##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 1-12014
 POWERSECURE INTERNATIONAL, INC.
  Delaware(State or other jurisdiction of 
incorporation or organization)
    
    84-1169358
(I.R.S. Employer Identification No.)
 1609 Heritage Commerce Court,
Wake Forest, North Carolina 27587
 (919) 556-3056
  Title of each class
    
    Name of each exchange on which registeredCommon Stock, par value $.01 per share
    
    The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
 None
 o þ
 o þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
   
 DOCUMENTS INCORPORATED BY REFERENCE




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##### 



POWERSECURE INTERNATIONAL, INC.
 Form 10-K
For the Fiscal Year Ended December 31, 2007
 TABLE OF CONTENTS
 PageCautionary Note Regarding Forward-Looking Statements
    
    
    1PART IItem 1. Business
    
    
    2Item 1A. Risk Factors
    
    
    14Item 1B. Unresolved Staff Comments
    
    
    29Item 2. Properties
    
    
    30Item 3. Legal Proceedings
    
    
    30Item 4. Submission of Matters to a Vote of Security Holders
    
    
    30PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    31Item 6. Selected Financial Data
    
    
    32Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    34Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    59Item 8. Financial Statements and Supplementary Data
    
    
    59Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    59Item 9A. Controls and Procedures
    
    
    60Item 9B. Other Information
    
    
    61PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    62Item 11. Executive Compensation
    
    
    62Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    62Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    62Item 14. Principal Accountant Fees and Services
    
    
    62PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    63Signatures
    
    
    64Index to Financial Statements
    
    
    F-1Exhibit Index
    
    
    X-1EX-10.24EX-10.38EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2




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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
  
    
    our prospects, including our future revenues, expenses, net income, margins,
profitability, cash flow, liquidity, financial condition and results of operations;
    
    our products and services and our markets, including market position, market share,
market demand and benefits of our products and services to customers;
    
    our ability to successfully develop, operate and grow our operations and businesses;
    
    our business plans, strategies, goals and objectives and our ability to successfully
achieve them;
    
    the sufficiency of our capital resources, including our cash and cash equivalents,
funds generated from operations, available borrowings under our credit arrangements and
other capital resources, to meet our future working capital, capital expenditure, debt
service and business growth needs;
    
    industry trends and customer preferences;
    
    the nature and intensity of our competition, and our ability to successfully compete
in our markets;
    
    business acquisitions, combinations, sales, alliances, ventures and other similar
business transactions and relationships;
    
    the effects on our business, financial condition and results of operations of
litigation and other claims and proceedings that arise from time to time; and
    
    future economic, business, market and regulatory conditions.
   1




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PART I
 
 Item 1. Business
 Background
       www.powersecure.com
 2




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Business Strategy
   
    
    In 2000, we formed our distributed generation business.
    
    In 2001, we acquired a process control and switchgear design and manufacturing firm.
    
    In 2005, we launched two new complementary energy service businesses for the
purposes of expanding our business and serving our utility clients by providing
technical engineering services and management consulting services.
    
    In 2006, we formed a new business to provide energy efficiency services to
industrial and commercial customers.
    
    Also in 2006, we launched a business unit focused on marketing the services of our
businesses to federal customers, primarily in conjunction with our utility alliances.
    
    In late 2006, we acquired a business that provides us with the capability to build
trailers and enclosures for our distributed generation and switchgear equipment.
    
    In mid-2007, we launched a business unit focused on providing utilities with
solutions involving building and servicing utility infrastructure.
    
    In late 2007, we organized a new business to design and manufacture lighting
solutions, including initially solutions specifically aimed at substantially reducing
the energy consumed in lighting cooler and freezer cases in grocery, convenience, and
retail drug stores.
  Overview of Operations
   3




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Distributed Generation Background
    The PowerSecure Distributed Generation Solution
   
    
    designing and engineering the distributed generation system;
 4




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
    
    obtaining the required regulatory approvals and permits;
    
    establishing the electricity inter-connect between the utility and customer to take
advantage of preferred rates;
    
    acquiring and installing the generators and other system equipment and controls;
    
    designing, engineering, constructing and installing the switchgear and process
controls; and
    
    providing ongoing monitoring and servicing of the system.
   Technology
   ®
 5




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Staffing
  Monitoring Center, Maintenance and System Management
   Sales and Marketing
   Engineering and Management Services
   6




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Energy Efficiency
  Efficient Lighting
  Backlog
  Southern Flow Companies, Inc.
   7




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Metretek, Incorporated
    WaterSecure
  Customers
  8




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Competition
   
    
    the performance and features functionality and benefits of our, and of our
competitors, products and services;
    
    the value to our customers for the price they pay for our products and services;
    
    the timing and market acceptance of new products and services and enhancements to
existing products and services developed by us and by our competitors;
    
    our responsiveness to the needs of our customers;
    
    the ease of use of products and services;
    
    the quality and reliability of our, and of our competitors, products and services;
    
    our reputation and the reputation of our competitors;
    
    our sales and marketing efforts;
    
    our ability to develop and maintain our strategic relationships; and
    
    the price of our, and of our competitors, products and services.
   9




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Regulation
  Regulation of Electricity.
 Regulation of Environment.
 Employees
  10




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Research and Development
   Raw Materials
  Intellectual Property
 ®
  11




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
    
    the technological and creative skills of our personnel;
    
    the development of new products, services and technologies;
    
    frequent product, service and technology enhancements;
    
    name recognition;
    
    customer training; and
    
    reliable product and service support.
    Segment Information
  
    
    distributed generation and energy efficiency; and
    
    natural gas measurement services.
  Available Information
 www.powersecure.com
 12




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Executive Officers of the Registrant
  Name
    
    Age
    
    PositionsSidney Hinton
    
    
    45
    
    
    President, Chief Executive Officer and DirectorChristopher T. Hutter
    
    
    41
    
    
    Vice President, Chief Financial Officer and TreasurerGary J. Zuiderveen
    
    
    49
    
    
    Vice President of Financial Reporting, Controller,
Principal Accounting Officer, Assistant Treasurer and
SecretaryJohn Bernard
    
    
    53
    
    
    President and Chief Executive Officer of Southern Flow
  Sidney Hinton
 Christopher T. Hutter
 Gary J. Zuiderveen
 John Bernard
 13




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Item 1A. Risk Factors
  Risks Related to Our Business and Industry
 Our operating results may fluctuate, which makes our operating results difficult to predict
and could cause our operating results to fall short of expectations from time to time.
  
    
    the size, timing and terms of sales and orders, especially large customer orders such as
the significant orders from Publix in recent years and the large orders from other
customers in the end of 2007 and early 2008, and the effects of customers delaying,
deferring or canceling purchase orders or making smaller purchases than expected;
    
    our ability to obtain adequate supplies of key components and materials for our products
on a timely and cost-effective basis;
    
    our ability to implement our business plans and strategies and the timing of such
implementation;
    
    the pace of development of our new businesses and the growth of their markets, which may
involve significant development expenses;
    
    changes in our operating expenses;
    
    changes in the prices charged by our suppliers;
    
    changes and uncertainties in the lead times required to obtain the necessary permits and
other governmental and regulatory approvals for projects;
    
    the timing, pricing and market acceptance of our new products and services;
    
    changes in our pricing policies and those of our competitors;
    
    the effects of hurricanes and other weather conditions on the demand requirements of our
customers;
    
    variations in the length of our product and service implementation process;
    
    changes in the mix of products and services having differing margins;
    
    the life cycles of our products and services;
    
    budgeting cycles of utilities and other major customers;
    
    the effects of litigation and regulatory proceedings and claims;
    
    economic conditions in the energy industry, especially in the natural gas and
electricity sectors;
    
    general economic and political conditions;
    
    the effects of governmental regulations and regulatory changes in our markets;
    
    our ability to access significant capital resources on a timely basis in order to
fulfill large customer orders;
    
    our ability to make and obtain the expected benefits from acquisitions of technology or
businesses, and the costs related to such acquisitions; and
    
    the development and maintenance of business relationships with strategic partners.
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Our recent growth and operating results have resulted from significant purchase commitments
from one customer, and if we suffer any cancellation, reduction or delay in these large
purchase commitments from this customer or if we do not receive additional significant
purchase commitments in the future, our business and operating results could be materially
and adversely affected.
  
    
    the loss of one or more large customers;
    
    any cancellation of orders by, or any reduction or delay in sales to, these
customers;
    
    the failure of large purchase commitments to be renewed or to recur;
    
    delays in timing of future projects with existing and new customers;
    
    our inability to successfully develop relationships with additional customers; or
    
    future price concessions that we may have to make to these customers.
 We do not have long-term commitments for significant revenues with most of our customers and
may be unable to retain existing customers, attract new customers or replace departing
customers with new customers that can provide comparable revenues.
  15




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Price increases in some of the key components in our products could materially and adversely
affect our operating results and cash flows.
  We depend on sole source and limited source suppliers for some of the key components and
materials in our products, which makes us susceptible to supply shortages or price increases
that could materially and adversely affect our business.
  Our business is subject to the risk of changes in utility tariff structures, which changes
could materially and adversely affect our business as well as our financial condition and
results of operations.
  Our business is subject to the risk of changes in environmental requirements, which changes
could materially and adversely affect our business as well as our financial condition and
results of operations.
  Some of our long-term turn-key contracts subject us to risks.
  16




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If we do not receive the benefits anticipated by our projects marketed under recurring
revenue project model, our financial condition and results of operations will be materially
and adversely affected .
  We could become subject to burdensome government regulation that affects our ability to
offer our products and services or that affects demand for our products and services.
  We may not be able to return to or exceed the levels of growth and profitability that we had
experienced before fiscal 2007.
  We face some risks that are inherent in energy operations.
  17




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Because some of our business and product offerings have limited histories and their business
strategies are still being developed and are unproven, limited information is available to
evaluate their future prospects.
   
    
    anticipate and adapt to the changing regulatory climate for energy and technology
products, services and technology;
    
    attract customers to our new businesses;
    
    anticipate and adapt to the changing energy markets and end-user preferences;
    
    attract, retain and motivate qualified personnel;
    
    respond to actions taken by our competitors;
    
    integrate acquired businesses, technologies, products and services;
    
    generate revenues, gross margins, cash flow and profits from sales of new products
and services; and
    
    implement an effective marketing strategy to promote awareness of our new
businesses, products and services.
  Changes in our product mix could materially and adversely affect our business.
  18




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Severe, adverse weather conditions, such as hurricanes, can cause a severe disruption in the
business of Southern Flow by significantly reducing the short and mid-term demand
requirements of its customers.
  We are subject to lawsuits, claims and proceedings from time to time, and in the future we
could become subject to new proceedings, and if any of those proceedings are material and
are successfully prosecuted against us, our business, financial condition and results of
operations could be materially and adversely affected.
   We extend product warranties which could adversely affect our operating results
  If we fail to successful educate our potential customers, including utility customers,
regarding the benefits of our distributed generation solutions or if the market otherwise
fails to continue to develop and expand the need for our solutions, our business will be
limited and adversely affected.
  19




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Because we are dependent upon the utility industry for a growing portion of our revenues,
reductions or deferrals of purchases of our products and services by utilities or their
customers could materially and adversely affect our business.
  Many of our products and services experience long and variable sales cycles, which could
have a negative impact on our results of operations for any given quarter or year.
  If we are unable to develop new and enhanced products and services that achieve market
acceptance in a timely manner, our operating results and competitive position could be
harmed.
  
    
    the changing requirements of customers;
    
    the accurate prediction of market requirements;
    
    the timely completion and introduction of new products and services;
    
    the quality, price and performance of new products and services;
    
    the availability, quality, price and performance of competing products, services and
technologies;
    
    our customer service and support capabilities and responsiveness;
    
    the successful development of our relationships with existing and potential
customers; and
    
    changes in technology, industry standards or end-user preferences.
  20




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Rapid technological changes may prevent us from remaining current with our technological
resources and maintaining competitive product and service offerings.
  
    
    effectively use and develop leading technologies;
    
    continue to develop our technical expertise;
    
    enhance our current products and services;
    
    develop new products and services that meet changing customer needs; and
    
    respond to emerging industry and regulatory standards and technological changes in a
cost-effective manner.
    If we are unable to continue to attract and retain key personnel, our business will be
materially and adversely affected.
  Failures in the integrity of our current systems and planned system upgrades could
materially affect our business performance and our ability to accurately and timely report
our financial results.
  21




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We face intense competition in the markets for our products, services and technology, and if
we cannot successfully compete in those markets, our business will be materially and
adversely affected.
   We may require a substantial amount of additional funds to finance our capital requirements
and the growth of our business, but we may not be able to raise a sufficient amount of funds
to do so on terms favorable to us and our stockholders or at all.
   22




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Restrictions imposed on us by the terms of our current credit facilities could limit how we
conduct our business and our ability to raise additional capital.
  
    
    incur additional indebtedness;
    
    create liens or other encumbrances;
    
    issue or redeem our securities;
    
    make dividend payments and investments;
    
    amend our charter documents;
    
    sell or otherwise dispose of our or our subsidiaries stock or assets;
    
    liquidate or dissolve;
    
    merge or consolidate with other companies; or
    
    reorganize, recapitalize or engage in a similar business transaction.
  
    
    limited in how we conduct our business;
    
    unable to raise additional capital, through debt or equity financings, when needed
for our operations and growth; and
    
    unable to compete effectively or to take advantage of new business opportunities.
 23




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If we fail to effectively manage our future growth, our ability to market and sell our
products and services and to provide quality service to our customers may be adversely
affected.
  Our management of the WaterSecure operations, a private energy program, presents risks to us.
  
    
    lawsuits by investors in this program who become dissatisfied with the results of
the program;
    
    material adverse changes in the business, results of operations and financial
condition of the program due to events, conditions and factors outside of our control,
such as general and local conditions affecting the oil and gas market generally and the
revenues of the program specifically;
    
    hazards of oil production water disposal facilities, including fires and
environmental hazards, such as the 2008 fires, that can result in loss of life,
personal injuries, damages to facilities that may not be insured and lost business,
revenues, net income and cash flows due to the interruptions caused by such hazards;
    
    risks inherent in managing a program and taking significant actions that affect its
investors;
    
    changes in the regulatory environment relating to the program;
    
    reliance upon significant suppliers and customers by the program; and
    
    changes in technology.
  We may be unable to acquire other businesses, technology or companies or engage in other
strategic transactions, or to successfully realize the benefits or avoid the difficulties of
any such strategic transactions.
  24




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
    
    difficulties in assimilating and integrating the operations, personnel, systems,
technologies, products and services of the acquired business;
    
    the technologies, products or businesses that we acquire may not achieve expected
levels of revenue, profitability, benefits or productivity;
    
    difficulties in retaining, training, motivating and integrating key personnel;
    
    diversion of managements time and resources away from our normal daily operations;
    
    difficulties in successfully incorporating licensed or acquired technology and
rights into our product and service offerings;
    
    difficulties in maintaining uniform standards, controls, procedures and policies
within the combined organizations;
    
    difficulties in retaining relationships with customers, employees and suppliers of
the acquired company;
    
    risks of entering markets in which we have no or limited direct prior experience;
    
    potential disruptions of our ongoing businesses; and
    
    unexpected costs and unknown risks and liabilities associated with the acquisitions.
    If we fail to adequately protect our intellectual property rights, we could lose important
proprietary technology, which could materially and adversely affect our business.
  25




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If we face claims of intellectual property infringement by third parties, we could encounter
expensive litigation, be liable for significant damages or incur restrictions on our ability
to sell our products and services.
   
    
    stop selling, incorporating or using our products and services that use the
infringed intellectual property;
    
    obtain from the owner of the infringed intellectual property right a license to sell
or use the relevant technology, which license may not be available on commercially
reasonable terms, or at all; or
    
    redesign the products and services that use the technology.
  Our business could suffer if we cannot maintain and expand our current strategic alliances
and develop new alliances.
  26




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When we become unable to use net operating loss carryforwards to offset future taxable
income for U.S. federal income tax purposes, either because we exhaust them or because we
lose the ability to use them for any reason, we would face exposure to significant tax
liabilities in the future, adversely affecting our net income and cash flow
 ,
  We may not be able to complete the sale of the assets of Metretek Florida even though we
believe that sale is in our long-term best interests.
  Downturns in general economic and market conditions could materially and adversely affect
our business.
  Risks Related to the Ownership of our Shares
 Our charter documents, as well as Delaware law, contain anti-takeover provisions that could
discourage or prevent a third-party acquisition of our common stock, even if an acquisition
would be beneficial to our stockholders.
  27




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
    
    a classified board of directors in which only approximately one-third of the total
board members are elected at each annual meeting;
    
    limitations on the ability of stockholders to change the authorized number of
directors or to fill vacancies on the board of directors;
    
    prohibition of cumulative voting in the election of directors;
    
    provisions permitting a director to be re-elected in an uncontested election even if
less than a majority of the shares voted in that election vote in favor of that
director;
    
    authority for our board of directors to issue shares of our common stock and our
preferred stock, and to determine the price, voting and other rights, preferences,
privileges and restrictions of undesignated shares of preferred stock, without any vote
by or approval of our stockholders;
    
    super-majority voting requirements to effect material amendments to our second
restated certificate and by-laws;
    
    a limitation on which persons may call a special meeting of stockholders;
    
    a prohibition on stockholders acting by written consent without a meeting;
    
    a fair price provision that sets minimum price requirements for potential acquirers
under certain conditions;
    
    anti-greenmail provisions which limit our ability to repurchase shares of common
stock from significant stockholders;
    
    restrictions under Delaware law on mergers and other business combinations between
us and any 15% stockholders; and
    
    advance notice requirements for director nominations and for stockholder proposals.
  Our stockholder rights agreement makes effecting a change of control more difficult, which
may discourage offers for shares of our common stock.
  We have not in the past and we do not currently intend to pay dividends on our common stock.
  28




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The market for our common stock is volatile and subject to extreme trading price and volume
fluctuations.
  
    
    actual or anticipated variations in our results of operations or those of our
competitors;
    
    announcements by us or our competitors of acquisitions, significant technical
innovations, new products or services, product improvements, significant contracts,
strategic relationships or capital commitments;
    
    the receipt, deferral or loss of significant customer orders, including sustaining
and growing revenues following the substantial completion in 2008 of significant
contracts from Publix, our largest customer;
    
    the introduction of new products and services by us or our competitors;
    
    the commencement of, or our involvement in, litigation or other legal or regulatory
proceedings;
    
    announcements by us or our competitors about the success or status of business;
    
    conditions or trends in the energy and technology industries in general, and in the
particular markets we serve;
    
    changes by us in revenue or earnings guidance;
    
    recommendations by securities analysts;
    
    changes in, or the failure by us to meet, securities analysts estimates and
expectations;
    
    the lower coverage by securities analysts and the media of smaller issuers like us;
    
    changes in the market valuation of other energy or technology companies;
    
    additions or departures of key personnel;
    
    sales of our common stock by our directors, executive officers and significant
stockholders; and
    
    general economic, business and market conditions.
   
 Item 1B. Unresolved Staff Comments
  29




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Item 2. Properties
      
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  30




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
 Market Information
   High
    
    LowFiscal Year 2007 Quarters Ended:March 31
    
    $
    13.58
    
    
    $
    10.75June 30
    
    
    15.82
    
    
    
    11.00September 30
    
    
    16.11
    
    
    
    11.94December 31
    
    
    14.70
    
    
    
    10.68Fiscal Year 2006 Quarters Ended:March 31
    
    $
    19.62
    
    
    $
    8.95June 30
    
    
    17.18
    
    
    
    11.60September 30
    
    
    17.84
    
    
    
    10.49December 31
    
    
    16.40
    
    
    
    11.28
  Holders
  Dividends
  31




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Item 6. Selected Financial Data
  Year Ended December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(In thousands, except per share amounts)Consolidated Statement of
Operations Data:Sales and services
    
    $
    111,112
    
    
    $
    115,702
    
    
    $
    43,507
    
    
    $
    31,388
    
    
    $
    28,926Cost of sales and services
    
    
    76,805
    
    
    
    84,104
    
    
    
    31,242
    
    
    
    22,289
    
    
    
    21,032Gross profit on sales and services
    
    
    34,307
    
    
    
    31,598
    
    
    
    12,265
    
    
    
    9,099
    
    
    
    7,894Operating expenses:General and administrative
    
    
    22,489
    
    
    
    19,011
    
    
    
    8,581
    
    
    
    6,681
    
    
    
    5,891Selling, marketing and service
    
    
    3,575
    
    
    
    2,859
    
    
    
    1,457
    
    
    
    1,271
    
    
    
    698Depreciation and amortization
    
    
    1,500
    
    
    
    885
    
    
    
    432
    
    
    
    290
    
    
    
    216Research and development
    
    
    148
    
    
    
    73
    
    
    
    
    
    
    
    
    
    
    
    Restructuring charges
    
    
    14,139
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    41,851
    
    
    
    22,828
    
    
    
    10,470
    
    
    
    8,242
    
    
    
    6,805Operating income (loss)
    
    
    (7,544
    )
    
    
    8,770
    
    
    
    1,795
    
    
    
    857
    
    
    
    1,089Other income and (expenses):Management fees
    
    
    423
    
    
    
    365
    
    
    
    428
    
    
    
    404
    
    
    
    155Interest and other income
    
    
    1,156
    
    
    
    715
    
    
    
    57
    
    
    
    53
    
    
    
    Interest, finance charges and other
    
    
    (57
    )
    
    
    (144
    )
    
    
    (570
    )
    
    
    (364
    )
    
    
    (156
    )Equity income
    
    
    2,774
    
    
    
    2,221
    
    
    
    1,690
    
    
    
    1,255
    
    
    
    469Litigation settlements, net
    
    
    385
    
    
    
    343
    
    
    
    
    
    
    
    
    
    
    
    Minority interest
    
    
    30
    
    
    
    (72
    )
    
    
    (211
    )
    
    
    (238
    )
    
    
    (207
    )Income (loss) before income taxes
    
    
    (2,833
    )
    
    
    12,198
    
    
    
    3,189
    
    
    
    1,967
    
    
    
    1,350Income tax benefit (provision)
    
    
    1,834
    
    
    
    (465
    )
    
    
    (46
    )
    
    
    (48
    )
    
    
    (57
    )Income (loss) from continuing operations
    
    
    (999
    )
    
    
    11,733
    
    
    
    3,143
    
    
    
    1,919
    
    
    
    1,293Discontinued Operations (1):Loss on disposal
    
    
    (1,261
    )
    
    
    
    
    
    
    (300
    )
    
    
    (3,356
    )
    
    
    Income (loss) from operations
    
    
    652
    
    
    
    (28
    )
    
    
    (509
    )
    
    
    (1,807
    )
    
    
    (414
    )Loss on discontinued operations
    
    
    (609
    )
    
    
    (28
    )
    
    
    (809
    )
    
    
    (5,163
    )
    
    
    (414
    )Net income (loss)
    
    $
    (1,608
    )
    
    $
    11,705
    
    
    $
    2,334
    
    
    $
    (3,244
    )
    
    $
    879Per Share Amounts (2):Income (loss) from continuing
operations:Basic
    
    $
    (0.06
    )
    
    $
    0.78
    
    
    $
    0.26
    
    
    $
    0.07
    
    
    $
    0.04Diluted
    
    $
    (0.06
    )
    
    $
    0.71
    
    
    $
    0.24
    
    
    $
    0.07
    
    
    $
    0.04Net income (loss):Basic
    
    $
    (0.10
    )
    
    $
    0.78
    
    
    $
    0.19
    
    
    $
    (0.47
    )
    
    $
    (0.02
    )Diluted
    
    $
    (0.10
    )
    
    $
    0.71
    
    
    $
    0.18
    
    
    $
    (0.45
    )
    
    $
    (0.02
    )Weighted average common shares outstanding:Basic
    
    
    16,045
    
    
    
    15,063
    
    
    
    12,287
    
    
    
    9,531
    
    
    
    6,043Diluted
    
    
    16,045
    
    
    
    16,477
    
    
    
    13,361
    
    
    
    10,036
    
    
    
    6,051
 
 (1)
    
    During fiscal 2007, our Board of Directors approved a plan to discontinue the business of
Metretek Florida and sell substantially all of its assets and operations. During fiscal
2004, our Board of Directors approved a plan to discontinue the business of MCM and sell all
of its manufacturing assets. The operations of the discontinued Metretek Florida and MCM
disposal group have been reclassified to discontinued operations for all periods presented.
In addition, certain other amounts prior to fiscal 2007 have been reclassified to conform 32




---



##### Table of Contents



to fiscal 2007 presentation. Such reclassifications had no impact on our net income (loss) or
stockholders equity.(2)
    
    Per share amounts presented for fiscal 2003 and fiscal 2004 include the effects of
preferred stock deemed distributions. Per share amounts for fiscal 2003 include the effects
of allocation of earnings to participating preferred stock as required by the provision of
EITF 03-06. December 31,2007
    
    2006
    
    2005
    
    2004
    
    2003(In thousands)Consolidated Balance
Sheet Data:Cash and cash equivalents
    
    $
    28,710
    
    
    $
    15,916
    
    
    $
    2,188
    
    
    $
    2,951
    
    
    $
    2,102Working capital
    
    
    41,278
    
    
    
    38,988
    
    
    
    4,911
    
    
    
    5,117
    
    
    
    5,964Total assets
    
    
    113,023
    
    
    
    89,699
    
    
    
    33,319
    
    
    
    30,211
    
    
    
    23,327Long-term notes payable
    
    
    
    
    
    
    
    
    
    
    3,594
    
    
    
    6,075
    
    
    
    5,227Redeemable preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,422Total stockholders equity
    
    
    59,240
    
    
    
    58,000
    
    
    
    16,230
    
    
    
    12,917
    
    
    
    1,169
 33




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
  The discussion in this item, as well as in other items in this report, contains
forward-looking statements within the meaning of and made under the safe harbor provisions of
Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements
are all statements other than statements of historical facts, including statements that refer to
plans, intentions, objectives, goals, strategies, hopes, beliefs, projections and expectations or
other characterizations of future events or performance, and assumptions underlying the foregoing.
See Cautionary Note Regarding Forward-Looking Statements at the beginning of this report.
Forward-looking statements are not guarantees of future performance or events, but are subject to
and qualified by known and unknown risks, uncertainties and other factors that could cause actual
results to differ materially from those expressed, anticipated or implied by such forward-looking
statements, including those risks, uncertainties and other factors described above in Item 1A.
Risk Factors, as well as other risks, uncertainties and factors discussed elsewhere in this
report, in documents that we include as exhibits to or incorporate by reference in this report, and
in other reports and documents that we from time to time file with or furnish to the SEC. You are
cautioned not to place undue reliance on any forward-looking statements, any of which could turn
out to be wrong. Any forward-looking statements made in this report speak only as of the date of
this report.
 Overview
     34




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##### Table of Contents



Recent Developments
    35




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##### Table of Contents



Operating Segments
  36




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##### Table of Contents



Distributed Generation and Energy Efficiency
     Natural Gas Measurement Services
  Results of Operations
  Fiscal 2007 Compared to Fiscal 2006
 Revenues
  37




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##### Table of Contents



Year-over-YearYear Ended December 31,
    
    
    Difference2007
    
    
    2006
    
    
    $
    
    
    %(In thousands)Segment Revenues:PowerSecure
    
    $
    94,923
    
    
    $
    99,543
    
    
    $
    (4,620
    )
    
    
    -4.6
    %Southern Flow
    
    
    16,190
    
    
    
    16,160
    
    
    
    30
    
    
    
    0.2
    %Total
    
    $
    111,113
    
    
    $
    115,703
    
    
    $
    (4,590
    )
    
    
    -4.0
    %
    Year Ended December 31,2007
    
    
    2006
    
    
    2005(In thousands)Revenues from Publix
    
    $
    52,001
    
    
    $
    61,359
    
    
    $
    1,000All other PowerSecure Revenues
    
    
    42,922
    
    
    
    38,184
    
    
    
    9,675Total PowerSecure Revenues
    
    $
    94,923
    
    
    $
    99,543
    
    
    $
    10,675Publix as a percentage of total
PowerSecure Revenues
    
    
    54.8
    %
    
    
    61.6
    %
    
    
    9.4
    %
   38




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##### Table of Contents



Gross Profit and Gross Profit Marg
  Year-over-YearYear Ended December 31,
    
    
    Difference2007
    
    
    2006
    
    
    $
    
    
    %(In thousands)Segment Costs of Sales and Services:PowerSecure
    
    $
    65,015
    
    
    $
    72,318
    
    
    $
    (7,303
    )
    
    
    -10.1
    %Southern Flow
    
    
    11,790
    
    
    
    11,786
    
    
    
    4
    
    
    
    0.0
    %Total
    
    $
    76,805
    
    
    $
    84,104
    
    
    $
    (7,299
    )
    
    
    -8.7
    %Segment Gross Profit:PowerSecure
    
    $
    29,908
    
    
    $
    27,225
    
    
    $
    2,683
    
    
    
    9.9
    %Southern Flow
    
    
    4,400
    
    
    
    4,374
    
    
    
    26
    
    
    
    0.6
    %Total
    
    $
    34,308
    
    
    $
    31,599
    
    
    $
    2,709
    
    
    
    8.6
    %Segment Gross Profit Margins:PowerSecure
    
    
    31.5
    %
    
    
    27.3
    %Southern Flow
    
    
    27.2
    %
    
    
    27.1
    %Total
    
    
    30.9
    %
    
    
    27.3
    %
     
    
    Our ability to improve our operating efficiency and benefit from economies of scale;
    
    Our ability to manage our materials and labor costs;
    
    The geographic density of our projects;
 39




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##### Table of Contents




    
    The mix of higher and lower margin products and services;
    
    The selling price of our products and services;
    
    The rate of growth of our new businesses, which tend to incur costs in excess of
revenues in their earlier phases and then become profitable and more efficient over time if they
are successful; and
    
    Other factors described below under Fluctuations.
  Operating Expense
  Year-over-YearYear Ended December 31,
    
    
    Difference2007
    
    
    2006
    
    
    $
    
    
    %(In thousands)Operating Expenses:General and administrative
    
    $
    22,489
    
    
    $
    19,011
    
    
    $
    3,478
    
    
    
    18.3
    %Selling, marketing and service
    
    
    3,575
    
    
    
    2,860
    
    
    
    715
    
    
    
    25.0
    %Depreciation and amortization
    
    
    1,500
    
    
    
    885
    
    
    
    615
    
    
    
    69.5
    %Research and development
    
    
    148
    
    
    
    73
    
    
    
    75
    
    
    
    102.7
    %Restructuring charges
    
    
    14,139
    
    
    
    
    
    
    
    14,139
    
    
    
    *Total
    
    $
    41,851
    
    
    $
    22,829
    
    
    $
    19,022
    
    
    
    83.3
    %
 
 *
    
    Not meaningful.  General and Administrative Expenses.
 40




---



##### Table of Contents



Year-over-YearYear Ended December 31,
    
    
    Difference2007
    
    
    2006
    
    
    $
    
    
    %(In thousands)PowerSecure G&A Expense:Personnel costs
    
    $
    11,141
    
    
    $
    9,812
    
    
    $
    1,329
    
    
    
    13.5
    %Vehicle lease and rental
    
    
    1,568
    
    
    
    1,145
    
    
    
    423
    
    
    
    36.9
    %Insurance
    
    
    878
    
    
    
    704
    
    
    
    174
    
    
    
    24.7
    %Rent-office and equipment
    
    
    711
    
    
    
    315
    
    
    
    396
    
    
    
    125.7
    %Professional fees and consulting
    
    
    618
    
    
    
    521
    
    
    
    97
    
    
    
    18.6
    %Travel
    
    
    388
    
    
    
    497
    
    
    
    (109
    )
    
    
    -21.9
    %Other
    
    
    1,443
    
    
    
    169
    
    
    
    1,274
    
    
    
    753.8
    %Southern Flow G&A Expense
    
    
    1,551
    
    
    
    1,472
    
    
    
    79
    
    
    
    5.4
    %Corporate Overhead Expense
    
    
    4,191
    
    
    
    4,376
    
    
    
    (185
    )
    
    
    -4.2
    %Total
    
    $
    22,489
    
    
    $
    19,011
    
    
    $
    3,478
    
    
    
    18.3
    %
    Selling, Marketing and Service Expenses.
 Depreciation and Amortization Expenses.
 Research and Development Expenses.
 Restructuring Charges.
 41




---



##### Table of Contents



Other Income and Expenses
  Year-over-YearYear Ended December 31,
    
    Difference2007
    
    2006
    
    $
    
    %(In thousands)Other Income and (Expenses):Management fees
    
    $
    423
    
    
    $
    365
    
    
    $
    58
    
    
    
    15.9
    %Interest and other income
    
    
    1,156
    
    
    
    715
    
    
    
    441
    
    
    
    61.7
    %Interest and finance charges
    
    
    (57
    )
    
    
    (144
    )
    
    
    87
    
    
    
    60.4
    %Equity income
    
    
    2,774
    
    
    
    2,221
    
    
    
    553
    
    
    
    24.9
    %Litigation settlements
    
    
    385
    
    
    
    343
    
    
    
    42
    
    
    
    12.2
    %Minority interest
    
    
    30
    
    
    
    (72
    )
    
    
    102
    
    
    
    141.7
    %Income tax benefit (provision)
    
    
    1,834
    
    
    
    (465
    )
    
    
    2,299
    
    
    
    494.4
    %
 Management Fees.
 Interest and Other Income.
 Interest and Finance Charges.
 Equity Income.
 Litigation
Settlements.
 Minority Interest.
 42




---



##### Table of Contents



Income Taxes.
 Fiscal 2006 Compared to Fiscal 2005
 Revenues
  Year-over-YearYear Ended December 31,
    
    
    Difference2006
    
    
    2005
    
    
    $
    
    
    %(In thousands)Segment Revenues:PowerSecure
    
    $
    99,543
    
    
    $
    30,200
    
    
    $
    69,343
    
    
    
    229.6
    %Southern Flow
    
    
    16,160
    
    
    
    13,307
    
    
    
    2,853
    
    
    
    21.4
    %Total
    
    $
    115,703
    
    
    $
    43,507
    
    
    $
    72,196
    
    
    
    165.9
    %
   43




---



##### Table of Contents



Gross Profit and Gross Profit Margins
  Year-over-YearYear Ended December 31,
    
    
    Difference2006
    
    

2005
    
    
    $
    
    
    %(In thousands)Segment Costs of Sales and Services:PowerSecure
    
    $
    72,318
    
    
    $
    21,305
    
    
    $
    51,013
    
    
    
    239.4
    %Southern Flow
    
    
    11,786
    
    
    
    9,937
    
    
    
    1,849
    
    
    
    18.6
    %Total
    
    $
    84,104
    
    
    $
    31,242
    
    
    $
    52,862
    
    
    
    169.2
    %Segment Gross Profit:PowerSecure
    
    $
    27,225
    
    
    $
    8,895
    
    
    $
    18,330
    
    
    
    206.1
    %Southern Flow
    
    
    4,374
    
    
    
    3,370
    
    
    
    1,004
    
    
    
    29.8
    %Total
    
    $
    31,599
    
    
    $
    12,265
    
    
    $
    19,334
    
    
    
    157.6
    %Segment Gross Profit Margins:PowerSecure
    
    
    27.3
    %
    
    
    29.5
    %Southern Flow
    
    
    27.1
    %
    
    
    25.3
    %Total
    
    
    27.3
    %
    
    
    28.2
    %
    Operating Expenses
  Year-over-YearYear Ended December 31,
    
    Difference2006
    
    2005
    
    $
    
    %(In thousands)Operating Expenses:General and administrative
    
    $
    19,011
    
    
    $
    8,581
    
    
    $
    10,430
    
    
    
    121.5
    %Selling, marketing and service
    
    
    2,860
    
    
    
    1,457
    
    
    
    1,403
    
    
    
    96.3
    %Depreciation and amortization
    
    
    885
    
    
    
    432
    
    
    
    453
    
    
    
    104.9
    %Reserarch and development
    
    
    73
    
    
    
    
    
    
    
    73
    
    
    
    *Total
    
    $
    22,829
    
    
    $
    10,470
    
    
    $
    12,359
    
    
    
    118.0
    %
 
 *
    
    Not meaningful. 44




---



##### Table of Contents



General and Administrative Expenses.
 Selling, Marketing and Service Expenses.
 Depreciation and Amortization Expenses.
 Research and Development Expenses.
 Other Income and Expenses
  Year-over-YearYear Ended December 31,
    
    Difference2006
    
    2005
    
    $
    
    %(In thousands)Other Income and (Expenses):Management fees
    
    $
    366
    
    
    $
    428
    
    
    $
    (62
    )
    
    
    -14.5
    %Interest and other income
    
    
    716
    
    
    
    57
    
    
    
    659
    
    
    
    1156.1
    %Interest and finance charges
    
    
    (144
    )
    
    
    (570
    )
    
    
    426
    
    
    
    74.7
    %Equity income
    
    
    2,221
    
    
    
    1,690
    
    
    
    531
    
    
    
    31.4
    %Litigation settlements
    
    
    343
    
    
    
    
    
    
    
    343
    
    
    
    *Minority interest
    
    
    (72
    )
    
    
    (211
    )
    
    
    139
    
    
    
    65.9
    %Income tax provision
    
    
    (465
    )
    
    
    (46
    )
    
    
    (419
    )
    
    
    -910.9
    %
 
 *
    
    Not meaningful Management Fees.
 Interest and Other Income.
 Interest and Finance Charges.
 45




---



##### Table of Contents



Equity Income.
 Litigation Settlements.
 Minority Interest.
 Income Taxes.
 Fluctuations
  
    
    the size, timing and terms of sales and orders, including large customer orders, such
as the recent significant Publix orders, as well as the effects of customers delaying,
deferring or canceling purchase orders or making smaller purchases than expected;
    
    our ability to obtain adequate supplies of key components and materials for our
products on a timely and cost-effective basis;
    
    our ability to implement our business plans and strategies and the timing of such
implementation;
    
    the pace of development of our new businesses and the growth of their markets;
    
    the timing, pricing and market acceptance of our new products and services;
    
    changes in our pricing policies and those of our competitors;
    
    variations in the length of our product and service implementation process;
    
    changes in the mix of products and services having differing margins;
    
    the effects of severe weather conditions, such as hurricanes, on the demand
requirements of our customers;
    
    the life cycles of our products and services;
    
    budgeting cycles of utilities and other major customers;
    
    changes and uncertainties in the lead times required to obtain the necessary permits
and other governmental and regulatory approvals for projects;
    
    economic conditions in the energy industry, especially in the natural gas and
electricity sectors including the effect of cyclical changes in energy prices;
 46




---



##### Table of Contents




    
    changes in the prices charged by our suppliers;
    
    the effects of governmental regulations and regulatory changes in our markets;
    
    general economic and political conditions;
    
    the effects of litigation, claims and other proceedings;
    
    our ability to make and obtain the expected benefits from acquisitions of technology or
businesses, and the costs related to such acquisitions;
    
    changes in our operating expenses; and
    
    changes in our valuation allowance for our net deferred tax asset.
    
    the development and maintenance of business relationships with strategic partners.
      Liquidity and Capital Resources
 Overview
  
    
    operations;
    
    inventory;
    
    accounts receivable;
 47




---



##### Table of Contents




    
    property and equipment acquisitions, including investments in recurring
revenue projects;
    
    software purchases or development;
    
    debt service requirements;
    
    restructuring obligations;
    
    deferred compensation obligations; and
    
    business and technology acquisitions and other growth transactions.
 Working Capital
  Cash Flows
  Year Ended December 31,2007
    
    
    2006
    
    
    2005(In thousands)Net cash flows provided by (used in) operating activities
    
    $
    16,607
    
    
    $
    (5,741
    )
    
    $
    2,741Net cash flows used in investing activities
    
    
    (4,692
    )
    
    
    (5,042
    )
    
    
    (1,388
    )Net cash provided by (used in) financing activities
    
    
    878
    
    
    
    24,511
    
    
    
    (2,116
    )Net increase (decrease) in cash and cash equivalents
    
    $
    12,793
    
    
    $
    13,728
    
    
    $
    (763
    )
 Cash Flows Provided by (Used in) Operating Activities
     48




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##### Table of Contents



Cash Used in Investing Activities
  Cash Provided by (Used in) Financing Activities
  Capital Spending
  Indebtedness
 Restructuring Obligations.
  49




---



##### Table of Contents



Equipment Line of Credit.
 Working Capital Credit Facility.
      50




---



##### Table of Contents



Preferred Stock Redemption
 Contractual Obligations and Commercial Commitments
  Payments Due by Period (1)Less than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1 - 3 Years
    
    
    4 - 5 Years
    
    
    5 YearsContractual ObligationCredit facility (2)
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Restructuring obligations
    
    
    5,731,000
    
    
    
    4,049,000
    
    
    
    1,682,000
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    8,000
    
    
    
    2,000
    
    
    
    4,000
    
    
    
    2,000
    
    
    
    Operating leases
    
    
    3,115,000
    
    
    
    889,000
    
    
    
    1,268,000
    
    
    
    615,000
    
    
    
    343,000Liabilities of Metretek Florida (3)
    
    
    755,000
    
    
    
    755,000Deferred compensation (4)
    
    
    2,661,000
    
    
    
    333,000
    
    
    
    666,000
    
    
    
    666,000
    
    
    
    996,000Series B preferred stock
    
    
    104,000
    
    
    
    104,000
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    12,374,000
    
    
    $
    6,132,000
    
    
    $
    3,620,000
    
    
    $
    1,283,000
    
    
    $
    1,339,000
 
 (1)
    
    Does not include interest that may become due and payable on such obligations in any future
period.(2)
    
    Total repayments are based upon borrowings outstanding as of December 31, 2007, not actual
or projected borrowings after such date.(3)
    
    In December 2007, our board of directors approved a plan of disposal of Metretek Florida.
This amount represents our liabilities of discontinued operations held for sale as of December
31, 2007.(4)
    
    Total amount represents our expected obligation on the deferred compensation arrangement and
does not include the value of the restricted annuity contract, or interest earnings thereon,
that we purchased to fund our obligation. Off-Balance
Sheet Arrangements
  Liquidity
  51




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Critical Accounting Policies
   
    
    revenue recognition;
    
    allowance for doubtful accounts;
    
    inventories;
    
    warranty reserve;
    
    impairment of long-lived assets;
    
    deferred tax valuation allowance;
    
    uncertain tax positions;
    
    costs of exit or disposal activities and similar nonrecurring charges; and
    
    stock-based compensation.
  Revenue Recognition
 52




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Allowance for Doubtful Accounts
 53




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##### Table of Contents



Inventories
  Warranty Reserve
 Balance at
    
    Reserve
    
    Utilized
    
    Balance atJanuary 1
    
    Additions
    
    Deductions
    
    December 31Fiscal 2005
    
    $
    67
    
    
    $
    4
    
    
    $
    
    
    
    $
    71Fiscal 2006
    
    
    71
    
    
    
    49
    
    
    
    (4
    )
    
    
    116Fiscal 2007
    
    
    116
    
    
    
    305
    
    
    
    
    
    
    
    421
  Impairment of Long-Lived Assets
  54




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##### Table of Contents



Deferred Tax Valuation Allowance
 Uncertain Tax Positions
 Costs of Exit or Disposal Activities and Similar Nonrecurring Charges.
 Stock-Based Compensation
  Stock Option Expense
   55




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##### Table of Contents



WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueBalance, December 31, 2006
    
    
    2,085,344
    
    
    $
    4.61Granted-Directors
    
    
    37,500
    
    
    
    12.73Granted-Employees
    
    
    30,000
    
    
    
    12.67Exercised
    
    
    (411,226
    )
    
    
    2.68Canceled
    
    
    
    
    
    
    Forfeited
    
    
    (13,750
    )
    
    
    10.28Balance, December 31, 2007
    
    
    1,727,868
    
    
    $
    5.34
    
    
    
    5.96
    
    
    $
    8.22Exercisable, December 31, 2007
    
    
    1,358,118
    
    
    $
    3.89
    
    
    
    5.37
    
    
    $
    9.69
  WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueBalance, December 31, 2005
    
    
    2,289,143
    
    
    $
    2.98Granted-Directors
    
    
    22,500
    
    
    
    14.78Granted-Employees
    
    
    306,000
    
    
    
    12.64Exercised
    
    
    (513,632
    )
    
    
    2.51Canceled
    
    
    
    
    
    
    Forfeited
    
    
    (18,667
    )
    
    
    6.49Balance, December 31, 2006
    
    
    2,085,344
    
    
    $
    4.61
    
    
    
    6.55
    
    
    $
    7.71Exercisable, December 31, 2006
    
    
    1,545,677
    
    
    $
    3.07
    
    
    
    5.78
    
    
    $
    9.25
  2007
    
    2006Expected stock price volatilility
    
    
    75.7
    %
    
    
    88.0
    %Risk Free interest rate
    
    
    5.07
    %
    
    
    4.72
    %Annual dividends
    
    $
    
    
    
    $
    Expected life  employees
    
    5 years
    
    4.3 yearsExpected life  directors
    
    5 years
    
    6 years
   Restricted Stock Award Expense
  56




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##### Table of Contents




    
    A total of 322,500 restricted shares will cliff vest in their entirety five years
after the grant date, provided the officers remain employed by us on that date.
    
    A total of 4,500 restricted shares fully vested on December 10, 2007, the date they were
awarded.
    
    A total of 60,000 restricted shares will vest on the date our annual report on Form 10-K
for the year ended December 31, 2007 is filed, based upon the achievement of a performance
target related to our income from continuing operations for 2007.
    
    The remaining 258,000 restricted shares vest in four equal annual installments,
commencing when our annual report on Form 10-K for the year ended December 31, 2008 is
filed, based upon the achievement of performance targets each year relating to our income
from continuing operations for fiscal years 2008 through 2012.
    
    All restricted shares remaining to vest will automatically vest upon a change in
control.
   Recent Accounting Pronouncements
      57




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58




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##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk.
  Commodity Price Risk
 Foreign Exchange Risk
  
 Item 8. Financial Statements and Supplementary Data
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  59




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##### Table of Contents



Item 9A. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  Managements Report on Internal Control Over Financial Reporting
  
    
    pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of our assets;
    
    provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and
    
    provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a material
effect on our financial statements.
 Internal ControlIntegrated Framework
  Limitations in Control Systems
  60




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal ControlIntegrated Framework Managements Report on Internal Control Over Financial
Reporting
    Internal ControlIntegrated Framework
   
 
 Item 9B. Other Information
  61




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##### Table of Contents



PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
   
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accounting Fees and Services
  62




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##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 (a)
    
    Documents filed as a part of this report:
 1.
    
    Financial StatementsThe following consolidated financial statements of PowerSecure International,
Inc. are included on pages F-1 to F-36 of this report:Report of Management
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2007 and 2006
Consolidated Statements of Operations for the Years Ended December 31, 2007, 2006 and 2005
Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005
Notes to Consolidated Financial StatementsThe following consolidated financial statements of Marcum Midstream 1995-2 Business
Trust are included on pages G-1 to G-11 of this report:Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2007 and 2006
Consolidated Statements of Income for the Years Ended December 31, 2007, 2006 and 2004
Consolidated Statements of Shareholders Equity for the Years Ended December 31, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005
Notes to Consolidated Financial Statements2.
    
    Financial Statement SchedulesThe following financial statement schedule is filed as part of this report:Schedule II  Valuation and Qualifying AccountsAll other financial statement schedules have been omitted because they are not
applicable or required or because the required information is presented in our
consolidated financial statements and notes thereto.3.
    
    ExhibitsThe exhibits required by this item are listed on the accompanying Exhibit Index
immediately following the financial statements for this report.
 (b)
    
    Item 601 Exhibits
 The exhibits required by this item are listed on the accompanying Exhibit Index immediately
following the financial statements for this report.
 (c)
    
    Financial Statement Schedules
 The financial statement schedules required by this item are listed under Item 15(a)(2) of this
report, above.
 63




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##### Table of Contents



SIGNATURES
  POWERSECURE INTERNATIONAL, INC.By:
    
    /s/ Sidney Hinton

Sidney Hinton, President and Chief Executive OfficerDate: March 14, 2008
 POWER OF ATTORNEY
   Signature
    
    Title
    
    Date/s/ Sidney Hinton
    
    President, Chief Executive Officer
and Director
    
    March 14, 2008Sidney Hinton
    
    (Principal Executive Officer)/s/ Christopher T. Hutter

Christopher T. Hutter
    
    Vice President, Chief Financial Officer, 
Treasurer and Assistant Secretary
    
    March 14, 2008(Principal Financial Officer)/s/ Gary J. Zuiderveen

Gary J. Zuiderveen
    
    Vice President of Financial Reporting, Controller, 
Principal Accounting Officer,
Assistant Treasurer and Secretary
    
    March 14, 2008(Principal Accounting Officer)/s/ Basil M. Briggs

Basil M. Briggs
    
    Chairman of the Board and Director
    
    March 14, 2008/s/ Anthony D. Pell

Anthony D. Pell
    
    Director
    
    March 14, 2008/s/ Kevin P. Collins

Kevin P. Collins
    
    Director
    
    March 14, 2008/s/ John A. (Andy) Miller

John A. (Andy) Miller
    
    Director
    
    March 14, 2008
 64




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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS
 PageCONSOLIDATED FINANCIAL STATEMENTS OF
POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIESReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2007 and 2006
    
    
    F-3Consolidated Statements of Operations for the Years Ended
December 31, 2007, 2006 and 2005
    
    
    F-5Consolidated Statements of Stockholders Equity for the Years
Ended December 31, 2007, 2006 and 2005
    
    
    F-6Consolidated Statements of Cash Flows for the Years Ended
December 31, 2007, 2006 and 2005
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8
 F - 1




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Internal
ControlIntegrated Framework
 Share-Based
Payment.
 HEIN & ASSOCIATES LLP
 
 F - 2




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POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 December 31,2007
    
    
    2006ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    28,709,688
    
    
    $
    15,916,460Trade receivables, net of allowance for doubtful accounts
of $262,547 and $225,004, respectively
    
    
    36,753,399
    
    
    
    40,255,372Other receivables
    
    
    376,198
    
    
    
    431,437Inventories
    
    
    20,785,549
    
    
    
    12,882,167Deferred income taxes (Note 11)
    
    
    2,528,636
    
    
    
    231,990Prepaid expenses and other current assets
    
    
    1,091,498
    
    
    
    818,583Assets of discontinued operations held for sale (Note 4)
    
    
    2,399,589
    
    
    
    144,490Total current assets
    
    
    92,644,557
    
    
    
    70,680,499PROPERTY, PLANT AND EQUIPMENT:Equipment
    
    
    6,488,695
    
    
    
    6,524,549Vehicles
    
    
    174,825
    
    
    
    166,894Furniture and fixtures
    
    
    614,589
    
    
    
    568,212Land, building and improvements
    
    
    1,013,022
    
    
    
    1,073,625Total property, plant and equipment, at cost
    
    
    8,291,131
    
    
    
    8,333,280Less accumulated depreciation and amortization
    
    
    2,640,424
    
    
    
    3,889,401Property, plant and equipment, net
    
    
    5,650,707
    
    
    
    4,443,879OTHER ASSETS:Goodwill (Notes 1 and 6)
    
    
    7,255,710
    
    
    
    9,146,409Restricted annuity contract (Note 7)
    
    
    2,001,204
    
    
    
    Intangible rights and capitalized software costs, net of
accumulated amortization of $1,227,482 and $1,543,024, respectively
    
    
    1,660,676
    
    
    
    1,763,970Investment in unconsolidated affiliate
    
    
    3,652,251
    
    
    
    3,513,501Other assets
    
    
    158,363
    
    
    
    151,177Total other assets
    
    
    14,728,204
    
    
    
    14,575,057TOTAL
    
    $
    113,023,468
    
    
    $
    89,699,435
 See accompanying notes to consolidated financial statements.
 F - 3




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##### Table of Contents



POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
 December 31,2007
    
    
    2006LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    11,321,639
    
    
    $
    15,090,540Accrued and other liabilities
    
    
    35,156,946
    
    
    
    16,026,867Restructuring charges payable
    
    
    4,047,849
    
    
    
    Current income taxes payable (Note 11)
    
    
    
    
    
    
    570,217Liabilities of discontinued operations held for sale (Note 4)
    
    
    754,589
    
    
    
    Current unrecognized tax benefit (Note 11)
    
    
    83,987
    
    
    
    Capital lease obligations (Note 9)
    
    
    1,392
    
    
    
    4,749Total current liabilities
    
    
    51,366,402
    
    
    
    31,692,373LONG-TERM NOTES PAYABLE (Note 8)
    
    
    
    
    
    
    NON-CURRENT UNRECOGNIZED TAX BENEFIT (Note 11)
    
    
    674,173
    
    
    
    NON-CURRENT RESTRUCTURING CHARGES (Note 2)
    
    
    1,682,543
    
    
    
    DEFERRED COMPENSATION OBLIGATION (Note 7)
    
    
    55,440
    
    
    
    NON-CURRENT CAPITAL LEASE OBLIGATIONS (Note 9)
    
    
    5,326
    
    
    
    7,431COMMITMENTS AND CONTINGENCIES (Note 10)MINORITY INTEREST IN SUBSIDIARIES (Note 1 and 6)
    
    
    
    
    
    
    STOCKHOLDERS EQUITY (Notes 12 and 13):Preferred stock  undesignated, $.01 par value; 2,000,000 shares
authorized; none issued and outstandingPreferred stock  Series C, $.01 par value; 500,000 shares
authorized; none issued and outstandingCommon stock, $.01 par value; 25,000,000 shares
authorized; 16,860,267 and 15,808,634 shares issued
and outstanding, respectively
    
    
    168,602
    
    
    
    158,086Additional paid-in-capital
    
    
    105,472,838
    
    
    
    102,287,543Accumulated deficit
    
    
    (46,401,856
    )
    
    
    (44,445,998
    )Total stockholders equity
    
    
    59,239,584
    
    
    
    57,999,631TOTAL
    
    $
    113,023,468
    
    
    $
    89,699,435
 See accompanying notes to consolidated financial statements.
 F - 4




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##### Table of Contents



POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Year Ended December 31,2007
    
    
    2006
    
    
    2005Revenues
    
    $
    111,112,536
    
    
    $
    115,702,578
    
    
    $
    43,506,729Cost of sales
    
    
    76,805,041
    
    
    
    84,104,151
    
    
    
    31,242,199Gross profit
    
    
    34,307,495
    
    
    
    31,598,427
    
    
    
    12,264,530Operating expenses:General and administrative
    
    
    22,489,223
    
    
    
    19,011,128
    
    
    
    8,580,602Selling, marketing and service
    
    
    3,575,214
    
    
    
    2,859,794
    
    
    
    1,457,207Depreciation and amortization
    
    
    1,500,106
    
    
    
    884,521
    
    
    
    431,872Research and development
    
    
    147,723
    
    
    
    73,048
    
    
    
    Restructuring charges
    
    
    14,139,216
    
    
    
    
    
    
    
    Total operating expenses
    
    
    41,851,482
    
    
    
    22,828,491
    
    
    
    10,469,681Operating income (loss)
    
    
    (7,543,987
    )
    
    
    8,769,936
    
    
    
    1,794,849Other income and (expenses):Management fees
    
    
    422,677
    
    
    
    365,558
    
    
    
    427,918Interest and other income
    
    
    1,156,037
    
    
    
    715,680
    
    
    
    57,409Interest and finance charges
    
    
    (57,376
    )
    
    
    (144,408
    )
    
    
    (569,573
    )Equity income
    
    
    2,773,919
    
    
    
    2,221,185
    
    
    
    1,689,537Litigation settlements
    
    
    385,434
    
    
    
    343,112
    
    
    
    Minority interest (Note 6)
    
    
    30,000
    
    
    
    (72,464
    )
    
    
    (210,875
    )Income (loss) before income taxes
    
    
    (2,833,296
    )
    
    
    12,198,599
    
    
    
    3,189,265Income tax benefit (provision) (Note 11)
    
    
    1,833,566
    
    
    
    (465,138
    )
    
    
    (45,690
    )Income (loss) from continuing operations
    
    
    (999,730
    )
    
    
    11,733,461
    
    
    
    3,143,575Discontinued operationsMetretek Florida (Note 4)Loss on disposal
    
    
    (1,260,631
    )
    
    
    
    
    
    
    (300,000
    )Income (loss) from operations, including
tax benefit of $11,241 in 2007
    
    
    652,026
    
    
    
    (28,125
    )
    
    
    (509,186
    )Loss on discontinued operations
    
    
    (608,605
    )
    
    
    (28,125
    )
    
    
    (809,186
    )Net income (loss)
    
    $
    (1,608,335
    )
    
    $
    11,705,336
    
    
    $
    2,334,389PER SHARE AMOUNTS (NOTE 1):Income (loss) from continuing operations:Basic
    
    $
    (0.06
    )
    
    $
    0.78
    
    
    $
    0.26Diluted
    
    $
    (0.06
    )
    
    $
    0.71
    
    
    $
    0.24Net income (loss):Basic
    
    $
    (0.10
    )
    
    $
    0.78
    
    
    $
    0.19Diluted
    
    $
    (0.10
    )
    
    $
    0.71
    
    
    $
    0.18WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:Basic
    
    
    16,045,261
    
    
    
    15,062,888
    
    
    
    12,287,107Diluted
    
    
    16,045,261
    
    
    
    16,477,336
    
    
    
    13,360,515
 See accompanying notes to consolidated financial statements.
 F - 5




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POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
 AdditionalCommon Stock
    
    
    Paid-In
    
    
    AccumulatedShares
    
    
    Value
    
    
    Capital
    
    
    Deficit
    
    
    TotalBALANCE,
JANUARY 1, 2005
    
    
    12,186,741
    
    
    $
    121,867
    
    
    $
    71,281,120
    
    
    $
    (58,485,723
    )
    
    $
    12,917,264Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,334,389
    
    
    
    2,334,389Stock warrant and option
exercises
    
    
    390,789
    
    
    
    3,908
    
    
    
    907,979
    
    
    
    
    
    
    
    911,887Amortization of restricted
stock awards
    
    
    
    
    
    
    
    
    
    
    66,000
    
    
    
    
    
    
    
    66,000BALANCE,
DECEMBER 31, 2005
    
    
    12,577,530
    
    
    
    125,775
    
    
    
    72,255,099
    
    
    
    (56,151,334
    )
    
    
    16,229,540Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,705,336
    
    
    
    11,705,336Stock option compensation
    
    
    
    
    
    
    
    
    
    
    712,071
    
    
    
    
    
    
    
    712,071Private placement, net
    
    
    2,012,548
    
    
    
    20,125
    
    
    
    26,200,997
    
    
    
    
    
    
    
    26,221,122Stock warrant and option
exercises
    
    
    1,218,556
    
    
    
    12,186
    
    
    
    3,053,376
    
    
    
    
    
    
    
    3,065,562Amortization of restricted
stock awards
    
    
    
    
    
    
    
    
    
    
    66,000
    
    
    
    
    
    
    
    66,000BALANCE,
DECEMBER 31, 2006
    
    
    15,808,634
    
    
    
    158,086
    
    
    
    102,287,543
    
    
    
    (44,445,998
    )
    
    
    57,999,631Adoption of FIN 48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (347,523
    )
    
    
    (347,523
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,608,335
    )
    
    
    (1,608,335
    )Stock option compensation
    
    
    
    
    
    
    
    
    
    
    972,204
    
    
    
    
    
    
    
    972,204Issuance and amortization of
restricted stock awards
    
    
    645,000
    
    
    
    6,450
    
    
    
    1,113,138
    
    
    
    
    
    
    
    1,119,588Stock option exercises, including
of tax benefit of $52,348
    
    
    406,633
    
    
    
    4,066
    
    
    
    1,099,953
    
    
    
    
    
    
    
    1,104,019BALANCE,
DECEMBER 31, 2007
    
    
    16,860,267
    
    
    $
    168,602
    
    
    $
    105,472,838
    
    
    $
    (46,401,856
    )
    
    $
    59,239,584
 See accompanying notes to consolidated financial statements.
 F - 6




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##### Table of Contents



POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended December 31,2007
    
    
    2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (1,608,335
    )
    
    $
    11,705,336
    
    
    $
    2,334,389Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Loss from discontinued operation
    
    
    608,605
    
    
    
    
    
    
    
    300,000Restructuring charges, net of cash payments
    
    
    5,729,023
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    1,500,106
    
    
    
    991,566
    
    
    
    563,889Minority interest in subsidiary
    
    
    (30,000
    )
    
    
    72,464
    
    
    
    210,875Deferred income taxes
    
    
    (2,296,646
    )
    
    
    278,152
    
    
    
    Loss on disposal of property, plant and equipment
    
    
    90,101
    
    
    
    43,431
    
    
    
    13,497Equity in income of unconsolidated affiliate
    
    
    (2,773,919
    )
    
    
    (2,221,185
    )
    
    
    (1,689,537
    )Distributions from unconsolidated affiliate
    
    
    2,574,669
    
    
    
    1,811,820
    
    
    
    1,507,956Stock compensation expense
    
    
    2,091,792
    
    
    
    778,071
    
    
    
    66,000Changes in operating assets and liabilities, net of
effect of aquisitons:Trade receivables, net
    
    
    3,501,973
    
    
    
    (28,181,260
    )
    
    
    (3,209,526
    )Inventories
    
    
    (7,903,382
    )
    
    
    (9,390,219
    )
    
    
    (226,971
    )Other current assets
    
    
    (785,893
    )
    
    
    (686,082
    )
    
    
    (63,580
    )Other noncurrent assets
    
    
    (7,186
    )
    
    
    (91,007
    )
    
    
    87,840Accounts payable
    
    
    (3,839,382
    )
    
    
    11,718,505
    
    
    
    77,804Accrued and other liabilities
    
    
    19,350,265
    
    
    
    7,380,847
    
    
    
    3,379,151Unrecognized tax benefits
    
    
    410,637
    
    
    
    
    
    
    
    Deferred compensation obligation
    
    
    55,440
    
    
    
    
    
    
    
    Retirement annuity
    
    
    (23,404
    )
    
    
    
    
    
    
    Net cash provided by (used in) continuing operations
    
    
    16,644,464
    
    
    
    (5,789,561
    )
    
    
    3,351,787Net cash provided by (used in) discontinued operations
    
    
    (37,800
    )
    
    
    48,331
    
    
    
    (610,546
    )Net cash provided by (used in) operating activities
    
    
    16,606,664
    
    
    
    (5,741,230
    )
    
    
    2,741,241CASH FLOWS FROM INVESTING ACTIVITIES:Investment in unconsolidated affiliate
    
    
    
    
    
    
    (1,260,360
    )
    
    
    (58,045
    )Additions to intangible rights and software development
    
    
    (574,077
    )
    
    
    (97,677
    )
    
    
    (390,007
    )Purchases of property, plant and equipment
    
    
    (2,147,490
    )
    
    
    (1,356,353
    )
    
    
    (939,808
    )Purchase of restricted annuity contract
    
    
    (1,977,800
    )
    
    
    
    
    
    
    Acquisitions, net of cash acquired
    
    
    
    
    
    
    (2,344,504
    )
    
    
    Proceeds from sale of property, plant and equipment
    
    
    7,560
    
    
    
    16,976
    
    
    
    Net cash used in investing activities
    
    
    (4,691,807
    )
    
    
    (5,041,918
    )
    
    
    (1,387,860
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net proceeds from private placement
    
    
    
    
    
    
    26,221,122
    
    
    
    Proceeds from stock warrant and option exercises
    
    
    1,104,019
    
    
    
    3,065,562
    
    
    
    911,887Net payments on line of credit
    
    
    
    
    
    
    (1,314,200
    )
    
    
    (1,307,081
    )Proceeds from equipment and project loans
    
    
    
    
    
    
    
    
    
    
    335,247Principal payments on long-term notes payable
    
    
    
    
    
    
    (3,375,494
    )
    
    
    (1,433,410
    )Cash distributions to minority interests
    
    
    
    
    
    
    (381
    )
    
    
    (130,912
    )Payments on preferred stock redemptions
    
    
    (220,186
    )
    
    
    (80,735
    )
    
    
    (488,814
    )Payments on capital lease obligations
    
    
    (5,462
    )
    
    
    (4,576
    )
    
    
    (3,477
    )Net cash provided by (used in) financing activities
    
    
    878,371
    
    
    
    24,511,298
    
    
    
    (2,116,560
    )NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
    
    
    12,793,228
    
    
    
    13,728,150
    
    
    
    (763,179
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    15,916,460
    
    
    
    2,188,310
    
    
    
    2,951,489CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    28,709,688
    
    
    $
    15,916,460
    
    
    $
    2,188,310
 See accompanying notes to consolidated financial statements.
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POWERSECURE INTERNATIONAL, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
 1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESOrganization The accompanying consolidated financial statements include the accounts of
PowerSecure International, Inc. (formerly known as Metretek Technologies, Inc.) and its
subsidiaries, primarily, PowerSecure, Inc. (PowerSecure subsidiary) (and its majority-owned
and wholly-owned subsidiaries, UtilityEngineering, Inc., PowerServices, Inc., EnergyLite, Inc.
EfficientLights, LLC and Reids Trailer, Inc. dba PowerFab), Southern Flow Companies, Inc.
(Southern Flow), and Metretek, Incorporated (Metretek Florida) (and its majority-owned
subsidiary, Metretek Contract Manufacturing Company, Inc. (MCM)), and WaterSecure Holdings,
Inc. (WaterSecure) (and its majority-owned subsidiary, Conquest Acquisition Company LLC
(CAC LLC)), collectively referred to as the Company or we or us or our.PowerSecure International was incorporated on April 5, 1991. Our operations are currently
focused on distributed generation, utility infrastructure, and energy efficiency, providing
products and services to utilities and their commercial, institutional, and industrial
customers. Our core distributed generation products and services involve the deployment of
electric generation equipment that supplements the electric power grid, enabling utilities to
avoid new investments in infrastructure for transmitting and distributing power, and providing
their customers with dependable backup power with a strong return on investment. The
distributed generation equipment is generally located at the utilities end-customers
business sites. We have sophisticated monitoring systems and electrical switching
technologies, which work in tandem to reduce customers costs by managing load curtailment
during peak power periods, and also
ensure backup power is available during power outages. In addition to its core distributed
generation products and services, we provide utilities with regulatory consulting, energy
system engineering and construction, and energy conservation services. We also provide
commercial and industrial customers with the identification, design and installation of cost
effective energy improvement systems for lighting, building controls, and other facility
upgrades.Through our Southern Flow subsidiary, we also provide a wide variety of natural gas
measurement services principally to producers and operators of natural gas production
facilities. See Note 14 for more information concerning our reportable segments.In August 2007, we changed our name from Metretek Technologies, Inc. to PowerSecure
International, Inc.Principles of Consolidation The consolidated financial statements include the accounts of
PowerSecure International and its subsidiaries after elimination of intercompany accounts and
transactions. We use the equity method to account for our investment in unconsolidated
affiliate.Use of Estimates The preparation of our consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America requires that
our management make estimates and assumptions that affect the reported amounts of assets and
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liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant estimates include
percentage-of-completion estimates, allowance for doubtful accounts receivable, inventory
valuation reserves, and our deferred tax valuation allowance.Revenue Recognition Our PowerSecure subsidiary utilizes the percentage-of-completion method
of revenue recognition, in accordance with SOP 81-1, for its project-based distributed
generation contracts. Nearly all of our distributed generation projects are fixed-price
contracts, with the exception of certain contracts which provide for additional billings based
on wire usage to connect the distributed generation equipment to customer facilities. In
applying the percentage-of-completion method, we have identified the key output project phases
that are standard components of our construction projects. We have further identified, based
on past experience, an estimate of the value of each of these output phases based on a
combination of costs incurred and the value added to the overall construction project. While
the order of these phases varies depending on the project, each of these output phases is
necessary to complete each project and each phase is an integral part of the turnkey product
solution we deliver to our customers. We use these output phases and percentages to measure
our progress toward completion of our construction projects. For each reporting period, the
status of each project, by phase, is determined by employees who are managers of or are
otherwise directly involved with the constructions project and is reviewed by our accounting
personnel. Utilizing this information, our PowerSecure subsidiary recognizes project revenues
(and associated project costs) based on the percentage associated with output phases that are
complete or in process on each of our projects. Revenues and gross profit are adjusted
prospectively for revisions in estimated total contract costs and contract values. Estimated
losses, if any, are recorded when identified. While a project is in process, amounts billed
to customers in excess of revenues recognized to date are classified as current liabilities.
Likewise, amounts recognized as revenue in excess of actual billings to date are recorded as
unbilled accounts receivable. In the event a contract provides for adjustments to the
contract price for actual wire usage, we recognize the associated revenue when the actual
costs are incurred and the customer is billed.Revenues on our recurring revenue distributed generation projects are recognized over the term
of the contracts as we provide the customer with access to assets for standby power and peak
shaving or, in certain cases, when energy savings are realized by the customer at their site.
We recognize revenue for equipment and supply sales, in accordance with the SECs Staff
Accounting Bulletin No. 101, when title passes, the risks and rewards of ownership have been
transferred to the customer, the fee is fixed or determinable, and collection of the related
receivable is probable. Natural gas measurement revenues are recognized as services are
provided. Sales of EnergyLites goods or services sometimes involve the provision of multiple
elements. Revenues from contracts with multiple element arrangements are recognized as each
element is earned based on the relative fair value of each element and when the delivered
elements have value to customers on a standalone basis. Amounts allocated to each element are
based on its objectively determined fair value, such as the sales price for the product or
service when it is sold separately or competitor prices for similar products or services.Cash and Cash Equivalents Cash and all highly liquid investments with a maturity of three
months or less from the date of purchase, including money market mutual funds, short-term time
deposits, and government agency and corporate obligations, are classified as cash and cash
equivalents. We maintain our cash in bank deposit accounts which, at times, may exceed
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federally insured limits. We have not experienced any losses in such accounts. We do not
believe we are exposed to any significant credit risk on cash and cash equivalents.
Supplemental statement of cash flows information is as follows:
 2007
    
    2006
    
    2005Cash paid during the year for:Interest
    
    $
    26,379
    
    
    $
    122,203
    
    
    $
    577,458State income taxes
    
    
    848,331
    
    
    
    166,985
    
    
    
    53,217Supplemental schedule of non-cash investing
and financing activities:Capital lease obligations incurred for the
purchase of equipment
    
    
    7,802
    
    
    
    13,491
    
    
    
    
 Accounts Receivable Our customers include a wide variety of mid-sized and large businesses,
utilities and institutions. We perform ongoing credit evaluations of our customers financial
condition and generally do not require collateral. We continuously monitor collections and
payments from our customers and regularly adjust credit limits of customers based upon payment
history and a customers current credit worthiness, as judged by us. We maintain a provision
for estimated credit losses.From time to time, we have derived a material portion of our revenues from one or more
significant customers. During the year ended December 31, 2007, our largest PowerSecure
subsidiary customer accounted for approximately $52,132,000, or 47% of total revenues. During
the year ended December 31, 2006, that same customer of our PowerSecure subsidiary accounted
for approximately $61,359,000 or 53% of our revenues. During the year ended December 31,
2005, our largest PowerSecure subsidiary customer (a different customer than in 2006 and 2007)
accounted for approximately 10% of our revenues.To date, nearly all our revenues have derived from sales to customers within the United
States.Inventories Inventories are stated at the lower of cost (determined primarily on a
specific-identification basis) or market. Inventories at December 31, 2007 and 2006 are
summarized as follows:
 2007
    
    
    2006Raw materials and supplies
    
    $
    9,069,718
    
    
    $
    1,897,846Work in process
    
    
    10,301,378
    
    
    
    9,530,471Finished goods and merchandise
    
    
    1,542,285
    
    
    
    1,656,290Valuation reserve
    
    
    (127,832
    )
    
    
    (202,440
    )Total
    
    $
    20,785,549
    
    
    $
    12,882,167
 In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (FAS) No. 151, Inventory Costs, an amendment of ARB No. 43,
Chapter 4 (FAS 151). FAS 151 amends the guidance in Chapter 4, Inventory Pricing, of
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Accounting Research Bulletin No. 43, Restatement and Revision of Accounting Research
Bulletins, to clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material. FAS 151 also clarifies the circumstances under which
fixed overhead costs associated with operating facilities involved in inventory processing
should be capitalized. We adopted the provisions of FAS 151 effective January 1, 2006. The
adoption of FAS 151 had no effect on our consolidated financial position or results of
operations.Property, Plant and Equipment Property, plant and equipment are stated at cost and are
generally depreciated using the straight-line method over their estimated useful lives, which
depending on asset class ranges from 3 to 30 years. Property, plant and equipment includes
items under capital lease with a net book value of $9,501 and $14,956 at December 31, 2007 and
2006, respectively.Investment in Unconsolidated AffiliateThrough WaterSecure, we hold a minority interest in
Marcum Midstream 1995-2 Business Trust (MM 1995-2). We currently own 36.26% of MM 1995-2.
During the years ended December 31, 2006 and 2005, WaterSecure acquired additional equity
interests in MM 1995-2 at a purchase price of $1,260,000 and $58,000, respectively. We used a
combination of cash on hand and borrowings on our lines of credit to acquire the additional
equity interests in MM 1995-2 in 2006.MM 1995-2 owns and operates six water disposal wells located at five facilities in northeastern
Colorado. We utilize the equity method to account for our investment in MM 1995-2. The
balance of our equity investment MM 1995-2 includes approximately $719,000 and $780,000 of
unamortized purchase premiums we paid on our acquired interests at December 31, 2007 and 2006,
respectively. The premiums are being amortized over a period of 14 years, which represents the
weighted average useful life of the underlying assets acquired.Summarized financial information for MM 1995-2 at December 31, 2007 and 2006 and for the three
years ended December 31, 2007 are as follows:
 December 31,2007
    
    
    2006Total current assets
    
    $
    3,136,735
    
    
    $
    2,816,175Property, plant and equipment, net
    
    
    8,366,745
    
    
    
    5,828,718Total other assets
    
    
    13,469
    
    
    
    9,833Total assets
    
    $
    11,516,949
    
    
    $
    8,654,726Total current liabilities
    
    $
    1,362,482
    
    
    $
    1,081,382Long-term note payable
    
    
    2,372,807
    
    
    
    341,142Total shareholders equity
    
    
    7,781,660
    
    
    
    7,232,202Total liabilities and shareholders equity
    
    $
    11,516,949
    
    
    $
    8,654,726
 Year Ended December 31,2007
    
    
    2006
    
    
    2005Total revenues
    
    $
    13,205,827
    
    
    $
    11,027,771
    
    
    $
    10,263,085Total costs and expenses
    
    
    5,556,369
    
    
    
    5,099,605
    
    
    
    4,868,291Net income
    
    $
    7,649,458
    
    
    $
    5,928,166
    
    
    $
    5,394,794
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Goodwill and Other Intangible Assets We account for goodwill and other intangible assets in
accordance with the provisions of FAS 141, Business Combinations and FAS 142, Goodwill and
Other Intangible Assets. We amortize intangible assets that do not have an indefinite life
over their estimated useful lives and do not amortize goodwill and intangible assets with
indefinite lives. We perform annual reviews (on October 1) of goodwill and intangible assets
with indefinite lives for impairment (or more frequently if impairment indicators arise).
Based on the results of our annual reviews, we have concluded that there has been no
impairment of goodwill or intangible assets during the three years ended December 31, 2007.We capitalize software development costs integral to our products once technological
feasibility of the products and software has been determined. Purchased software and software
development costs are amortized over five years, using the straight-line method. Unamortized
software and software development costs at December 31, 2007 and 2006 are $357,000 and
$148,000, respectively. Patents and license agreements are amortized using the straight-line
method over the lesser of their estimated economic lives or their legal term of existence,
currently 3 to 5 years. Unamortized patent and license costs at December 31, 2007 and 2006
are $328,000 and $270,000, respectively.During 2006, our PowerSecure subsidiary purchased contract and intellectual property rights to
provide services to federal customers of an investor-owned utility. The contract rights are
being amortized over their expected contract terms. The intellectual property rights are
being amortized over ten years, using the straight-line method. The balance of unamortized
contract and intellectual property rights at December 31, 2007 and 2006 was $976,000 and
$1,346,000, respectively.Accrued and Other Liabilities Accrued and other liabilities at December 31, 2007 and 2006
are summarized as follows:
 2007
    
    
    2006Accrued project costs
    
    $
    12,979,539
    
    
    $
    6,598,184Payroll, employee benefits and related liabilities
    
    
    4,521,064
    
    
    
    4,015,533Sales, property and franchise taxes payable
    
    
    1,334,056
    
    
    
    1,536,677Advance billings on projects in progress
    
    
    15,358,318
    
    
    
    2,623,315Preferred stock redemption obligation
    
    
    104,222
    
    
    
    324,408Deferred revenue
    
    
    275,589
    
    
    
    553,646Insurance premiums and reserves
    
    
    29,412
    
    
    
    111,882Warranty reserve
    
    
    420,619
    
    
    
    116,102Other
    
    
    134,127
    
    
    
    147,120Total
    
    $
    35,156,946
    
    
    $
    16,026,867
 Minority Interest The minority shareholders interest in the equity and losses of
EfficientLights for the year ended December 31, 2007 and the minority shareholders interests
in the equity and the income of CAC LLC for the period from January 1, 2006 to March 31, 2006
and for the year ended December 31, 2005 is included in minority interest in the accompanying
consolidated financial statements. In late 2007, the FASB issued FAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements-an amendment of ARB No. 51 (FAS 160), which
establishes accounting and reporting standards for the noncontrolling interest in a subsidiary
(minority interest) and for the deconsolidation of a subsidiary. We will be required to adopt the
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provisions of FAS 160 beginning January 1, 2009. We are currently evaluating the impact
that the adoption of FAS 160 will have on our financial position and results of operations.Research and Developments Costs Research and development costs relating principally to the
design and development of products (exclusive of costs capitalized under FAS 86) are expensed
as incurred.Impairment or Disposal of Long-Lived Assets In accordance with FAS 144 Accounting for the
Impairment or Disposal of Long-Lived Assets, we evaluate our long-lived assets whenever
significant events or changes in circumstances occur that indicate that the carrying amount of
an asset may not be recoverable. Recoverability of these assets is determined by comparing
the forecasted undiscounted future net cash flows from the operations to which the assets
relate, based on managements best estimates using appropriate assumptions and projections at
the time, to the carrying amount of the assets. If the carrying value is determined not to be
recoverable from future operating cash flows, the asset is deemed impaired and an impairment
loss is
recognized equal to the amount by which the carrying amount exceeds the estimated fair value
of the asset.Income Taxes On January 1, 2007, we adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a
minimum recognition threshold for a tax position taken or expected to be taken in a tax return
that is required to be met before being recognized in the financial statements. FIN 48 also
provides guidance on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition.We account for income taxes in accordance with the provisions of FAS 109, Accounting for
Income Taxes. Accordingly, we recognize deferred income tax assets and liabilities for the
estimated future tax consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases.
We have net operating loss carryforwards available in certain jurisdictions to reduce future
taxable income. Future tax benefits for net operating loss carryforwards are recognized to
the extent that realization of these benefits is considered more likely than not. To the
extent that available evidence raises doubt about the realization of a deferred income tax
asset, a valuation allowance is established.Basic and Diluted Earnings (Loss) Per Share Earnings (loss) per share is computed by
dividing net income (loss) by the weighted average number of shares outstanding during the
period on a basic and diluted basis. Diluted earnings per share reflects the potential
dilution that would occur if stock options and warrants were exercised using the average
market price for our stock for the period. Diluted earnings per share excludes the impact of
potential common shares related to stock options and warrants in periods in which we reported
a loss from continuing operations or in which the option or warrant exercise price is greater
than the average market price of our common stock during the period because the effect would
be antidilutive. A total of 1,056,872 in-the-money stock options and warrants were excluded
from diluted weighted-average shares outstanding for the year ended December 31, 2007 because
their effect was antidilutive.The following table sets forth the calculation of basic and diluted earnings (loss) per share:
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Year Ended December 31,2007
    
    
    2006
    
    
    2005Income (loss) from continuing operations
    
    $
    (999,730
    )
    
    $
    11,733,461
    
    
    $
    3,143,575Loss from discontinued operations
    
    
    (608,605
    )
    
    
    (28,125
    )
    
    
    (809,186
    )Net income (loss)
    
    $
    (1,608,335
    )
    
    $
    11,705,336
    
    
    $
    2,334,389Basic weighted-average common
shares outstanding in period
    
    
    16,045,261
    
    
    
    15,062,888
    
    
    
    12,287,107Add dilutive effects of stock
options and warrants
    
    
    
    
    
    
    1,414,448
    
    
    
    1,073,408Diluted weighted-average common
shares outstanding in period
    
    
    16,045,261
    
    
    
    16,477,336
    
    
    
    13,360,515Basic earnings (loss) per common share:Income (loss) from continuing operations
    
    $
    (0.06
    )
    
    $
    0.78
    
    
    $
    0.26Loss from discontinued operations
    
    
    (0.04
    )
    
    
    (0.00
    )
    
    
    (0.07
    )Basic earnings (loss) per common share
    
    $
    (0.10
    )
    
    $
    0.78
    
    
    $
    0.19Diluted earnings (loss) per common share:Income (loss) from continuing operations
    
    $
    (0.06
    )
    
    $
    0.71
    
    
    $
    0.24Loss from discontinued operations
    
    
    (0.04
    )
    
    
    (0.00
    )
    
    
    (0.06
    )Diluted earnings (loss) per common share
    
    $
    (0.10
    )
    
    $
    0.71
    
    
    $
    0.18
 Accounting Changes and Error Corrections
 Financial Instruments
 Fair Value Measurements
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Financial Assets and Financial Liabilities
 Accounting for Business Combinations
 Reclassifications
 2.
    
    RESTRUCTURING CHARGES
   F - 15




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3.
    
    PRIVATE PLACEMENT AND RELATED TRANSACTIONS
 2006 Private Placement
  2004 Private Placement and Stock Warrant Exercises
  F - 16




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4.
    
    DISCONTINUED OPERATIONS
   2007
    
    2006
    
    2005Total revenues
    
    $
    5,239,740
    
    
    $
    3,663,311
    
    
    $
    3,260,496Operating expenses
    
    
    4,598,955
    
    
    
    3,691,436
    
    
    
    3,769,682Income (loss) from operations
    
    
    640,785
    
    
    
    (28,125
    )
    
    
    (509,186
    )Income tax benefit
    
    
    11,241
    
    
    
    
    
    
    
    Estimated loss on disposal
    
    
    (1,260,631
    )
    
    
    
    
    
    
    (300,000
    )Loss from discontinued operations
    
    $
    (608,605
    )
    
    $
    (28,125
    )
    
    $
    (809,186
    )
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2007Inventories
    
    $
    1,189,437Prepaid expenses and other current assets
    
    
    195,159Property, plant and equipment, less
accumulated depreciation
    
    
    162,618Goodwill
    
    
    770,558Intangible
assets, less accumulated amortization
    
    
    47,530Other assets
    
    
    34,287Assets of discontinued operations held for sale
    
    $
    2,399,589Current liabilites
    
    
    754,589Other
    
    
    Liabilities of discontinued operations held for sale
    
    $
    754,589
  5.
    
    SERIES B PREFERRED STOCK
   6.
    
    ACQUISITIONS AND MINORITY INTERESTS
 PowerSecure Subsidiary Acquisitions
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Cash
    
    $
    60,000Equipment
    
    
    88,775Intangible rights
    
    
    11,706Accounts payable
    
    
    (70,481
    )Minority interest
    
    
    (30,000
    )Net assets acquired
    
    $
    60,000
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Cash
    
    $
    9,010Accounts receivable
    
    
    42,573Inventory
    
    
    41,681Equipment
    
    
    122,126Land and building
    
    
    375,000Intangible rights
    
    
    1,545,000Goodwill
    
    
    306,261Accounts payable
    
    
    (88,137
    )Net assets acquired
    
    $
    2,353,514
  CAC LLC Minority Interest
 7.
    
    DEFERRED COMPENSATION PLAN
  F - 20




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##### Table of Contents



8.
    
    DEBT
 Lines of Credit
     F - 21




---



##### Table of Contents



F - 22




---



##### Table of Contents



9.
    
    CAPITAL LEASE OBLIGATIONS
  Year Ending December 31:
 2008
    
    $
    1,8492009
    
    
    1,8492010
    
    
    1,8492011
    
    
    1,8492012
    
    
    924Total minimum lease payments
    
    
    8,320Less: Interest included in the lease payments
    
    
    1,602Present value of minimum lease payments
    
    $
    6,718
 10.
    
    COMMITMENTS AND CONTINGENCIES AND INCOME FROM LITIGATION SETTLEMENTS
 Income from Litigation Settlements
  F - 23




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##### Table of Contents



Other Matters
   Operating Leases
 Year Ending December 31:
 2008
    
    $
    888,6152009
    
    
    742,2002010
    
    
    526,0822011
    
    
    313,3982012 and thereafter
    
    
    645,348Total
    
    $
    3,115,643
 F - 24




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##### Table of Contents



Employee Benefit Plan
 Employment Agreements
   11.
    
    INCOME TAXES
   F - 25




---



##### Table of Contents



2007
    
    
    2006
    
    
    2005Current:Federal
    
    $
    (60,000
    )
    
    $
    (141,000
    )
    
    $
    State
    
    
    (113,000
    )
    
    
    (556,000
    )
    
    
    (46,000
    )Total current
    
    
    (173,000
    )
    
    
    (697,000
    )
    
    
    (46,000
    )Deferred:Federal
    
    
    1,865,000
    
    
    
    
    
    
    
    State
    
    
    142,000
    
    
    
    232,000
    
    
    
    Total deferred
    
    
    2,007,000
    
    
    
    232,000
    
    
    
    Total benefit (provision)
    
    $
    1,834,000
    
    
    $
    (465,000
    )
    
    $
    (46,000
    )
  2007
    
    2006
    
    2005Federal taxes at statutory rate
    
    
    34.00
    %
    
    
    34.00
    %
    
    
    34.00
    %State taxes, net of federal benefit
    
    
    -5.24
    %
    
    
    6.16
    %
    
    
    1.70
    %Permanent items
    
    
    -10.68
    %
    
    
    1.81
    %
    
    
    0
    %Alternative minimum tax
    
    
    -2.13
    %
    
    
    1.16
    %
    
    
    0
    %Valuation allowance
    
    
    70.29
    %
    
    
    -39.31
    %
    
    
    -34.00
    %True ups and other adjustments
    
    
    -21.53
    %
    
    
    0.00
    %
    
    
    0.00
    %Effective income tax rate for continuing operations
    
    
    64.71
    %
    
    
    3.82
    %
    
    
    1.70
    %
  2007
    
    
    2006Deferred tax assets:Net operating loss carryforwards
    
    $
    11,081,000
    
    
    $
    13,038,000Tax credit carryforwards
    
    
    201,000
    
    
    
    45,000Allowance for bad debts
    
    
    102,000
    
    
    
    88,000Restructuring charges
    
    
    2,235,000
    
    
    
    Other
    
    
    11,000
    
    
    
    236,000Gross deferred tax assets
    
    
    13,630,000
    
    
    
    13,407,000Deferred tax liabilities:Differences between book and tax basis of property and
equipment and intangible assets
    
    
    2,798,000
    
    
    
    2,893,000Other
    
    
    13,000
    
    
    
    Gross deferred tax liabilities
    
    
    2,811,000
    
    
    
    2,893,000Net deferred tax asset
    
    
    10,819,000
    
    
    
    10,514,000Valuation allowance and other
    
    
    (8,290,000
    )
    
    
    (10,282,000
    )Deferred tax assets, net
    
    $
    2,529,000
    
    
    $
    232,000
  F - 26




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##### Table of Contents



Unrecognized Tax BenefitCorporateOverhead
    
    
    InventoryAllocation
    
    
    Capitalization
    
    
    TotalJanuary 1, 2007 adoption of FIN 48
    
    $
    315,645
    
    
    $
    31,878
    
    
    $
    347,523Current year increase (decrease) as a
result of
tax positions taken during the year
    
    
    479,244
    
    
    
    (6,201
    )
    
    
    473,043Reductions as a result of a lapse of
the applicable statute of limitations
    
    
    (36,729
    )
    
    
    (25,677
    )
    
    
    (62,406
    )Balance at December 31, 2007
    
    $
    758,160
    
    
    $
    
    
    
    $
    758,160
   F - 27




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##### Table of Contents



12.
    
    CAPITAL STOCK
 Stockholder Rights Plan
 13.
    
    SHARE-BASED COMPENSATION
   Stock Options
 F - 28




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##### Table of Contents



In March 1998, our board of directors adopted the PowerSecure International, Inc. 1998 Stock
Incentive Plan (the 1998 Stock Plan), which was approved by our stockholders at the Annual
Meeting of Stockholders held on June 12, 1998. The 1998 Stock Plan authorizes our board of
directors to grant incentive stock options, non-qualified stock options, stock appreciation
rights, restricted stock, performance awards and other stock-based awards to our officers,
directors, employees, consultants and advisors for shares of our common stock. Stock options
granted under the 1998 Stock Plan must contain exercise prices not less than the fair market
value of our common stock on the date of grant, and must contain a term not in excess of 10
years from the date of grant. Nonqualified stock option grants to our Directors under the
1998 Stock Plan generally vest over periods up to two years. Qualified stock option grants to
our employees under the 1998 Stock Plan generally vest over periods up to five years. The
1998 Stock Plan replaced our 1991 Stock Plan and Directors Stock Plan (the Prior Plans),
and no new awards have been made under the Prior Plans since the 1998 Stock Plan was adopted,
although options outstanding under our Prior Plans remain in effect under these terms.The 1998 Stock Plan has been amended several times to increase the number of shares authorized
for issuance under that plan, most recently on June 12, 2006, which amendment increased the
number of shares available under the 1998 Stock Plan to a total of 3,750,000 shares of our
common stock.  At December 31, 2007, there were 73,000 shares available for grant under our
1998 Stock Plan and there were no shares available for grant under either our 1991 Stock Plan
or the Directors Stock Plan.  The 1998 Stock Plan expires on June 12, 2008, so no additional
awards can be made under that plan after such date, although awards granted prior to such date
will remain outstanding and subject to the terms and conditions of those awards.Pursuant to the requirements of FAS 123(R), net income (loss) for the years ended December
31, 2007 and 2006 includes $972,000 and $712,000, respectively, of pre-tax compensation costs
related to outstanding stock options. The after-tax compensation cost of outstanding stock
options for the year ended December 31, 2007 was $593,000. There were no net income tax
benefits related to our stock-based compensation arrangements during the years ended December
31, 2006 and 2005 because a valuation allowance was been provided for nearly all of our net
deferred tax assets. All of the stock option compensation expense is included in general and
administrative expenses in the accompanying consolidated statements of operations.During the year ended December 31, 2006, we issued 140,000 nonqualified stock options to new
employees outside of our existing stock option plans pursuant to an exception provided by the
American Stock Exchange on which our common stock was listed at the time those stock options
were granted.A summary of option activity for the year ended December 31, 2007 is as follow:
 F - 29




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##### Table of Contents



WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueBalance, December 31, 2006
    
    
    2,085,344
    
    
    $
    4.61Granted-Directors
    
    
    37,500
    
    
    
    12.73Granted-Employees
    
    
    30,000
    
    
    
    12.67Exercised
    
    
    (411,226
    )
    
    
    2.68Canceled
    
    
    
    
    
    
    Forfeited
    
    
    (13,750
    )
    
    
    10.28Balance, December 31, 2007
    
    
    1,727,868
    
    
    $
    5.34
    
    
    
    5.96
    
    
    $
    8.22Exercisable, December 31, 2007
    
    
    1,358,118
    
    
    $
    3.89
    
    
    
    5.37
    
    
    $
    9.69
 A summary of option activity for the year ended December 31, 2006 is as follows:
 WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueBalance, December 31, 2005
    
    
    2,289,143
    
    
    $
    2.98Granted-Directors
    
    
    22,500
    
    
    
    14.78Granted-Employees
    
    
    306,000
    
    
    
    12.64Exercised
    
    
    (513,632
    )
    
    
    2.51Canceled
    
    
    
    
    
    
    Forfeited
    
    
    (18,667
    )
    
    
    6.49Balance, December 31, 2006
    
    
    2,085,344
    
    
    $
    4.61
    
    
    
    6.55
    
    
    $
    7.71Exercisable, December 31, 2006
    
    
    1,545,677
    
    
    $
    3.07
    
    
    
    5.78
    
    
    $
    9.25
 The weighted average grant date fair value of the options granted to our directors during the
years ended December 31, 2007 and 2006 was $8.29 and $11.22, respectively. The weighted
average grant date fair value of the options granted to employees during the years ended
December 31, 2007 and 2006 was $8.25 and $8.48, respectively. The fair value was measured
using the Black-Scholes valuation model with the following assumptions for the years ended
December 31:
 2007
    
    2006Expected stock price volatilility
    
    
    75.7
    %
    
    
    88.0
    %Risk Free interest rate
    
    
    5.07
    %
    
    
    4.72
    %Annual dividends
    
    $
    
    
    
    $
    Expected life  employees
    
    5 years
    
    4.3 yearsExpected life  directors
    
    5 years
    
    6 years
 F - 30




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##### Table of Contents



The fair value of the stock option grants are amortized over their respective service periods
using the straight-line method and assuming a forfeiture rate of 5%.At December 31, 2007 and 2006, there was $1,979,000 and $2,507,000, respectively, of total
unrecognized compensation costs related to stock options. These costs at December 31, 2007
are expected to be recognized over a weighted average period of 1.59 years.The total intrinsic value of stock options exercised during the years ended December 31, 2007,
2006 and 2005 was $4,532,000, $5,736,000 and $902,000, respectively. Cash received from stock
option exercises for the years ended December 31, 2007, 2006 and 2005 was $1,052,000,
$1,291,000 and $397,000, respectively. The tax benefit realized on the 2007 and 2006 stock
option exercises was $52,000 and $331,000, respectively. The total fair value of stock
options vested during the years ended December 31, 2007, 2006 and 2005 was $971,000, $667,000
and $1,097,000, respectively.The following table illustrates the pro forma effect on net income and earnings per share if
we had applied the fair value recognition provisions of FAS 123(R) for the year ended December
31, 2005:
 2005Net income  as reported
    
    $
    2,334,389Deduct: Total stock-based employee
compensation expense determined
under fair value based method
    
    
    (971,944
    )Net income  pro forma
    
    $
    1,362,445Income per basic common share:As reported
    
    $
    0.19Pro forma
    
    $
    0.11Income per diluted common share:As reported
    
    $
    0.18Pro forma
    
    $
    0.10
 The weighted average grant date fair value of stock options issued during the year ended
December 31, 2005 was $2.07. The fair value of stock options were calculated using the
Black-Scholes stock option valuation model with the following weighted average assumptions for
grants in 2005: expected stock price volatility of 50%; risk-free interest rate of 4.19%;
dividend rate of $0.00 per year; and an expected life of 4 years for options granted to
employees and 10 years for options granted to directors.Restricted Stock Awards During the year ended December 31, 2007, our board of directors
awarded a total of 645,000 restricted shares of our common stock under the 1998 Stock Plan to
three officers, of which 600,000 restricted shares were awarded pursuant to the terms of the
Hinton Employment Agreement (see Note 10). Restricted shares are restricted in the sense
that they cannot be sold or otherwise transferred until they vest. If the officer receiving
the restricted
 F - 31




---



##### Table of Contents



shares leaves us before vesting, other than due to termination by us without cause, then any
unvested restricted shares will be forfeited and returned to us. The weighted average grant
date fair value of the restricted stock awards during the year ended December 31, 2007 was
$12.49 per share. The restricted shares vest as follows:
 
    
    A total of 322,500 restricted shares will cliff vest in their entirety five years
after the grant date, provided the officers remain employed by us on that date.
    
    A total of 4,500 restricted shares fully vested on December 10, 2007, the date they
were awarded.
    
    A total of 60,000 restricted shares will vest on the date our annual report on Form
10-K for the year ended December 31, 2007 is filed, based upon the achievement of a
performance target related to our income from continuing operations for 2007.
    
    The remaining 258,000 restricted shares vest in four equal annual installments,
commencing when our annual report on Form 10-K for the year ended December 31, 2008 is
filed, based upon the achievement of performance targets each year relating to our
income from continuing operations for fiscal years 2008 through 2012.
    
    All restricted shares remaining to vest will automatically vest upon a change in
control.
 The fair value of the 322,500 cliff vesting shares is being amortized on a straight-line basis
over the five year service period. The fair value of the performance vesting shares are
expensed as the achievement of the performance criteria becomes probable and the related
service period conditions are met. Stock compensation expense in the amount of $1,120,000 is
included in general and administrative expense in the accompanying consolidated statement of
operations for the year ended December 31, 2007.Stock compensation expense in the amount of $66,000 for each of the years ended December 31,
2006 and 2005 is also included in the accompanying consolidated statements of operations for
90,000 restricted shares of our common stock awarded by our board of directors in 2004. All
of 2004 stock awards were fully vested at December 31, 2006.14.
    
    SEGMENT AND RELATED INFORMATIONIn accordance with FAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, we define our operating segments as components of an enterprise for which
discrete financial information is available and is reviewed regularly by the chief operating
decision-maker, or decision-making group, to evaluate performance and make operating
decisions. Our reportable segments are strategic business units that offer different products
and services. They are managed separately because each business requires different technology
and marketing strategies. Our two reportable business segments include: Distributed
generation and energy efficiency; and natural gas measurement services. Previously we had
been engaged in a third business segment, automated energy data collection and telemetry.
That segment of our business has been discontinued and the results of its operations reported
as discontinued operations (see Note 4).Distributed Generation and Energy Efficiency The operations of our distributed generation
and energy efficiency segment are conducted by our PowerSecure subsidiary. Our PowerSecure
 F - 32




---



##### Table of Contents



subsidiary commenced operations in September 2000. Our PowerSecure subsidiarys operating
segment activities include products and services related to distributed generation, utility
infrastructure, and energy efficiency. Our PowerSecure subsidiary provides products and
services to utilities and their commercial, institutional, and industrial customers. Our
PowerSecure subsidiarys distributed generation products and services involve the deployment
of electric generation equipment that supplements the electric power grid, enabling utilities
to avoid new investments in infrastructure for transmitting and distributing power, and
providing their customers with dependable backup power with a strong return on investment.
The distributed generation equipment is generally located at the utilities end-customers
business sites. Our PowerSecure subsidiary has sophisticated monitoring systems and
electrical switching technologies, which work in tandem to reduce customers costs by managing
load curtailment during peak power periods, and also ensure backup power is available during
power outages. In addition to its core distributed generation products and services, our
PowerSecure subsidiary provides utilities with regulatory consulting, energy system
engineering and construction, and energy conservation services. Our PowerSecure subsidiary
also provides commercial and industrial customers with the identification, design and
installation of cost effective energy improvement systems for lighting, building controls, and
other facility upgrades. Through December 31, 2007, the majority of our PowerSecure
subsidiarys revenues have been generated from sales of distributed generation systems on a
turn-key basis, where the customer purchases the systems from our PowerSecure subsidiary.
Our PowerSecure subsidiary also markets its distributed generation products and services in a
recurring revenue model and a shared savings modelSince 2005, our PowerSecure subsidiary has added several new business units designed to expand
and complement its core distributed generation business and customers. UtilityEngineering
provides fee-based, technical engineering services to our PowerSecure subsidiarys utility
partners and customers. PowerServices provides rate analysis and other similar consulting
services to our PowerSecure subsidiarys utility, commercial and industrial customers.
EnergyLite assists customers in reducing their use of energy through investments in more
energy-efficient technologies. Our PowerSecure subsidiarys Federal business unit
concentrates on marketing its products and services to federal customers, primarily in
conjunction with our utility alliances. Reids Trailer, Inc., doing business as PowerFab,
builds trailers for the transportation of goods and equipment, an element in our PowerSecure
subsidiarys mobile distributed generation equipment business strategy. Late in the third
quarter 2007, our PowerSecure subsidiary launched a new majority-owned subsidiary,
EfficientLights, that designs and manufactures lighting solutions specifically aimed at
substantially reducing the energy consumed in lighting grocery stores.Each of these new PowerSecure subsidiary business units operates in a distinct market with
distinct technical disciplines, but share a common customer base which our PowerSecure
subsidiary intends to service and grow through shared resources and customer leads.
Accordingly, these units are included within Our PowerSecure subsidiarys distributed
generation and energy efficiency segment results.Natural Gas Measurement Services The operations of our natural gas measurement services
segment are conducted by Southern Flow. Southern Flows services include on-site field
services, chart processing and analysis, laboratory analysis, and data management and
reporting. These services are provided principally to customers involved in natural gas
production, gathering, transportation and processing
 F - 33




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##### Table of Contents



The accounting policies of the reportable segments are the same as those described in Note 1
of the Notes to Consolidated Financial Statements. We evaluate the performance of our
operating segments based on operating income (loss) before income taxes, nonrecurring items
and interest income and expense. Intersegment sales are not significant.Summarized financial information concerning our reportable segments is shown in the following
table. The Other amounts include corporate overhead and related items including
restructuring charges and net assets of discontinued operations. The table information
excludes the revenues, depreciation, and income or losses of the discontinued Metretek Florida
operations for all periods presented.
 Summarized Segment Financial Information
 2007
    
    
    2006
    
    
    2005Revenues:PowerSecure
    
    $
    94,923
    
    
    $
    99,543
    
    
    $
    30,200Southern Flow
    
    
    16,190
    
    
    
    16,160
    
    
    
    13,307Total
    
    $
    111,113
    
    
    $
    115,703
    
    
    $
    43,507Gross profit:PowerSecure
    
    $
    29,908
    
    
    $
    27,225
    
    
    $
    8,895Southern Flow
    
    
    4,400
    
    
    
    4,374
    
    
    
    3,370Total
    
    $
    34,308
    
    
    $
    31,599
    
    
    $
    12,265Segment profit (loss) (1):PowerSecure
    
    $
    8,190
    
    
    $
    10,452
    
    
    $
    2,639Southern Flow
    
    
    2,668
    
    
    
    2,769
    
    
    
    1,824Other
    
    
    (18,402
    )
    
    
    (4,451
    )
    
    
    (2,668
    )Total
    
    $
    (7,544
    )
    
    $
    8,770
    
    
    $
    1,795Capital expenditures:PowerSecure
    
    $
    2,339
    
    
    $
    1,214
    
    
    $
    1,107Southern Flow
    
    
    383
    
    
    
    136
    
    
    
    131Other
    
    
    
    
    
    
    104
    
    
    
    92Total
    
    $
    2,722
    
    
    $
    1,454
    
    
    $
    1,330Depreciation and amortization:PowerSecure
    
    $
    1,285
    
    
    $
    689
    
    
    $
    273Southern Flow
    
    
    145
    
    
    
    121
    
    
    
    130Other
    
    
    70
    
    
    
    75
    
    
    
    29Total
    
    $
    1,500
    
    
    $
    885
    
    
    $
    432Total assets:PowerSecure
    
    $
    71,010
    
    
    $
    58,666
    
    
    $
    16,644Southern Flow
    
    
    13,125
    
    
    
    12,049
    
    
    
    10,182Other
    
    
    28,888
    
    
    
    18,984
    
    
    
    6,493Total
    
    $
    113,023
    
    
    $
    89,699
    
    
    $
    33,319
 
 (1)
    
    Segment profit (loss) represents operating income (loss). F - 34




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##### Table of Contents



The following table presents our revenues by geographic area based on the location of the
use of the product or service for the years ending December 31:
 2007
    
    
    2006
    
    
    2005United States
    
    $
    111,101,868
    
    
    $
    115,684,347
    
    
    $
    43,491,603Canada
    
    
    10,668
    
    
    
    18,231
    
    
    
    14,748Other
    
    
    
    
    
    
    
    
    
    
    378Total
    
    $
    111,112,536
    
    
    $
    115,702,578
    
    
    $
    43,506,729
 15.
    
    UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATAThe following tables present our summarized quarterly consolidated financial information
(unaudited) for the years ended December 31 (in thousands, except per share amounts):
 F - 35




---



##### Table of Contents



Quarter2007
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthTotal revenues
    
    $
    25,416
    
    
    $
    22,591
    
    
    $
    26,230
    
    
    $
    36,876Operating income (loss)
    
    
    958
    
    
    
    (14,584
    )
    
    
    1,508
    
    
    
    4,574Other income, net
    
    
    598
    
    
    
    220
    
    
    
    250
    
    
    
    453Income from litigation settlements
    
    
    278
    
    
    
    
    
    
    
    107
    
    
    
    Equity income
    
    
    648
    
    
    
    673
    
    
    
    656
    
    
    
    796Minority interest
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    24Income taxes
    
    
    (306
    )
    
    
    (170
    )
    
    
    (162
    )
    
    
    2,472Income (loss) from continuing operations
    
    
    2,176
    
    
    
    (13,861
    )
    
    
    2,365
    
    
    
    8,319Income (loss) from discontinued operations
    
    
    57
    
    
    
    6
    
    
    
    290
    
    
    
    (961
    )Net income (loss)
    
    $
    2,233
    
    
    $
    (13,855
    )
    
    $
    2,655
    
    
    $
    7,358Basic earnings per common share:Income from continuing operations
    
    $
    0.14
    
    
    $
    (0.87
    )
    
    $
    0.15
    
    
    $
    0.51Income (loss) from discontinued operations
    
    
    
    
    
    
    
    
    
    
    0.01
    
    
    
    (0.06
    )Basic earnings per common share
    
    $
    0.14
    
    
    $
    (0.87
    )
    
    $
    0.16
    
    
    $
    0.45Diluted earnings per common share:Income (loss) from continuing operations
    
    $
    0.13
    
    
    $
    (0.87
    )
    
    $
    0.14
    
    
    $
    0.48Income (loss) from discontinued operations
    
    
    
    
    
    
    
    
    
    
    0.01
    
    
    
    (0.05
    )Diluted earnings per common share
    
    $
    0.13
    
    
    $
    (0.87
    )
    
    $
    0.15
    
    
    $
    0.43
 Quarter2006
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthTotal revenues
    
    $
    14,003
    
    
    $
    35,055
    
    
    $
    32,161
    
    
    $
    34,484Operating income (loss)
    
    
    106
    
    
    
    3,523
    
    
    
    2,133
    
    
    
    3,008Other income, net
    
    
    25
    
    
    
    292
    
    
    
    300
    
    
    
    319Income from litigation settlements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    343Equity income
    
    
    730
    
    
    
    521
    
    
    
    627
    
    
    
    343Minority interest
    
    
    (72
    )
    
    
    
    
    
    
    
    
    
    
    Income taxes
    
    
    (89
    )
    
    
    (23
    )
    
    
    (150
    )
    
    
    (203
    )Income from continuing operations
    
    
    700
    
    
    
    4,313
    
    
    
    2,910
    
    
    
    3,810Income (loss) from discontinued operations
    
    
    (62
    )
    
    
    (86
    )
    
    
    
    
    
    
    120Net income (loss)
    
    $
    638
    
    
    $
    4,227
    
    
    $
    2,910
    
    
    $
    3,930Basic earnings per common share:Income from continuing operations
    
    $
    0.05
    
    
    $
    0.28
    
    
    $
    0.19
    
    
    $
    0.24Income (loss) from discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    0.01Basic earnings per common share
    
    $
    0.05
    
    
    $
    0.27
    
    
    $
    0.19
    
    
    $
    0.25Diluted earnings per common share:Income from continuing operations
    
    $
    0.04
    
    
    $
    0.25
    
    
    $
    0.17
    
    
    $
    0.22Income (loss) from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.01Diluted earnings per common share
    
    $
    0.04
    
    
    $
    0.25
    
    
    $
    0.17
    
    
    $
    0.23
  F - 36




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SCHEDULE II
 POWERSECURE INTERNATIONAL, INC.
 VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2007, 2006 and 2005
(In thousands)
 Additions:Balance at
    
    Charged to
    
    
    
    
    
    Balance atBeginning
    
    Operating
    
    Deductions:
    
    End ofDescription
    
    of Period
    
    Expenses
    
    Write-offs
    
    PeriodAllowance for doubtful accounts:Year ended December 31, 2007
    
    $
    225
    
    
    $
    43
    
    
    $
    (6
    )(1)
    
    $
    262Year ended December 31, 2006
    
    
    95
    
    
    
    146
    
    
    
    (16
    )(1)
    
    
    225Year ended December 31, 2005
    
    
    741
    
    
    
    12
    
    
    
    (658
    )(1)
    
    
    95Inventory reserve:Year ended December 31, 2007
    
    $
    202
    
    
    $
    67
    
    
    $
    (141
    )(2)
    
    $
    128Year ended December 31, 2006
    
    
    166
    
    
    
    55
    
    
    
    (19
    )(2)
    
    
    202Year ended December 31, 2005
    
    
    1,548
    
    
    
    161
    
    
    
    (1,543
    )(2)
    
    
    166
 
 (1)
    
    Represents amounts written off as uncollectible, less recoveries.(2)
    
    Represents amounts written off against reserve, less recoveries.




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##### Table of Contents



MARCUM MIDSTREAM 1995-2 BUSINESS TRUST AND SUBSIDIARY
 TABLE OF CONTENTS
 PageREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    
    G - 2CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2007 AND 2006
    
    
    G - 3CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED
DECEMBER 31, 2007, 2006 AND 2005
    
    
    G - 4CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
    
    
    G - 5CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2007, 2006 AND 2005
    
    
    G - 6NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    G - 7
 G - 1




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 G - 2




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MARCUM MIDSTREAM 1995-2 BUSINESS TRUST AND SUBSIDIARY
 
 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2007 AND 2006
 2007
    
    
    2006ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    1,394,927
    
    
    $
    1,580,890Trade receivables (net of allowance for doubtful accounts
$9,454 and $9,454, respectively)
    
    
    1,716,141
    
    
    
    1,209,618Prepaid expenses
    
    
    25,667
    
    
    
    25,667Total current assets
    
    
    3,136,735
    
    
    
    2,816,175PROPERTY, PLANT AND EQUIPMENT, AT COST:Wells and storage tanks
    
    
    7,696,701
    
    
    
    6,048,244Equipment
    
    
    3,919,425
    
    
    
    2,612,685Land and improvements
    
    
    2,005,330
    
    
    
    1,662,041Total
    
    
    13,621,456
    
    
    
    10,322,970Less accumulated depletion and depreciation
    
    
    5,254,711
    
    
    
    4,494,252Property, plant and equipment, net
    
    
    8,366,745
    
    
    
    5,828,718OTHER ASSETS:Deferred loan charges (net of accumulated amortization
of $2,485 and $0, respectively)
    
    
    4,970
    
    
    
    Intangible assets (net of accumulated amortization
of $11,501 and $10,167, respectively)
    
    
    8,499
    
    
    
    9,833Total other assets
    
    
    13,469
    
    
    
    9,833TOTAL
    
    $
    11,516,949
    
    
    $
    8,654,726LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    478,522
    
    
    $
    245,712Administration fee
    
    
    14,125
    
    
    
    14,125Management fee
    
    
    184,798
    
    
    
    132,361Operator fee
    
    
    34,620
    
    
    
    31,833Note payable (Note 3)
    
    
    549,796
    
    
    
    571,656Accrued and other liabilities
    
    
    100,621
    
    
    
    85,695Total current liabilities
    
    
    1,362,482
    
    
    
    1,081,382LONG-TERM NOTE PAYABLE (Note 3)
    
    
    2,372,807
    
    
    
    341,142COMMITMENTS AND CONTINGENCIES (Note 4)SHAREHOLDERS EQUITY
    
    
    7,781,660
    
    
    
    7,232,202TOTAL
    
    $
    11,516,949
    
    
    $
    8,654,726
  G - 3




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MARCUM MIDSTREAM 1995-2 BUSINESS TRUST AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
 2007
    
    
    2006
    
    
    2005REVENUE:Disposal fees and mineral product sales
    
    $
    13,135,040
    
    
    $
    10,945,690
    
    
    $
    10,239,782Interest and other
    
    
    70,787
    
    
    
    82,081
    
    
    
    23,303Total revenue
    
    
    13,205,827
    
    
    
    11,027,771
    
    
    
    10,263,085COSTS AND EXPENSES:Cost of operations
    
    
    3,454,204
    
    
    
    3,279,631
    
    
    
    2,778,138Depreciation and amortization
    
    
    761,793
    
    
    
    687,128
    
    
    
    601,020Well development costs
    
    
    
    
    
    
    
    
    
    
    360,096General and administrative costs
    
    
    390,280
    
    
    
    330,408
    
    
    
    391,799Administration fee
    
    
    56,500
    
    
    
    56,500
    
    
    
    56,500Management fee
    
    
    656,752
    
    
    
    547,285
    
    
    
    511,989Operator fee
    
    
    132,102
    
    
    
    127,332
    
    
    
    102,332Interest and finance charges
    
    
    104,738
    
    
    
    71,321
    
    
    
    66,417Total costs and expenses
    
    
    5,556,369
    
    
    
    5,099,605
    
    
    
    4,868,291NET INCOME
    
    $
    7,649,458
    
    
    $
    5,928,166
    
    
    $
    5,394,794
  G - 4




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MARCUM MIDSTREAM 1995-2 BUSINESS TRUST AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
 PreferredShareholdersBALANCE, JANUARY 1, 2005
    
    $
    5,709,242Cash distributions paid
    
    
    (4,800,000
    )Net income
    
    
    5,394,794BALANCE, DECEMBER 31, 2005
    
    
    6,304,036Cash distributions paid
    
    
    (5,000,000
    )Net income
    
    
    5,928,166BALANCE, DECEMBER 31, 2006
    
    
    7,232,202Cash distributions paid
    
    
    (7,100,000
    )Net income
    
    
    7,649,458BALANCE, DECEMBER 31, 2007
    
    $
    7,781,660
  G - 5




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MARCUM MIDSTREAM 1995-2 BUSINESS TRUST AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
 2007
    
    
    2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    7,649,458
    
    
    $
    5,928,166
    
    
    $
    5,394,794Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    761,793
    
    
    
    687,128
    
    
    
    601,020Changes in other assets and liabilities:Trade receivables, net
    
    
    (506,523
    )
    
    
    229,564
    
    
    
    (290,310
    )Accounts payable
    
    
    232,810
    
    
    
    (285,001
    )
    
    
    425,340Administration fee
    
    
    
    
    
    
    9,417
    
    
    
    Management fee
    
    
    52,437
    
    
    
    77,381
    
    
    
    (25,391
    )Operator fee
    
    
    2,787
    
    
    
    23,305
    
    
    
    2,084Accrued expenses
    
    
    14,926
    
    
    
    73,580
    
    
    
    (2,783
    )Prepaid expenses and other
    
    
    (4,970
    )
    
    
    (21,404
    )
    
    
    7,206Net cash provided by operating activities
    
    
    8,202,718
    
    
    
    6,722,136
    
    
    
    6,111,960CASH FLOWS FROM INVESTING ACTIVITIES:Well development and enhancement
    
    
    (3,028,648
    )
    
    
    (175,804
    )
    
    
    (1,231,640
    )Other capital expenditures
    
    
    (269,838
    )
    
    
    (158,619
    )
    
    
    (397,195
    )Net cash used in investing activities
    
    
    (3,298,486
    )
    
    
    (334,423
    )
    
    
    (1,628,835
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from note payable
    
    
    3,100,000
    
    
    
    
    
    
    
    1,004,658Payments on note payable
    
    
    (1,090,195
    )
    
    
    (540,863
    )
    
    
    (571,558
    )Distributions to preferred shareholders
    
    
    (7,100,000
    )
    
    
    (5,000,000
    )
    
    
    (4,800,000
    )Net cash used in financing activities
    
    
    (5,090,195
    )
    
    
    (5,540,863
    )
    
    
    (4,366,900
    )NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
    
    
    (185,963
    )
    
    
    846,850
    
    
    
    116,225CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR
    
    
    1,580,890
    
    
    
    734,040
    
    
    
    617,815CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    1,394,927
    
    
    $
    1,580,890
    
    
    $
    734,040
  G - 6




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MARCUM MIDSTREAM 1995-2 BUSINESS TRUST AND SUBSIDIARY
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
 1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESOrganization The accompanying consolidated financial statements includes the accounts of
Marcum Midstream 1995-2 Business Trust and its wholly-owned subsidiary, Marcum Midstream 1995-2
EC Holding, LLC (MM95-2 EC Holding), collectively referred to as the Trust. The Trust
commenced operations on February 8, 1996. The Trust owns and operates six injection wells at
five oil field production water disposal facilities located in northeastern Colorado. MM95-2
EC Holding was formed by the Trust in July 2002 for the purpose of acquiring additional
operating assets.WaterSecure Holdings, Inc. (WaterSecure), a wholly-owned subsidiary of PowerSecure International,
Inc., is the managing trustee of the Trust, and Conquest Oil Company (Conquest) operates the
Trust assets under an operating agreement with the Trust.
Collectively, WaterSecure and Conquest or
their affiliates own 178.2, or 78.8%, of the 226 outstanding preferred shares of the Trust at
December 31, 2007.Principles of Consolidation The consolidated financial statements include the accounts of the
Trust and its subsidiary. All intercompany accounts and transactions have been eliminated in
consolidation.Revenue Recognition Revenues from disposal fees are recognized upon delivery and acceptance
of water to be disposed. Revenues from mineral product sales are recognized upon delivery to
the customer. Revenue amounts shown in the accompanying consolidated statements of income are
net of severance and conservation taxes and certain royalty interests.Statements of Cash Flows The Trust considers all investments with an original maturity of
three months or less at time of purchase to be cash equivalents. The Trust maintains its cash
in bank deposit accounts which, at times, may exceed federally insured limits. The Trust has
not experienced any losses in such accounts. The Trust does not believe it is exposed to any
significant credit risk on cash and cash equivalents. Supplemental statement of cash flows
information is as follows:
 2007
    
    
    2006
    
    
    2005Cash paid for interest
    
    $
    102,253
    
    
    $
    67,058
    
    
    $
    61,939
 Statements of Shareholders EquityThere are 226 preferred shares of the Trust authorized and
outstanding. There are no other authorized forms of ownership interest of the Trust.Receivables and Credit Policies Trade receivables consist of uncollateralized customer
obligations due under normal trade terms requiring payment within 30 days of the invoice date.
The Trust reviews trade receivables periodically and reduces the carrying amount by a valuation
allowance that reflects managements best estimate of the amount that may not be collectible.Property, Plant and Equipment Property, plant and equipment is stated at cost. The majority
of the Trust operating assets are depreciated based upon a units-of-production method while
equipment and land improvements are depreciated on the straight-line basis over estimated
useful lives ranging from 5 to 15 years. Management has evaluated future asset retirement
obligations and has concluded that estimated asset retirement obligations of the Trust are not
material.
 G - 7




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##### Table of Contents



Other Intangibles Other intangible assets are being amortized on the straight-line basis over
15 years.Income Taxes For federal and state income tax purposes, the Trust is treated as a partnership
and is not subject to federal or state income taxes. Accordingly, no provision for federal
income taxes is included in the financial statements of the Trust and the tax effects of its
activities accrue to the shareholders. The Trusts tax returns, the qualification of the Trust
as a partnership for federal income tax purposes, and the amount of taxable income or loss are
subject to examination by federal and state taxing authorities. If such examinations result in
changes to the Trusts taxable income, the tax liability of the shareholders could change
accordingly.Use of Estimates The preparation of the Trusts financial statements in conformity with
accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in these financial statements
and accompanying notes. Actual results could differ from those estimates.Major Customers Three customers have historically generated the majority of the Trusts
disposal fee revenues. In addition, revenues from mineral product sales are currently
generated from purchases by one customer, however management believes other customers would
purchase such products at substantially the same volumes and at prevailing market prices in the
event the current customer discontinued purchasing from the Trust.2.
    
    WELL DEVELOPMENT COSTSIn the fourth quarter of 2006, the Trust acquired additional land for expansion of its
operating activities. During 2007, the Trust developed a sixth well on the land. The new well
was placed into service in December 2007. Total cost of the development (including land) was
$3,042,000, and assets were allocated as follows:
 Well and storage tanks
    
    $
    1,486,000Equipment
    
    
    1,037,000Land and improvements
    
    
    519,000Total
    
    $
    3,042,000
 The well development was financed principally through a term loan with Bank of Choice, as
described further in Note 3.During the year ended December 31, 2005, the Trust expensed $360,096 of well development costs
incurred in an unsuccessful effort to develop an additional disposal well.3.
    
    NOTE PAYABLEIn August 2005, the Trust and its then Lender (Wells Fargo Bank West) amended an existing
fiscal 2002 term loan agreement to borrow an additional $1,005,000; to extend the term of the
Loan Agreement to August 22, 2008; and to reduce the scheduled principal and interest payments
on the note to $50,660 per month. Proceeds from the additional borrowings were used by the
Trust in 2006 to develop backup capacity through the development of a fifth well and enhance
operations at two of its existing sites.Interest accrued on the unpaid balance of the note at a fixed annual rate of 5.55% per year.
The term loan agreement contained various financial and other affirmative and negative
covenants and the note was collateralized by a first priority interest in virtually all of the
assets acquired. Fees incurred in connection with obtaining the original loan and subsequent
amendment in the amount of $25,702 were deferred and amortized over the term of the original
term loan agreement.
 G - 8




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##### Table of Contents



During 2007, in order to finance the development of the Trusts sixth operating well and to
refinance the remaining principal on the term loan with Wells Fargo, the Trust entered into a
Term Loan Agreement (the Loan Agreement) with Bank of Choice for a $3,100,000 note payable.
Of the total proceeds, $537,000 was used to refinance the existing term loan with Wells Fargo
and the balance was used to fund the well development costs described in Note 2.Interest accrues on the unpaid balance of the note at a fixed annual rate of 7.2% and the Loan
Agreement calls for monthly principal and interest payments to the lender in the amount of
$61,837 through the maturity date of August 28, 2012. The note is collateralized by a first
priority interest in the assets of the sixth well. Fees incurred in connection with the Loan
Agreement in the amount of $7,455 were deferred and are being amortized over the first year of
the loan. At December 31, 2007, scheduled principal payments on the note payable over the
remaining term of the note are as follows:
 Years EndedDecember 31,2008
    
    $
    549,7962009
    
    
    590,4332010
    
    
    634,3752011
    
    
    681,5882012
    
    
    466,411$
    2,922,603
 4.
    
    COMMITMENTS AND CONTINGENCIESIn December 2002, after the Trust completed an acquisition of certain operating assets, the
Trust discovered certain contamination of the soils under the site. Shortly thereafter, the
Trust filed a complaint against the seller in Colorado State District Court, for enforcement of
seller indemnifications in the asset purchase agreement. The Trust engaged an environmental
engineering firm to evaluate the extent of the contamination, and that firm concluded that
approximately 1% of the property area had been contaminated. The environmental firm developed,
and with their assistance the Trust commenced, a remediation plan that the firm advised should
bring the assets back into compliance with applicable
environmental requirements. The remediation plan consists of a soil evaporation extraction
system which is in place and continues to operate. Based upon the most recent ground water
sampling results, adverse impacts to groundwater continue to decrease. If future sampling
results continue to indicate favorable improvements, the soil evaporation extraction system may
be shut down in 2008. Even if the soil evaporation extraction system is shut down, ground
water sampling will likely be required through 2008 and into 2009.In early 2005, the Trust began a planned upgrade to various components of another of its
operating facilities. As the improvement project began, soils under the facility were found to
be contaminated. The environmental firm used in the above remediation was engaged to direct the
Trust on the appropriate course to return the soils to a level in compliance within regulatory
limits. The environmental firm has recommended, and the regulatory authorities have not
indicated otherwise, that no active remediation process is currently necessary due to the
present levels of contamination, the nature of the soils involved, and the cost to implement a
remediation process. Further, the environmental firm has indicated that naturally occurring
processes are expected to eliminate the contamination over time, although those
 G - 9




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##### Table of Contents



processes may
occur over a period of several years. The Trust will continue to monitor the facility and take
regular ground water samples as recommended by the environmental firm and as required by the
regulatory authorities. In the event that contamination levels increase, an active remediation
process may need to be implemented and those costs may be significant. Trust management
believes the contamination may be successfully abated over time with no material adverse
effects to the financial position or results of operations of the Trust.The Trust is subject to regulations and reporting requirements covering water quality, land
use, the storage of oil and water and the disposal of water. Compliance is continually
assessed. Regulations, interpretations and enforcement policies can change, which may
adversely impact the Trust operations in the future. Additionally, from time to time, in the
normal course of operations, oil or water spills or releases into the environment may occur.
The Trust must pay all or a portion of the cost to remediate sites where such environmental
contamination have occurred as a result of activities of the Trust. To date, the Trust is not
aware of any such environmental contamination caused by the activities of the Trust that would
have material adverse effects to the financial position or results of operations of the Trust.
However, the nature of environmental contamination matters is inherently uncertain, and Trust
management cannot provide any guarantee or assurance that all environmental contamination has
been identified, or that the current or future remediation efforts will be successful.
Additional contamination, either currently undetected or undetectable or arising in the future,
could later be discovered.In January 2008, two of the Trusts facilities suffered explosions and fire damage in separate
incidents.  One of the facilities suffered significant damage and was temporarily shut down for
approximately two weeks.  The other facility suffered minimal damage, but was also limited in
its operating activities for a short period.  One employee of the Trust and two agents of a
trucking company bringing water to the former facility were injured in the most serious fire
but are expected to fully recover.As of March 4, 2008, both of the damaged facilities were operational, although at reduced
capacity levels.  Management of the Trust believes insurance proceeds will be adequate to cover
the costs to replace assets lost or damaged in the explosions and resulting fires, and further
believes both facilities will return to full capacity and operations by the second quarter of
2008.  While the Trust suffered uninsured losses from the interruption of its business
activities, the amount of which have not been precisely determined at
March 4, 2008, based
on the circumstances known as of such date management of the Trust did not believe such losses
would have a material effect on the results of operations of the Trust for 2008.As a result of these incidents, the Trust commenced a series of changes recommended by safety
experts to minimize the risk of future explosions or fires.  Some of these changes were already
in place as of March 4, 2008 and the rest of the recommended changes will be implemented
over the balance of 2008.  The initial cost of all of these changes is currently estimated at
$200,000 to $250,000.  Annual incremental expenses associated with these changes are estimated
to be approximately $200,000. However, due to the nature of the Trusts activities, the risk
of future fires or explosions cannot be fully eliminated.  Damages resulting from future fires
or explosions may result in injury or loss of human life, extensive loss of or damage to
equipment and assets of the Trust and could result in temporary or permanent shut down of one
or more of the Trusts facilities.5.
    
    TRUST GENERAL AND ADMINISTRATIVE COSTSPursuant to the Amended and Restated Declaration of Trust, the Trust incurred $282,000,
$248,000 and $218,000 of Active Trustee and Trust Officer consulting and retainer fees and
compensation paid to WaterSecure, Conquest, or their affiliates during the years ended December 31,
2007, 2006 and 2005,
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respectively. Also, during the year ended December 31, 2005, the Trust
paid $143,347 to WaterSecure and Conquest for project management services incurred in connection with
the development of backup capacity and enhanced operating capacity at two of the Trusts
facilities.6.
    
    CASH DISTRIBUTIONS AND PROFIT ALLOCATIONSCash distributions and profit and loss allocations are determined by terms set forth in the
Amended and Restated Declaration of Trust. Generally, the Trust distributes all cash provided
by operating activities less amounts paid for acquisitions and capital expenditures, and debt
service requirements. All profits and cash distributions are allocated to preferred
shareholders in amounts equal to their percentage ownership of the preferred shares of the
Trust.7.
    
    OTHER RELATED PARTY TRANSACTIONSPursuant to the Amended and Restated Declaration of Trust, WaterSecure, as managing trustee, is
entitled to compensation for services rendered to the Trust. The compensation includes an
annual Trust administration fee equal to 1% of the total subscriptions of preferred
shareholders and an annual Trust management fee of 5% of Trust revenues, paid quarterly in
arrears. The Trust management fee is reduced to 4% for any quarter that Trust revenues during
the prior four consecutive calendar quarters do not exceed $3 million. Conquest, as operator,
has been reimbursed for direct operating expenses incurred during the years ended December 31,
2007, 2006 and 2005 in the amount of $1,211,273, $977,453 and $962,885, respectively, which
costs are included in cost of operations in the accompanying statements of income, and is paid
an annual operator fee (currently $150,000 ($25,000 per injection well), adjusted upward or
downward annually based on changes in the consumer price index). Accounts payable at December
31, 2007 and 2006 includes a liability in the amount of $52,098 and $38,639, respectively,
payable to Conquest for unreimbursed direct operating expenses.In December 1999, Conquest and WaterSecure agreed to share equally all future fees received from the
Trust. These fees include the administration fee, management fee, and operator fee.In September 2003, the Trust entered into a License Agreement (the Agreement) with an entity
wholly owned by the principals of the Operator. The Agreement runs month-to-month and
provides the Trust with an alternative location to dispose of water for certain customers of
the Trust. The Trust is obligated to pay a monthly fee of $5,000 for rights under the
Agreement. The Trust earns revenues
from disposal fees for water disposed at that facility for the Trusts customers. During the
years ended December 31, 2007 and 2005, the Trust earned a net $17,447, and $3,094,
respectively, and during the year ended December 31, 2006, the Trust paid a net $13,870 under
the Agreement, which is included in interest and other revenues in the consolidated statements
of income.
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POWERSECURE INTERNATIONAL, INC.
 Form 10-K
For the Year Ended December 31, 2007
 
 EXHIBIT LIST
 Number
    
    Description(3.1)
    
    Second Restated Certificate of Incorporation of Registrant.
(Incorporated by reference to Exhibit 4.1 to Registrants Registration
Statement on Form S-3, Registration No. 333-96369.)(3.2)
    
    Certificate of Ownership and Merger, as filed with the
Secretary of State of the State of Delaware on August 22, 2007, merging
PowerSecure International, Inc. into Registrant and amending Registrants
Second Amended and Restated Certificate of Incorporation to change the
Registrants name to PowerSecure International, Inc. (Incorporated by reference
to Exhibit 3.1 to Registrants Current Report on Form 8-K filed on August 22,
2007.)(3.3)
    
    Amended and Restated By-Laws of Registrant. (Incorporated by
reference to Exhibit 3.2 to Registrants Current Report on Form 8-K filed on
August 22, 2007.)(4.1)
    
    Specimen Common Stock Certificate. (Incorporated by reference
to Exhibit 4.1 to Registrants Registration Statement on Form S-18,
Registration No. 33-44558.)(4.2)
    
    Amended and Restated Rights Agreement, dated as of November
30, 2001, between Registrant and Computershare Investor Services, LLC.
(Incorporated by reference to Exhibit 4.1 to Registrants Registration
Statement on Form 8-A/A, Amendment No. 5, filed November 30, 2001.)(4.3)
    
    Amendment No. 1, dated as of April 22, 2004, to Amended and
Restated Rights Agreement between Registrant and ComputerShare Investor
Services, LLC. (Incorporated by reference to Exhibit 10.6 to Registrants
Current Report on Form 8-K filed May 6, 2004).(4.4)
    
    Amendment No. 2, dated as of March 29, 2006, to Amended and
Restated Rights Agreement between Registrant and ComputerShare Investor
Services, LLC. (Incorporated by reference to Exhibit 10.3 to Registrants
Current Report on Form 8-K filed March 30, 2006).(4.5)
    
    Form of Registration Rights Agreement, dated as of March 29,
2006, by and among Registrant and the investors named therein. (Incorporated by
reference to Exhibit 10.5 to Registrants Current Report on Form 8-K filed
March 30, 2006).(10.1)
    
    1991 Stock Option Plan, as amended and restated December 5, 1996.
(Incorporated by reference to Exhibit 10.2 to Registrants Annual Report on
Form 10-KSB for the year ended December 31, 1996.)*(10.2)
    
    Directors Stock Option Plan, as amended and restated December 2, 1996.
(Incorporated by reference to Exhibit 10.3 to Registrants Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1996.)*(10.3)
    
    Second Amended and Restated Employment Agreement, dated as of March 20, 2006,
by and between Registrant and W. Phillip Marcum. (Incorporated by reference to
Exhibit 10.3 to Registrants Annual Report on Form 10-K for the fiscal year
ended December 31, 2005.)*
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##### Table of Contents



Number
    
    Description(10.4)
    
    Separation Agreement, dated as of April 16, 2007, between Registrant and W.
Phillip Marcum (Incorporated by reference to Exhibit 10.1 to Registrants
Current Report on Form 8-K, filed April 20, 2007)*(10.5)
    
    Second Amended and Restated Employment Agreement, dated as of March 20, 2006,
by and between Registrant and A. Bradley Gabbard. (Incorporated by reference
to Exhibit 10.4 to Registrants Annual Report on Form 10-K for the fiscal year
ended December 31, 2005.)*(10.6)
    
    Separation Agreement, dated as of April 16, 2007, between Registrant and A.
Bradley Gabbard. (Incorporated by reference to Exhibit 10.2 to Registrants
Current Report on Form 8-K, filed April 20, 2007)*(10.7)
    
    Registrants 1998 Stock Incentive Plan, amended and restated as of June 12,
2006. (Incorporated by reference to Exhibit 4.3 to Registrants Registration
Statement on Form S-8, Registration No. 333-134938.)*(10.8)
    
    Form of Incentive Stock Option Agreement under the Registrant 1998 Stock
Incentive Plan, as amended. (Incorporated by reference to Exhibit 10.1 to
Registrants Current Report on Form 8-K, filed August 25, 2004)*(10.9)
    
    Form of Non-Qualified Stock Option Agreement under the Registrants 1998
Stock Incentive Plan, as amended. (Incorporated by reference to Exhibit 10.2
to Registrants Current Report on Form 8-K, filed August 25, 2004)*(10.10)
    
    Form of Restricted Stock Agreement under the Registrants 1998 Stock
Incentive Plan, as amended. (Incorporated by reference to Exhibit 10.3 to
Registrants Current Report on Form 8-K, filed August 25, 2004)*(10.11)
    
    Form of Indemnification Agreement between Registrant and each of its
directors. (Incorporated by reference to Exhibit 10.21 to Registrants Annual
Report on Form 10-KSB for the year ended December 31, 1999.)(10.12)
    
    Prototype  Basic Plan Document for the Metretek  Southern Flow Savings and
Investment Plan. (Incorporated by reference to Exhibit 4.7 to Registrants
Registration Statement on Form S-8, Registration No. 333-42698.)*(10.13)
    
    Adoption Agreement for the Metretek  Southern Flow Savings and Investment
Plan. (Incorporated by reference to Exhibit 4.8 to Registrants Registration
Statement on Form S-8, Registration No. 333-42698.)*(10.14)
    
    Employment and Non-Competition Agreement, dated as of August 15, 2007,
between Registrant and Sidney Hinton. (Incorporated by reference to Exhibit
10.1 to Registrants Current Report on Form 8-K filed August 15, 2007)*(10.15)
    
    Restricted Stock Agreement, dated as of August 15, 2007, by and between
Registrant and Sidney Hinton. (Incorporated by reference to Exhibit 10.2 to
Registrants Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 2007)*(10.16)
    
    Amendment No. 1 to Restricted
Stock Agreement, dated as of December 31, 2007, by and between Registrant and Sidney Hinton. (Incorporated by reference to
Exhibit 10.1 to Registrants Current Report on Form 8-K filed January 7,
2008)*(10.17)
    
    Employment and Non-Competition Agreement, dated as of December 10, 2007, by
and between Registrant and Christopher T. Hutter. (Incorporated by reference
to Exhibit 10.1 to Registrants Current Report on Form 8-K filed December 12,
2007)*(10.18)
    
    Restricted Stock Agreement, dated as of December 10, 2007, by and between
Registrant and Christopher T. Hutter. (Incorporated by reference to Exhibit
10.2 to Registrants Current Report on Form 8-K filed December 12, 2007)*
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##### Table of Contents



Number
    
    Description(10.19)
    
    Amendment No. 1, dated December 10, 2007, to Employment and Non-Competition
Agreement by and between Registrant and Gary J. Zuiderveen. (Incorporated by
reference to Exhibit 10.3 to Registrants Current Report on Form 8-K filed
December 12, 2007)*(10.20)
    
    Restricted Stock Agreement, dated as of December 10, 2007, to Employment and
Non-Competition Agreement by and between Registrant and Gary J. Zuiderveen.
(Incorporated by reference to Exhibit 10.4 to Registrants Current Report on
Form 8-K filed December 12, 2007)*(10.21)
    
    Amended and Restated Employment Agreement, dated as of April 16, 2007,
between Southern Flow Companies, Inc. and John Bernard. (Incorporated by
reference to Exhibit 10.7 to Registrants Current Report on Form 8-K filed
April 20, 2007)*(10.22)
    
    Employment and Non-Competition Agreement, dated as of February 6, 2006,
between EnergyLite, Inc. and Ronald W. Gilcrease. (Incorporated by reference
to Exhibit 10.1 to Registrants Current Report on Form 8-K filed February 10,
2006)*(10.23)
    
    Termination Agreement and Release, dated as of May 21, 2007, between
Registrant and Daniel J. Packard. (Incorporated by reference to Exhibit 10.1
to Registrants Current Report on Form 8-K filed May 25, 2007)*(10.24)
    
    Summary Sheet of Compensation of Non-Employee Directors. (Filed herewith.)*(10.25)
    
    Credit Agreement, dated as of September 2, 2005, among First National Bank
of Colorado, Registrant, Southern Flow Companies, Inc., PowerSecure, Inc. and
Metretek Incorporated. (Incorporated by reference to Exhibit 10.1 to
Registrants Current Report on Form 8-K filed September 9, 2005.)(10.26)
    
    Form of Security Agreement, dated as of September 2, 2005, by each of
Registrant, Southern Flow Companies, Inc., PowerSecure, Inc. and Metretek
Incorporated and First National Bank of Colorado. (Incorporated by reference to
Exhibit 10.2 to Registrants Current Report on Form 8-K filed September 9,
2005.)(10.27)
    
    Form of Guaranty, dated as of September 2, 2005, by Registrant for the
benefit of First National Bank of Colorado. (Incorporated by reference to
Exhibit 10.3 to Registrants Current Report on Form 8-K filed September 9,
2005.)(10.28)
    
    First Modification to Loan Documents, effective as of June 30, 2006, by and
among First National Bank of Colorado, Registrant, Southern Flow Companies,
Inc., PowerSecure, Inc. and Metretek Incorporated. (Incorporated by reference
to Exhibit 10.1 to Registrants Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 2006.)(10.29)
    
    Credit Agreement, dated as of August 23, 2007, among Registrant, the
financial institutions from time to time parties thereto as lenders, and
Citibank, N.A., as administrative agent. (Incorporated by reference to Exhibit
10.1 to Registrants Current Report on Form 8-K filed August 24, 2007.)(10.30)
    
    Form of Security Agreement, dated as of August 23, 2007, by each of
Registrant and its active subsidiaries in favor of Citibank, N.A., as
administrative agent, as secured party. (Incorporated by reference to Exhibit
10.2 to Registrants Current Report on Form 8-K filed August 24, 2007.)(10.31)
    
    Form of Guaranty, dated as of August 23, 2007, by each active subsidiary of
Registrant in favor of Citibank, N.A., as administrative agent. (Incorporated
by reference to Exhibit 10.3 to Registrants Current Report on Form 8-K filed
August 24, 2007.)
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##### Table of Contents



Number
    
    Description(10.32)
    
    Term Credit Agreement, dated as of January 17, 2008, among Registrant, the
financial institutions from time to time parties thereto as lenders, and
Citibank, N.A., as administrative agent. (Incorporated by reference to Exhibit
10.2 to Registrants Current Report on Form 8-K filed January 23, 2008.)(10.33)
    
    Form of First Amendment to Security Agreement, dated as of January 17, 2008,
by each of Registrant and its active subsidiaries in favor of Citibank, N.A.,
as administrative agent, as secured party. (Incorporated by reference to
Exhibit 10.4 to Registrants Current Report on Form 8-K filed January 23,
2008.)(10.34)
    
    Guaranty, dated as of January 17, 2008, by the active subsidiaries of
Registrant in favor of Citibank, N.A., as administrative agent. (Incorporated
by reference to Exhibit 10.5 to Registrants Current Report on Form 8-K filed
January 23, 2008.)(10.35)
    
    First Amendment to Credit Agreement, dated as of January 17, 2008, among
Registrant, the financial institutions from time to time parties thereto as
lenders, and Citibank, N.A., as administrative agent. (Incorporated by
reference to Exhibit 10.6 to Registrants Current Report on Form 8-K filed
January 23, 2008.)(10.36)
    
    PowerSecure, Inc. Key Employee Long-Term Retention Plan. (Incorporated by
reference to Exhibit 10.2 to Registrants Quarterly Report on Form 10-K for the
fiscal quarter ended June 30, 2006.)*(10.37)
    
    Real Estate Purchase Agreement, dated as of January 16, 2008, between
PowerSecure, Inc. and H & C Holdings, LLC. (Incorporated by reference to
Exhibit 10.1 to Registrants Current Report on Form 8-K filed January 23,
2008.)(10.38)
    
    Asset Purchase Agreement,
dated as of March 14, 2008, between Registrant,
Metretek, Incorporated and Mercury Instruments LLC (Filed herewith.)(14.1)
    
    Registrant Code of Ethics for Principal Executive Officer and Senior
Financial Officers. (Incorporated by reference to Exhibit 14.1 to Registrants
Annual Report on Form 10-K for the year ended December 31, 2003.)(14.2)
    
    Registrant Code of Business Conduct and Ethics. (Incorporated by reference to
Exhibit 14.2 to Registrants Annual Report on Form 10-K for the year ended
December 31, 2003.)(21.1)
    
    List of Subsidiaries of Registrant (Filed herewith.)(23.1)
    
    Consent of Hein & Associates LLP, Independent Registered Public Accounting
Firm (Filed herewith.)(31.1)
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or
15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith.)(31.2)
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or
15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith.)(32.1)
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
and Rule 13a-14(b) or 15d-14(b) under the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Filed herewith.)(32.2)
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
and Rule 13a-14(b) or 15d-14(b) under the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Filed herewith.)
 
 *
    
    Indicates management contract or compensation plan or arrangement. X-4