
                6
                
                
                
                2Acquired
      in-process research and development expenses
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                12
                
                
                
                —Selling,
      general and administrative expenses
                
                
                83
                
                
                
                112
                
                
                
                93
                
                
                
                56
                
                
                
                59Impairments
                
                
                —
                
                
                
                1
                
                
                
                2
                
                
                
                18
                
                
                
                9Operating
      loss
                
                
                (54
                )
                
                
                (88
                )
                
                
                (78
                )
                
                
                (60
                )
                
                
                (26
                )Finance
      expense, net
                
                
                0
                
                
                
                (1
                )
                
                
                (28
                )
                
                
                (15
                )
                
                
                (1
                )Gain
      on early redemption of convertible debentures
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                6
                
                
                
                —Gain
      on sale of shares in Comverge
                
                
                —
                
                
                
                —
                
                
                
                409
                
                
                
                43
                
                
                
                4Gain
      on IPO of Comverge
                
                
                —
                
                
                
                —
                
                
                
                286
                
                
                
                —
                
                
                
                —Loss
      on private placement of equity investments
                
                
                —
                
                
                
                —
                
                
                
                (1
                )
                
                
                —
                
                
                
                —Other
      income, net
                
                
                —
                
                
                
                8
                
                
                
                —
                
                
                
                —
                
                
                
                —Income
      (loss) from operations before taxes on income
                
                
                (55
                )
                
                
                (81
                )
                
                
                588
                
                
                
                (26
                )
                
                
                (23
                )Income
      tax benefit (expense)
                
                
                1
                
                
                
                (4
                )
                
                
                8
                
                
                
                (2
                )
                
                
                2Income
      (loss) from operations of the Company and its consolidated
      subsidiaries
                
                
                (54
                )
                
                
                (85
                )
                
                
                596
                
                
                
                (27
                )
                
                
                (20
                )Share
      of income (losses) in Paketeria
                
                
                —
                
                
                
                (10
                )
                
                
                (21
                )
                
                
                (8
                )
                
                
                1Share
      of losses in GridSense
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (4
                )
                
                
                0Share
      of losses in Comverge
                
                
                (9
                )
                
                
                (5
                )
                
                
                —
                
                
                
                —
                
                
                
                —Income
      (loss) from continuing operations
                
                
                (63
                )
                
                
                (101
                )
                
                
                575
                
                
                
                (39
                )
                
                
                (20
                )Gain
      (loss) on sale of discontinued operations and contract settlement (in
      2006), net of income taxes
                
                
                13
                
                
                
                (50
                )
                
                
                —
                
                
                
                —
                
                
                
                —Income
      from discontinued operations, net of income taxes
                
                
                20
                
                
                
                2
                
                
                
                —
                
                
                
                —
                
                
                
                —Net
      income (loss) attributable to non-controlling interests
                
                
                (30
                )
                
                
                (149
                )
                
                
                575
                
                
                
                (39
                )
                
                
                (20
                )Non-controlling
      interests
                
                
                (2
                )
                
                
                —
                
                
                
                —
                
                
                
                1
                
                
                
                1Net
      income (loss) attributable to Acorn Energy, Inc.
                
                
                (31
                )%
                
                
                (149
                )%
                
                
                575
                %
                
                
                (38
                )%
                
                
                (18
                )%


-50-




The
following table sets forth certain information with respect to revenues and
profits of our reportable business segments for the years ended December 31,
2008 and 2009, including the percentages of revenues attributable to such
segments.  (See Note 21 to our consolidated financial statements for
the definitions of our reporting segments.).  The column marked
“Other” aggregates information relating to miscellaneous operating segments,
which may be combined for reporting under applicable accounting
principles.




CoaLogix
                  
                  
                  Naval &
                    RT
                    Solutions
                  
                  
                  EIS
                  
                  
                  Other
                  
                  
                  Total(in thousands)Year
      ended December 31, 2009:Revenues
      from external customers
                  
                  $
                  18,099
                  
                  
                  $
                  7,985
                  
                  
                  $
                  3,999
                  
                  
                  $
                  1,234
                  
                  
                  $
                  31,317Percentage
      of total revenues from external customers
                  
                  
                  58
                  %
                  
                  
                  25
                  %
                  
                  
                  13
                  %
                  
                  
                  4
                  %
                  
                  
                  100
                  %Gross
      profit
                  
                  
                  6,296
                  
                  
                  
                  3,540
                  
                  
                  
                  3,301
                  
                  
                  
                  415
                  
                  
                  
                  13,552Depreciation
      and amortization
                  
                  
                  1,182
                  
                  
                  
                  189
                  
                  
                  
                  377
                  
                  
                  
                  25
                  
                  
                  
                  1,773Stock
      compensation expense
                  
                  
                  513
                  
                  
                  
                  2
                  
                  
                  
                  234
                  
                  
                  
                  —
                  
                  
                  
                  749Impairments
                  
                  
                  2,612
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,612Segment
      income (loss) before income taxes
                  
                  
                  (2,742
                  )
                  
                  
                  1,051
                  
                  
                  
                  (3,360
                  )
                  
                  
                  64
                  
                  
                  
                  (4,987
                  )Year
      ended December 31, 2008:Revenues
      from external customers
                  
                  $
                  10,099
                  
                  
                  $
                  7,032
                  
                  
                  $
                  2,330
                  
                  
                  $
                  1,235
                  
                  
                  $
                  20,696Percentage
      of total revenues from external customers
                  
                  
                  49
                  %
                  
                  
                  34
                  %
                  
                  
                  11
                  %
                  
                  
                  6
                  %
                  
                  
                  100
                  %Gross
      profit
                  
                  
                  2,457
                  
                  
                  
                  2,383
                  
                  
                  
                  1,409
                  
                  
                  
                  284
                  
                  
                  
                  6,533Depreciation
      and amortization
                  
                  
                  931
                  
                  
                  
                  165
                  
                  
                  
                  132
                  
                  
                  
                  33
                  
                  
                  
                  1,228Stock
      compensation expense
                  
                  
                  521
                  
                  
                  
                  —
                  
                  
                  
                  179
                  
                  
                  
                  —
                  
                  
                  
                  700Impairments
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Segment
      income (loss) before income taxes
                  
                  
                  (1,433
                  )
                  
                  
                  605
                  
                  
                  
                  (1,171
                  )
                  
                  
                  (86
                  )
                  
                  
                  (2,085
                  )




2009
COMPARED TO 2008




Revenues.  Revenues
increased by $10.6 million or 51% to $31.3 million in 2009 as compared to sales
of $20.7 million in 2008.  The increase in revenue was partially
attributable to the inclusion of Coreworx revenue of $4.0 million in 2009
compared to the $2.3 million of Coreworx revenue from the date of our
acquisition on August 13, 2008 through December 31, 2008 included in our 2008
results. The balance of the increase in revenue was due to the increase in
CoaLogix revenue of $8.0 million (79%) to $18.1 million compared to 2008 revenue
of $10.1 million. DSIT’s Naval & RT Solutions consolidated segment revenue
increased 14% from $7.0 million to $8.0 million. The increase in CoaLogix
revenue was due to continued penetration in the regeneration market combined
with the ability to process more SCR modules facilitated by the completion of a
plant expansion in the fourth quarter 2008. The increase in DSIT's Naval &
RT Solutions revenues was due to increased revenues from DSIT's AquaShieldTM
projects.





Gross
profit.  Gross profit in 2009 increased by $7.0 million or
107%, to $13.6 million from $6.5 million in 2008. The increase in gross profit
was attributable to the inclusion of Coreworx gross profit in 2009 of $3.3
million compared to the gross profit of $1.4 million recorded for Coreworx
following our acquisition in August 2008. In addition, both CoaLogix and DSIT
recorded increased gross profits of $3.8 million (an increase of 156%) and $1.3
million (an increase of 48%), respectively. The increase in both CoaLogix and
DSIT gross profits were attributable to both the increase in sales as well as
increased margins.


-51-


Gross
margin for CoaLogix increased from 24% in 2008 to 35% in 2009 reflecting greater
operational efficiency since the plant expansion at the end of 2008.
Consolidated gross margin in DSIT’s Naval and RT Solutions segment increased
from 34% in 2008 to 44% in 2009 due to an increase in the higher margin
AquaShieldTM
projects worked on in 2009.





Acquired in-process research and
development expenses (“IPR&D”).  In 2008, IPR&D
represented Coreworx’ research and development projects that had not reached
technological feasibility and had no alternative future use when acquired. We
determined that approximately $2.4 million of the purchase price of Coreworx
represented purchased in-process technology and expensed this amount immediately
upon acquisition in 2008.





Research and development expenses,
net (“R&D”).  We recorded net R&D expenses of $0.6
million in 2009 as compared to an expense of $1.2 million in 2008. The expense
recorded for 2009 is net of a benefit of approximately $1.0 million following
the approval of a claim by our Coreworx subsidiary for scientific research and
experimental development tax credit refunds from the Canada Revenue Agency of
the Ontario Ministry of Revenue in the second quarter of 2009.




Selling, general and administrative
expenses (“SG&A”).  SG&A in 2009 increased by $6.8
million as compared to 2008. A portion of the increase is attributable to the
Coreworx’ SG&A costs of $6.5 million in 2009 compared to the $1.5 million
recorded in 2008 with respect to the period following our acquisition in August
2008. CoaLogix’s SG&A costs in 2009 increased by $2.3 million as compared to
2008 reflecting increased overhead costs resulting from the company’s growth and
legal expenses associated with the EES and Evonik lawsuits discussed in Item 3,
Legal Proceedings. DSIT’s SG&A costs increased by $0.3 million in 2009
compared to 2008. Corporate general and administrative costs decreased by $0.8
million reflecting the effects of our efforts to reduce corporate
costs.




Impairments. During 2009, we
recorded impairments totaling $2.7 million. The 2009 impairments were primarily
comprised of $2.4 million with respect to CoaLogix's determination that its
acquired MetalliFix technology was not economically viable. As a result,
CoaLogix recorded an impairment charge on the unamortized balance of the
acquired technology and all associated assets.




During 2008,we
recorded impairments totaling $3.7 million. The 2008 impairments related to a
loss provision on our loans to Paketeria of $2.5 million due to Paketeria’s
increasing operating difficulties and our doubts as to its ability to repay its
debt to us and its ability to continue as a going concern. In addition, we
recorded a loss provision on the note payable from GridSense of $0.6 million due
to doubts of GridSense’s ability to repay the note. We also recorded a loss of
$0.5 million resulting from the impairment of our investment in and loans to
Local Power.




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





Finance expense,
net.The decrease in finance expense in 2009 compared with
2008 is primarily due to the interest expense of $3.1 million recorded with
respect to the write-off of the remaining balances of debt origination costs,
warrants value and beneficial conversion features in the early redemption of our
convertible debentures.


-52-


Gain on sale of shares in
Comverge.  In 2009, we sold all of the 502,500 shares of
Comverge shares that we held at the beginning of 2009 and recorded a pre-tax
gain of $1.4 million on proceeds of $4.0 million. In 2008, we sold 1,261,165 of
our Comverge shares of and recorded a pre-tax gain of $8.9 million on proceeds
of $15.4 million.





Taxes on
income.  In 2009, we recorded a tax benefit of $0.7 million,
primarily as the result of recording an income tax receivable ($0.5 million) due
to our expected utilization of current year net losses to carry back to recover
previous years’ tax payments and recognizing deferred tax assets ($0.2 million)
in our profitable DSIT subsidiary. In 2008, we recorded a non-cash expense of
$0.9 million with respect to the elimination of deferred tax assets from our
balance sheet due to the reduction in the value of Comverge shares. This was
partially offset by a tax benefit of $0.3 million for overpayment of previous
year’s taxes and $0.2 million resulting from our receipt of an exemption of
income taxes from the State of Delaware thus reducing our effective income tax
rate on domestic earnings to 34%.





Share of income (losses) in
Paketeria.  In the third quarter of 2009, liquidation
proceedings began with respect to Paketeria. Previously, in 2008, our investment
in Paketeria was reduced to zero and we ceased recording losses in Paketeria. As
a result of the liquidation proceedings, we eliminated the previously recorded
cumulative translation adjustment of $0.3 million associated with the investment
in Paketeria and recognized that amount as Share of Income in Paketeria. In
2008, we recorded a loss of $1.6 million of which approximately $1.0 million
represents our approximate 31% share of Paketeria’s losses for 2008 and
approximately $0.1 million representing amortization expense associated with
acquired intangibles and approximately $0.5 million representing the impairment
of the balance of our investment.




Share of losses in GridSense.
In 2009, we recorded a loss of $129,000 representing our share of GridSense’s
losses for 2009. We have ceased recording our share of losses in GridSense as
our investment balance has been reduced to zero. In 2008, we recorded losses of
$212,000 representing our share of GridSense’s losses and amortization of
intangibles for the first nine months of 2008 as we recorded our share of losses
in GridSense on a three month lag due to our inability to receive financial
information on a timely basis. In addition, in 2008, as a result of the steep,
continuous decline in the share price of GridSense, we determined that the
decline in value was other than temporary, and, accordingly recorded an
impairment of $714,000 in the value of GridSense to bring the value of our
investment in GridSense to its market value on the Toronto Stock Exchange on
that date.





Net loss.  We had a
net loss of $6.2 million in 2009 compared with net loss of $8.1 million in 2008.
Our loss in 2009 was due to impairments $2.7 million, primarily with respect to
the impairment of our MetalliFix technology, Coreworx losses of $3.4 million and
corporate expenses of $2.9 million, partially offset by the gain recognized on
our sale of Comverge shares of $1.4 million and net income from our DSIT
subsidiary of $1.4 million.




Net loss attributable to
non-controlling interests.  Of our losses in 2009 and 2008,
$248,000 and $412,000 was attributable to non-controlling interests in our
CoaLogix and DSIT subsidiaries. All of our $248,000 of losses in 2008 were
attributable to non-controlling interests in CoaLogix. In 2009, $618,000 of our
losses were attributable to non-controlling interests in CoaLogix. This was
offset by $206,000 of income that was attributable to non-controlling interests
in DSIT.


-53-


LIQUIDITY
AND CAPITAL RESOURCES




As of
December 31, 2009, we had working capital of $16.3 million, including $11.2
million of cash and cash equivalents not including current and non-current
restricted deposits of $2.2 million (of which we expect approximately $1.3
million to be released in the first half of 2010).  Net cash used in
the year ending December 31, 2009, was $3.9 million, of which $5.4 million was
used in operating activities.





The
primary use of cash in operating activities during 2009 was the cash used in
operations by our Coreworx and CoaLogix subsidiaries of $1.7 million and the
$1.8 million, respectively as well as the $2.3 million of cash used in our
corporate operations. DSIT generated approximately $0.4 million of cash from its
operating activities during 2009.




Cash
provided by investing activities of $0.7 million was primarily due to the $4.0
million of proceeds from the sale of our Comverge shares and covered-calls
during the period and $2.5 million from the release of restricted deposits
associated with one of DSIT’s projects. Those proceeds amounts were offset by
new restricted deposits of approximately $2.1 million as security for new DSIT
and CoaLogix projects, $1.6 million for the acquisition of property and
equipment, $1.0 million for investment in EnerTech arising from capital calls, a
$0.6 million loan to GridSense and an investment of $0.2 million in
USSI.




Net cash
of $0.8 million was provided for in financing activities, primarily from the
$2.9 million investment made by EnerTech and CoaLogix management in CoaLogix,
the $2.3 million of proceeds from the exercise of warrants and employee stock
options and the proceeds from a term loan of $0.5 million for our DSIT
subsidiary. These proceeds were partially offset by the redemption of our
debentures ($3.4 million), the purchase of treasury shares ($1.1 million) and
the payment for additional shares of DSIT ($0.3 million).





At
December 31, 2009, DSIT had approximately $530,000 in Israeli credit lines
available to DSIT from an Israeli bank, $105,000 of which was then being used,
net of secured deposits.  DSIT’s credit lines are available to it
until February 2011, are denominated in NIS and bear interest at a weighted
average rate of the Israeli prime rate per annum plus 3.0%.  The
Israeli prime rate fluctuates and as of December 31, 2009 was
2.5%.  The line-of-credit is subject to maintaining certain financial
covenants. At December 31, 2009, DSIT was in compliance with its financial
covenants. The Company has a floating lien and provided guarantees with respect
to DSIT’s outstanding lines of credit.  In addition, Acorn has agreed
to be supportive of DSIT’s liquidity requirements over the next 12
months.




On
December 31, 2009, DSIT took a term loan from an Israeli bank in the amount of
$530,000. The loan is denominated in NIS and bears interest at the rate of the
Israeli prime rate per annum plus 0.9%. The loan is to be repaid over a period
of 48 months of equal payments of approximately $12,000 per month (principal and
interest).




As
collateral for the term-loan, DSIT has deposited with an Israeli bank $79,000 as
a non-current restricted deposit. In addition to this restricted deposit, DSIT
has also deposited with an Israeli bank $751,000 as collateral for various
performance and bank guarantees for various projects. DSIT expects that a
majority of these deposits will be released in the first half of 2010, but
expects to deposit these funds again as collateral for guarantees for new
projects.




On March
1, 2010, DSIT was utilizing approximately $40,000 of its $530,000
line-of-credit.  We believe that DSIT will have sufficient liquidity
to finance its activities from cash flows from its own operations over the next
12 months.  This is based on continued utilization of its
line-of-credit and expected continued improvement of operating results from
anticipated growth in sales. DSIT is continuing to search for additional sources
of financing to support its growth.


-54-


In
October 2008, CoaLogix signed an agreement with Square 1 Bank for a $2 million
formula based line-of-credit. On March 1, 2010, CoaLogix was utilizing $200,000
of its line-of-credit. The line-of-credit expires on April 19, 2010 and bears
interest at prime plus 2.25%. The U.S. prime rate at December 31, 2009 was
3.25%. CoaLogix is negotiating more favorable terms and expects to renew the
line-of-credit before the extension period expires. The line-of-credit is for
financing CoaLogix’s working capital and to finance its growth and is subject to
certain financial covenants. We believe that CoaLogix will have sufficient
liquidity to finance its operating activities from cash flow from its own
operations and its bank financing over the next 12 months.





We expect
that Coreworx will require additional working capital support in order to
finance its working capital needs in 2010. Since January 1, 2010, we have lent
Coreworx $2.2 million. We expect Coreworx’ need for additional working capital
to lessen as it releases its new products during 2010; however, we have no
assurance that Coreworx will be able to generate sufficient sales to generate
positive cash flows. Thus, Coreworx may continue to require additional working
capital support in the coming months. Additional support may be in the form of a
bank line, new investment by others, additional investment by Acorn, or a
combination of the above. There is no assurance that such support will be
available from such sources in sufficient amounts, in a timely manner and on
acceptable terms.  The availability and amount of any additional
investment from us in Coreworx may be limited by the working capital needs of
our corporate activities and other operating companies.





We expect
that GridSense will require additional working capital support in order to
finance its working capital needs in 2010. This support may be in the form of a
bank line, new investment by others, additional investment by Acorn, or a
combination of the above.  Acorn, in its planned acquisition of the
ownership interest of GridSense not previously owned by Acorn, committed to
provide GridSense with additional working capital of up to $1.8 million in debt
or equity or a combination of both. There is no assurance that such support will
be available from such sources in sufficient amounts, in a timely manner and on
acceptable terms. The availability and amount of any additional investment from
Acorn in GridSense may be limited by the working capital needs of Acorn’s
corporate activities and other operating companies.





Prior to
the Company’s recent capital raise, the Company’s corporate operations (not
including cash at any of our subsidiaries) had a total of approximately $5.5
million in unrestricted cash and cash equivalents reflecting a $2.6 million
decrease from the balance as of December 31, 2009. The decrease in unrestricted
corporate cash is due primarily to a loan of approximately $2.2 million given to
our Coreworx subsidiary, an additional $300,000 investment in USSI and a loan of
$200,000 to GridSense. Those expenditures were partially offset by our receipt
of $400,000 loan repayment from our DSIT subsidiary. Following the capital
raise, which resulted in net proceeds of approximately $11.5 million, we had a
total of $17.0 million of unrestricted cash and cash equivalents.





We
believe that our current cash plus the cash generated from operations will
provide more than sufficient liquidity to finance the activities of Acorn and
its operating companies for the foreseeable future and for the next 12 months in
particular.


-55-


Contractual
Obligations and Commitments




The table
below provides information concerning obligations under certain categories of
our contractual obligations as of December 31, 2009.




CASH
PAYMENTS DUE TO CONTRACTUAL OBLIGATIONS




Years Ending December 31,
                  (in thousands)Total
                
                
                2010
                
                
                
                2011-2012
                
                
                
                2013-2014
                
                
                2015 and
                  thereafterOperating
      leases
                
                $
                8,693
                
                
                $
                1,772
                
                
                $
                3,156
                
                
                $
                1,688
                
                
                $
                2,077Bank
      debt
                
                
                530
                
                
                
                125
                
                
                
                265
                
                
                
                140
                
                
                
                —Investment
      in EnerTech(1)
                
                
                2,850
                
                
                
                2,850
                
                
                
                —
                
                
                
                —
                
                
                
                —Potential
      severance obligations
                
                
                3,244
                
                
                
                115
                
                
                
                —
                
                
                
                1,040
                (2)
                
                
                2,089
                (2)Investment
      in CoaLogix (3)
                
                
                2,877
                
                
                
                2,877
                
                
                
                —
                
                
                
                —
                
                
                
                —Purchase
      commitments
                
                
                871
                
                
                
                871
                
                
                
                —
                
                
                
                —
                
                
                
                —Total
      contractual cash obligations
                
                $
                19,065
                
                
                $
                8,610
                
                
                $
                3,421
                
                
                $
                2,868
                
                
                $
                4,166




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




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




Our
obligation under this commitment is presented as an obligation due in the next
12 months, though it is uncertain as to when actual payments may be made.
Through December 31, 2009, we have received and funded capital calls of
$2,150,000 to EnerTech.





(2)
Under Israeli law and labor agreements, DSIT is required to make severance
payments to dismissed employees and to employees leaving employment under
certain other circumstances.  The obligation for severance pay
benefits, as determined by the Israeli Severance Pay Law, is based upon length
of service and last salary.  These obligations are substantially
covered by regular deposits with recognized severance pay and pension funds and
by the purchase of insurance policies.  As of December 31, 2009, we
accrued a total of $3.1 million for potential severance obligations to our
Israeli employees of which approximately $2.1 million was funded.




(3) In
April 2009, we entered into an agreement with CoaLogix, EnerTech and certain
members of CoaLogix’s senior management to invest up to $5,624,000 in CoaLogix.
Through December 31, 2009, we invested $2,747,000 of our $5,624,000 commitment.
Our remaining obligation under this commitment of $2,877,000 is presented as due
in the next 12 months, though it is uncertain as to when actual payments may be
made.





Certain
Information Concerning Off-Balance Sheet Arrangements.




Our DSIT
subsidiary provides various performance, advance and tender guarantees as
required in the normal course of its operations.  As at December 31,
2009, such guarantees totaled approximately $2.6 million and were due to
expire through 2010.  As security for a portion of these guarantees,
Acorn has deposited with an Israeli bank approximately $0.3 million and DSIT has
deposited approximately $0.8 million which is shown as restricted cash on our
Consolidated Balance Sheets.  The Company expects a majority of the
restricted cash to be released in early 2010; however, DSIT expects to provide
additional security deposits for new guarantees for new projects throughout the
2010 calendar year.


-56-


Our
CoaLogix subsidiary provides various performance, advance and tender guarantees
as required in the normal course of its operations.  As at December
31, 2009, such guarantees totaled approximately $2.2 million and were due to
expire through 2011.  As a security for a portion of these guarantees,
the Company has deposited with a U.S. bank approximately $1.1 million which is
shown as a restricted deposit on the Company’s Consolidated Balance
Sheets.  The Company expects $0.6 million of the restricted deposit to
be released in 2010.




Impact
of Inflation and Currency Fluctuations




In the
normal course of business, we are exposed to fluctuations in interest rates on
our lines-of-credit ($530,000 available) and long-term debt incurred ($530,000
balance at December 31, 2009) to finance our operations in Israel. Our non-US
dollar monetary assets and liabilities (net assets of approximately $0.5 million
at December 31, 2009) in Israel are exposed to fluctuations in exchange
rates. Furthermore, $1.4 million and $0.7 million of our backlog of
projects are contracts and orders that are denominated in NIS and linked to an
Israeli Ministry of Defense Index, and denominated in NIS,
respectively.




Historically,
a majority of DSIT’s sales have been denominated in dollars or denominated in
NIS linked to the dollar.  Such sales transactions are negotiated in
dollars; however, for the convenience of the customer they are often settled in
NIS. These transaction amounts are linked to the dollar between the date
the transactions are entered into until the date they are effected and
billed.  From the time these transactions are effected and billed
through the date of settlement, amounts are primarily unlinked.  As
DSIT increases its sales to customers to customers outside of Israel, a greater
portion of its receipts from customers will be settled in dollars. In 2010, we
expect a significant portion of DSIT’s sales to be settled in dollars. A
significant majority of DSIT’s expenses in Israel are in NIS (primarily labor
costs), while a portion is in dollars or dollar-linked NIS.




The
dollar cost of our operations in Israel may be adversely affected in the future
by a revaluation of the NIS in relation to the dollar.  In 2009 the
appreciation of the NIS against the dollar was 0.7% while in 2008 it was
1.1%.  Inflation in Israel was 3.9% in 2009 and 3.8% during
2008.  During the first two months of 2010, the dollar appreciated by
0.6% against the NIS and inflation in Israel during this period was negative
1.0%.




As of
December 31, 2009, virtually all of DSIT’s monetary assets and liabilities that
were not denominated in dollars or dollar-linked NIS were denominated in
NIS.  In the event that in the future we have material net monetary
assets or liabilities that are not denominated in dollar-linked NIS, such net
assets or liabilities would be subject to the risk of currency fluctuations.
DSIT purchases forward contracts to attempt to reduce its exposure to currency
fluctuations.




In
addition, our non-US dollar assets and liabilities (net liability of
approximately $0.1 million at December 31, 2009) in Canada at our Coreworx
subsidiary are also exposed to fluctuations in exchange rates. The dollar cost
of our operations in Canada may also be adversely affected in the future by a
revaluation of the Canadian dollar in relation to the U.S. dollar.  In
2009 the appreciation of the U.S. dollar against the Canadian dollar was
15.9%.  During the first two months of 2010, the U.S. dollar
appreciated by 0.1% against the Canadian dollar.


-57-


As of
December 31, 2009, virtually all of Coreworx’s assets and liabilities that were
not denominated in dollars were denominated in Canadian dollars.  In
the event that in the future we have material net assets or liabilities that are
not denominated in U.S. dollars, such net assets or liabilities would be subject
to the risk of currency fluctuations.




SUMMARY
QUARTERLY FINANCIAL DATA (Unaudited)




The
following table sets forth certain of our unaudited quarterly consolidated
financial information for the years ended December 31, 2008 and
2009.  This information should be read in conjunction with our
Consolidated Financial Statements and the notes thereto.




2008
                
                
                2009First
                    Quarter
                
                
                Second
                    Quarter
                
                
                Third
                    Quarter
                
                
                Fourth
                    Quarter
                
                
                First
                    Quarter
                
                
                Second
                    Quarter
                
                
                Third
                    Quarter
                
                
                Fourth
                    Quarter(in thousands, except per share amountsRevenues
                
                $
                4,295
                
                
                $
                3,607
                
                
                $
                4,628
                
                
                $
                8,166
                
                
                $
                8,478
                
                
                $
                7,780
                
                
                $
                6,463
                
                
                $
                8,596Cost
      of sales
                
                
                2,897
                
                
                
                2,575
                
                
                
                3,731
                
                
                
                4,960
                
                
                
                5,099
                
                
                
                4,290
                
                
                
                3,602
                
                
                
                4,774Gross
      profit
                
                
                1,398
                
                
                
                1,032
                
                
                
                897
                
                
                
                3,206
                
                
                
                3,379
                
                
                
                3,490
                
                
                
                2,861
                
                
                
                3,822Research
      and development expenses, net of credits of $1,016 in the second quarter
      of 2009
                
                
                51
                
                
                
                57
                
                
                
                402
                
                
                
                659
                
                
                
                276
                
                
                
                (624
                )
                
                
                424
                
                
                
                493Acquired
      in-process research and development
                
                
                —
                
                
                
                —
                
                
                
                551
                
                
                
                1,893
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Impairments
                
                
                248
                
                
                
                268
                
                
                
                2,454
                
                
                
                694
                
                
                
                70
                
                
                
                10
                
                
                
                —
                
                
                
                2,612Selling,
      general and administrative expenses
                
                
                2,305
                
                
                
                2,418
                
                
                
                3,401
                
                
                
                3,543
                
                
                
                4,108
                
                
                
                4,619
                
                
                
                4,565
                
                
                
                5,225Operating
      loss
                
                
                (1,206
                )
                
                
                (1,711
                )
                
                
                (5,911
                )
                
                
                (3,583
                )
                
                
                (1,075
                )
                
                
                (515
                )
                
                
                (2,128
                )
                
                
                (4,508
                )Finance
      income (expense), net
                
                
                (2,988
                )
                
                
                88
                
                
                
                (50
                )
                
                
                (81
                )
                
                
                (169
                )
                
                
                85
                
                
                
                297
                
                
                
                (444
                )Gain
      on early redemption of convertible debentures
                
                
                1,259
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Gain
      on sale of Comverge shares
                
                
                —
                
                
                
                5,782
                
                
                
                3,079
                
                
                
                —
                
                
                
                417
                
                
                
                810
                
                
                
                176
                
                
                
                —Gain
      on outside investment in Company’s equity investments, net
                
                
                —
                
                
                
                —
                
                
                
                7
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Income
      (loss) before taxes on income
                
                
                (2,935
                )
                
                
                4,159
                
                
                
                (2,875
                )
                
                
                (3,664
                )
                
                
                (827
                )
                
                
                380
                
                
                
                (1,655
                )
                
                
                (4,952
                )Income
      tax benefit (expense)
                
                
                642
                
                
                
                (640
                )
                
                
                (691
                )
                
                
                347
                
                
                
                —
                
                
                
                —
                
                
                
                72
                
                
                
                672Income
      (loss) from operations of the Company and its consolidated
      subsidiaries
                
                
                (2,293
                )
                
                
                3,519
                
                
                
                (3,566
                )
                
                
                (3,317
                )
                
                
                (827
                )
                
                
                380
                
                
                
                (1,583
                )
                
                
                (4,280
                )Share
      of income (loss) in Paketeria
                
                
                (287
                )
                
                
                (374
                )
                
                
                (899
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                263
                
                
                
                —Share
      of loss in GridSense
                
                
                —
                
                
                
                (134
                )
                
                
                (60
                )
                
                
                (732
                )
                
                
                (129
                )
                
                
                —
                
                
                
                —
                
                
                
                —Net
      income (loss)
                
                
                (2,580
                )
                
                
                3,011
                
                
                
                (4,525
                )
                
                
                (4,049
                )
                
                
                (956
                )
                
                
                380
                
                
                
                (1,320
                )
                
                
                (4,280
                )Net
      (income) loss attributable to non-controlling interests
                
                
                (9
                )
                
                
                89
                
                
                
                204
                
                
                
                (36
                )
                
                
                (107
                )
                
                
                (37
                )
                
                
                96
                
                
                
                468Net
      income (loss) attributable to Acorn Energy Inc
                
                $
                (2,589
                )
                
                $
                3,100
                
                
                $
                (4,321
                )
                
                $
                (4,085
                )
                
                $
                (1,063
                )
                
                $
                343
                
                
                $
                (1,224
                )
                
                $
                (3,812
                )Basic
      net income (loss) per share attributable to Acorn Energy Inc.
      shareholders:
                
                $
                (0.23
                )
                
                $
                0.28
                
                
                $
                (0.37
                )
                
                $
                (0.35
                )
                
                $
                (0.09
                )
                
                $
                0.03
                
                
                $
                (0.11
                )
                
                $
                (0.33
                )Diluted
      net income (loss) per share attributable to Acorn Energy Inc.
      shareholders:
                
                $
                (0.23
                )
                
                $
                0.26
                
                
                $
                (0.37
                )
                
                $
                (0.35
                )
                
                $
                (0.09
                )
                
                $
                0.03
                
                
                $
                (0.11
                )
                
                $
                (0.33
                )Weighted
      average number of sharesoutstanding
      attributable to Acorn Energy Inc. – basic
                
                
                11,050
                
                
                
                11,243
                
                
                
                11,538
                
                
                
                11,637
                
                
                
                11,535
                
                
                
                11,377
                
                
                
                11,186
                
                
                
                11,692Weighted
      average number of sharesoutstanding
      attributable to Acorn Energy Inc. – diluted
                
                
                11,050
                
                
                
                12,138
                
                
                
                11,538
                
                
                
                11,637
                
                
                
                11,535
                
                
                
                11,553
                
                
                
                11,186
                
                
                
                11,692


-58-




ITEM
      7A.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 Not
applicable.


ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA





Furnished
at the end of this report commencing on page F-1.




ITEM
      9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE




None.




ITEM
9A(T)     CONTROLS AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures




Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934, as amended (the “Act”) as of the end of the
period covered by this annual report on Form 10-K.  Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that these disclosure controls and procedures were effective as of such date, at
a reasonable level of assurance, in ensuring that the information required to be
disclosed by our company in the reports we file or submit under the Act is (i)
accumulated and communicated to our management (including the Chief Executive
Officer and Chief Financial Officer) in a timely manner, and (ii) recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms.




Internal
Control Over Financial Reporting




Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules
13a-15(f).  Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the criteria in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.Based
on our evaluation, management has concluded that our internal control over
financial reporting was effective as of December 31, 2009.  Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.  This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting pursuant to
temporary rules of the Securities and Exchange Commission.




Changes
in Internal Control Over Financial Reporting




There was
no change in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934, as amended) during our last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.




ITEM
9B.          OTHER
INFORMATION





None.


-59-


PART
III




ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE




Directors
and Executive Officers




Set forth
below is certain information concerning the directors and certain officers of
the Company:




Name
              
              Age
              
              PositionJohn
      A. Moore
              
              44
              
              Director,
      Chairman of the Board, President and Chief Executive
    OfficerGeorge
      Morgenstern
              
              76
              
              Founder,
      Chairman Emeritus; Chairman of the Board of our DSIT Solutions Ltd.
      subsidiary (“DSIT”)Samuel
      M. Zentman
              
              65
              
              Director
      and member of our Audit CommitteeRichard
      J. Giacco
              
              57
              
              Director
      and member of our Audit CommitteeRichard
      Rimer
              
              44
              
              DirectorJoe
      Musanti
              
              52
              
              Director
      and Chairman of our Audit CommitteeWilliam
      J. McMahon
              
              54
              
              Chief
      Executive Officer and President of CoaLogixBenny
      Sela
              
              62
              
              Chief
      Executive Officer and President of DSITRay
      Simonson
              
              61
              
              Chief
      Executive Officer and President of CoreworxMichael
      Barth
              
              49
              
              Chief
      Financial Officer of the Company and DSITJoe
      B. Cogdell, Jr.
              
              56
              
              Vice
      President, General Counsel &
Secretary




George Morgenstern, founder of
the Company, has been a director since 1986. Mr. Morgenstern served as Chairman
of the Board from June 1993 through March 2009 and has served as Chairman
Emeritus since March 2009.  Mr. Morgenstern served as our President
and Chief Executive Officer from our incorporation in 1986 until March
2006.  Mr. Morgenstern also serves as Chairman of the Board of
DSIT.  Mr. Morgenstern served as a member of the Board of Directors of
Comverge from October 1997 to March 2006 and as Chairman until April
2003.




Key Attributes, Experience and
Skills.Mr. Morgenstern, as founder of the Company, brings a unique
perspective to the Board. Mr. Morgenstern has over 50 years of experience in all
aspects of the computer software and systems industry and has special knowledge
of the business environment in Israel. Mr. Morgenstern is an accomplished
businessman experienced in fostering growth of developing companies. Mr.
Morgenstern’s deep knowledge of our Company and his leadership and management
experience are valuable resources to the Company. Mr. Morgenstern serves as
Chairman of the Board of DSIT, and has a strong understanding of DSIT’s business
and industry segment.


-60-


John A. Moore has been a
director and President and Chief Executive Officer of our Company since March
2006. Mr. Moore was elected Chairman of the Board on March 25, 2009. Mr. Moore
also served as a director of Comverge from March 2006 through January
2008.  Mr. Moore is the President and founder of Edson Moore
Healthcare Ventures, which he founded to acquire $150 million of drug delivery
assets from Elan Pharmaceuticals in 2002.  Mr. Moore was Chairman and
EVP of ImaRx Therapeutics, a drug and medical therapy development company, from
February 2004 to February 2006 and Chairman of Elite Pharmaceuticals from
February 2003 to October 2004.  He is currently a member of the Board
of Directors of Voltaix, Inc., a leading provider of specialty gases to the
solar and semiconductor industries.  He was CEO of Optimer, Inc. (a
research based polymer development company) from inception in 1994 until 2002
and Chairman from inception until its sale in February 2008 to Sterling
Capital.




Key Attributes, Experience and
Skills.Mr. Moore brings his strategic vision for our Company to the
Board together with his leadership and business, deal making and investor
relations skills. Mr. Moore has an immense knowledge of our Company and the
energy technology industry which is beneficial to the Board. Mr. Moore’s service
as Chairman and CEO of the Company bridges a critical gap between the Company’s
management and the Board, enabling the Board to benefit from management’s
perspective on the Company’s business while the Board performs its oversight
function.




Samuel M. Zentman has been one
of our directors since November 2004.  From 1980 until 2006, Dr.
Zentman was the president and chief executive officer of a privately-held
textile firm, where he also served as vice president of finance and
administration from 1978 to 1980.  From 1973 to 1978, Dr. Zentman
served in various capacities at American Motors Corporation. He holds a Ph.D. in
Complex Analysis. Dr. Zentman serves on the boards of Powersafe Technology Corp.
as well as several national charitable organizations devoted to advancing the
quality of education.




Key Attributes, Experience and
Skills. Dr. Zentman’s long-time experience as a businessman trained
together with his experience with computer systems and software enables him to
bring valuable insights to the Board. Dr. Zentman also serves as a director of
our Coreworx subsidiary where his knowledge of and experience with computer
systems and software are valuable assets. Dr. Zentman has a broad, fundamental
understanding of the business drivers affecting our Company, in particular our
DSIT and Coreworx subsidiaries. Dr. Zentman also brings leadership and oversight
experience to the Board.




Richard J. Giacco was elected
to the Board in September 2006.  Mr. Giacco has been President of
Empower Materials, Inc., a manufacturer of carbon dioxide based thermoplastics,
since January 1999.  Mr. Giacco was the Managing Member of
Ajedium Film Group, LLC, a manufacturer of thermoplastic films from its
inception until its sale in 2008.  Mr. Giacco served as Associate
General Counsel of Safeguard Scientifics, Inc. from 1984 to 1990.




Key Attributes, Experience and
Skills.Mr. Giacco brings strong operational and strategic background and
valuable business, leadership and management experience to our Company. Mr.
Giacco’s experience helping to lead the growth and ultimate sale of a family
business provides strategic vision and insights as the Company implements its
growth strategies. Mr. Giacco also brings legal experience to the Board, and he
serves as a director of our CoaLogix subsidiary.




Richard Rimer was elected to
the Board in September 2006. Mr. Rimer is a principal of Top Quartile Partners,
an investment fund.  From 2001 to 2006, Mr. Rimer was a Partner at Index
Ventures, a private investment company.  He formerly served on the
boards of Direct Medica, a provider of marketing services to pharmaceutical
companies, and Addex Pharmaceuticals, a pharmaceutical research and development
company.  Prior to joining Index Ventures, Mr. Rimer was the
co-founder of MediService, the leading direct service pharmacy in Switzerland
and had served as a consultant with McKinsey & Co.


-61-


Key Attributes, Experience and
Skills.Mr. Rimer brings to the Board broad business experience, and a
deep understanding of capital markets. As a successful entrepreneur, Mr. Rimer
founded a company in Holland which he successfully sold and went on to found
MediService – one of Europe’s leading mail service pharmacies (sold to Galenica
GALN-SW). While at Index Ventures, Mr. Rimer led work on multiple deals
including sourcing, due diligence, deal structuring and negotiation, monitored
growth of portfolio companies, syndicated subsequent financings, supported exit
negotiations as well as helped with key recruits.  These experiences
enable Mr. Rimer to bring valuable resources to the Company in addition to Mr.
Rimer’s leadership, analytical skills and broad familiarity with international
and cross-border transactions.





Joe Musanti was elected to the
Board in September 2007.  Since 2006, Mr. Musanti has served as
President of Main Tape Inc., a leading manufacturer of surface protection film
and paper products, based in Cranbury, New Jersey.  From 2003 to 2006,
prior to becoming President, Mr. Musanti served as Vice President Finance of
Main Tape.  Prior to that, Mr. Musanti was Vice President Finance of
Rheometric Scientific, Inc., a manufacturer of thermal analytical
instrumentation products where he held significant domestic and foreign,
operational, managerial, financial and accounting positions.




Key Attributes, Experience and
Skills.Mr. Musanti’s training and extensive experience in financial
management at both public and private companies provide the Board with valuable
insights and skills necessary to lead the Audit Committee. Mr.
Musanti’s  strong operational and business background complement his
accounting and finance experience, and are valuable resources to the Board as it
exercises its oversight duties and support of the Company’s growth
strategies.




William J. McMahon serves as
Chief Executive Officer and President of CoaLogix since its creation in November
2007.  Mr. McMahon also serves as president of SCR-Tech, LLC, a
position he has held since March 2005.  Prior to that, Mr. McMahon
served as Group Vice President of the Ultrapure Water division of Ionics, Inc.
from 2000 to 2004.  From 1997 to 2000, he held several executive level
positions including Chairman, President and Chief Executive Officer of
Pantellos; President and Chief Executive Officer of Stone & Webster Sonat
Energy Resources; and President of Stone & Webster Energy Services Inc. From
1978 to 1997, Mr. McMahon held positions at DB Riley, Inc. and at The
Babcock & Wilcox Company.  Mr. McMahon earned a B.S. degree in
Nuclear Engineering from Georgia Institute of Technology and an MBA from Xavier
University.




Benny Sela serves as the CEO
of DSIT, a position he has held since July 2007.  Previously, he held
the position of Executive Vice President and Head of the company’s Real Time
Division since 1996.  Mr. Sela joined DSIT in February
1989.  Prior to that, Mr. Sela served in the Israeli Air Force
reaching the position of Lt. Colonel (Ret.).  During his service in
the Israeli Air Force, Mr. Sela was head of the Electronic Warfare branch,
working on both the F-16 and Lavi projects.  He holds a B.Sc. in
Electrical Engineering, a Masters Degree in Operations Research from Stanford
University, and an MBA.




Ray Simonsonserves as CEO and
Chief Technology Officer (“CTO”) of Coreworx, positions that he has held since
April 2006. Prior to this, Mr. Simonson was CTO of Coreworx since September
2004. Previously, he was Senior Vice President and CTO of CheckFree i-Solutions
from 2000 to 2004. From 1996 to 2000, as Chief Technology Officer, he co-founded
BlueGill Technologies and assembled and led the development of the first
XML-based internet billing application. Prior to his experience with Bluegill
and CheckFree, Ray was in a series of senior roles focused on delivering mission
critical IT systems primarily in banking and insurance, with a deep expertise in
enterprise content.




Michael Barth has been our
Chief Financial Officer and the Chief Financial Officer of DSIT since December
2005.  For the six years prior, he served as Deputy Chief Financial
Officer and Controller of DSIT.  Mr. Barth is a Certified Public
Accountant in both the U.S. and Israel and has over 20 years of experience in
public and private accounting.


-62-


Joe B. Cogdell, Jr. joined
Acorn and CoaLogix as Vice President, General Counsel and Secretary of each
corporation on January 2, 2009.  For the 20 years prior, Mr. Cogdell
was a member of the Corporate and Securities Practice Group of the law firm
Womble Carlyle Sandridge & Rice, PLLC in the firm’s Charlotte, North
Carolina office.  Mr. Cogdell has thirty-one years experience as a
corporate and business lawyer.




Audit
Committee; Audit Committee Financial Expert




The
Company has a separately designated standing Audit Committee established and
administered in accordance with SEC rules. The three members of the Audit
Committee of are Joe Musanti, Richard Rimer and Samuel M.
Zentman.  The Board of Directors has determined that each member of
the Audit Committee meets the independence criteria prescribed NASDAQ governing
the qualifications of for audit committee members and each Audit Committee
member meets NASDAQ’s financial knowledge requirements.  Our Board has
determined that Joe Musanti qualifies as an “audit committee financial expert,”
as defined in the rules and regulations of the SEC.




Compliance
with Section 16(a) of the Securities Exchange Act of 1934




Section
16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires our
executive officers and directors, and persons who own more than 10% of a
registered class of our equity securities to file reports of ownership and
changes in ownership with the SEC.  These persons are also required by
SEC regulation to furnish us with copies of all Section 16(a) forms they
file.  Based solely on our review of such forms or written
representations from certain reporting persons, we believe that during 2009 our
executive officers and directors complied with the filing requirements of
Section 16(a) except that a Form 4 for Dr. Zentman related to an exercise of
warrants and a Form 4 by Mr. Sela related to his exercise of employee stock
options were not timely filed.




We have
implemented measures to assure timely filing of Section 16(a) reports by our
executive officers and directors in the future.




Code
of Ethics




We have
adopted a code of ethics that applies to our principal executive officer,
principal financial officer, and principal accounting officer or controller,
and/or persons performing similar functions. Our code of ethics may be accessed
on the Internet at http://www.acornenergy.com/rsc/docs/55.pdf


-63-




ITEM
      11.
            EXECUTIVE
      COMPENSATION




Summary
Compensation Table




Name and Principal Position
              
              Year
              
              Salary ($)
              
              
              Bonus ($)
              
              
              Option
                  Awards ($)
              
              
              All Other
                  Compensation
                  ($)
              
              
              Total ($)John
      A. Moore
                President
      and CEO
              
              2009
              
              
              350,000
              
              
              
              160,000
              
              
              
              103,652
              (1)
              
              
              12,000
              (2)
              
              
              632,4172008
              
              
              325,000
              
              
              
              —
              
              
              
              692,645
              (3)
              
              
              12,000
              (2)
              
              
              1,029,645William
      J. McMahon
                CEO
      and President of CoaLogix and SCR-Tech
              
              2009
              
              
              250,000
              
              
              
              136,880
              
              
              
              175,574
              (4)
              
              
              13,200
              (5)
              
              
              575,6542008
              
              
              223,596
              
              
              
              171,160
              
              
              
              400,022
              (6)
              
              
              11,550
              (5)
              
              
              806,328Joe
      B. Cogdell, Jr.
                Vice
      President, General Counsel and Secretary(7)
              
              2009
              
              
              300,000
              
              
              
              90,380
              
              
              
              265,357
              (8)
              
              
              15,941
              (5)
              
              
              671,678







(1)
            Represents
      the grant date fair value calculated in accordance with applicable
      accounting principles with respect to 75,000 stock options granted on
      February 20, 2009 with an exercise price of $2.51.The fair value of the
      options was determined using the Black-Scholes option pricing model using
      the following assumptions: (i) a risk-free interest rate of 1.8% (ii) an
      expected term of 4.5 years (iii) an assumed volatility of 68% and (iv) no
      dividends.


(2)
            Consists
      of automobile expense allowance.


(3)
            Represents
      the grant date fair value calculated in accordance with applicable
      accounting principles with respect to 200,000 stock options granted on
      March 4, 2008 with an exercise price of $5.11 per share. The fair value of
      the options was determined using the Black-Scholes option pricing model
      using the following assumptions: (i) a risk-free interest rate of 2.5%
      (ii) an expected term of 6.1 years (iii) an assumed volatility of 76% and
      (iv) no dividends.


(4)
            Represents
      the grant date fair value calculated in accordance with applicable
      accounting principles with respect to 40,513 CoaLogix stock options
      granted on April 8, 2009 with an exercise price of $7.20. The fair
      value of the options was determined using the Black-Scholes option pricing
      model using the following assumptions: (i) a risk-free interest rate of
      1.8% (ii) an expected term of 6.1 years (iii) an assumed volatility of 65%
      and (iv) no dividends.


(5)
            Represents
      401k contributions.


(6)
            Represents
      the grant date fair value calculated in accordance with applicable
      accounting principles with respect to 147,050 stock options granted on
      April 9, 2008 with an exercise price of $5.05. The fair value of the
      options was determined using the Black-Scholes option pricing model using
      the following assumptions: (i) a risk-free interest rate of 2.6% (ii) an
      expected term of 5.9 years (iii) an assumed volatility of 56% and (iv) no
      dividends.


(7)
            Appointed
      Vice President, General Counsel and Secretary of both the Company and
      CoaLogix commencing January 2,
2009.


(8)
            Represents
      the grant date fair value calculated in accordance with applicable
      accounting principles with respect to 120,000 Acorn stock options granted
      on January 5, 2009 with an exercise price of $1.61 ($243,389) and 5,069
      CoaLogix stock options granted on April 8, 2009 with an exercise price of
      $7.20 ($21,968). The fair value of the Acorn stock options was
      determined using the Black-Scholes option pricing model using the
      following assumptions: (i) a risk-free interest rate of 2.5% (ii) an
      expected term of 9.0 years (iii) an assumed volatility of 73% and (iv) no
      dividends. The fair value of the CoaLogix stock options was determined
      using the Black-Scholes option pricing model using the following
      assumptions: (i) a risk-free interest rate of 2.6% (ii) an expected term
      of 5.9 years (iii) an assumed volatility of 56% and (iv) no
      dividends.


-64-




Employment
Arrangements




The employment arrangements of each
named executive officer and certain other officers are described
below.




John A.
Moore became our President and Chief Executive Officer in March
2006.  In March, 2008, we entered into a three-year Employment
Agreement with Mr. Moore. Under the terms of the Employment Agreement, Mr.
Moore’s initial base salary is $325,000 per annum, retroactive to January 1,
2008, increasing to $350,000 per annum on the first anniversary of the
Employment Agreement and increasing to $375,000 per annum on the second
anniversary. Mr. Moore is eligible to receive an annual cash bonus of up to
$200,000, based upon the attainment of agreed upon personal and company
performance goals and milestones for the preceding fiscal year, as determined by
the Board. Under the Employment Agreement, Mr. Moore is also entitled to (i) the
employee benefits generally made available to the registrant’s executive
officers, (ii) short-term and long-term disability insurance for the benefit of
Mr. Moore, and (iii) a monthly automobile expense allowance of
$1,000.  Under the Employment Agreement, Mr. Moore was also granted
non-qualified stock options to purchase 200,000 shares of common stock at an
exercise price of $5.11 per share. The options vest in equal quarterly
installments over a four-year period, commencing 90 days from the date of grant
and expire in March 2018. In February 2009, in lieu of a bonus for 2008, Mr.
Moore was awarded 75,000 stock options exercisable until February 20, 2014 at an
exercise price of $2.51 per share, exercisable immediately as to one-fourth of the options,
with the remainder to vest in equal installments on June 30, September 30 and
December 31, 2009. Mr. Moore's bonus for 2009 was $160,000.




William J.
McMahon has served as Chief Executive Officer and President of CoaLogix
since the Company’s acquisition of SCR-Tech and its related companies on
November 7, 2007.  Mr. McMahon employment terms are based on employment
agreement signed effective January 1, 2007 between Mr. McMahon and SCR-Tech’s
former parent company.  The employment agreement was subsequently assumed
and modified on November 7, 2007 in conjunction with the Company’s acquisition
of SCR-Tech.  The agreement has no fixed term and the employment is on an
“at-will” basis. Mr. McMahon’s employment agreement calls for base salary
of $215,000 per year with cost of living increases (a base salary of $250,000 in
2009 which was increased to $280,000 for 2010).  In April 2009 and
April 2008, Mr. McMahon also received options under the CoaLogix Inc. 2008 Stock
Option Plan and a 40% participation in the CoaLogix Capital Appreciation Rights
Plan. Under the Capital Appreciation Rights Plan, plan participants are entitled
to participate in an award pool based upon the sales proceeds (less sales
expenses) attributable to a sale or other change of control of CoaLogix which
exceeds an internal rate of return of 30% on the Company’s initial investment in
CoaLogix of $11,038,200 and any additional capital contributed by Acorn to
CoaLogix. If such internal rate of return threshold is met, the award pool under
the Capital Appreciation Rights Plan would be equal to 5% of the sales proceeds
less sales expenses, the CoaLogix’ stockholders’ initial investment and any
additional capital contributed by the stockholders to CoaLogix.  Mr.
McMahon is eligible to receive an annual bonus with a target payment equal to
50% of his base salary based upon criteria developed by the board of directors
of CoaLogix. The actual bonus payout may be more or less than the target level
base upon achievement of annual goals approved by its board of directors. 
Mr. McMahon’s bonus for 2009 was $136,880.




Benny Sela
has served as President and Chief Executive Officer of DSIT beginning July 1,
2007.  Mr. Sela’s employment agreement provided for a base salary
which is denominated in Israeli Consumer Price Index (“CPI”) linked NIS,
equivalent to approximately $174,000 per annum.  In October 2009, the
Board of DSIT approved new employment terms for Mr. Sela effective November 1,
2009. Under the new employment terms, Mr. Sela's salary increased to
approximately $191,000 per annum.  In addition to his base salary, Mr.
Sela is also entitled to receive a bonus payment equal to 1.75% of DSIT’s gross
profit.  Mr. Sela’s bonus for 2009 was $70,688.


-65-


Ray
Simonson has served as Chief Executive Officer of Coreworx since the
Company’s acquisition of Coreworx on August 13, 2008.  Mr. Simonson’s
employment terms are based on employment agreement signed effective April 1,
2005 between Mr. Simonson and Coreworx.  Mr. Simonson’s
employment agreement provides for a base salary which is denominated in Canadian
dollars, currently equivalent to approximately $214,000 per
annum.  Mr. Simonson is eligible to receive an annual bonus with a
target payment equal to 50% of his base salary based upon criteria developed by
the board of directors of Coreworx.  Mr. Simonson did not receive a
bonus for 2009.




Michael
Barth has served as Chief Financial Officer of the Company and Chief
Financial Officer of DSIT beginning December 1, 2005.  In August 2009,
the Board approved new employment terms for Mr. Barth effective August 1, 2009.
According to the terms of the new employment terms, Mr. Barth is entitled to a
salary increase from $150,000 to $175,000 per annum retroactive to August 1,
2009. One half of Mr. Barth’s salary is fixed in NIS at the November 1, 2007
exchange rate and linked to the Israel CPI and adjusted semi-annually. Mr.
Barth's bonus for 2009 was $75,000.




Joe B. Cogdell,
Jr. became Vice President, General Counsel and Secretary of each of the
Company and CoaLogix commencing January 2, 2009.  Mr. Cogdell’s
initial base salary is $300,000 per annum, and his base salary was increased to
$312,000 for 2010.  He is eligible to receive an annual bonus of up to
30% of his base salary, based upon the attainment of performance
goals.  Mr. Cogdell's bonus for 2009 was $90,380. The agreement has no
fixed term, and the employment is on an “at-will” basis.





Under the
employment agreement, in January 2009 Mr. Cogdell was awarded 120,000 options to
purchase Acorn common stock at an exercise price of $1.61 per share, vesting
as to 30,000 on the
first anniversary of the date of grant and as to the remainder in equal
quarterly installments over a three year period following the first anniversary
of the date of grant, exercisable through January 5,
2019.  Under the employment agreement, Mr. Cogdell will also
have the right to participate in any future financing of CoaLogix at the same
level and priority as Acorn so long as he is employed.  Mr. Cogdell
also received options under the CoaLogix Inc. 2008 Stock Option Plan and a
participation in the CoaLogix Capital Appreciation Rights Plan. Mr. Cogdell is
also entitled to the employee benefits generally made available to other senior
executives, officer’s liability and legal malpractice insurance, as well as bar
and legal association dues and continuing legal education
programs.  Under the employment agreement, Mr. Cogdell is subject to
non-solicitation and non-compete covenants, which continue for 18 months after
termination of his employment.





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


-66-


Outstanding
Equity Awards at 2009 Fiscal Year End




The
following tables sets forth all outstandingequityawards made to each of the Named Executive Officers
that are outstanding at December 31, 2009.







OPTIONS TO PURCHASE ACORN ENERGY, INC. STOCKName
                    
                    Number of
                        Securities
                        Underlying
                        Unexercised
                        Options (#)
                        Exercisable
                    
                    
                    Number of
                        Securities
                        Underlying
                        Unexercised Options
                        (#) Unexercisable
                    
                    
                    Option
                        Exercise Price
                        ($)
                    
                    
                    Option Expiration
                        DateJohn
      A. Moore
                    
                    
                    400,000
                    
                    
                    
                    —
                    
                    
                    
                    2.60
                    
                    
                    March 31, 201160,000
                    
                    
                    
                    —
                    
                    
                    
                    4.53
                    
                    
                    March 31, 201187,500
                    
                    
                    
                    112,500
                    (1)
                    
                    
                    5.11
                    
                    
                    March 4, 201875,000
                    
                    
                    
                    —
                    
                    
                    
                    2.51
                    
                    
                    February 20, 2014William
      J. McMahon
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    —Joe
      B. Cogdell, Jr.
                    
                    
                    —
                    
                    
                    
                    120,000
                    (2)
                    
                    
                    1.61
                    
                    
                    January 5, 2019








(1)
            These
      options vest 12,500 options quarterly from March 4, 2010 through March 4,
      2012.


(2)
            These
      options vest 30,000 on January 5, 2010 and 7,500 options quarterly
      thereafter from April 5, 2010 through January 5,
  2013.





OPTIONS TO PURCHASE COALOGIX INC. STOCKName
                  
                  Number of
                      Securities
                      Underlying
                      Unexercised
                      Options (#)
                      Exercisable
                  
                  
                  Number of
                      Securities
                      Underlying
                      Unexercised Options
                      (#) Unexercisable
                  
                  
                  Option
                      Exercise Price
                      ($)
                  
                  
                  Option Expiration
                      DateJohn
      A. Moore
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  —William
      J. McMahon
                  
                  
                  73,525
                  
                  
                  
                  73,525
                  (3)
                  
                  
                  5.05
                  
                  
                  April 18, 2018-
                  
                  
                  
                  40,513
                  (4)
                  
                  
                  7.20
                  
                  
                  April 7, 2019Joe
      B. Cogdell, Jr.
                  
                  
                  —
                  
                  
                  
                  5,069
                  (5)
                  
                  
                  7.20
                  
                  
                  April 7, 2019








(3)
            These
      options vest 9,191 options quarterly from February 7, 2010 through
      November 7, 2011.


(4)
            These
      options vest 10,128 on April 8, 2010 and 2,532 options quarterly
      thereafter from July 8, 2010 through April 8,
  2013.


(5)
            These
      options vest 1,267 on April 8, 2010 and 317 options quarterly thereafter
      from July 8, 2010 through April 8,
2013.


-67-


Estimated
Payments and Benefits Upon Termination or Change in Control




The
amount of compensation and benefits payable to each named executive officer and
certain other officers in various termination situations is described in the
tables below.




John
A. Moore




Under the
terms of the employment agreement with Mr. Moore, our President and Chief
Executive Officer, upon termination by the Company for cause (as defined in the
agreement) and upon termination by Mr. Moore without good reason (as defined in
the agreement), all compensation due to Mr. Moore under his agreement would
cease, except that Mr. Moore would receive all accrued but unpaid base salary up
to the date of termination, and reimbursement of all previously unreimbursed
expenses.  All vested and unexercised options granted by the Company
as of the date of termination would be exercisable in accordance with the terms
of the applicable stock option plan and agreements, provided that Mr. Moore
would have only three months to exercise such previously vested
options.  All options that had not vested as of the date of
termination would expire.





In the
event that within three months prior to or one year following a change of
control (as defined in the agreement), either (i) the Company terminates the
employment of Mr. Moore, other than for cause, or (ii) Mr. Moore terminates for
good reason, Mr. Moore would receive the following (except to the extent that
any payment would constitute an “excess parachute payment” under the IRS Code):
(i) an amount equal to (A) 24 months of then-current base salary and (B) two
times his most recent annual bonus; (ii) reimbursement of all previously
unreimbursed expenses; (iii) the full vesting of any and all stock options
granted to Mr. Moore by the Company prior to such termination, and extended
exercisability thereof until their respective expiration dates; and (iv) the
continuation of all medical and dental benefits at the Company’s sole expense
for a period of one year after termination.





In the
event that (i) the Company terminates the employment of Mr. Moore (including a
non-renewal of his agreement at the end of the three-year term provided therein,
but not including non-renewal following any subsequent renewal of the term),
other than upon a change of control, death, disability or for cause, or (ii) Mr.
Moore terminates for good reason, other than in connection with a change of
control, Mr. Moore shall receive the following (except to the extent that any
payment would constitute an “excess parachute payment” under the IRS Code): (i)
an amount equal to (A) 12 months of then-current base salary and (B) his most
recent annual bonus; (ii) reimbursement of all previously unreimbursed expenses;
(iii) accelerated vesting of all unvested options that otherwise would have
vested within 24 months of the date of termination, with such accelerated
options and all other vested and unexercised options granted by the Company as
of the date of termination to be exercisable for a period of one year from the
date of termination of employment in accordance with the terms of the applicable
stock option plan and agreements; and (iv) the continuation of all medical and
dental benefits at the Company’s sole expense for a period of one year after
termination.





In the
event of any change of control, all stock options granted to Mr. Moore prior to
such change of control vest and remain exercisable until their respective
expiration dates.





The term
of Mr. Moore’s agreement would end immediately upon his death, or upon
termination by the Company for cause or disability (as defined in the agreement)
or by Mr. Moore for good reason.  Upon termination due to Mr. Moore’s
death, all compensation due Mr. Moore under his agreement would
cease.


-68-


The
following table describes the potential payments and benefits upon termination
of employment for Mr. Moore, as if his employment terminated as of December 31,
2009, the last day of our last fiscal year.




Circumstances of TerminationPayments and benefits
                
                Voluntary
                    resignation
                
                
                Termination
                    not for cause
                
                
                Change of
                    control
                
                
                Death or
                    disabilityCompensation:Base
      salary
                
                
                —
                (1)
                
                $
                350,000
                (2)
                
                $
                700,000
                (5)
                
                
                —Bonus
                
                
                —
                
                
                
                —
                (3)
                
                
                —
                (3)
                
                
                —Benefits
      and perquisites:Perquisites
      and other personal benefits
                
                
                —
                
                
                
                6,972
                (4)
                
                
                6,972
                (4)
                
                
                —Total
                
                
                —
                
                
                $
                356,972
                
                
                $
                706,972
                
                
                
                —







(1)
            Assumes
      that there is no earned but unpaid base salary at the time of
      termination.


(2)
            The
      $350,000 represents 12 months of Mr. Moore’s base
  salary.


(3)
            No
      amounts are included for target bonus as there was no bonus for
      2009.


(4)
            The
      $6,972 represents 12 months of health insurance
  payments.


(5)
            The
      $700,000 represents 24 months of Mr. Moore’s base
  salary.




William
J. McMahon




Under the
terms of the employment agreement with Mr. McMahon, the President and Chief
Executive Officer of our CoaLogix subsidiary, as modified by the Modification
Agreement signed with Mr. McMahon upon acquisition of SCR-Tech by the Company,
in the event of his involuntarily termination (as defined in the agreement)
other than for cause (as defined in the agreement), Mr. McMahon would be
entitled to receive a lump sum cash payment in an amount equal to two hundred
percent (200%) of his annual compensation (as defined in the agreement). 
He would also receive 100% company-paid health, dental and life insurance
coverage at the same level of coverage as was provided to him and his dependents
immediately prior to the termination for up to a maximum of two years from the
date of his termination.




If Mr.
McMahon’s employment terminates by reason of his voluntary resignation (and is
not an involuntary termination), or if he is terminated for cause, then he would
not be entitled to receive severance or other benefits under his employment
agreement.




If the
Company terminates Mr. McMahon’s employment as a result of his disability (as
defined in the agreement), or his employment is terminated due to his death,
then he would not be entitled to receive severance or other benefits under his
employment agreement.


-69-


The
following table describes the potential payments and benefits upon termination
of employment for Mr. McMahon, as if his employment terminated as of December
31, 2009, the last day of our last fiscal year.




Circumstances of TerminationPayments and benefits
                
                Voluntary
                    resignation
                
                
                Termination
                    not for cause
                
                
                Change of
                    control
                
                
                Death or
                    disabilityCompensation:Base
      salary
                
                
                —
                (1)
                
                $
                500,000
                (2)
                
                $
                500,000
                (2)
                
                
                —Bonus
                
                
                —
                
                
                
                250,000
                (3)
                
                
                250,000
                (3)
                
                
                —Benefits
      and perquisites:Perquisites
      and other personal benefits
                
                
                —
                
                
                
                10,416
                (4)
                
                
                23,112
                (5)
                
                
                —Total
                
                
                —
                
                
                $
                760,416
                
                
                $
                773,112
                
                
                
                —







(1)
            Assumes
      that there is no earned but unpaid base salary at the time of
      termination.


(2)
            The
      $500,000 represents 200%  of Mr. McMahon’s base
      salary


(3)
            Represents
      200% of Mr. McMahon’s target bonus.


(4)
            Represents
      12 months of subsidized health and dental insurance
    payments


(5)
            Represents
      24 months of health, dental and life insurance
  payments.




Benny
Sela




Under the
terms of the employment agreement with Mr. Sela, the President and Chief
Executive Officer of our DSIT subsidiary, we are obligated to make certain
payments to fund in part our severance obligations to him.  We are
required to pay Mr. Sela an amount equal to 150% of his last month’s salary
multiplied by the number of years (including partial years) that Mr. Sela has
worked for us.  This severance obligation would be reduced by the
amount contributed by us to certain Israeli pension and severance funds pursuant
to Mr. Sela’s employment agreement.  As of December 31, 2009, the
unfunded portion of these payments was $182,974.  Mr. Sela would also
receive a lump sum payment equal to six months base salary in the event of a
voluntary resignation, and a lump sum payment equal to nine months salary in the
event of termination not for cause.




-70-


The
following table describes the potential payments and benefits upon termination
of employment for Mr. Sela, as if his employment terminated as of December 31,
2009, the last day of our last fiscal year.




Circumstances of TerminationPayments and benefits
                  
                  Voluntary
                      resignation
                  
                  
                  Termination
                      not for cause
                  
                  
                  Change
                      of control
                  
                  
                  Death or
                      disabilityCompensation:Base
      salary
                  
                  $
                  95,461
                  (1)
                  
                  $
                  143,192
                  (2)
                  
                  
                  —
                  
                  
                  $
                  143,192
                  (2)Benefits
      and perquisites:Perquisites
      and other personal benefits
                  
                  $
                  471,061
                  (3)
                  
                  $
                  483,688
                  (4)
                  
                  
                  
                  
                  
                  $
                  483,688
                  (4)Total
                  
                  $
                  566,522
                  
                  
                  $
                  626,880
                  
                  
                  
                  —
                  
                  
                  $
                  626,880







(6)
            Assumes
      that there is no earned but unpaid base salary at the time of
      termination.  The $95,461 represents a lump sum payment of six
      months’ salary due to Mr. Sela.


(7)
            Assumes
      that there is no earned but unpaid base salary at the time of
      termination.  The $143,192 represents a lump sum payment of nine
      months’ salary due to Mr. Sela.


(8)
            Includes
      $499,471 of severance pay based in accordance with Israeli labor law
      calculated based on his last month’s salary multiplied by the number of
      years (including partial years) that Mr. Sela worked for us multiplied by
      150% in accordance with his contract.  Of the $499,471 due Mr.
      Sela, we have funded $316,497 in an insurance fund.  Also
      includes accumulated, but unpaid vacation days ($24,336), car benefits
      ($6,000) and payments for pension and education funds ($19,254) less
      $78,000 of benefits waived in support of DSIT’s operations in
      2007.


(9)
            Includes
      $499,471 of severance pay based in accordance with Israeli labor law
      calculated based on his last month’s salary multiplied by the number of
      years (including partial years) that Mr. Sela worked for us multiplied by
      150% in accordance with his contract.  Of the $499,471 due Mr.
      Sela, we have funded $316,497 in an insurance fund.  Also
      includes accumulated, but unpaid vacation days ($24,336), car benefits
      ($9,000) and payments for pension and education funds ($28,881) less
      $78,000 of benefits waived in support of DSIT’s operations in
      2007.


-71-




Ray
Simonson




Under the
terms of the employment agreement with Mr. Simonson, the Chief Executive Officer
of our Coreworx subsidiary, in the event that he is terminated without cause and
not in connection with a change of control (as defined in the agreement), he
would receive severance pay equal to (i) six months of his base salary plus (ii)
one additional month of his base salary for each full or partial year served
after September 1, 2005 through the date of termination, with such payments to
be made on a salary continuance basis for the period covered, during which time
his benefits under the agreement would also continue.




In the
event that he is terminated without cause and in connection with a change of
control, Mr. Simonson would be entitled to the severance payments described
above as well as an additional lump sum payment in an amount equal to (i) three
(3) months of his base salary plus (ii) one (1) additional month of his base
salary for each full or partial year served after September 1, 2005 through the
date of termination, up to a maximum of twelve (12) months of base
salary.  All of his unvested options would immediately vest, and would
be exercisable until the earlier of their original expiration dates or the first
anniversary of the date termination.




If Mr.
Simonson’s title, role in the Company, responsibilities or line of reporting
were to be materially altered by the Company, he would be entitled to treat his
employment as having been terminated without cause and would be entitled to
receive the severance payments described above.




If he is
terminated for just cause (as defined in the agreement), Mr. Simonson would not
be due any severance compensation.




The
following table describes the potential payments and benefits upon termination
of employment for Mr. Simonson, as if his employment terminated as of December
31, 2009, the last day of our last fiscal year.




Circumstances of TerminationPayments and benefits
              
              Voluntary
                  resignation
              
              
              Termination
                  not for cause
              
              
              Change of
                  control
              
              
              Death or
                  disabilityCompensation:Base
      salary
              
              $
              —
              (1)
              
              $
              196,241
              (2)
              
              $
              196,241
              (2)
              
              
              —Bonus
              
              
              —
              
              
              
              —
              
              
              
              142,721
              (3)
              
              
              —Benefits
      and perquisites:Perquisites
      and other personal benefits
              
              
              8,234
              (2)
              
              
              23,302
              (2)
              
              
              23,302
              (2)
              
              
              —Total
              
              $
              8,234
              
              
              $
              219,543
              
              
              $
              362,264
              
              
              
              —







(1)
            Assumes
      that there is no earned but unpaid base salary at the time of
      termination.


(2)
            Represents
      eleven months of Mr. Simonson’s base
salary.


(3)
            Represents
      a lump-sum payment of eight months of Mr. Simonson’s base
      salary.


(4)
            Represents
      unpaid vacation pay.




Michael
Barth




Under the
terms of the employment arrangement with Mr. Barth, our Chief Financial Officer,
we are obligated to make certain payments to fund in part our severance
obligations to him.  We would be required to pay Mr. Barth an amount equal
to 120% of his last month’s salary multiplied by the number of years (including
partial years) that Mr. Barth worked for us.  This severance obligation,
which is customary for executives of Israeli companies, would be reduced by the
amount contributed by us to certain Israeli pension and severance funds pursuant
to Mr. Barth’s employment arrangement.  As of December 31, 2009, the
unfunded portion of these payments was $105,696.  In addition, the
arrangement with Mr. Barth provides for an additional payment equal to six times
his last month’s total compensation, payable at the end of his employment with
us.


-72-


The
following table describes the potential payments and benefits upon termination
of employment for Mr. Barth, as if his employment terminated as of December 31,
2009, the last day of our last fiscal year.




Circumstances of TerminationPayments and benefits
                
                Voluntary
                    resignation
                
                
                Termination
                    not for cause
                
                
                Change
                    of
                    control
                
                
                Death or
                    disabilityCompensation:Base
      salary
                
                $
                29,404
                (1)
                
                $
                88,212
                (2)
                
                
                —
                
                
                $
                88,212
                (2)Benefits
      and perquisites:Perquisites
      and other personal benefits
                
                $
                53,770
                (3)
                
                $
                176,803
                (4)
                
                
                —
                
                
                $
                176,803
                (4)Total
                
                $
                83,174
                
                
                $
                265,015
                
                
                
                —
                
                
                $
                265,015







(1)
            Assumes
      that there is no earned but unpaid base salary at the time of
      termination.  The $29,404 represents a lump sum payment of two
      months’ salary due to Mr. Barth.


(2)
            Assumes
      that there is no earned but unpaid base salary at the time of
      termination.  The $88,212 represents a lump sum payment of 6
      months’ salary due to Mr. Barth upon termination without cause or by death
      or disability.


(3)
            Includes
      $72,855 of severance pay based on the amounts funded in for Mr. Barth’s
      severance in accordance with Israeli labor law.  Also includes
      accumulated, but unpaid vacation days ($20,606), car benefits ($2,000) and
      payments for pension and education funds ($6,309) less $48,000 of benefits
      waived in support of DSIT’s operations in
2007.


(4)
            Includes
      $178,551 of severance pay based in accordance with Israeli labor law
      calculated based on his last month’s salary multiplied by the number of
      years (including partial years) that Mr..  Barth worked for us
      multiplied by 120% in accordance with his contract.  Of the
      $178,551 due Mr. .Barth, we have funded $72,855 in an insurance
      fund.  Also includes accumulated, but unpaid vacation days
      ($20,606), car benefits ($6,000) and payments for pension and education
      funds ($18,926) less $48,000 of benefits waived in support of DSIT’s
      operations in 2007.




Joe
B. Cogdell, Jr.




Under the
terms of the employment agreement with Mr. Cogdell, Vice President, General
Counsel and Secretary of each of the Company and CoaLogix, if he were to be
terminated as a result of an involuntary termination without cause (each as
defined in the agreement), Mr. Cogdell would be entitled to receive, as
severance, (i) an amount in cash equal to twice his annual compensation
(determined by reference to base salary and bonus) (the “Cash Severance Amount”)
payable over 24 months and (ii) for up to 18 months post-termination,
CoaLogix-subsidized COBRA premiums for continuing participation by Mr. Cogdell
and his eligible dependents in the companies’ group health plans such that Mr.
Cogdell is required to pay no more than an active employee.  If,
however, any such termination were to occur in connection with a change of
control (as defined in the agreement), the Cash Severance Amount would be
payable in one lump sum and the employee benefits obligation would be increased
such that CoaLogix would be fully responsible for the cost thereof and the
benefits would be broadened to include health, dental and life insurance
coverage to the extent Mr. Cogdell and his eligible dependents participated in
the same prior to the change of control.  Mr. Cogdell would not be
entitled to severance under the employment agreement in the event that his
employment is terminated for cause or due to voluntary resignation, death or
disability (as defined in the agreement).


-73-





Circumstances of TerminationPayments and benefits
                
                Voluntary
                    resignation
                
                
                Termination
                    not for cause
                
                
                Change of
                    control
                
                
                Death or
                    disabilityCompensation:Base
      salary
                
                
                —
                (1)
                
                $
                600,000
                (2)
                
                $
                600,000
                (2)
                
                
                —Bonus
                
                
                —
                
                
                $
                180,000
                (3)
                
                $
                180,000
                (3)
                
                
                —Benefits
      and perquisites:Perquisites
      and other personal benefits
                
                
                —
                
                
                
                21,366
                (4)
                
                
                26,874
                (5)
                
                
                —Total
                
                
                —
                
                
                $
                801,366
                
                
                $
                806,874
                
                
                
                —





(1)
            Assumes
      that there is no earned but unpaid base salary at the time of
      termination.


(2)
            Represents
      200% of Mr. Cogdell’s annual
compensation.


(3)
            Represents
      200% of Mr. Cogdell’s targeted
bonus.


(4)
            Represents
      18 months of subsidized health and dental insurance
    payments.


(5)
            Represents
      18 months of health, dental and life insurance
  payments.




Compensation
of Directors




In
October 2007, we agreed that each of our non-employee directors would be paid an
annual cash retainer of $40,000 payable quarterly in advance, as well as meeting
fees for Board and Committee meetings of $1,000 per meeting. In 2009, we agreed
that certain directors would receive an additional annual cash retainer; $12,000
for the lead director for CoaLogix matters, $12,000 for the lead director for
Coreworx matters and $10,000 for the Chairman of the Audit Committee. As an
employee, Mr. Moore is not entitled to separate compensation in his capacity as
a director.




Our 2006
Stock Option Plan for Non-Employee Directors, which was adopted in February 2007
and amended and restated in November 2008, provides for formula grants to
non-employee directors equal to an option to purchase (i) 25,000 shares of our
common stock upon a member’s initial appointment or election to the Board of
Directors and (ii) 10,000 shares of our common stock to each director, other
than newly appointed or elected directors, immediately following each annual
meeting of stockholders.  The initial grant to purchase 25,000 shares
of our common stock vests one-third per year for each of the three years
following the date of appointment or election and the annual grant to purchase
10,000 shares vests one year from the date of grant.  Both options
shall be granted at an exercise price equal to the closing price on NASDAQ on
the day preceding the date of grant and shall be exercisable until the earlier
of (a) seven years from the date of grant or (b) 18 months from the date that
the director ceases to be a director, officer, employee, or
consultant.  The plan also provides for non-formula grants at the
Board’s discretion.  The maximum number of shares of our common stock
to be issued under the plan is 400,000.  The Plan is administered by
the Board of Directors.




Consulting
Agreement with Mr. Morgenstern




Mr.
Morgenstern, our Chairman Emeritus, has been retained as a consultant by our
Company since March 2006 primarily to provide oversight of our Israeli
activities.  Mr. Morgenstern’s consulting agreement, as amended to
date, expires on March 31, 2011, provides for the payment of an annual
consulting fee of $1.00 and a non-accountable expense allowance of $75,000 per
year plus a payment of a bonus of $25,000 under certain
circumstances.




The
following table sets forth information concerning the compensation earned for
service on our Board of Directors during the fiscal year ended December 31,
2009 by each individual (other than Mr. Moore who is not separately compensated
for Board service) who served as a director at any time during the fiscal
year.


-74-




DIRECTOR
COMPENSATION IN 2009





Name
              
              Fees
                  Earned or
                  Paid in
                  Cash ($)
              
              
              Option
                  Awards ($)
                  (1)
              
              
              All Other
                  Compensation
                  ($)
              
              
              Total ($)Scott
      Ungerer(2)
              
              
              11,000
              
              
              
              —
              
              
              
              —
              
              
              
              11,000Joe
      Musanti
              
              
              53,000
              (3)
              
              
              31,198
              
              
              
              —
              
              
              
              84,198George
      Morgenstern
              
              
              44,000
              
              
              
              31,198
              
              
              
              75,000
              (4)
              
              
              150,198Samuel
      M. Zentman
              
              
              44,000
              
              
              
              31,198
              
              
              
              12,000
              (5)
              
              
              87,198Richard
      J. Giacco
              
              
              44,000
              
              
              
              31,198
              
              
              
              12,000
              (6)
              
              
              87,198Richard
      Rimer
              
              
              44,000
              
              
              
              31,198
              
              
              
              —
              
              
              
              75,198







(1)
            On
      August 4, 2009, all directors were granted 10,000 options to acquire stock
      in the Company. The options have an exercise price of $4.75 and expire on
      August 4, 2016. The fair value of the options was determined using the
      Black-Scholes option pricing model using the following assumptions: (i) a
      risk-free interest rate of 3.4% (ii) an expected term of 6.3 years (iii)
      an assumed volatility of 70% and (iv) no dividends.  All options
      awarded to directors in 2009 remained outstanding at fiscal year-end. As
      of December 31, 2009, the number of stock options held by each of the
      above persons was: Scott Ungerer, 8,333; Joe Musanti, 45,000; George
      Morgenstern, 237,500; Samuel Zentman, 95,000; Richard Giacco, 55,000; and
      Richard Rimer, 105,000.


(2)
            Mr.
      Ungerer resigned from his position as director on March 11,
      2009.


(3)
            Includes
      $10,000 Mr. Musanti received for services rendered as the Chairman of the
      Audit Committee.


(4)
            Mr.
      Morgenstern received a non-accountable expense allowance of $75,000 to
      cover travel and other expenses pursuant to a consulting
      agreement.


(5)
            Mr.
      Zentman received $12,000 for services rendered with respect to his
      overseeing the Company’s investment in Coreworx
  Inc.


(6)
            Mr.
      Giacco received $12,000 for services rendered with respect to his
      overseeing the Company’s investment in CoaLogix
  Inc.




-75-




ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
  MANAGEMENT




The
following table and the notes thereto set forth information, as of March 15,
2010 (except as otherwise set forth herein), concerning beneficial ownership (as
defined in Rule 13d-3 under the Securities Exchange Act of 1934) of common stock
by (i) each director of the Company, (ii) each executive officer (iii) all
executive officers and directors as a group, and (iv) each holder of 5% or more
of the Company’s outstanding shares of common stock.




Name and Address of Beneficial Owner (1) (2)
                
                Number of Shares of
                    common stock
                    Beneficially Owned (2)
                
                
                Percentage of
                    common stock
                    Outstanding (2)George
      Morgenstern
                
                
                328,861
                (3)
                
                
                2.3
                %John
      A. Moore
                
                
                1,220,911
                (4)
                
                
                8.3
                %Richard
      J. Giacco
                
                
                55,000
                (5)
                
                
                *Joseph
      Musanti
                
                
                29,666
                (6)
                
                
                *Richard
      Rimer
                
                
                135,000
                (7)
                
                
                1.0
                %Samuel
      M. Zentman
                
                
                101,621
                (8)
                
                
                *Michael
      Barth
                
                
                123,934
                (9)
                
                
                1.0
                %Joe
      B. Cogdell, Jr.
                
                
                39,500
                (10)
                
                
                —William
      J. McMahon
                
                
                10,500
                (11)
                
                
                *Benny
      Sela
                
                
                20,000
                (12)
                
                
                *Ray
      Simonson
                
                
                15,990
                (13)
                
                
                *All
      executive officers and directors of the Company as a group (11
      people)
                
                
                2,080,983
                (14)
                
                
                13.5
                %Austin
      W. Marxe and David M. Greenhouse
                
                
                679,860
                (15)
                
                
                4.8
                %





* Less
than 1%




(1)
            Unless
      otherwise indicated, the address for each of the beneficial owners listed
      in the table is in care of the Company, 4 West Rockland Road, Montchanin,
      Delaware 19710.


(2)
            Unless
      otherwise indicated, each person has sole investment and voting power with
      respect to the shares indicated.  For purposes of this table, a
      person or group of persons is deemed to have “beneficial ownership” of any
      shares as of a given date which such person has the right to acquire
      within 60 days after such date.  Percentage information is based
      on the 14,079,148 shares outstanding as of March 15,
  2010.


(3)
            Consists
      of 51,922 shares, 227,500 shares underlying currently exercisable options,
      and 49,439 shares owned by Mr. Morgenstern’s
  wife.


(4)
            Consists
      of 585,911 shares and 635,000 shares underlying currently exercisable
      options.


(5)
            Consists
      of 10,000 shares and 45,000 shares underlying currently exercisable
      options.


(6)
            Consists
      of 3,000 shares and 26,666 shares underlying currently exercisable
      options.


(7)
            Consists
      of 40,000 shares and 95,000 shares underlying currently exercisable
      options.


(8)
            Consists
      of 16,621 shares and 85,000 shares underlying currently exercisable
      options.


(9)
            Consists
      of 11,289 shares, 1,645 shares underlying currently exercisable warrants
      and 111,000 shares underlying currently exercisable options. Mr. Barth
      also owns 569 shares of DSIT representing approximately 4.0% of the DSIT’s
      outstanding shares.


(10)
            Consists
      of 2,000 shares and 37,500 shares underlying currently exercisable
      options. Mr. Cogdell also owns 5,088 shares of CoaLogix and options to
      purchase 1,267 CoaLogix shares, representing less than 1.0% of CoaLogix’s
      outstanding shares.


-76-


(11)
            Consists
      solely of shares. Mr. McMahon also owns 3,391 shares of CoaLogix and
      currently exercisable options to purchase 102,034 CoaLogix shares,
      representing approximately 2.8% of CoaLogix’s outstanding
      shares.


(12)
              Consists
      solely of shares underlying currently exercisable options. Mr. Sela also
      owns 925 shares of DSIT representing approximately 6.5% of the DSIT’s
      outstanding shares.


(13)
              Consists
      solely of shares. Mr. Simonson also owns currently exercisable options to
      purchase 324,000 Coreworx shares, representing less than 1.0% of
      Coreworx’s outstanding
shares.


(14)
            Consists
      of 796,672 shares, 1,645 shares underlying currently exercisable warrants
      and 1,282,666 shares underlying currently exercisable
    options.


(15)
            The
      information presented with respect to these beneficial owners is based on
      a Schedule 13G filed with the SEC on February 12, 2010.  Austin
      W. Marxe and David M. Greenhouse share sole voting and investment power
      over 140,464 shares of common stock owned by Special Situations Cayman
      Fund, L.P and 539,396 shares of common stock owned by Special Situations
      Fund III QP, L.P.  The business address for Austin W. Marxe and
      David M. Greenhouse is 527 Madison Avenue, Suite 2600, New York, NY
      10022.


-77-


EQUITY
COMPENSATION PLAN INFORMATION




The table
below provides certain information concerning our equity compensation plans as
of December 31, 2009.




Plan Category
                
                Number of Securities to
                    be Issued Upon
                    Exercise of
                    Outstanding Options,
                    Warrants and Rights (a)
                
                
                Weighted-average
                    Exercise Price of
                    Outstanding
                    Options, Warrants
                    and Rights
                
                
                Number of Securities
                    Remaining Available for
                    Future Issuance Under
                    Equity Compensation
                    Plans (Excluding
                    Securities Reflected in
                    Column (a))Equity
      Compensation Plans Approved by Security Holders
                
                
                637,000
                
                
                $
                3.48
                
                
                
                259,667Equity
      Compensation Plans Not Approved by Security Holders
                
                
                1,108,165
                
                
                $
                3.55
                
                
                
                —Total
                
                
                1,745,165
                
                
                $
                3.52
                
                
                
                259,667


The
grants made under our equity compensation plans not approved by security holders
were made under non-plan option agreements and under our 2006 Stock Incentive
Plan and 2006 Stock Option Plan for Non-Employee Directors during the period
from the adoption of such plans in January 2007 and the date of the approval of
such plans by shareholders in November 2008.  These grants were made
to directors, officers, employees and consultants at exercise prices equal to
the fair market value on the date of the grant.  The options generally
vest over a three year period and expire five to ten years from the date of the
grant.


ITEM
      13.
            CERTAIN
      RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
    INDEPENDENCE




Transactions
With Related Persons




We paid
approximately $275,000 and $780,000 in the years ended December 31, 2009 and
2008, respectively, for legal services rendered and reimbursement of
out-of-pocket expenses to Eilenberg & Krause LLP, a law firm in which
Sheldon Krause, our former Secretary and former General Counsel, is a
member.  Such fees related to services rendered by Mr. Krause and
other members and employees of his firm.  Mr. Krause is the son-in-law
of George Morgenstern, a director and our Chairman Emeritus, who up until March
2006, also served as our President and Chief Executive Officer. Mr. Krause
continues to provide legal services to us in 2010.




For
information regarding our Stockholders’ Agreement with CoaLogix and EnerTech,
see Note 4 to our Consolidated Financial Statements.




Director
Independence




Applying
the definition of independence provided under the NASDAQ rules, the Board has
determined that with the exception of Mr. Moore, all of the members of the Board
of Directors are independent.


-78-




ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES




Accounting
Fees




Aggregate
expenses to our principal accountant during the last two fiscal years are as
follows:




2008
              
              
              2009Audit
      Fees
              
              $
              302,000
              
              
              $
              290,000Audit-
      Related Fees
              
              
              29,000
              
              
              
              29,000Tax
      Fees
              
              
              —
              
              
              
              —Other
      Fees
              
              
              —
              
              
              
              8,000Total
              
              $
              331,000
              
              
              $
              327,000




Audit Fees were for
professional services rendered for the audits of the consolidated financial
statements of the Company, statutory and subsidiary audits, assistance with
review of documents filed with the SEC, consents, and other assistance required
to be performed by our independent accountants.




Audit-Related Fees were for
the analysis of the opening balance sheet of Coreworx in 2008, FIN 48 analyses
and travel expenses.




Other Fees were for services
related to reviewing registration statements.




Pre-Approval
Policies and Procedures




The Audit
Committee’s current policy is to pre-approve all audit and non-audit services
that are to be performed and fees to be charged by our independent auditor to
assure that the provision of these services does not impair the independence of
the auditor.  The Audit Committee pre-approved all audit and non-audit
services rendered by our principal accountant in 2009 and 2008.


-79-





PART
IV




ITEM
      15.
            EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES




(a)(1)
List of Financial Statements of the Registrant




The
consolidated financial statements of the Registrant and the report thereon of
the Registrant’s Independent Registered Public Accounting Firm are included in
this Annual Report beginning on page F-1.




Report
      of Kesselman & Kesselman
                
                F-1Consolidated
      Balance Sheets as of December 31, 2008 and 2009
                
                F-2Consolidated
      Statements of Operations for the years ended December 31, 2008 and
      2009
                
                F-3Consolidated
      Statements of Changes in Equity for the years ended December 31, 2008 and
      2009
                
                F-4Consolidated
      Statements of Cash Flows for the years ended December 31, 2008 and
      2009
                
                F-5Notes
      to Consolidated Financial Statements
                
                F-7




(a)(2)
List of Financial Statement Schedules




Financial
Statement Schedules:




The
financial statement schedule of the Registrant and the report thereon of the
Registrant’s Independent Registered Public Accounting Firm are included in this
Annual Report following the Notes to the Consolidated Financial
Statements.




Schedule
II – Valuation and Qualifying Accounts




(a)(3)
List of Exhibits





No.1.1
                    
                    Placement
      Agency Agreement between the Registrant and Merriman Curhan Ford & Co.
      dated as of March 8, 2010 (incorporated herein by reference to Exhibit 1.1
      to the Registrant’s Current Report on Form 8-K dated March 8,
      2010).1.2
                    
                    Form
      of Investor Purchase Agreement (incorporated herein by reference to
      Exhibit 1.2 to the Registrant’s Current Report on Form 8-K dated March 8,
      2010).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
                    
                    Certificate
      of Ownership and Merger dated September 15, 2006 effecting the name change
      to Acorn Factor, Inc. (incorporated herein by reference to Exhibit 3.1 to
      the Registrant’s Current Report on Form 8-K filed September 21,
      2006).3.3
                    
                    Certificate
      of Ownership and Merger dated December 21, 2007 effecting the name change
      to Acorn Energy, Inc. (incorporated herein by reference to Exhibit 3.1 to
      the Registrant’s Current Report on Form 8-K filed January 3,
      2008).3.4
                    
                    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”)).




-80-





3.5
                    
                    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
                    
                    Form
      of Warrant (incorporated herein by reference to Exhibit 4.1 to the
      Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,
      2006).4.3
                    
                    Form
      of Convertible Debenture (incorporated herein by reference to Exhibit 4.9
      to the Registrant’s Annual Report on Form 10-K for the fiscal year ended
      December 31, 2006).4.4
                    
                    Form
      of Warrant (incorporated herein by reference to Exhibit 4.10 to the
      Registrant’s Annual Report on Form 10-K for the fiscal year ended December
      31, 2006).4.5
                    
                    Form
      of Agent Warrant (incorporated herein by reference to Exhibit 4.3 to the
      Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      2007).10.1
                    
                    1994
      Stock Incentive Plan, as amended.  (incorporated herein by
      reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K
      for the year ended December 31, 2004 (the “2004
  10-K”)).*10.2
                    
                    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”)).*10.3
                    
                    1995
      Stock Option Plan for Non-management Employees, as amended (incorporated
      herein by reference to Exhibit 10.6 to the 2004 10-K).*10.4
                    
                    Form
      of Stock Option Agreement to employees under the 1994 Stock Incentive Plan
      (incorporated herein by reference to Exhibit 10.35 of the Registrant’s
      Annual Report on Form 10-K for the year ended December 31, 2004 (the “2004
      10-K”).*10.5
                    
                    Form
      of Stock Option Agreement under the 1994 Stock Option Plan for Outside
      Directors (incorporated herein by reference to Exhibit 10.36 of the 2004
      10-K).*10.6
                    
                    Form
      of Stock Option Agreement under the 1995 Stock Option Plan for
      Nonmanagement Employees (incorporated herein by reference to Exhibit 10.37
      of the 2004 10-K).10.7
                    
                    Stock
      Option Agreement dated as of December 30, 2004 by and between George
      Morgenstern and the Registrant (incorporated herein by reference to
      Exhibit 10.38 of the 2004 10-K).*10.8
                    
                    Stock
      Option Agreement dated as of December 30, 2004 by and between Sheldon
      Krause and the Registrant (incorporated herein by reference to Exhibit
      10.35 of the 2004 10-K).*10.9
                    
                    Stock
      Purchase Agreement dated as of March 9, 2006 by and between Shlomie
      Morgenstern, Databit Inc., and the Registrant (incorporated herein by
      reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
      dated March 16, 2006 (the “2006 8-K”)).10.10
                    
                    Amendment
      Agreement to Option Agreements and Restricted Stock Agreement dated as of
      March 9, 2006 by and between George Morgenstern and the Registrant
      (incorporated herein by reference to Exhibit D to Exhibit 10.1 to the
      Registrant’s Current Report on Form 8-K dated March 16, 2006 (the “2006
      8-K”)).*10.11
                    
                    Consulting
      Agreement dated as of March 9, 2006 by and between George Morgenstern and
      the Registrant (incorporated by reference to Exhibit E to Exhibit 10.1 to
      the 2006 8-K).*10.12
                    
                    Form
      of Common Stock Purchase Agreement (incorporated herein by reference to
      Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated August
      17, 2006 (the “August 2006 8-K”)).10.13
                    
                    Form
      of Note Purchase Agreement with Form of Convertible Promissory Note
      attached (incorporated herein by reference to Exhibit 10.2 to the August
      2006 8-K).10.14
                    
                    Form
      of Stock Purchase Agreement (incorporated herein by reference to Exhibit
      10.3 to the August 2006 8-K).10.15
                    
                    Form
      of Investors’ Rights Agreement (incorporated herein by reference to
      Exhibit 10.4 to the August 2006 8-K).10.16
                    
                    Form
      of Non-Plan Option Agreement (incorporated herein by reference to Exhibit
      10.5 to the August 2006
8-K).*




-81-





10.17
                  
                  Acorn
      Factor, Inc. 2006 Stock Option Plan for Non-Employee Directors
      (incorporated herein by reference to Exhibit 10.1 to the Registrant’s
      Current Report on Form 8-K filed March 6, 2007).*10.18
                  
                  Acorn
      Factor, Inc. 2006 Stock Incentive Plan (incorporated herein by reference
      to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed March
      6, 2007).*10.19
                  
                  Form
      of Subscription Agreement (incorporated herein by reference to Exhibit
      10.47 to the Registrant’s Annual Report on Form 10-K for the year ended
      December 31, 2006).10.20
                  
                  Placement
      Agent Agreement between First Montauk Securities Corp. and the Registrant
      dated March 8, 2007 (incorporated herein by reference to Exhibit 10.48 to
      the Registrant’s Annual Report on Form 10-K for the year ended December
      31, 2006).10.21
                  
                  Promissory
      Note of Acorn Factor, Inc. in favor of John A. Moore, dated December 31,
      2006 (incorporated herein by reference to Exhibit 4.11 to the Registrant’s
      Annual Report on Form 10-K for the fiscal year ended December 31,
      2007).10.22
                  
                  Amended
      and Restated Registration Rights Agreement between Acorn Factor, Inc. and
      Comverge, Inc., dated October 16, 2007(incorporated herein by reference to
      Exhibit 10.46 to the Registrant’s Annual Report on Form 10-K for the
      fiscal year ended December 31, 2007).10.23
                  
                  Loan
      Agreement by and between Acorn Factor, Inc. and Citigroup Global Markets,
      Inc., dated as of November 1, 2007 (incorporated herein by reference to
      Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed November
      14, 2007).10.24
                  
                  Stock
      Purchase Agreement by and among Acorn Factor, Inc., CoaLogix Inc.,
      Catalytica Energy Systems, Inc., and with respect to Article 11 only,
      Renegy Holdings, Inc., dated as of November 7, 2007 (incorporated herein
      by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
      8-K filed November 14, 2007).10.25
                  
                  Employment
      Agreement between and among William J. McMahon III, Catalytica Energy
      Systems, Inc., SCR-Tech LLC and CESI-SCR, Inc., effective as of January 1,
      2007 (incorporated herein by reference to Exhibit 10.1 to the Catalytica
      Energy Systems, Inc. Current Report on Form 8-K filed January 10,
      2007).*10.26
                  
                  Modification
      Agreement by and among William J. McMahon III, SCR-Tech, LLC, CESI-SCR,
      Inc., CoaLogix Inc. and Acorn Factor, Inc., dated as of November 7,
      2007(incorporated herein by reference to Exhibit 10.51 to the Registrant’s
      Annual Report on Form 10-K for the fiscal year ended December 31,
      2007).*10.27
                  
                  Lease
      Agreement dated December 16, 2002 and First Amendment to Lease Agreement
      dated February 18, 2004 (incorporated herein by reference to Exhibit 10.46
      to the Catalytica Energy Systems, Inc. Annual Report on Form 10-K for the
      year ended December 31, 2003).10.28
                  
                  Second
      Amendment to Lease Agreement dated December 29, 2006 (incorporated herein
      by reference to Exhibit 10.74 to the Catalytica Energy Systems, Inc.
      Annual Report on Form 10-KSB for the year ended December 31,
      2006).10.29
                  
                  Employment
      Agreement, dated as of March 4, 2008, by and between Acorn Energy, Inc.
      and John A. Moore (incorporated herein by reference to Exhibit 10.1 to the
      Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31,
      2008).*10.30
                  
                  Common
      Stock Purchase Agreement, dated as of February 29, 2008, by and between
      Acorn Energy, Inc. and EnerTech Capital Partners III L.P. (incorporated
      herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report
      on Form 10-Q for the quarter ended March 31, 2008).10.31
                  
                  Stockholders’
      Agreement, dated as of February 29, 2008, by and among CoaLogix, Inc.,
      Acorn Energy, Inc. and the other stockholders named therein (incorporated
      herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report
      on Form 10-Q for the quarter ended March 31, 2008).10.32
                  
                  Stock
      Option Agreement with William J. McMahon under the CoaLogix Inc. 2008
      Stock Option Plan (incorporated herein by reference to Exhibit 10.2 to the
      Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,
      2008).*10.33
                  
                  Participation
      Agreement with William J. McMahon under the CoaLogix Inc. and Subsidiaries
      Capital Appreciation Rights Plan. (incorporated herein by reference to
      Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the
      quarter ended June 30,
2008)*




-82-





10.34
                  
                  Acorn
      Energy, Inc. 2006 Stock Incentive Plan(as amended and
      restated effective November 3, 2008) (incorporated herein by reference to
      Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A
      filed on October 8, 2008)*10.35
                  
                  Acorn
      Energy, Inc. 2006 Stock Option Plan For Non-Employee Directors (as amended
      and restated effective November 3, 2008) (incorporated
      herein by reference to Appendix B to the Registrant’s Definitive Proxy
      Statement on Schedule 14A filed on October 8, 2008)*10.36
                  
                  Securities
      Purchase Agreement dated as of August 13, 2008, by and among Coreworx
      Inc., the debenture holders of Coreworx, the shareholders of Coreworx and
      Acorn Energy, Inc. (incorporated herein by reference to Exhibit 10.1 to
      Amendment No. 1 to the Registrant’s Current Report on Form 8-K/A filed
      October 28, 2008).10.37
                  
                  Form
      of Repayment Note issued to Coreworx debenture holders (incorporated
      herein by reference to Exhibit 4.1 to Amendment No. 1 to the Registrant’s
      Current Report on Form 8-K/A filed October 28, 2008)10.38
                  
                  CoaLogix
      Inc. 2008 Stock Option Plan (incorporated herein by reference to Exhibit
      10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter
      ended September 30, 2008).*10.39
                  
                  Forms
      of Option Agreements under the CoaLogix 2008 Stock Option Plan
      (incorporated herein by reference to Exhibit 10.2 to the Registrant’s
      Quarterly Report on Form 10-Q for the quarter ended September 30,
      2008).*10.40
                  
                  CoaLogix
      Inc. and Subsidiaries Capital Appreciation Rights Plan (incorporated
      herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report
      on Form 10-Q for the quarter ended September 30,
2008).*10.41
                  
                  Form
      of Participation Agreement under the CoaLogix Inc. and Subsidiaries
      Capital Appreciation Rights Plan (incorporated herein by reference to
      Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the
      quarter ended September 30, 2008).*10.42
                  
                  Employment
      Agreement among the Registrant, CoaLogix and Joe B. Cogdell, Jr. dated
      September 15, 2008 (incorporated herein by reference to Exhibit 10.6 to
      the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2008).*10.43
                  
                  Letter
      Agreement between the Registrant and CoaLogix dated September 15, 2008
      related to the employment of Joe B. Cogdell, Jr. (incorporated herein by
      reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form
      10-Q for the quarter ended September 30, 2008).*10.44
                  
                  Form
      of Option Agreement between the Registrant and John A. Moore dated March
      4, 2008 (incorporated herein by reference to Exhibit 10.52 to Registrant’s
      Annual Report on Form 10-K for the fiscal year ended December 31,
      2008).*10.45
                  
                  Form
      of Option Agreement between the Registrant and Joe B. Cogdell, Jr. dated
      January 5, 2009 (incorporated herein by reference to Exhibit 10.53 to
      Registrant’s Annual Report on Form 10-K for the fiscal year ended December
      31, 2008).*10.46
                  
                  Amendment
      dated as of March 31, 2009 by and between George Morgenstern and the
      Registrant to the Consulting Agreement dated as of March 9, 2006 by and
      between George Morgenstern and the Registrant (incorporated herein by
      reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q
      for the quarter ended March 31, 2009).*10.47
                  
                  Common
      Stock Purchase Agreement dated as of April 8, 2009, by and among Acorn
      Energy, Inc., EnerTech Capital Partners III L.P. and the other purchasers
      named therein (incorporated by reference to Exhibit 10.1 to Registrant’s
      Quarterly Report on Form 10-Q for the quarter ended June 30,
      2009).10.48
                  
                  Amended
      and Restated Stockholders’ Agreement, dated as of April 8, 2009, by and
      among CoaLogix Inc., Acorn Energy, Inc. and the other stockholders named
      therein (incorporated by reference to Exhibit 10.2 to Registrant’s
      Quarterly Report on Form 10-Q for the quarter ended June 30,
      2009).10.49
                  
                  Lease
      Agreement dated September 4, 2009 by and between SCR-Tech, LLC and Fat Boy
      Trading Company (incorporated herein by reference to Exhibit 10.1 to
      Registrant’s Quarterly Report on Form 10-Q for the quarter ended September
      30, 2009).




-83-





#10.50
                          
                          Form
      of Letter of Intent by and among Registrant, Gridsense Pty Ltd and certain
      shareholders of Gridsense Pty Ltd named therein dated October 29,
      2009.#10.51
                          
                          Form
      of Arrangement Agreement by and among the Registrant, Coreworx Inc. and
      Decision Dynamics Technology LTD dated as of March 2,
  2010.#10.52
                          
                          Forms
      of Option Award Certificate and Option Award Agreement under the
      Registrant’s Amended and Restated 2006 Stock Incentive
  Plan#10.53
                          
                          Forms
      of Option Award Certificate and Option Award Agreement under the
      Registrant’s Amended and Restated 2006 Stock Option Plan for Non-Employee
      Directors14.1
                          
                          Code
      of Business Conduct and Ethics of the Registrant (incorporated herein by
      reference to Exhibit 14 to the Registrant’s Current Report on Form
      8-K filed November 2, 2007).#21.1
                          
                          List
      of subsidiaries.#23.1
                          
                          Consent
      of Kesselman & Kesselman CPA.#31.1
                          
                          Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.#31.2
                          
                          Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.#32.1
                          
                          Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.#32.2
                          
                          Certification
      of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002.*
                          
                          This
      exhibit includes a management contract, compensatory plan or arrangement
      in which one or more directors or executive officers of the Registrant
      participate.#
                          
                          This
      exhibit is filed or furnished
herewith.





-84-




SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the Township of Montchanin, State
of Delaware, on March 22, 2010.




ACORN
      ENERGY, INC./s/
      John A. MooreBy:
                  John
      A. MooreChairman
      of the Board; President and Chief Executive
  Officer




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant, in the capacities
and on the dates indicated.




Signature
                                
                                Title
                                
                                Date/s/
      John A. Moore
                                
                                Chairman
      of the Board; President; ChiefJohn
      A. Moore
                                
                                Executive
      Officer; and Director
                                
                                March
      22, 2010/s/
      George Morgenstern
                                
                                DirectorGeorge
      Morgenstern
                                
                                
                                
                                March
      22, 2010/s/
      Michael Barth
                                
                                Chief
      Financial Officer (Principal
                                
                                March
      22, 2010Michael
      Barth
                                
                                Financial
      Officer and Principal Accounting Officer)/s/
      Samuel M. Zentman
                                
                                Director
                                
                                March
      22, 2010Samuel
      M. Zentman/s/
      Richard J. Giacco
                                
                                Director
                                
                                March
      22, 2010Richard
      J. Giacco/s/
      Richard Rimer
                                
                                Director
                                
                                March
      22, 2010Richard
      Rimer/s/
      Joe Musanti
                                
                                Director
                                
                                March
      22, 2010Joe
      Musanti




-85-


ACORN
ENERGY, INC.


AND
SUBSIDIARIES




INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS




Report
      of Independent Registered Public Accounting Firm
                                F-1Consolidated
      Balance Sheets as of December 31, 2009 and December 31,
    2008
                                F-2Consolidated
      Statements of Operations for the years ended December 31, 2009 and
      December 31, 2008
                                F-3Consolidated
      Statements of Changes in Equity for the years ended December 31, 2009 and
      December 31, 2008
                                F-4Consolidated
      Statements of Cash Flows for the years ended December 31, 2009 and
      December 31, 2008
                                F-5Notes
      to Consolidated Financial Statements
                                F-7





Report
of Independent Registered Public Accounting Firm




To the
Board of Directors and Shareholders of


Acorn
Energy, Inc.




We have
audited the consolidated balance sheets of Acorn Energy, Inc. (the “Company”)
and its subsidiaries as of December 31, 2009 and 2008, and the related
consolidated statements of operations, changes in equity and cash flows for each
of the two years in the period ended December 31, 2009.  These
financial statements are the responsibility of the Company’s Board of Directors
and management.  Our responsibility is to express an opinion on these
financial statements based on our audits.




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




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2009 and 2008 and the results of their
operations and of their cash flows for each of the two years in the period ended
December 31, 2009, in conformity with accounting principles generally accepted
in the United States of America.




As
discussed in Note 2 to the consolidated financial statements, the Company
changed the manner in which it accounts for non-controlling interests as of
January 1, 2009




March 22,
2010




/s/
Kesselman & Kesselman


Certified
Public Accountants


A member
of PricewaterhouseCoopers International Limited


Tel-Aviv,
Israel


F-1


ACORN
ENERGY, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)




As of December 31,2008
                
                
                2009ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                15,142
                
                
                $
                11,208Restricted
      deposit
                
                
                2,157
                
                
                
                1,627Accounts
      receivable, net
                
                
                4,524
                
                
                
                3,541Unbilled
      revenue and work-in-process
                
                
                581
                
                
                
                4,113Inventory
                
                
                1,148
                
                
                
                1,848Other
      current assets
                
                
                2,080
                
                
                
                2,317Total
      current assets
                
                
                25,632
                
                
                
                24,654Property
      and equipment, net
                
                
                2,447
                
                
                
                3,357Available
      for sale - Investment in Comverge
                
                
                2,462
                
                
                
                —Other
      investments and loans to equity investees
                
                
                1,246
                
                
                
                2,796Funds
      in respect of employee termination benefits
                
                
                1,677
                
                
                
                2,074Restricted
      deposit
                
                
                579
                
                
                
                611Intangible
      assets, net
                
                
                10,357
                
                
                
                8,194Goodwill
                
                
                6,342
                
                
                
                6,679Deferred
      taxes
                
                
                —
                
                
                
                227Other
      assets
                
                
                313
                
                
                
                143Total
      assets
                
                $
                51,055
                
                
                $
                48,735LIABILITIES
      AND EQUITYCurrent
      liabilities:Short-term
      bank credit and current maturities of long-term bank debt
                
                $
                445
                
                
                $
                430Notes
      payable
                
                
                3,400
                
                
                
                —Accounts
      payable
                
                
                1,939
                
                
                
                1,607Accrued
      payroll, payroll taxes and social benefits
                
                
                1,314
                
                
                
                1,409Other
      current liabilities
                
                
                4,696
                
                
                
                4,988Total
      current liabilities
                
                
                11,794
                
                
                
                8,434Long-term
      liabilities:Liability
      for employee termination benefits
                
                
                2,651
                
                
                
                3,129Long-term
      debt
                
                
                —
                
                
                
                405Other
      long-term liabilities
                
                
                487
                
                
                
                669Total
      long-term liabilities
                
                
                3,138
                
                
                
                4,203Commitments
      and contingencies (Note 16)Equity:Acorn
      Energy, Inc. shareholdersCommon
      stock - $0.01 par value per share:Authorized
      – 20,000,000 shares; Issued –12,454,528 and 13,248,813 shares at December
      31, 2008 and 2009, respectively
                
                
                124
                
                
                
                132Additional
      paid-in capital*
                
                
                54,035
                
                
                
                58,373Warrants
                
                
                1,020
                
                
                
                290Accumulated
      deficit
                
                
                (17,587
                )
                
                
                (23,343
                )Treasury
      stock, at cost – 841,286 and 1,275,081 shares at December 31, 2008 and
      2009, respectively
                
                
                (3,719
                )
                
                
                (4,827
                )Accumulated
      other comprehensive income (loss)
                
                
                (425
                )
                
                
                152Total
      Acorn Energy, Inc. shareholders’ equity
                
                
                33,448
                
                
                
                30,777Non-controlling
      interests*
                
                
                2,675
                
                
                
                5,321Total
      equity
                
                
                36,123
                
                
                
                36,098Total
      liabilities and equity
                
                $
                51,055
                
                
                $
                48,735




* The
amount for non-controlling interests has been reclassified for 2008




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


F-2


ACORN
ENERGY, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(IN
THOUSANDS, EXCEPT NET LOSS PER SHARE DATA)




Year ended December 31,2008
                    
                    
                    2009Revenues:SCR
      services
                    
                    $
                    10,099
                    
                    
                    $
                    18,099Projects
                    
                    
                    7,805
                    
                    
                    
                    8,807Software
      license and services
                    
                    
                    2,330
                    
                    
                    
                    3,999Other
                    
                    
                    462
                    
                    
                    
                    412Total
      revenues
                    
                    
                    20,696
                    
                    
                    
                    31,317Cost
      of sales:SCR
      services
                    
                    
                    7,642
                    
                    
                    
                    11,803Projects
                    
                    
                    5,244
                    
                    
                    
                    4,946Software
      license and services
                    
                    
                    921
                    
                    
                    
                    698Other
                    
                    
                    356
                    
                    
                    
                    318Total
      cost of sales
                    
                    
                    14,163
                    
                    
                    
                    17,765Gross
      profit
                    
                    
                    6,533
                    
                    
                    
                    13,552Operating
      expenses:Research
      and development expenses, net of credits of $1,016 in 2009
                    
                    
                    1,169
                    
                    
                    
                    569Acquired
      in-process research and development
                    
                    
                    2,444
                    
                    
                    
                    —Selling,
      general and administrative expenses
                    
                    
                    11,667
                    
                    
                    
                    18,517Impairments
                    
                    
                    3,664
                    
                    
                    
                    2,692Total
      operating expenses
                    
                    
                    18,944
                    
                    
                    
                    21,778Operating
      loss
                    
                    
                    (12,411
                    )
                    
                    
                    (8,226
                    )Gain
      on early redemption of convertible debentures
                    
                    
                    1,259
                    
                    
                    
                    —Finance
      expense, net
                    
                    
                    (3,031
                    )
                    
                    
                    (231
                    )Gain
      on sale of shares in Comverge
                    
                    
                    8,861
                    
                    
                    
                    1,403Gain
      on private placement of equity investments
                    
                    
                    7
                    
                    
                    
                    —Loss
      before taxes on income
                    
                    
                    (5,315
                    )
                    
                    
                    (7,054
                    )Income
      tax benefit (expense)
                    
                    
                    (342
                    )
                    
                    
                    744Loss
      from operations of the Company and its consolidated
      subsidiaries
                    
                    
                    (5,657
                    )
                    
                    
                    (6,310
                    )Share
      in income (losses) of Paketeria
                    
                    
                    (1,560
                    )
                    
                    
                    263Share
      in losses of GridSense
                    
                    
                    (926
                    )
                    
                    
                    (129
                    )Net
      loss
                    
                    
                    (8,143
                    )
                    
                    
                    (6,176
                    )Net
      loss attributable to non-controlling interests*
                    
                    
                    248
                    
                    
                    
                    420Net
      loss attributable to Acorn Energy, Inc shareholders.
                    
                    $
                    (7,895
                    )
                    
                    $
                    (5,756
                    )Basic
      and diluted net loss per share attributable to Acorn Energy, Inc.
      shareholders
                    
                    $
                    (0.69
                    )
                    
                    $
                    (0.50
                    )Weighted
      average number of shares outstanding attributable to Acorn Energy, Inc.
      shareholders – basic and diluted
                    
                    
                    11,374
                    
                    
                    
                    11,445




* The
amount for non-controlling interests has been reclassified for 2008




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


F-3


ACORN
ENERGY, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CHANGES IN EQUITY


(IN
THOUSANDS)




Acorn Energy, Inc. ShareholdersNumber
                        of Shares
                    
                    
                    Common
                        Stock
                    
                    
                    Additional
                        Paid-In
                        Capital
                    
                    
                    Warrants
                    
                    
                    Accumulated
                        Deficit
                    
                    
                    Treasury
                        Stock
                    
                    
                    Accumulated
                        Other
                        Comprehensive
                        Income (Loss)
                    
                    
                    Total Acorn
                        Energy, Inc.
                        Shareholders
                        Equity
                    
                    
                    Non-controlling
                        interests*
                    
                    
                    Total
                        EquityBalances
      as of December 31, 2007
                    
                    
                    11,135
                    
                    
                    $
                    111
                    
                    
                    $
                    49,306
                    
                    
                    $
                    1,330
                    
                    
                    $
                    (9,692
                    )
                    
                    $
                    (3,592
                    )
                    
                    $
                    29,862
                    
                    
                    $
                    67,325
                    
                    
                    $
                    —
                    
                    
                    $
                    67,325Net
      loss
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (7,895
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (7,895
                    )
                    
                    
                    (248
                    )
                    
                    
                    (8,
      143
                    )Adjustment
      to fair market value of Comverge shares, net of deferred
    taxes
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (29,680
                    )
                    
                    
                    (29,680
                    )
                    
                    
                    —
                    
                    
                    
                    (29,680
                    )Differences
      from translation of subsidiaries’ financial statements and equity
      investees
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (607
                    )
                    
                    
                    (607
                    )
                    
                    
                    —
                    
                    
                    
                    (607
                    )Comprehensive
      loss
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (38,182
                    )
                    
                    
                    (248
                    )
                    
                    
                    (38,430
                    )Intrinsic
      value of beneficial conversion feature of convertible debentures at
      extinguishment
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (1,259
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (1,259
                    )
                    
                    
                    —
                    
                    
                    
                    (1,259
                    )Conversion
      of Debentures
                    
                    
                    780
                    
                    
                    
                    8
                    
                    
                    
                    2,955
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,963
                    
                    
                    
                    —
                    
                    
                    
                    2,963Issuance
      by CoaLogix of CoaLogix shares to non-controlling
interests
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,223
                    
                    
                    
                    2,223Shares
      issued in acquisition of Coreworx
                    
                    
                    288
                    
                    
                    
                    3
                    
                    
                    
                    1,230
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,233
                    
                    
                    
                    —
                    
                    
                    
                    1,233Stock
      option compensation
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    731
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    731
                    
                    
                    
                    —
                    
                    
                    
                    731Stock
      option compensation of subsidiaries
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    700
                    
                    
                    
                    700Exercise
      of options and warrants
                    
                    
                    252
                    
                    
                    
                    2
                    
                    
                    
                    1,072
                    
                    
                    
                    (310
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    764
                    
                    
                    
                    —
                    
                    
                    
                    764Purchase
      of treasury shares
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (127
                    )
                    
                    
                    —
                    
                    
                    
                    (127
                    )
                    
                    
                    —
                    
                    
                    
                    (127
                    )Balances
      as of December 31, 2008
                    
                    
                    12,455
                    
                    
                    
                    124
                    
                    
                    
                    54,035
                    
                    
                    
                    1,020
                    
                    
                    
                    (17,587
                    )
                    
                    
                    (3,719
                    )
                    
                    
                    (425
                    )
                    
                    
                    33,448
                    
                    
                    
                    2,675
                    
                    
                    
                    36,123Net
      loss
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (5,756
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (5,756
                    )
                    
                    
                    (420
                    )
                    
                    
                    (6,176
                    )Adjustment
      to fair market value of Comverge shares, net
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    125
                    
                    
                    
                    125
                    
                    
                    
                    —
                    
                    
                    
                    125Differences
      from translation of subsidiaries’ financial statements
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    452
                    
                    
                    
                    452
                    
                    
                    
                    42
                    
                    
                    
                    494Comprehensive
      loss
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (5,179
                    )
                    
                    
                    (378
                    )
                    
                    
                    (5,557
                    )Issuance
      by CoaLogix of CoaLogix shares to non-controlling
interests
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    596
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    596
                    
                    
                    
                    2,277
                    
                    
                    
                    2,873Stock
      option compensation
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    678
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    678
                    
                    
                    
                    —
                    
                    
                    
                    678Stock
      option compensation of subsidiaries
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    747
                    
                    
                    
                    747Exercise
      of options and warrants
                    
                    
                    794
                    
                    
                    
                    8
                    
                    
                    
                    3,064
                    
                    
                    
                    (730
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,342
                    
                    
                    
                    —
                    
                    
                    
                    2,342Purchase
      of treasury shares
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (1,108
                    )
                    
                    
                    —
                    
                    
                    
                    (1,108
                    )
                    
                    
                    —
                    
                    
                    
                    (1,108
                    )Balances
      as of December 31, 2009
                    
                    
                    13,249
                    
                    
                    $
                    132
                    
                    
                    $
                    58,373
                    
                    
                    $
                    290
                    
                    
                    $
                    (23,343
                    )
                    
                    $
                    (4,827
                    )
                    
                    $
                    152
                    
                    
                    $
                    30,777
                    
                    
                    $
                    5,321
                    
                    
                    $
                    36,098




* The
amount for non-controlling interests has been reclassified for
2008




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


F-4


ACORN
ENERGY, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(IN
THOUSANDS)




2008
                
                
                2009Cash
      flows used in operating activities:Net
      loss
                
                $
                (8,143
                )
                
                $
                (6,176
                )Adjustments
      to reconcile net loss to net cash used in operatingactivities
      (see Schedule A)
                
                
                4,871
                
                
                
                748Net
      cash used in operating activities
                
                
                (3,272
                )
                
                
                (5,428
                )Cash
      flows provided by (used in) investing activities:Acquisitions
      of property and equipment
                
                
                (1,716
                )
                
                
                (1,582
                )Proceeds
      from the sale of Comverge shares
                
                
                15,355
                
                
                
                3,990Proceeds
      from the sale of property and equipment
                
                
                9
                
                
                
                —Restricted
      deposits
                
                
                (1,219
                )
                
                
                (2,079
                )Release
      of restricted deposits
                
                
                -
                
                
                
                2,468Loans
      to and costs of acquisition of note due from Paketeria
                
                
                (2,551
                )
                
                
                —Investment
      in and loans to Local Power.
                
                
                (250
                )
                
                
                —Investment
      in EnerTech
                
                
                (750
                )
                
                
                (1,000
                )Investment
      in USSI.
                
                
                —
                
                
                
                (200
                )Investment
      in and loans to GridSense.
                
                
                (1,889
                )
                
                
                (550
                )Loans
      to EES
                
                
                (200
                )
                
                
                —Acquisition
      of license
                
                
                (2,000
                )
                
                
                —Loans
      to Coreworx in contemplation of acquisition
                
                
                (1,500
                )
                
                
                —Transaction
      costs in 2007 acquisition of SCR-Tech
                
                
                (956
                )
                
                
                —Amounts
      funded for employee termination benefits
                
                
                (51
                )
                
                
                (377
                )Acquisition
      of Coreworx net of cash acquired (see Schedule C)
                
                
                (2,490
                )
                
                
                —Net
      cash provided by (used in) investing activities
                
                
                (208
                )
                
                
                670Cash
      flows provided by (used in) financing activities:Proceeds
      from employee stock option and warrant exercises
                
                
                764
                
                
                
                2,342Purchase
      of additional shares in DSIT
                
                
                —
                
                
                
                (294
                )Acquisition
      of treasury shares
                
                
                (127
                )
                
                
                (1,108
                )Repayment
      of notes payable to the former shareholders of Coreworx
                
                
                —
                
                
                
                (3,400
                )Issuance
      of shares to non-controlling interests in consolidated
      subsidiary
                
                
                2,223
                
                
                
                2,873Short-term
      bank credit, net
                
                
                (149
                )
                
                
                (136
                )Proceeds
      from borrowings of long-term debt
                
                
                —
                
                
                
                530Redemption
      of convertible debentures
                
                
                (3,443
                )
                
                
                —Repayments
      of long-term debt
                
                
                (216
                )
                
                
                (4
                )Net
      cash provided by (used in) financing activities
                
                
                (948
                )
                
                
                803Effect
      of exchange rate changes on cash and cash equivalents
                
                
                (74
                )
                
                
                21Net
      decrease in cash and cash equivalents
                
                
                (4,502
                )
                
                
                (3,934
                )Cash
      and cash equivalents at beginning of year
                
                
                19,644
                
                
                
                15,142Cash
      and cash equivalents at end of year
                
                $
                15,142
                
                
                $
                11,208Supplemental
      cash flow information:Cash
      paid during the year for:Interest
                
                $
                325
                
                
                $
                284Income
      taxes, net of refunds
                
                $
                867
                
                
                $
                (382
                )




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


F-5


ACORN
ENERGY, INC. AND SUBSIDIARIES


SCHEDULES
TO CONSOLIDATED STATEMENTS OF CASH FLOWS


(IN
THOUSANDS)




2008
                      
                      
                      2009A.
                      Adjustments
      to reconcile net loss to net cash provided by (used in)
      operating  activities:Depreciation
      and amortization
                      
                      $
                      1,298
                      
                      
                      $
                      1,775Acquired
      in-process research and development
                      
                      
                      2,444
                      
                      
                      
                      —Share
      in (income) losses of Paketeria
                      
                      
                      1,535
                      
                      
                      
                      (263
                      )Share
      in losses of GridSense
                      
                      
                      926
                      
                      
                      
                      129Change
      in deferred taxes
                      
                      
                      893
                      
                      
                      
                      (250
                      )Impairments
                      
                      
                      3,664
                      
                      
                      
                      2,692Exchange
      rate adjustment on restricted deposits
                      
                      
                      —
                      
                      
                      
                      109Decrease
      in liability for employee termination benefits
                      
                      
                      236
                      
                      
                      
                      453Gain
      on sale of shares in Comverge
                      
                      
                      (8,861
                      )
                      
                      
                      (1,403
                      )Gain
      on private placement in Company’s equity investments, net
                      
                      
                      (7
                      )
                      
                      
                      —Gain
      on early redemption of Debentures.
                      
                      
                      (1,259
                      )
                      
                      
                      —Loss
      on sale of property and equipment, net
                      
                      
                      21
                      
                      
                      
                      6Stock
      and stock option compensation
                      
                      
                      1,431
                      
                      
                      
                      1,425Amortization
      of beneficial conversion feature, debt origination costs and value of
      warrants in private placement of Debentures
                      
                      
                      3,064
                      
                      
                      
                      —Exchange
      loss on loans to Paketeria and GridSense
                      
                      
                      245
                      
                      
                      
                      —Other
                      
                      
                      18
                      
                      
                      
                      4Changes
      in operating assets and liabilities:Decrease
      (increase) in accounts receivable
                      
                      
                      (2,430
                      )
                      
                      
                      1,033Decrease
      (increase) unbilled revenue and work-in- process
                      
                      
                      1,203
                      
                      
                      
                      (3,532
                      )Increase
      in other current assets and other assets
                      
                      
                      (1,379
                      )
                      
                      
                      (545
                      )Increase
      in inventory
                      
                      
                      (1,029
                      )
                      
                      
                      (1,083
                      )Increase
      in accounts payable, accrued payroll, payroll taxes and social benefits,
      other current liabilities and other non-current
liabilities
                      
                      
                      2,858
                      
                      
                      
                      198$
                      4,871
                      
                      
                      $
                      748B.
                      Non-cash
      investing and financing activities:Unrealized
      loss from Comverge shares, net of deferred taxes
                      
                      $
                      (29,680
                      )Conversion
      of Debentures to common stock and additional
    paid-in-capital
                      
                      $
                      2,963Exercise
      of put option - acquisition of additional shares in DSIT unpaid at
      December 31, 2008
                      
                      $
                      294Increase
      in goodwill with respect to finalizing purchase price allocation of
      DSIT
                      
                      $
                      209Reduction
      in intangibles acquired with respect to finalizing purchase price
      allocation of DSIT
                      
                      $
                      250Reduction
      in value of put option with respect to finalizing purchase price
      allocation of DSIT
                      
                      $
                      41Fixed
      asset converted to project-in-process in DSIT
                      
                      $
                      199Intangibles
      acquired by Coreworx in consideration for future royalties
                      
                      
                      
                      
                      
                      $
                      99C.
                      Assets/liabilities
      acquired in the acquisition of Coreworx:Current
      assets
                      
                      $
                      (652
                      )Property
      and equipment
                      
                      
                      (183
                      )Intangibles
                      
                      
                      (3,673
                      )Goodwill
                      
                      
                      (2,398
                      )Current
      liabilities
                      
                      
                      668Due
      to Acorn
                      
                      
                      1,559Value
      of Acorn stock issued in acquisition
                      
                      
                      1,233Notes
      issued to former debenture holders of Coreworx
                      
                      
                      3,400In-process
      research and development
                      
                      
                      (2,444
                      )$
                      (2,490
                      )




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


F-6


NOTE 1— NATURE OF
OPERATIONS




(a)
            Description
      of Business




Acorn
Energy, Inc. (“Acorn” or the “Company”) a Delaware corporation is a holding
company that specializes in acquiring and accelerating the growth of emerging
ventures that promise improvement in the economic and environmental efficiency
of the energy sector.




Through
its majority-owned operating subsidiaries the Company provides products and
services in the following operating segments:




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




Naval and RT
Solutions.  Sonar and acoustic related solutions as well as
real time software consulting, development and production services provided
through the Company’s DSIT Solutions, Ltd. (“DSIT”) subsidiary, with a focus on
port security for strategic energy installations.




Energy Infrastructure Software (EIS)
Services provided through the Company’s Coreworx Inc. (“Coreworx”)
subsidiary. Coreworx is a leading provider of integrated project collaboration
and advanced document management solutions for the architecture, engineering and
construction markets, particularly for large capital projects.




The
Company owns significant equity interests in GridSense Pty Ltd. ("GridSense"),
an equity affiliate which provides remote monitoring and control systems to
electric utilities and industrial facilities worldwide. The Company also has an
equity interest in U.S. Sensor Systems, Inc. ("USSI") (See Notes 6(b) and 24).
USSI develops and produces fiber optic sensing systems for the energy and
defense markets. The Company’s operations are based in the United States, Israel
and Canada.  Acorn’s shares are traded on the NASDAQ Global Market
under the symbol ACFN.




See Note
21 for segment information and major customers.




(b)
            Accounting
      Principles




The
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America ("U.S.
GAAP").




In June
2009, the Financial Accounting Standards Board (FASB) issued the FASB Accounting
Standards Codification (“Codification”). The Codification became the single
authoritative source for U.S. GAAP and changed the way in which the
accounting literature is organized. As applicable to the Company, the
Codification became effective commencing in the third quarter of 2009. The
Codification does not change U.S. GAAP and has no effect on the Company's
financial position or results of operations.




(c)
            Use
      of Estimates in Preparation of Financial
  Statements




The
preparation of consolidated financial statements 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.




As
applicable to these consolidated financial statements, the most significant
estimates and assumptions relate to percentages of completion with respect to
revenue recognition, uncertainties with respect to income taxes, inventories,
contingencies and analyses of the possible impairment of
goodwill.


F-7


(d)
            Amounts
      in the Footnotes in the Financial
Statements




All
dollar amounts in the footnotes of the consolidated financial statements are in
thousands except for per share data.




NOTE 2—SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES




Principles
of Consolidation and Presentation




The
consolidated financial statements include the accounts of the Company and its
subsidiaries. In these financial statements, “subsidiaries” are companies that
are over 50% controlled, the financial statements of which are consolidated with
those of the Company. Significant intercompany transactions and balances are
eliminated in consolidation; profits from intercompany sales, are also
eliminated; non-controlling interests are included in equity.




Functional
Currency and Foreign Currency Transactions




The
currency of the primary economic environment in which the operations of Acorn
and its U.S. subsidiaries are conducted is the United States dollar
(“dollar”).  Accordingly, the Company and all of its U.S. subsidiaries
use the dollar as their functional currency.  The financial statements
of the Company’s Israeli subsidiary whose functional currency is the New Israeli
Shekel (“NIS”) and the Company’s Canadian subsidiary whose functional currency
is the Canadian dollar (“C$”) have been translated in accordance with applicable
accounting principles. Assets and liabilities are translated at year-end
exchange rates, while revenues and expenses are translated at average exchange
rates during the year. Differences resulting from translation are presented in
equity as Accumulated Other Comprehensive Loss.  Gains and losses on
foreign currency transactions and exchange gains and losses denominated in
non-functional currencies are reflected in finance income (expense), net, in the
Consolidated Statements of Operations when they arise.




Cash
Equivalents




The
Company considers all highly liquid investments, which include money market
funds and short-term bank deposits (up to three months from date of deposit)
that are not restricted as to withdrawal or use, to be cash
equivalents.




Accounts
Receivable




Accounts
receivable consists of trade receivables.  Trade receivables are
recorded at the invoiced amount.




Allowance
for Doubtful Accounts




The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of customers to make required
payments.  This allowance is based on specific customer account
reviews and historical collections experience.  If the financial
condition of the Company’s funding parties or customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.  The Company performs ongoing credit
evaluations of its customers and does not require collateral.




No
allowance was charged to expense related to trade accounts receivable in either
of the years ended December 31, 2008 or 2009.




Inventory




Raw
materials inventory is generally comprised of chemicals used in the regeneration
or rejuvenation of SCR modules and the process of mercury removal.
Work-in-process inventory is comprised of SCR modules to which minimal
additional work is required in order for them to become available for sale.
Inventories are stated at the lower of cost or market using the first-in,
first-out method.


F-8


Investment
in Marketable Securities




As of
December 31, 2009, the Company no longer has any remaining investment in
Comverge. The Company’s investment in Comverge was accounted for as
"available-for-sale" under applicable accounting
principles.  Accordingly, the Company carried the investments at fair
value, with unrealized holding gains and losses reported in equity as a separate
component of accumulated other comprehensive loss.  The cost of
securities sold is determined based on the average cost method and any gain or
loss is reflected in the Consolidated Statements of
Operations.  Changes in fair value, net of taxes, are reflected in
other comprehensive loss. Unrealized losses considered to be temporary are
reflected in other comprehensive loss; unrealized losses that are considered to
be other-than-temporary are charged to income as an impairment
charge.




Investments
in Companies Accounted for Using the Equity or Cost Method




Investments
in other non-consolidated entities are accounted for using the equity method or
cost basis depending upon the level of ownership and/or the Company’s ability to
exercise significant influence over the operating and financial policies of the
investee.  Investments of this nature are recorded at original cost
and adjusted periodically to recognize the Company’s proportionate share of the
investees’ net income or losses after the date of investment. When net losses
from an investment accounted for under the equity method exceed its carrying
amount, the investment balance is reduced to zero and additional losses are not
provided for.  The Company resumes accounting for the investment under
the equity method if the entity subsequently reports net income and the
Company’s share of that net income exceeds the share of net losses not
recognized during the period the equity method was
suspended.  Investments are written down only when there is clear
evidence that a decline in value that is other than temporary has
occurred.




When an
investment accounted for using the equity method issues its own shares, the
subsequent reduction in the Company’s proportionate interest in the investee is
reflected in equity as an adjustment to paid-in-capital. The Company evaluates
its investments in companies accounted for by the equity or cost method for
impairment when there is evidence or indicators that a decrease in value may be
other than temporary.




The
Company’s investments in GridSense (see Note 6(a)) and Paketeria AG (see Note
6(d)) are accounted for by the equity method.  The Company’s
investments in EnerTech Capital III L.P. ("EnerTech") (see Note 6(c)) and USSI
(see Note 6(b)) are accounted for by the cost method.




Non-Controlling
Interests




In
December 2007, the FASB issued a statement which established accounting and
reporting standards that require noncontrolling interests (previously referred
to as minority interest) to be reported as a component of equity, changes in a
parent’s ownership interest while the parent retains its controlling interest be
accounted for as equity transactions, and upon a loss of control, retained
ownership interest will be re-measured at fair value, with any gain or loss
recognized in earnings. Prior to adoption of the statement on January 1, 2009,
the Company had stopped attributing losses to its DSIT subsidiary because the
losses exceeded the carrying amount of the noncontrolling interest. Upon
adoption of the statement, the Company prospectively attributed income and
losses to the noncontrolling interests associated with DSIT. The presentation
and disclosure requirements of the statement were applied retrospectively. Other
than the change in presentation of noncontrolling interests and the treatment of
noncontrolling interests associated with DSIT and CoaLogix, the adoption of the
statement had no impact on the Company’s financial statements.




Property
and Equipment




Property
and equipment are presented at cost at the date of
acquisition.  Depreciation and amortization is calculated based on the
straight-line method over the estimated useful lives of the depreciable assets,
or in the case of leasehold improvements, the shorter of the lease term or the
estimated useful life of the asset.  Improvements are capitalized
while repairs and maintenance are charged to operations as
incurred.




F-9


Goodwill
and Acquired Intangible Assets




Goodwill
and intangible assets determined to have an indefinite useful life are not
amortized, but instead are tested for impairment at least
annually.  Intangible assets with estimable useful lives are amortized
over their respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance applicable accounting
principles.




The
Company assesses annually whether there is an indication that goodwill is
impaired, or more frequently if events and circumstances indicate that the asset
might be impaired during the year.  The Company performs its annual
impairment test at the conclusion of its annual budget process, in the fourth
quarter of each year.  The Company has identified its operating
segments as its reporting units for purposes of the impairment
test.  The Company’s existing goodwill and intangible assets are
associated with its CoaLogix, EIS and Naval & RT Solutions
segments.  The Company then determines the fair value of each
reporting unit and compares it to the carrying amount of the reporting
unit.  Calculating the fair value of the reporting units requires
significant estimates and assumptions by management.  To the extent
the carrying amount of a reporting unit exceeds the fair value of the reporting
unit, there is an indication that the reporting unit goodwill may be impaired
and a second step of the impairment test is performed to determine the amount of
the impairment to be recognized, if any.




Other
intangible assets that have finite useful lives (e.g. purchased technology), are
recorded at fair value at the time of the acquisition, and are carried at such
value less accumulated amortization.  The Company amortizes these
intangible assets on a straight-line basis over their estimated useful lives.
The Company's intangibles and their estimated useful lives are as
follows:




Estimated
                      Useful Life
                      (in years)Regeneration,
      rejuvenation and on-site cleaning technologies associated with
      SCR-Tech
                    
                    
                    10Software
      acquired associated with Coreworx
                    
                    
                    16ProExecute
      (see Note 11(b)(ii))
                    
                    
                    2.5Customer
      relationships associated with Coreworx
                    
                    
                    10Naval
      technologies
                    
                    
                    7




Impairment
of Long-Lived Assets




Long-lived
assets including certain intangible assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable.  Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to the
undiscounted future net cash flows expected to be generated by the
asset.  If the carrying amount of an asset exceeds its estimated
future undiscounted cash flows, an impairment charge is recognized by the amount
by which the carrying amount of the asset exceeds the fair value of the
asset.




Treasury
Stock




Company
shares held by the Company and a subsidiary are presented as a reduction of
equity, at their cost to the Company.




Revenue
Recognition




The
Company’s revenue recognition policy is consistent with applicable revenue
recognition guidance and interpretations.




The
Company recognizes revenue when persuasive evidence of an arrangement exists,
services have been rendered, the price is fixed or determinable, and
collectability is reasonably assured.


F-10




Revenues
from management and consulting, time-and-materials service contracts,
maintenance agreements and other services are recognized as services are
provided.




Revenues
from fixed-price contracts which require significant production, modification
and/or customization to customer specifications are recognized using the
percentage-of-completion. Percentage-of-completion estimates are in man-months
of labor and are reviewed periodically, and any adjustments required are
reflected in the period when such estimates are revised.  Losses on
contracts, if any, are recognized in the period in which the loss is
determined.




The
Company records product revenue from software licenses and products when
persuasive evidence of an arrangement exists, the software product has been
shipped or access to use the software has been granted by the Company, there are
no significant uncertainties surrounding product acceptance, the fees are fixed
and determinable and collection is probable.  The Company uses the
residual method to recognize revenue on delivered elements when a license
agreement includes one or more elements to be delivered at a future date if
evidence of the fair value of all undelivered elements exists.  If an
undelivered element for the arrangement exists under the license arrangement,
revenue related to the undelivered element is deferred based on vendor-specific
objective evidence (“VSOE”) of the fair value of the undelivered
element.




The
Company’s multiple-element sales arrangements include arrangements where
software licenses and the associated post-contract customer support (“PCS”) are
sold together.  The Company has established VSOE of the fair value of
the undelivered PCS element based on the contracted price for renewal PCS
included in the original multiple element sales arrangement, as substantiated by
contractual terms and the Company’s significant PCS renewal
experience.  The Company’s multiple element sales arrangements
generally include rights for the customer to renew PCS after the bundled term
ends.  These rights are irrevocable to the customer’s benefit, are for
specified prices and the customer is not subject to any economic or other
penalty for failure to renew.  Further, the renewal PCS options are
for services comparable to the bundled PCS and cover similar terms.




In the
renewal transaction, PCS is sold on a stand-alone basis to the licensees one
year or more after the license sale arrangement.  The renewal PCS
price is consistent with the renewal price in the original license sale
arrangement although an adjustment to reflect consumer price changes is not
uncommon.  If VSOE of fair value does not exist for all undelivered
elements, all revenue is deferred until sufficient evidence exists or all
elements have been delivered.




The
Company assesses whether payment terms are customary or extended in accordance
with normal practice relative to the market in which the sale is
occurring.  The Company’s sales arrangements generally include
standard payment terms.  These terms effectively relate to all
customers, products, and arrangements regardless of customer type, product mix
or arrangement size.




If the
revenue recognition criteria above are not satisfied, amounts received from
customers are classified as deferred revenue on the balance sheet until such
time as the revenue recognition criteria are met.




Revenues
related to SCR catalyst regeneration and cleaning services are recognized when
the service is completed for each catalyst module.  Customer
acceptance is not required for regeneration and cleaning services in that
CoaLogix’s contracts currently provide that services are completed upon receipt
of testing by independent third parties confirming compliance with contract
requirements.




From time
to time, CoaLogix purchases spent catalyst modules for its inventory.  In
the event that a customer purchases spent catalyst modules and enters a service
contract for regeneration with CoaLogix, revenues are recognized when the
service is completed for each catalyst module.




Costs
associated with performing SCR catalyst regeneration and cleaning services are
expensed as incurred because of the close correlation between the costs
incurred, the extent of performance achieved and the revenue
recognized.  In situations where revenue is deferred due to
collectability uncertainties, the Company defers the related costs as deferred
costs in Other Current Assets (see Note 9).


F-11




Unbilled
Revenue and Work-in-Process




Revenues
may be earned for those services in advance of amounts billable to the customer
and are recognized when the service is performed.  Revenues recognized
in excess of amounts billed for projects in process are recorded as unbilled
work-in-process.  Such amounts are generally billed upon the
completion of a project milestone.




Warranty
Provision




Warranties
provided for the Company’s catalytic regeneration services vary by contract, but
typically provide limited performance guarantees.  The Company’s DSIT
subsidiary generally grants its customers one to two year warranty on its
projects.




Estimated
warranty obligations are provided for as a cost of sales in the period in which
the related revenues are recognized, based on management’s estimate of future
potential warranty obligations and limited historical
experience.  Adjustments are made to accruals as warranty claim data
and historical experience warrant.




The
Company’s warranty obligations may be materially affected by product or service
failure rates and other costs incurred in correcting a product or service
failure.  Should actual product or service failure rates or other
related costs differ from the Company’s estimates, revisions to the accrued
warranty liability would be required.




The
following table summarizes the changes in accrued warranty liability from
December 31, 2007 to the year ended December 31, 2009:




Gross
                    Carrying
                    AmountBalance
      at December 31, 2007
                  
                  $
                  107Warranties
      issued
                  
                  
                  168Adjustment
      of warranty provision
                  
                  
                  (19
                  )Warranty
      claims
                  
                  
                  —Balance
      at December 31, 2008
                  
                  
                  256Warranties
      issued and adjustment of provision
                  
                  
                  50Adjustment
      of warranty provision
                  
                  
                  (22
                  )Warranty
      claims
                  
                  
                  —Balance
      at December 31, 2009
                  
                  $
                  284
                  *




* The
balance at December 31, 2009 is included in other current liabilities ($22) and
other long-term liabilities ($262). At December 31, 2008, the balance is
included in other current liabilities ($8) and other long-term liabilities
($248).




Concentration
of Credit Risk




Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist principally of cash and cash equivalents, restricted deposits and
accounts receivable.  The Company’s cash, cash equivalents and
restricted cash deposits were deposited with U.S., Israeli and Canadian, banks
and other financial institutions and amounted to $13,446 at December 31,
2009.  The Company uses major banks and brokerage firms to invest its
excess cash, primarily in money market funds.  The Company does not
believe there is significant risk of non-performance by the
counterparties.  Related credit risk would result from a default by
the financial institutions or issuers of investments to the extent of the
recorded carrying value of these assets.  Approximately 56% of the
accounts receivable at December 31, 2009, were due from four customers, all of
whom pay their receivables over usual credit periods (as to revenues from
significant customers – see Note 21).  Credit risk with respect to the
balance of trade receivables is generally diversified due to the number of
entities comprising the Company’s customer base.


F-12


Research
and Development Expenses




Research
and development expenses consist primarily of labor and related expenses and are
charged to operations as incurred.  Participation by third parties in
the Company’s research and development costs as well as credits arising from
qualifying scientific research and experimental development ("SRED")
expenditures are netted against research and development.




In
connection with business combinations, amounts assigned to tangible and
intangible assets to be used in a particular research and development project
that have not reached technological feasibility and have no alternative future
use are charged to acquired  in-process research and development at
the acquisition date.




Advertising
Expenses




Advertising
expenses are charged to operations as incurred.  Advertising expense
was $28 and $121 for the years ended December 31, 2008 and 2009,
respectively.




Stock-Based
Compensation




In
accordance with applicable accounting principles, stock-based compensation cost
is measured at the grant date, based on the fair value of the award, and is
recognized as expense on an accelerated basis over the employee’s requisite
service period (generally the vesting period of the equity grant).




See Note
17 for the assumptions used to calculate the fair value of stock-based employee
compensation.  Upon the exercise of options, it is the Company’s
policy to issue new shares rather than utilizing treasury shares.




The
Company accounts for stock-based compensation issued to non-employees (generally
consultants) on a fair value basis. The fair value of such equity awards is
charged to income over the expected service period.




Deferred
Income Taxes




Deferred
income taxes reflects 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 carryforwards.  Deferred tax assets and
liabilities are classified as current or non-current 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 the assets will not be realized.  Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.  The effect on deferred tax assets and
liabilities of a change in tax rates or laws is recognized in operations in the
period that includes the enactment date.




Income
Tax Uncertainties




The
calculation of the Company’s tax liabilities involves dealing with uncertainties
in the application of complex tax regulations. The Company recognizes
liabilities for uncertain tax positions based on the two-step process prescribed
by applicable accounting principles. The first step is to evaluate the tax
position for recognition by determining if the weight of available evidence
indicates that it is more likely than not that the position will be sustained on
audit, including resolution of related appeals or litigation processes, if any.
The second step requires the Company to estimate and measure the tax benefit as
the largest amount that is more than 50% likely of being realized upon ultimate
settlement. It is inherently difficult and subjective to estimate such amounts,
as this requires the Company to determine the probability of various possible
outcomes. The Company reevaluates these uncertain tax positions on a quarterly
basis. This evaluation is based on factors including, but not limited to,
changes in facts or circumstances, changes in tax law, effectively settled
issues under audit, and new audit activity. Such a change in recognition or
measurement would result in the recognition of a tax benefit or an additional
charge to the tax provision in the period. The Company recognizes interest and
penalties as incurred in finance income, (expense), net in the Consolidated
Statements of Operations.


F-13




Basic
and Diluted Net Loss Per Share




Basic net
loss per share is computed by dividing the net loss attributable to Acorn
Energy, Inc. by the weighted average number of shares outstanding during the
year, excluding treasury stock.  Diluted net income (loss) per share
is computed by dividing the net income (loss) by the weighted average number of
shares outstanding plus the dilutive potential of common shares which would
result from the exercise of stock options and warrants or conversion of
convertible securities in 2008.  Convertible debentures are assumed to
have been converted into ordinary shares, and net income is adjusted to
eliminate the interest expense, less the tax effect.  The dilutive
effects of stock options, warrants and convertible securities are excluded from
the computation of diluted net loss per share if doing so would be
antidilutive.  The weighted average number of options, warrants and
convertible debentures that were excluded from the computation of diluted net
loss per share, as they had an antidilutive effect, was approximately 2,770,000
and 1,669,000 for the years ending December 31, 2008 and 2009,
respectively.




Fair
Value Measurement




Effective
January 1, 2008, the Company adopted the provisions of the accounting
pronouncement which defines fair value, establishes a framework for measuring
fair value and enhances fair value measurement disclosure. Under the provisions
of the pronouncement, fair value is defined as the price that would be received
to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an
orderly transaction between market participants at the measurement
date.




The
pronouncement establishes a hierarchy for inputs used in measuring fair value
that maximizes the use of observable inputs and minimizes the use on
unobservable inputs by requiring that the most observable inputs be used when
available. Observable inputs are inputs that market participants would use in
pricing the asset or liability developed based on market data obtained from
sources independent of the Company. Unobservable inputs are inputs that reflect
the Company’s assumptions about the assumptions market participants would use in
pricing the asset or liability developed based on the best information available
in the circumstances. The hierarchy is described below:




Level 1:
Quoted prices (unadjusted) in active markets that are accessible at the
measurement date for assets or liabilities. The fair value hierarchy gives the
highest priority to Level 1 inputs.




Level 2:
Observable prices that are based on inputs not quoted on active markets, but
corroborated by market data.




Level 3:
Unobservable inputs are used when little or no market data is available. The
fair value hierarchy gives the lowest priority to Level 3 inputs.




Accumulated
Comprehensive Income (Loss)




The
components of the Company’s accumulated comprehensive income (loss) for the
years presented are as follows:




Acorn Energy, Inc.
                    
                    
                    Non-controlling interestAs of December 31,
                    
                    
                    As of December 31,2008
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009Differences
      from translation of subsidiaries’ financial statements and equity
      investees
                    
                    $
                    (300
                    )
                    
                    $
                    152
                    
                    
                    $
                    —
                    
                    
                    $
                    42Unrealized
      loss on investment in Comverge
                    
                    
                    (125
                    )
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Ending
      balance
                    
                    $
                    (425
                    )
                    
                    $
                    152
                    
                    
                    $
                    —
                    
                    
                    $
                    42


F-14




Recently
Issued Accounting Principles Not Yet Adopted by the Company




With the
exception of those stated below, there have been no recent accounting
pronouncements or changes in accounting pronouncements during the year ended
December 31, 2009, that are of material significance, or have potential material
significance, to the Company.




In June
2009, the FASB issued a statement amending the accounting for variable interest
entities. The amendments require an analysis to determine whether a variable
interest gives the entity a controlling financial interest in a variable
interest entity. This statement requires an ongoing reassessment and eliminates
the quantitative approach previously required for determining whether an entity
is the primary beneficiary. This statement is effective for fiscal years
beginning after Nov. 15, 2009. Accordingly, the Company will adopt the statement
at the beginning of fiscal year 2010. The Company is currently evaluating and
has not yet determined the impact, if any, its adoption will have on the
Company’s consolidated financial statements.




In
October 2009, the FASB issued amendments to the accounting and disclosure for
revenue recognition These amendments, effective for fiscal years beginning on or
after June 15, 2010 (early adoption is permitted), modify the criteria for
recognizing revenue in multiple element arrangements and require companies to
develop a best estimate of the selling price to separate deliverables and
allocate arrangement consideration using the relative selling price method.
Additionally, the amendments eliminate the residual method for allocating
arrangement considerations. The Company is currently evaluating the impact that
the adoption would have on its consolidated financial statements.




Reclassifications




Certain
reclassifications have been made to the Company’s prior year's consolidated
financial statements to conform to the current year’s consolidated financial
statement presentation.





NOTE
3—ACQUISITIONS




(a)
            Coreworx




On August
13, 2008, the Company completed the acquisition of all of the outstanding
capital stock of Coreworx. Coreworx is headquartered in Kitchener, Ontario,
Canada, and is engaged in the design and delivery of project collaboration
solutions for large capital projects.




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




As part
of the purchase of the Coreworx shares, the Company contributed to the capital
of Coreworx $2,500 in cash and $3,400 aggregate principal amount of its 8%
one-year promissory notes. The cash and notes were delivered by Coreworx to the
holders of Coreworx’s debentures in full payment and satisfaction of all
principal and accrued interest outstanding on such debentures. The 8% one-year
promissory notes were repaid on August 13, 2009.




In
consideration for the Coreworx shares, the Company issued 287,500 shares of its
common stock.




As a
result of the transaction, Coreworx became a wholly-owned subsidiary of the
Company and is presented as the Company’s EIS segment.




In
accordance with applicable accounting principles, the assets and liabilities of
Coreworx were adjusted to their fair values.  The purchase price of
$7,350 is the sum of the following: (i) $2,500 representing the cash
consideration for the shares of Coreworx, (ii) $3,400 representing the principal
amount of 8% one-year promissory notes (iii) $1,233 representing the market
value of the 287,500 shares of Acorn common stock issued to the former
shareholders of Coreworx (based on the average market price of Acorn shares on
the date of the announcement of the transaction and for the two days before and
after the announcement in accordance with applicable accounting principles and
(iv) $217 of transaction costs.


F-15




The
transaction is accounted for as a purchase business combination. Coreworx’s
results from operations for the period from acquisition to December 31, 2008
have been included in the Company’s Consolidated Statement of
Operations.




Under the
purchase method of accounting, the total consideration of $7,350 was allocated
to Coreworx’s identifiable tangible and intangible assets acquired and
liabilities assumed based on their fair values as of the date of the completion
of the transaction. As per an appraisal performed by management, which included
a number of factors, including the assistance of independent appraisers. The
Company allocated the purchase price as follows:





Cash
      and cash equivalents
                  
                  $
                  227Other
      current assets
                  
                  
                  652Property
      and equipment
                  
                  
                  183In-process
      research and development ( expensed immediately)
                  
                  
                  2,444Customer
      relationships
                  
                  
                  399Software
                  
                  
                  3,274Goodwill
                  
                  
                  2,398Total
      assets acquired
                  
                  
                  9,577Current
      liabilities
                  
                  
                  (668
                  )Non-current
      liabilities (intercompany debt eliminated in
consolidation)
                  
                  
                  (1,559
                  )Net
      assets acquired
                  
                  $
                  7,350





An amount
of $2,444 of the purchase price was allocated to the estimated fair value of
purchased in- process research and development, which, as of the closing date of
the merger, had not reached technological feasibility and had no alternative
future use, and, in accordance with US GAAP, was charged to operating
expenses upon acquisition. In-process research and development is related to
improvements to Coreworx’s software. To determine the amount of in-process
research and development, the net cash inflows were discounted to present
values, using a discount rate of 18% and other assumptions, which take into
account the assembled workforce, working capital, and other factors, which
impact on the determination of the in-process research and development. Coreworx
expects that cash inflows from this development to begin in the latter half of
2010 or early 2011.




Intangible
assets with estimable useful lives are amortized over that period. The acquired
intangible assets with estimable useful lives include approximately $399 for the
estimated fair value of Coreworx’s customer contracts and relationships
(estimated useful life of 10 years) and approximately $3,274 for the estimated
fair value of Coreworx’s software (estimated useful life of 16
years).




Neither
the goodwill nor the intangibles resulting from the acquisition are deductible
for income tax purposes. The goodwill is not amortized for financial statement
purposes in accordance with applicable accounting principles. The intangible
assets and the goodwill acquired were assigned to the Company’s EIS
segment.




Set forth
below is certain unaudited pro forma combined Statement of Operations data
assuming that the acquisition of Coreworx occurred on January 1, 2008 after
giving effect to: (i) purchase accounting adjustments including the
amortization of acquired intangibles with finite lives on a straight-line basis
over ten to sixteen years (ii) eliminating of Coreworx’s interest expense
recorded on Senior Secured Debentures which are assumed to have been redeemed at
the beginning of each year (iii) Acorn interest expense on the $3,400 principal
amount of 8% one-year promissory notes and (iv) income tax benefit for the Acorn
interest expense. No income tax benefit is calculated for the year ending
December 31, 2008 as the Company was in a tax loss position.


F-16




The
unaudited pro forma financial information is not necessarily indicative of the
combined results that would have been attained had the acquisitions of Coreworx
occurred as of January 1, 2008, nor is it necessarily indicative of future
results.




Year ended
                    December 31, 2008(in thousands except
                    per share data)(unaudited)Sales
                  
                  $
                  22,286Net
      loss attributable to Acorn Energy, Inc. shareholders
                  
                  $
                  (13,805
                  )Net
      loss per share attributable to Acorn Energy, Inc. shareholders – basic and
      diluted
                  
                  $
                  (1.20
                  )





See Note
11(b)(ii) with respect to Coreworx' acquisition in 2009 of
ProExecute.




(b)
            DSIT
      Solutions




On
November 29, 2007, the Company increased its holdings in DSIT by acquiring the
shares of DSIT’s former CEO for $740. In addition, the Company entered into a
put option agreement with certain affiliates of the former CEO pursuant to which
such affiliates have the option to sell to the Company all but not less than all
of the shares they hold in DSIT for an aggregate purchase price of
$294.  The option was exercised in December 2008, though payment of
the option exercise was not made until 2009.  As a result of the
acquisition and option exercise, the Company increased its holdings in DSIT from
72% to 84%.




In March
2008, the Company obtained a tentative preliminary valuation of intangible
assets as of November 29, 2007 for the purposes of allocating the $740 purchase
price to the assets, liabilities and the put option.  The Company
initially assigned $557 of the purchase price to intangible assets representing
the fair value of technology, backlog and customer relationships with the
balance of $231 being assigned to goodwill and an offset of $48 for the put
option.  Upon finalizing the purchase price allocation of the
Company’s additional investment in DSIT in April 2009, the Company increased the
amount allocated to goodwill by $209 (to $440) and decreased the acquired
intangibles of $250 (to $307). As a result of the adjustment of the purchase
price allocation, the amount allocated to the put option associated with the
additional investment in DSIT was reduced by $41 (to $7). The additional
investment of $294 resulting from the option exercise was allocated to
intangibles ($210) and goodwill ($84).




The
intangible assets and the goodwill acquired were assigned to the Company’s Naval
& RT Solutions segment.




NOTE
4—COALOGIX




On
February 29, 2008, EnerTech entered an agreement with the Company’s wholly-owned
CoaLogix Inc. subsidiary and the Company pursuant to which EnerTech purchased
from CoaLogix a 15% interest in CoaLogix for $1,948. The Company owned 85% of
CoaLogix following the transaction. The Company recorded an immaterial gain as a
result of the investment by EnerTech. During the second quarter of 2008,
EnerTech invested an additional $275 in CoaLogix as its 15% share of an
aggregate $1,850 additional investment made by the Company and EnerTech in
CoaLogix.




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


F-17




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




The first
three stages of the investment under the Purchase Agreement were completed in
2009. The Company’s share was $2,747. The Company transferred this amount to
CoaLogix and was issued 381,527 shares of CoaLogix common stock. Concurrently,
EnerTech and CoaLogix’s senior management’s share of the first three stages of
the stock purchase under the Purchase Agreement was $2,873. CoaLogix received
these amounts from EnerTech and CoaLogix senior management issued 381,527 and
17,638 shares of CoaLogix common stock, respectively. As a result of these
issuances of shares, the Company’s holdings in CoaLogix were diluted to
approximately 77.4%. In accordance with applicable accounting principles, the
Company recorded an increase of $596 in additional paid-in-capital as a result
of the $2,873 investment by non-controlling interests.




Concurrent
with the Purchase Agreement, CoaLogix granted additional options to purchase
shares of common stock to its senior management (see Note 17(g)).




The
non-controlling interests’ share of CoaLogix’s net loss in the years ending
December 31, 2008 and 2009 was $248 and $618, respectively.




NOTE 5—INVESTMENT
IN COMVERGE




During
2008, the Company sold an additional 1,261,165 of the 1,763,665 Comverge shares
it held at the beginning of 2008. The Company received proceeds of $15,355 from
the sales and recorded a pre-tax gain of $8,861.




The cost
basis of the 502,500 Comverge shares held by the Company at December 31, 2008
was $2,587 (approximately $5.15 per share). The investment was presented based
on Comverge’s share price of $4.90 at December 31, 2008 which resulted in a
reduction of the carrying value to reflect a fair market value of $2,462. The
difference of $125 was included in accumulated other comprehensive loss at
December 31, 2008 as the reduction in value was believed to be temporary. In
addition, the Company adjusted the previously recorded deferred tax liability
associated with the Comverge shares to zero. The net reduction of $29,680 was
recorded to accumulated other comprehensive income.




During
the year ended December 31, 2009, the Company sold all of the 502,500 Comverge
shares it held at the beginning of 2009.  The Company received
proceeds of $3,990 (including $112 received from covered-call options) and
recorded a pre-tax gain of $1,403 on the sale of these shares. The $125 that was
included in accumulated other comprehensive loss at December 31, 2008 was
eliminated following the sale of the Comverge shares in 2009.




NOTE 6—OTHER
INVESTMENTS




(a)
            GridSense




(i)           Initial
Investment in GridSense




On
January 2, 2008, the Company participated in a private placement financing of
total gross proceeds of 1,700 Canadian dollars ("C$") (approximately $1,700 at
the then exchange rate) for GridSense Systems Inc. (“GSI”). The Company was the
lead investor in the placement acquiring 15,714,285 shares and 15,714,285
warrants (the warrants expired in July 2008) for C$1,100 (approximately $1,100
at the then exchange rate) plus transaction costs of approximately $53. The
15,714,285 shares acquired by the Company in the placement represented
approximately 24.5% of GSI's issued and outstanding shares. In January 2008, GSI
issued 3,000,000 of its shares in an acquisition. The GSI issuance diluted the
Company’s holdings in GSI to approximately 23.4%. The Company recorded a loss of
$75 on the dilution.


F-18




Based on
an independent appraisal, the Company allocated the $1,153 investment in GSI as
follows: $761 to the value of technologies acquired, to be amortized using the
straight-line method over ten years; $73 to the value of the customer
relationships and $61 to the value of the trade-name at the date of the
investment to be amortized using the straight-line method over a weighted
average 12.5 year period; $25 to the value of the warrants acquired; and $233 to
non-amortizing goodwill.




All the
above components of the Company’s investment are not reflected separately as
such in the consolidated balance sheet of the Company, but are reflected as
components of the Company’s investment in GridSense.




The
Company accounts for its investment in GSI using the equity method in accordance
with applicable accounting principles. The Company records its share of income
or loss in GSI with a lag of three months as it has not been able to receive
timely financial information. In 2008, the Company recorded a loss of $123
representing the Company’s weighted average of approximately 23.6% share of
GSI's losses for the period from January 2, 2008 to September 30, 2008. In
addition to picking up its share of GSI’s losses, in 2008, the Company recorded
amortization of $64 with respect to the identified amortizable intangibles noted
above and expense of $25 with respect to the value of the expired
warrants.




On
December 31, 2008, as a result of the steep and continuous decline in the public
share price of GSI, the Company determined that the decline in value was other
than temporary, and, accordingly recorded an impairment of $714 in the value of
GSI to bring the value of the Company’s investment in GSI to its market value on
the Toronto Stock Exchange on that date.




In the
year ending December 31, 2009, the Company recorded $129 as its share of losses
in GridSense reducing its investment balance in GridSense to zero. The Company
has accordingly ceased recording its shares of losses in GridSense until such
time as its investment balance becomes positive.




The
Company holds significant variable interests in these GridSense, but is not the
primary beneficiary. Consequently, these entities are accounted for under the
equity method because the Company will not absorb a majority of the GridSense's
expected losses or receive a majority of its expected residual
returns.




(ii)           Loans
to GridSense




In July
2008, the Company lent GSI C$750 ($736 at the then exchange rate) under a
secured promissory note which bears interest at 8% and was initially due on
October 30, 2008. The maturity date of the loan was extended to January 31, 2009
with no other changes in terms. The note was secured by all the assets of GSI’s
principal operating subsidiary.  In the fourth quarter of 2008, the
Company recorded an impairment of C$777 ($631 at the then exchange rates) with
respect to the promissory note and accrued interest due to doubts as to GSI’s
ability to repay the note and ceased recording interest income (see Note
12).







(iii)           Privatization
of GridSense




On June
15, 2009, GSI effectively completed a plan which was approved by a majority of
GSI's shareholders in February 2009, whereby GSI transferred its grid monitoring
business to a newly formed private Australian corporation known as GridSense Pty
Ltd. (“GPL”). Concurrently, certain GSI shareholders (including Acorn)
transferred their shares to a third party and received shares in GPL. Under the
plan, GPL assumed all the debt of GSI including its debt to Acorn (See Note
6a(ii) above). As a result, the Company’s percentage ownership in the grid
monitoring business increased from approximately 23% (in GSI) to approximately
31% of the newly formed Australian corporation (GPL).  The Company recorded
no gain or loss on the privatization transaction. The carrying value of the
Company’s investment in GPL is zero as was the carrying value of the Company’s
investment in GSI prior to the going private transaction.


F-19




(iv)           Letter
of Intent to Acquire the Balance of GPL




On
November 4, 2009, the Company entered into a binding Letter of Intent with GPL
and the principal shareholders of GPL. The letter of intent has expired, however
the parties are proceeding to consummate the transaction based on such
terms.  According to the terms of the letter of intent the Company
will acquire all of the shares of GPL not currently owned by the Company as well
as the debt owed by GPL to certain of its shareholders (the “GPL debt”).
Consideration for the acquisition of the GPL shares and the GPL debt is $4,384
less certain debt owed to Acorn multiplied by the percentage of the GPL shares
not owned by the Company at closing, plus an earn-out to be determined based on
the gross sales of GPL for 2010. The earn-out is capped at $2,435 multiplied by
the percentage of the GPL shares not owned by the Company at closing. In
connection with the Letter of Intent, the Company has made bridge loans of $550
(which is included in other
investments and loans to equity investees) to GPL with an annual interest
rate of 8% per annum and terms of 24 months. The bridge loans will be used by
GPL for working capital and debt reduction purposes. The Company plans to close
on the transaction to acquire all the shares of GPL not currently owned by the
Company in April, 2010.




(b)
            U.S.
      Sensor Systems Inc.




On
November 27, 2009, the Company signed a term sheet with USSI, whereby subject to
definitive agreements, it agreed to acquire an approximate 4% interest (on a
fully diluted basis) in USSI for $200. USSI is a Delaware corporation based in
Northridge, California. USSI's primary focus is to develop and produce fiber
optic sensing systems for the energy and defense markets.  (see Note 24 –
Subsequent Events).





The
Company accounts for its investment in USSI under the cost method in accordance
with applicable accounting principles.




(c)
            EnerTech
      Capital Partners




In August
2007, the Company committed to invest up to $5,000 over a ten-year period in
EnerTech, a proposed $250 million venture capital fund targeting early and
expansion stage energy and clean energy technology companies that can enhance
the profits of the producers and consumers of energy.  To date, the
Company has funded $2,150 of its $5,000 investment commitment in EnerTech and
owns approximately 5.7% of EnerTech. The Company accounts for its investment in
EnerTech under the cost method in accordance with applicable accounting
principles.




The
following table summarizes the Company's investment in EnerTech.




Gross Carrying
                    AmountBalance
      at December 31, 2007
                  
                  $
                  400Capital
      calls during the year ended December 31, 2008
                  
                  
                  750Impairments
      recorded during the year ended December 31, 2008
                  
                  
                  (33
                  )Balance
      at December 31, 2008
                  
                  
                  1,117Capital
      calls during the year ended December 31, 2009
                  
                  
                  1,000Impairments
      recorded during the year ended December 31, 2009
                  
                  
                  (80
                  )Balance
      at December 31, 2009
                  
                  $
                  2,037


F-20





(d)
            Paketeria




(i)           Investment
in Paketeria




At
December 31, 2007, following a series of investments in Paketeria GmbH
("Paketeria"), a limited liability company incorporated under the laws of
Germany, the Company's investment in Paketeria, net of equity losses, stood at
$1,439. At December 31, 2007, the Company owned approximately 31.4% of
Paketeria.




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




The
Company accounted for its investment in Paketeria using the equity method in
accordance with applicable accounting principles.  During the year
ended December 31, 2008 the Company recorded a loss of $1,560 as its share of
losses in Paketeria.  Included in the abovementioned loss is $25 of
stock compensation expense with respect to options to purchase the Company's
common stock previously granted to the founder of Paketeria. As a result of the
losses recorded in the year ended December 31, 2008, the Company’s net
investment in Paketeria was written down to zero.




In the
third quarter of 2009, liquidation proceedings began with respect to Paketeria.
As a result of the liquidation proceedings, the Company eliminated the
previously recorded cumulative translation adjustment of $263 associated with
the investment in Paketeria and recognized that amount as share of income in
Paketeria. In the fourth quarter of 2009, the Company sold its investment in
Paketeria for a nominal amount.




(ii)           Loans
to Paketeria




During
the period from January 1, 2008 to June 30, 2008, the Company lent Paketeria
€1,030 ($1,584 based upon the then exchange rates) on a series of promissory
notes. The promissory notes bore interest at the rate of 8.0% and were due on
the earlier of December 31, 2008 or upon the completion of any transaction in
which Paketeria raised funds through any equity and/or debt
financing.  In addition, the Company received warrants to purchase
6,866 shares of Paketeria. The amount lent to Paketeria was allocated to the
loan and the warrants received based on the relative fair values at time of
issuance. The Company allocated $1,522 to the loan portion and $62 to the value
of the warrants.




On
August 26, 2008, the Company entered into a loan agreement with Paketeria
to provide Paketeria with additional interim financing of €600 ($890 based upon
the then exchange rates). Under the loan agreement, the loans advanced to
Paketeria during the period from January 1, 2008 to June 30, 2008 plus accrued
interest were combined with the additional interim financing to a single
combined loan of €1,662 ($2,423 at the then exchange rates). The combined loan
bore interest at 12% per year and was due on March 31, 2009.




(iii)           Paketeria
Impairment




Following
the marked deterioration of Paketeria’s cash flows and its decision to change
its business model, the Company ceased amortizing intangibles associated with
its investment in Paketeria and recorded an impairment of all unamortized
intangible asset balances. In addition, at the end of third quarter of 2008, the
Company recorded an impairment of $2,454 with respect to the Company’s loan and
accrued interest balances with Paketeria as Paketeria’s ability to repay the
loan was in doubt.




(e)
            Local
      Power




On July
31, 2007, the Company invested $250 (plus $18 of transaction costs) in Local
Power, Inc. (LPI), for 10% (fully diluted) of LPI.  During 2008, the
Company lent LPI $220 and advanced to LPI an additional $30, in addition to $25
advanced to LPI in 2007. During 2008, the Company accrued interest income of $3
with respect to the loan to LPI. In December 2008, the Company disposed of its
loans to and investment in LPI and recorded a loss of $546 which is included in
impairments in the Consolidated Statements of Operations. The Company received
no material consideration in the disposition.


F-21




NOTE
7—NON-CONTROLLING INTERESTS




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




Year ended
                    December 31,2008
                  
                  
                  2009Net
      loss attributable to NCI in CoaLogix
                  
                  $
                  248
                  
                  
                  $
                  626Net
      income attributable to NCI in DSIT
                  
                  
                  —
                  
                  
                  
                  (206
                  )Net
      loss attributable to NCI
                  
                  $
                  248
                  
                  
                  $
                  420





The
following schedule presents the effects of changes in the Company’s ownership
interests in its subsidiaries on the Company’s equity.





Year ended
                    December 31,2008
                  
                  
                  2009Net
      loss attributable to Acorn Energy, Inc.
                  
                  $
                  (7,895
                  )
                  
                  $
                  (5,756
                  )Transfers
      to (from) NCI:Increase
      in Acorn Energy Inc.’s Additional Paid-in-Capital from sale by CoaLogix of
      its shares to NCI
                  
                  
                  —
                  
                  
                  
                  596Net
      transfers to NCI
                  
                  
                  —
                  
                  
                  
                  596Changes
      from net  loss attributable to Acorn Energy, Inc. and transfers
      to (from) NCI
                  
                  $
                  (7,895
                  )
                  
                  $
                  (5,160
                  )




NOTE
8—INVENTORY





As of December 31,2008
                  
                  
                  2009Raw
      materials
                  
                  $
                  720
                  
                  
                  $
                  550Work-in-process
                  
                  
                  428
                  
                  
                  
                  1,298$
                  1,148
                  
                  
                  $
                  1,848




NOTE 9—OTHER
CURRENT ASSETS




As of December 31,2008
                  
                  
                  2009Prepaid
      expenses and deposits
                  
                  $
                  620
                  
                  
                  $
                  491Deferred
      costs
                  
                  
                  583
                  
                  
                  
                  778Prepaid
      chemicals
                  
                  
                  407
                  
                  
                  
                  —Taxes
      receivable
                  
                  
                  362
                  
                  
                  
                  478SRED
      receivable
                  
                  
                  —
                  
                  
                  
                  381Employees
                  
                  
                  84
                  
                  
                  
                  127Other
                  
                  
                  24
                  
                  
                  
                  62$
                  2,080
                  
                  
                  $
                  2,317


F-22




NOTE 10—PROPERTY
AND EQUIPMENT, NET




Property
and equipment consists of the following




Estimated
                          Useful
                          Life (in
                          years)
                        
                        
                        As of December 31,Cost:
                        
                        
                        
                        
                        2008
                        
                        
                        2009Computer
      hardware and software
                        
                        2 –
      5
                        
                        
                        $
                        683
                        
                        
                        $
                        920Equipment
                        
                        4-10
                        
                        
                        
                        2,368
                        
                        
                        
                        3,221Vehicles
                        
                        3
                        
                        
                        
                        5
                        
                        
                        
                        22Leasehold
      improvements
                        
                        Term
      of
                          lease
                        
                        
                        
                        479
                        
                        
                        
                        7583,535
                        
                        
                        
                        4,921Accumulated
      depreciation and amortizationComputer
      hardware and software
                        
                        
                        
                        
                        
                        
                        400
                        
                        
                        
                        455Equipment
                        
                        
                        
                        
                        
                        
                        442
                        
                        
                        
                        794Vehicles
                        
                        
                        
                        
                        
                        
                        1
                        
                        
                        
                        3Leasehold
      improvements
                        
                        
                        
                        
                        
                        
                        245
                        
                        
                        
                        3121,088
                        
                        
                        
                        1,564Property
      and equipment, net
                        
                        
                        
                        
                        
                        $
                        2,447
                        
                        
                        $
                        3,357




Depreciation
and amortization in respect of property and equipment amounted to $485 and $689
for 2008 and 2009, respectively.




During
2008, $199 of computer hardware and software was transferred to
project-in-process as part of a project being performed for a
customer.




NOTE 11—GOODWILL
AND INTANGIBLE ASSETS


(a)
Goodwill




The
changes in the carrying amounts of goodwill by segment from December 31, 2007 to
December 31, 2009 were as follows:




CoaLogix
                  
                  
                  Naval &
                    RT
                    Solutions
                  
                  
                  EIS
                  
                  
                  TotalBalance
      as of December 31, 2007
                  
                  $
                  3,714
                  
                  
                  $
                  231
                  
                  
                  $
                  —
                  
                  
                  $
                  3,945Goodwill
      created in the acquisition of Coreworx (see Note 3(a))
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,398
                  
                  
                  
                  2,398Adjustment
      of goodwill in additional investment in DSIT (see Note
    3(b))
                  
                  
                  —
                  
                  
                  
                  209
                  
                  
                  
                  —
                  
                  
                  
                  209Goodwill
      in additional investment in DSIT (see Note 3(b))
                  
                  
                  —
                  
                  
                  
                  84
                  
                  
                  
                  —
                  
                  
                  
                  84Impairments
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Translation
      adjustment
                  
                  
                  —
                  
                  
                  
                  6
                  
                  
                  
                  (300
                  )
                  
                  
                  (294
                  )Balance
      as of December 31, 2008
                  
                  
                  3,714
                  
                  
                  
                  530
                  
                  
                  
                  2,098
                  
                  
                  
                  6,342Impairments
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Translation
      adjustment
                  
                  
                  —
                  
                  
                  
                  4
                  
                  
                  
                  333
                  
                  
                  
                  337Balance
      as of December 31, 2009
                  
                  $
                  3,714
                  
                  
                  $
                  534
                  
                  
                  $
                  2,431
                  
                  
                  $
                  6,679




As
required, the Company performs an annual impairment test of recorded goodwill
(during the fourth quarter of each year), or more frequently if impairment
indicators are present.  The fair value of the goodwill of each
segment was determined by using a discounted cash flow methodology based on
projections of the amounts and timing of future revenues and cash flows, assumed
discount rates and other assumptions as deemed appropriate.In 2008 and 2009, no
impairments were found to the Company’s goodwill.


F-23




(b)
Intangibles




(i)           Solucorp
License




In May
2008, the Company’s CoaLogix subsidiary entered into a strategic alliance and
license agreement with Solucorp Industries, Ltd. (“Solucorp”) pursuant to which
CoaLogix obtained exclusive, worldwide commercialization and marketing rights to
Solucorp’s IFS-2C technology ("MetalliFix") for use in applications which remove
heavy metals, such as mercury, from power plant emissions. The agreement has a
term of ten years, with an option in favor of CoaLogix to renew for an
additional five-year period. In consideration for its rights under the
agreement, CoaLogix paid a license fee of $2,000 and agreed to pay royalties on
net sales of, and to share a portion of any royalties received in respect of,
licensed product with Solucorp based on specified formula. The license fee of
$2,000 was included in the intangibles of the Company's CoaLogix segment. On
December 31, 2009, the Company recorded an impairment charge of $1,672
associated with the unamortized balance of the Solucorp license (see Note
12).




(ii)          ProExecute




On April
23, 2009, the Company’s Coreworx subsidiary signed an agreement with ProExecute
LLC for the rights to its Contract Management Solution technology
(“ProExecute”). With the acquisition of ProExecute, Coreworx extended its
Project Information Control software platform, which is used for managing
complex engineering documentation and information exchange among design
professionals, external engineering firms and contractors, to include integrated
contract and document management solution designed to address the complete
construction contract life cycle.




The
Company determined that the acquisition of ProExecute should be recorded as a
business combination under applicable accounting principles, as Coreworx
acquired substantially all of the net assets of the ProExecute business
including its core intellectual property, full use of ProExecute’s physical
assets, as well as the access to all intellectual knowledge.




In
accordance with applicable accounting principles, the Company recorded the
assets acquired and the liabilities assumed (including any contractual
contingencies) measured at their fair values as of the date of acquisition. The
Company determined that the fair value of the acquired assets on the date of
acquisition was $99, all of which was allocated to license technology – an
amortizable intangible asset. This asset is being amortized over a 30-month
period and is included in the Company’s EIS segment. Additionally, the Company
recorded $99 as a liability representing the fair value of expected future
royalty fees payable with respect to the Company’s use of
ProExecute.


F-24


(iii)         Summary




The
changes in the carrying amounts of and accumulated amortization of intangible
assets from December 31, 2007 to December 31, 2009 were as
follows:




CoaLogix Segment
                  
                  Naval & RT
                      Solutions
                      Segment
                  
                  EIS Segment
                  
                  TotalSCR
                      Technologies**
                  
                  Solucorp License
                  
                  Naval
                      Technologies
                  
                  Software
                  
                  Customer
                      Relationships
                  
                  TotalCost
                  
                  A.A.*
                  
                  Cost
                  
                  
                  A.A.*
                  
                  Cost
                  
                  
                  A.A.*
                  
                  Cost
                  
                  A.A.*
                  
                  Cost
                  
                  A.A.*
                  
                  NetBalance as of
      December31, 2007
                  
                  
                  5,511
                  
                  
                  (81
                  )
                  
                  —
                  
                  
                  
                  —
                  
                  
                  557
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  5,987Acquisition
      of Solucorp license
                  
                  
                  —
                  
                  
                  —
                  
                  
                  2,000
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  2,000Adjustment
      of intangibles in additional investment in DSIT (see Note
      3(b))
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  (250
                  )
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (250
                  )Intangibles
      created in acquisition of Coreworx (see Note 3(a))
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  3,274
                  
                  
                  —
                  
                  
                  399
                  
                  
                  —
                  
                  
                  3,673Intangibles
      in additional investment in DSIT (see Note 3(b))
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  210
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  210Amortization
                  
                  
                  —
                  
                  
                  (552
                  )
                  
                  —
                  
                  
                  
                  (128
                  )
                  
                  —
                  
                  
                  
                  (48
                  )
                  
                  —
                  
                  
                  (71
                  )
                  
                  —
                  
                  
                  (14
                  )
                  
                  (813
                  )Translation
      adjustment
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  6
                  
                  
                  
                  —
                  
                  
                  (409
                  )
                  
                  2
                  
                  
                  (50
                  )
                  
                  1
                  
                  
                  (450
                  )Balance
      as of December 31, 2008
                  
                  $
                  5,511
                  
                  $
                  (633
                  )
                  $
                  2,000
                  
                  
                  $
                  (128
                  )
                  $
                  523
                  
                  
                  $
                  (48
                  )
                  $
                  2,865
                  
                  $
                  (69
                  )
                  $
                  349
                  
                  $
                  (13
                  )
                  $
                  10,357ProExecute
      (see Note 11(b)(ii))
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  99
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  99Amortization
                  
                  
                  —
                  
                  
                  (551
                  )
                  
                  —
                  
                  
                  
                  (200
                  )
                  
                  —
                  
                  
                  
                  (78
                  )
                  
                  —
                  
                  
                  (220
                  )
                  
                  —
                  
                  
                  (37
                  )
                  
                  (1,086
                  )Impairment
      of Solucorp license (see Note 14)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (2,000
                  )
                  
                  
                  328
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (1,672
                  )Translation
      adjustment
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  4
                  
                  
                  
                  (2
                  )
                  
                  472
                  
                  
                  (28
                  )
                  
                  56
                  
                  
                  (6
                  )
                  
                  496Balance
      as of December 31, 2009
                  
                  $
                  5,511
                  
                  $
                  (1,184
                  )
                  $
                  —
                  
                  
                  $
                  —
                  
                  $
                  527
                  
                  
                  $
                  (128
                  )
                  $
                  3,436
                  
                  $
                  (317
                  )
                  $
                  405
                  
                  $
                  (56
                  )
                  $
                  8,194




*Accumulated
amortization




**   SCR
Technologies includes regeneration, rejuvenation and on-site cleaning
technologies associated with SCR-Tech


F-25




All
intangible assets are being amortized over their estimated useful lives, whose
weighted average lives were estimated to be ten years for CoaLogix, seven years
for Naval Technologies and sixteen years for EIS.




Amortization
in respect of intangible assets amounted to $813 and $1,086 for 2008 and 2009,
respectively.




Amortization
expense with respect to intangible assets is estimated to be $955, $946, $903,
$903 and $903 for each of the years ending December 31, 2010 through
2014.




NOTE
12—IMPAIRMENTS




Impairments are composed of the
following:





Years ended
                      December 31,2008
                    
                    
                    2009Impairment
      of loans and accrued interest to Paketeria (see Note 6(d))
                    
                    $
                    2,454
                    
                    
                    $
                    —Impairment
      of loan and accrued interest to GridSense (see Note 6(a))
                    
                    
                    631
                    
                    
                    
                    —Impairment
      of investment in EnerTech (see Note 6(b))
                    
                    
                    33
                    
                    
                    
                    80Impairment
      of loans to and investment in Local Power (see Note 6(e))
                    
                    
                    546
                    
                    
                    
                    —Impairment
      of MetalliFix and associated assets
                    
                    
                    —
                    
                    
                    
                    2,372Impairment
      of loan and accrued interest due from EES
                    
                    
                    —
                    
                    
                    
                    240$
                    3,664
                    
                    
                    $
                    2,692




During
2009, CoaLogix engaged an outside firm to assist CoaLogix with the determination
of the economic viability of MetalliFix. On December 18, 2009, the outside firm
issued its assessment that MetalliFix is not economically viable and not
competitive with other commercial products for mercury control that are
currently available. On December 30, 2009, the management of CoaLogix determined
that a material impairment of MetalliFix had occurred. Accordingly, CoaLogix
recorded an impairment charge of the remaining unamortized balance of the
Solucorp license ($1,672) as well as associated assets (chemicals - $383 and
prepaid chemicals - $317).




In 2008,
CoaLogix lent $200 to Environmental Energy Services, Inc. (“EES”) on a
convertible promissory note in contemplation of the acquisition by CoaLogix of
the assets of EES. CoaLogix did not enter into a definitive agreement with EES
by the target date provided for in the convertible promissory note and does not
intend to proceed with the acquisition. In the fourth quarter of 2009, CoaLogix
recorded an impairment charge on the loan balance ($200) and accrued interest
($40), as payment of the debt by EES is in doubt.




NOTE 13—BANK DEBT,
CONVERTIBLE DEBENTURES AND OTHER DEBT




(a)
            Lines
      of credit




In
October 2008, the subsidiaries of the Company’s CoaLogix subsidiary received a
$2,000 formula based line-of-credit from a U.S. bank, $200 of which was being
used at December 31, 2009. The line-of-credit was for a period of one year
(expiring in October 2009) and was subsequently extended to April 19, 2010. The
line-of-credit bears interest at 5.50% (U.S. prime plus 2.25%). The U.S. prime
rate at December 31, 2009 was 3.25%. CoaLogix is attempting to negotiate more
favorable terms and expects to renew the line-of-credit before the extension
period expires. The line-of-credit is subject to certain financial covenants.
CoaLogix was in compliance with its financial covenants at December 31,
2009.


F-26




In
addition, the Company’s DSIT subsidiary has a line-of-credit of approximately
$530 from an Israeli bank, of which $105 was being used at December 31,
2009.  The line-of-credit is subject to certain financial covenants.
DSIT was in compliance with its financial covenants at December 31, 2009. The
line-of-credit expires on March 31, 2010 at which time it may be renewed
(generally for a term of one year) under terms agreeable to both DSIT and the
bank. The line-of-credit is denominated in NIS and bears interest at a weighted
average rate of the Israeli prime rate per annum plus 3.0%.The Israeli prime
rate as of December 31, 2009 was 2.5% (December 31, 2008, 4.0%).





(b)
            Bank
      Debt




On
December 31, 2009, the Company's DSIT subsidiary took a loan from an Israeli
bank in the amount of $530. The loan is denominated in NIS and bears interest at
the rate of the Israeli prime rate per annum plus 0.9%. The loan is to be repaid
over a period of 48 months of equal payments of approximately $12 per month
(principal and interest). Principal payments with respect to the loan are $125,
$130, $135 and $140 for each of the years ending December 31, 2010, 2011, 2012
and 2013, respectively. As a security for this loan, DSIT has deposited with the
Israeli bank $79, reflected as a non-current restricted deposit on the Company’s
Consolidated Balance Sheets.





(c)
            Private
      Placement of Convertible Redeemable Subordinated
  Debentures




In 2007,
the Company conducted a private placement and issued $6,886 of its Debentures.
The Debentures provided that from the date of issuance of the Debentures to and
including, the first anniversary of the closing, 50% of the outstanding
principal amount of the Debentures were to be convertible into shares of the
Company’s common stock at a price of $3.80 per share and that following the
first anniversary of the closing, the Debentures were to be convertible up to
the entire principal amount then outstanding.  On December 18, 2007,
the Company decided to redeem all outstanding Debentures.




As part
of the private placement, the Company also issued Warrants to purchase 453,047
shares of the Company’s common stock exercisable for five years at an exercise
price of $4.50 per share. The Warrants are subject to call for cancellation at
the option of the Company on 20 business days notice, upon the common stock
having achieved a volume weighted average price of $6.00 or more for 20
consecutive trading days.  The Company allocated $531 to the value of
the warrants based on a valuation performed by an independent consultant who
utilized the Black Scholes method and applied a discount reflecting the callable
feature embedded in the warrant.  The value allocated to the warrants
was reflected as a discount to the total Debenture amount and was initially to
be charged to interest expense over the four-year life of the
Debenture.  The period of amortization of the warrants was accelerated
in December 2007 as a result of decision to redeem all the outstanding
Debentures.




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


F-27




(d)
            Notes
      Payable




As part
of the purchase of the Coreworx shares on August 13, 2008 (see Note 3(a)), the
Company issued to the former shareholders of Coreworx $3,400 aggregate principal
amount of its one-year promissory notes. The notes bore interest at a rate of 8%
per year and was payable quarterly. The notes were paid in full on August 13,
2009.




(e)
            Debt
      summary




As of December 31,2008
                    
                    
                    2009Lines
      of credit
                    
                    $
                    441
                    
                    
                    $
                    305Bank
      debt
                    
                    
                    —
                    
                    
                    
                    530Notes
      payable
                    
                    
                    3,400
                    
                    
                    
                    —Capital
      lease obligations
                    
                    
                    4
                    
                    
                    
                    —Total
      debt
                    
                    
                    3,845
                    
                    
                    
                    835Less:
      Lines-of-credit
                    
                    
                    (441
                    )
                    
                    
                    (305
                    )Less:
      Notes payable
                    
                    
                    (3,400
                    )
                    
                    
                    —Less:
      Current portion of debt
                    
                    
                    (4
                    )
                    
                    
                    (125
                    )Long-term
      bank debt
                    
                    $
                    —
                    
                    
                    $
                    405




With
respect to DSIT’s line-of-credit (see (a) above), a lien in favor of the Israeli
bank was placed on DSIT’s assets.  In addition, the Company has
guaranteed DSIT’s line-of-credit. With respect to the line-of-credit for
CoaLogix (see (a) above), a lien in favor of the U.S. bank was placed on
CoaLogix’s assets with the exception of CoaLogix’s intellectual property. The
U.S. bank took a double-negative pledge on CoaLogix’s intellectual
property.




NOTE 14—OTHER
CURRENT LIABILITIES




Other
current liabilities consist of the following:




As of December 31,2008
                    
                    
                    2009Taxes
      payable
                    
                    $
                    302
                    
                    
                    $
                    76Advances
      from customers
                    
                    
                    2,476
                    
                    
                    
                    1,924Accrued
      expenses
                    
                    
                    1,893
                    
                    
                    
                    2,920Warranty
      provision
                    
                    
                    8
                    
                    
                    
                    22Other
                    
                    
                    17
                    
                    
                    
                    46$
                    4,696
                    
                    
                    $
                    4,988




NOTE 15—LIABILITY
FOR EMPLOYEE TERMINATION BENEFITS




(a)
Israeli labor law and certain employee contracts generally require payment of
severance pay upon dismissal of an employee or upon termination of employment in
certain other circumstances.  The Company has recorded under liability
for employee termination benefits the amount that would be paid if all its
Israeli employees were dismissed at the balance sheet date, on an undiscounted
basis, in accordance with Israeli labor law.  This liability is
computed based upon the employee’s number of years of service and salary
components, which in the opinion of management create entitlement to severance
pay in accordance with labor agreements in force.


F-28




The
liability is partially funded by sums deposited in dedicated funds in respect of
employee termination benefits.  For certain Israeli employees, the
Company’s liability is covered mainly by regular contributions to defined
contribution plans.  These funded amounts are not reflected in the
balance sheets, since they are not under the control and management of the
Company.




(b)
Severance pay expenses amounted to approximately, $338 and $244 for the years
ended December 31, 2008 and 2009, respectively.




(c) The
Company expects to contribute approximately $260 in respect of its severance pay
obligations in the year ending December 31, 2010.




(d) The
Company does not expect to pay any future benefits to its employees upon their
normal retirement age during the years 2010 to 2013 and expects to pay $1,519
during the years 2014 to 2019. These amounts do not include amounts that might
be paid to employees that will cease working with the Company before their
normal retirement age. The liability as at December 31, 2009 for future
benefit payments in the next ten years is included under liability for employee
termination benefits. The liability for future benefits has not been reduced to
reflect any amounts already deposited in dedicated funds with respect to those
employees.  The amounts due were determined based on the employees’
current salary rates and the number of service years that will be accumulated
upon their retirement date.




NOTE 16—COMMITMENTS
AND CONTINGENCIES




(a)
            Leases
      of Property and Equipment




Office
rental and automobile leasing expenses, for 2008 and 2009, were $1,252 and
$1,531 respectively.  The Company and its subsidiaries lease office
space and equipment under operating lease agreements.  Those leases
will expire on different dates from 2010 to 2017. Future minimum lease payments
on non-cancelable operating leases as of December 31, 2009 are as
follows:




Years
      ending December 31,2010
                  
                  $
                  1,7722011
                  
                  
                  1,7832012
                  
                  
                  1,3732013
                  
                  
                  8512014
                  
                  
                  8372015
      and thereafter
                  
                  
                  2,077$
                  8,693




(b)
            EnerTech




In August
2007, the Company committed to invest up to $5,000 over a ten-year period in
EnerTech. To date, the Company has received and funded capital calls of $2,150
to EnerTech (see Note 6(c)).




(c)
            Guarantees




The
Company’s DSIT subsidiary provides various performance, advance and tender
guarantees as required in the normal course of its operations.  As at
December 31, 2009, such guarantees totaled approximately $2,619 and were due to
expire through 2010.  As a security for a portion of these guarantees,
the Company has deposited with an Israeli bank $300 which is shown as a current
restricted deposit and DSIT has deposited with an Israeli bank $752 as a current
restricted deposit on the Company’s Consolidated Balance Sheets.  The
Company expects the majority of the restricted deposit to be released in early
2010.


F-29




The
Company’s CoaLogix subsidiary provides various performance, advance and tender
guarantees as required in the normal course of its operations.  As at
December 31, 2009, such guarantees totaled approximately $2,215 and were due to
expire through 2011.  As a security for a portion of these guarantees,
the Company has deposited with a U.S. bank $1,107 of which $575 is shown as a
current restricted deposit and $532 as a non-current restricted deposit on the
Company’s Consolidated Balance Sheets.  The Company expects the
majority of the restricted deposit to be released in 2010.




See Note
13(e) with respect to guarantees on the Company’s lines of credit.




(d)
            Litigation




On August
13, 2008, EES filed suit against CoaLogix and its CEO in the United States
District Court for the District of Connecticut alleging claims for tortious
interference with contract, fraudulent misrepresentation, conversion, unfair
trade practices and unjust enrichment. EES’ claims arise largely out of a series
of business relationships that existed between EES, CoaLogix and Solucorp. The
suit seeks unspecified damages in addition to disgorgement of all revenues
CoaLogix has earned from its dealings with Solucorp. CoaLogix denies any
liability and is defending this lawsuit in the event that a favorable settlement
is not reached.  The Company believes EES’s claims to be without
merit; however, at this point, the Company cannot estimate what the final
outcome of the suit might be. Since the suit was filed in August, 2008 and is
still pending with no prospect of settlement, the Company has recorded an
undisclosed provision.




NOTE
17—EQUITY




(a)
            General




The
Company is authorized to issue 20,000,000 shares of common stock.  At
December 31, 2009 the Company had issued and outstanding 13,248,813 shares of
its common stock, par value $0.01 per share (See Note 24 – Subsequent Events).
Holders of outstanding common stock are entitled to receive dividends when, as
and if declared by the Board and to share ratably in the assets of the Company
legally available for distribution in the event of a liquidation, dissolution or
winding up of the Company. Holders of common stock do not have subscription,
redemption, conversion or other preemptive rights. Holders of the common stock
are entitled to elect all of the Directors on the Company’s
Board.  Holders of the common stock do not have cumulative voting
rights, meaning that the holders of more than 50% of the common stock can elect
all of the Company’s Directors.  Except as otherwise required by
Delaware General Corporation Law, all stockholder action is taken by vote of a
majority of shares of common stock present at a meeting of stockholders at which
a quorum (a majority of the issued and outstanding shares of common stock) is
present in person or by proxy or by written consent pursuant to Delaware law
(other than the election of Directors, who are elected by a plurality
vote).




The
Company is not authorized to issue preferred stock.  Accordingly, no
preferred stock is issued or outstanding.




(b)
            Summary
      Employee Option Information




The
Company’s stock option plans provide for the grant to officers, directors and
other key employees of options to purchase shares of common
stock.  The purchase price must be paid in cash.  Each
option is exercisable to one share of the Company’s common
stock.  Most options expire within five to ten years from the date of
the grant, and generally vest over three year period from the date of the grant.
At December 31, 2009, 33,000 options were available for grant under the Amended
and Restated 2006 Stock Incentive Plan and 226,667 options were available for
grant under the 2006 Director Plan. In 2008 and 2009, all options granted to
non-employees were from the 2006 Amended and Restated Stock Incentive Plan which
permits grants to non-employees.


F-30




In
connection with the stock option exercises during the years ended December 31,
2008 and 2009, the Company received proceeds of $111 and $273,
respectively.  During the years ended December 31, 2008 and 2009, all
50,000 and 257,168 shares issued in connection with option exercises were newly
issued shares. The intrinsic value of options exercised in 2008 and 2009 were
$136 and $1,592, respectively.




The
Company granted 270,000 and 300,000 options to employees who were related
parties (directors and executive officers) in the years ended December 31, 2008
and 2009, respectively, under various option plans.  During 2008,
10,000 options were exercised and no options were forfeited by related parties.
During 2009, 224,668 options were exercised by related parties and 46,667
options were forfeited. As of December 31, 2008 and 2009, the number of
outstanding options held by the related parties was 1,478,500 and 1,547,165
options, respectively.




The
weighted average grant-date fair value of the options granted during 2008 and
2009, amounted to $2.91 and $1.47 per option, respectively. 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):




2008
                  
                  
                  2009Risk-free
      interest rate
                  
                  
                  2.6
                  %
                  
                  
                  2.1
                  %Expected
      term of options, in years
                  
                  
                  5.5
                  
                  
                  
                  5.7Expected
      annual volatility
                  
                  
                  74
                  %
                  
                  
                  70
                  %Expected
      dividend yield
                  
                  None
                  
                  
                  None




The
expected term of the options is the length of time until the expected date of
exercising the options.  With respect to determining expected exercise
behavior, the Company has grouped its option grants into certain groups in order
to track exercise behavior and establish historical rates.  The
Company estimated volatility by considering historical stock
volatility.  The risk-free interest rates are based on the U.S.
Treasury yields for a period consistent with the expected
term.  Additionally, the Company expects no dividends to be
paid.  The Company believes that the valuation technique and the
approach utilized to develop the underlying assumptions are appropriate in
determining the estimated fair value of the Company’s stock options granted in
the years ended December 31, 2008 and 2009.  Estimates of fair value
are not intended to predict actual future events or the value ultimately
realized by persons who receive equity awards.




(c)
            Non-Employee
      Options




In
January 2008, the Company granted an outside consultant an option for the
purchase of 10,000 shares of the Company’s common stock.  The options
vested after six months, have an exercise price of $5.08 and expire after seven
years.




The
Company used the Black-Scholes valuation method to estimate the fair value of
the options granted to the consultant.  The Company used a risk free
interest rate of 3.3%, an expected life of seven years, an annual volatility of
76% and no expected dividends to determine the value the options
granted.  The Company estimated the fair value of each option granted
to be $3.66. The Company recorded $37 to selling, general and administrative
expense with respect to the option granted to the consultant in the year ended
December 31, 2008.




In
February 2008, the Company hired a consultant to provide strategic advisory
services.  In addition to monetary compensation of $175 per year, the
Company granted the advisor an option for the purchase of 75,000 shares of the
Company’s common stock.  The options provided for vesting at a rate of
12,500 shares every six months.  The options have an exercise price of
$5.50 and were exercisable for seven years.  In December 2008, the
Company terminated its agreement with the strategic advisor.  Only
12,500 options to purchase the Company’s common stock vested up until the
termination of the agreement with the strategic advisor.


F-31




The
Company used the Black-Scholes valuation method to estimate the fair value of
the options granted to the strategic advisor.  The Company used a risk
free interest rate of 2.4%, an expected life of seven years, an annual
volatility of 68% and no expected dividends to determine the value of the
options granted.  The Company estimated the fair value of each option
granted to be $3.63. The Company recorded $45 to selling, general and
administrative expense with respect to the option granted to the strategic
advisor in the year ended December 31, 2008.




In June
2009, the Company granted several outside consultants options for the purchase
of a total of 20,000 shares of the Company’s common stock.  The
options vested over a period of three years, have an exercise price of $2.56 and
expire after seven years.  The Company used the Black-Scholes
valuation method to estimate the fair value of the options granted to the
consultants.  The Company used a risk free interest rate of 3.3%, an
expected life of seven years, an annual volatility of 75% and no expected
dividends to determine the value the options granted.  The Company
estimated the fair value of each option granted to be $1.83.




In the
years ended December 31, 2008 and 2009, the Company included $38 and $13,
respectively, of stock-based compensation expense in selling, general and
administrative expense in its statements of operations with respect to options
granted to non-employees.




(d)
            Modification
      of Stock Options




During
the year ended December 31, 2008, the Company modified the exercise price of
50,000 options previously granted to a financial advisor.  The Company
recognized as compensation expense the incremental increase in the value of the
options of $13 in selling, marketing, general and administrative expense. The
modified options were granted in December 2007 for past services.  The
options vested immediately, had an exercise price of $4.95 and expire in
December 2012.




(e)
            Summary
      Employee and Non-Employee Option
Information




A summary
of the Company’s option plans as of December 31, 2008 and 2009, as well as
changes during each of the years then ended, is presented below:




2008
                  
                  
                  2009Number
                    of Options
                    (in shares)
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Number
                    of Options
                    (in shares)
                  
                  
                  Weighted
                    Average
                    Exercise
                    PriceOutstanding
      at beginning of year
                  
                  
                  1,684,000
                  
                  
                  $
                  3.09
                  
                  
                  
                  1,876,500
                  
                  
                  $
                  3.27Granted
      at market price
                  
                  
                  355,000
                  
                  
                  $
                  4.68
                  
                  
                  
                  379,500
                  
                  
                  $
                  2.52Exercised
                  
                  
                  (50,000
                  )
                  
                  $
                  2.22
                  
                  
                  
                  (257,168
                  )
                  
                  $
                  1.06Forfeited
      or expired
                  
                  
                  (112,500
                  )
                  
                  $
                  4.88
                  
                  
                  
                  (253,667
                  )
                  
                  $
                  2.65Outstanding
      at end of year
                  
                  
                  1,876,500
                  
                  
                  $
                  3.27
                  
                  
                  
                  1,745,165
                  
                  
                  $
                  3.52Exercisable
      at end of year
                  
                  
                  1,517,330
                  
                  
                  $
                  3.10
                  
                  
                  
                  1,421,831
                  
                  
                  $
                  3.52


F-32


Summary
information regarding the options outstanding and exercisable at December 31,
2009 is as follows:




Outstanding
                  
                  
                  ExercisableRange of Exercise Prices
                  
                  Number
                    Outstanding
                  
                  
                  Weighted
                    Average
                    Remaining
                    Contractual
                    Life
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Number
                    Exercisable
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price(in shares)
                  
                  
                  (in years)
                  
                  
                  
                  
                  
                  (in shares)$0.88
      – 1.61
                  
                  
                  127,500
                  
                  
                  
                  8.78
                  
                  
                  $
                  1.57
                  
                  
                  
                  7,500
                  
                  
                  $
                  0.88$2.24
      – 2.65
                  
                  
                  684,500
                  
                  
                  
                  2.20
                  
                  
                  $
                  2.55
                  
                  
                  
                  662,000
                  
                  
                  $
                  2.55$2.87
      – 3.90
                  
                  
                  321,332
                  
                  
                  
                  3.15
                  
                  
                  $
                  3.32
                  
                  
                  
                  311,332
                  
                  
                  $
                  3.30$4.20
      – 4.80
                  
                  
                  239,333
                  
                  
                  
                  3.90
                  
                  
                  $
                  4.50
                  
                  
                  
                  180,999
                  
                  
                  $
                  4.47$5.08
      – 6.00
                  
                  
                  372,500
                  
                  
                  
                  5.81
                  
                  
                  $
                  5.48
                  
                  
                  
                  260,000
                  
                  
                  $
                  5.641,745,165
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,421,831




Stock-based
compensation expense included in the Company’s Statements of Operations
was:




Year ended
                    December 31,
                    2008
                  
                  
                  Year ended
                    December 31,
                    2009Cost
      of sales
                  
                  $
                  200
                  
                  
                  $
                  87Research
      and development expense
                  
                  
                  54
                  
                  
                  
                  148Selling,
      general and administrative expense
                  
                  
                  1,152
                  
                  
                  
                  1,189Share
      of losses in Paketeria
                  
                  
                  25
                  
                  
                  
                  —Total
      stock based compensation expense
                  
                  $
                  1,431
                  
                  
                  $
                  1,424




The stock
compensation expense recorded in the years ended December 31, 2008 and 2009
includes amounts with respect to subsidiary stock options granted – see Notes
17(g) and 17(h) below.




As at
December 31, 2009, the total compensation cost related to non-vested awards not
yet recognized was approximately $335 which the Company expects to recognize
over a weighted-average period of approximately 1.3 years.




(f)
            DSIT
      Stock Option Plan




In
November 2006, the Company adopted a Key Employee Stock Option Plan (the “DSIT
Plan”) for its DSIT subsidiary to be administrated by a committee of board
members of DSIT, currently comprised of the entire board of directors of DSIT.
The purpose of the DSIT Plan and associated grants is to provide incentives to
key employees of DSIT to further the growth, development and financial success
of DSIT.


F-33


A summary
status of the DSIT Plan as of December 31, 2008 and 2009, as well as changes
during the years then ended, is presented below:




2008
                  
                  
                  2009Number of
                      Options (in
                      shares)
                  
                  
                  Weighted
                      Average
                      Exercise
                      Price
                  
                  
                  Number of
                      Options
                      (in shares)
                  
                  
                  Weighted
                      Average
                      Exercise
                      PriceOutstanding
      at beginning of year
                  
                  
                  1,524
                  
                  
                  $
                  118.11
                  
                  
                  
                  1,524
                  
                  
                  $
                  118.11Granted
      at fair value
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Exercised
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Forfeited
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Outstanding
      at end of year
                  
                  
                  1,524
                  
                  
                  $
                  118.11
                  
                  
                  
                  1,524
                  
                  
                  $
                  118.11Exercisable
      at end of year*
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  —




*  Options
vest only upon an exit event for the Company.




Summary
information regarding the options under the Plan outstanding and exercisable at
December 31, 2009 is as follows:




Outstanding
                      
                      
                      ExercisableRange of Exercise
                        Prices
                      
                      Number
                        Outstanding
                      
                      
                      Weighted
                        Average
                        Remaining
                        Contractual
                        Life
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      
                      Number
                        Exercisable
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price(in
      shares)
                      
                      
                      (in
      years)
                      
                      
                      
                      
                      
                      (in
      shares)$105.26
      – 112.04
                      
                      
                      547
                      
                      
                      4.0
                      
                      
                      $
                      109.68
                      
                      
                      
                      —
                      
                      
                      
                      —$119.05
      – $121.21
                      
                      
                      501
                      
                      
                      4.0
                      
                      
                      $
                      119.76
                      
                      
                      
                      —
                      
                      
                      
                      —$126.05
                      
                      
                      476
                      
                      
                      4.0
                      
                      
                      $
                      126.05
                      
                      
                      
                      —
                      
                      
                      
                      —1,524
                      
                      
                      
                      
                      
                      $
                      118.11
                      
                      
                      
                      —
                      
                      
                      
                      —




If all
the options in the DSIT Plan are exercised, the Company’s holdings in DSIT will
be diluted from 84% to approximately 71.4%.




(g)
            CoaLogix
      Stock Option Plan




In April
2008, the Company approved the CoaLogix Inc. 2008 Stock Option Plan (the
“CoaLogix Plan”) for its CoaLogix subsidiary to be administrated by the board
members of CoaLogix.




In 2008,
CoaLogix granted options to purchase 376,875 of its ordinary shares (the "2008
Grants") to senior management, employees and a consultant of CoaLogix under the
CoaLogix Plan. The 2008 Grants were granted with an exercise price of $5.05 per
share and are exercisable for a period of ten years. The options vest over a
four year period from the date of grant.




In 2009,
CoaLogix granted options (the “2009 Grants”) to purchase 99,645 of its ordinary
shares to senior management and employees of CoaLogix under the CoaLogix Plan.
The options were granted with an exercise price of $7.20 per share and are
exercisable for a period of ten years. A portion of these options (81,045) (the
“April Grants”) are subject to a double trigger vesting schedule. The 2009
Grants vest over a four-year term with 25% vesting after one year and the
balance vesting quarterly over the following three years. In addition, the
maximum cumulative number of the April Grants that may vest at any applicable
vesting date is limited based on the amount invested by the Purchasers under the
Purchase Agreement described in Note 4.


F-34




In
addition, in July 2009, 16,200 options were granted to certain directors of
CoaLogix (the “Director Grants”). The options were granted with an exercise
price of $7.20 per share and are exercisable for a period of ten years. The
Director Grants vest quarterly over a two-year period.




Upon
exercise of all the options in the CoaLogix Plan, the Company’s holdings in
CoaLogix would be diluted from approximately 77.4% to approximately
67.7%.




CoaLogix
valued the options using a Black Scholes model using the following
variables:




2008
                    Grants
                  
                  
                  2009
                    GrantsStock
      price*
                  
                  $
                  5.05
                  
                  
                  $
                  7.20Exercise
      price
                  
                  $
                  5.05
                  
                  
                  $
                  7.20Expected
      term of option in years
                  
                  
                  5.9
                  
                  
                  
                  6.0Volatility**
                  
                  
                  56
                  %
                  
                  
                  65
                  %Risk-free
      interest rate
                  
                  
                  2.6
                  %
                  
                  
                  2.0
                  %Expected
      dividend yield
                  
                  None
                  
                  
                  None




*
      The stock price for 2008 Grants was determined based upon the valuation
      used in the Company’s acquisition of SCR-Tech. The stock price for 2009
      Grants was based upon the valuation used in the Company's recent
      investment in CoaLogix (see Note
4).




**   The
      calculated volatility for comparable companies for the expected term was
      used.




Based
upon the above, it was determined that the options granted with respect to the
2008 Grants had a value of $2.84 per option and the options granted with respect
to the 2009 Grants had a value of $4.33 per option.




Stock-based
compensation expense with respect to CoaLogix options included in the Company’s
statements of operations was:




Year
                    ended
                    December
                    31, 2008
                  
                  
                  Year
                    ended
                    December
                    31, 2009Cost
      of sales – SCR services
                  
                  $
                  170
                  
                  
                  $
                  85Selling,
      general and administrative expense
                  
                  
                  351
                  
                  
                  
                  428Total
      stock based compensation expense
                  
                  $
                  521
                  
                  
                  $
                  513




The
purpose of the CoaLogix Plan is to provide incentives to key employees of
CoaLogix to further the growth, development and financial success of CoaLogix.
Summary information regarding the options outstanding and exercisable under the
CoaLogix option plan as of December 31, 2008 and 2009, as well as changes during
each of the years then ended, is presented below:


F-35




2008
                  
                  
                  2009Number
                    of Options
                    (in shares)
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Number
                    of Options
                    (in shares)
                  
                  
                  Weighted
                    Average
                    Exercise
                    PriceOutstanding
      at beginning of year
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  376,875
                  
                  
                  $
                  5.05Granted
      at market price
                  
                  
                  376,875
                  
                  
                  $
                  5.05
                  
                  
                  
                  115,845
                  
                  
                  $
                  7.20Exercised
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Forfeited
      or expired
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Outstanding
      at end of year
                  
                  
                  376,875
                  
                  
                  $
                  5.05
                  
                  
                  
                  492,720
                  
                  
                  $
                  5.55Exercisable
      at end of year
                  
                  
                  82,719
                  
                  
                  $
                  5.05
                  
                  
                  
                  177,238
                  
                  
                  $
                  5.07




Summary
information regarding the options under the CoaLogix Plan outstanding and
exercisable at December 31, 2009 is as follows:




Outstanding
                    
                    
                    ExercisableExercise Price
                    
                    Number
                      Outstanding
                    
                    
                    Weighted
                      Average
                      Remaining
                      Contractual
                      Life
                    
                    
                    Number
                      Exercisable(in
      shares)
                    
                    
                    (in
      years)
                    
                    
                    (in
      shares)$5.05
                    
                    
                    376,875
                    
                    
                    
                    8.3
                    
                    
                    
                    175,213$7.20
                    
                    
                    115,845
                    
                    
                    
                    9.3
                    
                    
                    
                    2,025




In 2008,
the CoaLogix granted an officer of the Company 147,050 options with an exercise
price of $5.05 under the CoaLogix Plan. An additional 18,400 options with
similar terms were granted to a consultant in 2008 who in 2009 became an officer
of the Company. In 2009, CoaLogix granted officers 45,582 options with an
exercise price of $7.20 under the CoaLogix Plan. During 2008 and 2009, no
CoaLogix options were exercised by any of the officers.




(h)
            Coreworx
      Stock Option Plan




In
October 2008, the Company approved the Coreworx Inc. 2008 Stock Option Plan (the
“Coreworx Plan”) for its Coreworx subsidiary to be administrated by the Board
members of Coreworx.




In
October 2008, Coreworx granted options to purchase 6,720,000 of its ordinary
shares (out of a total of 10,796,004 options in the Coreworx Plan), to senior
management and employees of Coreworx under the Coreworx Plan. The options were
granted with an exercise price of $0.17 per share and are exercisable for a
period of ten years. For employees employed more than two years, the options
vest one-third immediately with the remaining two-third vesting quarterly over a
three-year period. For employees employed less than two years, the options vest
quarterly over a three-year period. Upon exercise of all the options in the
Coreworx Plan, the Company’s holdings in Coreworx would be diluted from 100% to
80%.


F-36




Coreworx
valued the options using a Black Scholes model using the following
variables:




Stock
      price*
                  
                  $
                  0.17Exercise
      price
                  
                  $
                  0.17Expected
      term of option in years
                  
                  
                  10
      .0Volatility**
                  
                  
                  51.9
                  %Risk-free
      interest rate
                  
                  
                  3.75
                  %Expected
      dividend yield
                  
                  None




*
 The stock price was determined based upon the Company’s acquisition cost
in Coreworx.




**  The
calculated volatility for the expected term was used.




Based
upon the above, it was determined that the options granted had a value of $0.11
per option.




Stock-based
compensation expense with respect to Coreworx options included in the Company’s
statements of operations was:




Year ended December 31,2008
                  
                  
                  2009Cost
      of sales – Software License and Service
                  
                  $
                  30
                  
                  
                  $
                  —Research
      and development expense
                  
                  
                  54
                  
                  
                  
                  148Selling,
      general and administrative expense
                  
                  
                  95
                  
                  
                  
                  86Total
      stock based compensation expense
                  
                  $
                  179
                  
                  
                  $
                  234





The
purpose of the Coreworx Plan is to provide incentives to key employees of
Coreworx to further the growth, development and financial success of Coreworx.
Summary information regarding the options outstanding and  exercisable
under the Coreworx option plan as of December 31, 2008 and 2009, as well as
changes during each of the years then ended, is presented below:




2008
                  
                  
                  2009Number
                    of Options
                    (in shares)
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  
                  Number
                    of Options
                    (in shares)
                  
                  
                  Weighted
                    Average
                    Exercise
                    PriceOutstanding
      at beginning of year
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  6,720,000
                  
                  
                  $
                  0.17Granted
      at market price
                  
                  
                  6,720,000
                  
                  
                  $
                  0.17
                  
                  
                  
                  —
                  
                  
                  
                  —Exercised
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Forfeited
      or expired
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Outstanding
      at end of year
                  
                  
                  6,720,000
                  
                  
                  $
                  0.17
                  
                  
                  
                  6,720,000
                  
                  
                  $
                  0.17Exercisable
      at end of year
                  
                  
                  1,156,667
                  
                  
                  $
                  0.17
                  
                  
                  
                  3,011,111
                  
                  
                  $
                  0.17




The
weighted average remaining contractual life of the outstanding options in the
Coreworx Plan is 8.8 years.




In 2008,
Coreworx granted an officer 486,000 options with an exercise price of $0.17 in
the year ended December 31, 2008 under the Coreworx Plan.  During 2008
and 2009, no options were exercised by the officer.


F-37




(i)
            Warrants




The
Company has issued warrants at exercise prices equal to or greater than market
value of the Company’s common stock at the date of issuance.  A
summary of warrant activity follows:




2008
                    
                    
                    2009Number
                      of
                      Options
                      (in
                      shares)
                    
                    
                    Weighted
                      Average
                      Exercise
                      Price
                    
                    
                    Number
                      of
                      Options
                      (in
                      shares)
                    
                    
                    Weighted
                      Average
                      Exercise
                      PriceOutstanding
      at beginning of year
                    
                    
                    986,506
                    
                    
                    $
                    3.89
                    
                    
                    
                    784,023
                    
                    
                    $
                    4.06Granted
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Exercised
                    
                    
                    (202,483
                    )
                    
                    $
                    3.23
                    
                    
                    
                    (537,119
                    )
                    
                    
                    3.85Forfeited
      or expired
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Outstanding  and
      exercisable at end of year
                    
                    
                    784,023
                    
                    
                    $
                    4.06
                    
                    
                    
                    246,904
                    
                    
                    $
                    4.50




At
December 31, 2009, all the 246,904 outstanding and exercisable warrants had an
exercise price of $4.50 and had a remaining contractual life of 2.3
years.




During
the years ended December 31, 2008 and 2009, the Company received proceeds of
$653 and $2,069, respectively, from the exercise of warrants.




(j)
            Stock
      Repurchase Program




In
October, 2008, the Company’s Board of Directors authorized a share repurchase
program of up to 1,000,000 shares of its common stock. The share repurchase
program will be implemented at management’s discretion from time to time. During
2008, the Company acquired 63,915 shares of its common stock for $127. During
2009, the Company acquired 433,795 shares of its common stock for
$1,108.  At December 31, 2009 the Company owned a total of 1,275,081
of its own shares.





NOTE 18—FINANCE
EXPENSE, NET




Finance
expense, net consists of the following:




Year ended December 31,2008
                  
                  
                  2009Interest
      income
                  
                  $
                  405
                  
                  
                  $
                  93Interest
      expense
                  
                  
                  (3,200
                  )
                  
                  
                  (218
                  )Exchange
      loss, net
                  
                  
                  (236
                  )
                  
                  
                  (106
                  )$
                  (3,031
                  )
                  
                  $
                  (231
                  )




In 2008, interest expense includes
$3,064 of non-cash interest expense with respect to the amortization of debt
origination costs, beneficial conversion feature and warrants associated with
early redemption of the Company’s Debentures (see Note 13(c)).




NOTE 19—INCOME
TAXES




(a)
            Composition
      of loss from continuing operations before income taxes is as
      follows:




Year ended December 31,2008
                  
                  
                  2009Domestic
                  
                  $
                  (4,524
                  )
                  
                  $
                  (5,306
                  )Foreign
                  
                  
                  (791
                  )
                  
                  
                  (1,748
                  )$
                  (5,315
                  )
                  
                  $
                  (7,054
                  )


F-38





Income
tax expense (benefit) consists of the following:




Year ended December 31,2008
                  
                  
                  2009Current:Federal
                  
                  $
                  (300
                  )
                  
                  $
                  (550
                  )State
      and local
                  
                  
                  (225
                  )
                  
                  
                  —Foreign
                  
                  
                  (26
                  )
                  
                  
                  56(551
                  )
                  
                  
                  (494
                  )Deferred:Federal
                  
                  
                  893
                  
                  
                  
                  —State
      and local
                  
                  
                  —
                  
                  
                  
                  —Foreign
                  
                  
                  —
                  
                  
                  
                  (250
                  )893
                  
                  
                  
                  (250
                  )Total
      income tax expense (benefit)
                  
                  $
                  342
                  
                  
                  $
                  (744
                  )




(b)
            Effective
      Income Tax Rates




Set forth
below is reconciliation between the federal tax rate and the Company’s effective
income tax rates with respect to continuing operations:




Year ended December 31,2008
                  
                  
                  2009Statutory
      Federal rates
                  
                  
                  34
                  %
                  
                  
                  34
                  %Increase
      (decrease) in income tax rate resulting from:Non-deductible
      expenses
                  
                  
                  18
                  
                  
                  
                  —Tax
      on foreign activities
                  
                  
                  —
                  
                  
                  
                  (16
                  )State
      income taxes, net
                  
                  
                  (5
                  )
                  
                  
                  —Other
                  
                  
                  (9
                  )
                  
                  
                  —Net
      operating loss adjustment in deferred tax assets
                  
                  
                  62
                  
                  
                  
                  25Valuation
      allowance
                  
                  
                  (106
                  )
                  
                  
                  (32
                  )Effective
      income tax rates
                  
                  
                  (6
                  %)
                  
                  
                  11
                  %




(c)
            Analysis
      of Deferred Tax Assets and
(Liabilities)




As of December 31,Deferred tax assets consist of the following:
                        
                        2008
                        
                        
                        2009Employee
      benefits and deferred compensation
                        
                        $
                        1,113
                        
                        
                        $
                        1,226Investments
                        
                        
                        1,298
                        
                        
                        
                        612Other
      temporary differences
                        
                        
                        246
                        
                        
                        
                        173Net
      operating and capital loss carryforwards
                        
                        
                        4,000
                        
                        
                        
                        5,6706,657
                        
                        
                        
                        7,681Valuation
      allowance
                        
                        
                        (6,657
                        )
                        
                        
                        (7,431
                        )Net
      deferred tax assets
                        
                        
                        —
                        
                        
                        
                        250Deferred
      tax liabilities consist of the following:Asset
      basis differences
                        
                        
                        (29
                        )
                        
                        
                        (29
                        )Net
      deferred assets (liabilities), net
                        
                        $
                        (29
                        )
                        
                        $
                        (29
                        )


F-39




Valuation
allowances relate principally net operating loss carryforwards related to the
Company and its CoaLogix and Coreworx subsidiaries and book-tax differences
related to investments in and loans to equity investees. The change in the
valuation allowance was an increase of $774 in 2009.  The increase in
2009 was primarily attributable to increases in net loss carryforwards which was
partially offset by the deductibility in 2009 of certain losses on loans and
investments to the Company’s equity investments which were previously not
deductible for tax.




Deferred
tax assets relate to primarily to employee benefits at the Company's DSIT
subsidiary of which $227 is recorded in other assets and $23 is recorded in
other current assets.




(d)
            Summary
      of Tax Loss Carryforwards




As of
December 31, 2009, the Company had various net operating loss carryforwards
expiring as follows:




Expiration
                  
                  Federal
                  
                  
                  State
                  
                  
                  Foreign2024-2030
                  
                  $
                  7,506
                  *
                  
                  $
                  4,187
                  
                  
                  $
                  8,544Unlimited
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  813Total
                  
                  $
                  7,506
                  
                  
                  $
                  4,187
                  
                  
                  $
                  9,357




*
Includes approximately $3,930 of net operating loss carryforwards associated
with CoaLogix whose utilization in limited to approximately $490 per year due to
limits on utilizing the acquired net operating loss carryforwards under Internal
Revenue Service regulations following a change in control.




(e)
            Taxation
      in the United States




On
October 22, 2004, The American Jobs Creation Act (the “Act”) was signed into
law.  The Act includes a deduction of 85% of certain foreign earnings
that are repatriated, as defined in the Act.  The Company’s foreign
earnings are derived from the Company’s Israeli and Canadian
subsidiaries.  Due to Israeli tax and company law constraints and
DSIT’s own cash and finance needs as well as Coreworx’s cash needs, the Company
does not expect any foreign earnings to be repatriated to the United States in
the near future.




As a
holding company without other business activity in Delaware, the Company is
exempt from Delaware state income tax. During 2008, the Company received
confirmation of the applicability of this exemption to it. Thus, the Company’s
statutory income tax rate on domestic earnings is the federal rate of
34%.




As a
result of the Purchase Agreement (see Note 4) and the Company’s reduced holdings
in CoaLogix, effective September 30, 2009, the Company no longer consolidates
the results of CoaLogix for tax purposes.




(f)
            Tax
      Reform in Israel




The
income of the Company’s Israeli subsidiaries is taxed at regular rates.
 The provisions of the Law for the Amendment the Israel Income Tax
Ordinance, 2005, which was passed into law in August 2005, prescribe a
progressive reduction of corporate tax liability, resulting in the following
rates for 2008 and thereafter: 2008 – 27%, 2009 – 26% and for 2010 and
thereafter – 25%.




On July
23, 2009, the Israel Economic Efficiency Law (Legislation Amendments for
Applying the Economic Plan for 2009 and 2010), 2009, became effective,
stipulating, among other things, an additional gradual decrease in tax rates in
2011 and thereafter, as follows: 2011 – 24%, 2012 – 23%, 2013 – 22%, 2014 – 21%,
2015 – 20% and 2016 and thereafter – 18%.


F-40




(g)
            Taxation
      in Canada




Investment
tax credits, which are earned as a result of qualifying research and development
expenditures made in Canada by Coreworx, are recognized and applied to reduce
income tax expense in the year in which the expenditures are made and their
realization is reasonably assured.   Investment tax credits are earned at a
rate of 20% of the related expenditure and can be applied against taxes
otherwise owing to the Canadian taxation authorities.  Investment tax
credits earned can be carried forward applied and against taxes otherwise owing
to the Canadian taxation authorities for a period of 20 years.  The Company
has not recorded the benefit of any earned investment tax credits as their
realization has not been reasonably assured. The combined Canadian Federal and
provincial tax rates applicable to the Company’s Canadian operations are 31% for
the 2010 tax year and 28.25%, 26.25% and 25.50% for the tax years ending
December 31, 2011, 2012 and 2013, respectively.





(h)
            Uncertain
      Tax Positions (UTP):




In the
year ended December 31, 2008, $37 for unrecognized tax benefits was eliminated
and the amounts included for interest and penalties expense were reduced by
$6.  As of December 31, 2008 and 2009, the amount of interest and
penalties accrued on the balance sheet was $67 and $72, respectively, and is
included in other liabilities.




Following
is a reconciliation of the total amounts of the Company’s unrecognized tax
benefits for the period from January 1, 2008 to December 31, 2009:




2008
                  
                  
                  2009Balance
      at January 1
                  
                  $
                  247
                  
                  
                  $
                  210Decreases
      in unrecognized tax benefits and associated interest and penalties as a
      result of tax positions taken during the current period
                  
                  
                  (37
                  )
                  
                  
                  —Balance
      at December 31
                  
                  $
                  210
                  
                  
                  $
                  210




The
Company is subject to U.S. Federal and state income tax, Canadian Federal and
provincial income tax and Israeli income tax.  As of January 1, 2009,
the Company is no longer subject to examination by U.S. Federal taxing
authorities for years before 2006, for years before 2005 for state income taxes
and before 2003 for Israeli income taxes. The Company is no longer subject to
examination by the Canadian federal authorities for tax years before 2006.
However, the tax years ending May 11, 2004 through December 31, 2008 are
currently subject to examination by the Canadian provincial
authorities.





NOTE 20—RELATED
PARTY BALANCES AND TRANSACTIONS




(a)           The
Company paid consulting and other fees to directors of $315 and $264 for the
years ended December 31, 2008 and 2009, respectively, which are included in
selling, general and administrative expenses.




(b)           The
Company paid legal fees for services rendered and out-of-pocket disbursements to
a firm in which a principal is the son-in-law of one of the Company’s Directors,
of approximately $780 and $275 for the years ended December 31, 2008 and 2009,
respectively.  Approximately $130 and $68 was owed to this firm as of
December 31, 2008 and 2009, respectively, and is included in other current
liabilities and trade accounts payable.




(c)           In
July 2000, the Company entered into a lease for space for its former Databit
subsidiary. Following the 2006 sale of the Databit subsidiary to its CEO (the
son of one of the Directors of the Company), the lease obligation was
transferred to Databit with Databit being obligated to return the security
deposit of $34 at the end of the lease.  Prior to the sale of Databit,
the Company participated in one-half of the lease costs associated with these
premises. Following the end of the lease period, the landlord of the premises
billed Databit for certain charges related to the period when Databit was owned
by the Company. In 2009, the Company agreed to accept $22 from Databit as full
repayment of the security deposit.


F-41




See Note
17(b) for information related to options and stock awards to related
parties.




NOTE 21—SEGMENT
REPORTING AND GEOGRAPHIC INFORMATION




(a)
            General
      Information




As of
December 31 2009, the Company’s operations are based upon three operating
segments:




(i)          CoaLogix
- SCR (Selective Catalytic Reduction) Catalyst and Management services conducted
through the Company’s CoaLogix subsidiary which provides catalyst regeneration
technologies and management services for selective catalytic reduction (SCR)
systems used by coal-fired power plants to reduce nitrogen oxide (NOx)
emissions.




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




(iii)          Energy
Infrastructure Software (EIS) Services are provided through the Company’s
Coreworx subsidiary. Coreworx provides integrated project collaboration and
advanced document management solutions for the architecture, engineering and
construction markets, particularly for large capital projects.




The
Company’s reportable segments are strategic business units, offering different
products and services and are managed separately as each business requires
different technology and marketing strategies.  Similar operating
segments are aggregated into one reportable segment.





(b)
            Information
      about Profit or Loss and Assets




The
accounting policies of all the segments are those described in the summary of
significant accounting policies.  The Company evaluates performance
based on net income or loss before taxes.




The
Company does not systematically allocate assets to the divisions of the
subsidiaries constituting its consolidated group, unless the division
constitutes a significant operation.  Accordingly, where a division of
a subsidiary constitutes a segment that does not meet the quantitative
thresholds of applicable accounting principles, depreciation expense is recorded
against the operations of such segment, without allocating the related
depreciable assets to that segment.  However, where a division of a
subsidiary constitutes a segment that does meet the quantitative thresholds,
related depreciable assets, along with other identifiable assets, are allocated
to such division.


F-42


The
following tables represent segmented data for the years ended December 31, 2009
and 2008:




CoaLogix
                
                
                Naval &
                  RT
                  Solutions
                
                
                EIS(*)
                
                
                Other
                  (**)
                
                
                TotalYear
      ended December 31, 2009:Revenues
      from external customers
                
                $
                18,099
                
                
                $
                7,985
                
                
                $
                3,999
                
                
                $
                1,234
                
                
                $
                31,317Intersegment
      revenues
                
                
                —
                
                
                
                5
                
                
                
                —
                
                
                
                —
                
                
                
                5Segment
      gross profit
                
                
                6,296
                
                
                
                3,540
                
                
                
                3,301
                
                
                
                415
                
                
                
                13,552Depreciation
      and amortization
                
                
                1,182
                
                
                
                189
                
                
                
                377
                
                
                
                25
                
                
                
                1,773Stock
      compensation expense
                
                
                513
                
                
                
                2
                
                
                
                234
                
                
                
                —
                
                
                
                749Impairments
                
                
                2,612
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                2,612Segment
      net income (loss) before income taxes
                
                
                (2,742
                )
                
                
                1,051
                
                
                
                (3,360
                )
                
                
                64
                
                
                
                (4,987
                )Non-controlling
      interests in segment income (loss)
                
                
                (626
                )
                
                
                194
                
                
                
                —
                
                
                
                12
                
                
                
                (420
                )Segment
      assets
                
                
                10,957
                
                
                
                1,116
                
                
                
                6,052
                
                
                
                45
                
                
                
                18,170Expenditures
      for segment assets
                
                
                1,262
                
                
                
                154
                
                
                
                80
                
                
                
                38
                
                
                
                1,534Year
      ended December 31, 2008:Revenues
      from external customers
                
                $
                10,099
                
                
                $
                7,032
                
                
                $
                2,330
                
                
                $
                1,235
                
                
                $
                20,696Intersegment
      revenues
                
                
                —
                
                
                
                146
                
                
                
                —
                
                
                
                —
                
                
                
                146Segment
      gross profit
                
                
                2,457
                
                
                
                2,383
                
                
                
                1,409
                
                
                
                284
                
                
                
                6,533Depreciation
      and amortization
                
                
                931
                
                
                
                165
                
                
                
                132
                
                
                
                33
                
                
                
                1,228Stock
      compensation expense
                
                
                521
                
                
                
                —
                
                
                
                179
                
                
                
                —
                
                
                
                700Impairments
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Segment
      net income (loss) before income taxes
                
                
                (1,433
                )
                
                
                605
                
                
                
                (1,171
                )
                
                
                (86
                )
                
                
                (2,085
                )Non-controlling
      interests in segment (loss)
                
                
                (248
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (248
                )Segment
      assets
                
                
                12,548
                
                
                
                1,102
                
                
                
                5,400
                
                
                
                43
                
                
                
                19,093Expenditures
      for segment assets
                
                
                3,596
                
                
                
                328
                
                
                
                56
                
                
                
                15
                
                
                
                3,995Acquired
      in-process research and development expense
                
                
                —
                
                
                
                —
                
                
                
                2,444
                
                
                
                —
                
                
                
                2,444




(*)
            EIS
      activities were acquired on August 13, 2008.  Accordingly, the
      segment information above represents EIS activity only from the time since
      acquisition.




(**)
            Represents
      operations in Israel that did not meet the quantitative reporting
      thresholds of applicable accounting
principles.


F-43


(c)           The
following tables represent a reconciliation of the segment data to consolidated
statement of operations and balance sheet data for the years ended and as of
December 31, 2008 and 2009:


Year ended December 31,2008
                
                
                2009Revenues:Total
      consolidated revenues for reportable segments
                
                $
                19,461
                
                
                $
                30,083Other
      operational segment revenues
                
                
                1,235
                
                
                
                1,234Total
      consolidated revenues
                
                $
                20,696
                
                
                $
                31,317Income
      (loss):Total
      net loss for reportable segments
                
                $
                (1,999
                )
                
                $
                (5,051
                )Other
      operational segment net income (loss)
                
                
                (86
                )
                
                
                64Total
      net loss
                
                
                (2,085
                )
                
                
                (4,987
                )Unallocated
      cost of corporate and DSIT headquarters*
                
                
                (4,185
                )
                
                
                (3,390
                )Acquired
      in-process research and development (see Note 3(a))
                
                
                (2,444
                )
                
                
                —Income
      tax benefit (expense)
                
                
                (342
                )
                
                
                744Non-cash
      interest expense on convertible debentures (see Note 14
    (b))
                
                
                (3,064
                )
                
                
                —Gain
      on early redemption of convertible debentures (see Note
    14(c))
                
                
                1,259
                
                
                
                —Gain
      on private placement of equity investments (see  Note
      14(c))
                
                
                7
                
                
                
                —Non-controlling
      interests (see Note 7)
                
                
                248
                
                
                
                420Impairments
      not allocated to reportable segments (see Note 12)
                
                
                (3,664
                )
                
                
                (80
                )Share
      of losses in GridSense (see Note 6(a))
                
                
                (926
                )
                
                
                (129
                )Share
      of income (losses) in Paketeria  (see Note 6(d))
                
                
                (1,560
                )
                
                
                263Gain
      on sale of shares in Comverge (see Note 5)
                
                
                8,861
                
                
                
                1,403Consolidated
      net loss attributable to Acorn Energy, Inc. shareholders
                
                $
                (7,895
                )
                
                $
                (5,756
                )




*  Includes
$675 and $706 of stock compensation expense for the years ending December 31,
2009 and 2008, respectively.




As of December 31,2008
                
                
                2009Assets:Total
      assets for reportable segments
                
                $
                19,093
                
                
                $
                18,170Unallocated
      assets of CoaLogix headquarters
                
                
                5,185
                
                
                
                10,181Unallocated
      assets of DSIT headquarters
                
                
                5,414
                
                
                
                7,709Unallocated
      assets of Coreworx headquarters
                
                
                1,898
                
                
                
                990Assets
      of corporate headquarters *
                
                
                19,465
                
                
                
                11,685Total
      consolidated assets
                
                $
                51,055
                
                
                $
                48,735







* In
2009, includes $8,031 of unrestricted cash, $300 of restricted deposits and
$2,237 of other investments. In 2008, includes $12,632 of unrestricted cash,
$2,735 of restricted deposits and $2,642 representing the value of the Company’s
investment in Comverge.


F-44




Segment
                      Totals
                    
                    
                    Adjustments
                    
                    
                    Consolidated
                      TotalsOther Significant ItemsYear
      ended December 31, 2009Depreciation
      and amortization
                    
                    $
                    1,773
                    
                    
                    
                    2
                    
                    
                    $
                    1,775Stock
      compensation expense
                    
                    
                    749
                    
                    
                    
                    676
                    
                    
                    
                    1,425Expenditures
      for assets
                    
                    
                    1,534
                    
                    
                    
                    48
                    
                    
                    
                    1,582Year
      ended December 31, 2008Depreciation
      and amortization
                    
                    $
                    1,176
                    
                    
                    $
                    122
                    
                    
                    $
                    1,298Stock
      compensation expense
                    
                    
                    700
                    
                    
                    
                    731
                    
                    
                    
                    1,431Expenditures
      for assets*
                    
                    $
                    3,995
                    
                    
                    
                    15
                    
                    
                    $
                    4,010







*   Includes
$294 for the acquisition of additional shares in DSIT, all of which was
allocated to the Naval & RT Solutions segment (see Note 3(b)) and $2,000 for
the acquisition of the Solucorp license which was allocated to the CoaLogix
segment (see Note 11(b)(i)).




The
reconciling items are primarily corporate headquarters data, which are not
included in the segment information. None of the other adjustments are
significant.




As of December 31,2008
                  
                  
                  2009Revenues
      based on location of customer:United
      States and Canada
                  
                  $
                  12,201
                  
                  
                  $
                  21,930Israel
                  
                  
                  7,374
                  
                  
                  
                  5,754Asia
                  
                  
                  663
                  
                  
                  
                  3,456Other
                  
                  
                  458
                  
                  
                  
                  177$
                  20,696
                  
                  
                  $
                  31,317




As of December 31,2008
                  
                  
                  2009Long-lived
      assets located in the following countries:United
      States
                  
                  $
                  2,092
                  
                  
                  $
                  2,924Israel
                  
                  
                  187
                  
                  
                  
                  281Canada
                  
                  
                  168
                  
                  
                  
                  152$
                  2,447
                  
                  
                  $
                  3,357




(d)
            Revenues
      from Major Customers




Consolidated Revenues2008
                      
                      
                      2009Customer
                      
                      Segment
                      
                      Revenues
                      
                      
                      % of
                          Total
                          Revenues
                      
                      
                      Revenues
                      
                      
                      % of
                          Total
                          RevenuesA
                      
                      Naval
      & RT Solutions
                      
                      $
                      3,476
                      
                      
                      
                      17
                      %
                      
                      $
                      2,625
                      
                      
                      
                      8
                      %B
                      
                      CoaLogix
                      
                      $
                      2,887
                      
                      
                      
                      14
                      %
                      
                      $
                      4,363
                      
                      
                      
                      14
                      %C
                      
                      CoaLogix
                      
                      $
                      3,755
                      
                      
                      
                      18
                      %
                      
                      $
                      1,415
                      
                      
                      
                      5
                      %


F-45




NOTE 22—FINANCIAL
INSTRUMENTS




Fair
values of financial instruments included in current assets and current
liabilities are estimated to approximate their book values, due to the short
maturity of such instruments.




NOTE 23—FAIR VALUE
MEASUREMENTS




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




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




As at December 31, 2008Level 1
              
              
              Level 2
              
              
              Level 3
              
              
              TotalCash
      and cash equivalents
              
              $
              15,142
              
              
              
              —
              
              
              
              —
              
              
              $
              15,142Available
      for sale – Investment in Comverge
              
              
              2,462
              
              
              
              —
              
              
              
              —
              
              
              
              2,462Total
              
              $
              17,604
              
              
              $
              —
              
              
              $
              —
              
              
              $
              17,604





NOTE 24—SUBSEQUENT
EVENTS




Option
to Purchase Shares of USSI




Following
the purchase of an additional 95,469 shares of USSI on February 23, 2010 for
$300, the Company entered into an option agreement with USSI and a related
option agreement with certain stockholders of USSI.  The Company
currently owns 146,386 shares of USSI’s common stock which the Company purchased
for $500 and which represents approximately 10.0% of USSI’s fully diluted
capitalization.




Under the
terms of the option agreement with USSI, the Company has the right to acquire up
to an additional 159,115 shares of USSI’s common stock for a purchase price of
$500.  The Company has the right to acquire 63,646 of these shares
under the option in consideration for payment of $200 on or before May 31,
2010.  If the Company exercises this installment, it has the right to
acquire the remaining 95,469 shares under the option on or before August 27,
2010 in consideration for payment of $300.




Under the
Company’s agreement with certain of USSI’s stockholders, the Company has the
right to acquire 516,378 shares of USSI common stock held by such
stockholders in consideration for payment to them of $2,112 on or before
August 27, 2010.  The purchase price is payable in the Company’s
common stock which shall be priced on the basis of the volume weighted average
of the Company’s common stock on the 20 trading days ending on the day that is
five days preceding the date that the Company exercises its option to acquire
the shares of the USSI stockholders.  The shares of the Company’s
common stock that are issued to the USSI stockholders in consideration for their
shares would be restricted securities under Securities Act of 1933 and would be
subject to a lock-up by certificate legend.  The shares would be
released from the lock-up over a one year period, with 25% being released each
three months. If the Company exercises the options described in this and in the
preceding paragraph, the Company would own common stock of USSI representing
approximately 51% of USSI’s fully diluted capitalization.




F-46




Under the
agreement with USSI, if the Company exercises the options to acquire USSI’s
common stock described in the two preceding paragraphs, the Company would have
the right to acquire 1,693,391 additional shares of USSI’s common stock from
USSI on or before November 30, 2010 in consideration for payment of
$1,500.  If the Company exercises this option, it would have the right
to acquire 1,693,391 additional shares of common stock from USSI on or before
May 30, 2011 in consideration for payment of $1,500.




If the
Company purchases all of the USSI common stock it is entitled to purchase under
the agreements, the Company would hold USSI shares representing approximately
84% of USSI’s fully diluted capitalization. The Company is evaluating and has
not yet determined the impact, if any, the adoption of the FASB statement
amending the accounting for variable interest entities will have on the
Company’s investment in USSI.




Contemplated
Acquisition of Decision Dynamics




On March
2, 2010, the Company entered into a definitive agreement pursuant to which its
wholly-owned Coreworx subsidiary would acquire all of the issued and outstanding
common stock of Decision Dynamics Technology Ltd., a Canadian corporation
(“Decision Dynamics”).  Decision Dynamics, a TSX Venture Exchange-traded
company, is a leading provider of capital project controls and cost management
software for normal operations and capital projects in the energy
industry.




As
contemplated by the definitive agreement, Coreworx would acquire all of the
issued and outstanding securities of Decision Dynamics in consideration for
issuance of 1,000,000 shares of the Company’s common stock to the Decision
Dynamics shareholders.  The acquisition is structured as a plan of
arrangement under the Canada Business Corporations Act and is subject to the
satisfaction of a number of closing conditions, including approval by the
holders of at least two-thirds of the outstanding common shares and options of
Decision Dynamics, each voting as a separate class, the approval of the Court of
Queen's Bench of Alberta and other regulatory approvals. The acquisition will be
submitted to Decision Dynamics’ shareholders and option holders for approval at
a special meeting which is expected to be held in April 2010. The Board of
Directors of Decision Dynamics has unanimously recommended that Decision
Dynamics’ shareholders and option holders vote in favor of the acquisition.
Irrevocable support agreements in favor of the transaction have been agreed to
by persons holding approximately 51% of the outstanding shares and 94% of the
outstanding stock options.




Subject
to obtaining the required approvals, the transaction is expected to close in
April 2010.




Capital
Raise




On March
8, 2010, the Company entered into a Placement Agency Agreement (the “Placement
Agency Agreement”) with Merriman Curhan Ford & Co. (“MCF”) related to a
registered direct offering of up to 2,213,818 shares of our common stock (the
“Offering”). Under the terms of the transaction and pursuant to separate
subscription agreements (the “Investor Purchase Agreements”) between us and each
of the investors, the Company sold the common stock at $5.50 per share to
certain accredited investors for gross proceeds of approximately $12,275. The
closing of the Offering took place on March 11, 2010.




The
aggregate net proceeds from the Offering, after deducting the placement agent’s
fee and the estimated offering expenses payable by the Company in connection
with the Offering, are expected to be approximately $11,500.


F-47


Report of
Independent Registered Public Accounting Firm on Financial Statement
Schedule




To the
Board of Directors of Acorn Energy, Inc.:




Our
audits of the consolidated financial statements referred to in our report dated
March 22, 2010 of Acorn Energy, Inc. related to the consolidated financial
statements of Acorn Energy, Inc. which are included in this Annual Report on
Form 10-K also included an audit of the financial statement schedule listed in
Item 15(a)(2) of this Annual Report on Form 10-K. In our opinion, this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.




March 22,
2010




/s/
Kesselman & Kesselman


Certified
Public Accountants


A member
of PricewaterhouseCoopers International Limited


Tel Aviv,
Israel


F-48


ACORN
ENERGY, INC.


SCHEDULE
II


VALUATION
AND QUALIFYING ACCOUNTS


FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2009


(IN
THOUSANDS)




Description
                    
                    Balance at the
                      Beginning of
                      the Year
                    
                    
                    Charged to
                      Costs and
                      Expenses
                    
                    
                    Other
                      Adjustments
                    
                    
                    Balance at
                      the End of
                      the YearAllowance
      for doubtful accountsYear
      ended December 31, 2008
                    
                    
                    16
                    
                    
                    
                    —
                    
                    
                    
                    (16
                    )
                    
                    
                    —Year
      ended December 31, 2009
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Valuation
      allowance for deferred tax assetsYear
      ended December 31, 2008
                    
                    
                    1,312
                    
                    
                    
                    —
                    
                    
                    
                    5,345
                    
                    
                    
                    6,657Year
      ended December 31, 2009
                    
                    
                    6,657
                    
                    
                    
                    
                    
                    
                    
                    774
                    
                    
                    
                    7,431


F-49