UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011 Commission file number:  0-19771

ACORN ENERGY, INC.

(Exact name of registrant as specified in charter)

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

302-656-1707

Registrant’s telephone number, including area code

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

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

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

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨  No x

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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by

reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

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

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

Yes ¨  No x

As of last day of the second fiscal quarter of 2011, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $64.5 million based on the closing sale price on that date as reported on the NASDAQ Global Market. As of March 8, 2012 there were 17,750,352 shares of Common Stock, $0.01 par value per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

None.

TABLE OF CONTENTS

		PAGE
PART I
Item 1.	BUSINESS	1
Item 1A.	RISK FACTORS	12
Item 1B.	UNRESOLVED STAFF COMMENTS	23
Item 2.	PROPERTIES	24
Item 3.	LEGAL PROCEEDINGS	25
Item 4.	MINE SAFETY DISCLOSURES	26
PART II
Item 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	27
Item 6.	SELECTED FINANCIAL DATA	29
Item 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	32
Item 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	50
Item 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	52
Item 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	53
Item 9A	CONTROLS AND PROCEDURES	54
Item 9B.	OTHER INFORMATION	55
PART III
Item 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	56
Item 11.	EXECUTIVE COMPENSATION	60
Item 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	74
Item 13.	CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE	76
Item 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	77
PART IV
Item 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	78

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

AquaShield™ and PointShield^™ are trademarks of our DSIT Solutions Ltd. subsidiary.  Line IQ^™, Transformer IQ^™, Bushing IQ^™ , Cable IQ^™ and PowerMonic^™ are trademarks of our GridSense subsidiaries. LazerLok^™ is a trademark of our US Seismic Systems, Inc. subsidiary.

PART I

ITEM 1. BUSINESS

OVERVIEW

Acorn Energy, Inc. ("Acorn" or "the Company”) is a holding company focused on technology driven solutions for energy infrastructure asset management.  Our four businesses improve the world's energy infrastructure by making it more secure by providing security solutions for underwater energy infrastructure (DSIT), more reliable by providing condition monitoring instruments for critical assets on the electric grid (GridSense and OmniMetrix LLC) and more productive and efficient by increasing oil and gas production while lowering costs through use of ultra-high sensitive seismic tools for more precise pinpointing of oil and gas reservoirs (USSI). We acquired OmniMetrix, LLC ("OmniMetrix") in February 2012 (see Recent Developments). Accordingly, OmniMetrix results are not included in this report.

Through our majority or wholly-owned operating subsidiaries we provided the following services and products in 2011:

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

·      Smart Grid Distribution Automation.  Theseproducts and services are provided by our GridSense subsidiaries (GridSense Inc. in the United States and GridSense Pty Ltd. and CHK GridSense Pty Ltd. in Australia - collectively "GridSense") which develop, market and sell remote monitoring and control systems to electric utilities and industrial facilities worldwide.

·      Energy and Security Sensor Systems.  These products and services are provided by our US Seismic Systems, Inc. subsidiary ("USSI") which develops and produces “state of the art” fiber optic sensing systems for the energy, commercial security and defense markets worldwide.

During 2011, each of the three abovementioned activities represented a reportable segment. In addition, our “Other” segment represents IT and consulting activities at our DSIT subsidiary.

REVENUES BY COMPANY

The following table shows, for the periods indicated, the dollar amount (in thousands) of the consolidated revenues attributable to each of our consolidated companies. The revenues of USSI are included in our consolidated financial statements effective February 23, 2010. The revenues of GridSense are included in our consolidated financial statements effective May 12, 2010. Accordingly, there are no comparative revenues reported for these activities for 2009. On August 31, 2011, we sold our interests in CoaLogix Inc. ("CoaLogix") and on December 17, 2010, we discontinued our Coreworx Inc. ("Coreworx") activities. Accordingly, CoaLogix' and Coreworx' revenues and results are excluded for all periods indicated.

	Year ended December 31,						Three months ended December 31,
	2009		2010		2011		2009		2010		2011
DSIT Solutions	$	9,219	$	11,457	$	10,493	$	2,746	$	2,843	$	3,807
GridSense	—		2,382		7,119		—		1,194		2,435
USSI	—		405		1,316		—		212		433
Total	$	9,219	$	14,244	$	18,928	$	2,746	$	4,249	$	6,675

1

ENERGY & SECURITY SONAR SOLUTIONS – DSIT SOLUTIONS LTD.

DSIT Solutions Ltd., which is 84% owned by the Company, is a globally-oriented company based in Israel with expertise in sonar and acoustics and development capabilities in the areas of real-time and embedded systems.  Based on these capabilities, we offer a full range of sonar and acoustic-related solutions to strategic energy installations as well as defense and homeland security markets. In addition, based on expertise in fields such as signal acquisition and processing applications, communication technologies, computerized vision for the semiconductor industry and command, control and communication management (“C3”) we provide wide ranging solutions to both governmental and commercial customers.

Products and Services

DSIT’s Energy & Security Sonar Solutions activities are focused on two areas – sonar and acoustic solutions for energy and security markets and other real-time and embedded hardware and software development and production.

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

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

·      PointShield™ Portable Diver Detection Sonar (PDDS) – The PointShield™ PDDS is a medium range portable diver detection sonar aimed at protecting vessels at anchorage and covers restricted areas such as water canals and intakes. The PointShield™ is a cost-effective system tailored to meet the needs of customers, whose main concern is portability and flexibility.

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

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

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

·      Sonar Building Blocks – based on our sonar capabilities and development of the DDS, DSIT has developed a number of generic building blocks of sonar systems such as Signal Processing Systems and Sonar Power Amplifiers. Some customers designing and building their own sonar systems have purchased these building blocks from us.  These elements are specifically tailored and optimized for sonar systems and have advantages over generic standard building blocks.

Other Real-Time and Embedded Solutions

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

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

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

·      Modems, data links and telemetry systems – DSIT is working with major defense industries in Israel such as Rafael Advanced Defense Systems Ltd. and Israel Aerospace Industries Ltd., developing modems, advanced wide-band data links and telemetry systems for airborne and missile systems. DSIT is providing development and production services of hardware and embedded signal processing software with high quality control standards.

DSIT’s other operations include IT and consulting activities whose results are not included in the Energy & Security Sonar Solutions segment.

Customers and Markets

According to a recent Wall Street Journal article, nearly 30% of U.S. oil production and 15% of gas production is produced from wells on the Outer Continental Shelf. Globally, some 30% of the world's oil output comes from offshore production. An enormous amount of capital investment has gone into creating this underwater energy infrastructure. This includes the oil platforms that drill, extract and temporarily store oil and gas, as well as the oil and gas wellheads, pipelines and pumps required to transfer the product from its location to shore. While this infrastructure was built with the assumption that it would be able to weather natural disasters, much of this infrastructure comprises what is known in the military as "soft" targets from beneath the water that would not require much in the way of explosives to cause significant, and perhaps catastrophic, damage.

This vulnerability, combined with the development and proliferation of technologies such as mini-submarines which can submerge to depths of a few dozen feet making detection difficult, unmanned underwater vehicles, divers with underwater scooters, as well as conventional scuba divers threaten the undersea economy with significant damage resulting from lost energy resources, damaged infrastructure and environmental degradation should an attack occur. DSIT looks to target potential customers in such areas that have significant underwater energy assets and infrastructure.

All of this segment’s operations (excluding sales and product delivery, set-up and service) take place in Israel. In recent years, an increasing share of this segments revenues were derived from outside of Israel (68% in 2011, 55% in 2010, 43% in 2009 and 15% in 2008). We expect this trend of increasing shares of this segment’s revenues to be generated from outside of Israel to continue in 2012, particularly following the recently announced $12.3 million order for AquaShield^TM and PointShield^TM DDS systems with an Asian customer.  DSIT continues to invest considerable effort to penetrate European, Asian, South American, U.S. and other markets in order to broaden its geographic sales base with respect to its sonar technology solutions. We have significant customer relationships with some of Israel’s largest companies in its defense and electronics industries as well as relationships with some of the biggest Asian defense integrators. We are currently exploring several cooperation opportunities within Asia and the U.S.

We believe that in 2012, we will see an increased flow of orders for our AquaShield^TM DDS and PointShield^TM DDS systems generated by customers realizing the potential threat to their coastal and offshore critical facilities as well as vessels, canals and water intakes. DSIT is currently in discussions with numerous potential energy, commercial and governmental customers who have shown interest in the company's underwater security systems.

Four customers accounted for approximately 79% of segment sales in 2011 (28%, 24%, 15% and 12%), two of which accounted for 25% ($4.7 million) of Acorn’s consolidated revenues for 2011 ($2.6 million and $2.2 million or 14% and 11%, respectively). The loss of any one or more of these customers could have a material adverse effect on this segment.

Competition

Our Energy & Security Sonar Solutions segment faces competition from several competitors, large and small, operating in worldwide markets, (such as Sonardyne International Ltd. (based in the United Kingdom), Atlas Elektronik (based in Germany) and the Kongsberg group of companies (based in Norway)) with substantially greater financial and marketing resources, particularly with respect to our energy and security sonar solutions. We believe that our wide range of experience and long-term relationships with large businesses as well as the strategic partnerships that we are developing will enable us to compete successfully and obtain future business. In 2011, DSIT successfully performed a demonstration in an Asian country to a number of potential customers.

3

DSIT's AquaShield^TM achieved a much better performance regarding detection range and automatic classification, than its competitor who performed a demonstration to these customers at an earlier date. DSIT has sold its AquaShieldTM DDS and PointShieldTM PDDS systems to the Israeli Navy following a comprehensive review and evaluation process in which the Navy investigated competing systems and selected those of DSIT.

Intellectual Property

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

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

We keep the detailed description of these core algorithms as proprietary information and accordingly they are not disclosed to the public or to customers. We use contractual measures such as non-disclosure agreements and special contract terms to protect this intellectual and proprietary information. It is uncommon for companies such as DSIT to rely heavily on patents, as the patent itself may disclose critical information. Nonetheless, in certain cases the benefits of patent protection can outweigh the risks. We anticipate that we may apply for certain patents during the course of 2012.

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

Facilities

DSIT’s activities are conducted in approximately 19,000 square feet of office space in the Tel Aviv metropolitan area under a lease that expires in August 2012. We believe that DSIT’s current premises are sufficient to handle the anticipated increase in sales for the near future. DSIT anticipates renewing its lease at its current location when its lease expires.

SMART GRID DISTRIBUTION AUTOMATION – GRIDSENSE

In accordance with applicable accounting standards, we began consolidating the results of GridSense beginning May 12, 2010, the date we acquired the outstanding GridSense shares not previously owned by us. Prior to that date we accounted for our GridSense investment using the equity method.

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

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

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

GridSense operates from offices in the U.S. and Australia and has utility customers throughout the world, including the Americas, Asia, Australia, Africa, and the United Kingdom.

4

GridSense Offerings & Solutions

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

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

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

•Cable IQ^TM - This system provides real-time monitoring of underground infrastructure, enabling utilities to optimize the loading of underground feeders, detect outages and other events, and monitor various power quality parameters.

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

•Bushing IQ^TM - The Bushing IQ^TM is a continuous online system for monitoring power factor in high voltage capacitive bushings.

Customers and Markets

Within Australia where GridSense has an established sales team and support infrastructure, GridSense sells the PowerMonic^TM, Line IQ^TM, Cable IQ ^TM, Transformer IQ^TM and Bushing IQ^TM range of products directly to electric utilities and industrial customers. Outside of Australia, GridSense utilizes a network of resellers, including rental companies, electrical engineering firms, distributors, independent manufacturers' representatives and agents. In addition, in North America, GridSense employs four sales professionals. By leveraging off this indirect sales network, GridSense has expanded into international territories while minimizing the risk and financial burden of maintaining a direct sales organization.

Strategically important markets outside of Australia include North America, South America, China and South Africa. Having invested heavily in an organization to support its customers in the U.S. and Canada, GridSense has grown its customer base from just a handful a few years ago to over 200 utility companies ranging from municipal utilities and cooperatives to large investor owned utilities. The penetration of this market in the relatively short time since GridSense established operations in the US has been made possible with the establishment of a manufacturer's representative network covering the region. Given the size of the North American utility market, sales from this territory are expected to grow, and we believe North America will eventually represent the largest portion of overall GridSense sales in the future. Unlike North America which is characterized by a large number of electricity suppliers over a vast geographic territory, the opportunities in South America, China and South Africa are focused on a small number of large electric utility operators. We are currently pursuing deployment opportunities in these aforementioned markets having already established relationships with local utilities and currently supporting pilots or evaluation trials.

GridSense has activities in other international markets but continues a measured and disciplined approach toward expansion. Validation of the market opportunity takes place before actual deployment of resources. GridSense mitigates its operational and financial risks by aligning itself with resellers that exhibit technical competency, established customer relationships and on-the-ground resources to support our offerings.

In 2011, two customers accounted for approximately 46% ($3.3 million) of GridSense's revenues (34% and 12% or $2.4 million and $0.9 million, respectively). One of those customers represented approximately 13% of Acorn's consolidated revenues for 2011. This customer was a U.S. utility that deployed a large number of TransformerIQ^TM systems across a fleet of transformers. Although follow-on sales are expected in future periods from this existing customer, it is unknown whether GridSense will enter into a similar sized transaction with this utility in the future. The loss of one or more of the company's top customers could have a material effect on the overall sales of GridSense. To mitigate this risk, the company is aggressively expanding its sales pipeline and supporting a larger base of customers.

5

Competition

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

Intellectual Property

GridSense invests significant resources in product development and research in order to maintain its competitiveness in the marketplace. Keeping proprietary information safe from unauthorized use or disclosure is therefore an important objective. In order to protect its proprietary know-how and technology, GridSense uses a combination of patents, trade secrets, contracts, copyrights and trademarks. GridSense owns three Australian patents and three U.S. patents, and has one patent pending in both Australia and the U.S. In addition, GridSense owns three patents in Canada, two in Europe, two in South Africa and one in Great Britain. Some of GridSense's know-how and technology may not be patentable. To protect its rights, GridSense requires employees, as well as select consultants, advisors and collaborators to enter into confidentiality agreements. While these agreements will provide some level of protection, they cannot provide absolute assurance that GridSense's trade secrets, know-how or other proprietary information are fully safeguarded. Whenever intellectual property is developed internally or acquired, GridSense will evaluate and determine the optimal mix of controls to protect itself.

Production Facilities and Locations

GridSense has headquarters in Sydney, Australia and Sacramento, CA. The leased facility in Sydney covers 8,100 square feet while the leased facility in Sacramento has approximately 10,400 square feet. GridSense management believes both facilities are sufficient to meet the company's needs for the foreseeable future. GridSense has successfully outsourced many production processes to external parties while maintaining strict quality assurance standards including the internal testing of all finished goods. The transfer of production to accredited contract manufacturers has reduced the Company's fixed manufacturing overhead and freed up resources to focus on quality assurance and service.

ENERGY AND SECURITY SENSOR SYSTEMS - US SEISMIC SYSTEMS, INC.

In accordance with applicable accounting standards, we began consolidating the results of US Seismic Systems, Inc. ("USSI") beginning February 23, 2010, the date we effectively acquired USSI. USSI is a Delaware corporation based in Chatsworth, California which was established in October 2007. In a series of investments, option exercises and exchanges of shares beginning in November 2009 through May 2011, we acquired an aggregate of approximately 81% of USSI.  In addition, we have in the period from May 2011 to January 2012, advanced to USSI $2.5 million in contemplation of a new investment agreement. In February 2012, we entered into a new Stock Purchase Agreement with USSI pursuant to which we converted these advanced funds into additional shares of USSI common stock and shares of USSI's new Series A-1 Preferred Stock. We currently own approximately 87% of USSI (See Recent Developments).

USSI's primary focus is to develop and produce “state of the art” fiber optic sensing systems for the energy and security (both commercial and defense) markets.  USSI’s patented ultra-high sensitivity fiber optic sensors are being designed to replace the legacy expensive, unreliable, and bulky electronic sensors currently in widespread use today with small, low cost, ultra-reliable, and inherently-safe fiber optic sensors.  USSI’s fiber optic sensors have demonstrated greater than three hundred times the sensitivity as compared to the legacy electronic sensors and sell for a fraction of the cost of traditional electronic sensors.

Products and Services

USSI’s new fiber optic sensing systems provide its users with a competitive advantage over those relying on existing sensor technology.  As further described below, primary product lines for which USSI is currently developing products include downhole fiber optic sensor systems for oilfield 4D seismic reservoir monitoring, shale gas microseismic monitoring,  fiber optic perimeter security systems (including commercial and defense), and fiber optic pipeline/coal mine monitoring systems.  USSI’s systems are currently being installed for evaluation by companies in North America, Asia, and Eastern Europe. Except as noted below, USSI has not yet made significant sales of products for commercial use by customers.

6

4D reservoir & shale gas monitoring. New oil discoveries are not keeping pace with the worldwide demand for oil.  To make up for this shortfall, more oil must be produced from existing fields, which dictates increased use of 4D seismic techniques (repeated 3D seismic images to monitor the movement of oil reservoir fluids over time) to increase the percentage of oil extracted.  For 4D to be cost-effective, permanently-installed seismic sensors are needed.  Current mainstream oilfield seismic sensing systems are based upon 50 year-old technology that is too costly and unreliable for permanent installations.  USSI’s fiber optic seismic sensors can meet the demanding performance, cost, and reliability requirements needed for advanced 4D seismic analysis.

In addition to oilfield seismic sensing, there is also a great need for the USSI technology in the harvesting of natural gas.  There is a fundamental shift underway within the oil and gas industry as major oil companies are increasingly focusing on natural gas as new horizontal drilling techniques combined with hydro fracking are making the world’s vast tight gas shale fields economical to produce.  Natural gas is significantly cheaper per BTU than oil, burns cleaner than oil and is also gaining traction as a fuel for transportation.  USSI’s fiber optic sensors can provide the ability to monitor the fracking process to improve production efficiency and minimize potential environmental damage at a fraction of the cost of competing technology.

Fiber optic pipeline monitoring. There are currently approximately 160,000 miles of oil transmission pipelines and 305,000 miles of gas transmission pipelines in the US, most of which were built before the end of World War II. USSI provides pipeline monitoring for Oil and Gas pipelines, through a similar revolutionary, all-in-one, fiber optic sensing cable.   Since the optical fiber is the sensor, there are no electronics required in the sensor cable, and every inch of the cable is acoustically sensitive ensuring that there are no gaps in coverage.  The USSI system detects unusual acoustic activity such as leaks, tampering, theft or damage caused by construction equipment.  The USSI system can effectively detect attempted illegal tapping of pipelines in remote areas as well as intrusion into pipeline facilities for terrorist activities.  The unique ability of USSI’s sensor to monitor hundreds of miles of pipeline in real-time, with no electronics on the pipeline is a distinct advantage over competing systems.

Fiber optic perimeter security. USSI has developed an all-optical security system based upon a microphonic cable that can be mounted on a fence, buried along a border/perimeter, or placed underwater in a harbor.  We believe the USSI fiber optic microphonic cable is the most sensitive available as it can detect disturbance signals that are 100 times quieter than competing systems.  In addition, the USSI system is unique in its ability to detect and classify multiple simultaneous events.  The system utilizes sophisticated signal processing techniques to screen out false alarms, and will detect, pinpoint and notify on any attempts to infiltrate a facility.

The USSI security sensing system features low noise, high sensitivity, and high dynamic range, providing a true reproduction of acoustic signals, and clearly defined, independent sensing zones.  We believe the USSI buried fiber optic sensing system has the lowest noise floor of any competing fiber optic perimeter security system.  This advantage enables the USSI system to detect in-ground disturbance signals that may be very weak or that occur at much larger distances.  In addition, the USSI system is unique in its ability to detect and classify multiple simultaneous events on single or multiple zones.  This capability is very important in that it prevents a potential intruder from foiling the system by masking an intrusion attempt by simultaneously applying loud noise at an alternate location. Certain of these products are already in use by customers.

Customers and Markets

In the period since our acquisition of USSI in February 2010, it has recorded total revenues of approximately $1.7 million ($0.4 million in 2010 and $1.3 million in 2011). Although the value of orders to date remains small, USSI has initiated numerous project proposals for all of its products and services as well as successfully demonstrated its sensor technology at numerous test sites for potential customers.

Energy. USSI targets its products into the oilfield geophysics market, which has about a $12 billion annual market size, of which about $10 billion is for seismic acquisition and processing activities, and about $2 billion is for equipment such as seismic sources and sensors.  USSI’s sensor systems fall into the oilfield geophysical equipment market, and its potential customers are the oilfield service companies.  The leading oilfield service companies are Schlumberger,  Halliburton, and Baker Hughes.

Three companies account for 90% of the Oilfield Geophysical Equipment market. Sercel, S.A, a subsidiary of Compagnie Generale de Geophysique-Veritas (CGGVeritas) represents 54% of the market, ION Geophysical Corporation represents 28% and Oyo Geospace Corporation represents about 8%. The majority of this equipment is currently used for marine seismic and land (surface) seismic applications, with downhole seismic and microseismic making up only about 10%. USSI is initially pursuing the downhole seismic and microseismic market as these are the least mature but the fastest growing markets. USSI believes the size of this market can grow to in excess of $1B as the microseismic monitoring percentage of shale gas wells increases from today's 2-3% to 50%. After addressing these markets, USSI plans to pursue the larger, more mature marine and land seismic markets.

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Security. As a result of the attacks of September 11, the United States and many of its international partners have embarked on a massive, long-term effort to enhance the security of their homelands.  Waging a cost effective campaign to enhance homeland security demands new, highly developed technologies.  USSI’s all fiber optic security systems are an example of one of those technologies.For these applications, what is needed is an unobtrusive sensor system that will allow military forces and/or border security personnel to monitor long stretches of territory from protected sites at extended standoff ranges.

According to Homeland Security Research Corporation ("HSRC"), a consulting firm, the U.S. Homeland Security-Homeland Defense market is larger and is growing faster than many realize. HSRC forecasts it to grow from $69 billion in 2010 to $85 billion by 2014. USSI’s potential customers are the large and small commercial security system integrators, government organizations such as the U.S. Department of Homeland Security, and large government contractors such as Boeing, Northrop Grumman, Lockheed Martin, and Raytheon as well as leading commercial system integrators such as ADT Ltd. (a subsidiary of Tyco International Ltd.),  Protection One, Inc., and Monitronics, International, Inc.

Competition

Oil & Gas. USSI’s primary competition comes from oilfield equipment providers using conventional retrievable downhole sensor technology.  This technology is well-proven and widely used.  The leaders include OYO Geospace Corporation, Sercel S.A., and ION Geophysical Corporation.  Our target market is the emerging permanent downhole sensor market.  The existing conventional technology is not suited for permanent installations for the following reasons:

• Cost - downhole sensor arrays using existing technology cost $4M to $6M per copy.  The equivalent USSI downhole system sells for a fraction of that price.

• Reliability - existing technology requires expensive downhole electronics that cannot be serviced or repaired if permanently installed.  The USSI system has no downhole electronics.

USSI also has competition from other oilfield fiber optic sensor companies such as Stingray Geophysical Ltd. (Stingray), Weatherford International Ltd., and Petroleum Geo-Services ASA (PGS).  We believe that some of our competitors use early generation fiber optic sensor technology which is expensive and difficult to manufacture.  In another case, the highest reported performance of one competitor is significantly less than published USSI performance.  

Security Systems. USSI’s competition in the security market comes from well established companies utilizing conventional (leaky-coax cable) technology and relatively new companies utilizing fiber optic technology.  Both technologies can be mounted to a fence or buried around a perimeter.  The leading competitors using conventional technology are Southwest Microwave Inc., and Magal Security Systems, Ltd.  The leading fiber optic competitors are Future Fibre Technologies Pty Ltd., FiberSensys Inc.,  Sensoptics Ltd., and Senstar Corporation.

Existing conventional technology, which has been installed in tens of thousands of locations, has multiple drawbacks.  These drawbacks include susceptibility to electromagnetic interference ("EMI"), radio frequency interference ("RFI") and lightning. The traditional geophones that are part of existing conventional technology consist of a moving coil of wires around a stationary magnet.  If EMI from an outside magnetic field is introduced, it will interfere with the geophone’s performance. If RFI from a radio (or cell phone, or other wireless device) is transmitting near a system that contains existing conventional technology, it could interfere with the system’s performance as well.  Furthermore, it is expensive to install and maintain the existing conventional technology, requiring multiple electronics boxes and unreliable batteries in the field.  These problems with existing conventional technology led to the emergence of fiber optic-based security systems.  The problems with the competing fiber optic security systems include an inability to detect multiple simultaneous events, low sensitivity (10 to 100 times less sensitive than USSI technology), and low signal fidelity (making it difficult to distinguish false alarms).

Intellectual Property

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

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will evaluate and determine the optimal mix of controls to protect itself. USSI owns three U.S. patents, one U.S. trademark, and has 16 applications pending in the U.S. and internationally (PCT filings).

Facilities

USSI's activities are conducted in approximately 21,000 square feet of office and production space in the San Fernando Valley (a suburb north of Los Angeles, CA) under a lease that expires in April 2015. We believe USSI's facilities are sufficient for expected expanding production requirements over the next six to twelve months. Thereafter, it may be necessary to seek expanded or new facilities, and whether they will be available at such time, location and on terms acceptable to USSI cannot be determined. Any inability to expand our production facilities as required to meet customer demand could result in loss of, or a delay in fulfilling, orders and loss of associated revenue.

BACKLOG

As of December 31, 2011, our backlog of work to be completed and the amounts expected to be completed in 2012 were as follows (amounts in millions of U.S. dollars):

	Backlog at December 31, 2011		Amount expected to be completed in 2012
DSIT Solutions	$	13.6	$	9.9
GridSense	0.5		0.5
USSI	1.5		1.5
Total	$	15.6	$	11.9

RESEARCH AND DEVELOPMENT EXPENSE, NET

Research and development expense recorded for the years ended December 31, 2009, 2010 and 2011 for each of our consolidated subsidiaries is as follows (amounts in thousands of U.S. dollars):

	Years ended December 31,
	2009		2010		2011
DSIT Solutions	$	457	$	323	$	568
GridSense *	—		259		1,370
USSI **	—		383		1,057
Total	$	457	$	965	$	2,995

*   GridSense was acquired on May 12, 2010. Accordingly, the research and development expense recorded with respect to GridSense relates only to the period after its acquisition.

**   USSI was effectively acquired on February 23, 2010. Accordingly, the research and development expense recorded with respect to USSI relates only to the period after its acquisition.

Research and development expense recorded is net of participation by third parties in the Company’s research and development costs as well as credits arising from qualifying research and experimental development expenditures.

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EMPLOYEES

At December 31, 2011, we employed a total of 159 employees, including 132 full-time employees.  We consider our relationship with our employees to be satisfactory.

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

	Full-time employee count at December 31, 2011
	U.S	Australia	Israel	Total
DSIT Solutions	—	—	57	57
GridSense	23	22		45
USSI *	28	—	—	28
Acorn	2			2
Total	53	22	57	132

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

	Full-time employee count at December 31, 2011
	Production, Engineering and Technical Support	Marketing and Sales	Management, Administrative and Finance	Total
DSIT Solutions	46	2	9	57
GridSense	34	7	4	45
USSI *	24	2	2	28
Acorn	—	—	2	2
Total	104	11	17	132

* USSI's full-time employee count includes eight full-time consultants in Production, Engineering and Technical Support.

We have no collective bargaining agreements with any of our employees.  However, with regard to our Israeli activities, certain provisions of the collective bargaining agreements between the Israeli Histadrut (General Federation of Labor in Israel) and the Israeli Coordination Bureau of Economic Organizations (including the Industrialists Association) are applicable by order of the Israeli Ministry of Labor.  These provisions mainly concern the length of the workday, contributions to a pension fund, insurance for work-related accidents, procedures for dismissing employees, determination of severance pay and other conditions of employment.  We generally provide our Israeli employees with benefits and working conditions beyond the required minimums.  Israeli law generally requires severance pay upon the retirement or death of an employee or termination of employment without due cause.  Furthermore, Israeli employees and employers are required to pay specified amounts to the National Insurance Institute, which administers Israel’s social security programs.  The payments to the National Insurance Institute include health tax and are approximately 5.5% of wages (up to a specified amount), of which the employee contributes approximately 70% and the employer approximately 30%.

In Australia, all employers are required to make contributions to retirement investment funds benefiting employees called Superannuation.  GridSense is required to pay 9% of salary as a contribution toward Superannuation funds nominated by its employees.  Further, the Australian Government stipulates that employees are entitled to severance pay if their position is terminated as a result of company restructuring.

ADDITIONAL FINANCIAL INFORMATION

For additional financial information regarding our operating segments, foreign and domestic operations and sales, see “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 22 to our Consolidated Financial Statements included in this Annual Report.

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AVAILABLE INFORMATION

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). These filings are available to the public over the internet at the SEC's website at http://www.sec.gov. You may also read and copy any document we file at the SEC's public reference room located at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.

Our website can be found at http://www.acornenergy.com. We make available free of charge on or through our website, access to our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after such material is electronically filed, or furnished, to the SEC. Our website also includes our Code of Business Conduct and Ethics, Board of Directors' Committee Charters for the Audit, Compensation and Nominating Committees.

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ITEM 1A. RISK FACTORS

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

GENERAL FACTORS

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

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

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

Despite our recent gain on our sale of CoaLogix, we have a history of operating losses, and have used significant amounts of cash to fund our operating activities over the years.  In 2009, 2010 and 2011, we had operating losses of $2.3 million, $6.5 million and $8.0 million, respectively.  Cash used in operating activities of continuing operations in 2009, 2010 and 2011 was $1.4 million, $6.3 million and $7.8 million, respectively.

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

There can be no assurance that we will continue to declare cash dividends.

In October 2011, our Board of Directors adopted a dividend policy pursuant to which Acorn would pay quarterly dividends on our common stock. The source of our current dividends are the proceeds from our recent sale of CoaLogix. We intend to continue to pay such dividends subject to capital availability and periodic determinations by our Board of Directors that cash dividends are in the best interest of our stockholders and are in compliance with all laws and agreements of Acorn applicable to the declaration and payment of cash dividends.

Future dividends may be affected by, among other factors:

• our views on potential future capital requirements for investments in acquisitions or our subsidiaries;

• use of cash to consummate various acquisition transactions;

• stock repurchase programs;

• the ability of our subsidiaries to generate sufficient cash flow in the future to enable Acorn to continue to pay dividends;

• changes in federal and state income tax laws or corporate laws; and

• changes to our business model.

Our dividend payments may change from time to time, and we cannot provide assurance that we will continue to declare dividends in any particular amounts or at all. A reduction in our dividend payments could have a negative effect on our stock price.

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

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

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

We depend on key technical employees and sales personnel.  The loss of certain personnel could diminish our ability to develop and maintain relationships with customers and potential customers.  The loss of certain technical personnel could harm our ability to meet development and implementation schedules.  The loss of key sales personnel could have a negative effect on sales to certain current customers.  Although most of our significant employees are bound by confidentiality and non-competition agreements, the enforceability of such agreements cannot be assured.  Our future success also depends on our continuing ability to identify, hire, train and retain other highly qualified technical and managerial personnel.  If we fail to attract or retain highly qualified technical and managerial personnel in the future, our business could be disrupted.

We have recently hired an individual who is our Senior Director of External Relations to assist in certain legislative and other governmental relations matters - such activities may be deemed to be lobbying efforts.

To the extent that our Senior Director of External Relations engages in activities that constitute “lobbying” under federal, state, or local laws, we have to register him and possibly ourselves and one or more of our subsidiaries under such applicable laws.  Lobbying laws typically require periodic financial and other reports to be timely made and any failure to register or to comply with the applicable regulations could subject us, our employees and officers and directors to civil or criminal penalties.  We intend to comply with such laws.

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

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

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

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

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

Part of our business model includes the acquisition of new companies either as new platform companies (OmniMetrix in February 2012 (see Recent Developments), USSI in February 2010 and GridSense in May 2010) or complimentary companies for our subsidiaries. Any failure to effectively integrate any future acquisition's management into our controls, systems and procedures could materially adversely affect our business, results of operations and financial condition.

Our strategy is to continue to integrate our newly acquired companies and grow the businesses of all of our companies.  Integrating acquisitions is often costly, and we may not be able to successfully integrate our acquired companies with existing operations without substantial costs, delays or other adverse operational or financial consequences.  Integrating acquired

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companies involves a number of risks that could materially and adversely affect our business, including:

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

• inability to retain key personnel of the acquired companies;

• dilution of existing stockholders;

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

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

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

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

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

In order to grow, one or more of our companies may decide to pursue growth through acquisitions. Any significant acquisition by one or more of our operating companies could require substantial use of our capital and may require significant debt or equity financing.  We cannot provide any assurance as to the availability or terms of any such financing or its effect on our liquidity and capital resources.

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

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

We may in the future become involved in litigation that may materially adversely affect us.

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

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

In accordance with applicable accounting principles, goodwill is not amortized but is reviewed annually or more frequently for impairment and other intangibles are also reviewed if certain conditions exist. During the year ended December 31, 2010, we recorded a $5.0 million impairment of goodwill associated with our former Coreworx subsidiary following our decision to stop funding it and an impairment of $1.2 million associated with our GridSense segment. Any additional impairment of the value of goodwill will result in an additional charge against earnings which could materially adversely affect our reported results of operations and financial position in future periods.

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

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

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

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

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

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

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

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

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

Litigation regarding patents or other intellectual property rights is costly and time consuming, and could divert the attention of our management and key personnel from our business operations.  The complexity of the technology involved and the uncertainty

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of intellectual property litigation increase these risks.  Claims of intellectual property infringement might also require us to enter into costly royalty or license agreements or to indemnify our customers.  However, we may not be able to obtain royalty or license agreements on terms acceptable to us or at all.  Any inability on our part to obtain needed licenses could delay or prevent the development, manufacture and sale of our products, systems or services.  We may also be subject to significant damages or injunctions against development, manufacture and sale of our products, systems or services.We also may be required to incur significant time and expense in pursuing claims against companies we believe are infringing or have misappropriated our intellectual property rights.

Concentrations of credit risk

Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash and cash equivalents, short-term deposits, escrowed funds, restricted deposits and trade receivables.  The counterparty to a significant amount of our cash equivalents is a money market of a major financial institution. We do not believe there is significant risk of non-performance by this counterparty.   The counterparty to our restricted deposits are two major Israeli banks. We do not believe there is significant risk of non-performance by these counterparties. Short-term deposits are in FDIC insured certificates of deposit through the Certificate of Deposit Account Registry Service.  The Company does not believe there is significant risk of non-performance by the counterparties. The counterparty to our escrowed funds is a major financial institution. We do not believe there is significant risk of non-performance by this counterparty. Approximately 32% of the trade accounts receivable at December 31, 2011 was due from two customers that pay their trade receivables over usual credit periods.  Credit risk with respect to the balance of trade receivables is generally diversified due to the number of entities comprising our customer base. Approximately 71% of the balance in unbilled revenue at December 31, 2011 was due from two customers that when billed, pay their trade receivables over usual credit periods.  Credit risk with respect to the balance of unbilled revenue is generally diversified due to the number of entities comprising our customer base.

Results from our past successful sales of subsidiary companies may not be repeated

In the past, we have sold certain former subsidiaries (Comverge and CoaLogix) at a profit, but there can be no assurance that we will be able to repeat these successes with one or more of our current subsidiaries.  We invest in companies before they have a meaningful history of revenues and whether we can operate these entities successfully or realize any profit on our investments in them cannot be determined.   

RISKS RELATED TO DSIT SOLUTIONS

Failure to accurately forecast costs of fixed-priced contracts could reduce DSIT's margins.

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

Hostilities in the Middle East region may slow down the Israeli high-tech market and may harm DSIT's operations.

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

Exchange rate fluctuations could increase the cost of DSIT's operations.

A majority of DSIT’s sales are based on contracts or orders which are in U.S dollars or are in New Israeli Shekels (“NIS”) linked to the U.S. dollar.  At the same time, most of DSIT’s expenses are denominated in NIS (primarily labor costs) and are not linked to any foreign currency.  The net effect of a devaluation of the U.S. dollar relative to the NIS is that DSIT’s costs in dollar terms increases more than its revenues. DSIT enters into forward contracts to try to mitigate its exposures to exchange rate fluctuations; however, we can provide no assurance that such controls will be implemented successfully. In 2011 the U.S. dollar strengthened in relation to the NIS by 7.7%.

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

In 2011, approximately 70% of DSIT’s revenues were concentrated in four customers. These customers are expected to continue to make up a significant portion of DSIT’s revenues and cash flow for 2012. A significant reduction of future orders or delay in milestone payments from any of these customers could have a material adverse effect on the performance of DSIT.

DSIT is dependent on meeting milestones to provide cash flow for its operations.

DSIT's operations place a great reliance on it meeting project milestones in order to generate cash flow to finance its operations.  Should DSIT encounter difficulties in meeting significant project milestones, resulting cash flow difficulties could have a material adverse effect on its operations.

DSIT must at times provide significant guarantees in order to secure projects. These guarantees are often collateralized by restricted deposits.

Some of the projects DSIT performs require significant performance and/or bank guarantees. At December 31, 2011, DSIT had $5.7 million of performance and bank guarantees outstanding. In addition, DSIT had on deposit at two Israeli banks approximately $2.4 million collateralizing some of these guarantees. These deposits are restricted and, accordingly, DSIT cannot use these funds for operations until the guarantees which are being collateralized are released. At times, this can create cash flow difficulties which could have a material adverse effect on its operations.

In addition, DSIT may not always be able to supply such guarantees or restricted deposits without financial assistance from Acorn.  If Acorn needs to provide financial guarantees for DSIT, Acorn may not have sufficient funds available to it to invest in other emerging ventures or take advantage of opportunities available to it in a timely manner.

If DSIT is unable to keep pace with rapid technological change, its results of operations, financial condition and cash flows may suffer.

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

DSIT is dependent on a number of suppliers who provide it with components for some of its products.

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

DSIT is a relatively small company with limited resources compared to some of its current and potential competitors, which may hinder its ability to compete effectively.

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

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RISKS RELATED TO GRIDSENSE

GridSense has incurred net losses and may never achieve sustained profitability.

GridSense incurred net losses for the years ended December 31, 2009, 2010 and 2011.  We believe that GridSense will reduce its losses in 2012; however, we can provide no assurance that GridSense will generate sufficient revenues and cash flow to allow it to become profitable or to sustain profitability or to have positive cash flows.

GridSense will need additional financing to grow and finance its operations

We expect that GridSense will continue to require working capital support in order to finance its operations in 2012 as it continues to grow its production, engineering and technical support team in 2012. This support may be in the form of a bank line, new investment by others, additional investment by Acorn, or a combination of the above. We have no assurance that such additional support will be available in sufficient amounts, in a timely manner and on acceptable terms.  The availability and amount of any additional investment from Acorn may be limited by the investment and working capital needs of our corporate activities and other operating companies. In addition to support from Acorn, GridSense is in the process of negotiating a line of credit facility from a commercial bank. Management believes that establishment of a bank facility is achievable during 2012. We have no assurance the GridSense will be successful in establishing a bank facility in 2012 or beyond.

GridSense’s products and services may not gain market acceptance or competitors may introduce offerings that surpass those of GridSense.

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

GridSense’s products are subject to regulatory approvals.

Numerous regulations govern the manufacture and sale of GridSense’s products in the United States and other countries where GridSense intends to market its products. Such regulation bears upon the approval of manufacturing techniques, testing procedures and approval for the manufacturing and sale of GridSense’s products, including advertising and labeling.

Any failure or delay in obtaining regulatory approvals would adversely affect our ability to market our products. Furthermore, product approvals may be withdrawn if problems occur following initial marketing or if compliance with regulatory standards is not maintained.  The failure, delay or withdrawal of a previously given regulatory approval could materially adversely affect our revenues, cash flows and financial position.

Sales to utilities are generally characterized by long sales cycles.

GridSense’s sales are largely dependent on the sales cycle of electric utilities which is typically long and requires much technical and application support.  The purchasing cycle for a utility may involve an evaluation trial or pilot, analysis of data and results, review of competitor’s offerings and smaller scale deployments, before a purchasing decision is made.  For large orders, some utilities are required to solicit competitive bids from other vendors which can contribute more time.  The entire process can take anywhere between several weeks to several quarters.  Delays in securing purchase orders can materially adversely affect our revenues, cash flows and financial condition.

GridSense is attempting to broaden its revenue base by expanding into the North American market.

GridSense is currently recording a significant portion of its revenue from sales generated in Australia (more than 45% in 2011 and more than 60% for the 2010 calendar year).  GridSense believes that its continued growth and profitability will require additional expansion of sales in other markets, most notably the North American market.  To the extent that GridSense is unable to expand sales into other markets in a timely and cost-effective manner, its business, operating results and financial condition could be materially adversely affected.  In addition, even with the successful recruitment of additional personnel and international

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resellers, there can be no assurance that GridSense will be successful in maintaining or increasing international market demand for its products.

Exchange rate fluctuations could increase the cost of GridSense’s Australian operations.

GridSense has operations in both the U.S. and Australia. Its Australian operations are subject to the volatility of the Australian dollar vis-à-vis the U.S. dollar (in 2011 the Australian dollar was virtually unchanged vis-a-vis the U.S. dollar while in 2010, the Australian dollar strengthened by 13.3%).  While risks are somewhat mitigated by the fact that GridSense’s Australian operation’s sales and expenses are primarily denominated in Australian dollars, currency fluctuations may impact the translation of certain balance sheet items, affect the economics of manufacturing and ultimately affect its financial performance. GridSense does not employ specific strategies, such as the use of derivative instruments or hedging, to manage its foreign currency exchange rate exposures.

GridSense’s market is subject to rapidly changing technologies.

GridSense markets its products in a field where electronics and software/firmware dominate. This fast changing area may generate unknown methods of detecting and monitoring disturbances that could render GridSense’s technology inferior, resulting in GridSense’s results of operations being materially adversely affected. GridSense does, however, closely monitor trends and changes in technologies and customer demand that could adversely impact its competitiveness and overall success.

GridSense is subject to vigorous competition with very large competitors that have substantially greater resources and operating histories.

Some of GridSense’s competitors in the markets it serves are larger, better capitalized and have greater resources than GridSense. As GridSense grows and penetrates markets where larger companies have been established, it may experience a reduced rate of growth due to competitive forces.   Competition from these competitors may have a material adverse effect on our operations, including a potential reduction in operating margins and a loss of potential business.

RISKS RELATED TO USSI

USSI has a limited operating history.

USSI was formed in November 2007 and has a limited operating history.  Many of its products are at a research and development stage and substantial time, effort and financial resources will be required before it can become profitable.  USSI’s operations are subject to all of the risks inherent in the establishment of a new business enterprise, especially one that is dependent on developing new products for the oil & gas and security industries.  The likelihood of USSI’s success should be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with establishing a new business such as uncertainty in product development,  uncertainty in market acceptance of its products, competition, and changes in business strategy.  USSI has no assurance that it will be successful in its business activities.

USSI has incurred net losses and may never achieve sustained profitability.

Since its inception, USSI has had annual operating losses. USSI expects to continue to have operating losses for the year ending December 31, 2012 and possibly beyond as a result of increases in operating expenses required to commence manufacturing and production and to expand its sales and marketing operations. USSI can provide no assurance that it will ultimately generate sufficient revenues to allow it to become profitable, to sustain profitability or to have positive cash flows.

USSI will need additional financing to grow its business and finance its operations

In the period since Acorn's initial investment in November 2009 through May 2011, it has invested $2.5 million directly in USSI. During the period from May 2011 through January 2012, Acorn advanced $2.5 million in contemplation of a new investment agreement that was signed in February 2012 (see Recent Developments). We have no assurance that USSI’s future capital needs will not exceed these amounts or that USSI will generate sufficient cash flow in the future to fund its operations in the absence of additional funding sources.  USSI may need to raise additional funds if revenues fail to meet projections or to fund a rapid expansion to meet product demand, respond to competitive pressures or acquire complementary products, businesses or technologies.  If additional funds are raised through the direct issuance of equity or convertible debt securities to third parties, Acorn’s percentage ownership of USSI may be reduced.

In addition, should additional funds be needed, there can be no assurance that additional financing will be available on

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terms acceptable to USSI.  If funds are not available, or are not available on acceptable terms, USSI may not be able to fund its growth, respond to competitive pressures or take advantage of unanticipated acquisition opportunities.  Accordingly, this could materially and adversely affect USSI’s business, results of operations and financial condition.

USSI is a small company with limited resources compared to some of its current and potential competitors, which may hinder its ability to compete effectively.

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

If USSI is unable to keep pace with technological change, USSI’s results of operations, financial condition and cash flows may suffer.

Many of USSI’s products are in the research and development stage.  In addition, some of USSI’s existing products may require additional engineering and upgrades in conjunction with market developments as well as specific customer needs.  There can be no assurance that USSI will continue to be successful in its engineering efforts regarding the development of its products and future technological difficulties could adversely affect its business, results of operations and financial condition.

USSI is not yet ready to manufacture its products in commercial quantities.

In order to be successful, USSI's products must be manufactured in commercial quantities at an acceptable cost and must meet the specifications required by the customers regarding quality.  We believe that USSI's space and manufacturing capabilities at its current facilities in Chatsworth, California to be sufficient to handle a large increase in sales for the future.  USSI has begun to increase its production staff and has purchased or is planning purchases of automation, control and tracking systems necessary to support larger scale production, but such systems have either not yet been purchased or if acquired, are not yet fully operational.  In addition to adding internal staffing and resources, USSI may consider potential opportunities to acquire third party manufacturing capacity through acquisition or contract manufacturing arrangements, and whether or when any will exist on terms acceptable to USSI cannot be determined. Whether such systems and the personnel with the skills to effectively operate them can be put in place to meet customer orders on a timely and high quality basis can also not be determined.  Failure to do so could result in delays or failures in meeting customer demand, resulting in a loss of customer confidence and orders.  Such difficulties could materially and adversely affect the business, results of operations and financial condition of USSI.

USSI is dependent on a number of suppliers who provide it with key components for some of its products.

USSI’s products incorporate “state of the art” technologies.  As such, in many cases there are limited supplies of key components.  In particular, USSI currently relies on a single source for the development of its high-end interrogators for some of its technologically advanced product offerings.  USSI has not yet found a second source supplier that is economically feasible to use at this time.  While USSI continues to try to mitigate the risks associated with this key component, any production delays by this supplier or any adverse change to its financial condition could materially and adversely affect USSI’s business, results of operations and financial condition.

USSI’s targeted customers may be reluctant to try its alternative solution despite its increased reliability and lower cost.

Potential customers may elect to continue to use the existing expensive and less reliable technologies given their familiarity of the existing products in the market.  The competition in USSI’s markets may have superior resources and marketing ability which could lead to potential customers selecting existing products over USSI’s products.While USSI continues to develop its products and invest in marketing efforts accordingly, there is no assurance that USSI’s products will be preferred in the market place relative to the competition with superior overall resources.  If the market place does not adopt USSI’s products as anticipated, USSI’s business, results of operations and financial condition could be materially and adversely affected.

Failure to accurately forecast costs of fixed-priced contracts could reduce USSI’s margins.

When working on a fixed-price basis, USSI undertakes to deliver solutions to a customer’s specifications or requirements for a particular project.  The profits from these projects are primarily determined by USSI’s success in correctly estimating and thereafter controlling project costs.  Costs may in fact vary substantially as a result of various factors, including underestimating costs, difficulties with new technologies and economic and other changes that may occur during the term of the contract.  If, for

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any reason, USSI’s costs are substantially higher than expected, USSI may incur losses on fixed-price contracts.

USSI may lose sales if it is unable to obtain government authorization to export its products.

The export of some of USSI’s products may be subject to export controls imposed by the U.S. government and administered by the U.S. Departments of State and Commerce. In certain instances, these regulations may require pre-shipment authorization from the administering department.  For products subject to the Export Administration Regulations (“EAR”) administered by the Department of Commerce’s Bureau of Industry and Security, the requirement for a license is dependent on the type and end use of the product, the final destination and the identity of the end user.  All USSI products that are exported are subject to EAR; however, most of USSI’s equipment is considered EAR99.  EAR99 items generally consist of low-technology consumer goods and do not require a license in many situations. However, if USSI were to attempt to export an EAR99 item to an embargoed country, to an end-user of concern (as defined by the U.S. Department of Commerce) or in support of a prohibited end-use (as defined by the U.S. Department of Commerce), USSI would be required to obtain a license.

Exports of certain USSI products may also be subject to the International Traffic in Arms Regulations (“ITAR”) regulations administered by the Department of State’s Directorate of Defense Trade Controls and may require a license.  

Obtaining export licenses can be difficult and time-consuming. Failure to obtain export licenses could significantly reduce our revenue and materially adversely affect USSI’s business, financial condition and results of operations. Compliance with U.S. government regulations may also subject USSI to additional fees and costs. The absence of comparable restrictions on competitors in other countries may adversely affect USSI’s competitive position.

Limited Protection of Proprietary Technology; Risks of Infringement

USSI’s success is heavily dependent upon its internally developed technology.  USSI has filed patents covering the specific use and novel inventions developed internally.  To further protect its proprietary rights, USSI relies on a combination of patent, trade secret, nondisclosure and other contractual restrictions.  As part of its confidentiality procedures, USSI enters into nondisclosure agreements with its employees, as well as select consultants and strategic partners and limit access to and distribution of its designs and proprietary information.  Despite these efforts, USSI may be unable to effectively protect its proprietary rights.  In addition, the expense associated with the enforcement of USSI’s proprietary rights may be substantial.

RISKS RELATED TO OUR SECURITIES

Our stock price is highly volatile.

The market price of our common stock has fluctuated substantially in the past and is likely to continue to be highly volatile and subject to wide fluctuations. During 2011, our common stock has traded at prices as low as $3.46 and as high as $6.30 per share. Fluctuations in our stock price may continue to occur in response to various factors, many of which we cannot control, including:

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

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

• announcements of changes in our senior management;

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

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

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

• changes in our dividend policy;

• changes in accounting rules;

• changes in investor perceptions; or

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

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

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

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

As of March 1, 2012, 17,743,772 shares of our common stock were issued and outstanding.  As of that date we had 223,645 warrants outstanding and exercisable with a weighted average exercise price of $4.20 and 1,157,915 options outstanding and exercisable with a weighted average exercise price of $4.34 per share, which if exercised would result in the issuance of additional shares of our common stock.  In addition to the options noted above, at March 1, 2011, 185,418 options are outstanding, but have not yet vested and are not yet exercisable.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

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ITEM 2. PROPERTIES

Our corporate activities are conducted in office space in Wilmington, Delaware under a lease that expires in June 2012 at a monthly rent of $3,450 per month. We anticipate either renewing our lease or finding a similar space near Wilmington.

Our DSIT subsidiary’s activities are conducted in approximately 19,000 square feet of office space in the Tel Aviv, Israel metropolitan area under a lease that expires in August 2012.  The annual rent is approximately $220,000. DSIT anticipates renewing its lease remaining at its current location and does not anticipate a material change in its annual rent.

GridSense operates facilities in Sydney, Australia and West Sacramento, CA.  The Sydney office occupies approximately 8,100 square feet of office, testing laboratory, production and warehouse space.  The lease in Sydney expires in July 2013. The annual rent is approximately $90,000 and is subject to annual increases based on the Australian CPI index. The West Sacramento office is approximately 10,400 square feet and its annual rent  is approximately $90,000. The lease agreement expires in May 2015. The annual rent at the West Sacramento office increases 3% per year.

USSI's activities are conducted in approximately 21,000 square feet of office and production space in the San Fernando Valley (a suburb north of Los Angeles, CA) under a lease that expires in April 2015. The annual rent at this facility is approximately $150,000.

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ITEM 3. LEGAL PROCEEDINGS

None.

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ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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PART II

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

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

	High		Low
2010:
First Quarter	$	7.49	$	5.63
Second Quarter	6.68		4.45
Third Quarter	5.51		4.30
Fourth Quarter	5.04		3.55
2011:
First Quarter	$	4.37	$	3.56
Second Quarter	4.16		3.46
Third Quarter	5.72		4.07
Fourth Quarter	6.30		4.64

As of March 8, 2012, the last reported sales price of our common stock on the Nasdaq Global Market was $8.94, there were 133 record holders of our common stock and we estimate that there were approximately 3,300 beneficial owners of our common stock.

We paid no dividends in 2009 or 2010. On October 17, 2011, our Board of Directors approved the payment of a quarterly dividend of $0.035 per share and a 2011 year-end declaration of a special dividend of $0.05 per share. The quarterly dividend was paid ($614,000) on November 28, 2011 to common shareholders of record on November 16, 2011. The special year-end dividend was paid ($876,000) on January 9, 2012 to stockholders of record on December 30, 2011. On February 7, 2012, our Board of Directors approved a dividend of $0.035 per share to be paid on March 1, 2012 to common stockholders of record on February 20, 2012. On March 1, 2012, the total dividend payment was $618,000. Our decision to pay a similar dividend in the future will be affected by our future results of operations, financial position, business, changes to applicable tax laws and regulations, and the various other factors that may affect our overall business, including those set forth in "Risk Factors." Accordingly, we cannot assure you that in the future we will continue to pay a quarterly dividend of this amount, or at all.

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PERFORMANCE GRAPH

The following stock price performance graph compares the cumulative total return of the Company's Common Stock during the period December 31, 2006 to December 31, 2011, to the cumulative total return during such period of (i) the NASDAQ Composite Index and (ii) the Russell MicroCap Index. The graph assumes that the value of the investment in our Common Stock and each index (including reinvestment of dividends) was $100.00 on December 31, 2006.

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ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated statement of operations data for the years ended December 31, 2009, 2010 and 2011 and consolidated balance sheet data as of December 31, 2010 and 2011 has been derived from our audited Consolidated Financial Statements included in this Annual Report.  The selected consolidated statement of operations data for the years ended December 31, 2007 and 2008 and the selected consolidated balance sheet data as of December 31, 2007, 2008 and 2009 has been derived from our unaudited consolidated financial statements not included herein.

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

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Selected Consolidated Statement of Operations Data:

	For the Years Ended December 31,
	2007			2008			2009			2010			2011
	(in thousands, except per share data)
Revenues	$	4,863		$	8,267		$	9,219		$	14,244		$	18,928
Cost of sales	3,567			5,600			5,264			8,200			12,015
Gross profit	1,296			2,667			3,955			6,044			6,913
Research and development expenses, net	415			236			457			965			2,995
Selling, general and administrative expenses	5,022			6,282			5,702			10,440			11,952
Impairments	112			3,664			81			1,166			—
Operating loss	(4,253		)	(7,515		)	(2,285		)	(6,527		)	(8,034		)
Finance expense, net	(1,585		)	(2,871		)	(71		)	(224		)	(26		)
Gain on early redemption of Convertible Debentures	—			1,259			—			—			—
Gain on Comverge IPO	16,169			—			—			—			—
Gain on sale of shares in Comverge	23,124			8,861			1,403			—			—
Gain (loss) on private placement of equity investments	(37		)	7			—			—			—
Gain on investment in GridSense	—			—			—			1,327			—
Dividends received from EnerTech	—			—			—			135			—
Loss on sale of EnerTech	—			—			—			(1,821		)	—
Gain on sale of HangXing	—			—			—			—			492
Income (loss) from operations before taxes on income	33,418			(259		)	(953		)	(7,110		)	(7,568		)
Income tax benefit (expense)	445			(342		)	719			(671		)	12,767
Income (loss) from operations of the Company and its consolidated subsidiaries	33,863			(601		)	(234		)	(7,781		)	5,199
Share of income (losses) in Paketeria	(1,206		)	(1,560		)	263			—			—
Share of losses in GridSense	—			(926		)	(129		)	—			—
Income (loss) from continuing operations	32,657			(3,087		)	(100		)	(7,781		)	5,199
Gain on the sale of discontinued operations, net of income taxes	—			—			—			—			31,069
In-process research and development expense recorded in acquisition of discontinued operation	—			(2,444		)	—			—			—
Loss from discontinued operations, net of income taxes	(140		)	(2,612		)	(6,076		)	(17,969		)	(1,948		)
Non-controlling interest share of loss from discontinued operations	—			248			626			67			540
Net income (loss)	32,517			(7,895		)	(5,550		)	(25,683		)	34,860
Net (income) loss attributable to non-controlling interests	—			—			(206		)	595			549
Net income (loss) attributable to Acorn Energy, Inc. shareholders	$	32,517		$	(7,895	)	$	(5,756	)	$	(25,088	)	$	35,409
Basic net income (loss) per share attributable to Acorn Energy, Inc. shareholders:
Income (loss) from continuing operations	$	3.31		$	(0.48	)	$	(0.02	)	$	(0.48	)	$	0.33
Discontinued operations	(0.01		)	(0.21		)	(0.48		)	(1.20		)	1.70
Net income (loss) per share attributable to Acorn Energy, Inc. shareholders	$	3.30		$	(0.69	)	$	(0.50	)	$	(1.68	)	$	2.03
Weighted average number of shares outstanding attributable to Acorn Energy, Inc shareholders - basic	9,848			11,374			11,445			14,910			17,462
Diluted net income (loss) per share attributable to Acorn Energy, Inc. shareholders:
Income (loss) from continuing operations attributable to Acorn Energy, Inc. shareholders	$	2.81		$	(0.48	)	$	(0.02	)	$	(0.48	)	$	0.32
Discontinued operations	(0.01		)	(0.21		)	(0.48		)	(1.20		)	$	1.67
Net income (loss) per share	$	2.80		$	(0.69	)	$	(0.50	)	$	(1.68	)	$	1.99
Weighted average number of shares outstanding attributable to Acorn Energy, Inc shareholders - diluted	12,177			11,374			11,445			14,910			17,743

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Selected Consolidated Balance Sheet Data:

	As of December 31,
	2007		2008		2009		2010		2011
	(in thousands, except per share data)
Working capital	$	13,843	$	13,838	$	16,220	$	14,599	$	60,217
Total assets	96,967		51,055		48,735		59,785		85,805
Short-term and long-term debt	4,995		3,591		635		1,610		818
Total Acorn Energy, Inc. shareholders’ equity	67,325		33,448		30,777		33,373		69,651
Non-controlling interests	—		2,675		5,321		8,504		(84		)
Total equity	67,325		36,123		36,098		41,877		69,567
Cash dividends paid per share	—		—		—		—		0.035

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

RECENT DEVELOPMENTS

Acquisition of OmniMetrix

On February 15, 2012, we entered into a definitive agreement pursuant to which we acquired, through our XYZ Holdings, Inc. wholly-owned Georgia subsidiary ("Holdings" which has been renamed OMX Holdings, Inc.), all of the issued and outstanding limited liability company membership interests (the "Interests") in OmniMetrix, LLC, a Georgia limited liability company ("OmniMetrix"). OmniMetrix is in the business of designing, manufacturing, marketing and selling (i) wireless remote systems that monitor standby power generation, backup power generators, remote powered equipment, cellular towers, emergency towered communications and remote tower sites, (ii) cathodic protection products to monitor pipeline integrity, and (iii) other wireless remote systems. Holdings purchased the Interests in OmniMetrix from its three individual holders in consideration for an aggregate cash payment of $8.5 million, subject to certain adjustments as provided in the definitive agreement. The acquisition of OmniMetrix adds to the Company's growing product lines of remote monitoring systems for aging energy infrastructure.

Acorn investment in USSI

On February 6, 2012, we entered into a new Stock Purchase Agreement (the “USSI Purchase Agreement”) with USSI pursuant to which we converted certain advanced funds ($2.5 million) into additional shares of USSI common stock (“USSI Common Stock”) and shares of USSI's new Series A-1 Preferred Stock (“USSI Preferred Stock”). We also made a further payment to USSI of $2.25 million on February 6, 2012 to purchase additional shares of USSI Preferred Stock, and we anticipate that we will purchase more shares of USSI Preferred Stock for an aggregate purchase price of $2.5 million at a future date. The USSI Preferred Stock provides that upon any future liquidation of USSI, to the extent funds are available for distribution to USSI's stockholders after the satisfaction of any USSI liabilities at that time, USSI would first repay us for the purchase price of our USSI Preferred Stock. Thereafter, we would receive a further payment for such shares ratably with all other USSI Common Stock holders as though our shares of USSI Preferred Stock were the same number of shares of USSI Common Stock.

We currently own approximately 87% of USSI, which would increase to approximately 92% if and when the second closing occurs. In connection with the USSI Purchase Agreement, we also agreed to permit USSI to establish a new 2012 Stock Plan (the “USSI 2012 Plan”) under which key employees, directors and consultants of USSI may receive options to purchase up to an aggregate of 1,180,000 shares of USSI Common Stock on such terms as the USSI 2012 Plan provides and as determined by USSI's board of directors or by such committee designated by USSI's board to administer the USSI 2012 Plan, if any. If options to purchase all shares of USSI Common Stock available under the USSI 2012 Plan are granted and exercised, and provided that we have made the additional $2.5 million USSI Preferred Stock purchase as contemplated by the USSI Purchase Agreement, we would own approximately 81% of USSI on a fully diluted basis.

Acorn investment in GridSense

In February, our Board of Directors committed to make up to a $2 million additional investment in our GridSense subsidiaries. We advanced the initial $1 million on February 29, 2012. We anticipate that these funds will be used to fund working capital. We expect to make an additional $1 million investment pursuant to this commitment later this year. We did not receive additional shares in connection with the foregoing as we already own 100% of their outstanding shares.

Acorn Dividend

On February 7, 2012, we announced that our Board of Directors approved a dividend of $0.035 per share to be paid on March 1, 2012 to common stockholders of record on February 20, 2012. The dividend is a continuation of our policy to pay a regular quarterly per share dividend of $.035 per quarter. On March 1, 2012, the total dividend payment was $618,000.

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OVERVIEW AND TREND INFORMATION

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

We operate in three reportable segments: Energy & Security Sonar Solutions (through our DSIT subsidiary), GridSense and USSI. In addition, our “Other” segment represents IT and consulting activities at our DSIT subsidiary.

The following analysis should be read together with the segment information provided in Note 22 to our Consolidated Financial Statements included in this report.

DSIT Solutions

In 2011, DSIT increased its focus on marketing and developing its energy and security sonar solutions and products; particularly its products related to underwater security for energy and other strategic sites. Revenue of our DSIT subsidiary decreased by $1.0 million, or 8%, from $11.5 million in 2010 to $10.5 million in 2011. The decrease was due to decreased revenue in the Energy & Security Sonar Solutions segment (from $10.2 million in 2010 to $9.1 million in 2011) while Other revenue (representing certain IT and consulting work performed by DSIT) increased slightly ($0.1 million). Fourth quarter 2011 revenue for DSIT was $3.8 million reflecting a significant increase (34%) over fourth quarter 2010 revenue of $2.8 million. Fourth quarter 2011 revenues were also well above (103%) third quarter 2011 revenues ($1.9 million). The increase in fourth quarter revenues was due to DSIT's recent receipt of its largest order ever ($12.3 million) for underwater security systems. The contract calls for the delivery of a large number of AquaShield™ Diver Detection Sonar (DDS) and PointShield™ Portable Diver Detection Sonar (PDDS) systems to protect offshore oil platforms, coastal energy terminals and high value vessels against underwater intrusion and sabotage. DSIT began delivery of the systems in the fourth quarter of 2011. DSIT's decreased revenues in 2011 compared to 2010 was due to the completion of an AquaShield™ DDS project in the end of 2010 without another project to replace those lost revenues. Furthermore, work on another AquaShield^TM DDS project slowed down in 2011 due to the delay in an expected follow-up order of a large expansion to the project changing the configuration of the already ordered DDS systems. The receipt of the recent $12.3 million order and delivery of systems in the fourth quarter reversed the trend of declining revenues for DSIT during 2011.

Gross profit in DSIT in 2011 was $3.7 million which reflects a decrease of $1.2 million or 24% from $4.9 million in 2010. DSIT’s gross profit of $1.5 million during the fourth quarter of 2011 represented a $0.5 million increase over DSIT’s gross profit in the fourth quarter of 2010. The decrease in the year-on-year gross profit was attributable to both decreased revenues and gross margins in DSIT’s Energy & Sonar Security projects.   The increase in DSIT’s quarter-on-quarter gross profit was due to the revenues recognized associated with the recent $12.3 million AquaShield^TM DDS systems order and the high margins associated with that order. Fourth quarter 2011 gross profit was also $1.1 million above third quarter 2011 gross profit ($0.4 million) due to the revenue recognized and associated with the aforementioned AquaShield^TM systems.

DSIT's gross margin in 2011 was 35%, down from 2010’s gross margin of 42%. This followed a slight decrease in its gross margin from 43% in 2009. The decrease in gross margin in 2011 was attributable to the slow-down of work on an AquaShield^TM DDS project which caused deterioration in the gross margin associated with that project. In addition, decreased margins in a number of non-Naval projects in our Energy & Sonar Security Solutions segment occurred when we encountered technological difficulties which caused greater than expected labor costs to bring those projects to completion. Fourth quarter 2011 gross margin was 39% as compared to 34% in the fourth quarter of 2010 and 20% in the third quarter of 2011. The increase in gross margins in the fourth quarter of 2011 was due to increased margins associated with the new project received in the fourth quarter of 2011.

During 2011, DSIT recorded approximately $3.1 million of selling, general and administrative ("SG&A") expense as compared to approximately $3.0 million recorded during 2010. The increase in DSIT SG&A expense is attributable to increased marketing costs ($0.2 million) which offset decreased other general and administrative costs.

DSIT recorded a net income of $0.1 million in 2011 ($1.1 million in 2010 and $1.3 million in 2009). The decrease of $1.0 million from 2010 to 2011 was due to the decreased gross profit (which resulted from lower revenues and gross margins) and increased developments costs ($0.2 million) and SG&A expenses ($0.1 million) which were partially offset by a decrease in income tax expenses ($0.5 million). DSIT’s backlog at December 31, 2011 was approximately $13.6 million of which it expects to recognize approximately $9.9 million in 2012. DSIT expects to show significant revenue growth in 2012 compared to 2011 due to revenue it expects to recognize on it recently received $12.3 million order and additional orders it expects to receive during 2012. DSIT's level of profitability in 2012 will be affected by anticipated increased development and marketing costs as DSIT

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looks to expand its product portfolio and its marketing activities.

Energy & Security Sonar Solutions

During 2009, 2010 and 2011, revenues from our Energy & Security Sonar Solutions segment in our DSIT subsidiary were $8.0 million, $10.2 million and $9.1 million, respectively, accounting for approximately 87% , 89% and 87% of DSIT’s revenues for 2009, 2010 and 2011, respectively. The balance of DSIT’s revenues of $1.2 million, $1.3 million and $1.4 million for the years ending December 31, 2009, 2010 and 2011 were derived from DSIT’s other IT and consulting activities.

This segment’s revenues decreased by $1.1 million or 11% in 2011 as compared to 2010. While in 2010, this segment’s revenues increased by $2.2 million or 27% as compared to 2009. The decrease in revenues was due to the completion of an AquaShield™ DDS project in the end of 2010 without another project to replace those lost revenues until the receipt of the recent $12.3 million order received in December 2011. Furthermore, work on another AquaShield^TM DDS project slowed down in 2011 due to the delay in an expected follow-up order of a large expansion to the project changing the configuration of the already ordered DDS systems.

Segment gross profit decreased in 2011 as compared to 2010 to $3.0 million from $4.4 million following an increase in 2010 from 2009 from $3.5 million in 2009 to $4.4 million in 2010. The decreased gross profit in 2011 as compared to 2010 was due to decreased revenues of our energy and sonar solutions products combined with reductions in gross margins which decreased from 43% in 2010 to 33% in 2011. The reduced margins in 2011 were caused the previously mentioned slow-down of work on an AquaShield^TM DDS project and decreased margins in a number of non-Naval projects.

We anticipate significant growth in sales in 2012, particularly from our acoustic and sonar solutions projects as a result of our increased backlog with our revenues from embedded hardware and software development projects expected to remain relatively stable.  We anticipate new customers from new regions (primarily Asia based) placing orders for our sonar and acoustic products in 2012. The level of DSIT's net income in 2012 will further depend on amounts we choose to invest in expanded research and development and marketing efforts.

GridSense

In 2011, GridSense continued to focus on delivering solutions that address the power quality and reliability needs of utilities.  Each of GridSense's main product lines (the Line IQ^™,Cable IQ^™,PowerMonic^™ and Transformer IQ^™) addresses different aspects of the power delivery system.  In addition to its existing product range, GridSense continues to invest in new technology which may lead to the commercialization of new products and revenue drivers for the business. GridSense intends to expand its transformer monitoring capabilities and is expected to launch derivative products related to the TransformerIQ^TM in future periods.

In accordance with applicable accounting standards, we began consolidating the results of GridSense beginning May 12, 2010, the date we acquired the outstanding GridSense shares not previously owned by us. Accordingly, full year results for 2010 and years prior were not included in Acorn's consolidated financial statements. In 2011, GridSense recorded revenues of $7.1 million, more than doubling 2010's full year revenues of $3.3 million. The increase of $3.8 million or 116% from 2010 to 2011 was primarily due to an order GridSense received in June 2011 from a leading electric utility in the Southeastern USA to use GridSense’s TransformerIQ^TM to monitor over 2,000 transformers in one metropolitan county of its service territory. This project is expected to be a showcase for Smart Grid distribution optimization demonstrating the scalability and impact of affordable monitoring solutions on electric reliability. The American Recovery and Reinvestment Act provided half the funding for this project.

In 2011, gross profit was $3.3 million compared with 2010's full year gross profit of $1.7 million representing an increase of $1.6 million or 94% from 2010 to 2011. The gross margin percentage decreased in 2011 to 47% compared to 53% in 2010. The decrease in gross margin was due to non-recurring production set up costs related to large initial production batch runs of certain products. In future periods, we expect the gross margin percentage to rebound to historical levels of 50% or greater.

     In 2011, GridSense's U.S. operations contributed approximately $3.7 million to GridSense's total revenue compared to approximately $1.2 million in 2010, an increase of over 200%. The increase in revenues is attributable to the June 2011 order GridSense received from a leading electric utility in the Southeastern USA to use its TransformerIQ^TM to monitor over 2,000 transformers. The order was completed in 2011. Australia operations contributed approximately $3.4 million of revenues in 2011 compared to $2.2 million in 2010, an increase of $1.1 million or 50%. The increase is attributable to the adoption of new products such as a new PowerMonic^TM version capable of remote communications which was launched during the year.

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GridSense’s full year revenues by main product lines for 2009, 2010 and 2011 are as follows:

	2009*		2010*		2011
	(in thousands of U.S dollars)
PowerMonic™	$	1,698	$	1,386	$	2,891
Line IQ™	1,230		1,116		1,187
Transformer IQ™	—		89		2,696
Other	681		724		345
Total	$	3,609	$	3,315	$	7,119

* 2009 revenues are prior to Acorn's acquisition of GridSense. 2010 revenues include revenues for the period prior to Acorn's acquisition of GridSense in May 2010.

Sales across all major product lines increased in 2011 compared to 2010. Management expects sales for all product lines to continue to grow as market conditions continue to improve. In 2011, Line IQ^™ sales represented 17% of GridSense's revenues while Transformer IQ^™ sales represented 38% of overall company sales. Management expects sales from both the Line IQ^™ and Transformer IQ^™ to represent a greater portion of overall sales in the future. These product lines are expected to drive sales growth for the company.

The Line IQ^™ product family has introduced a newly redesigned advanced sensor which improves both the functionality and price of its predecessor product. This new sensor will be available to customers during 2012. Due to the improved cost of deploying this line monitoring system, utilities will be able to justify larger scale roll-outs. Management expects increases in the size of deployment with existing Line IQ^™ users as well as adoption by new utility customers.

The Transformer IQ^™ was commercially introduced during 2010. During 2011, GridSense was awarded a sizeable order by a U.S. utility to monitor a fleet of over 2,000 transformers, validating the technology and market demand. Since fulfillment of this large order, GridSense has generated traction with other utility customers involving various applications of transformer monitoring. Management expects growth from new customers as a number of prospective utility customers are in various stages of evaluating TransformerIQ^TM in pilots or trials. In addition, increased marketing and sales efforts is expected to expand GridSense's market penetration.

USSI

In 2011, USSI continued to focus on customer “proof-of-concept” contracts for its major product lines. In particular, USSI had revenue related to “proof-of-concept” contracts for its 4D reservoir and shale gas monitoring, from fiber optic perimeter security systems and government contract revenue from fiber optic underwater security system development for diver detection.

In 2011, full year revenues were $1.3 million compared to $0.4 million in 2010. The increase of $0.9 million or 196% from 2010 to 2011 was due primarily to the interest of the oil and gas market in entering into “proof-of-concept” contracts for USSI's downhole and marine seismic products.

USSI's full year revenues by main markets for 2010 and 2011 are as follows:

	2010*		2011
	(in thousands of U.S dollars)
Oil & Gas	$	120	$	955
Commercial Security	106		226
Defense	219		135
Total	$	445	$	1,316

* 2010 revenues include revenues for the period prior to Acorn's effective acquisition of USSI in February 2010.

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In 2011, full year gross profit was a negative $98,000 compared to a positive $48,000 in 2010. The decline is primarily due to increased engineering and production costs as USSI transitions from development of its products to production. USSI is currently engaged in developing cost cutting measures for the manufacturing of its commercial products, including investment in equipment that will make manufacturing more efficient and improving the production process that will ultimately result in less man-hours required for each product sold. Furthermore, USSI expects that its gross margin will grow as it benefits from allocating its fixed costs over a larger revenue base and as it begins to utilize lower cost personnel in its production.

We anticipate significant growth in revenues in 2012, particularly from new customers related to our 4D reservoir & shale gas monitoring systems following the numerous demonstrations scheduled for early 2012 as well as follow-on projects from our existing 2011 "proof-of-concept" projects, each of which has the potential for annual multi-million dollar follow-up orders. We also anticipate significantly increased costs as we have grown our employee base from seven at the end of 2010 to 28 full-time employees (including eight full-time consultants) as of December 31, 2011. USSI expects to continue to grow its Engineering and Operations staff into 2012.

CoaLogix

On August 31, 2011, Acorn completed the sale of its majority owned CoaLogix Inc. subsidiary (“CoaLogix”) pursuant to which Acorn and the other owner of CoaLogix sold all the outstanding capital stock of CoaLogix for $101 million (subject to certain adjustments) in cash.  Acorn owned approximately 65% of CoaLogix on a fully diluted basis and received $61.9 million in consideration for its CoaLogix shares, of which $6.0 million was deposited in an escrow account to secure possible indemnification claims which Acorn expects to be released by August 31, 2012 and $347,000 which was deposited in an escrow account against a possible working capital shortfall and which was released to Acorn in the fourth quarter of 2011.

In connection with the sale of Acorn's shares of the common stock of CoaLogix, Acorn recorded a gain of $47.0 million (included in the gain is approximately $485,000 which was received as part of an additional working capital adjustment in the fourth quarter of 2011). Acorn also recorded income taxes of approximately $16.0 million based on a Federal income tax rate of 34%. The net gain of $31.0 million is reflected in Acorn's Condensed Consolidated Statement of Operations as a “Gain on the sale of discontinued operations, net of income taxes”.

Coreworx

On November 9, 2010, following a decision by Acorn's board of directors to cease providing funding for Coreworx, Acorn entered into a letter of intent with Coreworx for Acorn to sell all of its common stock in Coreworx to a management buyout group consisting of Coreworx’ management and certain employees and other investors.  The management buyout transaction was consummated on December 17, 2010, following which Acorn retained a 10% interest in Coreworx, warrants to acquire an additional 10% of Coreworx, $4.0 million of Coreworx debt and a $40,000 restructuring fee due from Coreworx on July 1, 2011. Acorn did not attribute any value to any of the above on its financial statements of December 31, 2010.

On October 31, 2011, Acorn sold its 10% stake in Coreworx and the entire $4.0 million of Coreworx debt, its right to royalties and the $40,000 restructuring fee (which was at the time still unpaid) back to Coreworx for $100,000. The Company recorded a $64,000 gain (net of income taxes of $34,000) on the transaction in Gain on the sale of discontinued operations, net of income taxes in the Company's Consolidated Statements of Operations. Acorn still retains its warrants to acquire 10% of Coreworx and continues not to ascribe any value to those warrants.

Corporate

Corporate general and administrative expense in 2011 reflected a $0.4 million decrease to $3.9 million as compared to $4.3 million of expense in 2010.  The decrease in corporate general and administrative expense in 2011 is primarily attributable to decreased professional fees associated with certain 2010 activities (an SEC inquiry regarding our sales of Comverge stock, a registered direct offering and our acquisitions and dispositions), as well as decreased compensation costs primarily attributable to reduced stock compensation expense in 2011. These decreases were partially offset by increased investor relations costs. Fourth quarter corporate general and administrative expense of $1.4 million reflected a $0.4 million increase as compared to the third quarter corporate general and administrative expense primarily due to corporate bonuses. We expect our annual corporate general and administrative costs to increase in 2012 as compared to 2011. We anticipate increasing our investor relation costs as well as incurring increasing personnel costs associated with compensation increases. We have hired a Senior Director of External Relations who is available to assist our subsidiaries with marketing and, in the case of our U.S. subsidiaries, certain legislative and other governmental relations matters. We have also retained one of our directors as a paid consultant to work with our operating companies in developing and monitoring their business plans, provide investor relations services in Europe and help identify acquisition and partnership opportunities.

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CRITICAL ACCOUNTING POLICIES

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

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

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

Principles of Consolidation and Investments in Associated Companies

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

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

In the year ending December 31, 2010, we began consolidating the results of USSI effective February 23, 2010 following the signing of option agreements with USSI and certain shareholders of USSI whereby we received options to acquire up to 87% of the company (see Note 4(b) to our Consolidated Financial Statements). We also began consolidating the results of GridSense on May 12, 2010 following our acquisition of the approximately 70% of the company we did not previously own (see Note 4(a) to our Consolidated Financial Statements). On December 17, 2010, we ceased consolidating the results of Coreworx following the sale of all of our common stock in the company to a management buyout group consisting of Coreworx’ management and certain employees and other investors (see Note 5(b) to our Consolidated Financial Statements).  On August 31, 2011, we ceased consolidating the results of CoaLogix following the sale of all of our common stock in the company (see Note 3(b) to our Consolidated Financial Statements). The results of CoaLogix and Coreworx are presented as discontinued operations for all the periods since our acquisition of them in November 2007 and August 2008, respectively.

Business combination accounting

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

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Goodwill and Intangibles

As a result of our various acquisitions, we have recorded goodwill and various amortizable intangible assets. Businesses acquired are recorded at their fair value on the date of acquisition. The excess of the purchase price over the fair value of assets acquired and liabilities assumed is recognized as goodwill.

Our goodwill at December 31, 2011 was approximately $4.6 million representing approximately 5.4% of our total assets. Our goodwill is allocated to our segments as follows: Energy & Security Sonar Solutions – approximately $0.5 million, GridSense – approximately $2.7 million and USSI – approximately $1.4 million.

Our intangible assets that have finite useful lives recorded at fair value at the time of the acquisition, and are carried at such value less accumulated amortization. Our net intangible asset balance at December 31, 2011 was approximately $4.8 million representing approximately 5.6% of our total assets. The composition of our intangible assets at December 31, 2011 consisted of Naval Technologies in our Energy & Security Sonar Solutions segment ($0.2 million, net of accumulated amortization), Software and Customer Relationships in our GridSense segment ($2.2 million, net of accumulated amortization) and Sensor Technologies in our USSI segment ($2.3 million, net of accumulated amortization). We amortize these intangible assets on a straight-line basis over their estimated useful lives.

We review our goodwill for impairment annually at the reporting unit level in the fourth quarter of each fiscal year. Each of our reportable operating segments (Energy & Security Sonar Solutions, GridSense and USSI) is deemed to be a reporting unit.  These reporting units have been identified based on appropriate accounting principles, which considers, among other things, the manner in which we operate our business and the availability of discrete financial information. Assets acquired and liabilities assumed are assigned to a reporting unit as of the date of acquisition. In the event we reorganize our business, we reassign the assets (including goodwill) and liabilities among the affected reporting units. Our corporate activities and those relating to our non-reporting segment are not assigned to our reporting units. We periodically review these reporting units to ensure that they continue to reflect the manner in which the business is operated.

We also analyze whether any indicators of impairment for goodwill and intangibles exist each quarter. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include a sustained, significant decline in our share price and market capitalization, a decline in our expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition, the testing for recoverability of our long-lived assets, and/or slower growth rates, among others.

In September 2011, the Financial Accounting Standards Board (“FASB”) issued guidance that simplified how entities test for goodwill impairment. This guidance permits entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a two-step goodwill impairment test. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, and early adoption is permitted. As discussed more fully in Note 12(a) to the Consolidated Financial Statements, we early adopted this guidance for our annual goodwill impairment test that was conducted in the fourth quarter of 2011.

If we had determined that was necessary to perform a two-step goodwill impairment test, we would determine the fair value of each reporting unit and compare it to the carrying amount of the reporting unit.  Calculating the fair value of the reporting units requires significant estimates and assumptions by management.  To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit, there is an indication that the reporting unit goodwill may be impaired and a second step of the impairment test is performed to determine the amount of the impairment to be recognized, if any.

The first step of our annual evaluation in the two-step goodwill impairment test is to compare the estimated fair value of our reporting units to their respective carrying values to determine whether there is an indicator of potential impairment. If the carrying amount of a reporting unit exceeds its estimated fair value, we conduct a second step, in which we calculate the implied fair value of goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the calculated implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. The fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets such as the assembled workforce) as if the reporting unit had been acquired in a business combination at the date of assessment and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.

We estimate the fair value of our reporting units using discounted expected future cash flows.  We perform a valuation analysis, utilizing an income approach in our goodwill assessment process. The following describes the valuation methodology

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typically used to derive the fair value of our reporting units. 

Income Approach: To determine each reporting unit’s estimated fair value, we discount the expected cash flows of our reporting units. We estimate our future cash flows after considering current economic conditions and trends; estimated future operating results, growth rates, anticipated future economic and regulatory conditions; and the availability of necessary technology. The discount rate used represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in our operations and the rate of return an outside investor would expect to earn. To estimate cash flows beyond the final year of our model, we use a terminal value approach. Under this approach, we use estimated operating income before depreciation and amortization in the final year of our model, adjust it to estimate a normalized cash flow, apply a perpetuity growth assumption and discount by a perpetuity discount factor to determine the terminal value. We incorporate the present value of the resulting terminal value into our estimate of fair value.

The preparation of the long-range forecasts, the selection of the discount rates and the estimation of the multiples used in valuing the terminal year involve significant judgments. Changes to these assumptions could affect the estimated fair value of our reporting units and could result in a goodwill impairment charge in a future period.

For 2011, as required, the Company performed an annual impairment test of recorded goodwill (during the fourth quarter of each year), or more frequently if impairment indicators or triggering events are present. As previously noted, in September 2011, the FASB issued guidance that simplified how entities test for goodwill impairment by permitting entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a two-step goodwill impairment test. We early adopted this guidance for our annual goodwill impairment test that was conducted in the fourth quarter of 2011. 

In performing the 2011 goodwill impairment test for each of our reporting units, we assessed the relevant qualitative factors and concluded that it is more likely than not that the fair values of our reporting units are greater than their carrying amounts. After reaching this conclusion, no further testing was performed. The qualitative factors we considered included, but were not limited to, general economic conditions, industry and market conditions, pipeline and backlog, our recent and projected financial performance and the price of the Company's common stock.

Revenue Recognition

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

In the year ended December 31, 2011, we recorded approximately $10.5 million of revenues representing approximately 55% of our consolidated revenues in our DSIT subsidiary.  In 2011, DSIT derived approximately $8.9 million or 85% of its revenues from fixed-price type contracts.  Fixed-price type contracts require the accurate estimation of the cost, scope and duration of each engagement.  Revenue and the related costs for these projects are recognized for a particular period, using the percentage-of-completion method as costs (primarily direct labor) are incurred, with revisions to estimates reflected in the period in which changes become known.  If we do not accurately estimate the resources required or the scope of work to be performed, or do not manage our projects properly within the planned periods of time or satisfy our obligations under the contracts, then future revenue and margins may be significantly and negatively affected and losses on existing contracts may need to be recognized.  Any such resulting changes in revenues and reductions in margins or contract losses could be material to our results of operations.

In 2011, GridSense recorded approximately $7.1 million of revenue representing approximately 38% of our consolidated revenue for the year.

Revenue from sales of GridSense monitoring equipment is recognized at the time title to the equipment and significant risks of ownership pass to the customer (which is generally upon shipment), when all significant contractual obligations have been satisfied and collection is reasonably assured. Revenue from customer support services on monitoring equipment includes sales of parts and servicing of equipment. Sales of parts revenue is recognized when the parts are shipped to the customer or when the part is installed in the customer's equipment. Servicing of equipment revenue is recognized as the related service work is performed.

In 2011, USSI recorded approximately $1.3 million of revenue representing approximately 7% of our consolidated revenue for the year.

     Revenue from sales of USSI equipment is recognized at the time title to the equipment and significant risks of ownership pass to the customer (which is generally upon shipment), when all significant contractual obligations have been satisfied and collection is reasonably assured.

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Foreign Currency Transactions

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

DSIT’s functional currency is the New Israeli Shekel (“NIS”) while GridSense’s functional currency for its Australian operations is the Australian dollar (“AUS$”). In the year ended December 31, 2011, 55% of our consolidated revenues (80% and 100% in the years ended December 31, 2010 and 2009, respectively) came from our DSIT subsidiary while 18% of our consolidated revenue in the year ended December 31, 2011 (11% in the year ended December 31, 2010) came from GridSense’s Australian subsidiary. Their financial statements have been translated using the exchange rates in effect at the balance sheet date.  Statements of operations amounts have been translated using the average exchange rate for the year or the specific exchange rate on the date of a specific transaction.  All exchange gains and losses denominated in non-functional currencies are reflected in finance expense, net in the consolidated statement of operations when they arise.

Stock-based Compensation

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

The expected volatility factor used to value stock options in 2011 was based on the historical volatility of the market price of the Company’s common stock over a period equal to the estimated weighted average life of the options.  For the expected term of the option, we used an estimate of the expected option life based on historical experience. The risk-free interest rate used is based upon U.S. Treasury yields for a period consistent with the expected term of the options.  Historically, we had not paid dividends up until the decision by our Board in October 2011 to pay a quarterly dividend of $0.035 beginning in November 2011. Accordingly, our expected dividend rate was zero for all option grants prior to October 2011. Subsequent to the declaration of the quarterly dividend, our expected dividend rate was approximately 2.7%.  We recognize stock-based compensation expense on an accelerated basis over the requisite service period.  Due to the numerous assumptions involved in calculating share-based compensation expense, the expense recognized in our consolidated financial statements may differ significantly from the value realized by employees on exercise of the share-based instruments.  In accordance with the prescribed methodology, we do not adjust our recognized compensation expense to reflect these differences.  Recognition of stock-based compensation expense had, and will likely continue to have, a material effect on our selling, general and administrative and other items within our consolidated statements of operations and also may have a material effect on our deferred income taxes and additional paid-in capital line items within our consolidated balance sheets.  We are also required to use judgment in estimating the amount of stock-based awards that are expected to be forfeited.  If actual forfeitures differ significantly from the original estimate, stock-based compensation expense and our results of operations could be materially impacted.

For each of the years ended December 31, 2011, 2010 and 2009, we incurred stock compensation expense with respect to options of approximately $0.4, $0.7 million and $0.7 million, respectively.

See Note 18(d) the consolidated financial statements for the assumptions used to calculate the fair value of share-based employee compensation.

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RESULTS OF OPERATIONS

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

	Year ended December 31,
	2007		2008		2009		2010		2011
Revenues	100	%	100	%	100	%	100	%	100	%
Cost of sales	73		68		57		58		63
Gross profit	27		32		43		42		37
Research and development expenses	9		3		5		7		16
Selling, general and administrative expenses	103		76		62		73		63
Impairments	2		44		1		8		—
Operating loss	(87	)	(91	)	(25	)	(46	)	(42	)
Finance expense, net	(33	)	(35	)	(1	)	(2	)	—
Gain on early redemption of convertible debentures	—		15		—		—		—
Gain on sale of shares in Comverge	476		107		15		—		—
Gain on IPO of Comverge	332		—		—		—		—
Loss on private placement of equity investments	(1	)	—		—		—		—
Gain on investment in GridSense	—		—		—		9		—
Dividends received from EnerTech	—		—		—		1		—
Gain on sale of HangXing	—		—		—		—		3
Loss on sale of EnerTech	—		—		—		(13	)	—
Income (loss) from operations before taxes on income	687		(3	)	(10	)	(50	)	(40	)
Income tax benefit (expense)	9		(4	)	8		(5	)	67
Income (loss) from operations of the Company and its consolidated subsidiaries	696		(7	)	(3	)	(55	)	27
Share of income (losses) in Paketeria	(25	)	(19	)	3		—		—
Share of losses in GridSense	—		(11	)	(1	)	—		—
Share of losses in Comverge	—		—		—		—		—
Income (loss) from continuing operations	672		(37	)	(1	)	(55	)	27
In-process research and development expense recorded in acquisition of discontinued operation	—		(30	)	—		—		—
Loss from discontinued operations, net of income taxes	(3	)	(32	)	(66	)	(126	)	(10	)
Gain on the sale of discontinued operations, net of income taxes	—		—		—		—		164
Non-controlling interest share of loss from discontinued operations	—		3		7		—		3
Net income (loss)	669		(96	)	(60	)	(181	)	184
Net income (loss) attributable to non-controlling interests	—		—		(2	)	4		3
Net income (loss) attributable to Acorn Energy, Inc.	669		(96	)	(62	)	(177	)	187

The following table sets forth certain information with respect to revenues and profits of our reportable business segments for the years ended December 31, 2011, 2010 and 2009, including the percentages of revenues attributable to such segments.  (See Note 22 to our consolidated financial statements for the definitions of our reporting segments).  The column marked “Other” aggregates information relating to miscellaneous operating activities in our DSIT subsidiary, which may be combined for reporting under applicable accounting principles.

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	Energy & Security Sonar Solutions			GridSense				USSI			Other			Total
Year ended December 31, 2011:
Revenues from external customers	$	9,104		$	7,119			$	1,316		$	1,389		$	18,928
Percentage of total revenues from external customers	48		%	38		%		7		%	7		%	100		%
Segment gross profit	3,019			3,327				(98		)	665			6,913
Depreciation and amortization	220			375				224			28			847
Stock compensation expense	—			—				—			—			—
Segment net income (loss) before income taxes	(244		)	(1,448		)		(2,775		)	298			(4,169		)
Year ended December 31, 2010:
Revenues from external customers	$	10,179		$	2,382			$	405		$	1,278		$	14,244
Percentage of total revenues from external customers	71		%	17		%		3		%	9		%	100		%
Segment gross profit	4,380			1,172				23			469			6,044
Depreciation and amortization	172			242				141			23			578
Stock compensation expense	42			—				—			—			42
Impairments	—			1,166				—			—			1,166
Segment net income (loss) before income taxes	1,488			(2,852		)	*	(1,191		)	77			(2,478		)
Year ended December 31, 2009:
Revenues from external customers	$	7,985		$	—			$	—		$	1,234		$	9,219
Percentage of total revenues from external customers	87		%	—				—			13		%	100		%
Segment gross profit	3,540			—				—			415			3,955
Depreciation and amortization	189			—				—			25			214
Stock compensation expense	2			—				—			—			2
Impairments	—			—				—			—			—
Segment net income before income taxes	1,051			—				—			64			1,115

* includes the impairment charge of $1,166

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2011 COMPARED TO 2010

Revenues.  Revenues increased by $4.7 million or 33% to $18.9 million in 2011 as compared to revenues of $14.2 million in 2010.   DSIT’s revenue decreased $1.0 million (8%) from $11.5 million to $10.5 million. GridSense's revenue for 2011 was $7.1 million compared to $2.4 million in 2010 since we began consolidating results in May 2010. USSI's revenue for 2011 was $1.3 million compared to $0.4 million in 2010 since we began consolidating its results in February 2010.

The decrease in DSIT's Energy & Security Sonar Solutions revenues was due to decreased revenue from DSIT's AquaShield^™ projects which resulted from a project which was completed in late 2010. GridSense's increased revenue were attributable to increased revenue in both its U.S and Australian operations. The increased revenue in its U.S. operations was due to an order GridSense received in June 2011 from a leading electric utility in the Southeastern USA to use GridSense's TransformerIQ^TM to monitor over 2,000 transformers in one metropolitan county of its service territory. The increased revenues in its Australian operations was attributable to the adoption of new products such as a new PowerMonic^TM version capable of remote communications which was launched during the year. USSI's increase in revenues was attributable to its receipt and delivery on several "proof-of-concept" projects for its major product lines (4D reservoir & shale gas monitoring, fiber optic perimeter security systems and underwater security systems for diver detection) throughout 2011.

Gross profit.  Gross profit in 2011 increased by $0.9 million or 14%, to $6.9 million from $6.0 million in 2010. DSIT recorded decreased gross profits (approximately $1.2 million or 24%). GridSense's gross profit for 2011 was $3.3 million compared to $1.2 million in 2010 since we began consolidating its results in May 2010. USSI's gross profit for 2011 was a negative $98,000 compared to a marginal gross profit of $23,000 in 2010 since we began consolidating its results in February 2010.

The decrease in DSIT gross profits was attributable to both decreased revenues and a decrease in consolidated gross margins from 42% in 2010 to 35% in 2011. DSIT's decline in gross margins was due to the slow-down of work on an AquaShield^TM DDS project which caused deterioration in the gross margin associated with that project as well as decreased margins in a number of non-Naval projects in our Energy & Sonar Security Solutions segment which encountered technological difficulties to bring those projects to completion. GridSense's increase in gross profits was wholly attributable to its increased revenues as its gross margin declined slightly from 49% in 2010 to 47% in 2011. GridSense's decreased gross margin is due to non-recurring production set up costs related to large initial production batch runs of certain products. USSI's negative gross profit in 2011 is due to negative margins incurred as it works through its “proof-of-concept” contracts and as it transitions from development to production.

Research and development expenses (“R&D”).  R&D of $3.0 million in 2011 reflects an increase of $2.0 million or 210% as compared to 2010's R&D of $1.0 million. Our R&D reflects significant increases by both GridSense and USSI who recorded R&D of $1.4 million and $1.1 million, respectively, in 2011 compared to $0.3 million and $0.4 in 2010 in the period after our acquisition of them.

Selling, general and administrative expenses (“SG&A”).  SG&A increased by $1.5 million from $10.4 million in 2010 to $11.9 million in 2011. DSIT’s SG&A costs in 2010 increased by $0.1 million to $3.1 million in 2011. Corporate general and administrative costs decreased by $0.4 million in 2011 compared to 2010 to $3.9 million. In addition, our 2011 SG&A includes full year SG&A costs by GridSense and USSI ($3.4 million and $1.6 million, respectively) whereas 2010's SG&A costs ($2.3 million and $0.8 million, respectively) were only for the period following our acquisition of them.

DSIT’s increased SG&A costs primarily reflect increased marketing costs. Decreased corporate general and administrative costs primarily reflect decreased professional fees associated with certain 2010 activities as well as decreased compensation costs primarily attributable to reduced stock compensation expense in 2011. SG&A costs at GridSense were relatively unchanged on a pro-rata basis, while increased SG&A costs at USSI were primarily driven by the growth of the company's infrastructure to handle anticipated sales growth.

Gain on sale of HangXing. In March 2011, we sold our 25% interest in HangXing International Automation Engineering Co. Ltd. (“HangXing”) back to the majority owner, China Aero-Polytechnology Establishment for $492,000. Our investment of approximately $250,000 in HangXing was made in 1995. The investment was entirely written-off in 1999.

Income tax benefit (expense). In 2011, the $12.8 million of income tax benefit recorded is primarily due to the release of a valuation allowance on previously reserved deferred tax assets of approximately $14.6 million of deferred tax assets as a result of the current period taxable gain on the sale of CoaLogix. The deferred tax assets were primarily related to recognition of previous years’ net losses. This was offset by current tax expense of approximately $1.8 million.

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Loss from discontinued operations, net of income taxes. In December 2010, we entered into an agreement to sell all of our common stock in Coreworx to a management buyout group consisting of Coreworx’ management and certain employees and other investors. As a result, all of Coreworx’ activity for 2010 (a net loss of $19.5 million) is presented as a loss from discontinued operations, net of income taxes as is the $1.8 million gain we recorded on the deconsolidation of Coreworx. In addition, as a result of the sale of all of our common stock in CoaLogix, all of CoaLogix’ activity for 2011 (a net loss prior to attribution to non-controlling interests) of $1.9 million and $0.3 million for the years ended December 31, 2011 and 2010, respectively, are also presented as a loss from discontinued operations, net of income taxes.

Gain on the sale of discontinued operations, net of income taxes. In August 2011, we completed the sale of our majority owned CoaLogix Inc. subsidiary pursuant to a Stock Purchase Agreement with EnerTech Capital Partners III L.P., certain management employees of the CoaLogix subsidiary (collectively with the Company, the "Sellers"), CoaLogix and CoaLogix Holdings, Inc. (the "Buyer"), pursuant to which the Sellers sold all the outstanding capital stock of CoaLogix to the Buyer for $101 million (subject to certain adjustments) in cash. We received approximately $61.9 million in consideration for our CoaLogix shares, of which approximately $6.3 million was deposited into various escrow accounts, of which approximately $0.3 million was released in the fourth quarter of 2011 and the balance is expected to be released in the third quarter of 2012. During the fourth quarter of 2011, we recorded an additional gain on the sale of CoaLogix of approximately $0.5 million following our receipt of an additional $0.5 million as part of a working capital adjustment. In connection with the sale of our shares of the common stock of CoaLogix, we recorded a net gain of approximately $31.0 million (a gain of $47.0 million net of income taxes of $16.0 million).

Net income (loss). We had net income of $35.4 million in 2011 compared with net loss of $25.1 million in 2010. Our net income in 2011 attributable to gains of $31.0 million and $0.5 million recorded on the sales of CoaLogix and HangXing, respectively. Those gains were offset by losses from our operating companies, corporate operating and tax expenses and losses recorded with respect to discontinued operations of our former CoaLogix subsidiary. GridSense and USSI losses for the year were $1.4 million and $2.8 million, respectively. In addition we recorded corporate operating expenses of $3.9 million and losses from discontinued operations of $1.9 million. Those losses were partially offset by an income tax benefit of $12.8 million, DSIT's income of $0.1 million, the non-controlling interest share of our subsidiary losses of $0.5 million and the non-controlling interest share of CoaLogix losses of $0.5 million.

2010 COMPARED TO 2009

Revenues.  Revenues increased by $5.0 million or 55% to $14.2 million in 2010 as compared to sales of $9.2 million in 2009.  DSIT’s revenue increased $2.2 million (24%) from $9.2 million to $11.5 million. Our 2010 sales also include $2.4 million and $0.4 million of sales by our GridSense and USSI subsidiaries whose results since our acquisition are included in our results for 2010. The increase in DSIT's Energy & Security Sonar Solutions revenues was due to increased revenues from DSIT's AquaShield^™ projects.

Gross profit.  Gross profit in 2010 increased by $2.1 million or 53%, to $6.0 million from $4.0 million in 2009. DSIT recorded increased gross profit ($0.9 million or 23% ). Our 2010 gross profit also includes $1.2 million of gross profit by our GridSense subsidiary whose results since our acquisition are included in our results for 2010. USSI’s contribution to our gross profit since our acquisition of it was negligible. The increase in DSIT gross profit were almost wholly attributable to the increase in sales as gross margins decreased slightly. Consolidated gross margin at DSIT was 42% in 2010, a slight decrease from 43% in 2009.

Research and development expenses (“R&D”).  R&D of $1.0 million in 2010 reflects an increase of $0.5 million or 111% as compared to 2009. Our 2010 R&D includes $0.3 million and $0.4 million of R&D by our GridSense and USSI subsidiaries whose results since our acquisition are included in our results for 2010.

Impairments. During 2010, we recorded a non-cash impairment charge of $1.2 million. The 2010 impairment was with respect to previously recorded goodwill associated with our GridSense subsidiary. The impairment was recorded following our annual impairment analysis which is performed in the fourth quarter.

Selling, general and administrative expenses (“SG&A”).  SG&A increased from $5.7 million in 2009 by $4.7 million to $10.4 million in 2010. DSIT’s SG&A costs in 2010 increased by $0.6 million as compared to 2009. Corporate general and administrative costs increased by $1.0 million in 2010 compared to 2009. In addition, our 2010 SG&A includes $2.3 million and $0.8 million of SG&A by our GridSense and USSI subsidiaries whose results since our acquisition are included in our results for 2010.

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DSIT’s increased SG&A costs primarily reflect increased marketing costs as well as increased salary costs and non-recurring provisions recorded associated with salary adjustments. Increased corporate general and administrative costs reflect bonuses recorded in the first half of 2010 combined with increased administrative and salary costs and professional and investor relation fees.

Loss on sale of EnerTech.  In December 2010, we sold our investment in EnerTech and received proceeds of approximately $1.1 million. We recorded a loss of approximately $1.8 million on the sale. As a result of the sale, we no longer have any commitment to fund capital calls in EnerTech.

Loss from discontinued operations, net of income taxes.  On December 17, 2010, we entered into an agreement to sell all of our common stock in Coreworx to a management buyout group consisting of Coreworx’ management and certain employees and other investors.  As a result, all of Coreworx’s net activity for 2010 (a loss of $19.5 million) through that date which includes a charge of $9.5 million with respect to the impairment of the goodwill and intangibles associated with Coreworx. In addition, we recorded a gain of $1.8 million on the disposition of Coreworx which is comprised of a gain of $5.9 million on the deconsolidation of Coreworx assets and liabilities less a full provision on Coreworx debt of $4.0 million due to us from Coreworx following the management buyout transaction and an estimated $0.1 million of legal fees. In addition, as a result of the sale of all of our common stock in CoaLogix, all of CoaLogix’ activity for 2010 (a net loss prior to attribution to non-controlling interests) of $0.3 million for the year ended December 31, 2010, is also presented as a loss from discontinued operations, net of income taxes.

Net loss.  We had a net loss of $25.1 million in 2010 compared with net loss of $5.8 million in 2009. Our loss in 2010 was primarily due to losses associated with our former Coreworx’ subsidiary which are reflected in discontinued operations ($19.5 million of losses is losses from discontinued operation partially offset by the gain of $1.8 million on the deconsolidation of Coreworx) as well as CoaLogix losses of $0.3 million which are also included in losses from discontinued operations. In addition, we also recorded losses in GridSense and USSI since our acquisition of them of $3.0 million (which includes a non-cash $1.2 million impairment charge against goodwill) and $1.2 million, respectively, corporate expenses of $4.3 million and a loss of $1.8 million on the sale of our EnerTech investment which were partially offset by net income from our DSIT subsidiary of $1.1 million, $0.7 million of non-controlling interests’ share in our losses and a gain of $1.3 million we recorded with respect to the step-up of the previous carrying value of our investment in GridSense to fair value in accordance with generally accepted accounting principles for step acquisitions.

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LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2011, we had working capital of $60.2 million, including $34.3 million of cash and cash equivalents, short-term deposits of $18.0 million, $6.0 million of funds held in escrow and current restricted deposits of $2.2 million . Net cash and cash equivalents increased during the year ended December 31, 2011 by $27.7 million. Approximately $7.8 million was used in operating activities of our continuing operations during the year.

The primary use of cash in our operating activities during the year ended December 31, 2011 was the cash used in operations by our USSI and GridSense subsidiaries ($2.8 million and $1.8 million, respectively) combined with the approximately $5.7 million of cash used in our corporate operating activities. The $5.7 million of cash used in our corporate activities includes tax payments of approximately $2.1 million on our expected taxable income for 2011.These uses of cash were partially offset by the $2.5 million of cash provided by DSIT's operating activities during the year.

Net cash provided by investment activities of $36.6 million was primarily from the proceeds from the sale of our interest in CoaLogix ($62.1 million of which $6.3 million was placed in escrow and $0.3 million was subsequently released in 2011) and the sale of our interest in HangXing ($0.5 million) . This was partially offset by $18.0 million that was placed in short-term deposits, $0.5 million which was used for the acquisition of property and equipment during the year and $1.1 million (net) of new restricted deposits during the period.

Net cash of $1.2 million was used in financing activities, primarily from the repayment of both long and short-term debt (net of long-term debt borrowings) of $0.8 million and our dividend payment in November 2011 of $0.6 million. This was partially offset by proceeds from the exercise of options ($0.2 million).

At December 31, 2011, DSIT had approximately $1.0 million in Israeli credit lines available to it from two Israeli banks (approximately $523,000 from each bank), of which approximately $0.5 million was then being used.  DSIT’s credit lines at one bank expires on September 4, 2012. The line of credit at the second bank formally expired on February 29, 2012. DSIT continues to obtain credit from the bank and is currently negotiating terms of renewal. The credit lines at the bank whose term expired in February 2012 are expected to be renewed for another year at terms similar to current terms. The lines of credit are denominated in NIS and bear interest at a weighted average rate of the Israeli prime rate per annum plus 2.5%.  The Israeli prime rate fluctuates and as of December 31, 2011 was 4.25% .  The lines-of-credit are subject to maintaining certain financial covenants. At December 31, 2011, DSIT was in compliance with its financial covenants. Acorn has a floating lien and provided guarantees with respect to DSIT’s outstanding lines of credit.

As at December 31, 2011, DSIT also has an outstanding term loan from an Israeli bank in the amount of approximately $275,000. The loan is denominated in NIS and bears interest at the rate of the Israeli prime rate per annum plus 0.9%. The loan is to be repaid over the next 24 months in equal payments of approximately $12,000 per month (principal and interest).

As collateral for the term-loan, DSIT has deposited with an Israeli bank approximately $78,000 as a non-current restricted deposit. In addition to this restricted deposit, DSIT has also deposited with two Israeli banks approximately $2.5 million as collateral for various performance and bank guarantees for various projects as well as for its credit facilities at the banks. DSIT expects that most of these deposits will be released during 2012 ($2.2 million are recorded as current restricted deposits), but expects to redeposit a majority of these funds again as collateral for new guarantees for new projects and for renewing its credit facilities.

On February 29, 2012, DSIT had approximately $2.3 million of cash of which $2.2 million was restricted ($1.9 million current and $0.3 million non-current) and was utilizing approximately $0.7 million of its lines-of-credit.  We believe that DSIT will have sufficient liquidity to finance its activities from cash flows from its own operations over the next 12 months.  This is based on continued utilization of its line-of-credit and expected continued improvement of operating results from anticipated growth in sales.

As of February 29, 2012, GridSense had approximately $1.0 million cash on hand following Acorn's transfer of $1.0 million for working capital (see Recent Developments). During the 2011 calendar year, Acorn provided GridSense with approximately $2.2 million for its working capital needs. Due to seasonality and the budget cycles of utility customers, GridSense expects its operations to be cash-flow negative in certain quarters and cash flow neutral or positive in other quarters. In order to attempt to accelerate its growth, GridSense may require additional working capital. In the long-term, while GridSense continues to have a strong sales pipeline, and we believe that it will be able to replicate large-scale projects similar to the TransformerIQTM project in the future, the timing of these projects is difficult to predict and there may be delays in getting awarded such contracts. As a result, we have no assurance that GridSense will be able to maintain its increased sales or be able to reduce its need for additional financing to support its working capital needs in 2012 and beyond. Accordingly, GridSense may continue to need additional working capital support, while it works to increase its sales. This support may be in the form of a bank line, additional investment or loan by Acorn, or a combination of the above. GridSense is currently in discussions with a bank to provide working capital financing; however, there is no assurance that such financing will be available in sufficient amounts, in a timely manner

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or on acceptable terms.

USSI currently has no other sources of financing other than its internally generated sales and investments by Acorn. On February 6, 2012, we entered into the USSI Purchase Agreement with USSI pursuant to which we converted previously advanced funds ($2.5 million during the period from May 2011 to January 2012) into additional shares of USSI Common Stock and shares of USSI Preferred Stock (see Recent Developments). We also made a further payment to USSI of $2.25 million February 6, 2012 to purchase additional shares of USSI Preferred Stock, and we anticipate that we will purchase more shares of USSI Preferred Stock for an aggregate purchase price of $2.5 million at a future date. This subsequent purchase is subject to the satisfaction of certain customary conditions. As of February 29, 2012, USSI had cash on hand of approximately $1.4 million. We have no assurance that USSI will not need additional financing from time-to-time to finance its working capital needs. Additional financing for USSI may be in the form of a bank line, new investment by others, a loan or investment by Acorn, or a combination of the above. There is no assurance that such support will be available from such sources in sufficient amounts, in a timely manner or on acceptable terms.

As at March 1, 2012, the Company's corporate operations (not including cash at any of our subsidiaries) had a total of approximately $19.4 million in cash and cash equivalents reflecting a $14.2 million decrease from the balance as of December 31, 2011. The decrease in corporate cash is primarily due the acquisition of OmniMetrix for $8.5 million (see Recent Developments), to an additional advance ($250,000) and investments ($2.25 million) in USSI (see Recent Developments), $1.5 million dividends (a special dividend paid in January and our regular quarterly dividend paid on March 1, 2012 (see Recent Developments)), a transfer to GridSense of $1.0 million and our corporate expenses.

We believe that the cash remaining from the sale of CoaLogix will provide more than sufficient liquidity to finance the operating activities of Acorn and the operations of its operating subsidiaries for the foreseeable future and for the next 12 months in particular.

Contractual Obligations and Commitments

The table below provides information concerning obligations under certain categories of our contractual obligations as of December 31, 2011.

CASH PAYMENTS DUE TO CONTRACTUAL OBLIGATIONS

	Years Ending December 31, (in thousands)
	Total		2012		2013-2014		2015-2016		2017 and thereafter
Bank and other debt, utilized lines-of-credit and capital leases	$	818	$	677	$	141	$	—	$	—
Operating leases	1,669		719		768		182		—
Potential severance obligations (1)	3,837		—		957		322		2,558
Total contractual cash obligations	$	6,324	$	1,396	$	1,866	$	504	$	2,558

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

(1) Under Israeli law and labor agreements, DSIT is required to make severance payments to dismissed employees and to employees leaving employment under certain other circumstances.  The obligation for severance pay benefits, as determined by the Israeli Severance Pay Law, is based upon length of service and last salary.  These obligations are substantially covered by regular deposits with recognized severance pay and pension funds and by the purchase of insurance policies.  As of December 31, 2011, we accrued a total of $3.8 million for potential severance obligations to our Israeli employees of which approximately $2.6 million was funded.

Certain Information Concerning Off-Balance Sheet Arrangements

Our DSIT subsidiary provides various performance, advance and tender guarantees as required in the normal course of its operations.  As at December 31, 2011, such guarantees totaled approximately $5.7 million and a majority were due to expire in 2013 and 2014.  As security for a portion of these guarantees, DSIT has deposited approximately $2.4 million which is shown as restricted cash on our Consolidated Balance Sheets ($2.2 million as current restricted cash and $0.2 million as non-current restricted cash).  As DSIT’s restricted cash is released from the completion of projects and the end of the guarantees, it expects to

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provide additional security deposits for new guarantees for new projects throughout the 2012 calendar year.

Impact of Inflation and Interest Rate & Currency Fluctuations

In the normal course of business, we are exposed to fluctuations in interest rates on our lines-of-credit ($1.0 million available) and long-term debt incurred ($0.3 million balance at December 31, 2011) to finance our operations in Israel. Such lines-of-credit and loan bear interest at interest rates that are linked to the Israeli prime rate (4.25% at December 31, 2011 and 3.5% at December 31, 2010).

Our non-US dollar monetary assets and liabilities (net liabilities of approximately $1.7 million at December 31, 2011) in Israel are exposed to fluctuations in exchange rates.

Historically, a majority of DSIT’s sales have been denominated in dollars or denominated in NIS linked to the dollar.  Such sales transactions are negotiated in dollars; however, for the convenience of the customer they are often settled in NIS.  These transaction amounts are linked to the dollar between the date the transactions are entered into until the date they are effected and billed.  From the time these transactions are effected and billed through the date of settlement, amounts are primarily unlinked.  As DSIT increases its sales to customers outside of Israel, a greater portion of its receipts from customers will be settled in dollars. In 2012, we expect an increasing portion of DSIT’s sales to be settled in dollars. A significant majority of DSIT’s expenses in Israel are in NIS (primarily labor costs), while a portion is in dollars or dollar-linked NIS.

The dollar cost of our operations in Israel may be adversely affected in the future by a revaluation of the NIS in relation to the dollar.  In 2011 the appreciation of the dollar against the NIS was 7.6% while in 2010 the NIS appreciated against the dollar by 6.0%.

As of December 31, 2011, virtually all of DSIT’s monetary assets and liabilities that were not denominated in dollars or dollar-linked NIS were denominated in NIS.  In the event that in the future we have material net monetary assets or liabilities that are not denominated in dollar-linked NIS, such net assets or liabilities would be subject to the risk of currency fluctuations. DSIT purchases forward contracts to attempt to reduce its exposure to currency fluctuations.

In addition, our non-US dollar assets and liabilities (net liability of approximately $0.1 million at December 31, 2011) in Australia at our GridSense subsidiary’s Australian operations are also exposed to fluctuations in exchange rates. The dollar cost of our operations in Australia may also be adversely affected in the future by a revaluation of the Australian dollar in relation to the U.S. dollar.  In 2011 the Australian dollar was virtually unchanged against the U.S. dollar. During 2010, the Australian dollar appreciated against the U.S. dollar by 13.3%.

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SUMMARY QUARTERLY FINANCIAL DATA (Unaudited)

The following table sets forth certain of our unaudited quarterly consolidated financial information for the years ended December 31, 2010 and 2011.  This information should be read in conjunction with our Consolidated Financial Statements and the notes thereto.

	2010												2011
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			First Quarter			Second Quarter			Third Quarter			Fourth Quarter
	(in thousands, except per share amounts
Revenues	$	2,606		$	3,372		$	4,018		$	4,249		$	3,095		$	4,107		$	5,051		$	6,675
Cost of sales	1,424			1,749			2,221			2,807			1,921			2,760			3,244			4,090
Gross profit	1,182			1,623			1,797			1,442			1,174			1,347			1,807			2,585
Research and development expenses, net	41			179			281			463			490			384			713			1,408
Impairments	—			—			—			1,166			—			—			—			—
Selling, general and administrative expenses	2,247			2,592			2,830			2,772			2,743			2,724			3,142			3,343
Operating loss	(1,106		)	(1,148		)	(1,314		)	(2,959		)	(2,059		)	(1,761		)	(2,048		)	(2,166		)
Finance income (expense), net	5			(197		)	53			(85		)	(117		)	(100		)	262			(71		)
Gain on investment in GridSense	—			1,327			—			—			—			—			—			—
Gain on sale of HangXing	—			—			—			—			492			—			—			—
Distribution received from EnerTech	135			—			—			—			—			—			—			—
Loss on the sale of EnerTech	—			—			—			(1,821		)	—			—			—			—
Income (loss) before taxes on income	(966		)	(18		)	(1,261		)	(4,865		)	(1,684		)	(1,861		)	(1,786		)	(2,237		)
Income tax benefit (expense)	(75		)	(123		)	(372		)	(101		)	(65		)	26			12,111			695
Net income (loss) from continuing operations	(1,041		)	(141		)	(1,633		)	(4,966		)	(1,749		)	(1,835		)	10,325			(1,542		)
Gain on the sale of CoaLogix, net of income taxes	—			—			—			—			—			—			30,683			386
Loss from discontinued operations, net of income taxes	(2,132		)	(3,275		)	(3,307		)	(9,255		)	(836		)	(568		)	(544		)	—
Non-controlling interests share of loss from discontinued operations	(5		)	45			244			(217		)	232			157			151			—
Net income (loss)	(3,178