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, 2008
            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 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 2008, the aggregate market value of the
registrant’s common stock held by non-affiliates of the registrant was
approximately $60.5 million based on the closing sale price on that date as
reported on the NASDAQ Global Market. As of March 26, 2009 there were 11,467,589
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
                                                                      17Item
      1B.
                                                                      UNRESOLVED
      STAFF COMMENTS
                                                                      36Item
      2.
                                                                      PROPERTIES
                                                                      36Item
      3.
                                                                      LEGAL
      PROCEEDINGS
                                                                      37Item
      4.
                                                                      SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                                                                      39PART
      IIItem
      5.
                                                                      MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
                                                                      40Item
      6.
                                                                      SELECTED
      FINANCIAL DATA
                                                                      41Item
      7.
                                                                      MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                                                                      43Item
      7A.
                                                                      QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                                                                      60Item
      8.
                                                                      FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
                                                                      61Item
      9.
                                                                      CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
                                                                      61Item
      9A.
                                                                      CONTROLS
      AND PROCEDURES
                                                                      61Item
      9B.
                                                                      OTHER
      INFORMATION
                                                                      61PART
      IIIItem
      10.
                                                                      DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                                                                      62Item
      11.
                                                                      EXECUTIVE
      COMPENSATION
                                                                      65Item
      12.
                                                                      SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
                                                                      74Item
      13.
                                                                      CERTAIN
      RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
    INDEPENDENCE
                                                                      75Item
      14.
                                                                      PRINCIPAL
      ACCOUNTING FEES AND SERVICES
                                                                      76PART
      IVItem
      15.
                                                                      EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
                                                                      77





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 and OncoProTM are trademarks 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 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-owned operating subsidiaries we provide the following
services:





· SCR Catalyst and Management Services.We provide selective catalytic reduction (“SCR”), catalyst and management
services removal for coal-fired power plants.  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
nitrogen oxide (“NOx”) compliance costs through CoaLogix’s SCR-Tech LLC
subsidiary.In addition,
commencing later in 2009, we plan to offer an innovative technology
(MetalliFixTM) for the removal of heavy metals, such as mercury, from coal-fired
power plants under CoaLogix’s MetalliFix 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 subsidiary.




· Energy Infrastructure Software (EIS)
Services.We provide energy infrastructure software services through our
recently acquired 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 significant equity interests are engaged in the following
activities:





· Comverge Inc.A leading
provider of clean energy solutions and supply electric capacity.




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




During
2008, we had operations in three reportable segments: providing catalyst
regeneration technologies and management services for SCR systems through our
CoaLogix subsidiary (our SCR 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 which is conducted 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).





SALES
BY ACTIVITY




The
following table shows, for the years indicated, the dollar amount (in thousands)
and the percentage of the sales attributable to each of the segments of our
operations.









2006
                        
                        
                        2007
                        
                        
                        2008Amount
                        
                        
                        %
                        
                        
                        Amount
                        
                        
                        %
                        
                        
                        Amount
                        
                        
                        %CoaLogix
                        
                        $
                        —
                        
                        
                        
                        —
                        %
                        
                        $
                        797
                        
                        
                        
                        14
                        %
                        
                        $
                        10,099
                        
                        
                        
                        49
                        %Naval
      & RT Solutions
                        
                        
                        2,797
                        
                        
                        
                        68
                        
                        
                        
                        3,472
                        
                        
                        
                        61
                        
                        
                        
                        7,032
                        
                        
                        
                        34EIS
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        2,330
                        
                        
                        
                        11Other
                        
                        
                        1,320
                        
                        
                        
                        32
                        
                        
                        
                        1,391
                        
                        
                        
                        25
                        
                        
                        
                        1,235
                        
                        
                        
                        6Total
                        
                        $
                        4,117
                        
                        
                        
                        100
                        %
                        
                        $
                        5,660
                        
                        
                        
                        100
                        %
                        
                        $
                        20,696
                        
                        
                        
                        100
                        %




COALOGIX




Overview




Through
SCR-Tech, which is 100% owned by our 85% owned CoaLogix subsidiary, we offer a
variety of services for coal-fired power plants that use SCR systems to reduce
Nitrous Oxide (“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.





CoaLogix
provides innovative products and services to address the growing emissions
control market for coal-fired power plants.  We foresee substantial
and growing opportunities in this market, driven by a continued use of coal to
meet generally increasing energy demand, combined with increasingly stringent
air quality regulations, resulting in a rapidly developing demand for clean coal
technologies and a substantial future market for innovative, cost-effective
solutions for clean energy production.  Coal-fired plants represent
approximately 50% of the nation’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 significant new coal-fired generating capacity will need to be
added in the U.S. through 2030 to meet baseload electricity demand, and the
kilowatts generated by coal are projected to increase approximately 19% from
2008 through by 2030.





We
believe the future of coal as a primary fuel source for U.S. power production is
reasonably assured, driven by growing energy demand, volatile world oil and
natural gas prices, limited oil and natural gas supplies, and increased focus on
energy independence.  Coal is the least expensive fossil fuel on an
energy-per-BTU basis, and remains one of the most abundantly available fossil
fuels in the U.S. 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.  Furthermore, since U.S. air quality
regulations allow power plant operators to pool their emissions reductions
(e.g., remove more NOx than required at one unit and settle for lower than
otherwise required NOx removal at another), utilities favor the highly efficient
SCR technology for their largest NOx generating assets.





SCR
technology is based on ceramic catalyst that removes NOx from the power plant
exhaust by reducing it with ammonia to elemental nitrogen and water
vapor.  Over time, ash buildup can cause physical clogging or blinding
of the catalyst, which negatively impacts the performance of both the SCR system
and the power generating facility.  In addition, various chemical
elements present in the flue gas, which act as catalyst poisons, cause a gradual
deactivation of the catalyst over time.  The result is a decrease in
NOx removal efficiency, which requires a continual need for some form of
catalyst replenishment throughout the operating life of the SCR
system.





The
average useful life of SCR catalyst is approximately 24,000 hours (equivalent to
three years of year-round operation).  Until a few years ago, the only
solution 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.





-2-


Coal
fired power plants are currently the largest single source of harmful airborne
mercury emissions in the United States. During coal combustion three forms of
mercury are released: particulate, elemental and oxidized. Particulate mercury
is carried over with the fly-ash; oxidized mercury is readily solubilized in
aqueous solutions such as those found in a power plant’s flue gas
desulphurization (“FGD”) system, and elemental mercury, being both insoluble in
water and high in vapor pressure, is almost wholly emitted into the atmosphere
at the plant stack.  Oxidized mercury can be washed into local bodies of
water by rainfall. Almost all elemental mercury and most of the oxidized mercury
are carried away by wind and enter the global mercury cycle where essentially
all of it will be oxidized, and a significant fraction will be converted through
biological processes to its most toxic form of
methyl-mercury.





Testing
has been under way at electric utilities to find viable and economical mercury
control strategies to meet pending regulations. Electric utilities are actively
helping the DOE test the effectiveness of emerging, mercury-specific control
technologies. DOE's goal is to develop more effective options that will
significantly cut mercury emissions.





We will
also begin to offer later in 2009 a new technology for removal of heavy metals,
such as mercury and selenium, from coal-fired power plants under the brand name
MetalliFixTM.  MetalliFix utilizes a chemical additive that is injected into
the FGD system (also known as the scrubber).  MetalliFix reacts with
and fixates elemental and oxidized mercury by transforming these toxic
contaminants into a chemically and thermally stable form, and therefore
provides a
further step towards achieving environmentally acceptable coal burning energy
plants.





Regulatory
Drivers




The 1990
Clean Air Act Amendments were implemented to improve air quality in the United
States.  This federal law covers the USA and is 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”) describing how each state will meet the EPA’s set
limits for various pollutants.  Emissions of NOx from coal-fired power
plants are considered to be one of the principal contributors to secondary
ground level ozone, or smog, and thus are included in the EPA’s criteria
pollutants for which limits have been established.  Energy producers
and other industries operating large power plants, particularly in the Eastern
half of the U.S., have been required to significantly reduce their NOx
emissions.  Increasingly stringent NOx reduction requirements are the
primary regulatory drivers of our SCR services business today.  In
addition, concerns continue to grow over mercury.





Below is
a summary of current and impending regulations driving our SCR Catalyst and
Management Services and MetalliFix businesses:





· NOx SIP Call - The original
regulatory driver of SCR-Tech’s business is the EPA’s NOx SIP
Call.  This program was designed to mitigate the regional transport of
NOx, which is contributing to the poor air quality of downwind
states.  The NOx SIP Call 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.  Implementation of the NOx SIP Call required major NOx
reductions during the five-month “ozone season” (May 1-September 30) in 19
Midwestern and Eastern states and the District of Columbia and has resulted in a
dramatic increase in the number of SCR system installations at coal-fired power
plants for the removal of NOx.




· Clean Air Interstate Rule
(CAIR) - Under CAIR, 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.




-3-




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 will 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 cap and trade program involves NOx
emission allowance being assigned to these states with each state having
authority to allocate emission allowances to power plants within each
state.  The power plants can buy excess allowances (i.e. trade) from
each other.  Over the next decade we expect the implementation of CAIR
to increase NOx trading (resulting in an increase in the amount of SCR catalyst
used to control NOx with the objective of generating NOx credits), further
increase the number of SCR systems installed today, and also require beginning
in 2009 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 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 issued an opinion in the State of North
Carolina v. Environmental Protection Agency (EPA) in which the court
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.




· Clean Air Mercury Rule (CAMR)
- The EPA issued CAMR as the first program ever designed to permanently cap and
reduce mercury emissions from coal-fired power plants.  CAMR was
expected to reduce utility emissions of mercury significantly between 2010 and
2018 and impact SCR catalyst choices in the future.  The D.C. Court of
Appeals invalidated CAMR in February, 2008, and the Supreme Court on February
23, 2009, refused to hear an appeal of such invalidation.  Therefore,
CAMR stands invalidated.  The opponents of CAMR opposed it because
they generally believed that the cap and trade approach to regulating mercury
emissions would not yield sufficient reductions in emissions.  We
anticipate that the EPA will promulgate regulations replacing CAMR which will
provide for an alternative regulatory scheme to force all coal-fired power
plants to substantially reduce mercury emissions; however, the EPA has not
indicated a timetable for issuance of such alternative regulatory
scheme.




· State Mercury Regulations –
Many states have issued regulations which regulate emissions of mercury from
coal-fired power plants.  With the invalidation of CAMR, the
regulations issued by the various states serve as the regulatory driver for
coal-fired power plants having to restrict mercury emissions until such time as
the EPA issues the federal alternative regulatory scheme.




Market
for SCR Catalyst and Management Services




The
recent growth in SCR system installations driven by the NOx SIP Call and CAIR
has resulted in a large and growing 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.




-4-




SCR-Tech’s
Service Offerings




Catalyst
Cleaning, Rejuvenation and Regeneration




We offer
proprietary and patented processes based on highly sophisticated and advanced
technologies 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.




SCR
and Catalyst Management




We
believe the most effective way to operate an SCR system is through a
comprehensive catalyst management program.




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.




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.




Quality
Control




We
maintain a comprehensive quality assurance/quality control program for each step
in our SCR catalyst and management process including SCR reactor inspection,
catalyst sampling, testing, chemical analysis, development of a custom cleaning,
rejuvenation and regeneration process, and catalyst treatment, packing and
shipping.




Our
testing, inspection, and laboratory services all complement each other and allow
us to provide our customers with a complete picture of their SCR reactor and its
operating effects on the balance of the plant.




Customers
and Markets




Our SCR
Catalyst and Management Services business currently primarily serves the U.S.
coal-fired power generation market.  In 2008, SCR-Tech began serving
the U.S. natural gas-fired power generation market. Our customer base ranges
from large investor-owned utilities and independent power producers to smaller
municipal power generators.





Since
commencing commercial operations in its regeneration facility in March 2003,
SCR-Tech has provided services for some of the largest electric utility
companies and independent power producers (“IPPs”), and their equipment
suppliers, in the U.S. SCR-Tech has made significant progress over the past
years in strengthening its relationships within the utility industry, developing
new sales channels, and increasing its market penetration.





In 2008,
three customers represented approximately 75% of SCR-Tech’s
revenue.  As part of an ongoing growth and revenue diversification
strategy, SCR-Tech continues to actively target SCR operators throughout the
United States, and the Eastern U.S. in particular, to further expand its
customer base and broaden its reach in the marketplace.





-5-




Two of
CoaLogix’s customers, The Detroit Edison Company and Allegheny Energy Service
Corporation represented 18% and 14%, respectively, of our consolidated sales for
2008.




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 SteagGmbH. 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).





New
catalyst replacement is the primary competition for SCR-Tech’s regeneration
process when a replenishment of catalyst activity is necessary.  While
we believe that SCR-Tech’s regeneration process offers significant cost and
performance advantages over the purchase of replacement catalyst and essentially
eliminates the costs and environmental concerns associated with land filling
spent catalyst, it is possible that the leading SCR catalyst suppliers and
others could eventually develop a solution that may compete with
ours.  We cannot fully anticipate how catalyst manufacturers may react
to growing competitive pressure and increased penetration of regeneration in the
U.S. catalyst replacement market.  While we know of no catalyst
supplier with definitive plans to launch U.S.-based regeneration services in the
near-term, we expect some future tactics or market entry by these companies to
better compete with SCR-Tech’s regeneration process. We believe the combination
of our intellectual property and patent protection, practical experience
required to successfully engage in catalyst regeneration, the investment
required for a production facility, and the limited size of the market create a
barrier for a significant number of new entrants to the market.





Furthermore,
we plan to vigorously protect our proprietary technologies and processes and
further deter competitors from entering the market through ongoing technology
innovations and cost-reduction activities, adding new patents and strengthening
our protection of existing patents, and by identifying industry trends and
future needs so that we may further tailor our products and services to better
meet these needs.





With
respect to mercury removal for coal-fired power generation, we are aware of
other technologies that will compete with MetalliFix.  These include
other FGD or scrubber additives that enhance the capture of mercury, sorbent
injection technologies, and oxidizer technologies. Most mercury removal
technologies are in the development and test stages for
commercialization.  Although the MetalliFix process is also being
further tested, developed and enhanced for the market, our research leads us to
believe that it will have competitive advantages over many other technologies,
including scrubber additives, for its ability to capture elemental mercury and
reduce total mercury emissions.





Production
Facilities




SCR-Tech’s
business operations are located in Charlotte, North Carolina in a 117,000 square
foot production facility for the cleaning and regeneration of SCR
catalyst.





During
2008, we expanded our plant capacity through an investment in equipment and
technologies that enhanced workflow throughput and mitigated processing
bottlenecks.  Along with the expansion, we implemented additional
shifts to meet the increasing regeneration demand.  Although the
capacity of our existing production facility is sufficient to meet market demand
through 2009, we believe that further production capacity expansion will be
necessary beyond 2009 to meet growing demands.  We expect to make
substantial additional capital investments over the next two years to
accommodate anticipated market growth. To accommodate further expansion, we
anticipate building a second production facility at our existing site or a new
facility at a different location.  The timing of such a facility
expansion will be a function of market growth, and could commence as early as
later this year.





-6-




Intellectual
Property




We
rigorously protect our proprietary technologies and processes and other
intellectual property.  We seek to maintain our position and
reputation as a market leader, and recognize the need to remain technologically
advanced relative to competitors and potential competitors, and to distinguish
ourselves based on continuous technological innovations.  Our strategy
is to rapidly identify key intellectual property developed or acquired by us in
order to protect it in a timely and effective manner, and to continually use
such intellectual property to our competitive advantage in the SCR services
marketplace.





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 four U.S. patents and three pending U.S. applications and one
patent continuation. We also strongly rely on trade secrets and other know-how
to protect the foundation technology and processes. 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 have adopted a proactive approach to
identifying patentable innovations and securing patent protection through the
timely filing and aggressive prosecution of patent applications. Accordingly, we
plan to continue to file new patent applications as we gain knowledge and
experience with our various processes and service offerings. We will continue to
vigorously defend our intellectual property.





In May
2008, CoaLogix entered into a license agreement with Solucorp Industries, Ltd.
giving us worldwide marketing, selling, and installation rights to Solucorp’s
IFS-2C technology for the fixation of heavy metals, such as mercury, for the
electric power generation industry. CoaLogix will be marketing the solution
under the brand name MetalliFixTM later this year.





NAVAL
& RT SOLUTIONS – DSIT SOLUTIONS LTD.




DSIT
Solutions is a globally-oriented high tech company with top-tier 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.




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.




-7-




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”). – The ongoing threat of terror attacks since 9/11
has produced an awareness of the need to protect critical marine and coastal
infrastructures that has become a growing priority for governments and the
private sector alike.  Current marine surveillance solutions often
ignore the areas of underwater surveillance and underwater site security,
tracking above-water activity only, and leaving the area under water vulnerable
to intrusion by divers and swimmer delivery vehicles (“SDVs”). Building on our
technical and operational experience in sonar and underwater acoustic systems
for naval applications, we have developed an innovative, cost-effective Diver
Detection Sonar (“DDS”) system, the AquaShieldTM, that provides critical coastal
and offshore protection of sites through detecting, tracking, and warning of
unauthorized divers and SDVs for effective response.  Our AquaShieldTM
DDS system is fully automatic and requires intervention of a security person
only for decision and response to the threat. Underwater sonar units or “nodes”
are strategically placed to provide maximum security with up to 360o
coverage.  The number and configuration of nodes are customized to
meet each site’s unique requirements and topology.  AquaShieldTM DDS
systems operate in all weather and water conditions.  The system’s
flexibility enables rapid deployment and adjustment to specific site
conditions.  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”). – We have developed an integrated HSS that
incorporates DDS sensors with above-water surveillance sensors to create a
comprehensive above and below water security system.  The system
protects 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.  The HSS can include sonar, radar,
electro-optical devices, and other surveillance sensors.  The system
is fully operable in shallow or deep water, daytime or nighttime and in all
weather conditions.  The system features a high probability of
detection, a low false alarm rate and ease of operation and
control.




· Enerview
and Portview - In our effort to expand our offerings in the area of site
security, DSIT has initiated discussions towards strategic alliances for
marketing additional elements of site surveillance systems. These include above
water sensors such as day and night optical sensors and a three dimensional
Command & Control software application that integrates all sensors into one
comprehensive solution used to monitor and control on-site security and
safety.




· Mobile
Acoustic Range (“MAR”). - Based on their radiated noise, submarines and surface
vessels can be detected by passive sonar systems.  The MAR accurately
measures a 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.  The MAR’s flexibility enables
rapid deployment and saves the maintenance costs involved in operating a fixed
acoustic range.  The MAR is a cost-effective solution for measuring
the radiated noise of any naval platform.  The system has previously
been sold to leading navies and shipyards around the world.




· Generic
Sonar Simulator (“GSS”). –We have 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.




-8-


The GSS operating principles are
designed for ease-of-use, simulation accuracy, and simplified
instruction.  The system offers a range of sophisticated
features.  The GSS can be easily adapted to simulate any sonar
system.




· Underwater
Acoustic Signal Analysis system. – DSIT’s Underwater Acoustic Signal Analysis
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.).




· Sonar
Upgrade Program (“SUP”). – With DSIT's SUP, many types of outmoded sonar
systems, on board both surface ships and submarines, can be easily and
inexpensively updated. DSIT’s system upgrade process can modernize a ship’s
sonar system - delivering the capability of a new system at less than half the
cost. Many navies around the world use obsolete sonar systems – often in service
for over 25 years – due to budget limitations that prevent them from purchasing
urgently needed modern equipment. DSIT’s comprehensive upgrade program is based
on expertise in acoustic technologies, digital signal processing, Human-Machine
Interface, and extensive ongoing feedback from client navies. Our SUP optimizes
existing sonar platforms by replacing old back-end elements with
state-of-the-art sub-systems (e.g., receivers, processors, computers, and
operator consoles) and overhauling front-end elements (e.g., transducers and
transmitter power amplifiers).




Other
Real-Time and Embedded Solutions




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




· 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. - The semiconductor industry employs
optical inspection systems in order to detect defects that occur during wafer
manufacture.  These optical systems are based on a wide range of
sophisticated algorithms that utilize image and signal processing techniques in
order to detect defects of different types.  DSIT has been cooperating
with global leaders of state-of-the-art wafer inspection systems in developing
cutting edge technologies for almost a decade.  We develop and
manufacture 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 we have 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.




· Bluetooth
solutions. - Bluetooth is a powerful, low cost, wireless technology that is
revolutionizing the personal connectivity market.  It enables
short-range wireless links that seamlessly connect all types of mobile and other
devices offering anywhere/anytime connectivity between devices, and with the
Internet.  We offer Bluetooth wireless data and voice solutions for
OEMs, including hardware and software development, integration and
production.




-9-


· Sonar
Building Blocks. – based on our sonar capabilities and development of the DDS,
DSIT has 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 from us these building
blocks. We can leverage our investment in our internal R&D to sell these
building blocks with relatively high margins




· IntervalZero.
- DSIT is the exclusive representative of IntervalZero (formerly, Ardence, Inc.)
in Israel. IntervalZero is a global leader in designing and developing software
solutions that enhance the control, dependability and management of Windows®
operating systems.




Customers
and Markets




All of
this segment’s operations in 2006, 2007 and 2008 and most of its sales took
place in Israel.  We expect to generate significant revenues from
naval solutions outside of Israel in 2009.  We have created
significant relationships with some of Israel’s largest companies in its defense
and electronics industries.  DSIT is continuing to invest considerable
effort to penetrate European, Asian and other markets in order to broaden its
geographic sales base with respect to our sonar technology solutions. In 2007,
we had our first sale of our AquaShieldTM DDS. The system was successfully
installed in a European oil terminal in the spring of 2008. This sale is
believed to be the first in the world of a system designed and operated to
protect a strategic coastal energy facility.  In December 2008, we
sold another AquaShieldTM DDS to an EMEA (Europe, Middle East, Africa)
government. In early 2009, we received additional orders for our AquaShieldTM underwater
security system. The system will be used for the protection of a large energy
site at an undisclosed location in Asia. The system will include multiple
AquaShieldTM
Diver Detection sonar (DDS) units, which will be combined and integrated into a
comprehensive surveillance system. The system will guard and protect the
customer’s infrastructure from underwater intrusion and sabotage.





We
believe that in 2009, increased awareness as to the susceptibility of strategic
coastal energy installations worldwide will result in increased sales of our
AquaShieldTM DDS.




Two
customers accounted for 60% of segment sales in 2008 (49% and 11%, respectively)
while in 2007, three customers accounted for 74% (39%, 19% and 16%,
respectively) of segment sales.




One of
DSIT’s customers, the Israeli Ministry of Defense, represented 17% of our
consolidated sales for 2008.




Competition




Our Naval
& RT Solutions segment faces competition from numerous competitors, large
and small, operating in the Israeli and worldwide markets, some with
substantially greater financial and marketing resources.  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.




DSIT’s
staff includes some of the top authorities in the field of sonar and
acoustics.  We believe that their knowledge, expertise and experience
as well as our long track record of cooperation and delivery of high quality
sonar solutions to navies and commercial customers world-wide combined with our
agility and flexibility as a small company to tailor solutions to the unique
requirements of the customer provides us with an advantage over our
competitors




-10-




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 2009. We are
currently examining our options to either remain in our current facility or to
move to a new facility. 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 Inc. (“Coreworx”) based in Kitchener, Ontario, Canada on
August 13, 2008, and we currently own 100% of Coreworx.  Coreworx is
an Ontario, Canada corporation, and was incorporated on December 5,
2004.  Coreworx software is used today on more than 400 of the world's
major capital projects (“MCPs”) with aggregate capital values exceeding $500
billion.  Coreworx provides software that manages project information
and work processes on an international scale to increase efficiency and reduce
risks for owners and engineering and construction contractors involved with
MCPs.





Industry
Background





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.  MCPs can have large numbers of
stakeholders, such as owner/operators (“O/O”) who will ultimately own and
operate the facility or plant under design and construction, engineering and
construction firms (“E&C”) which design and construct the MCPs, and
suppliers and subcontractors which provide actual materials and labor for most
MCPs.  Due to the scale, large number of stakeholders involved, and
the complexity of MCPs, project information control is critical.





Customers
and Markets





Market
Drivers and Trends





For the
past five years spending for MCPs by governments, quasigovernmental entities,
and private enterprise has been on the rise in response to the global economic
expansion which preceded the recent global economic downturn.  There
has been extraordinary activity in certain areas, in particular in the energy
and resource sector, and the broad expansion of activity across all sectors
generally has meant upward pressure on costs as prices for labor and materials
have increased over the past five years.  With the recent world
economic downturn, marginal projects are being shelved, and only well-funded
owners are proceeding with MCPs.





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 work on MCPs in the oil and gas, mining and power generation sectors
primarily in North America and Australia.





Information
Technology Use in Major Capital Projects





E&Cs
and their subcontractors and suppliers involved in MCPs have 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.





-11-




Coreworx
Market Focus





Coreworx’s
specific market focus is centered in three areas, namely oil and gas, mining and
power generation.





Oil
and Gas





The oil
and gas sectors continue to attract a large volume of capital spending resulting
in initiation of MCPs.  Oil and gas producers must resort to more
remote, technically challenging environments in order to find new production
sources, such as in deep water offshore fields. Analyst Douglas-Westwood
estimates that an average of $27 billion will be spent on deep water projects
alone between now and 2013, with Africa accounting for 40% of global spending,
Latin America 20%, and North America, Indonesia/Malaysia/India and Western
Europe rounding out worldwide deep water project locations.





Mining





According
to Industrial Info, as of December 2008, there are an estimated 840 mining and
minerals projects around the world that have yet to begin construction. These
projects are valued at an estimated $215 billion, with three-quarters of them
being outside North America.





Power
Generation





Continuing
demand for electricity and growth of developing economies have lead to global
increases in capital spending on new power generation and transmission
projects.  Increases in global electric power demand, and
environmental concerns have increased development of renewable and alternative
energy sources, such as nuclear, wind, solar and hydro-electric.  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.





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 $850 million.





Customers





Coreworx
software is currently in use by global customers in 35 countries on more than
400 capital projects tens of thousands of users.Coreworx’s customers
include E&Cs such as Fluor Corporation and J. Ray McDermott, Inc. and O/Os
such as Chevron Corporation, BHP Billiton, Husky Oil Limited, USEC Inc., and
CITIC Pacific Mining.





In the
fiscal year ending December 31, 2008, Coreworx was dependent upon a few major
customers, and the following customers provided the following percentage of
Coreworx’s revenue:  Fluor Corporation (48%), BHP Billiton (20%), J.
Ray McDermott, Inc. (12%), and Chevron Corporation (11%).





Marketing
and Sales





We
presently focus our marketing and sales efforts on North America and
Australia.  We directly market and sell our products and services
through our internal direct sales force.  Our sales employees are
based in our headquarters, and we also have sales representatives in Houston,
Texas and Calgary, Alberta, Canada.





-12-




Strategic
Partners





We
partner with prominent organizations in enterprise software and hardware in an
effort to enhance the value of our Coreworx solutions and the investments our
customers have made in their existing systems.  Coreworx is an
“industry-optimized” grade partner of IBM.  Coreworx is also a Gold
Certified partner with Microsoft, and Coreworx works closely with Microsoft to
ensure that our enterprise software continues to maintain industry standards and
functionalities.





Research
and Development





Coreworx
devotes substantial resources to continuing research and
development.  Our research and development are primarily directed
toward improving the functionality of our software solutions and addressing
challenges and problems faced by our customers.  Our research and
development expenditures were $1.1 million and $2.8 million in the fiscal years
ending December 31, 2007 and 2008, respectively.





Products
& Benefits





Coreworx
provides information control software for global MCPs in the oil and gas, mining
and power generation sectors.





Coreworx
software is a secure web-based enterprise platform that E&Cs and O/Os use to
automate workflow and document review in a manner that improves performance over
the design through construction phases of MCPs.  Coreworx software
enables our customers to better manage the challenges associated with MCPs as
described above.





During
the construction of a typical MCP, hundreds of thousands of documents and
drawings will be exchanged by team members every month around the globe over the
entire project lifecycle.   With Coreworx, our customers are able
to control and manage these documents and benefit specifically from mitigated
commercial risk, improved control and workflow scheduling, and reduced
costs.





Competition





Coreworx
focuses on providing web-based engineering work process software to help MCPs
mitigate the many information management risks associated with MCPs. Coreworx
knows of no other vendor that offers the depth of engineering document
management capability and engineering process workflows in a collaborative
web-based application for MCPs.  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. The
competition is categorized as follows:





Project
Centric Suites offer a complete solution; however, they offer strong
functionality in one or two areas and less robust capabilities in the
rest.  Competitors who offer project centric suites are McLaren
Software, ENOVIA, MatrixOne, Aconex, Primavera (recently acquired by Oracle),
Meridian Systems, Skire, Constructware and Buzzsaw from Autodesk,
Organize–SharePoint based in the Netherlands, eConstruction and
e-Builder.  We believe Coreworx provides best in class functionality
in collaborative document based work processes for MCPs.





Computer
Aided Design (“CAD”) and Modeling products are used at the beginning of the MCP
cycle to design and model the MCP plants.  Vendors of these products
are attempting to extend their product line into more of the MCP lifecycle and
will compete with Coreworx.  Major competitors who offer these
solutions include AVEVA, Bentley and Intergraph.  We believe that
these products do not provide the depth and breadth of project information
control functionality needed by MCPs, and we are often required to connect to
these products in a best of breed strategy.





-13-


Enterprise
Content Management (“ECM”) software products are designed to manage corporate
unstructured information (documents) in support of Sarbanes Oxley (“SOX”) and
Occupational, Safety and Health Administration (“OSHA”) requirements and other
general business requirements.  These ECM solutions by design offer a
limited amount of configurability once deployed and are therefore expensive and
slow to deploy on a per-project level basis. The major competitors in the ECM
market are Filenet (owned by IBM), Documentum (owned by EMC), and
OpenText.





SharePoint,
a recent Microsoft entrant, has been making inroads in the ECM market and is
often perceived by the IT departments of our prospects and customers as a
head-on competitor to Coreworx. There are currently structural limitations in
SharePoint that limit its effectiveness on MCPs; however, there are many
SharePoint based competitors entering our market. Coreworx is responding to this
threat by imbedding the key Coreworx functionality within the SharePoint
portal.





The first
generation project information control applications attempted by the O/Os and
E&Cs initially deployed an ECM solution with the expectation that this would
address their project specific requirements. After spending considerable time
and effort, many O/Os and E&Cs realized that the ECM solutions do not meet
the unique needs of MCPs. At that point, they chose to develop their own
solution, often based on a commercial ECM product. Others like Chevron and Fluor
recognized that their overall project solution requirements cannot be addressed
by a single vendor and chose to integrate “best of breed” products to manage all
aspects of MCPs. Today all of Coreworx’s customers have an ECM, a CAD and
modeling solution and one or more project centric solutions.





Most of
the competitors described above are much larger and better capitalized than
Coreworx, and may have the capability to advance the functionality of their
products to better address the problems and challenges faced by E&Cs and
O/Os described above.  We believe the architectural advantage and
benefits of the Coreworx solution combined with our deep domain knowledge and
our ability to respond quickly to market needs provides Coreworx with a
competitive advantage.





Locations





Coreworx’s
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 that our current premises are
sufficient to handle our activities for the near future.





Intellectual
Property





We
rigorously protect our proprietary know how, source code, technologies,
processes and other intellectual property.  We seek to maintain our
position and reputation as a market leader, and recognize the need to remain
technologically advanced relative to competitors and potential competitors, and
to distinguish ourselves based on continuous technological innovations. Our
strategy is to rapidly identify key intellectual property developed or acquired
by us in order to protect it in a timely and effective manner, and to
continually use such intellectual property to our competitive advantage. An
objective of our intellectual property strategy is to enable us to be first to
market with proprietary technology and to sustain a long term leadership in the
market.





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.





DEMAND
RESPONSE SOLUTIONS – COMVERGE INC.




At
December 31, 2008, we owned approximately 2% of Comverge Inc., a NASDAQ listed
company, engaged in the business of providing demand response
solutions.





-14-


Comverge
is a clean energy company providing peaking and base load capacity to electric
utilities, grid operators and associated electricity markets.  As an
alternative to the traditional method of providing capacity by building a new
power plant, Comverge delivers capacity through implementation of demand
management solutions that decrease energy consumption.  The capacity
Comverge delivers is more environmentally friendly and less expensive than
conventional alternatives and has the benefit of increasing overall system
reliability.  Comverge’s solutions are designed, built and operated
for the benefit of their customers, which include electric utilities and grid
operators that serve residential, commercial and industrial
consumers.  Comverge provides capacity to its customers either through
long-term contracts where it actively manages electrical demand or by selling
its demand response systems to utilities that operate them.





Comverge’s
clean energy solutions enable its electric utility industry customers to address
issues they confront on a daily basis, such as rising demand, decreasing supply,
higher commodity prices, greater emphasis on the reduction of green house gases
and emerging mandates to use energy efficiency solutions to address these
issues.  Comverge’s solutions provide its customers with benefits
beyond those relating to environmental and pricing
concerns.  Comverge’s energy efficiency offerings allow utilities to
reduce base load capacity which helps to improve system
reliability.  Comverge’s demand response solutions enable its
customers to reduce demand for electricity during peak hours, when strain on the
system is greatest.




We
currently remain one of Comverge’s largest stockholders, even after our recent
sales of Comverge shares in 2007, 2008 and 2009.  At December 31,
2008, we owned 502,500 shares of Comverge’s common stock with a market value at
December 31, 2008 of approximately $2.5 million.  In the period
through March 26, 2009, we sold 175,000 of our Comverge shares and received
proceeds of approximately $1.2 million. As of March 26, 2009, the market value
of our remaining 327,500 shares in Comverge was approximately $2.4
million.




GRID
MONITORING SOLUTIONS - GRIDSENSE SYSTEMS INC.




We
currently own approximately 23.4% of GridSense Systems Inc. (GridSense) and
account 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, trouble
shooting and proactive maintenance, system planning and condition monitoring,
and provide 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
SystemsTM patented solutions allow end-users to cost effectively monitor the
power quality & reliability parameters of electric transmission and
distribution systems in applications where competitive offerings are
non-existent or cost-prohibitive.  The company 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
operates from offices in the US and Australia and has utility customers
throughout the world, including the Americas, Asia, Australia, Africa, and the
UK.





-15-




GridSense
Offerings & Solutions





GridSense
has a range of commercially proven offerings sold to customers worldwide. The
success of the company'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:





· LineTracker Systems.
- The fourth generation LineTracker provides real-time monitoring of electricity
grids and captures important operational, maintenance, planning and regulatory
reporting information.  Installed permanently or as a mobile
monitoring and diagnostic device, the LineTracker can be deployed in substations
to monitor the load and detect power outages or remote from the substation
to provide additional intelligence for planning, extending the life of capital
equipment, maintenance, and load balancing.  The LineTracker provides
all these applications at a fraction of the cost of alternative solutions in the
market.  .





· PowerMonic
Systems. - The PowerMonic range of rugged, outdoor power analyzers and
analytical software were originally designed with and for electric utilities to
monitor and investigate power quality problems.  With over 70% market
share in Australia and New Zealand, the self-powered three phase analyzers are
used to log, measure, investigate, and solve 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.  The compact design integrates easily with
new transformers but can also be easiliy retrofitted to older
transformers.  With the comprehensive diagnostics and real time
performance data accumulated by the Transformer IQ, utilities can effectively
predict nearly all the failure modes known to occur to
transformers.





A
Comprehensive System Spanning The Grid





The
Company’s various offerings address all the critical points of the
grid.  Real time data help utilities respond to network disruptions,
optimize asset utilization, and perform preventative measures on issues that can
potentially materialize into system failures.  Using two way
communications and industry standard data protocols, GridSense enables utilities
to integrate data into third party systems such as SCADA as well as access
information through proprietary software or though a web-hosted platform via the
internet.
















Collaboration
and Future Products





GridSense
works closely with its utility customers and other institutions in developing
products that meet unaddressed needs in the marketplace.





· In 2008,
GridSense completed a project with DOE-sponsored GridApps. Enhancements to the
LineTracker were introduced including improvements to the communication module
enabling two-way communications and the format structure of the
data.


· Most
recently, GridSense completed a joint project with the California Energy
Commission (CEC) and Southern California Edison where power factor measurement
was added to the LineTracker.


· The
company is currently developing an underground monitoring system known as
CableTracker with grant funding from the Australian government.





On
October 18, 2008, GridSense and certain of its significant shareholders
(including Acorn Energy) entered into agreements to take GridSense private
(GridSense is currently traded on the TSX Venture Exchange under the symbol
“GSN”) through the sale by GridSense of its grid monitoring solutions business
to a newly formed Australian corporation which will be owned by certain of
GridSense’s significant shareholders, including Acorn Energy. This transaction
is pending, and if such transaction is consummated, Acorn Energy would own
approximately 31.2% of such newly-formed Australian corporation as compared to
the 23.4% interest Acorn Energy owns in the publicly-held GridSense. Under the
plan, the debt of C$750,000 ($616,000) owed by GridSense will be continue to be
owed by GridSense’s Australian operating subsidiary. Such transaction was
approved by a majority of GridSense’s disinterested public shareholders at a
meeting held on February 19, 2009, and is expected to close in the second
quarter of 2009.




BACKLOG




As of
December 31, 2008, our backlog of work to be completed and the amounts projected
to be completed in 2009 was as follows (amounts in millions of U.S.
dollars):




Backlog at
                    December
                    31, 2008
                
                
                Amount
                    expected
                    to be
                    performed
                    in 2009CoaLogix
                
                $
                10.0
                
                
                $
                9.2DSIT
      Solutions
                
                
                4.8
                
                
                
                3.3Coreworx
                
                
                1.3
                
                
                
                1.2Total
                
                $
                16.1
                
                
                $
                13.7




EMPLOYEES




At
December 31, 2008, we employed a total of 156 people.  We consider our
relationship with our employees to be satisfactory.




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




-16-




Employee count at December 31, 2008U.S
                            
                            
                            Canada
                            
                            
                            Israel
                            
                            
                            TotalCoaLogix
                            
                            
                            43
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            43DSIT
      Solutions
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            64
                            
                            
                            
                            64Coreworx
                            
                            
                            3
                            
                            
                            
                            43
                            
                            
                            
                            —
                            
                            
                            
                            46Acorn
                            
                            
                            3
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            3Total
                            
                            
                            49
                            
                            
                            
                            43
                            
                            
                            
                            64
                            
                            
                            
                            156




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




Employee count at December 31, 2008Production,
                                  Engineering
                                  and
                                  Technical
                                  Support
                                
                                
                                Marketing
                                  and Sales
                                
                                
                                Management,
                                  Administrative
                                  and Finance
                                
                                
                                TotalCoaLogix
                                
                                
                                34
                                
                                
                                
                                2
                                
                                
                                
                                7
                                
                                
                                
                                43DSIT
      Solutions
                                
                                
                                46
                                
                                
                                
                                2
                                
                                
                                
                                16
                                
                                
                                
                                64Coreworx
                                
                                
                                32
                                
                                
                                
                                8
                                
                                
                                
                                6
                                
                                
                                
                                46Acorn
                                
                                
                                —
                                
                                
                                
                                —
                                
                                
                                
                                3
                                
                                
                                
                                3Total
                                
                                
                                112
                                
                                
                                
                                12
                                
                                
                                
                                32
                                
                                
                                
                                156




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 24 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.




-17-




GENERAL
FACTORS




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





As widely
reported, global credit and financial markets have been experiencing extreme
disruptions in recent months, including severely diminished liquidity and credit
availability, declines in consumer confidence, declines in economic growth,
increases in unemployment rates, and uncertainty about economic stability. We
can provide no assurance that there will not be further deterioration in credit
and financial markets and confidence in economic conditions. These economic
uncertainties affect businesses such as ours in a number of ways, making it
difficult to accurately forecast and plan our future business activities. The
current tightening of credit in financial markets have lead consumers and
businesses to postpone spending, which may cause our customers to cancel,
decrease or delay their existing and future orders with us. In addition,
financial difficulties experienced by our suppliers or distributors could result
in product delays, increased accounts receivable defaults and inventory
challenges. The continuing disruption in the credit markets has severely
restricted access to capital. As a result, the ability to incur additional
indebtedness to fund operations or refinance maturing obligations as they become
due is significantly constrained. We are unable to predict the likely duration
and severity of the current disruptions in the credit and financial markets and
adverse global economic conditions, and if the current uncertain economic
conditions continue or further deteriorate, our business and results of
operations could be materially and adversely affected.




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 2006, 2007 and 2008, we
had operating losses of $3.6 million, $4.4 million and $12.4 million,
respectively.  Cash used in operations in 2006, 2007 and 2008 was $1.6
million, $2.6 million and $3.2 million, respectively.




Despite
selling a significant portion of our Comverge investment during the period from
December 2007 through September 2008 and receiving proceeds (net of transaction
costs) of approximately $43.7 million and raising approximately $6.9 million
(approximately $6.0 million net of transaction costs) in 2007 from the private
placement of our Convertible Debentures, we have utilized a significant portion
of those funds in our recent acquisitions and investment activity.




In
addition, we continue to pursue additional investments and may need to support
the financing needs of our subsidiaries.  While we currently have
enough cash on hand to fund our operations for the next 12 months, we may need
additional funds to finance the 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 employees.  The loss of the services of any key employee
could materially harm our business, financial condition, future results and cash
flow.  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 notice periods ranging up to 90 days.  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.




-18-




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




We depend
on our key management, technical employees and sales personnel.  The
loss of certain managers 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.




A
failure to integrate our new management may adversely affect us.




In August
2008, we acquired Coreworx and its entire management team.  Any
failure to effectively integrate Coreworx’s new management into our controls,
systems and procedures could materially adversely affect our business, results
of operations and financial condition.




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.




Businesses
we acquire may have disclosure controls and procedures and internal controls
over financial reporting that are weaker than or otherwise not in conformity
with ours.




We have a
history of acquiring businesses with varying levels of organizational size and
complexity. Upon consummating an acquisition, we seek to implement our
disclosure controls and procedures as well as our internal controls over
financial reporting at the acquired company as promptly as possible. Depending
upon the size and complexity of the business acquired, the implementation of our
disclosure controls and procedures as well as the implementation of our internal
controls over financial reporting at an acquired company may be a lengthy
process. Typically, we conduct due diligence prior to consummating an
acquisition; however, our integration efforts may periodically expose
deficiencies in the disclosure controls and procedures as well as in internal
controls over financial reporting of an acquired company. We expect that the
process involved in completing the integration of our own disclosure controls
and procedures as well as our own internal controls over financial reporting at
an acquired business will sufficiently correct any identified deficiencies.
However, if such deficiencies exist, we may not be in a position to comply with
our periodic reporting requirements and, as a result, our business and financial
condition may be materially harmed.




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.




-19-




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.




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.




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 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 pending 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.




-20-




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 the Financial Accounting Standards Board, or FASB, Accounting
Standard Number 142, Goodwill and Other Intangible Assets, or SFAS 142,
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.




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.




-21-





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.




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 our industry has 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 our intellectual property rights. We are
currently pursuing one such claim as described  under “Item 3 – Legal
Proceedings”. The complexity of our technology and the nature of intellectual
property litigation would make it expensive and potentially difficult to prove
that a competitor is in fact infringing on our intellectual property rights, but
we have commenced such litigation as described under “Item 3. Litigation” 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.




-22-




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 $1.5 million, $2.4 million and $0.8 million for the
years ended December 31, 2008, 2007, and 2006,
respectively.    We believe that SCR-Tech will significantly
improve its operating results in 2009; however, we can provide no assurance that
SCR-Tech will generate sufficient revenues to allow it to become profitable or
to sustain profitability.




SCR-Tech
has a limited operating history




SCR-Tech
commenced commercial operations in March 2003.  Thus SCR-Tech does not
have a long-term operational history sufficient to allow us to determine whether
it can successfully operate its business under differing environments and
conditions or at any level of sustained 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
will 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.  There also are a number of SCR catalyst manufacturers
with substantial parent companies that may seek to maintain market share by
significantly reducing prices 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.




-23-




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 may 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.  In addition, if EES prevails and obtains rights to
IFS-2C, EES will be a competitor in the mercury reduction business.




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 fiscal 2008, three customers
represented about 75% of our revenue. During 2007, four customers represented
more than 90% of our revenue.    Although such large orders
is 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 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.




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




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.




-24-




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 our 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.




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.  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.




-25-




We
likely 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.




We
believe this site is sufficient to meet SCR-Tech’s anticipated production
requirements through 2009.  However, 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 two years to
construct a second SCR regeneration plant.  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.




In
addition there is no assurance that CoaLogix will be able to raise the necessary
funds from its current shareholders or outside sources to construct a new
regeneration facility. Moreover, 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.




Beyond
December 31, 2009, 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.




In
addition, we continue to actively pursue business opportunities, including but
not limited to, mergers, acquisitions or other strategic
arrangements.  Such strategic opportunities could require the use of
additional cash, reducing our available capital prior to December 31, 2009, 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 is 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
may be subject to warranty claims from its customers.




SCR-Tech
typically provides limited warranties to its customers relating to the level of
success of its catalyst cleaning and regeneration services.  In the
event SCR-Tech is unable to perform a complete regeneration of an SCR catalyst,
SCR-Tech may be required to re-perform a regeneration or repay a portion of the
fees earned for the regeneration efforts.  SCR-Tech also may be
required to provide warranties with respect to its other SCR catalyst services
provided to its customers.  Since SCR-Tech has only a limited
operating history, it is not possible to determine the amount or extent of any
potential warranty claims that SCR-Tech may incur.  There is a risk
that any such claims could be substantial and could affect the profitability of
SCR-Tech and the financial condition of the Company.  The Company does
maintain a limited warranty claim liability; however, should the amount of any
potential warranty claims be incurred at levels higher than the warranty
liability, the profitability and financial condition of the Company could be
impacted.




-26-




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.




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.




-27-




New
competitors could enter the regeneration business.




Currently,
we are aware of only one competitor in the SCR regeneration business in the
United States.  It is possible that at some time in the future new
competitors will enter into the SCR regeneration
business.  Manufacturers of SCR catalyst may have an advantage if they
chose to enter the SCR regeneration business since they are familiar with the
manufacture and properties of SCR catalyst.  In addition original
catalyst manufacturers may have greater financial resources available to them
than does SCR-Tech.




Our
business could be impacted by challenges to and developments in environmental
legislation and regulations.




SCR-Tech’s
business is in large part dependent upon federal and state legislation and
regulations which require reductions in emissions from coal-fired power
plants.  We can provide no assurance that such legislation and
regulations will not be challenged in the courts and possibly altered to the
detriment of SCR-Tech.  In addition, legislation and regulations could
be changed in the future to be less stringent and relax or delay requirements on
emissions from coal-fired power plants.




Our
business may be impacted by the world-wide financial crisis.




The
current economic conditions and limited availability of credit may affect the
ability of CoaLogix’s customers to purchase services from
CoaLogix.  This may result in deferral of projects by CoaLogix’s
customers, which would have an adverse impact on our ability to achieve planned
sales. The limited availability of credit may also affect CoaLogix’s ability to
fund its need to expand its production capabilities in 2009 in order to
accommodate its anticipated growth. CoaLogix anticipates that it will need to
increase production capacity by constructing a new plant in 2009 in order to
satisfy expected increased orders from customers, and CoaLogix current financial
resources are not sufficient to provide the anticipated substantial cost to
build a new plant.  CoaLogix is currently exploring options to provide
funds for construction of a new plant. However, we have no assurance that we
will be able to raise the necessary funds for the expansion at agreeable
terms.





MetalliFix
is a new technology and has no operating history.




The MetalliFix technology has been
tested only in a limited number times at a bench scale, and not yet tested at
the commercial scale.   Although we believe the tests have been
successful, a commercial test or full scale installation has not yet been
achieved.  Thus the MetalliFix technology has no operating history
sufficient to allow us to determine whether it can be successful under the
current or differing environments and conditions or at any level of
profitability.





The
size of the market for mercury removal and remediation is
uncertain.




The EPA’s Clean Air and Mercury Rule
(CAMR) was vacated by the D.C. Circuit Court of Appeals in February 2008, and
there is uncertainty whether more stringent legislation will be implemented when
CAMR will be reinstated and the timing of such.   The mercury
removal regulations promulgated by individual states dictate current removal
guidelines until CAMR takes effect, and the rate and timing of new state
regulations is uncertain for the long term.  Therefore, the overall
market for mercury removal and remediation is difficult to
predict.   Any delay in the development of the mercury market
could significantly and adversely affect the value of our MetalliFix
offering.





There
is currently only one  supplier of key materials in the MetalliFix
process.




The chemicals used in the MetalliFix
process are currently obtained under license from Solucorp Industries’ IFS-2C
technology.   One of the key chemicals in the IFS-2C technology
is produced by Solucorp in a foreign country.  We are not aware of any
other producers of this chemical and are currently relying on solely on Solucorp
for our supply of this chemical.  This dependence on one supplier of a
key chemical used in the MetalliFix process could have adverse impacts on our
introduction of MetalliFix and on our ability to adequately satisfy agreements
which we hope to enter into to remove mercury for customers and exploit this
market.





-28-




MetalliFix
will be subject to vigorous competition




We are aware of other
technologies that will compete with MetalliFix.  These include other
FGD or scrubber additives that enhance the capture of mercury, sorbent injection
technologies, and oxidizer technologies. Most mercury removal technologies are
in the development and test stages for commercialization.  Although
the MetalliFix process is also being further tested, it may not prove to have a
competitive advantage compared to other mercury removal
technologies.  MetalliFix may not meet expected mercury removal
levels, cost hurdles, safety standards, or another competitive characteristic
that will become evident after further testing.





If
we or Solucorp Industries are unable to protect the intellectual property,
others may duplicate the technology.




We rely on Solucorp’s patented IFS-2C
technology for the MetalliFix process. Our ability to compete effectively will
depend, in part, on Solucorp’s ability to protect its patents.  The
ability of others to use Solucorp’s intellectual property could allow them to
duplicate the benefits of the MetalliFix offering and reduce our competitive
advantage.  We cannot control Solucorp’s efforts to safeguard,
maintain, and defend its intellectual property rights, and we cannot be assured
whether Solucorp will be completely successful in doing so.  These
actions could place Solucorp’s intellectual property rights at risk and could
result the loss of their patent on which our MetalliFix business strategy partly
depends.





Extensive
and evolving environmental and health and safety laws and regulations may
restrict our operations and growth and increase our costs.




Existing
environmental laws and regulations have become more stringently enforced in
recent years because of greater public interest in protecting the environment.
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 effect our customers’ decisions to utilize
our services which may materially adversely affect our business.




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.




-29-




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.




Some of
our employees in Israel are obligated to perform military reserve
duty.  In the event of severe unrest or other conflict, one or more of
our key employees could be required to serve in the military for extended
periods of time.  In the past, there have been numerous call-ups of
military reservists to active duty, and it is possible that there will be
additional call-ups in the future.  Our Israeli operations could be
disrupted as a result of such call-ups for military service.




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 Euros 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 weakening of the dollar relative to the NIS
had a net negative impact on DSIT’s operations in 2008.  During the
period from January 1, 2008 to June 1, 2008, the dollar lost 16.0% of its value
relative to the NIS before recovering and finishing 2008 just 1.1% below the
value at December 31, 2007.  DSIT is currently considering ways to
control is 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 2008,
41% of DSIT’s sales (28% in 2007) were concentrated in one customer (Israel
Defense Ministry). In addition, in 2009, DSIT has received $4.0 million of
orders from a new customer. Both of these customers are expected to make up a
significant portion of DSIT’s revenues and cash flow for 2009. 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.




In August
2005, we sold our outsourcing business, which in the past provided our Israeli
operations with a steady cash flow stream, and, in conjunction with bank lines
of credit, helped to finance our Israeli operations.  Our present
operations, as we are currently structured, place a greater 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.




-30-




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 state, 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 technologically dependent on several key employees.




Our sonar
and acoustic-related solutions and products are dependent on the knowledge and
know-how of several persons. The loss of any or a combination of these persons
could harm our ability to meet project deadlines and our ability to market
certain products.  As our sonar and acoustic-related solutions is a
significant portion of our growth strategy, this would ultimately negatively
impact on our business, results of operations and financial condition. While we
are attempting to mitigate this risk by hiring and training additional
personnel, we can provide no assurance that we will be successful in doing so in
a cost effective and 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.




DSIT
incurred significant net losses in recent years and may never achieve sustained
profitability.




DSIT has
incurred net losses of $1.3 million and $0.5 million for the years ended
December 31, 2007, and 2006, respectively.    Although DSIT
recorded net income of $0.5 million for the year ended December 31, 2008, and we
believe that DSIT will improve its operating results in 2009, we can provide no
assurance that DSIT will continue to generate sufficient revenues to allow it to
sustain profitability.




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 increased its lines-of-credit during 2008 from NIS 940,000
(approximately $235,000) to NIS 2,000,000 (approximately$526,000), DSIT needs
additional financing from time to time due to the timing of large milestone
payments. 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.




-31-




RISKS
RELATED TO COREWORX





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




Coreworx
has incurred net losses of CDN$5.3 million and CDN$8.7 million for the years
ended December 31, 2008 and 2007, respectively.  As of December 31,
2008, it had an accumulated deficit of approximately CDN$29.4
million.  We believe that Coreworx will reduce its losses in 2009;
however, we can provide no assurance that Coreworx will generate sufficient
revenues to allow it to become profitable or to sustain
profitability.




Coreworx
may need additional financing




Cash used
in operations in 2007 and 2008 was CDN$3.4 million and CDN$5.7 million,
respectively. Coreworx has recently begun to restructure its operations in order
to become cash-flow neutral. We expect that Coreworx may continue to require
additional working capital support in order to effectuate its revised plan and
finance its operations in 2009.  This support may be in the form of a
bank line, new investment by others, additional investment by Acorn, or a
combination of the above. We have no assurance that additional working such
support will be available such sources in sufficient amounts, in a timely manner
and on acceptable terms.  The availability and amount of any
additional investment from us may be limited by the working capital needs of our
corporate activities and other operating companies.




The
current economic conditions and Credit Crisis May Result in Deferral of Projects
by Our Customers.




The
current economic conditions and limited availability of credit may affect
capital projects and budgets of Coreworx customers. This may result in deferral
of projects, which would have an adverse impact on our ability to achieve
planned sales. Specifically, oil and gas and mining MCPs are sensitive to the
market prices of oil and minerals, and decreases in the prices of oil and
mineral commodities have caused some MCPs in these sectors to be delayed
indefinitely.




If
we are not able to attract and retain top employees, our ability to compete may
be harmed.




Our
performance is substantially dependent on the performance of our executive
officers and key employees. The loss of the services of any of our executive
officers or other key employees could significantly harm our business. We do not
maintain “key person” life insurance policies on any of our employees. Our
success is also highly dependent on our continuing ability to identify, hire,
train, retain and motivate highly qualified management, technical, sales and
marketing personnel. In particular, the recruitment of top research developers
and experienced salespeople is critical to our success. Competition for such
people is intense, substantial and continuous, and we may not be able to
attract, integrate or retain highly qualified technical, sales or managerial
personnel in the future. In addition, in our effort to attract and retain
critical personnel, we may experience increased compensation costs that are not
offset by either improved productivity or higher prices for our products or
services.




-32-




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 such as Open Text’s Open Text, EMC’s Documentum, Autodesk’s
Buzzsaw, IBM’sFileNet and Microsoft’s
Sharepoint. 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. Numerous releases of competitive products have
occurred recently and may be expected to continue in the near future. 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.





Coreworx
has assembled what it believes to be a unique suite of products along with an
aggressive product marketing strategy that will be the basis of driving future
revenue growth. We intend to pursue our strategy of growing the capabilities of
our software offerings through our proprietary research and the development of
new product offerings. 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. Commercial success depends on many factors
including the degree of innovation of the products developed through our
research and development efforts, sufficient support from our strategic
partners, and effective distribution and marketing. 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.




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:





-33-




·
            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 US dollar, future
operating results will be negatively affected.




Coreworx
currently derives approximately 75% of its revenue in U.S. dollars and a
significant portion in Australian dollars.  At the same time, most of
Coreworx’s expenses are denominated in Canadian dollars.  A decline in
the value of the U.S. dollar will have a major impact on Coreworx’s
profitability as it increases Coreworx’s costs in U.S. dollars. 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’s 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.




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’s
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 2008,
90% of Coreworx’s revenue was the result of sales to four 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’s 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’s results of operations and revenues, cash
flows and earnings.





-34-




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 the integration
of the Coreworx suite with Microsoft SharePoint, a widely used collaboration
tool and expects to complete the integration by the end of 2009. A failure to
complete integration on a timely basis would have a negative impact on
Coreworx’s sales, particularly to potential new customers.




Coreworx’s
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.




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.




-35-




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.
During 2008 our common stock has traded at prices as low as $1.35 and as high as
$6.56 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.





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.




A
substantial number of shares of our Common Stock are, or could upon exercise of
options or warrants, 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
December 31, 2008, 12,454,528 shares of our Common Stock were issued and
outstanding.  As of December 31, 2008 we had 784,023 warrants
outstanding and exercisable with a weighted average exercise price of $4.06 and
1,517,330 options outstanding and exercisable with a weighted average exercise
price of $3.10 per share, which if exercised for cash would result in the
issuance of an additional 2,301,353 shares of Common Stock.  Of the
options and warrants noted above, none of the warrants and 245,000 options are
in-the-money at December 31, 2008. In addition to the options noted above, at
December 31, 2008, 359,170 options are outstanding, but haven not yet vested and
are not yet exercisable.




ITEM
      1A.
            UNRESOLVED
      STAFF COMMENTS




None.




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 117,000 square feet of office, production, laboratory and
warehouse space in Charlotte, North Carolina.  The annual rent is
approximately $627,000.  This lease expires on December 31, 2012, with
two options to renew for five years each.




-36-




Our DSIT
subsidiary’s activities are conducted in approximately 18,000 square feet of
office space in the Tel Aviv, Israel metropolitan area under a lease that
expires in August 2009.  The annual rent is approximately
$322,000.




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.




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 is the immediate parent of Evonik LLC and is a subsidiary
of Evonik Steag GmbH.  Evonik Steag GmbH is a subsidiary of Evonik
AG.  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 connection with settlement of a dispute
unrelated to the current lawsuit, H.Hartenstein and B.Hartenstein entered into a
Confidentiality and Invention Assignment Agreement with SCR-Tech (the
“Confidentiality Agreement”) effective December 15, 2005.  Under the
Confidentiality Agreement,   H.Hartenstein and B.Hartenstein
agreed to keep confidential, not to use and not to disclose any confidential
information of SCR-Tech.




Once
employed by Evonik LLC, H.Hartenstein and B.Hartenstein were directly involved
with Evonik LLC’s construction of an SCR regeneration facility at Evonik LLC’s
Kings Mountain location.




SCR-Tech
has information and belief that the Evonik German Entities were aware of
H.Hartenstein’s and B.Hartenstein’s involvement in construction of Evonik’s SCR
regeneration facility.




In the
lawsuit, SCR-Tech has alleged that H.Hartenstein and B.Hartenstein materially
breached the Confidentiality Agreement, Evonik LLC
tortiously  interfered with the contractual obligations of
H.Hartenstein and B.Hartenstein under the Confidentiality Agreement, 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. The suit also alleges that
H.Hartenstein and B.Hartenstein as former officers of SCR-Tech breached their
fiduciary duties to SCR-Tech by misappropriating and using SCR-Tech’s
proprietary information and other confidential assets to the detriment of
SCR-Tech, that H.Hartenstein and B.Hartenstein while officers of SCR-Tech took
steps to exploit their knowledge of SCR-Tech’s trade secrets and usurped
SCR-Tech’s opportunity – vis-à-vis Evonik LLC – for
their own benefit, and that the Evonik Defendants engaged in unfair and
deceptive acts or practices in violation of North Carolina’s deceptive trade
laws.




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.  As of March 26, 2009, no answer has been filed by the other
Evonik Defendants.




-37-


In its
answer, Evonik LLC denies any liability to SCR-Tech and has denied wrong
doing.  Evonik LLC has alleged in its answer that SCR-Tech’s claims
are barred because of the doctrines of estoppel and waiver, equitable doctrine
of unclean hands, equitable doctrine of laches, and the relevant statutes of
limitation.  Further, Evonik LLC has alleged that SCR-Tech lacks
standing to bring any claim for misappropriation of trade secrets because
SCR-Tech did not own any trade secrets or other intellectual property with
regard to SCR regeneration process, and Evonik LLC further alleges that SCR-Tech
cannot establish any trade secret under North Carolina law and SCR-Tech has
failed to identify the existence of any trade secret with sufficient
particularity.




Evonik
LLC’s answer contains counterclaims against SCR-Tech to the effect that SCR-Tech
defamed Evonik LLC, and as a result of such defamation Evonik LLC’s standing,
business goodwill and reputation have been damaged.  Evonik LLC has
further counterclaimed that SCR-Tech’s lawsuit was filed to gain an unfair
competitive advantage over Evonik LLC and SCR-Tech’s actions relative to the
lawsuit constitute unfair and deceptive trade practices in violation of North
Carolina law.  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 that in the case of unfair and deceptive conduct and actions it is entitled
to treble damages in addition to its costs, interest and reasonable attorney’
fees.  Further, Evonik LLC has requested that it be awarded punitive
damages to be determined at trial. We believe the counter-claims to be without
merit.




The
Evonik German Entities have objected to being named parties in the lawsuit, and
have filed a motion to be dismissed from the lawsuit based upon their argument
that the North Carolina court lacks jurisdiction and they are not proper parties
to the lawsuit.




The
Evonik lawsuit is in the early stages of litigation, and discovery has not yet
commenced.  The issues involved in the lawsuit are complex, and we
anticipate that the expenses relating to the lawsuit (e.g. legal fees, expert
witness fees, discovery costs, travel expenses, etc.) will be
costly.




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 26, 2009, no meaningful settlement talks have
occurred nor have any been scheduled.




The
lawsuit will involve time and attention of senior management of SCR-Tech, and
could divert the attention of senior management 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 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, and SCR-Tech has not reserved funds for
such contingency or legal fees associated with this litigation. In addition, if
SCR-Tech is unsuccessful, Evonik LLC will remain a competitor of
SCR-Tech.




Lawsuit
filed by Environmental Energy Services, Inc. Against CoaLogix




In
August, 2008, CoaLogix was sued in U.S. District Court, District of Connecticut,
by Environmental Energy Systems, Inc. (“EES”).  In January, 2008,
CoaLogix and EES signed a letter of intent involving CoaLogix’s possible
purchase of certain assets of EES.  EES had entered into an agreement
with Solucorp to introduce Solucorp’s mercury containment product, IFS-2C, to
certain power plants.  In the spring of 2008, CoaLogix decided not to
pursue an acquisition of assets of EES.  In May, 2008, CoaLogix and
Solucorp entered into a license agreement pursuant to which Solucorp licensed
the exclusive, worldwide rights to IFS-2C to CoaLogix.  CoaLogix is
marketing IFS-2C under the trademark MetalliFix.




In its
complaint, EES has alleged that CoaLogix improperly acquired knowledge of IFS-2C
through its dealings with EES in connection with the letter of intent, CoaLogix
tortiously interfered with EES’s business relationship with Solucorp, CoaLogix
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 (ie. 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.




-38-




CoaLogix
filed its answer to EES’ complaint.  CoaLogix denies liability to EES
and contends that EES’ allegations are without merit. The matter is in the
initial discovery stage.   CoaLogix intends to vigorously defend
the lawsuit by EES.




No
settlement discussions or mediation have yet occurred.




Although
CoaLogix believes that EES’ allegations are without merit, there is no way to
predict the outcome of this lawsuit.  In the event EES is successful,
CoaLogix could be liable to EES for substantial damages, interest and EES costs
and attorneys’ fees.




CoaLogix’s
license agreement with Solucorp provides that Solucorp will indemnify CoaLogix
for any loss, cost or expense incurred by CoaLogix in connection with Solucorp’s
agreement with EES relating to IFS-2C.  CoaLogix expects Solucorp to
reimburse CoaLogix for its expenses, including attorneys’ fees relating to the
EES case.  In addition, should EES prevail, CoaLogix expects Solucorp
to indemnify it for any loss, cost or expense sustained in the
lawsuit.  Solucorp is a small company with limited revenues, and there
can be no assurance that Solucorp will have the financial ability to indemnify
CoaLogix for any loss, cost or expense which may be ultimately incurred by
CoaLogix including, but not limited to, reimbursement of attorneys’
fees.




ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS




At our Annual Meeting of
Stockholders on November 3, 2008, John A. Moore, George Morgenstern, Richard J.
Giacco, Joseph Musanti, Richard S. Rimer, Scott B. Ungerer and Samuel M. Zentman
were elected as directors, each for a term of one year to serve until the next
annual meeting of stockholders and until their successors have been elected and
qualified.  The results of the voting were as follows:




Nominee
              
              For
              
              
              WithheldJohn
      A. Moore
              
              
              7,996,396
              
              
              
              935,091George
      Morgenstern
              
              
              7,982,523
              
              
              
              948,964Richard
      J. Giacco
              
              
              8,491,596
              
              
              
              439,891Joseph
      Musanti
              
              
              8,491,596
              
              
              
              439,891Richard
      S. Rimer
              
              
              8,491,596
              
              
              
              439,891Scott
      B. Ungerer
              
              
              8,491,596
              
              
              
              439,891Samuel
      M. Zentman
              
              
              8,491,596
              
              
              
              439,891





Also at
our Annual Meeting, our stockholders approved our Amended 2006 Stock Incentive
Plan, with 1,491,008 shares voting in favor, 1,252,593 shares voting against
approval, 74,851 shares abstaining and 6,113,035 broker non-votes.





In
addition, at our Annual Meeting, our stockholders approved our Amended 2006
Stock Option Plan for Non-Employee Directors, with 1,958,782 shares voting in
favor, 785,419 shares voting against approval, 74,251 shares abstaining and
6,113,035 broker non-votes.




-39-




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”.  Prior to December 17, 2007, our Common Stock traded on OTC
Bulletin Board (“OTCBB”).  The following table sets forth, for the
periods indicated, the high and low reported sales prices per share of our
Common Stock on NASDAQ and the OTCBB (as applicable).




High
              
              
              Low2007:First
      Quarter
              
              $
              4.97
              
              
              $
              3.40Second
      Quarter
              
              
              5.28
              
              
              
              3.65Third
      Quarter
              
              
              5.59
              
              
              
              3.80Fourth
      Quarter
              
              $
              5.99
              
              
              $
              4.102008:First
      Quarter
              
              $
              5.80
              
              
              $
              4.20Second
      Quarter
              
              
              6.56
              
              
              
              4.25Third
      Quarter
              
              
              5.41
              
              
              
              3.48Fourth
      Quarter
              
              $
              3.50
              
              
              $
              1.35




As of
March 26, 2009, the last reported sales price of our Common Stock on the Nasdaq
Global Market was $2.47, there were 93 record holders of our Common Stock and we
estimate that there were approximately 1,980 beneficial owners of our Common
Stock.




We paid
no dividends in 2007 or 2008, and do not intend to pay any dividends in
2009.




Issuer
Purchases of Equity Securities




The following table summarizes our
purchases of our Common Stock during the year ended December 31,
2008.




Period
              
              Total Number
                  of Shares
                  Purchased
              
              
              Average
                  Price Paid
                  per Share
              
              
              Total Number of
                  Shares
                  Purchased as
                  Part of Publicly
                  Announced
                  Plans or
                  Programs
              
              
              Maximum
                  Number of
                  Shares that
                  May Yet Be
                  Purchased
                  Under the
                  Program (1)October 1, 2008 – October 31, 2008
              
              
              34,000
              
              
              $
              2.42
              
              
              
              34,000
              
              
              
              966,000November 1, 2008 – November 30, 2008
              
              
              29,915
              
              
              $
              1.51
              
              
              
              63,915
              
              
              
              936,085December
      1, 2008 – December 31, 2008
              
              
              —
              
              
              
              —
              
              
              
              63,915
              
              
              
              936,085Total
              
              
              63,915
              
              
              $
              1.99
              
              
              
              63,915
              
              
              
              936,085





(1) 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.




-40-




ITEM
      6.
            SELECTED
      FINANCIAL DATA




The
selected consolidated statement of operations data for the years ended December
31, 2006, 2007 and 2008 and consolidated balance sheet data as of December 31,
2007 and 2008 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, 2004 and 2005 and
the selected consolidated balance sheet data as of December 31, 2004, 2005 and
2006 has been derived from our unaudited 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.”




-41-




Selected
Consolidated Statement of Operations Data:




For the Years Ended December 31,2004
              
              
              2005
              
              
              2006
              
              
              2007
              
              
              2008(in thousands, except per share data)Sales
              
              $
              3,364
              
              
              $
              4,187
              
              
              $
              4,117
              
              
              $
              5,660
              
              
              $
              20,696Cost
      of sales
              
              
              2,491
              
              
              
              2,945
              
              
              
              2,763
              
              
              
              4,248
              
              
              
              14,163Gross
      profit
              
              
              873
              
              
              
              1,242
              
              
              
              1,354
              
              
              
              1,412
              
              
              
              6,533Research
      and development expenses
              
              
              30
              
              
              
              53
              
              
              
              324
              
              
              
              415
              
              
              
              1,169Acquired
      in-process research and development
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              2,444Selling,
      marketing, general and administrative expenses
              
              
              3,374
              
              
              
              3,464
              
              
              
              4,618
              
              
              
              5,278
              
              
              
              11,667Impairments
              
              
              —
              
              
              
              —
              
              
              
              40
              
              
              
              112
              
              
              
              3,664Operating
      loss
              
              
              (2,531
              )
              
              
              (2,275
              )
              
              
              (3,628
              )
              
              
              (4,393
              )
              
              
              (12,411
              )Finance
      expense, net
              
              
              (33
              )
              
              
              (12
              )
              
              
              (30
              )
              
              
              (1,585
              )
              
              
              (3,031
              )Gain
      on early redemption of Convertible Debentures
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,259Gain
      on Comverge IPO
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              16,169
              
              
              
              —Gain
      on sale of shares in Comverge
              
              
              705
              
              
              
              —
              
              
              
              —
              
              
              
              23,124
              
              
              
              8,861Gain
      (loss) on private placement of equity investments
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (37
              )
              
              
              7Other
      income, net
              
              
              148
              
              
              
              —
              
              
              
              330
              
              
              
              —
              
              
              
              —Income
      (loss) from operations before taxes on income
              
              
              (1,711
              )
              
              
              (2,287
              )
              
              
              (3,328
              )
              
              
              33,278
              
              
              
              (5,315
              )Income
      tax benefit (expense)
              
              
              (27
              )
              
              
              37
              
              
              
              (183
              )
              
              
              445
              
              
              
              (342
              )Income
      (loss) from operations of the Company and itsconsolidated
      subsidiaries
              
              
              (1,738
              )
              
              
              (2,250
              )
              
              
              (3,511
              )
              
              
              33,723
              
              
              
              (5,657
              )Share
      of losses in Comverge
              
              
              (1,242
              )
              
              
              (380
              )
              
              
              (210
              )
              
              
              —
              
              
              
              —Share
      of losses in Paketeria
              
              
              —
              
              
              
              —
              
              
              
              (424
              )
              
              
              (1,206
              )
              
              
              (1,560
              )Share
      of losses in GridSense
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (926
              )Minority
      interests, net of tax
              
              
              (90
              )
              
              
              (73
              )
              
              
              —
              
              
              
              —
              
              
              
              248Income
      (loss) from continuing operations
              
              
              (3,070
              )
              
              
              (2,703
              )
              
              
              (4,145
              )
              
              
              32,517
              
              
              
              (7,895
              )Gain
      (loss) on sale of discontinued operations and contract settlement (in
      2006), net of income taxes
              
              
              —
              
              
              
              541
              
              
              
              (2,069
              )
              
              
              —
              
              
              
              —Income
      (loss) from discontinued operations, net ofincome
      taxes
              
              
              1,898
              
              
              
              844
              
              
              
              78
              
              
              
              —
              
              
              
              —Net
      income (loss)
              
              $
              (1,172
              )
              
              $
              (1,318
              )
              
              $
              (6,136
              )
              
              $
              32,517
              
              
              $
              (7,895
              )Basic
      net income (loss) per share:Income
      (loss) from continuing operations
              
              $
              (0.39
              )
              
              $
              (0.26
              )
              
              $
              (0.48
              )
              
              $
              3.30
              
              
              $
              (0.69
              )Discontinued
      operations
              
              
              0.24
              
              
              
              0.10
              
              
              
              (0.23
              )
              
              
              —
              
              
              
              —Net
      income (loss) per share
              
              $
              (0.15
              )
              
              $
              (0.16
              )
              
              $
              (0.71
              )
              
              $
              3.30
              
              
              $
              (0.69
              )Weighted
      average number of shares outstanding
              
              
              7,976
              
              
              
              8,117
              
              
              
              8,689
              
              
              
              9,848
              
              
              
              11,374Diluted
      net income (loss) per share:Income
      (loss) from continuing operations
              
              $
              (0.39
              )
              
              $
              (0.26
              )
              
              $
              (0.48
              )
              
              $
              2.80
              
              
              $
              (0.69
              )Discontinued
      operations
              
              
              0.24
              
              
              
              0.10
              
              
              
              (0.23
              )
              
              
              —
              
              
              
              —Net
      income (loss) per share
              
              $
              (0.15
              )
              
              $
              (0.16
              )
              
              $
              (0.71
              )
              
              $
              2.80
              
              
              $
              (0.69
              )Weighted
      average number of shares outstanding
              
              
              7,976
              
              
              
              8,117
              
              
              
              8,689
              
              
              
              12,177
              
              
              
              11,374





-42-




Selected
Consolidated Balance Sheet Data:




As of December 31,2004
              
              
              2005
              
              
              2006
              
              
              2007
              
              
              2008(in
      thousands)Working
      capital
              
              $
              874
              
              
              $
              1,458
              
              
              $
              259
              
              
              $
              13,843
              
              
              $
              13,838Total
      assets
              
              
              17,025
              
              
              
              10,173
              
              
              
              7,258
              
              
              
              96,967
              
              
              
              51,055Short-term
      and long-term debt
              
              
              1,396
              
              
              
              365
              
              
              
              788
              
              
              
              5,010
              
              
              
              3,845Minority
      interests
              
              
              1,471
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,975Total
      shareholders’ equity (deficit)
              
              
              2,125
              
              
              
              820
              
              
              
              (461
              )
              
              
              67,325
              
              
              
              34,148




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




RECENT
DEVELOPMENTS




CoaLogix




On
February 23, 2009, the U.S. Supreme Court refused to hear an appeal of the
earlier decision by the U.S. Circuit Court of Appeals for the D.C. Circuit which
vacated CAMR.  With this decision, CAMR is no longer
effective.  CAMR was the federal government’s attempt to reduce
mercury emissions from coal-fueled power plants, and with the vacature of CAMR
there is no current federal regulation directly addressing reduction of mercury
emissions from coal-fueled power plants.  The EPA is expected to
promulgate new regulations restricting mercury emissions; however, there is no
way to predict when such new regulations will be promulgated or
effective.  The lack of federal regulations restricting mercury
emissions could cause a delay for the demand for MetalliFix by utilities, and
could have a negative impact upon CoaLogix’s marketing and sales of
MetalliFix.




GridSense




On
February 19, 2009, a majority of the shareholders approved a plan to make
GridSense a private company by GridSense transferring its grid monitoring
business to a newly formed Australian corporation that will be owned by certain
of the significant shareholders of GridSense including Acorn
Energy.  Under the plan, the debt of C$750,000 ($616,000) owed by
GridSense will be continue to be owed  by
GridSense’s  Australian operating subsidiary.  Our
percentage ownership of the newly formed Australian corporation once GridSense
has gone private is expected to be approximately 31.2%.  The going
private transaction is expected to be effective in the second quarter of
2009.




DSIT




In February, DSIT received a $2.3
million order for its AquaShieldTM underwater security system. The system will be
used for the protection of a large energy facility at an undisclosed location in
Asia. The system will include multiple AquaShieldTM Diver Detection sonar (DDS)
units, which will be combined and integrated into a comprehensive surveillance
system. The system will guard and protect the customer infrastructure from
underwater intrusion and sabotage. This order follows $1.7 million order for
another AquaShieldTM underwater security system in January plus another $0.2
million of other project orders for its other Naval & RT Solutions. The
addition of these orders increased DSIT’s backlog from $4.8 million at December
31, 2008 to $9.0 million.




Comverge




The
market value of our 502,500 common shares of Comverge on December 31, 2008 was
approximately $2.5 million based on a market share price of $4.90 on that
date.  Since December 31, 2008, (through March 26, 2009) we have sold
175,000 of our common shares of Comverge and received proceeds of approximately
$1.2 million. The value of our remaining 337,500 shares of Comverge’s common
shares as of March 26, 2009, is approximately $2.4 million based on a market
share price of $7.19.




-43-




Corporate




During
the period from January 1, 2009 to March 26, 2009, we continued to make
purchases of our Common Stock and acquired an additional 145,653 shares for
approximately $328,000.




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
1.  Business–Risk Factors Which May Affect Future
Results.”




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’s results only
for the period following the date of acquisition. CoaLogix was acquired on
November 7, 2007; our results for 2007 include CoaLogix’s results only for the
period following the date of acquisition.




The
following analysis should be read together with the segment information provided
in Note 24 to our Consolidated Financial Statements included in this
report.




CoaLogix/SCR-Tech/MetalliFix




CoaLogix
sales in 2008 were $10.1 million compared to 2007 sales of $4.5 million (of
which we recorded only $0.8 million since we recorded CoaLogix sales only since
our acquisition of SCR-Tech on November 7, 2007). The increase in CoaLogix's
sales in 2008 compared to 2007 is due to increased penetration in the growing
regeneration market. In addition, CoaLogix increased its production capacity in
the fourth quarter of 2008 with the completion of a plant expansion. CoaLogix
increased its sales from the $1.8 million recorded in the third quarter of 2008
to $4.7 million in the fourth quarter of 2008. The increase in sales was
attributable largely to increased production volume facilitated by the plant
expansion and to seasonal factors since power plants typically do not schedule
service of the catalyst systems during the spring and summer ozone
months.




CoaLogix
gross profit in 2008 was $2.5 million compared to 2007 gross profit of $0.5
million (of which we recorded only $0.1 million since we recorded CoaLogix gross
profit only since our acquisition of SCR-Tech on November 7, 2007). In increase
in CoaLogix gross profit in 2008 was attributable to the increase in sales
combined with increased efficiencies in our production. CoaLogix gross profit in
the fourth quarter of 2008 was $1.6 million representing a $1.8 million increase
over the negative gross loss of $0.2 million recorded by CoaLogix in the third
quarter of 2008.The increase in CoaLogix
gross profit was attributable to the significant increase in fourth quarter
sales (an increase of $2.9 million) combined with third quarter gross profit
being suppressed due to seasonal factors since power plants typically do not
schedule service of the catalyst systems during the spring and summer ozone
months. CoaLogix also completed some projects during the third quarter 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.




In March
2008, EnerTech Capital III, a strategic investor, acquired a 15% interest in
CoaLogix.  We currently own 85% of CoaLogix following EnerTech’s
investment.




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





On
January 1, 2009, Phase I of the Clean Air Interstate Rule (CAIR) went into
effect.  This is designed to permanently cap and achieve substantial
reductions in emissions of NOx across 28 Eastern states and the District of
Columbia, which we believe will further increase the size of our addressable
market.




-44-


In 2009,
we expect CoaLogix to improve on its 2008 results based upon on its year-end
backlog for SCR services of $10.0 million and anticipated new orders, and the
expected introduction of MetalliFixTM for mercury removal for coal-fired power
generation plants. We expect that CoaLogix will need to expand its production
capabilities in 2009 in order to accommodate anticipated growth in
demand..




DSIT
Solutions




Sales of
our DSIT subsidiary increased by $3.4 million, or 170%, from $4.9 million in
2007 to $8.3 million in 2008 due to a $3.6 million increase in sales for the
Naval & RT Solutions segment. The increase resulted from the recording of a
full-year’s sales in 2008 on a three-year project for a sonar and acoustic
system for the Israeli Ministry of Defense received in the middle of 2007
combined with increased sales from DSIT’s other real-time and embedded solutions
projects. Fourth quarter 2008 sales for DSIT were $1.9 million reflecting a $0.1
million decrease from third quarter 2008 sales of $2.0 million.




Gross
profit in DSIT in 2008 was $2.7 million which reflects an increase of $1.4
million or 106% from $1.3 million in 2007. DSIT’s gross profit of $0.7 million
during the fourth quarter of 2008 represented a $0.1 million increase over
DSIT’s third quarter 2008 gross profit despite a $0.1 million decrease in sales.
The increase in gross profit was attributable to a high margin project
commenced  by DSIT in the fourth quarter of 2008.




DSIT’s
improved its gross margin to 32% in 2008 as compared to  25% in 2007.
DSIT’s increased gross margins were due to higher margin projects being
performed during the 2008 as compared to 2007.





Naval
&RT Solutions




During
2006, 2007 and 2008, sales from our Naval & RT solutions in our DSIT
subsidiary were $2.8 million, $3.5 million and $7.4 million, respectively,
accounting for approximately 68%, 71% and 85% of DSIT’s consolidated sales for
2006, 2007 and 2008, respectively. The balance of DSIT’s sales of $1.3 million,
$1.4 million and $1.2 million for the years ending December 31, 2006, 2007 and
2008, respectively, were derived from DSIT’s other IT and consulting
activities.




Consolidated
segment revenues increased by $3.6 million or 102% in 2008 as compared to
2007.  The increase in sales was the result of the acquisition of
three significant Naval projects in 2007 and 2008.




·
            A
      NIS 30 million (approximately $7.8 million at December 31, 2008)
      three-year project for a sonar and underwater acoustic system for the
      Israeli Ministry of Defense, and




·
            An
      order to supply our AquaShieldTM Diver Detection Sonar (DDS) system to
      protect a European oil terminal, which according to Jane’s International
      Defence Review is believed to mark
      the first commercial sale of a diver detection device to protect a
      critical coastal energy
installation.




·
            A
      fourth quarter 2008 sale of AquaShieldTM DDS System to an undisclosed EMEA
      government.




Two of
these projects began in mid-2007 and our increased sales in 2008 are a direct
result of our progress in those projects.  In addition to our
increased sales from the abovementioned projects, we also recorded increased
sales from our other real-time and embedded solutions projects.




Consolidated
segment gross profit also increased (from $1.1 million in 2007 to $2.4 million
in 2008) as a result of the increased sales from our three significant projects
and our other projects. In addition, our gross profit margin increased from 2007
to 2008 from 33% to 35% due to higher gross margins recorded in our Acoustic
& Sonar solutions projects as compared to our real-time and embedded
solutions projects.




-45-


We
anticipated continued growth in sales in 2009. We expect our sales growth to
come primarily from our acoustic and sonar solutions projects with our embedded
hardware and software development projects expected to remain relatively
stable.  In the first three months of 2009, we have already received
$4.0 million of new orders for our AquaShieldTM DDS in addition to $0.2 million
for other projects. DSIT reached profitability in 2008 and we expect 2009 to be
profitable as well.




Coreworx




Coreworx, which we acquired on August
13, 2008, had sales in 2008 of CDN$4.4 million compared to 2007 sales of CDN$3.2
million.  The increase in Coreworx’s sales in 2008 compared to 2007
was principally due to new license sales to Fluor and BHP Billiton.





Coreworx’s gross profit in 2008 was
CDN$3.7 million compared to 2007 gross profit of CDN$1.9 million.  The
increase in Coreworx’s gross profit in 2008 was attributable to the increase in
software license sales which attract higher margins than other category of
sales. Software license sales increased by approximately 50% in 2008 over
2007.





Coreworx increased its gross margin in
2008 to 84% as compared to 2007’s 61%.  Coreworx’s increased gross
margin was due to a much stronger mix of license revenue compared to prior
periods.





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





During 2008, Coreworx delivered Release
6.3 of its software to its customers on time, and completed the architecture for
integration of SharePoint.  Coreworx also sold a Gold license to its
software to and renegotiated a favorable maintenance and support agreement with
Fluor.





Coreworx has observed that
the Latin American economy has been less adversely affected by the global
economic downturn than have other parts of the world, and believes there are
opportunities to market and sell its software in Latin
America.  Therefore, Coreworx will begin a marketing campaign to O/Os
and E&Cs with MCPs located in Latin America in 2009. To accelerate this
initiative and mitigate the risk, Coreworx will take advantage of hiring key
personnel who until recently worked for a competitor in this region who have
recently become available as a result of Oracles acquisition of Primavera.
Additionally, Coreworx intends to establish a Value Added Reseller (“VAR”)
network in order to manage this region.





In 2009, we expect Coreworx to improve
on its 2008 results based upon its year-end backlog of CDN$1.6 million,
anticipation of new sales, the addition of ProExecute and expansion to Latin
America.





Corporate




At the
end of 2008, we began an effort to streamline our corporate costs. Towards that
end, we have taken several steps in order to conserve our corporate cash
including hiring in-house counsel, reducing personnel, consulting and marketing
costs. We 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.




CRITICAL
ACCOUNTING POLICIES




The
Securities and Exchange Commission (“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.




-46-




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; investments
in marketable securities, revenue recognition, foreign currency transactions,
stock-based compensation and impairments in goodwill and intangible
assets.




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.  Minority interests in net losses are limited to the
extent of their equity capital.  Losses in excess of minority interest
equity capital are charged against us in our consolidated statements of
operations.




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 2008, wrote down our investments in Paketeria, GridSense and
Enertech by a total of approximately $1.2 million.




Investments
in Marketable Securities




We
account for our investments in equity securities under Financial Accounting
Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”)
No. 115, Accounting for Certain Investments in Debt and Equity Securities, (FAS
115).  Marketable securities are classified as available-for-sale
securities and are accounted for at their fair value.  Unrealized
gains and losses on these securities are reported as other comprehensive income
(loss), respectively.  Under FAS 115, unrealized holding gains and
losses are excluded from earnings and reported net of the related tax effect in
other comprehensive income as a separate component of shareholders’
equity.




As of
December 31, 2008, the 502,500 Comverge shares we held can be considered
“available-for-sale” under SFAS 115.  Accordingly, we recorded our
investment in Comverge based on Comverge’s share price of $4.90 at December 31,
2008 and recorded a decrease of $125,000 to our investment balance by recording
those shares at fair market value to Accumulated Other Comprehensive Income with
respect to the recording those shares at fair market value.




-47-




Revenue
Recognition




In the
year ended December 31, 2008, we recorded approximately $10.1 million of
revenues representing approximately 49% 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, regenerates them and
subsequently sells them to customers as refurbished units.  In such
cases, revenues are not recognized until the units are delivered to the
customer.




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
collectibility 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, 2008, we recorded approximately $8.3 million of revenues
representing approximately 38% of our consolidated revenues in our DSIT
subsidiary.  In 2008, DSIT derived approximately $6.4 million or 76%
of DSIT’s 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 Statement of Position (“SOP”)
97-2, “Software Revenues Recognition,” issued by the American Institute of
Certified Public Accountants, SOP 98-9, “Modification of 97-2, Software
Recognition with Respect to Certain Transactions” and Staff Accounting Bulletin
(“SAB”) No. 101 “Revenues Recognition in Financial Statements,” issued by
the SEC. Coreworx’s revenues of approximately $2.3 million since its acquisition
by us represents approximately 11% of our consolidated revenues for the year
ended December 31, 2008.




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 SOP 97-2 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.  In accordance with SOP 97-2, as amended,
revenues derived from multiple-element software sale arrangements are recognized
in earnings based on the relative fair values of the individual
elements.




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.




-48-




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 (CDN$) and DSIT’s functional currency
is the New Israeli Shekel (“NIS”). In the year ended December 31, 2008, 38% of
our revenues (86% and 100% in the years ended December 31, 2007 and 2006,
respectively) came from our DSIT subsidiary while 11% of our revenue in the year
ended December 31, 2008 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




Effective
January 1, 2006, we have accounted for share-based compensation pursuant to SFAS
No. 123R, Share-Based Payment (SFAS 123R).  SFAS No. 123R requires a
public entity 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.  As a result of our
adoption of SFAS No. 123R, during the years ended December 31, 2008, 2007 and
2006, we recognized expense related to share options issued prior to but
unvested as of January 1, 2006 as well as expense related to share options
issued subsequent to January 1, 2006.




The fair
values of all stock options granted were estimated using the Black-Scholes
option-pricing model.  The Black-Scholes model requires the input of
highly subjective assumptions such as risk-free interest rates, volatility
factor of the expected market price of our Common Stock and the weighted-average
expected option life.  The expected volatility factor used to value
stock options in 2007 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.  In December 2007, the SEC issued Staff
Accounting Bulletin 110 (SAB 110) to amend the SEC’s views discussed in Staff
Accounting Bulletin 107 (SAB 107) regarding the use of the simplified method in
developing an estimate of expected life of share options in accordance with SFAS
No. 123(R).  We will continue to use the simplified method until we
have the historical data necessary to provide a reasonable estimate of expected
life in accordance with SAB 107, as amended by SAB 110.  For expected
option life, we have what SAB 107 defines as “plain-vanilla” stock options, and
therefore used a simple average of the vesting period and the contractual term
for options as permitted by SAB 107.  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 a straight-line
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 methodology
prescribed by SFAS 123R, 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 affect on our general
and administrative line items within our consolidated statements of operations
and also may have a material affect on our deferred income taxes and additional
paid-in capital line items within our consolidated balance
sheets.  Under SFAS No. 123R, we are 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.




-49-




For the
years ended December 31, 2008, 2007 and 2006, we incurred stock compensation
expense of approximately $1.4, $0.9 million and $1.8 million, respectively. The
2008 expense includes stock compensation expense recorded with respect to stock
option grants in our CoaLogix and Coreworx subsidiaries of $0.7
million.




See Note
20 to the consolidated financial statements for information on the impact of our
adoption of SFAS 123R and the assumptions used to calculate the fair value of
share-based employee compensation.




We
account for stock-based compensation issued to non-employees on a fair value
basis in accordance with SFAS No. 123 and EITF Issue No. 96-18, “Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
conjunction with Selling, Goods or Services” and related
interpretations.




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 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. In
2008, as a result of our acquisition of Coreworx and the subsequent cost
allocation, we recorded an immediate expense of approximately $2.4 million
associated with acquired in-process research and development. In addition
approximately $3.8 million was allocated to amortizable intangible assets and
approximately $2.4 million to goodwill.




Goodwill




As a
result of our various acquisitions, we have recorded goodwill. Our goodwill at
December 31, 2008 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 $2.5 million. We
record goodwill when the purchase price paid for an acquisition exceeds the
estimated fair value of the net identified tangible and intangible assets
acquired.




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. Changes in our strategy and/or market
conditions could significantly impact these judgments and require adjustments to
recorded amounts of goodwill.




-50-




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
2008.




RESULTS
OF OPERATIONS




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




Year ended December 31,2004
                
                
                2005
                
                
                2006
                
                
                2007
                
                
                2008Sales
                
                
                100
                %
                
                
                100
                %
                
                
                100
                %
                
                
                100
                %
                
                
                100
                %Cost
      of sales
                
                
                74
                
                
                
                70
                
                
                
                67
                
                
                
                75
                
                
                
                68Gross
      profit
                
                
                26
                
                
                
                30
                
                
                
                33
                
                
                
                25
                
                
                
                32Research
      and development expenses
                
                
                1
                
                
                
                1
                
                
                
                8
                
                
                
                7
                
                
                
                6Acquired
      in-process research and development expenses
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                12Selling,
      general and administrative expenses
                
                
                100
                
                
                
                83
                
                
                
                112
                
                
                
                93
                
                
                
                56Impairments
                
                
                —
                
                
                
                —
                
                
                
                1
                
                
                
                2
                
                
                
                18Operating
      loss
                
                
                (75
                )
                
                
                (54
                )
                
                
                (88
                )
                
                
                (78
                )
                
                
                (60
                )Finance
      expense, net
                
                
                (1
                )
                
                
                0
                
                
                
                (1
                )
                
                
                (28
                )
                
                
                (15
                )Gain
      on early redemption of convertible debentures
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                6Gain
      on sale of shares in Comverge
                
                
                21
                
                
                
                —
                
                
                
                —
                
                
                
                409
                
                
                
                43Gain
      on IPO of Comverge
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                286
                
                
                
                —Gain
      (loss) on private placement of equity investments
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (1
                )
                
                
                —Other
      income, net
                
                
                4
                
                
                
                —
                
                
                
                8
                
                
                
                —
                
                
                
                —Income
      (loss) from operations before taxes on income
                
                
                (51
                )
                
                
                (55
                )
                
                
                (81
                )
                
                
                588
                
                
                
                (26
                )Income
      tax benefit (expense)
                
                
                (1
                )
                
                
                1
                
                
                
                (4
                )
                
                
                8
                
                
                
                (2
                )Income
      (loss) from operations of the Company and its consolidated
      subsidiaries
                
                
                (51
                )
                
                
                (54
                )
                
                
                (85
                )
                
                
                596
                
                
                
                (27
                )Share
      of losses in Paketeria
                
                
                —
                
                
                
                —
                
                
                
                (10
                )
                
                
                (21
                )
                
                
                (8
                )Share
      of losses in GridSense
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (4
                )Share
      of losses in Comverge
                
                
                (37
                )
                
                
                (9
                )
                
                
                (5
                )
                
                
                —
                
                
                
                —Minority
      interests, net of tax
                
                
                (3
                )
                
                
                (2
                )
                
                
                —
                
                
                
                —
                
                
                
                1Income
      (loss) from continuing operations
                
                
                (91
                )
                
                
                (65
                )
                
                
                (101
                )
                
                
                575
                
                
                
                (38
                )Gain
      (loss) on sale of discontinued operations and contract settlement (in
      2006), net of income taxes
                
                
                —
                
                
                
                13
                
                
                
                (50
                )
                
                
                —
                
                
                
                —Income
      from discontinued operations, net ofincome
      taxes
                
                
                56
                
                
                
                20
                
                
                
                2
                
                
                
                —
                
                
                
                —Net
      income (loss)
                
                
                (35
                )%
                
                
                (31
                )%
                
                
                (149
                )%
                
                
                575
                %
                
                
                (38
                )%




The
following table sets forth certain information with respect to revenues and
profits of our reportable business segments for the years ended December 31,
2006, 2007 and 2008, including the percentages of revenues attributable to such
segments.  (See Note 24 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.




-51-




CoaLogix
                
                
                Naval &
                  RT
                  Solutions
                
                
                EIS
                
                
                Other
                
                
                Total(in thousands)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
                
                
                
                6,533Segment
      income (loss) before income taxes
                
                
                (1,433
                )
                
                
                605
                
                
                
                (1,171
                )
                
                
                (86
                )
                
                
                (2,085
                )Year
      ended December 31, 2007:Revenues
      from external customers
                
                $
                797
                
                
                $
                3,472
                
                
                $
                —
                
                
                $
                1,391
                
                
                $
                5,660Percentage
      of total revenues from external customers
                
                
                14
                %
                
                
                61
                %
                
                
                —
                
                
                
                25
                %
                
                
                100
                %Gross
      profit
                
                
                116
                
                
                
                1,139
                
                
                
                —
                
                
                
                157
                
                
                
                1,412Segment
      loss before income taxes
                
                
                (140
                )
                
                
                (309
                )
                
                
                —
                
                
                
                (799
                )
                
                
                (1,248
                )Year
      ended December 31, 2006:Revenues
      from external customers
                
                $
                —
                
                
                $
                2,797
                
                
                $
                —
                
                
                $
                1,320
                
                
                $
                4,117Percentage
      of total revenues from external customers
                
                
                —
                
                
                
                68
                %
                
                
                —
                
                
                
                32
                %
                
                
                100
                %Gross
      profit
                
                
                —
                
                
                
                1,004
                
                
                
                —
                
                
                
                350
                
                
                
                1,354Segment
      loss before income taxes
                
                
                —
                
                
                
                (155
                )
                
                
                —
                
                
                
                (296
                )
                
                
                (451
                )




2008
COMPARED TO 2007




Sales.  Sales
increased by $15.0 million or 266% to $20.7 million in 2008 as compared to sales
of $5.7 million in 2007.  Of the increase in sales, $9.3 million was
attributable to sales from our CoaLogix segment which was included for the full
year 2008, but was included in 2007 only for the period from acquisition on
November 7, 2007 to year end. In addition, our 2008 sales also include $2.3
million of sales by our recently acquired Coreworx subsidiary whose results
since our acquisition (August 13, 2008) are included in our  results
for 2008. Sales of our DSIT subsidiary increased by $3.4 million, or 170%, from
$4.9 million in 2007 to $8.3 million in 2008 due to a $3.6 million increase in
sales for the Naval & RT Solutions segment. The increase resulted from the
recording of a full-year’s sales in 2008 on a three-year project for a sonar and
acoustic system for the Israeli Ministry of Defense received in the middle of
2007 combined with increased sales from DSIT’s other real-time and embedded
solutions projects.




Gross
profit.  Gross profits in 2008 increased by $5.1 million or
363%, to $6.5 million from $1.4 million in 2007. The increase in gross profits
was attributable to the inclusion in 2008 of a full year of CoaLogix and the
inclusion of Coreworx from the date of its acquisition. Gross profit at CoaLogix
and Coreworx in 2008 was $2.5 and $1.4 million, respectively. Gross profit in
DSIT in 2008 was $2.7 million which reflects an increase of $1.4 million or 106%
from $1.3 million in 2007. DSIT's gross profit increase was due primarily to its
increased sales noted above combined with improved margins.




Gross
margins also increased to 32% in 2008 compared to 25% in 2007. The increased
gross margins were  the result of increased margins for both DSIT and
CoaLogix.  DSIT’s increased its gross margin to 32% as compared to
2007’s 25% while CoaLogix increased its gross margins to 24% in 2008 from 14% in
2007 in the period from our acquisition. In addition, 2008 included Coreworx’s
gross margins of 63%, which were not included in 2007 results. DSIT’s increased
gross margins were due to higher margin projects being performed during the 2008
as compared to 2007. CoaLogix’s increased gross margins were due to higher
margin projects in 2008 and efficiencies from higher revenue combined with
relatively marginal growth in costs.




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





-52-




Research and development expenses
(“R&D”).  R&D expenses in 2008 increased by $0.7
million as compared to 2007. The increase in R&D expense was due to the
inclusion in 2008 of Coreworx R&D expenses of approximately $0.9 million.
This was partially offset by a decrease in R&D expense at DSIT.




Selling, general and administrative
expenses (“SG&A”).   SG&A in 2008 increased by
$6.4 million as compared to 2007. A portion of the increase was attributable to
the inclusion of CoaLogix’s and Coreworx’s SG&A costs of $3.9 and $1.5
million, respectively (in 2007 CoaLogix’s SG&A costs in the period since our
acquisition was $0.3 million). DSIT’s SG&A increased slightly from $2.0
million in 2007 to $2.1 million in 2008. Corporate SG&A expense also
increased by approximately $1.1 million during 2008 to $4.1 million as compared
to 2007. The increase in corporate SG&A is due to increased professional
fees and salaries reflecting a higher level of corporate activity due to our
M&A activity.




Impairments.During 2008,we
recorded a loss provision on our loans to Paketeria of $2.5 million due to
Paketeria’s increasing operating difficulties and our doubts as to its ability
to repay its debt to us. 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 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 increase in finance expense in the first nine months
of 2008 compared with the first nine months of 2007 is due primarily to the
non-cash interest expense of $3.1 million recorded with respect to the write-off
of the remaining balances of debt origination costs, warrants value and
beneficial conversion features in the early redemption of our convertible
debentures. This was partially offset by interest income earned on the proceeds
of the sale of Comverge shares.





Taxes on
income.  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%.





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




Share of losses in GridSense.
We record our share of income or loss in GridSense with a lag of three months as
we are not able to receive timely financial information. We will record our
share of GridSense’s fourth quarter results in the first quarter of 2009. In
2008, we recorded a loss of $123,000 representing our approximate 24% share of
GridSense’s losses for the first nine months of 2008. In addition, we also
recognized additional losses totaling $89,000 with respect to amortization
related to acquired technologies, customer relationships and trademarks and the
value of expiring warrants. On December 31, 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.





-53-


Share of losses 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 the period and approximately $0.1 million representing
amortization expense associated with acquired intangibles and approximately $0.5
million representing the impairment of the balance of our investment. As a
result of these losses, our investment in Paketeria was reduced to zero and we
have ceased recording losses in Paketeria.




Net income.  We had
a net loss of $7.9 million in 2008 compared with net income of $32.5 million in
2007. Our loss in 2008 was due to impairments and losses of $6.2 million
recorded with respect to our investments in Paketeria, GridSense and Local Power
combined with $2.4 million of expense recorded with respect to acquired
in-process research and development in our acquisition of Coreworx, $2.8 million
of net finance expenses, CoaLogix and Coreworx losses of $1.4 million and $0.9
million, respectively, and corporate expenses of $4.1   million.
Those losses were partially offset by the gain recognized on our sale of
Comverge shares of $8.9 million and a non-cash gain of $1.3 million related to
the early redemption of our convertible debentures.




2007
COMPARED TO 2006




Sales.  Sales
increased by $1.54 million or 37% to $5.66 million in 2007 as compared to sales
of $4.12 million in 2006.  Of the increase in sales, $0.8 million was
attributable to sales from our newly acquired SCR-Tech subsidiary whose sales
were included in our consolidated sales during the period from November 7, 2007
to year end.  Without SCR-Tech’s sales, our sales increased by $0.7
million or 18%.  The increase in sales is attributable to certain new
projects (primarily a new Naval solutions project) in our RT Solutions
segment.




Gross
profit.  Gross profit increased marginally by $58,000 or 4% to
$1.41 million in 2007 as compared to gross profit of $1.35 million in
2006.  If the gross profit from our newly acquired SCR-Tech subsidiary
were excluded, our gross profit would have decreased by $58,000 or 4% in 2007 as
compared to 2006.  Gross profit margins also decreased from 33% in
2006 to 25% in 2007, including SCR-Tech’s results, and 27% excluding SCR-Tech’s
2007 results.  Gross profit in our RT Solutions segment increased as a
result of increased sales.  This increase was offset in part by a
moderate decrease in gross margin for the segment (from 36% in 2006 to 33% in
2007) due to the completion in 2006 of a number of relatively high margin
projects in the segment.  The large decrease in gross margin (from 27%
in 2006 to 11% in 2007) in our Other segment was due to a significant decrease
in the number of billable hours in our DSIT subsidiary’s non-RT Solution
activities without a commensurate decrease in labor costs.




Research and development expenses
(“R&D”).  R&D expenses increased in 2007 by $91,000 or
28% as compared to 2006.  In the first half of 2007, our DSIT
subsidiary invested approximately $175,000 in developing costs for its OncoPro
software.  Such development efforts ceased in the second half of 2007
when DSIT decided to concentrate its development efforts in its AquaShieldTM
Diver Detection Sonar.




Selling, marketing, general and
administrative expenses (“SMG&A”).  Our SMG&A costs
increased by $0.7 million or 14% to $5.3 million in 2007 as compared to $4.6
million in 2006.  A portion of the increase (approximately $250,000)
was attributable to SMG&A costs from SCR-Tech for the period since our
acquisition.  We also had significantly increased professional fees
due to our increase in corporate activity and Sarbanes-Oxley compliance as well
as increased administrative salary costs.  These increased costs
offset the decrease of $0.8 million in non-cash stock compensation expense in
2007 as compared to 2006.




Finance expense,
net.  Finance expense, net, increased in 2007 as compared to
2006 from $30,000 to $1.6 million.  The increase is entirely
attributable to the finance costs associated with our private placement of
convertible debt in the first and second quarters of 2007.  Of the
$1.6 million of interest expense recorded in 2007, $1.3 million was non-cash
interest expense related to the amortization of beneficial conversion features,
debt origination costs and the value of warrants issued in connection with our
2007 private placement of convertible debt.




-54-




Income tax benefit,
net.  We had an income tax benefit of $445,000 in 2007 due to
the recording of deferred tax assets of $0.9 million as well as a reduction of a
$0.7 million tax provision recorded in a previous year with respect to one of
our foreign subsidiaries.  Such tax benefits were partially offset by
a $1.1 million current tax provision recorded as a result of our current year’s
net income.




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




Gain on sale of shares in
Comverge.  In December 2007, as part of Comverge’s follow-on
offering, we sold 1,022,356 of its Comverge shares for approximately $28.4
million, net of transaction costs and recorded a pre-tax gain of approximately
$23.1 million.




Loss on private placement of
Paketeria.  In September 2007, Paketeria completed a private
placement of shares.  As part of the transaction, the Company
converted approximately $1.2 million of debt to equity in
Paketeria.  As a result of the Paketeria private placement, the
Company recorded a decrease in its investment in Paketeria and recorded a
non-cash gain of $37,000 in “Loss on private placement of
Paketeria”.




Share of losses in
Paketeria.  In 2007, we recognized losses of $1.2 million
representing our approximate 31% share of Paketeria’s losses for the year and
amortization expense associated with acquired non-compete and franchise
agreements and the change in value of options.




Net income.  We had
net income of $32.5 million in 2007 compared with a net loss of $6.1 million in
2006, due to a non-cash gain on the Comverge IPO of $16.2 million plus the gain
recognized on our sale of Comverge shares of $23.1 million.  Those
gains were partially offset by our corporate expenses of approximately $3.1
million, net finance expenses of approximately $1.6 million, DSIT losses of $1.2
million and our share of losses in Paketeria of $1.2 million.




LIQUIDITY
AND CAPITAL RESOURCES




As of
December 31, 2008, we had working capital of $13.8 million, including $15.1
million of cash and cash equivalents not including current and non-current
restricted deposits of $2.7 million (of which we expect approximately $2.2
million to be released in the second quarter of 2009).  Net cash used
in the year ending December 31, 2008, was $4.5 million, of which $3.3 million
was used in operating activities. The primary use of cash in operating
activities in 2008 was our corporate cash operating expenditures of
approximately $4.5 million which was offset by cash generated from operations of
$0.6 million each and DSIT and CoaLogix.




Cash used
in investing activities were primarily due to our acquisition of Coreworx ($2.5
million), $5.0 million of loans made to Paketeria, GridSense, Coreworx (in
contemplation of our acquisition) and others, $2.0 million used for the
acquisition of license technology by our CoaLogix subsidiary, $1.7 million used
for acquisitions of property and equipment, $1.9 million used to fund our
investment in GridSense and EnerTech, $1.0 million deposited in an Israeli bank
as a guarantee for a project being performed by DSIT and $1.0 million of costs
related to our November 2007 acquisition of SCR Tech. These amounts were offset
by proceeds of $15.4 million from the sale of Comverge shares during
2008.




Net cash
of $0.9 million was used in financing activities, primarily from the redemption
of our debentures ($3.4 million) and repayment of short and long-term borrowings
($0.4 million) and the purchase of treasury shares ($0.1 million). This use of
cash was partially offset by the $2.2 million investment made by EnerTech in
CoaLogix and the $0.8 million of proceeds from the exercise of warrants and
employee stock options.




As of
March 1, 2009, the Company’s corporate operations (not including cash at any of
our subsidiaries) had a total of approximately $12.0 million in cash and cash
equivalents (not including the $2.7 million deposited in an account as a
security for a guarantee for DSIT), reflecting a $0.6 million decrease from the
balance as of December 31, 2008.




-55-




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





At
December 31, 2008, DSIT had approximately $526,000 in Israeli credit lines
available to DSIT by an Israeli bank, $191,000 of which was then being used, net
of secured deposits.  DSIT’s credit lines are available to it until
March 2010, are denominated in NIS and bear interest at a weighted average rate
of the Israeli prime rate per annum plus 3.0% (at December 31, 2007, plus
1.5%).  The Israeli prime rate fluctuates and as of December 31, 2008
was 4.0% (December 31, 2007, 0%).  The line-of-credit is subject to
maintaining certain financial covenants. At December 31, 2008, 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.




At the
beginning of March 2009, DSIT was utilizing approximately $191 of its $526
line-of-credit.  We believe that DSIT will have sufficient liquidity
to finance its activities from cash flow from its own operations over the next
12 months.  This is based on continued utilization of its lines of
credit and expected continued improvement of operating results stemming from
anticipated growth in sales. DSIT is continuing to search for additional sources
of financing to support its growth.




In
October 2008, CoaLogix signed an agreement with Square 1 Bank for a $500,000
term loan and a $2 million formula based line-of-credit.  The term
loan is for a period of 36 months and bears interest at prime plus 1.5%. The
line-of-credit is for a period of one year and bears interest at prime plus
0.75%. Both the term loan and the line-of-credit are to finance CoaLogix’s
working capital and to finance its growth and  are subject to certain
financial covenants. 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.  CoaLogix anticipates that it
will need to increase production capacity by beginning construction of a new
plant in 2009 in order to satisfy expected increased orders from customers.
CoaLogix does not have the financial resources to finance the anticipated cost
to build a new plant. CoaLogix is currently exploring options to obtain funding
for the construction of the new plant.





We expect
that Coreworx will require additional working capital support in order to
finance its working capital needs in 2009. This support may be in the form of a
bank line, new investment by others, additional investment by Acorn, or a
combination of the above. 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.





-56-




Contractual
Obligations and Commitments




The table
below provides information concerning obligations under certain categories of
our contractual obligations as of December 31, 2008.




CASH
PAYMENTS DUE TO CONTRACTUAL OBLIGATIONS




Years Ending December 31,
                    (in thousands)Total
                  
                  
                  2009
                  
                  
                  
                  2010-2011
                  
                  
                  
                  2012-2013
                  
                  
                  2014 and
                    thereafterNotes
      payable
                  
                  $
                  3,400
                  
                  
                  $
                  3,400
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —EnerTech
      (1)
                  
                  
                  3,850
                  
                  
                  
                  3,850
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Operating
      leases
                  
                  
                  3,401
                  
                  
                  
                  1,212
                  
                  
                  
                  1,792
                  
                  
                  
                  397
                  
                  
                  
                  —Potential
      severance obligations to Israeli employees (2)
                  
                  
                  2,651
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,651Total
      contractual cash obligations
                  
                  $
                  13,302
                  
                  
                  $
                  8,462
                  
                  
                  $
                  1,792
                  
                  
                  $
                  397
                  
                  
                  $
                  2,651




We expect
to finance these contractual commitments in 2008 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 Capital Partners III L.P. (“EnerTech III”), a proposed $250 million
venture capital fund targeting early and expansion stage energy and clean energy
technology companies that can enhance the profits of the producers and consumers
of energy.




The
primary objective of EnerTech III is to provide superior venture
returns.  In so doing, EnerTech III may also provide investors with
venture portfolio diversification, a hedge against rising commodity fuel prices
and access to emerging companies that reduce the global dependence on
hydrocarbons.




Our
obligation under this commitment is presented as a current liability, though it
is uncertain as to when actual payments may be made.  To date, we have
received and funded a capital call of $1,150,000 to EnerTech III.




(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, 2008, we accrued a total of
$2.7 million for potential severance obligations of which approximately
$1.7 million was funded with cash to insurance companies.




Certain
Information Concerning Off-Balance Sheet Arrangements.




Our DSIT
subsidiary has provided various performance, advance and tender guarantees as
required in the normal course of its operations.  As at December 31,
2008, such guarantees totaled approximately $3.9 million and were due to
expire through 2010.  As security for a portion of these guarantees,
Acorn has deposited with an Israeli bank approximately $2.7 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 the second
quarter of 2009.




-57-




Impact
of Inflation and Currency Fluctuations




In the
normal course of business, we are exposed to fluctuations in interest rates on
lines-of-credit incurred to finance our operations in Israel, whose utilization
at December 31, 2008 stood at approximately $191,000. Our non-US dollar monetary
assets and liabilities (net assets of approximately $0.3 million at December 31,
2008) in Israel are exposed to fluctuations in exchange rates. Furthermore, $1.8
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 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.  In
2009, 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, 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 2008 the
appreciation of the NIS against the dollar was 1.1% and in 2007 the appreciation
of the NIS against the dollar was 9.0%.  Inflation in Israel was 3.8%
in 2008 and 3.3% during 2007.  During the first two months of 2009,
the dollar appreciated by 9.5% against the NIS and inflation during this period
was -0.6%. In the first quarter of 2009, DSIT began to attempt to manage its
foreign currency exposures by purchasing forward contracts on certain of its
expected expenses.




As of
December 31, 2008, 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.




In
addition, our non-US dollar assets and liabilities (net liability of
approximately $0.3 million at December 31, 2008) 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 US dollar.  In
2008 the appreciation of the US dollar against the Canadian dollar was
23.3%.  During the first two months of 2009, the US dollar appreciated
by 4.5% against the Canadian dollar.




As of
December 31, 2008, 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 US dollars, such net assets or liabilities would be subject
to the risk of currency fluctuations.




-58-




SUMMARY
QUARTERLY FINANCIAL DATA (Unaudited)




The
following table sets forth certain of our unaudited quarterly consolidated
financial information for the years ended December 31, 2007 and
2008.  This information should be read in conjunction with our
Consolidated Financial Statements and the notes thereto.




2007
              
              
              2008First
                  Quarter
              
              
              Second
                  Quarter
              
              
              Third
                  Quarter
              
              
              Fourth
                  Quarter
              
              
              First
                  Quarter
              
              
              Second
                  Quarter
              
              
              Third
                  Quarter
              
              
              Fourth
                  Quarter(in thousands, except per share amounts)Sales
              
              $
              1,039
              
              
              $
              681
              
              
              $
              1,595
              
              
              $
              2,345
              
              
              $
              4,295
              
              
              $
              3,607
              
              
              $
              4,628
              
              
              $
              8,166Cost
      of sales
              
              
              754
              
              
              
              625
              
              
              
              1,122
              
              
              
              1,747
              
              
              
              2,897
              
              
              
              2,575
              
              
              
              3,731
              
              
              
              4,960Gross
      profit
              
              
              285
              
              
              
              56
              
              
              
              473
              
              
              
              598
              
              
              
              1,398
              
              
              
              1,032
              
              
              
              897
              
              
              
              3,206Research
      and development expenses
              
              
              130
              
              
              
              103
              
              
              
              77
              
              
              
              105
              
              
              
              51
              
              
              
              57
              
              
              
              402
              
              
              
              659Acquired
      in-process research and development*
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              551
              
              
              
              1,893Impairments
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              546
              
              
              
              2,454
              
              
              
              664Selling,
      general and administrative expenses
              
              
              810
              
              
              
              1,049
              
              
              
              1,153
              
              
              
              2,378
              
              
              
              2,553
              
              
              
              2,140
              
              
              
              3,401
              
              
              
              3,573Operating
      loss
              
              
              (655
              )
              
              
              (1,096
              )
              
              
              (757
              )
              
              
              (1,885
              )
              
              
              (1,206
              )
              
              
              (1,711
              )
              
              
              (5,911
              )
              
              
              (3,583
              )Finance
      income (expense), net
              
              
              (26
              )
              
              
              (345
              )
              
              
              (358
              )
              
              
              (856
              )
              
              
              (2,988
              )
              
              
              88
              
              
              
              (50
              )
              
              
              (81
              )Gain
      on early redemption of convertible debentures
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,259
              
              
              
              —
              
              
              
              —
              
              
              
              —Gain
      on public offering of Comverge
              
              
              —
              
              
              
              16,169
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Gain
      on sale of Comverge shares
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              23,124
              
              
              
              —
              
              
              
              5,782
              
              
              
              3,079
              
              
              
              —Gain
      (loss) on outside investment in Company’s equity investments,
      net
              
              
              —
              
              
              
              —
              
              
              
              (37
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              7
              
              
              
              —Income
      (loss) before taxes on income
              
              
              (681
              )
              
              
              14,728
              
              
              
              (1,152
              )
              
              
              20,383
              
              
              
              (2,935
              )
              
              
              4,159
              
              
              
              (2,875
              )
              
              
              (3,664
              )Income
      tax benefit (expense)
              
              
              (2
              )
              
              
              (3
              )
              
              
              (4
              )
              
              
              454
              
              
              
              642
              
              
              
              (640
              )
              
              
              (691
              )
              
              
              347Income
      (loss) from operations of theCompany
      and its consolidatedsubsidiaries
              
              
              (683
              )
              
              
              14,725
              
              
              
              (1,156
              )
              
              
              20,837
              
              
              
              (2,293
              )
              
              
              3,519
              
              
              
              (3,566
              )
              
              
              (3,317
              )Share
      of loss in Paketeria
              
              
              (187
              )
              
              
              (201
              )
              
              
              (440
              )
              
              
              (378
              )
              
              
              (287
              )
              
              
              (374
              )
              
              
              (899
              )
              
              
              —Share
      of loss in GridSense
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (134
              )
              
              
              (60
              )
              
              
              (732
              )Minority
      interests
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (9
              )
              
              
              89
              
              
              
              204
              
              
              
              (36
              )Net
      income (loss)
              
              $
              (870
              )
              
              $
              14,524
              
              
              $
              (1,596
              )
              
              $
              20,459
              
              
              $
              (2,589
              )
              
              $
              3,100
              
              
              $
              (4,321
              )
              
              $
              (4,085
              )Basic
      net income (loss) per share:Net
      income (loss) per share
              
              $
              (0.09
              )
              
              $
              1.52
              
              
              $
              (0.16
              )
              
              $
              2.00
              
              
              $
              (0.23
              )
              
              $
              0.28
              
              
              $
              (0.37
              )
              
              $
              (0.35
              )Diluted
      net income (loss) per share:Net
      income (loss) per share
              
              $
              (0.09
              )
              
              $
              1.21
              
              
              $
              (0.16
              )
              
              $
              1.68
              
              
              $
              (0.23
              )
              
              $
              0.26
              
              
              $
              (0.37
              )
              
              $
              (0.35
              )Weighted
      average number of sharesoutstanding
      – basic
              
              
              9,507
              
              
              
              9,583
              
              
              
              10,063
              
              
              
              10,217
              
              
              
              11,050
              
              
              
              11,243
              
              
              
              11,538
              
              
              
              11,637Weighted
      average number of sharesoutstanding
      – diluted
              
              
              9,507
              
              
              
              12,290
              
              
              
              10,063
              
              
              
              12,789
              
              
              
              11,050
              
              
              
              12,138
              
              
              
              11,538
              
              
              
              11,637





* In the
third quarter of 2008, we received a preliminary draft of a Purchase Price
Allocation (PPA) with respect to our acquisition of Coreworx. The PPA had
initially allocated $551,000 to acquired in-process research and development
(IPR&D) which in accordance with accounting principles was immediately
expensed in the third quarter of 2008. Subsequent to the third quarter, upon
finalizing the PPA after further analysis, evaluation and information gathering,
the IPR&D was adjusted to $2,444,000. This is treated as a correction of an
estimate and accordingly, the $1,893,000 not initially recorded as IPR&D in
the third quarter of 2008 is recorded in the fourth quarter of
2008.




-59-


ITEM
      7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




General




We are
required to make certain disclosures regarding our financial instruments,
including derivatives, if any.




A
financial instrument is defined as cash, evidence of an ownership interest in an
entity, or a contract that imposes on one entity a contractual obligation either
to deliver or receive cash or another financial instrument to or from a second
entity.  Examples of financial instruments include cash and cash
equivalents, trade accounts receivable, loans, investments, trade accounts
payable, accrued expenses, options and forward contracts.  The
disclosures below include, among other matters, the nature and terms of
derivative transactions, information about significant concentrations of credit
risk, and the fair value of financial assets and liabilities.




Foreign
Currency Risk




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 as is the of
the balance sheets of our Canadian operations from C$ into U.S.
dollars.  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
2008 the NIS strengthened in relation to the U.S. dollar by 1.1%.  In
the period since our acquisition of Coreworx, the U.S. dollar strengthened in
relation to the Canadian dollar by 12.5%. To test the sensitivity of these
operations to fluctuations in the exchange rate, the hypothetical change in CTA
and foreign exchange gains and losses is calculated by multiplying the net
assets of these non-U.S. operations by a 10% change in the currency exchange
rates.




As of
December 31, 2008, a 10% weakening of the U.S. dollar against the NIS and
against the Canadian dollar would have increased stockholders’ equity by
approximately $800,000 (arising from a CTA adjustment of approximately $735,000
and net exchange gains of approximately $65,000).  These hypothetical
changes are based on adjusting the December 31, 2008 exchange rates by
10%.




In 2009,
DSIT began to attempt to manage its foreign currency exposures by purchasing
forward contracts on certain of its expected expenses. Coreworx does not employ
specific strategies, such as the use of derivative instruments or hedging, to
manage its foreign currency exchange rate exposures.




Fair
Value of 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 investments.  Fair value for long-term debt and
long-term deposits are estimated based on the current rates offered to us for
debt and deposits with similar terms and remaining maturities.  The
fair value of our long-term debt and long-term deposits are not materially
different from their carrying amounts.




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 44% of the trade
accounts receivable at December 31, 2008 was due from a customer that pays its
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.




-60-




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.
            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.




Management
has excluded Coreworx from its assessment of internal control over financial
reporting as of December 31, 2008, because ownership was acquired by Acorn
during 2008. Coreworx represented approximately 14% of Acorn’s consolidated
total assets and approximately 11% of Acorn’s consolidated net sales as of, and
for the year ended, December 31, 2008.




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, 2008.  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




On March
25, 2009 we renewed the Consulting Agreement between the Company and George
Morgenstern. Mr. Morgenstern currently is a director and Chairman Emeritus of
the Company. Mr. Morgenstern 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, which was to
expire on March 31, 2009, but was extended to expire 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.




-61-




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
              
              PositionGeorge
      Morgenstern
              
              75
              
              Founder,
      Chairman Emeritus; Chairman of the Board of our DSIT Solutions Ltd.
      subsidiary (“DSIT”)John
      A. Moore
              
              43
              
              Director,
      Chairman of the Board, President and Chief Executive
    OfficerSamuel
      M. Zentman
              
              64
              
              Director
      and member of our Audit CommitteeRichard
      J. Giacco
              
              56
              
              Director
      and member of our Audit CommitteeRichard
      Rimer
              
              43
              
              DirectorJoe
      Musanti
              
              51
              
              Director
      and Chairman of our Audit CommitteeWilliam
      J. McMahon
              
              53
              
              Chief
      Executive Officer and President of CoaLogixBenny
      Sela
              
              61
              
              Chief
      Executive Officer and President of DSITRay
      Simonson
              
              60
              
              Chief
      Executive Officer and President of CoreworxMichael
      Barth
              
              48
              
              Chief
      Financial Officer of the Company and DSITJoe
      B. Cogdell, Jr.
              
              55
              
              Vice
      President, General Counsel and Secretary of the Company and
    CoaLogix




George Morgenstern, founder of
the Company, has been one of our directors since 1986. Mr. Morgenstern served as
Chairman of the Board from June 1993 through March 25, 2009 and as Chairman
Emeritus since March 25, 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.




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.




Samuel M. Zentman has been one
of our directors since November 2004.  Since 1980 Dr. Zentman has been
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.




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 is also a Managing Member of
Ajedium Film Group, LLC, a manufacturer of thermoplastic films.  Mr.
Giacco served as Associate General Counsel of Safeguard Scientifics, Inc. from
1984 to 1990.  Mr. Giacco presently serves as the Chair of the Audit
Committee of the Board of Directors of Ministry of Caring, Inc., and the Chair
of the Finance Committee of the Board of Directors of Sacred Heart Village,
Inc.




-62-




Richard Rimer was elected to
the Board in September 2006.  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.




Joe Musanti was elected to the
Board in September 2007.  Mr. Musanti is President of Main Tape Inc.,
a leading manufacturer of surface protection film and paper products, based in
Cranberry, New Jersey.  Prior to becoming President, Mr. Musanti
served as Vice President Finance of Main Tape.  Before 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.




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.  Previously, he held the position of Executive Vice President
and Head of the company’s Real Time Division.  Prior to this, Mr. Sela
was the General Manager of DSI Technologies.  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.




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 years experience as a
corporate and business lawyer.




-63-




Audit
Committee; Audit Committee Financial Expert




The three
members of the Audit Committee of our Board of Directors (the “Audit Committee”)
are Joe Musanti, Richard J. Giacco and Samuel M. Zentman.  The Board
of Directors has determined that each member of the Audit Committee meets the
independence criteria prescribed by applicable law and the rules of the SEC for
audit committee membership and meets the criteria for audit committee membership
required by NASDAQ.  Further, each Audit Committee member meets
NASDAQ’s financial knowledge requirements.  Also, 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 2008 our
executive officers and directors complied with the filing requirements of
Section 16(a), with the exception of a John A. Moore Form 4 report filed on
August 28, 2008 (two days after the due date) reporting an open market purchase
of 5,000 shares on August 22, 2008.




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.acornfactor.com/pdfs/code.pdf.




-64-




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
              
              2008
              
              
              325,000
              
              
              
              —
              
              
              
              351,331
              (1)
              
              
              12,000
              (2)
              
              
              688,3312007
              
              
              275,000
              
              
              
              200,000
              
              
              
              177,545
              (3)
              
              
              —
              
              
              
              652,545William
      J. McMahon
                CEO
      and President of CoaLogix and SCR-Tech
              
              2008
              
              
              223,596
              
              
              
              171,160
              
              
              
              —
              
              
              
              231,225
              (4)
              
              
              625,9812007
              
              
              31,354
              (5)
              
              
              96,750
              
              
              
              —
              
              
              
              1,181
              (6)
              
              
              129,285Benny
      Sela
                CEO
      and President of DSIT (7)
              
              2008
              
              
              174,321
              
              
              
              20,500
              
              
              
              —
              
              
              
              59,490
              (9)
              
              
              254,3112007
              
              
              137,287
              
              
              
              —
              
              
              
              30,458
              (8)
              
              
              39,331
              (9)
              
              
              207,076







(1)
            Represents
      FAS 123R expense with respect to 200,000 stock options granted as of March
      4, 2008 with an exercise price of $5.11 per
  share.


(2)
            Consists
      of automobile expense allowance of
$12,000.


(3)
            Represents
      FAS 123R expense with respect to 400,000 stock options granted as of March
      27, 2006 with an exercise price of $2.60 per share and 60,000 options
      granted as of February 27, 2007 with an exercise price of $4.53 per
      share.


(4)
            Consists
      of (i) $11,550 in 401k contributions and (ii) $219,675 of FAS 123R stock
      compensation expense with respect to CoaLogix stock options granted in
      April 2008.


(5)
            Appointed
      President and CEO of CoaLogix as of November 7, 2007 upon the acquisition
      of SCR-Tech by Acorn Energy.  The salary shown in the table was
      earned subsequent to the acquisition of SCR-Tech by Acorn on November 7,
      2007.  His total salary for the full year was
      $215,000.


(6)
            Consists
      of 401k contributions which were paid subsequent to the acquisition of
      SCR-Tech by Acorn on November 7, 2008.  His full-year amount was
      $8,100.


(7)
            Appointed
      Chief Executive Officer of DSIT and President of DSIT effective July 1,
      2007.


(8)
            Represents
      FAS 123R expense with respect to 25,000 stock options granted as of
      February 27, 2007 with an exercise price of $3.50 per share and 20,000
      options granted as of December 31, 2004 with an exercise price of $0.91
      per share.


(9)
            Consists
      of contributions to severance and pension funds and automobile fringe
      benefits.  Contributions to severance and pension funds are made
      on substantially the same basis as those made on behalf of other Israeli
      executives.




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.




-65-


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.  Mr. McMahon’s employment
agreement calls for base salary of $215,000 per year with cost of living
increases (a base salary of $223,596 in 2008). In April 2008, Mr. McMahon also
received options under the CoaLogix Inc. 2008 Stock Option Plan and a
participation in the CoaLogix Capital Appreciation Rights Plan. 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 bous for 2008 was $171,160.




Benny Sela
has served as President and Chief Executive Officer of DSIT beginning July 1,
2007.  In December 2007, the Board of DSIT approved new employment
terms for Mr. Sela retroactive to July 1, 2007.  Mr. Sela’s current
employment agreement provides for a base salary which is denominated in Israeli
Consumer Price Index (“CPI”) linked NIS, currently equivalent to approximately
$168,000 per annum.  In addition to his base salary, Mr. Sela is also
entitled to receive a bonus payment equal to 5% of DSIT’s net profit before
tax.  Mr. Sela’s bonus for 2008 was $20,500.




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 $185,000 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.




Michael
Barth has served as Chief Financial Officer of the Company and Chief
Financial Officer of DSIT beginning December 1, 2005.  In September
2008, the Board approved modified terms of the employment arrangement with Mr.
Barth. According to the terms of the modified employment arrangement, Mr. Barth
is entitled to a salary increase from $100,000 to $150,000 per annum. 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. The Board also approved the
payment of a cash bonus to Mr. Barth (equal to the difference between his prior
salary of $100,000 per annum and new salary for the period from November 1, 2007
through the effective date of the modification).




In
February 2009, in lieu of a bonus for 2008, Mr. Barth was awarded 35,000 stock
options exercisable
until February 20, 2014at 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.




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.  He is eligible to receive
an annual bonus of up to 30% of his base salary, based upon the attainment of
performance goals.  The agreement has no fixed term, and the
employment is on an “at-will” basis.





-66-




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.  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 anticipated to be initially apportioned 50/50 between Acorn and
CoaLogix, subject to periodic review.




Outstanding
Equity Awards at 2008 Fiscal Year End




Name
                
                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, 201137,500
                
                
                
                162,500
                (1)
                
                
                5.11
                
                March
      4, 2018Benny
      Sela
                
                
                20,000
                
                
                
                —
                
                
                
                1.80
                
                March
      31, 200920,000
                
                
                
                —
                
                
                
                0.91
                
                December
      31, 2009


–––––––––––––––––––


(1)
            These
      options vest 12,500 options quarterly from March 4, 2009 through March 4,
      2012.




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.





-67-


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.





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,
2008, 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)
                  
                  $
                  325,000
                  (2)
                  
                  $
                  650,000
                  (5)
                  
                  
                  —Bonus
                  
                  
                  —
                  
                  
                  
                  —
                  (3)
                  
                  
                  —
                  (3)
                  
                  
                  —Benefits
      and perquisites:Perquisites
      and other personal benefits
                  
                  
                  —
                  
                  
                  
                  6,088
                  (4)
                  
                  
                  6,088
                  (4)
                  
                  
                  —Total
                  
                  
                  —
                  
                  
                  $
                  331,088
                  
                  
                  $
                  656,088
                  
                  
                  
                  —


––––––––––––––––––


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


(2)
            The
      $325,000 represents 12 months of Mr. Moore’s base
  salary.


(3)
            No
      amounts are included for target bonus as there was no bonus for
      2008.


(4)
            The
      $6,088 represents 12 months of health insurance
  payments.


(5)
            The
      $650,000 represents 24 months of Mr. Moore’s base
  salary.




-68-




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.




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, 2008, 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)
                  
                  $
                  447,192
                  (2)
                  
                  $
                  447,192
                  (4)
                  
                  
                  —Bonus
                  
                  
                  —
                  
                  
                  
                  223,596
                  (3)
                  
                  
                  223,596
                  (6)
                  
                  
                  —Benefits
      and perquisites:Perquisites
      and other personal benefits
                  
                  
                  —
                  
                  
                  
                  14,760
                  (4)
                  
                  
                  36,600
                  (7)
                  
                  
                  —Total
                  
                  
                  —
                  
                  
                  $
                  685,548
                  
                  
                  $
                  707,388
                  
                  
                  
                  —




–––––––––––––––––––


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


(2)
            The
      $447,192 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
      200% of Mr. McMahon’s base salary.


(6)
            Represents
      200% of Mr. McMahon’s target bonus.


(7)
            Represents
      24 months of subsidized 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 will 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, 2008, the
unfunded portion of these payments was $138,093.  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.




-69-




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,
2008, 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
                  
                  $
                  84,000
                  (1)
                  
                  $
                  126,000
                  (2)
                  
                  
                  —
                  
                  
                  $
                  126,000
                  (2)Benefits
      and perquisites:Perquisites
      and other personal benefits
                  
                  $
                  381,360
                  (3)
                  
                  $
                  393,390
                  (4)
                  
                  
                  —
                  
                  
                  $
                  393,390
                  (4)Total
                  
                  $
                  465,360
                  
                  
                  $
                  519,390
                  
                  
                  
                  —
                  
                  
                  $
                  519,390




–––––––––––––––––––


(1)
            Assumes
      that there is no earned but unpaid base salary at the time of
      termination.  The $84,000 represents a lump sum payment of six
      months salary due to Mr. Sela.


(2)
            Assumes
      that there is no earned but unpaid base salary at the time of
      termination.  The $126,000 represents a lump sum payment of nine
      months salary due to Mr. Sela.


(3)
            Includes
      $417,433 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 $417,433 due Mr.
      Sela, we have funded $279,350 in an insurance fund.  Also
      includes accumulated, but unpaid vacation days ($17,857), car benefits
      ($6,000) and payments for pension and education funds ($18,060) less
      $78,000 of benefits waived in support of DSIT’s operations in
      2007.


(4)
            Includes
      $417,443 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 $417,443 due Mr. Sela,
      we have funded $279,350 in an insurance fund.  Also includes
      accumulated, but unpaid vacation days ($17,857), car benefits ($9,000) and
      payments for pension and education funds ($27,090) less $78,000 of
      benefits waived by Mr. Sela in support of DSIT’s operations in
      2007.




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, 2008, the last day of our last fiscal year.




-70-




Circumstances of TerminationPayments and benefits
                
                Voluntary
                    resignation
                
                
                Termination
                    not for cause
                
                
                Change of
                    control
                
                
                Death or
                    disabilityCompensation:Base
      salary
                
                
                —
                (1)
                
                $
                171,042
                (3)
                
                $
                171,042
                (3)
                
                
                —Bonus
                
                
                —
                
                
                
                —
                
                
                
                119,730
                (4)
                
                
                —Benefits
      and perquisites:Perquisites
      and other personal benefits
                
                
                15,394
                (2)
                
                
                15,394
                (2)
                
                
                15,394
                (2)
                
                
                —Total
                
                $
                15,394
                
                
                $
                186,436
                
                
                $
                306,166
                
                
                
                —


–––––––––––––––––––


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


(2)
            Represents
      unpaid vacation pay.


(3)
            Represents
      ten months of Mr. Simonson’s base
salary.


(4)
            Represents
      a lump-sum payment of seven months of Mr. Simonson’s base
      salary.




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.  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.  As of
December 31, 2008, the unfunded portion of these payments was
$90,757.




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,
2008, 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
                
                $
                25,000
                (1)
                
                $
                75,000
                (2)
                
                
                —
                
                
                $
                75,000
                (2)Benefits
      and perquisites:Perquisites
      and other personal benefits
                
                $
                30,489
                (3)
                
                $
                135,994
                (4)
                
                
                —
                
                
                $
                135,994
                (4)Total
                
                $
                50,489
                
                
                $
                210,994
                
                
                
                —
                
                
                $
                210,994




–––––––––––––––––––


(1)
            Assumes
      that there is no earned but unpaid base salary at the time of
      termination.  The $25,000 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 $75,000 represents a lump sum payment of 6
      months salary due to Mr. Barth upon termination without cause or by death
      or disability.


(3)
            Includes
      $52,094 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 ($19,018), car benefits ($2,000) and
      payments for pension and education funds ($5,375) less $48,000 of benefits
      waived in support of DSIT’s operations in
2007.


(4)
            Includes
      $142,851 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
      $142,851 due Mr. .Barth, we have funded $52,094 in an insurance
      fund.  Also includes accumulated, but unpaid vacation days
      ($19,018), car benefits ($6,000) and payments for pension and education
      funds ($16,125) less $48,000 of benefits waived in support of DSIT’s
      operations in 2007.




-71-




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).




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
            
            
            —
            
            
            
            22,145
            (4)
            
            
            27,453
            (4)
            
            
            —Total
            
            
            —
            
            
            $
            802,145
            
            
            $
            807,453
            
            
            
            —




(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.




DIRECTOR
COMPENSATION IN 2008




Name
                  
                  Fees
                      Earned or
                      Paid in
                      Cash ($)
                  
                  
                  Option
                      Awards ($)
                      (1)
                  
                  
                  All Other
                      Compensation
                      ($)
                  
                  
                  Total ($)Scott
      Ungerer
                  
                  
                  45,000
                  
                  
                  
                  37,462
                  
                  
                  
                  —
                  
                  
                  
                  82,462Joe
      Musanti
                  
                  
                  58,000
                  (2)
                  
                  
                  36,105
                  
                  
                  
                  —
                  
                  
                  
                  94,105George
      Morgenstern
                  
                  
                  49,000
                  
                  
                  
                  22,630
                  
                  
                  
                  75,000
                  (3)
                  
                  
                  146,630Samuel
      M. Zentman
                  
                  
                  49,000
                  
                  
                  
                  36,932
                  
                  
                  
                  8,000
                  (4)
                  
                  
                  93,932Richard
      J. Giacco
                  
                  
                  58,000
                  (5)
                  
                  
                  37,557
                  
                  
                  
                  —
                  
                  
                  
                  95,557Richard
      Rimer
                  
                  
                  48,000
                  
                  
                  
                  35,972
                  
                  
                  
                  —
                  
                  
                  
                  83,972




–––––––––––––––––––


(1)
            Reflects
      the dollar amount recognized for financial statement reporting purposes
      for the fiscal year ended December 31, 2008 in accordance with FAS 123(R),
      and thus includes amounts from awards granted in and prior to
      2008.  All options awarded to directors in 2008 remained
      outstanding at fiscal year-end.


(2)
            Includes$10,000
      for Mr. Musanti’s service as the Chairman of the Audit
      Committee.


(3)
            Mr.
      Morgenstern received a non-accountable expense allowance of $75,000 to
      cover travel and other expenses pursuant to a consulting
      agreement.


(4)
            Mr.
      Zentman received $8,000 for services rendered with respect to his
      overseeing the Company’s investment in Local Power
  Inc.


(5)
            Includes
      $10,000 for Mr. Giacco’s service as the lead director for compensation
      matters.




-72-




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, and an additional
annual cash retainer of $10,000 for each of the Chairman of the Audit Committee
and the lead director for compensation matters.




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, was to expire on March 31, 2009, but was extended on March 25, 2009 and
now 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.




-73-




ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
  MANAGEMENT




The
following table and the notes thereto set forth information, as of March 26,
2009 (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
                  
                  
                  498,861
                  (3)
                  
                  
                  4.1
                  %John
      A. Moore
                  
                  
                  964,661
                  (4)
                  
                  
                  8.0
                  %Richard
      J. Giacco
                  
                  
                  32,666
                  (5)
                  
                  
                  *Joseph
      Musanti
                  
                  
                  8,333
                  (6)
                  
                  
                  *Richard
      Rimer
                  
                  
                  111,666
                  (7)
                  
                  
                  *Samuel
      M. Zentman
                  
                  
                  87,990
                  (8)
                  
                  
                  *Michael
      Barth
                  
                  
                  87,684
                  (9)
                  
                  
                  *Joe
      B. Cogdell, Jr.
                  
                  
                  0
                  
                  
                  
                  —William
      J. McMahon
                  
                  
                  10,500
                  (10)
                  
                  
                  *Benny
      Sela
                  
                  
                  40,000
                  (6)
                  
                  
                  *Ray
      Simonson
                  
                  
                  15,990
                  (10)
                  
                  
                  *All
      executive officers and directors of the Company as a group (12
      people)
                  
                  
                  1,889,877
                  (11)
                  
                  
                  14.8
                  %Austin
      W. Marxe and David M. Greenhouse
                  
                  
                  868,720
                  (12)
                  
                  
                  7.6
                  %


––––––––––––––––––––


* 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 11,467,589 shares outstanding as of March 26,
  2009.


(3)
            Consists
      of 51,922 shares, 397,500 shares underlying currently exercisable options,
      and 49,439 shares owned by Mr. Morgenstern’s
  wife.


(4)
            Consists
      of 435,911 shares and 528,750 shares underlying currently exercisable
      options.


(5)
            Consists
      of 6,000 shares and 26,666 shares underlying currently exercisable
      options.


(6)
            Consists
      solely of shares underlying currently exercisable
  options.


(7)
            Consists
      of 35,000 shares and 76,666 shares underlying currently exercisable
      options.


(8)
            Consists
      of 20,000 shares, 1,324 shares underlying currently exercisable warrants
      and 66,666 shares underlying currently exercisable
  options.


(9)
            Consists
      of 6,289 shares, 1,645 shares underlying currently exercisable warrants
      and 79,750 shares underlying currently exercisable
  options.


(10)
            Consists
      solely of shares.


(11)
            Consists
      of 624,244 shares, 2,969 shares underlying currently exercisable warrants
      and 1,262,664 shares underlying currently exercisable
    options.


(12)
            The
      information presented with respect to these beneficial owners is based on
      a Schedule 13G filed with the SEC on February 13, 2009.  Austin
      W. Marxe and David M. Greenhouse share sole voting and investment power
      over 179,484 shares of Common Stock owned by Special Situations Cayman
      Fund, L.P and 689,236 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.




-74-




EQUITY
COMPENSATION PLAN INFORMATION




The table
below provides certain information concerning our equity compensation plans as
of December 31, 2008.




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 (b)
              
              
              Number of Securities
                  Remaining Available for
                  Future Issuance Under
                  Equity Compensation
                  Plans (Excluding
                  Securities Reflected in
                  Column (a) (c)Equity
      Compensation Plans Approved by Security Holders
              
              
              67,500
              
              
              $
              2.09
              
              
              
              612,500Equity
      Compensation Plans Not Approved by Security Holders
              
              
              1,809,000
              
              
              $
              3.31
              
              
              
              —Total
              
              
              1,876,500
              
              
              $
              3.27
              
              
              
              612,500




ITEM
      13.
            CERTAIN
      RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE




Transactions
With Related Persons




During
2008, we paid approximately $780,000 for legal services rendered and
reimbursement of out-of-pocket expenses to Eilenberg Krause & Paul LLP, a
law firm in which Sheldon Krause, a former director and our Secretary and
General Counsel, is a member.  Such fees related to services rendered
by Mr. Krause and other members and employees of his firm, as well as certain
special and local counsel retained and supervised by his firm who performed
services on our behalf.  Mr. Krause is the son-in-law of George
Morgenstern, our Chairman of the Board, who up until March 2006, also served as
our President and Chief Executive Officer.




In August
2006, as part of our initial investment in Paketeria, we also entered into a
Stock Purchase Agreement with two shareholders of Paketeria—one of whom is our
President and Chief Executive Officer and the other is one of our
directors.  Pursuant to that agreement, we were entitled through
August 2007 to purchase the shares of Paketeria equally held by the two
Paketeria shareholders for an aggregate purchase price of the U.S. dollar
equivalent on the date of purchase of €598,000 (approximately $776,000 at the
then exchange rate), payable in our Common Stock and warrants on the same terms
as our July 2006 private placement.  The option was initially extended
by both shareholders to November 5, 2007 and again by our President and Chief
Executive Officer for his share (€299,000 or approximately $416,000 at December
31, 2008 exchange rates) to March 31, 2009.  At the December 31, 2008
exchange rate, the exercise of the option would result in the issuance of
approximately 157,000 shares of our Common Stock and warrants exercisable for
approximately 39,000 shares of Common Stock.  The warrants would have
an exercise price of $2.78 per share and be exercisable for five years from
their grant date.




For
additional information regarding our Stockholders’ Agreement with CoaLogix and
EnerTech, see Note 8 to our Consolidated Financial Statements.




It is the
policy of the Company that before a transaction with a related party will be
entered into, it must receive the approval of a majority of the disinterested
members of the Board of Directors.  In determining whether or not a
transaction involves a related party we apply the definition provided under Item
404 of Regulation S-K.




All of
the above transactions received the unanimous approval of the disinterested
members of our Board of Directors.




-75-




Director
Independence




Applying
the definition of independence provided under the Nasdaq Marketplace Rules, with
the exception of Mr. Moore and Mr. Morgenstern, all of the members of the Board
of Directors are independent.  Applying Marketplace Rules, Mr. Moore
would not be deemed independent because he is an employee of the Company and Mr.
Morgenstern would not be deemed independent because of his prior service as
Chief Executive Officer of the Company.






ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES




Accounting
Fees




Aggregate
fees billed by our principal accountant during the last two fiscal years are as
follows:




2007
              
              
              2008Audit
      Fees
              
              $
              237,000
              
              
              $
              323,000Audit-
      Related Fees
              
              
              —
              
              
              
              14,000Tax
      Fees
              
              
              8,000
              
              
              
              24,000Other
      Fees
              
              
              25,000
              
              
              
              27,000Total
              
              $
              270,000
              
              
              $
              388,000




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.




Tax Fees were for tax
planning strategies and tax audit related work performed by our independent
accountants.




Other Fees were for services
related to reviewing registration statements, filings related to pro-forma
statements and due diligence procedures.




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 was in compliance with the
requirements of the Sarbanes-Oxley Act of 2002 regarding the pre-approval of all
audit and non-audit services and fees by the mandated effective date of May 6,
2003.  The Audit Committee pre-approved all audit and non-audit
services rendered by our principal accountant in 2008 and 2007.




-76-




PART
IV




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 & KesselmanConsolidated
      Balance Sheets as of December 31, 2007 and 2008Consolidated
      Statements of Operations for the years ended December 31, 2006, 2007 and
      2008Consolidated
      Statements of Changes in Shareholders’ Equity (Capital Deficiency) for the
      years ended December 31, 2006, 2007 and 2008Consolidated
      Statements of Cash Flows for the years ended December 31, 2006, 2007 and
      2008Notes
      to Consolidated Financial Statements




(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 beginning on page F-1.




Schedule
II – Valuation and Qualifying Accounts




(a)(3)
List of Exhibits




No.3.1
              Certificate
      of Incorporation of the Registrant, with amendments thereto (incorporated
      herein by reference to Exhibit 3.1 to the Registrant’s Registration
      Statement on Form S 1 (File No. 33 70482) (the “1993 Registration
      Statement”)).3.2
              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”)).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).




-77-


No.10.1
                1991
      Stock Option Plan (incorporated herein by reference to Exhibit 10.4 to the
      1992 Registration Statement).*10.2
                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”)).*10.3
                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”)).*10.4
                1995
      Stock Option Plan for Non-management Employees, as amended (incorporated
      herein by reference to Exhibit 10.6 to the 2004 10-K).*10.5
                Voting
      Agreement, dated as of April 7, 2003, by and among Comverge (“Comverge”),
      the Registrant and the other investors named therein (incorporated herein
      by reference to Exhibit 10.32 to the 2002 10-K).10.6
                Second
      Amended and Restated Co-Sale And First Refusal Agreement dated as of
      October 26, 2004, by and among Comverge, Inc., the Registrant and other
      persons party thereto (incorporated herein by reference to Exhibit 10.4 to
      the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
      September 30, 2004).10.7
                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”).10.8
                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).10.9
                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).10.10
                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).*10.11
                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).*10.12
                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”)).10.13
                Amendment
      Agreement to Option Agreements and Restricted Stock Agreement dated as of
      March 9, 2006 by and between George Morgenstern and Data System’s &
      Software Inc. (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”)).*10.14
                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).*10.15
                Form
      of Subscription Agreement (incorporated herein by reference to Exhibit
      10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter
      ended June 30, 2006).10.16
                Placement
      Agent Agreement between First Montauk Securities Corp. and the Registrant
      dated June 12, 2006 (incorporated herein by reference to Exhibit 10.2 to
      the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June
      30, 2006).10.17
                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”)).10.18
                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).10.19
                Form
      of Stock Purchase Agreement (incorporated herein by reference to Exhibit
      10.3 to the August 2006 8-K).10.20
                Form
      of Investors’ Rights Agreement (incorporated herein by reference to
      Exhibit 10.4 to the August 2006 8-K).10.21
                Form
      of Non-Plan Option Agreement (incorporated herein by reference to Exhibit
      10.5 to the August 2006
8-K).*




-78-


No.10.22
                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).*10.23
                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).*10.24
                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).10.25
                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).10.26
                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).10.27
                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).10.28
                Form
      of Lock-Up Agreement with Comverge, Inc. (incorporated herein by reference
      to Exhibit 10.47 to the Registrant’s Annual Report on Form 10-K for the
      fiscal year ended December 31, 2007).10.29
                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).10.30
                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).10.31
                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).*10.32
                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).*10.33
                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).10.34
                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).10.35
                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)10.36
                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).10.37
                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).10.38
                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 June 30, 2008).*




-79-


No.10.39
              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).*10.40
              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 June 30, 2008).*10.41
              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)*10.42
              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)*10.43
              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)*10.44
              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).10.45
              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)10.46
              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).*10.47
              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).*10.48
              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).*10.49
              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).*10.50
              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).*10.51
              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).*#10.52
              Form
      of Option Agreement between the Registrant and John A. Moore dated March
      4, 2008.*#10.53
              Form
      of Option Agreement between the Registrant and Joe B. Cogdell, Jr. dated
      January 5, 2009.*14.1
              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.




-80-




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 30, 2009.




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. MooreJohn
      A. Moore
                            
                            Chairman
      of the Board; President; Chief Executive Officer;
                                andDirector
                            
                            March
      30, 2009/s/
      George MorgensternGeorge
      Morgenstern
                            
                            Director
                            
                            March
      30, 2009/s/
      Michael Barth
                            
                            Chief
      Financial Officer (Principal
                            
                            March
      30, 2009Michael
      Barth
                            
                            FinancialOfficer
      and Principal
                              Accounting
      Officer)/s/
      Samuel M. Zentman
                            
                            Director
                            
                            March
      30, 2009Samuel
      M. Zentman/s/
      Richard J. Giacco
                            
                            Director
                            
                            March
      30, 2009Richard
      J. Giacco/s/
      Richard Rimer
                            
                            Director
                            
                            March
      30, 2009Richard
      Rimer/s/
      Joe Musanti
                            
                            Director
                            
                            March
      30, 2009Joe
      Musanti




-81-


ACORN
ENERGY, INC.


AND
SUBSIDIARIES




INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS




CONSOLIDATED
FINANCIAL STATEMENTS OF ACORN ENERGY, INC.:




Report
      of Independent Registered Public Accounting Firm
                            F-1Consolidated
      Balance Sheets as of December 31, 2008 and December 31,
    2007
                            F-2Consolidated
      Statements of Operations for the years ended December 31, 2008,December
      31, 2007 and December 31, 2006
                            F-3Consolidated
      Statements of Changes in Shareholders’ Equity (Capital Deficiency) for the
      years ended December 31, 2008, December 31, 2007 and December 31,
      2006
                            F-4Consolidated
      Statements of Cash Flows for the years ended December 31, 2008,December
      31, 2007 and December 31, 2006
                            F-5Notes
      to Consolidated Financial Statements
                            F-8







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, 2008 and 2007, and the related
consolidated statements of operations, changes in shareholders’ equity (capital
deficiency) and cash flows for each of the three years in the period ended
December 31, 2008.  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, 2008 and 2007 and the results of their
operations and of their cash flows for each of the three years in the period
ended December 31, 2008, in conformity with accounting principles generally
accepted in the United States of America.




As
discussed in Note 2 to the financial statements, the Company changed the manner
in which it accounts for certain tax positions in 2007.




March 30,
2009




/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 31,2007
                    
                    
                    2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    19,644
                    
                    
                    $
                    15,142Restricted
      deposit
                    
                    
                    —
                    
                    
                    
                    2,157Accounts
      receivable, net
                    
                    
                    1,775
                    
                    
                    
                    4,524Unbilled
      work-in-process
                    
                    
                    1,784
                    
                    
                    
                    581Inventory
                    
                    
                    119
                    
                    
                    
                    1,148Other
      current assets
                    
                    
                    1,391
                    
                    
                    
                    2,080Total
      current assets
                    
                    
                    24,713
                    
                    
                    
                    25,632Property
      and equipment, net
                    
                    
                    1,335
                    
                    
                    
                    2,447Available
      for sale - Investment in Comverge
                    
                    
                    55,538
                    
                    
                    
                    2,462Investment
      in Paketeria
                    
                    
                    1,439
                    
                    
                    
                    —Investment
      in GridSense
                    
                    
                    —
                    
                    
                    
                    129Other
      investments
                    
                    
                    668
                    
                    
                    
                    1,117Funds
      in respect of employee termination benefits
                    
                    
                    1,607
                    
                    
                    
                    1,677Restricted
      deposit
                    
                    
                    1,517
                    
                    
                    
                    579Other
      intangible assets, net
                    
                    
                    5,987
                    
                    
                    
                    10,357Goodwill
                    
                    
                    3,945
                    
                    
                    
                    6,342Other
      assets
                    
                    
                    218
                    
                    
                    
                    313Total
      assets
                    
                    $
                    96,967
                    
                    
                    $
                    51,055LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Short-term
      bank credit and current maturities of long-term debt
                    
                    $
                    761
                    
                    
                    $
                    445Notes
      payable
                    
                    
                    —
                    
                    
                    
                    3,400Convertible
      debt, net
                    
                    
                    4,237
                    
                    
                    
                    —Accounts
      payable
                    
                    
                    910
                    
                    
                    
                    2,285Accrued
      payroll, payroll taxes and social benefits
                    
                    
                    1,118
                    
                    
                    
                    1,314Other
      current liabilities
                    
                    
                    3,844
                    
                    
                    
                    4,350Total
      current liabilities
                    
                    
                    10,870
                    
                    
                    
                    11,794Long-term
      liabilities:Liability
      for employee termination benefits
                    
                    
                    2,397
                    
                    
                    
                    2,651Long-term
      debt
                    
                    
                    12
                    
                    
                    
                    —Deferred
      income taxes
                    
                    
                    16,038
                    
                    
                    
                    29Other
      long-term liabilities
                    
                    
                    325
                    
                    
                    
                    458Total
      long-term liabilities
                    
                    
                    18,772
                    
                    
                    
                    3,138Minority
      interests
                    
                    
                    —
                    
                    
                    
                    1,975Commitments
      and contingencies (Note 19)Shareholders’
      equity:Common
      stock - $0.01 par value per share:Authorized
      – 20,000,000 shares; Issued – 11,134,795 and 12,454,528 shares at December
      31, 2007 and 2008, respectively
                    
                    
                    111
                    
                    
                    
                    124Additional
      paid-in capital
                    
                    
                    49,306
                    
                    
                    
                    54,735Warrants
                    
                    
                    1,330
                    
                    
                    
                    1,020Accumulated
      deficit
                    
                    
                    (9,692
                    )
                    
                    
                    (17,587
                    )Treasury
      stock, at cost – 777,371 and 841,286 shares at December 31, 2007 and 2008,
      respectively
                    
                    
                    (3,592
                    )
                    
                    
                    (3,719
                    )Accumulated
      other comprehensive income (loss)
                    
                    
                    29,862
                    
                    
                    
                    (425
                    )Total
      shareholders’ equity
                    
                    
                    67,325
                    
                    
                    
                    34,148Total
      liabilities and shareholders’ equity
                    
                    $
                    96,967
                    
                    
                    $
                    51,055




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 INCOME (LOSS) PER SHARE DATA)




Year ended December 31,2006
                        
                        
                        2007
                        
                        
                        2008Sales:Projects
                        
                        $
                        3,186
                        
                        
                        $
                        4,061
                        
                        
                        $
                        7,805Catalytic
      regeneration services
                        
                        
                        —
                        
                        
                        
                        797
                        
                        
                        
                        10,099Software
      license and services
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        2,330Other
                        
                        
                        931
                        
                        
                        
                        802
                        
                        
                        
                        462Total
      sales
                        
                        
                        4,117
                        
                        
                        
                        5,660
                        
                        
                        
                        20,696Cost
      of sales:Projects
                        
                        
                        2,022
                        
                        
                        
                        2,891
                        
                        
                        
                        5,244Catalytic
      regeneration services
                        
                        
                        —
                        
                        
                        
                        681
                        
                        
                        
                        7,642Software
      license and services
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        921Other
                        
                        
                        741
                        
                        
                        
                        676
                        
                        
                        
                        356Total
      cost of sales
                        
                        
                        2,763
                        
                        
                        
                        4,248
                        
                        
                        
                        14,163Gross
      profit
                        
                        
                        1,354
                        
                        
                        
                        1,412
                        
                        
                        
                        6,533Operating
      expenses:Research
      and development expenses, net
                        
                        
                        324
                        
                        
                        
                        415
                        
                        
                        
                        1,169Acquired
      in-process research and development
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        2,444Selling,
      general and administrative expenses
                        
                        
                        4,618
                        
                        
                        
                        5,278
                        
                        
                        
                        11,667Impairments
                        
                        
                        40
                        
                        
                        
                        112
                        
                        
                        
                        3,664Total
      operating expenses
                        
                        
                        4,982
                        
                        
                        
                        5,805
                        
                        
                        
                        18,944Operating
      loss
                        
                        
                        (3,628
                        )
                        
                        
                        (4,393
                        )
                        
                        
                        (12,411
                        )Gain
      on early redemption of convertible debentures
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        1,259Finance
      expense, net
                        
                        
                        (30
                        )
                        
                        
                        (1,585
                        )
                        
                        
                        (3,031
                        )Gain
      on sale of shares in Comverge
                        
                        
                        —
                        
                        
                        
                        23,124
                        
                        
                        
                        8,861Gain
      on public offering of Comverge
                        
                        
                        —
                        
                        
                        
                        16,169
                        
                        
                        
                        —Gain
      (loss) on private placement of equity investments
                        
                        
                        —
                        
                        
                        
                        (37
                        )
                        
                        
                        7Other
      income - settlement of a claim
                        
                        
                        330
                        
                        
                        
                        —
                        
                        
                        
                        —Income
      (loss) before taxes on income
                        
                        
                        (3,328
                        )
                        
                        
                        33,278
                        
                        
                        
                        (5,315
                        )Income
      tax benefit (expense)
                        
                        
                        (183
                        )
                        
                        
                        445
                        
                        
                        
                        (342
                        )Income
      (loss) from operations of the Company and its consolidated
      subsidiaries
                        
                        
                        (3,511
                        )
                        
                        
                        33,723
                        
                        
                        
                        (5,657
                        )Share
      in losses of Paketeria
                        
                        
                        (424
                        )
                        
                        
                        (1,206
                        )
                        
                        
                        (1,560
                        )Share
      in losses of GridSense
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (926
                        )Share
      in losses of Comverge
                        
                        
                        (210
                        )
                        
                        
                        —
                        
                        
                        
                        —Minority
      interests
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        248Net
      income (loss) from continuing operations
                        
                        
                        (4,145
                        )
                        
                        
                        32,517
                        
                        
                        
                        (7,895
                        )Loss
      on sale of discontinued operations and contractsettlement,
      net of tax
                        
                        
                        (2,069
                        )
                        
                        
                        —
                        
                        
                        
                        —Net
      income from discontinued operations, net of tax
                        
                        
                        78
                        
                        
                        
                        —
                        
                        
                        
                        —Net
      income (loss)
                        
                        $
                        (6,136
                        )
                        
                        $
                        32,517
                        
                        
                        $
                        (7,895
                        )Basic
      net income (loss) per share:Income
      (loss) per share from continuing operations
                        
                        $
                        (0.48
                        )
                        
                        $
                        3.30
                        
                        
                        $
                        (0.69
                        )Discontinued
      operations
                        
                        
                        (0.23
                        )
                        
                        
                        —
                        
                        
                        
                        —Net
      income (loss) per share
                        
                        $
                        (0.71
                        )
                        
                        $
                        3.30
                        
                        
                        $
                        (0.69
                        )Weighted
      average number of shares outstanding – basic
                        
                        
                        8,689
                        
                        
                        
                        9,848
                        
                        
                        
                        11,374Diluted
      net income (loss) per share:Income
      (loss) per share from continuing operations
                        
                        $
                        (0.48
                        )
                        
                        $
                        2.80
                        
                        
                        $
                        (0.69
                        )Discontinued
      operations
                        
                        
                        (0.23
                        )
                        
                        
                        —
                        
                        
                        
                        —Net
      income (loss) per share
                        
                        $
                        (0.71
                        )
                        
                        $
                        2.80
                        
                        
                        $
                        (0.69
                        )Weighted
      average number of shares outstanding –diluted
                        
                        
                        8,689
                        
                        
                        
                        12,177
                        
                        
                        
                        11,374




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


F-3




ACORN
ENERGY, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (CAPITAL DEFICIENCY)


(IN
THOUSANDS)




Number of
                    Shares
                  
                  
                  Common
                    Stock
                  
                  
                  Additional
                    Paid-In
                    Capital
                  
                  
                  Warrants
                  
                  
                  Accumulated
                    Deficit
                  
                  
                  Treasury
                    Stock
                  
                  
                  Accumulated
                    Other
                    Comprehensive
                    Income (Loss)
                  
                  
                  TotalBalances
      as of December 31, 2005
                  
                  
                  8,937
                  
                  
                  $
                  88
                  
                  
                  $
                  39,975
                  
                  
                  $
                  183
                  
                  
                  $
                  (35,608
                  )
                  
                  $
                  (3,791
                  )
                  
                  $
                  (27
                  )
                  
                  $
                  820Net
      loss
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (6,136
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (6,136
                  )Differences
      from translation of subsidiaries’ financial statementsand
      investment in Paketeria
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  85
                  
                  
                  
                  85Comprehensive
      loss
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (6,051
                  )Private
      placements of common stock and warrants,net
      of issuance costs of $715
                  
                  
                  1,216
                  
                  
                  
                  12
                  
                  
                  
                  1,810
                  
                  
                  
                  705
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,527Warrants
      issued with respect to financialadvisory
      services
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  121
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  121Cancellation
      of warrants
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  121
                  
                  
                  
                  (121
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Exercise
      of options
                  
                  
                  123
                  
                  
                  
                  2
                  
                  
                  
                  244
                  
                  
                  
                  —
                  
                  
                  
                  (160
                  )
                  
                  
                  199
                  
                  
                  
                  —
                  
                  
                  
                  285Stock
      option and reclassification of stock-based deferred
      compensation
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,837
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,837Balances
      as of December 31, 2006
                  
                  
                  10,276
                  
                  
                  
                  102
                  
                  
                  
                  43,987
                  
                  
                  
                  888
                  
                  
                  
                  (41,904
                  )
                  
                  
                  (3,592
                  )
                  
                  
                  58
                  
                  
                  
                  (461
                  )Net
      income
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  32,517
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  32,517FAS
      115 adjustment on Comverge shares, net of deferred taxes
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  29,555
                  
                  
                  
                  29,555Differences
      from translation of subsidiaries’ financial statements and investment in
      Paketeria
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  249
                  
                  
                  
                  249Comprehensive
      income
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  62,321Adjustment,
      as of January 1, 2007, resulting from first-time adoption of FIN 48
      adjustment
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (305
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (305
                  )Warrants
      issued to placement agent with respect to private placement of
      Debentures
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  213
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  213Warrants
      issued with respect to private placement of Debentures
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  531
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  531Beneficial
      conversion feature with respect to private placementof
      Debentures
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,570
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,570Stock
      option compensation
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  894
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  894Exercise
      of options and warrants
                  
                  
                  733
                  
                  
                  
                  8
                  
                  
                  
                  1,445
                  
                  
                  
                  (302
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,151Conversion
      of Debentures
                  
                  
                  126
                  
                  
                  
                  1
                  
                  
                  
                  479
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  480Transaction
      costs of previous private placements
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (69
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (69
                  )Balances
      as of December 31, 2007
                  
                  
                  11,135
                  
                  
                  
                  111
                  
                  
                  
                  49,306
                  
                  
                  
                  1,330
                  
                  
                  
                  (9,692
                  )
                  
                  
                  (3,592
                  )
                  
                  
                  29,862
                  
                  
                  
                  67,325Net
      loss
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (7,895
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (7,
      895
                  )FAS
      115 adjustment on Comverge shares, net of deferred taxes
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (29,680
                  )
                  
                  
                  (29,680
                  )Differences
      from translation of subsidiaries’ financial statements and equity
      investees
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (607
                  )
                  
                  
                  (607
                  )Comprehensive
      loss
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (38,182
                  )Intrinsic
      value of beneficial conversion feature of convertible debentures at
      extinguishment
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (1,259
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (1,259
                  )Conversion
      of Debentures
                  
                  
                  780
                  
                  
                  
                  8
                  
                  
                  
                  2,955
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  2,963Shares
      issued in acquisition of Coreworx
                  
                  
                  288
                  
                  
                  
                  3
                  
                  
                  
                  1,230
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,233Stock
      option compensation
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  731
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  731Stock
      option compensation of subsidiaries
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  700
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  700Exercise
      of options and warrants
                  
                  
                  252
                  
                  
                  
                  2
                  
                  
                  
                  1,072
                  
                  
                  
                  (310
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  764Purchase
      of treasury shares
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (127
                  )
                  
                  
                  —
                  
                  
                  
                  (127
                  )Balances
      as of December 31, 2008
                  
                  
                  12,455
                  
                  
                  $
                  124
                  
                  
                  $
                  54,735
                  
                  
                  $
                  1,020
                  
                  
                  $
                  (17,587
                  )
                  
                  $
                  (3,719
                  )
                  
                  $
                  (425
                  )
                  
                  $
                  34,148




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)





2006
                    
                    
                    2007
                    
                    
                    2008Cash
      flows used in operating activities:Net
      income (loss)
                    
                    $
                    (6,136
                    )
                    
                    $
                    32,517
                    
                    
                    $
                    (7,895
                    )Adjustments
      to reconcile net loss to net cash used in operatingactivities
      (see Schedule A)
                    
                    
                    4,548
                    
                    
                    
                    (35,100
                    )
                    
                    
                    4,639Net
      cash used in operating activities
                    
                    
                    (1,588
                    )
                    
                    
                    (2,583
                    )
                    
                    
                    (3,256
                    )Cash
      flows provided by (used in) investing activities:Acquisitions
      of property and equipment
                    
                    
                    (149
                    )
                    
                    
                    (228
                    )
                    
                    
                    (1,716
                    )Purchase
      of additional shares in DSIT
                    
                    
                    —
                    
                    
                    
                    (740
                    )
                    
                    
                    —Proceeds
      from the sale of Comverge shares
                    
                    
                    —
                    
                    
                    
                    28,388
                    
                    
                    
                    15,355Proceeds
      from the sale of property and equipment
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    9Restricted
      cash (under agreement to a related party)
                    
                    
                    1,350
                    
                    
                    
                    —
                    
                    
                    
                    —Restricted
      deposit
                    
                    
                    247
                    
                    
                    
                    (1,517
                    )
                    
                    
                    (1,219
                    )Investment
      in Comverge
                    
                    
                    (210
                    )
                    
                    
                    —
                    
                    
                    
                    —Investment
      in Paketeria
                    
                    
                    (1,338
                    )
                    
                    
                    —
                    
                    
                    
                    —Loans
      to and costs of acquisition of note due from Paketeria
                    
                    
                    —
                    
                    
                    
                    (1,189
                    )
                    
                    
                    (2,551
                    )Investment
      in and loans to Local Power.
                    
                    
                    —
                    
                    
                    
                    (268
                    )
                    
                    
                    (250
                    )Investment
      in
      EnerTech
                    
                    
                    —
                    
                    
                    
                    (400
                    )
                    
                    
                    (750
                    )Investment
      in and loans to GridSense.
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (1,889
                    )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
                    
                    
                    (671
                    )
                    
                    
                    (343
                    )
                    
                    
                    (100
                    )Utilization
      of employee termination benefits
                    
                    
                    544
                    
                    
                    
                    304
                    
                    
                    
                    30Sale
      of Databit (see Schedule C)
                    
                    
                    (974
                    )
                    
                    
                    —
                    
                    
                    
                    —Acquisition
      of SCR-Tech (see Schedule D)
                    
                    
                    —
                    
                    
                    
                    (10,112
                    )
                    
                    
                    —Acquisition
      of Coreworx net of cash acquired (see Schedule E)
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (2,490
                    )Net
      cash provided by (used in) investing activities
                    
                    
                    (1,201
                    )
                    
                    
                    13,895
                    
                    
                    
                    (227
                    )Cash
      flows provided by (used in) financing activities:Proceeds
      from employee stock option and warrant exercises
                    
                    
                    285
                    
                    
                    
                    1,151
                    
                    
                    
                    764Acquisition
      of treasury shares
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (127
                    )Proceeds
      (expenses)from private placement of commonstock
      and warrants, net of issuance costs
                    
                    
                    2,631
                    
                    
                    
                    (137
                    )
                    
                    
                    —Proceeds
      from note payable to a related party
                    
                    
                    300
                    
                    
                    
                    —
                    
                    
                    
                    —Repayment
      of note payable to a related party
                    
                    
                    —
                    
                    
                    
                    (300
                    )
                    
                    
                    —Proceeds
      from loan for acquisition of SCR-Tech
                    
                    
                    —
                    
                    
                    
                    14,000
                    
                    
                    
                    —Repayment
      of  loan for acquisition of SCR-Tech
                    
                    
                    —
                    
                    
                    
                    (14,000
                    )
                    
                    
                    —Issuance
      of shares to minority shareholders in consolidated
    subsidiary
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,226Short-term
      bank credit, net
                    
                    
                    332
                    
                    
                    
                    128
                    
                    
                    
                    (149
                    )Proceeds
      from borrowings of long-term debt
                    
                    
                    —
                    
                    
                    
                    276
                    
                    
                    
                    —Proceeds
      from convertible debentures with warrants netof
      transaction costs of $1,046
                    
                    
                    —
                    
                    
                    
                    5,840
                    
                    
                    
                    —Redemption
      of convertible debentures
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (3,443
                    )Repayments
      of long-term debt
                    
                    
                    (151
                    )
                    
                    
                    (147
                    )
                    
                    
                    (216
                    )Net
      cash provided by (used in) financing activities
                    
                    
                    3,397
                    
                    
                    
                    6,811
                    
                    
                    
                    (945
                    )Effect
      of exchange rate changes on cash and cash equivalents
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (74
                    )Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    608
                    
                    
                    
                    18,123
                    
                    
                    
                    (4,502
                    )Cash
      and cash equivalents at beginning of year
                    
                    
                    913
                    
                    
                    
                    1,521
                    
                    
                    
                    19,644Cash
      and cash equivalents at end of year
                    
                    $
                    1,521
                    
                    
                    $
                    19,644
                    
                    
                    $
                    15,142Supplemental
      cash flow information:Cash
      paid during the year for:Interest
                    
                    $
                    25
                    
                    
                    $
                    547
                    
                    
                    $
                    325Income
      taxes
                    
                    $
                    19
                    
                    
                    $
                    44
                    
                    
                    $
                    867




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)





2006
                        
                        
                        2007
                        
                        
                        2008A.
                        Adjustments
      to reconcile net loss to net cash provided by(used
      in) operating activities:Depreciation
      and amortization .
                        
                        $
                        204
                        
                        
                        $
                        300
                        
                        
                        $
                        1,298Acquired
      in-process research and development
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        2,444Share
      in losses of Comverge
                        
                        
                        210
                        
                        
                        
                        —
                        
                        
                        
                        —Share
      in losses of Paketeria
                        
                        
                        159
                        
                        
                        
                        1,157
                        
                        
                        
                        1,535Share
      in losses of GridSense
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        926Change
      in deferred taxes
                        
                        
                        —
                        
                        
                        
                        (893
                        )
                        
                        
                        893Impairment
      of loans to Paketeria
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        2,454Impairment
      of loans to GridSense
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        631Impairment
      of investment in Enertech
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        33Impairment
      of investment in and loans to Local Power
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        546Impairment
      of goodwill and intangibles
                        
                        
                        40
                        
                        
                        
                        112
                        
                        
                        
                        —Increase
      (decrease) in liability for employee terminationbenefits
                        
                        
                        281
                        
                        
                        
                        (148
                        )
                        
                        
                        254Gain
      on sale of shares in Comverge
                        
                        
                        —
                        
                        
                        
                        (23,124
                        )
                        
                        
                        (8,861
                        )Gain
      on public offering of investment in Comverge
                        
                        
                        —
                        
                        
                        
                        (16,169
                        )
                        
                        
                        —Loss
      (gain) on private placement in Company’s equity investments,
      net
                        
                        
                        —
                        
                        
                        
                        37
                        
                        
                        
                        (7
                        )Gain
      on early redemption of Debentures.
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (1,259
                        )Loss
      on sale of Databit and contract settlement.
                        
                        
                        2,298
                        
                        
                        
                        —
                        
                        
                        
                        —Loss
      on sale of property and equipment, net
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        21Stock
      and stock option compensation
                        
                        
                        1,522
                        
                        
                        
                        894
                        
                        
                        
                        1,431Value
      of warrants issued for services provided
                        
                        
                        121
                        
                        
                        
                        —
                        
                        
                        
                        —Amortization
      of beneficial conversion feature, debt originationcosts
      and value of warrants in private placement of Debentures
                        
                        
                        —
                        
                        
                        
                        1,297
                        
                        
                        
                        3,064Minority
      interests
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (248
                        )Exchange
      loss on loans to Paketeria and GridSense
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        245Other
                        
                        
                        7
                        
                        
                        
                        (6
                        )
                        
                        
                        16Changes
      in operating assets and liabilities:Decrease
      in accounts receivable, unbilled work-in- process, other current assets
      and other assets
                        
                        
                        350
                        
                        
                        
                        107
                        
                        
                        
                        (2,606
                        )Decrease
      (increase) in inventory
                        
                        
                        (18
                        )
                        
                        
                        20
                        
                        
                        
                        (1,029
                        )Increase
      (decrease) in accounts payable, other current liabilitiesand
      other liabilities
                        
                        
                        (626
                        )
                        
                        
                        1,316
                        
                        
                        
                        2,858$
                        4,548
                        
                        
                        $
                        (35,100
                        )
                        
                        $
                        3,256B.
                        Non-cash
      investing and financing activities:Accrued
      expenses in respect of private placement of common stock
                        
                        $
                        104Unrealized
      gain (loss) from Comverge shares, net of deferred taxes
                        
                        
                        
                        
                        
                        $
                        29,555
                        
                        
                        $
                        (29,680
                        )Conversion
      of loans and notes receivable and accrued interest due from Paketeria to
      investment in Paketeria
                        
                        
                        
                        
                        
                        $
                        1,154Conversion
      of Debentures to common stock and additional
    paid-in-capital
                        
                        
                        
                        
                        
                        $
                        479
                        
                        
                        $
                        2,963Adjustment
      of retained earnings and other current liabilities with respect to the
      adoption of FIN 48
                        
                        
                        
                        
                        
                        $
                        305Exercise
      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
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        199




F-6




ACORN
ENERGY, INC. AND SUBSIDIARIES


SCHEDULES
TO CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 (IN
THOUSANDS)


2006
                                        
                                        
                                        2007
                                        
                                        
                                        2008C.
                                        Assets/liabilities
      disposed of in the sale of Databit Inc. andcontract
      settlement:Current
      assets (excluding cash)
                                        
                                        $
                                        2,815Non-current
      assets
                                        
                                        
                                        40Debt
                                        
                                        
                                        (20
                                        )Current
      liabilities
                                        
                                        
                                        (1,816
                                        )Stock
      compensation costs
                                        
                                        
                                        315Other
                                        
                                        
                                        (10
                                        )Loss
      on the sale of Databit and contract settlement.
                                        
                                        
                                        (2,298
                                        )$
                                        (974
                                        )D.
                                        Assets/liabilities
      acquired in the acquisition of SCR-Tech:Current
      assets (excluding cash)
                                        
                                        
                                        
                                        
                                        
                                        $
                                        (2,120
                                        )Non-current
      assets
                                        
                                        
                                        
                                        
                                        
                                        
                                        (845
                                        )Intangibles
                                        
                                        
                                        
                                        
                                        
                                        
                                        (5,511
                                        )Goodwill
                                        
                                        
                                        
                                        
                                        
                                        
                                        (3,714
                                        )Debt
                                        
                                        
                                        
                                        
                                        
                                        
                                        12Current
      liabilities
                                        
                                        
                                        
                                        
                                        
                                        
                                        1,110Deferred
      taxes
                                        
                                        
                                        
                                        
                                        
                                        
                                        29(11,039
                                        )Less
      unpaid transaction costs
                                        
                                        
                                        
                                        
                                        
                                        
                                        927(10,112
                                        )E.
                                        Assets/liabilities
      acquired in the acquisition of Coreworx:Current
      assets (excluding cash)
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        $
                                        (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-7


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:




·
            CoaLogixoffers SCR
      Catalyst and Management Services for coal-fired power plants that use
      selective catalytic reduction (SCR) systems to reduce nitrogen oxide (NOx)
      emissions, provided through CoaLogix Inc. and its subsidiary SCR-Tech
      LLC.  These services include SCR catalyst management, cleaning
      and regeneration as well as consulting services to help power plant
      operators to optimize efficiency and reduce overall NOx compliance costs.
      In addition, beginning later in 2009, CoaLogix will offer a new technology
      for the removal of heavy metals, such as mercury, from coal-fired power
      plants, operating under its subsidiary MetalliFix
  LLC.




·
            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 recently acquired
      (August 13, 2008) Coreworx Inc. (“Coreworx”) subsidiary (See Note 3(a)).
      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 also owns significant equity interests in GridSense Systems Inc., an
equity affiliate which provides remote and control systems to electric utilities
and industrial facilities worldwide and in Paketeria AG, an equity affiliate
which is a Berlin based store owner and franchisor whose stores provide post and
parcels, eBay dropshop, mobile telephones, photocopying, printing, photo
processing, office supplies and printer cartridge refilling services in Germany.
The Company also has an available for sale investment in Comverge Inc.which provides energy
intelligence solutions for utilities and energy companies through demand
response. 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
24 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.




(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.  Actual results could differ
from those estimates.


F-8


(d)
            Amounts
      in the Footnotes in the Financial
Statements




All
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. All intercompany balances and transactions have been
eliminated.  Minority interests in net losses are limited to the
extent of their equity capital.  Losses in excess of minority interest
equity capital are charged against the Company.




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 (“CDN$”) have been translated in accordance with
Statement of Financial Accounting Standards (“SFAS”) 52 of the Financial
Accounting Standards Board of the United States (“FASB”) assets and liabilities
are translated at year-end exchange rates, while operating results items are
translated at the exchange rate in effect on the date of the
transaction.  Differences resulting from translation are presented in
shareholders’ equity as accumulated other comprehensive income
(loss).  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.




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 for any of
the years ended December 31, 2006, 2007 and 2008.


F-9




Inventory




Raw
materials inventory is generally comprised of chemicals used in the regeneration
or rejuvenation of SCR modules and the process of mercury removal. Finished
goods inventory is comprised of SCR modules available for sale. Inventories are
stated at the lower of cost or market using the first-in, first-out
method.




Investment
in Marketable Securities




The
Company’s investment in Comverge is accounted for as available for sale in
accordance with SFAS 115, “Accounting for Certain Investments in Debt and Equity
Securities”.  SFAS 115 establishes the accounting and reporting
requirements for all debt securities and for investments in equity securities
that have readily determinable fair values.  All marketable securities
must be classified as one of the following: held-to-maturity,
available-for-sale, or trading.  The Company classifies its marketable
securities as available-for-sale and, as such, carries the investments at fair
value, with unrealized holding gains and losses reported in shareholders’ equity
as a separate component of accumulated other comprehensive income
(loss).  The cost of securities sold is determined based on the
average cost method.  Changes in fair value, net of taxes, are
reflected in other comprehensive income (loss). Unrealized losses considered to
be temporary are reflected in other comprehensive income (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 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. In accordance with
EITF 99-10 “Percentage Used to Determine the Amount of Equity Method Losses” and
EITF 98-13 “Accounting by an Equity Method Investor for Investee Losses When the
Investor Has Loans to and Investments in Other Securities of the
Investee”,   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 income as a deemed dilution gain
proportionate interest in or loss on disposition. 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 Inc. and Paketeria AG are accounted for by
the equity method.  The Company’s investments in EnerTech Capital III
L.P. is accounted for by the cost method.  Gains or losses arising
from the issuance of shares by associated companies to third parties are carried
to income currently.




Property
and Equipment




Property
and equipment are presented at cost at the date of acquisition including
capitalized labor costs, net of third party participation.  Capital
leases are recorded at the present value of minimum lease payments. 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-10


Goodwill
and Acquired Intangible Assets




Goodwill
represents the excess of cost over the fair value of net assets of businesses
acquired.  Under SFAS No. 142, goodwill and intangible assets
determined to have an indefinite useful life are not amortized, but instead are
tested for impairment at least annually.  SFAS No. 142 also requires
that intangible assets with estimable useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 144, “Accounting for
Impairment or Disposal of Long-Lived Assets”.




SFAS No.
142 requires the Company to assess 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 SCR and RT Solutions segments and its recently
acquired EIS segment.  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
              
              
              10Solucorp
      license
              
              
              10Software
      acquired associated with Coreworx
              
              
              16Customer
      relationships associated with Coreworx
              
              
              10Naval
      technologies
              
              
              7





Impairment
of Long-Lived Assets




Under
SFAS No. 144, long-lived assets including certain intangible assets are to be
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 are presented as a reduction of shareholders’ equity,
at their cost to the Company.


F-11




Revenue
Recognition




As
prescribed in Staff Accounting Bulletin (“SAB”) 101 and 104, “Revenue
Recognition in Financial Statements,” the Company recognizes revenue when
persuasive evidence of an arrangement exists, services have been rendered, the
price is fixed or determinable, and collectibility is reasonably
assured.




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




In
accordance with Statement of Position (“SOP”) No. 97-2 “Software Revenue
Recognition”, revenues from fixed-price contracts which require significant
production, modification and/or customization to customer specifications are
recognized using the percentage-of-completion method in conformity with
Accounting Research Bulletin (“ARB”) No. 45 “Long-Term Construction-Type
Contracts” and SOP No. 81-1 “Accounting for Performance of Construction-Type and
Certain Production-Type Contracts.  Percentage-of-completion estimates
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.


F-12


In
accordance with EITF Issue No. 99-19 “Recording Revenue Gross as a Principal
Versus Net as an Agent”, revenue from drop-shipments of third-party hardware and
software sales are recognized upon delivery, and recorded at the gross amount
when the Company is responsible for fulfillment of the customer order, has
latitude in pricing, has discretion in the selection of the supplier, customizes
the product to the customer’s specifications and has credit risk from the
customer.




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, regenerates them and
subsequently sells them to customers as refurbished units.  In such
cases, revenues are not recognized until the units are delivered to the
customer.




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
collectibility uncertainties, the Company does not defer costs due to the
uncertainties related to payment for such services. In situations where revenue
is deferred due to the non-completion of regeneration services, the Company
defers the related costs as deferred costs in Other Current Assets (see Note
13).




Unbilled
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 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 revenues 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.


F-13


The
following table summarizes the changes in accrued warranty liability from
December 31, 2006 to the year ended December 31, 2008:




Gross
      Carrying
                  AmountBalance
      at December 31, 2006
                
                $
                —Warranties
      issued and adjustment of provision
                
                
                —Warranty
      provision acquired in acquisition of SCR-Tech
                
                
                107Warranty
      claims
                
                
                —Balance
      at December 31, 2007
                
                
                107
                *Warranties
      issued and adjustment of provision
                
                
                149Warranty
      claims
                
                
                —Balance
      at December 31, 2008
                
                $
                256
                *




* The
balance at December 31, 2008 is included in Other Current Liabilities ($8) and
Other Long-Term Liabilities ($248). At December 31, 2007, the entire
balance is included in Other Long-Term Liabilities.




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 receivables.  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 $17,878 at December 31,
2008.  The Company uses major banks and brokerage firms to invest its
excess cash in money market funds.  The counter-party to a majority of
the Company’s cash equivalent deposits is a money market of a major financial
institution which invests only in US treasuries. The Company does not believe
there is significant risk of non-performance by the
counterparty.  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 44% of the accounts
receivable at December 31, 2008, were due from a customer that pays its
receivables over usual credit periods (as to revenues from significant customers
– see Note 24).  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.




Research
and Development Expenses




Research
and development costs which consists primarily of labor and related costs are
charged to operations as incurred.  Participation by third parties in
the Company’s research and development costs are netted against costs
incurred.




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 $3, $8 and $28 for the years ended December 31, 2006, 2007 and 2008,
respectively.




Stock-Based
Compensation




Effective
January 1, 2006, the Company adopted the provisions of SFAS 123R, “Share-Based
Payment,” which establishes accounting for equity instruments exchanged for
services.  Under the provisions of SFAS 123R, share-based compensation
cost is measured at the grant date, based on the fair value of the award, and is
recognized as expense on a straight-line basis over the employee’s requisite
service period (generally the vesting period of the equity
grant).  The Company has applied the provisions of SAB 107 in its
adoption of SFAS 123R.


F-14


In
December 2007, the SEC issued SAB No. 110 regarding the use of a "simplified"
method, as discussed in SAB 107, in developing an estimate of expected term of
"plain vanilla" share options in accordance with SFAS No. 123R.  In
particular, the SEC staff indicated in SAB 107 that it will accept a company's
election to use the simplified method, regardless of whether the company has
sufficient information to make more refined estimates of expected term. At the
time SAB 107 was issued, the SEC staff believed that more detailed external
information about employee exercise behavior (e.g., employee exercise patterns
by industry and/or other categories of companies) would, over time, become
readily available to companies. Therefore, the SEC staff stated in SAB 107 that
it would not expect a company to use the simplified method for share option
grants after December 31, 2007. The SEC staff understands that such detailed
information about employee exercise behavior may not be widely available by
December 31, 2007. Accordingly, the SEC staff will continue to accept, under
certain circumstances, the use of the simplified method beyond December 31,
2007. The Company currently uses the simplified method for “plain vanilla” share
options and warrants, and will continue to assess the continued use of the
simplified method in 2009. It is not believed that this will have an impact on
the Company’s financial position, results of operations or cash
flows.




See Note
20 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 on a fair
value basis in accordance with SFAS No. 123R and EITF Issue No. 96-18,
“Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services” and related
interpretations.




Equity
awards granted to non-employees (primarily consultants) are accounted for under
the provisions of FAS 123 and EITF Issue No. 96-18, ‘Accounting for Equity
Instruments that are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services’. The fair value of such equity
awards is charged to income over the expected service period.




Deferred
Income Taxes




Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes, as well as operating loss, capital
loss and tax credit 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. The Company may incur an additional tax
liability in the event of an inter-company dividend distribution from foreign
subsidiaries. No deferred income taxes have been provided, since it is the
Company's policy not to distribute, in the foreseeable future, dividends which
would result in additional tax liability.




Prior to
January 1, 2007, the Company recognized income tax accruals with respect to
uncertain tax positions based upon SFAS No. 5, “Accounting for Contingencies.”
Under SFAS No. 5, the Company recorded a liability associated with an uncertain
tax position if the liability was both probable and estimable.  The
Company’s liability under SFAS No. 5 included interest and penalties, which were
recognized as incurred within “Finance expense, net” in the Consolidated
Statements of Operations.


F-15


Effective
January 1, 2007, the Company adopted FASB Interpretation (FIN) No. 48,
“Accounting for Uncertainty in Income Taxes.”  FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in financial statements in
accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return.  FIN 48 requires that the Company determine whether the
benefits of tax positions are more likely than not of being sustained upon audit
based on the technical merits of the tax position.  For tax positions
that are more likely than not of being sustained upon audit, the Company
recognizes the largest amount of the benefit that is more likely than not of
being sustained.  For tax positions that are not more likely than not
of being sustained upon audit, the Company does not recognize any portion of the
benefit in the consolidated financial statements.  The provisions of
FIN 48 also provide guidance on de-recognition, classification, interest and
penalties, accounting in interim periods, and disclosure.




The
cumulative effect of the adoption of the recognition and measurement provisions
of FIN 48 resulted in a $305 reduction to the January 1, 2007 balance of
retained earnings.  Results of prior periods have not been
restated.  The Company’s policy for interest and penalties related to
income tax exposures was not impacted as a result of the adoption of the
recognition and measurement provisions of FIN 48.  Therefore, the
Company continues to recognize interest and penalties as incurred within
“Finance expense, net” in the Consolidated Statements of
Operations.




Basic
and Diluted Net Income (Loss) Per Share




Basic net
income (loss) per share is computed by dividing the net income (loss) 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.  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 income (loss) per share if doing so would be antidilutive.  The
number of weighted average number of options, warrants and convertible
debentures that were excluded from the computation of diluted net income (loss)
per share, as they had an antidilutive effect, were approximately 2,394,000,zero,and2,770,000 for
the years ending December 31, 2006, 2007 and 2008, respectively.




Fair
Value Measurement




Effective
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements”
(“SFAS No. 157”). SFAS 157 defines fair value, establishes a framework for
measuring fair value and enhances fair value measurement disclosure. Under this
standard, 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.




SFAS 157
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.




F-16




Comprehensive
Income (Loss)




The
components of the Company’s comprehensive income (loss) for the years presented
are net income (loss), FAS 115 adjustments and differences from the translation
of equity investments and subsidiaries’ financial statements.




Components of Accumulated Other
                    Comprehensive Income (Loss) are as follows:
                  
                  As of December 31,2006
                  
                  
                  2007
                  
                  
                  2008Differences
      from translation of subsidiaries’ financial statements and equity
      investees
                  
                  $
                  58
                  
                  
                  $
                  249
                  
                  
                  $
                  (300
                  )Unrealized
      gain (loss) on investment in Comverge
                  
                  
                  —
                  
                  
                  
                  46,457
                  
                  
                  
                  (125
                  )Deferred
      taxes on unrealized gain in investment in Comverge
                  
                  
                  —
                  
                  
                  
                  (16,902
                  )
                  
                  
                  —Ending
      balance
                  
                  $
                  58
                  
                  
                  $
                  29,862
                  
                  
                  $
                  (425
                  )




Recently
Issued Accounting Principles




In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of SFAS No. 133”, which
requires additional disclosures about the objectives of using derivative
instruments; the method by which the derivative instruments and related hedged
items are accounted for under FASB Statement No.133 and its related
interpretations; and the effect of derivative instruments and related hedged
items on financial position, financial performance, and cash flows. SFAS 161
also requires disclosure of the fair values of derivative instruments and their
gains and losses in a tabular format. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early adoption encouraged. The Company will be
required to adopt SFAS 161 on January 1, 2009. This Statement will not impact
the consolidated financial results as it is disclosure-only in
nature.




In April
2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible
Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in
developing renewal or extension assumptions on legal and contractual provisions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, “Goodwill and Other Intangible Assets.” FSP 142-3 is effective for
fiscal years beginning after December 15, 2008. The Company will be
required to adopt FSP 142-3 on January 1, 2009. The Company is currently
assessing the impact FSP 142-3 may have on its consolidated financial position
and results of operations.




In May 2008, the FASB issued Staff
Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement)” (the
“FSP”), which clarifies the accounting for convertible debt instruments that may
be settled in cash (including partial cash settlement) upon conversion. The FSP
requires issuers to account separately for the liability and equity components
of certain convertible debt instruments in a manner that reflects the issuer’s
nonconvertible debt (unsecured debt) borrowing rate when interest cost is
recognized. The FSP requires bifurcation of a component of the debt,
classification of that component in equity and the accretion of the resulting
discount on the debt to be recognized as part of interest expense in
consolidated statement of operations. The FSP requires retroactive application
to the terms of instruments as they existed for all periods presented. The FSP
is effective for fiscal years beginning after December 15, 2008. The
Company will be required to adopt the FSP on January 1, 2009. The Company does
not expect the adoption of this FSP to have a material effect on its
consolidated financial position and results of operations.


F-17





In June
2008, the FASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF
07-5 addresses the determination of whether an equity linked financial
instrument (or embedded feature) that has all of the characteristics of a
derivative under other authoritative U.S. GAAP accounting literature is indexed
to an entity’s own stock and would thus meet the first part of a scope exception
from classification and recognition as a derivative instrument. EITF 07-5 is
effective for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. The Company will be required to adopt EITF
07-5 on January 1, 2009. The Company is currently assessing the impact that EITF
07-5 may have on its consolidated financial position and results of
operations.




In
November 2008, the FASB ratified Emerging Issues Task Force (EITF) Issue No.
08-6,"Equity Method Investment Accounting Considerations" ("EITF 08-6"). EITF
08-6 clarifies the accounting for certain transactions and impairment
considerations involving equity method investments. EITF 08-6 is effective in
fiscal years beginning on or after December 15, 2008, including interim periods
within those fiscal years. EITF 08-6 shall be applied prospectively. Earlier
application by an entity that has previously adopted an alternative accounting
policy is not permitted. The Company will be required to adopt EITF 08-6 on
January 1, 2009. The Company is currently assessing the impact that EITF 08-6
may have on its consolidated financial position and results of
operations.




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




Reclassifications




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





NOTE
3—ACQUISITIONS




(a)
            Coreworx




On August
13, 2008, the Company completed a Securities Purchase Agreement (the “Purchase
Agreement”) for 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.  The acquisition was strategic move by the Company to
participate in the ongoing global energy infrastructure expansion.




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.


F-18




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




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




In
accordance with SFAS No. 141, “Business Combinations”, the assets and
liabilities of Coreworx are required to be 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 EITF 99-12
“Determination of the Measurement Date for the Market Price of Acquirer
Securities Issued in a Purchase Business Combination”) and (iv) $217 of
transaction costs.




The
Company also agreed to make a contingent payment to the former Coreworx
shareholders of one-half of the expected net receipt (less fees) by Coreworx of
amounts due from the Canada Revenue Agency or the Ontario Ministry of Revenue in
connection with Coreworx’s 2007 scientific research and experimental development
tax credit refund claim or Ontario innovation tax credit refund claim for 2007
(collectively, the “SRED Claim”) during the six months immediately following the
closing date; this amount was not included in the purchase price as the receipt
of the SRED Claim within the  six months following the closing date
was not determinable beyond a reasonable doubt. (The SRED Claim was not received
within the six month period following the closing date. See Subsequent Events -
Note 27(a)).




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 is 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. The consideration for the acquisition was attributed to net assets
on the basis of fair value of assets acquired and liabilities assumed based on
an appraisal performed by management, which included a number of factors,
including the assistance of independent appraisers. The Company has 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.


F-19





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 market value
of Coreworx’s customer contracts and relationships (estimated useful life of 10
years) and approximately $3,274 for the estimated market value of Coreworx’s
software (estimated useful life of 16 years).





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





The following are certain unaudited
pro forma combined income data assuming that the acquisition of Coreworx
occurred on January 1, 2008 and 2007, respectively after giving effect to:
(a) purchase accounting adjustments including the amortization of acquired
intangibles with finite lives on a straight-line basis over ten to sixteen years
(b) eliminating of Coreworx’s interest expense recorded on Senior Secured
Debentures which are assumed to have been redeemed at the beginning of each year
(c) Acorn interest expense on the $3,400 principal amount of 8% one-year
promissory notes and (d) income tax benefit for the Acorn interest expense. The
income tax benefit is recorded at Acorn’s effective income tax rate of 40% in
the year ending December 31, 2007. No income tax benefit is calculated for the
year ending December 31, 2008 as the Company was in a tax loss position. The
pro-forma financial information for the year ending December 31, 2006 only
includes the pro-forma adjustments with respect to the Company’s acquisition of
SCR Tech (see Note 3(b)
for pro-forma adjustments associated with the Company’s acquisition of SCR-Tech.
The 2007 pro-forma information includes the pro-forma adjustments for both
SCR-Tech and Coreworx).




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




Year ended December 31,2006
              
              
              2007
              
              
              2008(in thousands except per share data)(unaudited)
              
              
              (unaudited)
              
              
              (unaudited)Sales
              
              $
              11,500
              
              
              $
              11,587
              
              
              $
              22,286Net
      income (loss)
              
              $
              (7,041
              )
              
              $
              21,206
              
              
              $
              (13,805
              )Net
      income (loss) per share – basic
              
              $
              (0.82
              )
              
              $
              2.09
              
              
              $
              (1.20
              )Net
      income (loss) per share – diluted
              
              $
              (0.82
              )
              
              $
              1.93
              
              
              $
              (1.20
              )




(b)
            SCR-Tech




On
November 7, 2007  the Company completed the purchase of SCR-Tech LLC
(“SCR-Tech”) and other affiliated entities described below (collectively, the
“Acquired Companies”) from Catalytica Energy Systems, Inc. (“Catalytica”), a
subsidiary of Renegy Holdings, Inc., for a purchase price of $9.6 million in
cash.  SCR-Tech and the other Acquired Companies are providers of
catalyst regeneration technologies and management services for selective
catalytic reduction systems used by coal-fired power plants to reduce nitrogen
oxides (NOx) emissions.




The
acquisition of the Acquired Companies was completed pursuant to a Stock Purchase
Agreement (the “Purchase Agreement”), dated November 7, 2007, by and among the
Company, Catalytica, Renegy Holdings, Inc. and CoaLogix Inc.
(“CoaLogix”).  CoaLogix is a newly-formed, wholly-owned subsidiary of
the Company which was formed for the purpose of consummating the acquisition of
the Acquired Companies.


F-20


Under the
Purchase Agreement CoaLogix purchased all of the issued and outstanding capital
stock of CESI-SCR, Inc. (“CESI-SCR”) and CESI-Tech Technologies, Inc.
(“CESI-Tech”) from Catalytica for $9,600 plus a working capital adjustment
(amounting to $714) and the assumption by the Company and/or CoaLogix of certain
liabilities of Catalytica relating to the business (including certain
obligations with respect to employment agreements previously entered into by the
Acquired Companies).  CESI-SCR owns all the issued and outstanding
membership interests of SCR-Tech LLC (“SCR-Tech”), the primary operating entity
of the Acquired Companies.




To
provide financing for the purchase of the Acquired Companies, the Company
entered into a Loan Agreement with CitiGroup Global Markets, Inc., dated as
November 1, 2007 (the “Loan Agreement”).  As security for the
repayment of advances under the Loan Agreement, the Company pledged the
2,786,021 shares of Comverge, Inc. common stock it then held (see Note
4).  On November 5, 2007, the Company drew down $14,000 under the Loan
Agreement to finance the acquisition of the Acquired Companies.  The
$14,000 advanced to the Company under the Loan Agreement were payable upon
demand by the lender.  Interest was payable monthly on any amounts
advanced under the Loan Agreement in accordance with the lender’s published
rates and policies for securities margin accounts.  The entire loan
balance was repaid in 2007 upon the sale by the Company of a portion of its
investment in Comverge (see Note 4) and the pledge was withdrawn.




The
transaction was accounted for as a purchase business
combination.  SCR-Tech’s results from operations for the period from
acquisition to December 31, 2007 and for 2008 have been included in the
Company’s consolidated statement of operations.




The
aggregate purchase price for SCR-Tech was $11,039, comprised of (i) $9,600
representing the purchase price as per the Purchase Agreement (ii) $714
representing the working capital adjustment, and (iii) $725 of transaction
costs.




The
Company obtained a valuation of intangible assets as of November 7, 2007, and
has accordingly allocated the purchase price as follows:




Current
      assets
                
                $
                2,120Property
      and equipment
                
                
                813Intangible
      assets
                
                
                5,511Goodwill
                
                
                3,714Other
      non-current assets
                
                
                32Total
      assets acquired
                
                
                12,190Current
      liabilities
                
                
                1,110Non-current
      liabilities
                
                
                12Deferred
      tax liabilities created in acquisition
                
                
                29Total
      liabilities assumed
                
                
                1,151Net
      assets acquired
                
                $
                11,039




The
intangible assets represent the fair value of technologies acquired (ten-year
useful life).  The goodwill resulting from the acquisition is not
deductible for income tax purposes.  The intangible assets and the
goodwill acquired were assigned to the Company’s new CoaLogix
segment.




The
following are certain unaudited pro forma combined income data assuming that the
acquisition by CoaLogix of the Acquired Companies occurred on January 1, 2007
and 2006, respectively after giving effect to: (a) purchase accounting
adjustments including the amortization of acquired intangibles with finite lives
on a straight-line basis over ten years (b) eliminating management fees charged
by SCR-Tech’s former parent company (c) eliminating allocated audit fees charged
by SCR-Tech’s former parent company (d) eliminating interest expense charged by
SCR-Tech’s former parent company (e) recording interest expense from the $14,000
loan taken to acquire SCR-Tech. (See Note
3(a) for the pro-forma financial information.)


F-21




(c)
            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%.  The purchase price is subject to upward adjustment if, in
the event that at any time prior to December 31, 2009, the Company receives
consideration for its shares in DSIT exceeding the value for DSIT implicit in
the purchase price.




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 a decrease in 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—INVESTMENT
IN COMVERGE




As at
January 1, 2007, the Company owned 4,415,309 shares of common stock of Comverge
with a negative value of $1,824 and 1,156,733 preferred shares of Comverge with
value of zero.




On April
18, 2007, Comverge completed its initial public offering of 6,095,000 shares of
common stock at a price of $18.00 a share, including 795,000 shares sold
pursuant to the exercise by the underwriters of their over-allotment option
granted to them by certain selling stockholders.  The shares are
listed on the Nasdaq Global Market under the symbol “COMV”.  The
Company did not sell any of its shares of Comverge common stock in the initial
public offering.


F-22


Immediately
prior to the closing of the Comverge offering on April 18, 2007, all shares of
preferred stock of Comverge were converted to common stock of Comverge and the
Company owned 2,786,021 shares (after adjusting for a one for two split of
shares) of Comverge common stock, which at the time represented approximately
15.9% of the then issued and outstanding capital stock of Comverge.




As a
result of the Comverge offering, the Company recorded an increase in its
investment in Comverge (from a negative value of $1,824) and recorded a non-cash
gain of $16,169 in “Gain on public offering of Comverge”.  Subsequent
to the offering, the Company no longer accounted for its investment in Comverge
under the equity method.




In
December 2007, as part of a follow-on offering by Comverge, the Company sold
1,022,356 of its Comverge shares for $28,388, net of transaction costs and
recorded a pre-tax gain of $23,124.




As of
December 31, 2007, the remaining 1,763,665 of Comverge shares held by the
Company were accounted for as “available-for-sale” under SFAS
115.  Accordingly the Company recorded its investment in Comverge
based on Comverge’s share price of $31.49 at December 31, 2007. This resulted in
an increase of $46,457 in the carrying value of its investment balance by
recording those shares at their fair market value of $55,538. The Company
recorded a deferred tax liability of $16,902 to Accumulated Other Comprehensive
Income with respect to the recording those shares at fair market
value.




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




The cost
basis of the Company’s remaining 502,500 Comverge shares at December 31, 2008 is
$2,587 (approximately $5.15 per share). The investment is 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 is included in Accumulated Other Comprehensive Loss at
December 31, 2008 as the reduction in value is 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 (Loss).




NOTE 5—INVESTMENT
IN PAKETERIA




On August
7, 2006, the Company entered into a Common Stock Purchase Agreement with
Paketeria GmbH, a limited liability company incorporated under the laws of
Germany, and certain Paketeria shareholders, for the purchase by the Company of
an approximately 23% interest in Paketeria for a purchase price of approximately
€598 ($776 at the then exchange rates) plus transaction fees of approximately
$101.  Paketeria is a Berlin based store owner and franchisor whose
stores provide post and parcels, eBay dropshop, mobile telephones, photocopying,
printing, photo processing, office supplies and printer cartridge refilling
services in Germany.




In
addition to the Common Stock Purchase Agreement, the Company also entered into a
Note Purchase Agreement with Paketeria’s founder and managing
director.  Under the Note Purchase Agreement, the Company agreed to
purchase from the founder and managing director all or a portion of the €210
($270 at the then exchange rate) convertible promissory note (the “Note”) issued
by Paketeria and payable to him.  The Note (which as described below
has been fully converted) was convertible into shares of Paketeria at a
conversion price of €50.70 per share ($65.30 per share at the then exchange
rate), provided for accrual of interest at a rate of 8% per annum, and a final
maturity of August 7, 2009.  The Note Purchase Agreement required the
Company to purchase one third of the principal amount of the Note upon
Paketeria’s achieving each of three franchise licensing milestones—the licensing
of its 60th, 75th, and 115th franchises.


F-23


On
October 30, 2006 the Company increased its ownership in Paketeria from 23% to
approximately 33%.  The increase was accomplished through (i) the
purchase and conversion into 2,850 Paketeria shares pursuant to a Purchase
Notice Conversion and Accession Agreement of €140 ($184 at the then exchange
rates), representing two-thirds (plus accrued interest) the convertible note and
(ii) an additional investment by the Company of approximately €183 ($235 at the
then exchange rates) for the purchase of an additional 3,000 Paketeria shares
plus transaction costs of $42.  The Company’s total investment in
Paketeria prior to the allocation of the purchase price was $1,338.




The
Company allocated $31 of the purchase price to the fair market value of the call
option to purchase the convertible note.  In September 2007, in
connection with the Paketeria Private Placement (see below) the Company
exercised its call option.




The
Company allocated $30 of the purchase price to the fair value of the put option
which requires the Company to purchase the principal amount of the convertible
note.  At December 31, 2006, the Company redetermined the fair value
of the remaining put option and determined it to be $9 based upon Paketeria’s
advancement on progress in achieving the milestones noted above.  The
reduction in the fair value of the put option was recorded as part of the
Company’s equity loss in Paketeria.




The
Company also entered into a Stock Purchase Agreement with two shareholders of
Paketeria—one of whom is the Company’s President and Chief Executive Officer and
the other of whom is a director of the Company.  Pursuant to that
agreement, the Company was entitled through August 2007 to purchase the shares
of Paketeria equally held by the two Paketeria shareholders for an aggregate
purchase price of the US dollar equivalent on the date of purchase of €598,
payable in Company Common Stock and warrants on the same terms as the Company’s
2006 private placement.  The Company determined the fair value of the
option to purchase the shares under the Stock Purchase Agreement to be $68 using
a Black-Scholes calculation using a risk-free interest rate of 5.09 %, an
expected life of one year, an annual volatility of 20% and no
dividends.  Such option was extended by both shareholders initially to
November 5, 2007 and subsequently extended again by the Company’s President and
Chief Executive Officer on his share until December 31, 2009.  If the
Company exercises its option on these shares, its holdings in Paketeria would
increase by approximately 5.6%.  At the December 31, 2008 exchange
rate the exercise of the option by the Company would result in the issuance of
approximately 157,000 shares of Common Stock and warrants exercisable for
approximately 39,000 shares of Common Stock.  The warrants would have
an exercise price of $2.78 per share and be exercisable for five years from
their grant date.




The
Company accounts for its investment in Paketeria using the equity method in
accordance with APB Opinion No. 18, “The Equity Method of Accounting for
Investments in Common Stock”.  Based on an independent appraisal, the
Company allocated the remaining $1,269 balance of the investment in Paketeria as
follows: $281 to the value of the non-compete agreement from Paketeria’s founder
and managing director amortizable using the straight-line method over four
years; $185 to the value of the franchise agreements at the date of the
investment, amortizable using the sum-of-years digits method over the five-year
life of  the franchise agreements at acquisition; and $446 to the
Paketeria brand name, deemed to be an intangible asset with an indefinite life
and accordingly, not amortized; and $357 to non-amortizing
goodwill.




The
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 Paketeria.




On
September 20, 2007, Paketeria completed a private placement of its shares
raising approximately €1,733 ($2,457 at the then exchange rate).  The
shares were issued by Paketeria on the basis of a valuation of €133.33 per Euro
share capital, representing a pre-money valuation of Paketeria of €8,000
($11,344 at the then exchange rate).


F-24


In
addition, concurrent with the private placement, the Company converted
shareholder loans in the aggregate principal amount of €750 ($1,056 at the then
exchange rate) plus accrued interest, into shares of Paketeria on the same basis
as the private placement.  At the same time the Company exercised its
option under the August 2006 investment agreement to acquire the remaining
portion of the convertible promissory note in the amount of €70 ($98 at the then
exchange rate) plus accrued interest.  The Company converted this
balance plus accrued interest into shares of Paketeria on the basis of an
evaluation of € 50.70 nominal value per Euro share capital (the valuation from
the August 2006 investment agreement) upon the closing of the private
placement.  The increase in the Company’s investment in Paketeria from
its additional investment was allocated as an increase in the goodwill component
of the Company’s investment in Paketeria.




As a
result of the Paketeria private placement, the Company recorded a non-cash loss
of $37 in “Gain (Loss) on Private Placement of Equity Investments”.




After the
private placement and related transactions described above, the Company owned
approximately 31% of Paketeria.




On
December 7, 2007 Paketeria converted from a GmbH company to an AG company and
recapitalized its share capital with 1,296,000 shares outstanding of which the
Company owns 406,425 shares.




On
December 21, 2007, Paketeria’s shares were listed under the symbol “AOSTYL” on
the Open Market (Freiverkehr) of the Frankfurt Stock Exchange and became
eligible for trading.   There is virtually no trading in
Paketeria’s shares on this market.  From the listing date to December
31, 2008, a total of 998 shares of Paketeria were sold.




During
the six months ended 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.




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




On
August 26, 2008, the Company entered into a Loan Agreement with Paketeria
to provide Paketeria with Additional Interim Financing of €600 ($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
bears interest at 12% per year and is due on March 31, 2009. The Combined Loan
and any accrued interest are subordinate to the rights of any unsubordinated
creditors of Paketeria. If the Combined Loan and accrued interest are not paid
at the due date, the Company is entitled to convert the outstanding principal
and accrued interest into new Common Shares of Paketeria to be issued at a
valuation of €2.31 ($3.21 at current exchange rates) per share. In addition,
Paketeria granted warrants to the Company to acquire Paketeria shares. The
warrants are exercisable at €7.71 ($10.73 at current exchange rates) per share
to acquire the number of Paketeria shares derived by dividing the Combined
Loan’s outstanding principal plus accrued interest by €7.71. The warrant may
only be exercised to the extent the conversion right is not exercised. The
warrants granted in connection with the Combined Loan replaced the warrants
received with the series of promissory notes. No value was attributed to the
warrants received from the Combined Loan as the value was determined to be
immaterial.




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


F-25




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
balances of the non-compete agreement, franchise agreements, brand name and
goodwill. In addition, at the end of third quarter of 2008, the Company recorded
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 is in doubt and
ceased recording interest income.




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





Period from
                    August 8,
                    2006 to
                    December
                    31, 2006
                  
                  
                  Year ended
                    December
                    31, 2007
                  
                  
                  Year ended
                    December
                    31, 2008Equity
      loss in Paketeria
                  
                  $
                  (127
                  )
                  
                  $
                  (971
                  )
                  
                  $
                  (992
                  )Amortization
      expense associated with acquired non-compete and franchise
      agreements
                  
                  
                  (32
                  )
                  
                  
                  (186
                  )
                  
                  
                  (76
                  )Impairment
      of non-compete and franchise agreements, option value, brand name and
      goodwill
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (467
                  )Stock
      compensation expense
                  
                  
                  (265
                  )
                  
                  
                  (49
                  )
                  
                  
                  (25
                  )Share
      of losses in Paketeria
                  
                  $
                  (424
                  )
                  
                  $
                  (1,206
                  )
                  
                  $
                  (1,560
                  )




The
activity in the Company’s investments in Paketeria is as follows:




Investment
      balance as of December 31, 2006
                
                $
                1,212Conversion
      of debt and accrued interest in connection with private placement(including
      transaction costs)
                
                
                1,189Adjustment
      of investment with respect to non-cash loss in connection withprivate
      placement
                
                
                (37
                )Amortization
      of acquired non-compete and franchise agreements and change invalue
      of options
                
                
                (186
                )Company’s
      share of Paketeria’s losses
                
                
                (971
                )Translation
      adjustment
                
                
                232Investment
      balance as of December 31, 2007
                
                
                1,439Net
      adjustment of investment with respect to non-cash gains in connection with
      outside investments
                
                
                82Amortization
      of acquired non-compete and franchise agreements
                
                
                (76
                )Cumulative
      translation adjustment
                
                
                14Company’s
      share of Paketeria losses – period from January 1, 2008 to September 30,
      2008
                
                
                (992
                )Investment
      balance prior to impairment
                
                
                467Impairment
      of non-compete and franchise agreements, option value, brand name and
      goodwill
                
                
                (467
                )Investment
      balance as of December 31, 2008
                
                $
                —




See Note
20(c) (3) with respect to the options granted to Paketeria’s founder and
managing director as part of the Company’s investment in
Paketeria.  During the years ended December 31, 2008, 2007 and 2006,
the Company recorded $25, $49 and $265, respectively, of SFAS 123R stock
compensation expense as part of its Share in Losses of
Paketeria.


F-26


The
percentage share of Paketeria’s loss recognized by the Company as equity loss
against its investment can be found in the table below:




Percentage of Paketeria
                                  Losses Recognized
                                  Against Investment in
                                  PaketeriaAugust
      7, 2006 – October 30, 2006
                                
                                23%October
      31, 2006 – September 20, 2007
                                
                                33%September
      21, 2007 – December 31, 2008
                                
                                31%





NOTE 6—INVESTMENT
IN GRIDSENSE




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




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




The
Company accounts for its investment in GridSense using the equity method in
accordance with APB Opinion No. 18, “The Equity Method of Accounting for
Investments in Common Stock”. The Company records its share of income or loss in
GridSense with a lag of three months as it is not able to receive timely
financial information. In 2008, the Company recorded a loss of $123 representing
the Company’s weighted average of approximately 23.6% share of GridSense’s
losses for the period from January 2, 2008 to September 30, 2008.





Based on an independent appraisal, the
Company allocated the $1,153 investment in GridSense 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 tradename 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. In addition to the
Company’s share of  losses in GridSense for the period from January 2,
2008 to September 30, 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 share
price of GridSense, the Company determined that the decline in value was other
than temporary, and, accordingly recorded an impairment of $714 in the value of
GridSense to bring the value of the Company’s investment in GridSense to its
market value on the Toronto Stock Exchange on that date.


F-27





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





Year ended
                    December 31,
                    2008Equity
      loss in GridSense for the period from January 2, 2008 –September 30,
      2008
                  
                  $
                  (123
                  )Amortization
      expense associated with acquired technologies, customer relationships and
      trademarks and write-off of arrant value
                  
                  
                  (89
                  )Impairment
      of investment in GridSense
                  
                  
                  (714
                  )Share
      of losses in GridSense
                  
                  $
                  (926
                  )




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




In
October, 2008, GridSense and certain of its significant shareholders, including
the Company, entered into agreements to privatize the operations of GridSense in
a corporation organized in Australia. If and when the proposed privatization is
completed, the Company would own approximately 39.1% of the outstanding shares
of privatized GridSense as compared to the 23.4% interest the Company maintains
in the publicly held GridSense. In addition, the privatized GridSense will
assume all indebtedness owed to the Company by the public GridSense. The
privatization is subject to regulatory approval in Canada and approval by a
majority of GridSense’s disinterested public shareholders. (See Note 27 –
Subsequent Events.)




NOTE 7—OTHER
INVESTMENTS




(a)
            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. This amount is 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.




(b)
            EnerTech
      III




In August
2007, the Company committed to invest up to $5,000 over a ten-year period in
EnerTech Capital Partners III L.P. (“EnerTech III”), a proposed $250 million
venture capital fund targeting early and expansion stage energy and clean energy
technology companies that can enhance the profits of the producers and consumers
of energy.  In 2007, the Company received and funded a capital call of
$400 to EnerTech III. In August 2008, the Company received and funded a capital
call of $750 from EnerTech III.  In the fourth quarter of 2008,
EnerTech III recorded an impairment in the value of one of its investments.
Accordingly, the Company has recorded an impairment of $33 in its investment in
EnerTech III of its share of the impairment. The carrying value of the Company’s
investment in EnerTech III was $1,117 at December 31, 2008.




The Company accounts for its investment in EnerTech III under the cost
method.


F-28




NOTE 8—MINORITY
INTERESTS






On
February 29, 2008, the Company entered into a Common Stock Purchase Agreement
(the “Stock Purchase Agreement”) with the Company’s wholly-owned CoaLogix Inc.
subsidiary and EnerTech III pursuant to which EnerTech III purchased from
CoaLogix a 15% interest in CoaLogix for $1,948. The Company owns 85% of CoaLogix
following the transaction and EnerTech III’s interest in CoaLogix is reflected
in the Company’s Consolidated Balance Sheets as Minority Interests. The Company
recorded an immaterial gain as a result of the investment by EnerTech III.
During the second quarter of 2008, EnerTech III invested an additional $278 in
CoaLogix as its 15% share of an aggregate $1,850 additional investment made by
the Company and Enertech III in CoaLogix. The minority interest’s share of
CoaLogix’s net loss in the year ending December 31, 2008 was $248.




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




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




NOTE
9—IMPAIRMENTS




Impairments are composed of the
following:





Year
                  ended
                  December
                  31, 2006
                
                
                Year
                  ended
                  December
                  31, 2007
                
                
                Year
                  ended
                  December
                  31, 2008Impairment
      of loans and accrued interest to Paketeria (see Note 5)
                
                $
                —
                
                
                $
                —
                
                
                $
                2,454Impairment
      of loan and accrued interest to GridSense (see Note 6)
                
                
                —
                
                
                
                —
                
                
                
                631Impairment
      of investment in EnerTech III (see Note 7(b))
                
                
                —
                
                
                
                —
                
                
                
                33Impairment
      of loans to and investment in Local Power (see Note 7(a))
                
                
                —
                
                
                
                —
                
                
                
                546Impairment
      of goodwill (see Note 15)
                
                
                40
                
                
                
                89
                
                
                
                —Impairment
      of intangibles (see Note 15)
                
                
                —
                
                
                
                23
                
                
                
                —$
                40
                
                
                $
                112
                
                
                $
                3,664




NOTE
10—DISCONTINUED OPERATIONS- SALE OF DATABIT




On March
10, 2006 the Company entered into a Stock Purchase Agreement dated as of March
9, 2006 (the “SPA”), for the sale of all the outstanding capital stock of its
Databit Inc. subsidiary  (“Databit”) to Shlomie Morgenstern, President
of Databit and a Vice President of the Company.  In the past, the
operations of Databit represented the Company’s computer hardware
segment.  The transactions contemplated under the SPA, and the related
transactions to which the Company, Shlomie Morgenstern and the Company’s then
CEO, George Morgenstern, were party, were consummated on March 10, 2006 and
included the following:


F-29


(i)           Termination
of the Employment Agreement dated August 19, 2004 among Shlomie Morgenstern,
Databit and the Company and the release of the Company from any and all
liability (other than under the related stock option and restricted stock
agreements which would be modified as described below) including the waiver by
Shlomie Morgenstern of any and all severance or change of control payments to
which he would have been entitled.




(ii)           Amendment
of the option and restricted stock agreements between the Company and Shlomie
Morgenstern to provide for acceleration of any unvested grants on the closing of
the transactions and for all options to be exercisable through 18 months from
the closing.




(iii)           The
assignment to and assumption by Databit of the obligations of the Company to
George Morgenstern under the Employment Agreement between the Company and George
Morgenstern dated January 1, 1997, as amended (the “GM Employment
Agreement”) upon the following terms:




(A)                      Reduction
of the amounts owed to George Morgenstern under the GM Employment Agreement by
the lump sum payment described below and the modifications to options and
restricted stock agreements described below.




(B)                      A
release by George Morgenstern of the Company from any and all liability and
obligations to him under the GM Employment Agreement, subject to a lump sum
payment of $600 (the “contract settlement”).




(iv)           The
assumption by Databit of the Company’s obligations under the Company’s leases
for the premises in New York City and Mahwah, New Jersey, which provide for
aggregate rents of approximately  $450 over the next three
years.




(v)           The
amendment of the option agreement with George Morgenstern dated December 30,
2004 to provide for the acceleration of the 60,000 options that are not
currently vested and the extension of the exercise period for all options held
by George Morgenstern to the later of (i) September 2009 and (ii) 18 months
after the cessation of service under the new consulting agreement described
below.




(vi)           The
amendment of the Restricted Stock Agreement dated August 31, 1998 between George
Morgenstern and the Company to provide for the removal of any vesting conditions
from the 20,000 shares still subject to such conditions.




(vii)           Execution
and delivery by George Morgenstern and the Company of a new consulting agreement
for a period of two years, pursuant to which George Morgenstern would serve as a
consultant to the Company, primarily to assist in the management of the
Company’s DSIT subsidiary, which agreement provides for de minimus compensation
per year plus a non-accountable expense allowance of $65 per year to cover
expected costs of travel and other expenses.




Results
of operations of the discontinued operations of Databit were as
follows:




Period ended
                    March 9, 2006Sales
                  
                  $
                  2,949Cost
      of sales
                  
                  
                  2,316Gross
      profit
                  
                  
                  633Selling,
      marketing, general and administrative expenses
                  
                  
                  558Income
      from operations
                  
                  
                  75Other
      income, net
                  
                  
                  3Finance
      expense, net
                  
                  
                  —Net
      income before income taxes
                  
                  
                  78Income
      tax benefit
                  
                  
                  —Net
      income from discontinued operations
                  
                  $
                  78




F-30




The loss
of the sale of Databit and contract settlement is comprised of the
following:




Excess
      of assets over liabilities transferred
                
                $
                1,204Contract
      settlement costs
                
                
                600Stock
      compensation expense
                
                
                315Professional
      fees and other transaction costs
                
                
                179Adjustment
      of prior years expense allocations
                
                
                (229
                )Total
      loss on the sale of Databit and contract settlement
                
                $
                2,069




NOTE 11—ACCOUNTS
RECEIVABLE, NET




Accounts
      receivable, net, consists of the following:
                  
                  As of December 31,2007
                  
                  
                  2008Trade
      accounts receivable
                  
                  $
                  1,791
                  
                  
                  $
                  4,524Allowance
      for doubtful accounts
                  
                  
                  (16
                  )
                  
                  
                  —$
                  1,775
                  
                  
                  $
                  4,524




NOTE
12—INVENTORY




As of December 31,2007
                
                
                2008Raw
      materials
                
                $
                119
                
                
                $
                720Finished
      goods
                
                
                —
                
                
                
                428$
                119
                
                
                $
                1,148




NOTE 13—OTHER
CURRENT ASSETS




As of December 31,2007
                
                
                2008Prepaid
      expenses and deposits
                
                $
                357
                
                
                $
                620Deferred
      costs
                
                
                —
                
                
                
                583Prepaid
      inventory
                
                
                —
                
                
                
                407Debt
      origination costs (see Note 16)
                
                
                895
                
                
                
                —Taxes
      receivable
                
                
                —
                
                
                
                362Employees
                
                
                34
                
                
                
                84Due
      from Local Power
                
                
                25
                
                
                
                —Other
                
                
                80
                
                
                
                24$
                1,391
                
                
                $
                2,080




F-31




NOTE 14—PROPERTY
AND EQUIPMENT, NET




Property
and equipment consist of the following




Estimated
                          Useful
                          Life (in
                          years)
                        
                        
                        As of December 31,Cost:
                        
                        
                        
                        
                        2007
                        
                        
                        2008Computer
      hardware and software
                        
                        2 –
      5
                        
                        
                        $
                        934
                        
                        
                        $
                        683Equipment
                        
                        4-10
                        
                        
                        
                        974
                        
                        
                        
                        2,368Vehicles
                        
                        3
                        
                        
                        
                        41
                        
                        
                        
                        5Leasehold
      improvements
                        
                        Term
      of
                          lease
                        
                        
                        
                        363
                        
                        
                        
                        4792,312
                        
                        
                        
                        3,535Accumulated
      depreciation and amortizationComputer
      hardware and software
                        
                        
                        
                        
                        
                        
                        502
                        
                        
                        
                        400Equipment
                        
                        
                        
                        
                        
                        
                        281
                        
                        
                        
                        442Vehicles
                        
                        
                        
                        
                        
                        
                        22
                        
                        
                        
                        1Leasehold
      improvements
                        
                        
                        
                        
                        
                        
                        172
                        
                        
                        
                        245977
                        
                        
                        
                        1,088Property
      and equipment, net
                        
                        
                        
                        
                        
                        $
                        1,335
                        
                        
                        $
                        2,447




Depreciation
and amortization in respect of property and equipment amounted to $161, $195 and
$485 for 2006, 2007 and 2008, respectively.  During 2007, the Company
wrote off $748 of fully depreciated assets.




During
2008, $199 of computer hardware and software was transferred to
project-in-process as part of a project being performed for a customer. The
balance was subsequently netted against provision for project purchases (in
Other Current Liabilities).




Property
and equipment is presented net of third party participation received of $78 in
the year ended December 31, 2007.




NOTE 15—GOODWILL
AND OTHER INTANGIBLE ASSETS




During
the year ended December 31, 2008, the Company recorded additions to goodwill in
both its EIS segment and its Naval & RT Solutions segment as a result of its
acquisition of Coreworx (see Note 3(a)) and its additional investment in DSIT
(see Note 3(c)).


F-32


The
changes in the carrying amounts of goodwill by segment from December 31, 2006 to
December 31, 2008 were as follows:




CoaLogix
                
                
                Naval &
                  RT
                  Solutions
                
                
                EIS
                
                
                Other
                
                
                TotalBalance
      as of December 31, 2006
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                97
                
                
                $
                97Goodwill
      created in acquisition of SCR-Tech (see Note 3(b))
                
                
                3,714
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                3,714Goodwill
      in additional investment in DSIT(see
      Note 3(c))
                
                
                —
                
                
                
                231
                
                
                
                —
                
                
                
                —
                
                
                
                231Goodwill
      impairment
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (89
                )
                
                
                (89
                )Translation
      adjustment
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (8
                )
                
                
                (8
                )Balance
      as of December 31, 2007
                
                
                3,714
                
                
                
                231
                
                
                
                —
                
                
                
                —
                
                
                
                3,945Goodwill
      created in acquisition of Coreworx (see Note 3(a))
                
                
                —
                
                
                
                —
                
                
                
                2,398
                
                
                
                —
                
                
                
                2,398Adjustment
      of goodwill in additional investment in DSIT (see Note
    3(c))
                
                
                —
                
                
                
                209
                
                
                
                —
                
                
                
                —
                
                
                
                209Goodwill
      in additional investment in DSIT(see
      Note 3(c))
                
                
                —
                
                
                
                84
                
                
                
                —
                
                
                
                —
                
                
                
                84Translation
      adjustment
                
                
                —
                
                
                
                6
                
                
                
                (300
                )
                
                
                —
                
                
                
                (294
                )Balance
      as of December 31, 2008
                
                $
                3,714
                
                
                $
                530
                
                
                $
                2,098
                
                
                $
                —
                
                
                $
                6,342




As
required by SFAS No. 142, 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 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 2007, the Company
recorded an impairment of $89 with respect to the goodwill in its Other segment.
In 2008, no impairments were found to the Company’s goodwill.




On May 9,
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 for use in applications which remove heavy metals,
such as mercury, from power plants. The agreement has a term of ten years, with
an option in favor of CoaLogix to renew for an additional five-year period. In
consideration for its rights under the agreement, CoaLogix paid an upfront
license fee of $2,000 and agreed to pay royalties on net sales of, and to share
a portion of any royalties received in respect of, licensed product with
Solucorp based on specified formula.


F-33




The
changes in the carrying amounts and accumulated amortization of intangible
assets from December 31, 2006 to December 31, 2008 were as
follows:




SCR
              
              
              Solucorp
              
              
              Naval
              
              
              
              
              
              CustomerTechnologies**
              
              
              License
              
              
              Technologies
              
              
              Software
              
              
              Relationships
              
              
              Other
              
              
              TotalCost
              
              
              A.A.*
              
              
              Cost
              
              
              A.A.*
              
              
              Cost
              
              
              A.A.*
              
              
              Cost
              
              
              A.A.*
              
              
              Cost
              
              
              A.A.*
              
              
              Cost
              
              
              A.A.*
              
              
              NetBalance
      as of December 31, 2006
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              224
              
              
              $
              (177
              )
              
              $
              47Intangibles
      created in acquisition of SCR-Tech (see Note 3(b))
              
              
              5,511
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              5,511Intangibles
      in additional investment in DSIT (see Note 3(c))
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              557
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              557Impairment
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (23
              )
              
              
              —
              
              
              
              (23
              )Amortization
              
              
              —
              
              
              
              (81
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (24
              )
              
              
              (105
              )Balance
      as of December 31, 2007
              
              
              5,511
              
              
              
              (81
              )
              
              
              —
              
              
              
              —
              
              
              
              557
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              201
              
              
              
              (201
              )
              
              
              5,987Acquisition
      of Solucorp license
              
              
              —
              
              
              
              —
              
              
              
              2,000
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              2,000Adjustment
      of intangibles in additional investment in DSIT (see Note
      3(c))
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (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(c))
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              210
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              210Amortization
              
              
              —
              
              
              
              (552
              )
              
              
              —
              
              
              
              (128
              )
              
              
              —
              
              
              
              (48
              )
              
              
              —
              
              
              
              (71
              )
              
              
              —
              
              
              
              (14
              )
              
              
              —
              
              
              
              —
              
              
              
              (813
              )Cumulative
      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
              )
              
              $
              201
              
              
              $
              (201
              )
              
              $
              10,357


*    Accumulated
amortization




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


F-34




Amortization
in respect of intangible assets amounted to $39, $105 and $813 for 2006, 2007
and 2008, respectively. In 2008, no impairments were found to the Company’s
intangible assets.




Amortization
expense with respect to intangible assets is estimated to be $1,074 per year for
each of the years ending December 31, 2009 through 2013.




NOTE 16—SHORT-TERM
BANK CREDIT, 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, $250 of which was being used at December 31, 2008. The
line-of-credit is for a period of one year (expiring in October 2009) and bears
interest at 4% (prime plus 0.75% ). (The prime rate at December 31, 2008 was
3.25%). The line-of-credit is subject to certain financial covenants. CoaLogix
was in violation with one of its financial covenants at December 31, 2008, but
received a waiver from the bank with respect to the violation.




In addition, the Company’s DSIT
subsidiary has a line-of-credit of approximately $526 from an Israeli bank, of
which $191 was being used at December 31, 2008 (net of secured
deposits).  The line-of-credit is subject to certain financial
covenants. DSIT was in compliance with its financial covenants at December 31,
2008. The line-of-credit expires on March 31, 2009 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 bear interest at a
weighted average rate of the Israeli prime rate per annum plus 3.0% (at December
31, 2007, plus 1.5%).The Israeli prime rate as of December 31, 2008 was 4.0%
(December 31, 2007, 5.5%).





(b)
            Private
      Placement of Convertible Redeemable Subordinated
  Debentures




On March
30, 2007, the Company conducted an initial closing of a private placement of its
Debentures.  At the initial closing the Company issued $4,281
principal amount of the Debentures, at par, and received gross proceeds in the
same amount.  On April 11, 2007, the Company conducted a second and
final closing of a private placement of its Debentures.  At the second
closing the Company issued $2,605 principal amount of the Debentures, at par,
and received gross proceeds in the same amount.  On December 18, 2007,
the Company decided to redeem all outstanding Debentures.  All the
unconverted Debentures outstanding were redeemed on January 29, 2008 (see
below).




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.  During 2007, $480 of
the Debentures were converted into shares of the Company’s Common Stock
resulting in the issuance of 126,263 shares.




The
Company determined the fair value of the beneficial conversion feature of the
Debentures issued to be $2,570 for both the initial and second
closings.  In accordance with applicable accounting principles, the
beneficial conversion feature is reflected as a discount to the total Debenture
amount and is charged to interest expense over the four-year period of the
Debenture.  The period of amortization of the beneficial conversion
feature was accelerated in December 2007 as a result of the previously noted
decision to redeem all the outstanding Debentures in 2008.  With
respect to the beneficial conversion feature, the Company recorded interest
expense of $747 in the year ended December 31, 2007.


F-35




By the
terms of the offering, each subscriber, in addition to the Debentures, received
a warrant exercisable for the purchase of a number of shares equal to 25% of the
principal amount of the Debentures purchased by such subscriber, divided by the
conversion price of $3.80, resulting in the issuance of Warrants to purchase
281,656 shares at the initial closing and 171,391 shares at the second and final
closing.  The Warrants are exercisable for shares of the Company’s
Common Stock for five years at an exercise price of $4.50 per share and are
callable by the Company at any time after the effectiveness of the registration
statement and provided that the registration statement has been effective during
the period of notice and is effective at the time of the call, 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 the previously noted
decision to redeem all the outstanding Debentures in 2008.  In the
year ended December 31, 2007, the Company recorded interest expense of $186 with
respect to these warrants.




The
Debentures bore interest at the rate of 10% per annum, payable quarterly and had
a scheduled maturity of March 30, 2011.  The Debentures provided that
if the Company failed to redeem at least 50% of the total outstanding principal
amount of the Debentures, together with interest accrued thereon, by the first
anniversary of the initial closing, the annual rate of interest payable on the
Debentures would be increased to 12%.  As noted above, all the
unconverted Debentures outstanding were redeemed on January 29, 2008 (see
below).




In
connection with the offering, the Company retained a registered broker-dealer to
serve as placement agent.  In accordance with the terms of the
agreement, the placement agent received a 7% selling commission, 3% management
fee, and 2% non-accountable expense allowance, out of the gross proceeds of the
offering.  In addition, the placement agent was entitled to and
received warrants on substantially the same terms as those issued to the
subscribers, exercisable for the purchase of the number of shares equal to 10%
of the total principal amount of the Debentures sold, divided by the conversion
price of $3.80.  Out of the gross proceeds received, the Company paid
the placement agent commissions and expenses of $864 and issued to the placement
agent warrants to purchase 181,211 shares of Common Stock.  The value
of the warrants issued to the placement agent was determined to be $213 based
upon the valuation performed by the independent consultant mentioned
above.  In addition, the Company paid various other transaction costs
of $182.  The total debt origination costs of $1,259 were reflected as
a discount against the total Debenture amount and were initially charged to
interest expense over the four year life of the Debentures.  The
period of amortization of the debt origination costs was accelerated in December
2007 as a result of the previously noted decision to redeem all the outstanding
Debentures in 2008.  In the year ended December 31, 2007, the Company
recorded interest expense of $364 with respect to these debt origination
costs.  At December 31, 2007, the net balance of the debt origination
costs of $895 was included in Other Current Assets (see Note 13).




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





(c)
            Notes
      Payable




As part
of the purchase of the Coreworx shares on August 13, 2008, (see Note 3(a)), the
Company entered into agreement with the former shareholders of Coreworx to pay a
total of $3,400 aggregate principal on one-year promissory notes. The notes bear
interest at a rate of 8% per year and is payable quarterly. The entire principal
balances on the notes are due on August 13, 2009.


F-36





(d)
            Debt
      summary




At
December 31, 2007, short and long-term debt included bank debt representing
loans received by DSIT from Israeli banks denominated in NIS and capital lease
obligations. The loans received by DSIT were repaid in 2008.




As of December 31,2007
                
                
                2008Lines
      of credit
                
                $
                590
                
                
                $
                441Bank
      debt – DSIT
                
                
                167
                
                
                
                —Notes
      payable
                
                
                —
                
                
                
                3,400Capital
      lease obligations
                
                
                16
                
                
                
                4Total
      debt
                
                
                773
                
                
                
                3,845Less:
      Lines-of-credit
                
                
                (590
                )
                
                
                (441
                )Less:
      Notes payable
                
                
                —
                
                
                
                (3,400
                )Less:
      Current portion of debt and capital lease obligations
                
                
                (171
                )
                
                
                (4
                )Long-term
      bank debt
                
                $
                12
                
                
                $
                —




At
December 31, 2007, all bank debt was denominated in NIS and was
unlinked.  With respect to the bank debt and lines of credit for DSIT
(see (a) above), a lien in favor of the Israeli banks was placed on DSIT’s
assets.  In addition, the Company has guaranteed DSIT’s lines of
credit to Israeli banks. With respect to the bank debt and lines 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 17—OTHER
CURRENT LIABILITIES




Other
current liabilities consist of the following:




As of December 31,2007
                
                
                2008Taxes
      payable
                
                $
                1,107
                
                
                $
                302Advances
      from customers
                
                
                77
                
                
                
                2,476Accrued
      expenses
                
                
                2,485
                
                
                
                1,547Warranty
      provision
                
                
                107
                
                
                
                8Other
                
                
                68
                
                
                
                17$
                3,844
                
                
                $
                4,350




NOTE 18—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 a severance pay
liability for 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-37




The
liability is partially funded by sums deposited in dedicated funds in respect of
employee termination benefits.  The Company may only utilize the
insurance policies for the purpose of disbursement of severance
pay.  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, $412, $235 and $338 for the
years ended December 31, 2006, 2007 and 2008, respectively.




(c) The
Company expects to contribute approximately $216 to the insurance policies in
respect of its severance pay obligations in the year ending December 31,
2009.




(d) The
Company does not expect to pay any future benefits to its employees upon their
normal retirement age during the years 2009 to 2013 and expects to pay $1,390
during the years 2014 to 2018. The liability as at December 31, 2008 for future
benefit payments in the next ten years is included in these financial statements
in “liability for employee termination benefits”. The liability for future
benefits does not reflect any amounts already deposited in dedicated funds with
respect to those employees (see “a” above).  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.  These amounts do not include amounts that might be paid to
employees that will cease working with the Company before their normal
retirement age.




NOTE 19—COMMITMENTS
AND CONTINGENCIES




(a)
            Leases
      of Property and Equipment




Office
rental and automobile leasing expenses, for 2006, 2007 and 2008, were $586, $560
and $1,252, respectively.  The Company and its subsidiaries lease
office space and equipment under operating lease agreements.  Those
leases will expire on different dates from 2009 to 2012.Future minimum lease
payments on non-cancelable operating leases as of December 31, 2008 are as
follows:




Years
      ending December 31,2009
                
                $
                1,2122010
                
                
                1,0822011
                
                
                7202012
                
                
                3702013
                
                
                272014
      and thereafter
                
                
                —$
                3,411




(b)
            EnerTech
      III




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 $1,150
to EnerTech III (see Note 7(b)).




(c)
            Guarantees




The
Company’s DSIT subsidiary has provided various performance, advance and tender
guarantees as required in the normal course of its operations.  As at
December 31, 2008, such guarantees totaled approximately $3,857 and were due to
expire through 2010.  As a security for a portion of these guarantees,
the Company has deposited with an Israeli bank $2,736 which is shown
as  a restricted deposit ($2,157 as a current restricted deposit and
$579 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 early 2009.


F-38




See Note
16(a) 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 tortuous
interference with contract, fraudulent misrepresentation, conversion, unfair
trade practices and unjust enrichment. EES’ claims arise largely out of a series
of business relationships that existed between EES, CoaLogix and Solucorp. The
suit seeks unspecified damages in addition to disgorgement of all revenues
CoaLogix has earned from its dealings with Solucorp. CoaLogix denies any
liability and intends to defend 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. No provision has been recorded with respect
to the suit against CoaLogix and its CEO.




In March
2006, the Company reached a settlement agreement with an Israeli bank with
respect to the Company’s claims against the bank and the bank’s counterclaims
against the Company.  As part of the settlement agreement, all claims
and counterclaims by the parties were dismissed.  The bank returned to
the Company approximately $94 plus interest and CPI adjustments of attorney fees
and court costs previously paid by the Company.  As a result of the
settlement agreement, the Company recorded $330 of other income in the first
quarter of 2006.




NOTE
20—SHAREHOLDERS’ EQUITY




(a)
            General




The
Company is authorized to issue 20,000,000 shares of Common Stock.  At
December 31, 2008 the Company had issued and outstanding 12,454,528 shares of
its Common Stock, par value $0.01 per shareholders of 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)
            Employee
      Stock Options




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, 2008, 362,500 options were available for grant under the 2006
Stock Incentive Plan and 250,000 options were available for grant under the 2006
Director Plan.


F-39




A summary
of the Company’s option plans with respect to employees as of December 31, 2006,
2007 and 2008, as well as changes during each of the years then ended, is
presented below:




2006
                
                
                2007
                
                
                2008Number
                  ofOptions
                  (in shares)
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Number
                  of Options
                  (in shares)
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Number
                  of Options
                  (in shares)
                
                
                Weighted
                  Average
                  Exercise
                  PriceOutstanding
      at beginning of year
                
                
                1,565,335
                
                
                $
                2.49
                
                
                
                1,867,835
                
                
                $
                2.51
                
                
                
                1,403,000
                
                
                $
                3.07Granted
      at market price
                
                
                740,000
                
                
                $
                2.84
                
                
                
                201,000
                
                
                $
                4.44
                
                
                
                270,000
                
                
                $
                4.44Granted
      at discount to market price
                
                
                —
                
                
                
                —
                
                
                
                79,000
                
                
                $
                3.50
                
                
                
                —
                
                
                
                —Exercised
                
                
                (165,833
                )
                
                $
                1.72
                
                
                
                (538,168
                )
                
                $
                1.48
                
                
                
                (40,000
                )
                
                $
                2.54Forfeited
      or expired
                
                
                (271,667
                )
                
                $
                3.84
                
                
                
                (206,667
                )
                
                $
                3.63
                
                
                
                (50,000
                )
                
                $
                4.12Outstanding
      at end of year
                
                
                1,867,835
                
                
                $
                2.51
                
                
                
                1,403,000
                
                
                $
                3.07
                
                
                
                1,583,000
                
                
                $
                3.29Exercisable
      at end of year
                
                
                1,501,157
                
                
                $
                2.43
                
                
                
                1,182,665
                
                
                $
                2.81
                
                
                
                1,282,164
                
                
                $
                2.30




In
connection with the stock option exercises during the years ended December 31,
2007 and 2008, the Company received proceeds of $795 and $102,
respectively.  During the years ended December 31, 2007 and 2008, all
538,168 and 40,000 shares issued in connection with options exercises were newly
issued shares. The intrinsic value of options exercised in 2007 and 2008 were
$1,945 and $91, respectively.




The
Company granted 740,000, 176,000 and 270,000 options to employees who are
related parties in the years ended December 31, 2006, 2007 and 2008,
respectively, under various option plans.  No options were exercised
by related parties to purchase shares of common stock of the Company, during
2006 or 2007. During 2008, 47,500 options were exercised by a related party and
25,000 options were forfeited. As of December 31, 2006, 2007 and 2008, the
number of outstanding options held by the related parties was 1,439,000,
1,243,500 and 1,478,500 options, respectively.




The
weighted average grant-date fair value of the options granted to employees and
directors during 2006, 2007 and 2008, amounted to $2.10, $1.91 and $2.91 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):




2006
                  
                  
                  2007
                  
                  
                  2008Risk-free
      interest rate
                  
                  
                  4.8
                  %
                  
                  
                  4.4
                  %
                  
                  
                  2.6
                  %Expected
      term of options, in years
                  
                  
                  3.7
                  
                  
                  
                  2.8
                  
                  
                  
                  5.5Expected
      annual volatility
                  
                  
                  109
                  %
                  
                  
                  59
                  %
                  
                  
                  74
                  %Expected
      dividend yield
                  
                  None
                  
                  
                  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 create establish historical
rates.  Currently, as permitted by SAB 107, the Company used the
simplified method to compute the expected option term for options granted in
2006, 2007 and 2008 since the Company’s history of option exercises is too brief
to have established 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 year ended December 31, 2008.  Estimates of
fair value are not intended to predict actual future events or the value
ultimately realized by persons who receive equity awards.


F-40




Stock-based
compensation expense included in the Company’s statements of operations with
respect to employees and directors was:




Year
                    ended
                    December
                    31, 2006
                  
                  
                  Year
                    ended
                    December
                    31, 2007
                  
                  
                  Year
                    ended
                    December
                    31, 2008Cost
      of sales
                  
                  $
                  24
                  
                  
                  $
                  25
                  
                  
                  $
                  —Selling,
      general and administrative
                  
                  
                  1,025
                  
                  
                  
                  551
                  
                  
                  
                  679Loss
      on the sale of discontinued operations andcontract
      settlement
                  
                  
                  315
                  
                  
                  
                  —
                  
                  
                  
                  —$
                  1,364
                  
                  
                  $
                  576
                  
                  
                  $
                  679




As at
December 31, 2008, the Company had a total of approximately $479 of compensation
expense not yet recognized with respect to employee stock options to be
recognized over a period of approximately three years.




During
the year ended December 31, 2007, the Company modified the expiration date of
options with two of its employees.  The Company recognized as
compensation expense the incremental increase in the value of the options of $6
in selling, general and administrative expense.




During
the year ended December 31, 2006, the Company modified the terms of numerous
options with its employees.  In connection with the Company’s sale of
Databit (see Note 10), the Company modified the expiration date for the options
held by Databit employees.  No incremental compensation cost was
recorded as a result of the modification.  Also in connection with the
Company’s sale of Databit and contract settlement, the Company modified the
expiration date and vesting date of options held by Shlomie Morgenstern
(President of Databit) and George Morgenstern (our then CEO).  As a
result of the modifications, the Company recognized an incremental compensation
cost of $276, which was included in the loss recorded on the sale of Databit and
contract settlement.




During
2006, the Company also modified the expiration date of options for certain
employees, former employees and a former director.  As a result of the
modification, the Company recognized as compensation expense the incremental
increase in value of the options of $102 which is included in cost of sales
($17) and selling, general and administrative expense ($85).




(c)
            Non-employee
      Stock Options




(1)           General




In 2007
and 2008, all options granted to non-employees were from the 2006 Stock
Incentive Plan which permits grants to non-employees.  Previously,
options granted to employees were non-plan grants or were granted from option
plans which have since expired.




(2)           Non-Performance
Based 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.


F-41




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.




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 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.




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.




The
Company used the Black-Scholes valuation method to estimate the fair value of
the options to purchase the 50,000 shares of Common Stock of the Company, using
a risk free interest rate of 3.5%, an expected term of five years, an annual
volatility of 72% and no expected dividends.  The Company estimated
the fair value of the option to be approximately $153.  During the
year ended December 31, 2007, the Company recorded the $153 to selling, general
and administrative expenses with respect to the options granted to the financial
advisor.




In July
2006, the Company entered into an agreement with an investor relations firm for
investor relation and strategic planning services.  In exchange for
these services, the Company agreed to pay an annual fee of $138 for a period of
one year and to provide the investor relations firm an option for the purchase
of 120,000 shares of the Company’s Common Stock.  The options vested
with respect to 40,000 shares immediately upon the grant, with the balance
vesting at a rate of 5,000 per month.  The options have an exercise
price of $2.96 and expire after five years.  In July 2007, the Company
terminated its agreement with the investor relations firm.  In the
year ended December 31, 2007, 35,000 options to purchase the Company’s Common
Stock vested up until the termination of the agreement with the investor
relations firm.




The
Company used the Black-Scholes valuation method to estimate the fair value of
the option to purchase the 35,000 shares which vested over the period from the
January 1, 2007 through the termination of the agreement.  The Company
used a weighted average risk free interest rate of 4.8%, an expected life of
five years, an annual volatility of 79% and no expected dividends to determine
the value the options granted.  The Company estimated the fair value
of the options granted to be approximately $117 and recorded that amount to
selling, general and administrative expenses with respect to the option granted
to the investor relations firm in the year ended December 31, 2007.




(3)           Performance
Based Options




In August
2006, as part of the Company’s investment in Paketeria (see Note 5), the Company
granted the founder and managing director of Paketeria an option to purchase
150,000 shares of the Company’s Common Stock.  The option has an
exercise price of $2.80, a contractual life of five years and vests one-third
upon the achievement of each of the three milestones described above in Note
5.  The first of the three milestones was met in the fourth quarter of
2006 and the second milestone was met in the third quarter of 2007. In 2008, the
founder and managing director of Paketeria has agreed to forfeit his right to
exercise any of the options granted to him should Paketeria fail to make payment
of its debt to the Company when the debt comes due.


F-42




The
Company used the Black-Scholes valuation method to estimate the fair value of
the options to purchase the 150,000 shares of Common Stock of the Company, using
a risk free interest rate of 5.0%, an expected life of five years, an annual
volatility of 103% and no expected dividends.  At December 31, 2006,
the Company estimated the fair value of the options to be approximately
$385.  During the years ended December 31, 2008, 2007 and 2006,
the Company recorded $25, $49 and $265, respectively to its Share in losses of
Paketeria with respect to the option granted to the founder and managing
director of Paketeria based on performance towards the milestones described
above in Note 5.  If the third and remaining tranche of 50,000 options
vests, the Company will record additional selling, general and administrative
expense based on an updated Black-Scholes valuation.




(4)           Summary
Information




A summary
of the Company’s option plans with respect to non-employees as of December 31,
2006, 2007 and 2008, as well as changes during each of the years then ended, is
presented below:




2006
                
                
                2007
                
                
                2008Number
                  of
                  Options
                  (in
                  shares)
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Number
                  of
                  Options
                  (in
                  shares)
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Number
                  of
                  Options
                  (in
                  shares)
                
                
                Weighted
                  Average
                  Exercise
                  PriceOutstanding
      at beginning of year
                
                
                10,000
                
                
                $
                0.91
                
                
                
                305,000
                
                
                $
                2.81
                
                
                
                281,000
                
                
                $
                3.15Granted
      at market price
                
                
                145,000
                
                
                $
                2.94
                
                
                
                50,000
                
                
                $
                4.95
                
                
                
                85,000
                
                
                $
                5.45Granted
      at discount to market price
                
                
                150,000
                
                
                $
                2.80
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Exercised
                
                
                —
                
                
                
                —
                
                
                
                (54,000
                )
                
                $
                2.96
                
                
                
                (10,000
                )
                
                $
                0.91Forfeited
      or expired
                
                
                —
                
                
                
                —
                
                
                
                (20,000
                )
                
                $
                2.96
                
                
                
                (62,500
                )
                
                $
                5.50Outstanding
      at end of year
                
                
                305,000
                
                
                $
                2.81
                
                
                
                281,000
                
                
                $
                3.15
                
                
                
                293,500
                
                
                $
                3.18Exercisable
      at end of year
                
                
                125,000
                
                
                $
                2.73
                
                
                
                214,333
                
                
                $
                3.95
                
                
                
                235.166
                
                
                $
                3.32




The
weighted average grant-date fair value of the options granted to non-employees
during 2006, 2007 and 2008, amounted to $2.47, $3.05 and $3.63 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):




2006
              
              
              2007
              
              
              2008Risk-free
      interest rate
              
              
              5.0
              %
              
              
              3.5
              %
              
              
              2.5
              %Expected
      term of options, in years
              
              
              4.0
              
              
              
              5.0
              
              
              
              7.0Expected
      annual volatility
              
              
              105
              %
              
              
              72
              %
              
              
              69
              %Expected
      dividend yield
              
              None
              
              
              None
              
              
              None




(5)           In
the years ended December 31, 2008, 2007 and 2006, the Company included $38, $270
and $473, respectively, of stock-based compensation expense selling, general and
administrative expense in its statements of operations.


F-43




(d)
            Summary
      Information of Employee and Non-Employee
Options




A summary
of the Company’s option plans with respect to employees and non-employees as of
December 31, 2006, 2007 and 2008, as well as changes during each of the years
then ended, is presented below:




2006
                
                
                2007
                
                
                2008Number
                  ofOptions
                  (in shares)
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Number
                  of Options
                  (in shares)
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Number
                  of Options
                  (in shares)
                
                
                Weighted
                  Average
                  Exercise
                  PriceOutstanding
      at beginning of year
                
                
                1,575,335
                
                
                $
                2.48
                
                
                
                2,172,835
                
                
                $
                2.55
                
                
                
                1,684,000
                
                
                $
                3.09Granted
      at market price
                
                
                885,000
                
                
                $
                2.86
                
                
                
                251,000
                
                
                $
                4.54
                
                
                
                355,000
                
                
                $
                4.68Granted
      at discount to market price
                
                
                150,000
                
                
                $
                2.80
                
                
                
                79,000
                
                
                $
                3.50
                
                
                
                —
                
                
                
                —Exercised
                
                
                (165,833
                )
                
                $
                1.30
                
                
                
                (592,168
                )
                
                $
                1.61
                
                
                
                (50,000
                )
                
                $
                2.22Forfeited
      or expired
                
                
                (271,667
                )
                
                $
                4.82
                
                
                
                (226,667
                )
                
                $
                3.57
                
                
                
                (112,500
                )
                
                $
                4.88Outstanding
      at end of year
                
                
                2,172,835
                
                
                $
                2.55
                
                
                
                1,684,000
                
                
                $
                3.09
                
                
                
                1,876,500
                
                
                $
                3.27Exercisable
      at end of year
                
                
                1,626,157
                
                
                $
                2.46
                
                
                
                1,396,998
                
                
                $
                2.96
                
                
                
                1,517,330
                
                
                $
                3.10


F-44




Summary
information regarding the options outstanding and exercisable at December 31,
2008 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
      – 1.78
                          
                          
                          245,000
                          
                          
                          
                          1.15
                          
                          
                          $
                          0.91
                          
                          
                          
                          245,000
                          
                          
                          $
                          0.91$1.80
      – 2.85
                          
                          
                          712,000
                          
                          
                          
                          2.49
                          
                          
                          $
                          2.55
                          
                          
                          
                          602,000
                          
                          
                          $
                          2.56$2.87
      – 3.90
                          
                          
                          341,000
                          
                          
                          
                          4.06
                          
                          
                          $
                          3.30
                          
                          
                          
                          287,664
                          
                          
                          $
                          3.27$4.20
      – 4.80
                          
                          
                          206,000
                          
                          
                          
                          3.80
                          
                          
                          $
                          4.45
                          
                          
                          
                          172,666
                          
                          
                          $
                          4.50$5.08
      – 6.00
                          
                          
                          372,500
                          
                          
                          
                          5.70
                          
                          
                          $
                          5.48
                          
                          
                          
                          210,000
                          
                          
                          $
                          5.771,876,500
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,517,330




Stock-based
compensation expense included in the Company’s statements of operations
was:




Year
                  ended
                  December
                  31, 2006
                
                
                Year
                  ended
                  December
                  31, 2007
                
                
                Year
                  ended
                  December
                  31, 2008Cost
      of sales*
                
                $
                24
                
                
                $
                25
                
                
                $
                200Research
      and development expense**
                
                
                —
                
                
                
                —
                
                
                
                54Selling,
      marketing, general and administrative expense***
                
                
                1,233
                
                
                
                820
                
                
                
                1,120Share
      of losses in Paketeria
                
                
                265
                
                
                
                49
                
                
                
                25Loss
      on the sale of discontinued operations andcontract
      settlement
                
                
                315
                
                
                
                —
                
                
                
                —Total
      stock based compensation expense
                
                $
                1,837
                
                
                $
                894
                
                
                $
                1,399




*           The
$200 of stock compensation expense recorded in the year ended December 31, 2008
was with respect to subsidiary stock options granted – see Notes 20(f) and 20(g)
below.






**           The
$54 of stock compensation expense recorded in the year ended December 31, 2008
was with respect to subsidiary stock options granted – see Note 20(g)
below.






***          $414
of the stock compensation expense recorded in the year ended December 31, 2008
was with respect to subsidiary stock options granted – see Notes 20(f) and 19(g)
below.




As at December 31, 2008, the total
compensation cost related to non-vested awards not yet recognized was
approximately $527 which the Company expects to recognize over a
weighted-average period of 1.5 years.





During the year ended December 31,
2008, the Company received proceeds of $111 from the exercise of
options.




(e)
            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.


F-45




On
December 31, 2006, DSIT granted options to purchase 3,914 of its ordinary
shares, to senior management and employees of DSIT under the DSIT
Plan.  The options were granted with an exercise price of NIS 1.00
($0.24 at the then exchange rate) per share and are exercisable for a period of
seven years.  The options were fully vested and exercisable at the
date of grant.  The options were exercised in February 2007 and as a
result, the Company’s holdings in DSIT were reduced to 58%.  In
November 2007 and December 2008, the Company acquired additional shares of DSIT
and increased its holdings in DSIT to 84% (see Note 3(c)).




Also on
December 31, 2006, DSIT granted options to purchase 2,260 of its ordinary shares
to senior management and employees of DSIT at exercise prices ranging from NIS
1.00 ($0.26) to $126.05 per share and exercisable for a period of seven
years.  These options vest and become exercisable only upon the
occurrence of an initial public offering of DSIT or a merger, acquisition,
reorganization, consolidation or similar transaction involving
DSIT.  Upon exercise of these options, the Company’s holdings in DSIT
will be diluted to approximately 76%.




The
purpose of the DSIT Plan for the DSIT subsidiary and associated grants is to
provide incentives to key employees of DSIT to further the growth, development
and financial success of DSIT.




A summary
status of the DSIT Plan as of December 31, 2006 ,2007 and 2008, as well as
changes during the year then ended, is presented below:




2006
                  
                  
                  2007
                  
                  
                  2008Number
                      of
                      Options
                      (in
                      shares)
                  
                  
                  Weighted
                      Average
                      Exercise
                      Price
                  
                  
                  Number
                      of
                      Options
                      (in
                      shares)
                  
                  
                  Weighted
                      Average
                      Exercise
                      Price
                  
                  
                  Number
                      of
                      Options
                      (in
                      shares)
                  
                  
                  Weighted
                      Average
                      Exercise
                      PriceOutstanding
      at beginning of year
                  
                  
                  —
                  
                  
                  $
                  —
                  
                  
                  
                  6,174
                  
                  
                  $
                  32.05
                  
                  
                  
                  1,524
                  
                  
                  $
                  118.11Granted
      at fair value
                  
                  
                  6,174
                  
                  
                  $
                  32.05
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Exercised
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  3,914
                  
                  
                  $
                  0.24
                  
                  
                  
                  —
                  
                  
                  
                  —Forfeited
                  
                  
                  —
                  
                  
                  
                  
                  
                  
                  
                  736
                  
                  
                  $
                  27.36
                  
                  
                  
                  —
                  
                  
                  
                  —Outstanding
      at end of year
                  
                  
                  6,174
                  
                  
                  $
                  32.05
                  
                  
                  
                  1,524
                  
                  
                  $
                  118.11
                  
                  
                  
                  1,524
                  
                  
                  $
                  118.11Exercisable
      at end of year
                  
                  
                  3,914
                  
                  
                  $
                  0.24
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —




Summary
information regarding the options under the Plan outstanding and exercisable at
December 31, 2008 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
                
                
                
                5.0
                
                
                $
                109.68
                
                
                
                —
                
                
                
                —$119.05
      – $121.21
                
                
                501
                
                
                
                5.0
                
                
                $
                119.76
                
                
                
                —
                
                
                
                —$126.05
                
                
                476
                
                
                
                5.0
                
                
                $
                126.05
                
                
                
                —
                
                
                
                —1,524
                
                
                
                
                
                
                $
                118.11
                
                
                
                —
                
                
                
                —




In 2006,
the Company granted an officer 759 options with a weighted average exercise
price of $26.53 in the year ended December 31, 2006 under the
Plan.  During 2007, 569 options with an exercise price of $0.24 were
exercised by the officer.


F-46




(f)
            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 July 2008, the CoaLogix Plan was amended to reflect a 25
for 1 stock split. The grants and exercise prices noted below reflect the stock
split




In April
2008, CoaLogix granted options to purchase 349,275 of its ordinary shares (out
of a total of 417,650 options in the CoaLogix Plan), to senior management of
CoaLogix under the CoaLogix Plan. In July 2008, an additional 27,600 options
were granted to employees and consultant of CoaLogix. The April 2008 and July
2008 options were granted with an exercise price of $5.05 per share and are
exercisable for a period of ten years. The options vest over a four year period
from the date of grant. Upon exercise of all the options in the CoaLogix Plan,
the Company’s holdings in CoaLogix will be diluted from 85% to approximately
74%.




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




Stock
      price*
                  
                  $
                  5.05Exercise
      price
                  
                  $
                  5.05Expected
      term of option in years
                  
                  5.9
      yearsVolatility**
                  
                  
                  56
                  %Risk-free
      interest rate
                  
                  
                  2.6
                  %Expected
      dividend yield
                  
                  None




* The
stock price was determined based upon the valuation used in the Company’s
acquisition of SCR-Tech.




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




Based
upon the above, it was determined that the options granted had a value of $2.84
per option. During the year ended December 31, 2008, $521 was recorded as stock
compensation expense with respect to the abovementioned options ($170 in Cost of
Sales – Catalytic Regeneration Services and $351 in Selling, General and
Administrative expenses).





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. A
summary status of the CoaLogix Plan as of December 31, 2008, as well as changes
during the year then ended, is presented below:




2008Number
                      of
                      Options
                      (in
                      shares)
                    
                    
                    Weighted
                      Average
                      Exercise
                      PriceOutstanding
      at beginning of year
                    
                    
                    —
                    
                    
                    $
                    —Granted
      at fair value
                    
                    
                    376,475
                    
                    
                    
                    5.05Exercised
                    
                    
                    —
                    
                    
                    
                    —Forfeited
                    
                    
                    —
                    
                    
                    
                    —Outstanding
      at end of year
                    
                    
                    376,475
                    
                    
                    $
                    5.05Exercisable
      at end of year
                    
                    
                    82,719
                    
                    
                    $
                    5.05




F-47




Summary
information regarding the options under the CoaLogix Plan outstanding and
exercisable at December 31, 2008 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)$5.05
                
                
                376,475
                
                
                
                9.3
                
                
                $
                5.05
                
                
                
                82,719
                
                
                $
                5.05




In 2008,
the Company granted an officer 147,050 options with an exercise price of $5.05
in the year ended December 31, 2008 under the CoaLogix Plan.  During
2008, no options were exercised by the officer.




(g)
            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 6,849,000 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%.




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
      yearsVolatility**
                  
                  
                  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.





During
the year ended December 31, 2008, $187 was recorded as stock compensation
expense with respect to the abovementioned options ($38 in Cost of Sales –
Software License and Service, $69 in Research and Development expense and $80 in
Selling, General and Administrative expenses).





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. A
summary status of the Plan as of December 31, 2008, as well as changes during
the year then ended, is presented below:


F-48




2008Number
                    of
                    Options
                    (in
                    shares)
                  
                  
                  Weighted
                    Average
                    Exercise
                    PriceOutstanding
      at beginning of year
                  
                  
                  —
                  
                  
                  $
                  —Granted
      at fair value
                  
                  
                  6,849,000
                  
                  
                  
                  0.17Exercised
                  
                  
                  —
                  
                  
                  
                  —Forfeited
                  
                  
                  —
                  
                  
                  
                  —Outstanding
      at end of year
                  
                  
                  6,849,000
                  
                  
                  $
                  0.17Exercisable
      at end of year
                  
                  
                  1,156,667
                  
                  
                  $
                  0.17




Summary
information regarding the options under the Coreworx Plan outstanding and
exercisable at December 31, 2008 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)$0.17
                
                
                6,849,000
                
                
                
                9.81
                
                
                $
                0.17
                
                
                
                1,156,667
                
                
                $
                0.17




In 2008,
the Company 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, no options were exercised by the officer.




(h)
            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:




2006
                
                
                2007
                
                
                2008Number
                  of
                  Options
                  (in
                  shares)
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Number
                  of
                  Options
                  (in
                  shares)
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Number
                  of
                  Options
                  (in
                  shares)
                
                
                Weighted
                  Average
                  Exercise
                  PriceOutstanding
      at beginning of year
                
                
                190,000
                
                
                $
                2.81
                
                
                
                614,039
                
                
                $
                2.79
                
                
                
                986,506
                
                
                $
                3.89Granted
      at market price
                
                
                474,039
                
                
                $
                2.80
                
                
                
                634,258
                
                
                $
                4.50
                
                
                
                —
                
                
                
                —Exercised
                
                
                —
                
                
                
                —
                
                
                
                (261,791
                )
                
                $
                2.80
                
                
                
                (202,483
                )
                
                $
                3.23Forfeited
      or expired
                
                
                (50,000
                )
                
                $
                3.00
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Outstanding  and
      exercisable at end of year
                
                
                614,039
                
                
                $
                2.79
                
                
                
                986,506
                
                
                $
                3.89
                
                
                
                784,023
                
                
                $
                4.06


F-49


The
following table summarized information about warrants outstanding and
exercisable at December 31, 2008:




Exercise
      Price
                  
                  Number
                    Outstanding
                  
                  
                  Weighted
                    Average
                    Remaining
                    Contractual
                    Life(in
      shares)
                  
                  
                  (in
      years)$2.78
                  
                  
                  202,451
                  
                  
                  
                  2.53$4.50
                  
                  
                  581,572
                  
                  
                  
                  3.26784,023
                  
                  
                  
                  3.07




(i)
            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.
Previously, the Company’s Board of Directors had authorized the purchase of up
to 800,000 shares of the Company’s common stock.  During 2006, the
Company issued 43,333 of its treasury shares with respect to options exercised
and at December 31, 2008 owned in the aggregate 841,286 of its own
shares.





NOTE 21—FINANCE
EXPENSE, NET




Finance
expense, net consists of the following:




Year
      ended December 31,2006
                  
                  
                  2007
                  
                  
                  2008Interest
      income
                  
                  $
                  39
                  
                  
                  $
                  163
                  
                  
                  $
                  405Interest
      expense*
                  
                  
                  (27
                  )
                  
                  
                  (1,775
                  )
                  
                  
                  (3,200
                  )Exchange
      gain (loss), net
                  
                  
                  (42
                  )
                  
                  
                  27
                  
                  
                  
                  (236
                  )$
                  (30
                  )
                  
                  $
                  (1,585
                  )
                  
                  $
                  (3,031
                  )




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 16(b)).




In 2007, interest expense includes
$1,297 of non-cash interest expense with respect to the amortization of debt
origination costs, beneficial conversion feature and warrants associated with
the Company’s Debentures (see Note 16(b)) and a non-cash reversal of interest
expense ($209) associated with a reduction of a provision made for interest due
upon the Company’s adoption of FIN 48 (see Note 22(h)).




NOTE 22—INCOME
TAXES




(a)
            Composition
      of income (loss) from continuing operations before income taxes is as
      follows:




Year
      ended December 31,2006
                          
                          
                          2007
                          
                          
                          2008Domestic
                          
                          $
                          (2,469
                          )
                          
                          $
                          34,441
                          
                          
                          $
                          (4,524
                          )Foreign
                          
                          
                          (859
                          )
                          
                          
                          (1,163
                          )
                          
                          
                          (791
                          )$
                          (3,328
                          )
                          
                          $
                          33,278
                          
                          
                          $
                          (5,315
                          )


F-50


Income
tax expense (benefit) consists of the following:




Year
      ended December 31,2006
                
                
                2007
                
                
                2008Current:Federal
                
                $
                —
                
                
                $
                850
                
                
                $
                (300
                )State
      and local
                
                
                —
                
                
                
                225
                
                
                
                (225
                )Foreign
                
                
                183
                
                
                
                (627
                )
                
                
                (26
                )183
                
                
                
                448
                
                
                
                (551
                )Deferred:Federal
                
                
                —
                
                
                
                (893
                )
                
                
                893State
      and local
                
                
                —
                
                
                
                —
                
                
                
                —Foreign
                
                
                —
                
                
                
                —
                
                
                
                ——
                
                
                
                —Total
      income tax expense (benefit)
                
                $
                183
                
                
                $
                (445
                )
                
                $
                342




(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 31,2006
                
                
                2007
                
                
                2008Statutory
      Federal rates
                
                
                34
                %
                
                
                34
                %
                
                
                34
                %Increase
      (decrease) in income tax rate resulting from:Non-deductible
      expenses
                
                
                (1
                )
                
                
                1
                
                
                
                18Deferred
      compensation expense
                
                
                (19
                )
                
                
                1
                
                
                
                —State
      income taxes, net
                
                
                1
                
                
                
                1
                
                
                
                (5
                )Other
                
                
                3
                
                
                
                —
                
                
                
                (9
                )Net
      operating loss adjustment in deferred tax assets
                
                
                —
                
                
                
                —
                
                
                
                62Valuation
      allowance
                
                
                (23
                )
                
                
                (38
                )
                
                
                (106
                )Effective
      income tax rates
                
                
                (5
                )%
                
                
                (1
                )%
                
                
                (6
                %)





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, beginning with
the Company’s transition to Delaware in March 2006, the Company’s statutory
income tax rate on domestic earnings is the federal rate of 34%.




(c)
            Analysis
      of Deferred Tax Assets and
(Liabilities)




As
      of December 31,2007
                    
                    
                    2008Deferred
      tax assets consist of the following:Employee
      benefits and deferred compensation
                    
                    $
                    954
                    
                    
                    $
                    1,113Investments
                    
                    
                    —
                    
                    
                    
                    1,298Other
      temporary differences
                    
                    
                    360
                    
                    
                    
                    246Net
      operating loss carryforwards
                    
                    
                    891
                    
                    
                    
                    4,0002,205
                    
                    
                    
                    6,657Valuation
      allowance
                    
                    
                    (1,312
                    )
                    
                    
                    (6,657
                    )Net
      deferred tax assets
                    
                    
                    893
                    
                    
                    
                    —Deferred
      tax liabilities consist of the following:Investments
                    
                    
                    (16,903
                    )
                    
                    
                    —Intangible
      asset basis differences
                    
                    
                    (28
                    )
                    
                    
                    (29
                    )Net
      deferred liabilities, net
                    
                    $
                    (16,038
                    )
                    
                    $
                    (29
                    )


F-51




Valuation
allowances relate principally net operating loss carryforwards related to
Israeli companies and book-tax differences related to investments in and loans
to equity investees. The change in the valuation allowance was a decrease of
$12,600 and an increase of $5,345 in 2007 and 2008, respectively.  The
decrease in 2007 was primarily attributable to the adjustment of the Company’s
investment in Comverge to market value in accordance with FAS 115 and the
utilization of net loss carryforwards from that year’s income whereas the
increase in 2008 was primarily attributable to net loss carryforwards of
acquired companies and the impairments of loans and investments to the Company’s
equity investments which are not deductible for tax.




(d)
            Summary
      of Tax Loss Carryforwards




As of
December 31, 2008, the Company had various net operating loss carryforwards
expiring as follows:




Expiration
                  
                  Federal
                  
                  
                  State
                  
                  
                  Foreign2024-2027
                  
                  $
                  5,167
                  *
                  
                  $
                  4,610
                  
                  
                  $
                  5,428Unlimited
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,404Total
                  
                  $
                  5,167
                  
                  
                  $
                  4,610
                  
                  
                  $
                  6,832




*
Includes approximately $4,610 of net operating loss carryforwards associated
with CoaLogix whose utilization in limited to approximately $490 per year due to
limits 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 Company in the
near future.




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




(f)
            Tax
      Reform in Israel




The
income of the Company’s Israeli subsidiaries is taxed at the regular Israeli
corporate tax rates. In August 2005, Amendment No. 147 to the Income Tax
Ordinance was published, which reduced corporate tax rates. As a result of the
amendment, the corporate tax rates are as follows: 2006 – 31% 2007 - 29%, 2008 -
27%, 2009 - 26% and for 2010 and thereafter - 25%.


F-52


(g)
            Taxation
      in Canada




Investment
tax credits, which are earned as a result of qualifying research and development
expenditures made in Canada, 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 against taxes otherwise owing to the Canadian taxation
authorities for a period of 10 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 34%.





(h)
            Uncertain
      Tax positions (UTP):




As
described in Note 2 above, the Company adopted the provisions of FIN 48 as of
January 1, 2007.




As a
result of the adoption of FIN 48, the Company recognized a current liability for
unrecognized tax benefits in amount of $18.  In addition, as of
January 1, 2007 the Company recognized interest and penalties expense, related
to unrecognized tax benefits in the amounts of $152 and $135,
respectively.  These changes were accounted for as a cumulative effect
of a change in accounting principle that is reflected in the financial
statements as an increase of $305 in the balance of accumulated deficit as of
January 1, 2007.  In the year ending December 31, 2007, the initial
balance of $18 for unrecognized tax benefits eliminated and the amounts recorded
with respect to interest and penalties expense were reduced by $111 and $98,
respectively.  In the year ending December 31, 2008, $37 for
unrecognized tax benefits eliminated and the amounts recorded with respect to
interest and penalties expense were reduced by $6 and $6,
respectively.  As of December 31, 2007 and 2008, the amount of
interest and penalties accrued on the balance sheet was $78 and $67,
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, 2007 to December 31, 2008:




2007
                      
                      
                      2008Balance
      at January 1
                      
                      $
                      918
                      
                      
                      $
                      247Decreases
      in unrecognized tax benefits and associated interest and penalties as a
      result of tax positions taken during the current period
                      
                      
                      (671
                      )
                      
                      
                      (37
                      )Balance
      at December 31
                      
                      $
                      247
                      
                      
                      $
                      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 2005 and for years before 2004 for state and
Israeli income taxes. The Company is no longer subject to examination by
Canadian Federal and provincial authorities for years before 2004.




NOTE 23—RELATED
PARTY BALANCES AND TRANSACTIONS




(a)           The
Company paid consulting and other fees to directors of $136, $226 and $315 for
the years ended December 31, 2006, 2007 and 2008, 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 a former director and is the son-in-law of the
Company’s Chairman of the Board, of approximately $473, $654 and $780 for the
years ended December 31, 2006, 2007 and 2008,
respectively.  Approximately $507 and $130 was owed to this firm as of
December 31, 2007 and 2008, respectively, and is included in other current
liabilities and trade accounts payable.




F-53




(c)           The
former chief executive officer of the Company’s Israeli subsidiary had a loan
from the subsidiary that was acquired in 2001.  On November 29, 2007,
as part of the Company acquisition of the former chief executive officer’s
shares in DSIT (see Note 3(c)), the loan was repaid.  The loan was
denominated in NIS, was linked to the Index and bore interest at
4%.  The Company recorded interest income of $4 in each of the years
ended December 31, 2006 and 2007, respectively, with respect to the
loan.




(d)           In
December 2006, the Company’s CEO loaned the Company $300 for a period of six
months on a note payable.  The note bore interest at the rate of
9.5%.  The Company had the right to repay the note at any time prior
to maturity.  The note was repaid in April 2007.  The
Company paid interest of $7 in the year ended December 31, 2007 with respect to
the note.




See Note
5 with respect to the Stock Purchase Agreement with two shareholders of
Paketeria—one of whom is the Company’s President and Chief Executive Officer and
the other who is one of the Company’s current directors.




See Note
10 with respect to the sale of the Company’s Databit subsidiary to a related
party in March 2006.




See Note
20 for information related to options and stock awards to related
parties.




NOTE 24—SEGMENT
REPORTING AND GEOGRAPHIC INFORMATION




(a)
            General
      Information




As of
December 31 2008, the Company’s current 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 oxides (NOx)
emissions. In addition, CoaLogix offers a new technology (MetalliFix) for the
removal of heavy metals, such as mercury, from coal-fired power
plants.




(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
recently acquired 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 operating in different countries 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 operating profit or loss.


F-54


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 SFAS No. 131, 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 of SFAS No. 131, related
depreciable assets, along with other identifiable assets, are allocated to such
division.




The
following tables represent segmented data for the years ended December 31, 2008,
2007 and 2006:




CoaLogix(*)
                  
                  
                  Naval &
                    RT
                    Solutions
                  
                  
                  EIS(**)
                  
                  
                  Other
                    (***)
                  
                  
                  TotalYear ended
      December 31, 2008:Revenues
      from external customers
                  
                  $
                  10,099
                  
                  
                  $
                  7,032
                  
                  
                  $
                  2,330
                  
                  
                  $
                  1,235
                  
                  
                  $
                  20,696Intersegment
      revenues
                  
                  
                  —
                  
                  
                  
                  146
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  146Depreciation
      and amortization
                  
                  
                  931
                  
                  
                  
                  165
                  
                  
                  
                  132
                  
                  
                  
                  33
                  
                  
                  
                  1,228Stock
      compensation expense
                  
                  
                  521
                  
                  
                  
                  —
                  
                  
                  
                  179
                  
                  
                  
                  —
                  
                  
                  
                  700Segment
      gross profit
                  
                  
                  2,457
                  
                  
                  
                  2,383
                  
                  
                  
                  1,409
                  
                  
                  
                  284
                  
                  
                  
                  6,533Segment
      income (loss)
                  
                  
                  (1,433
                  )
                  
                  
                  605
                  
                  
                  
                  (1,171
                  )
                  
                  
                  (86
                  )
                  
                  
                  (2,085
                  )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
                  
                  
                  
                  —
                  
                  
                  
                  2,444Year
      ended December 31, 2007:Revenues
      from external customers
                  
                  $
                  797
                  
                  
                  $
                  3,472
                  
                  
                  $
                  —
                  
                  
                  $
                  1,391
                  
                  
                  $
                  5,660Intersegment
      revenues
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Depreciation
      and amortization
                  
                  
                  129
                  
                  
                  
                  78
                  
                  
                  
                  —
                  
                  
                  
                  59
                  
                  
                  
                  266Segment
      gross profit
                  
                  
                  116
                  
                  
                  
                  1,139
                  
                  
                  
                  —
                  
                  
                  
                  157
                  
                  
                  
                  1,412Impairment
      of goodwill and intangible assets
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (112
                  )
                  
                  
                  (112
                  )Segment
      loss
                  
                  
                  (140
                  )
                  
                  
                  (309
                  )
                  
                  
                  —
                  
                  
                  
                  (799
                  )
                  
                  
                  (1,248
                  )Segment
      assets
                  
                  
                  9,911
                  
                  
                  
                  1,149
                  
                  
                  
                  —
                  
                  
                  
                  84
                  
                  
                  
                  11,144Expenditures
      for segment assets
                  
                  
                  —
                  
                  
                  
                  889
                  
                  
                  
                  —
                  
                  
                  
                  39
                  
                  
                  
                  928Year
      ended December 31, 2006:Revenues
      from external customers
                  
                  $
                  —
                  
                  
                  $
                  2,797
                  
                  
                  $
                  —
                  
                  
                  $
                  1,320
                  
                  
                  $
                  4,117Intersegment
      revenues
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Depreciation
      and amortization
                  
                  
                  —
                  
                  
                  
                  94
                  
                  
                  
                  —
                  
                  
                  
                  73
                  
                  
                  
                  167Segment
      gross profit
                  
                  
                  —
                  
                  
                  
                  1,004
                  
                  
                  
                  —
                  
                  
                  
                  350
                  
                  
                  
                  1,354Impairment
      of goodwill
                  
                  
                  —
                  
                  
                  
                  (40
                  )
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (40
                  )Segment
      loss
                  
                  
                  —
                  
                  
                  
                  (155
                  )
                  
                  
                  —
                  
                  
                  
                  (296
                  )
                  
                  
                  (451
                  )Segment
      assets
                  
                  
                  —
                  
                  
                  
                  345
                  
                  
                  
                  —
                  
                  
                  
                  325
                  
                  
                  
                  670Expenditures
      for segment assets
                  
                  
                  —
                  
                  
                  
                  125
                  
                  
                  
                  —
                  
                  
                  
                  16
                  
                  
                  
                  141




(*)
            CoaLogix’s
      SCR activities were acquired on November 7, 2007.  Accordingly,
      the segment information above represents CoaLogix’s activity since that
      time.




(**)
            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 thresholds of SFAS
      No. 131.


F-55




(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, 2006, 2007 and 2008:




Year
      ended December 31,2006
                
                
                2007
                
                
                2008Revenues:Total
      consolidated revenues for reportable segments
                
                $
                2,797
                
                
                $
                4,269
                
                
                $
                19,461Other
      operational segment revenues
                
                
                1,320
                
                
                
                1,391
                
                
                
                1,235Total
      consolidated revenues
                
                $
                4,117
                
                
                $
                5,660
                
                
                $
                20,696Income
      (loss):Total
      loss for reportable segments
                
                $
                (155
                )
                
                $
                (449
                )
                
                $
                (1,999
                )Other
      operational segment operating loss
                
                
                (296
                )
                
                
                (799
                )
                
                
                (86
                )Total
      operating loss
                
                
                (451
                )
                
                
                (1,248
                )
                
                
                (2,085
                )Unallocated
      cost of corporate and DSIT headquarters*
                
                
                (3,207
                )
                
                
                (3,433
                )
                
                
                (4,185
                )Other
      income, net
                
                
                330
                
                
                
                —
                
                
                
                —Acquired
      in-process research and development (see Note 3(a))
                
                
                —
                
                
                
                —
                
                
                
                (2,444
                )Income
      tax benefit (expense)
                
                
                (183
                )
                
                
                445
                
                
                
                (342
                )Non-cash
      interest expense on convertible debentures
                  (see
      Note 16 (b))
                
                
                —
                
                
                
                (1,297
                )
                
                
                (3,064
                )Gain
      on early redemption of convertible debentures
                  (see
      Note 16(b))
                
                
                —
                
                
                
                —
                
                
                
                1,259Gain
      (loss) on private placement of equity investments
                  (see  Note
      16(b))
                
                
                —
                
                
                
                (37
                )
                
                
                7Minority
      interests
                
                
                —
                
                
                
                —
                
                
                
                248Impairments
      (see Note 9)
                
                
                —
                
                
                
                —
                
                
                
                (3,664
                )Share
      of losses in GridSense (see Note 6)
                
                
                —
                
                
                
                —
                
                
                
                (926
                )Share
      of losses in Paketeria  (see Note 5)
                
                
                (424
                )
                
                
                (1,206
                )
                
                
                (1,560
                )Share
      of losses in Comverge (see Note 4)
                
                
                (210
                )
                
                
                —
                
                
                
                —Gain
      on sale of shares in Comverge (see Note 4)
                
                
                —
                
                
                
                23,124
                
                
                
                8,861Gain
      on IPO of Comverge (see Note 4)
                
                
                —
                
                
                
                16,169
                
                
                
                —Discontinued
      operations, net of tax
                
                
                78
                
                
                
                —
                
                
                
                —Gain
      (loss) on sale of discontinued operations, net of tax
                
                
                (2,069
                )
                
                
                —
                
                
                
                —Consolidated
      income (loss)
                
                $
                (6,136
                )
                
                $
                32,517
                
                
                $
                (7,895
                )







*  Includes
$706, $821 and $1,229 of FAS 123R stock compensation expense for the years
ending December 31, 2008, 2007 and 2006, respectively.




As
      of December 31,2006
                  
                  
                  2007
                  
                  
                  2008Assets:Total
      assets for reportable segments
                  
                  $
                  670
                  
                  
                  $
                  11,144
                  
                  
                  $
                  19,093Unallocated
      assets of CoaLogix headquarters
                  
                  
                  —
                  
                  
                  
                  1,916
                  
                  
                  
                  5,185Unallocated
      assets of DSIT headquarters
                  
                  
                  4,018
                  
                  
                  
                  5,722
                  
                  
                  
                  5,414Unallocated
      assets of Coreworx headquarters
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,898Unallocated
      assets of corporate headquarters *
                  
                  
                  2,570
                  
                  
                  
                  78,185
                  
                  
                  
                  19,465Total
      consolidated assets
                  
                  $
                  7,258
                  
                  
                  $
                  96,967
                  
                  
                  $
                  51,055







* 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. In 2007,
includes $55,538 representing the value the Company’s investment in Comverge and
$19,478 of unrestricted cash.


F-56




Other
      Significant Items
                
                Segment
                  Totals
                
                
                Adjustments
                
                
                Consolidated
                  TotalsYear
      ended December 31, 2008Depreciation
      and amortization
                
                $
                1,228
                
                
                $
                70
                
                
                $
                1,298Stock
      compensation expense
                
                
                700
                
                
                
                731
                
                
                
                1,431Expenditures
      for assets*
                
                $
                3,995
                
                
                
                15
                
                
                $
                4,010Year
      ended December 31, 2007Depreciation
      and amortization
                
                $
                266
                
                
                $
                34
                
                
                $
                300Expenditures
      for assets**
                
                
                928
                
                
                
                40
                
                
                
                968Year
      ended December 31, 2006Depreciation
      and amortization
                
                $
                167
                
                
                $
                37
                
                
                $
                204Expenditures
      for assets
                
                
                141
                
                
                
                8
                
                
                
                149









**
Includes $740 for the acquisition of additional shares in DSIT, all of which was
allocated to the RT Solutions segment (see Note 3(c)).




The
reconciling items are all corporate headquarters data, which are not included in
the segment information. None of the other adjustments are
significant.




As
      of December 31,2006
                
                
                2007
                
                
                2008Revenues
      based on location of customer:Israel
                
                $
                4,034
                
                
                $
                4,579
                
                
                $
                7,374United
      States
                
                
                —
                
                
                
                797
                
                
                
                12,201Other
                
                
                83
                
                
                
                284
                
                
                
                1,121$
                4,117
                
                
                $
                5,660
                
                
                $
                20,696





As
      of December 31,2006
                
                
                2007
                
                
                2008Long-lived
      assets located in the following countries:Israel
                
                $
                445
                
                
                $
                560
                
                
                $
                187Canada
                
                
                —
                
                
                
                —
                
                
                
                168United
      States
                
                
                —
                
                
                
                775
                
                
                
                2,092$
                445
                
                
                $
                1,335
                
                
                $
                2,447




(d)
            Revenues
      from Major Customers




Consolidated
      Sales2006
                        
                        
                        2007
                        
                        
                        2008Customer
                        
                        Segment
                        
                        Sales
                        
                        
                        %
      of
                          Total
                          Sales
                        
                        
                        Sales
                        
                        
                        %
      of
                          Total
                          Sales
                        
                        
                        Sales
                        
                        
                        %
      of
                          Total
                          SalesA
                        
                        Naval
      & RT Solutions
                        
                        $
                        881
                        
                        
                        
                        21
                        %
                        
                        $
                        569
                        
                        
                        
                        10
                        %
                        
                        $
                        796
                        
                        
                        
                        4
                        %B
                        
                        Naval
      & RT Solutions
                        
                        $
                        842
                        
                        
                        
                        20
                        %
                        
                        $
                        648
                        
                        
                        
                        11
                        %
                        
                        $
                        632
                        
                        
                        
                        3
                        %C
                        
                        Naval
      & RT Solutions
                        
                        $
                        173
                        
                        
                        
                        4
                        %
                        
                        $
                        1,365
                        
                        
                        
                        24
                        %
                        
                        $
                        3,476
                        
                        
                        
                        17
                        %D
                        
                        CoaLogix
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        $
                        624
                        
                        
                        
                        11
                        %
                        
                        $
                        127
                        
                        
                        
                        1
                        %E
                        
                        CoaLogix
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        $
                        2,887
                        
                        
                        
                        14
                        %F
                        
                        CoaLogix
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        $
                        122
                        
                        
                        
                        2
                        %
                        
                        $
                        3,755
                        
                        
                        
                        18
                        %G
                        
                        Other
                        
                        $
                        687
                        
                        
                        
                        17
                        %
                        
                        $
                        555
                        
                        
                        
                        10
                        %
                        
                        $
                        435
                        
                        
                        
                        2
                        %




F-57


NOTE 25—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 26—FAIR VALUE
MEASUREMENTS




Financial
items measured at fair value as of December 31, 2008 are classified in the
table below in accordance with the hierarchy established in SFAS
157.




Level
      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 27—SUBSEQUENT
EVENTS




(a)
            Acquisition
      of Coreworx – subsequent payment




As
described in Note 3(a), a contingent payment of one-half of the net receipt
(less fees) by Coreworx of monies due from the Canada Revenue Agency or the
Ontario Ministry of Revenue in connection with Coreworx’s 2007 SRED Claim was
due to be paid to the former shareholders of Coreworx if received within six
months following the closing date. No SRED funds were received within the six
month period, and accordingly, any future receipts on account of the SRED Claim,
should they be received will belong entirely to the Company.





(b)
            Privatization
      of GridSense




On February 19, 2009, a majority of the
shareholders approved a plan to make GridSense a private
company.  Under the plan, Acorn’s percentage ownership of the
GridSense common stock once GridSense has gone private is expected to be
approximately 31%. The transaction is pending regulatory approval in
Canada.




(c)
            Sale
      of Comverge shares




Through March 26, 2009, the Company
sold 175,000 of its shares of Comverge and received proceeds of
$1,222.




F-58




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 30, 2009 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 30,
2009




/s/
Kesselman & Kesselman


Certified
Public Accountants


A member
of PricewaterhouseCoopers International Limited


Tel Aviv,
Israel


F-59


ACORN
ENERGY, INC.


SCHEDULE
II


VALUATION
AND QUALIFYING ACCOUNTS


FOR
THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008


(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, 2006
                        
                        $
                        18
                        
                        
                        $
                        —
                        
                        
                        $
                        (4
                        )
                        
                        $
                        14Year
      ended December 31, 2007
                        
                        
                        14
                        
                        
                        
                        —
                        
                        
                        
                        2
                        
                        
                        
                        16Year
      ended December 31, 2008
                        
                        
                        16
                        
                        
                        
                        —
                        
                        
                        
                        (16
                        )
                        
                        
                        —Valuation
      allowance for deferred tax assetsYear
      ended December 31, 2006
                        
                        $
                        12,181
                        
                        
                        $
                        —
                        
                        
                        $
                        1,731
                        
                        
                        $
                        13,912Year
      ended December 31, 2007
                        
                        
                        13,912
                        
                        
                        
                        12,600
                        
                        
                        
                        —
                        
                        
                        
                        1,312Year
      ended December 31, 2008
                        
                        
                        1,312
                        
                        
                        
                        —
                        
                        
                        
                        5,345
                        
                        
                        
                        6,657


F-60