PROSPECTUS

Filed Pursuant to Rule 424(b)(1)
Registration Number 333-136528

27,441,064 Shares

Common Stock

We are offering 20,000,000 shares and the selling stockholders named in this prospectus are selling 7,441,064 shares. We will not receive any proceeds from the sale of shares by the selling stockholders.

All shares in this offering will be sold in Canadian dollars (C$) and we intend to immediately convert all proceeds of the offering to U.S. dollars. Accordingly, references to the proceeds of this offering in this prospectus are in U.S. dollars based on an exchange rate between Canadian dollars and U.S. dollars at November 9, 2006 of $1 U.S. dollar to $1.1292 Canadian dollars. Currently, no public market exists for the shares. Our common stock has been conditionally approved for listing on the Toronto Stock Exchange under the symbol “XWE.”

Investing in the common stock involves risks that are described in the “Risk Factors” section beginning on page 9 of this prospectus.

PRICE C$1.05 PER SHARE

	Per Share		Total
Public offering price	C$	1.05	C$	28,813,117.20
Underwriting discounts	C$	0.063	C$	1,728,787.03
Proceeds, before expenses, to World Energy Solutions, Inc.	C$	0.987	C$	19,740,000.00
Proceeds, before expenses, to the selling stockholders	C$	0.987	C$	7,344,330.17

We have granted the underwriters an over-allotment option to purchase up to an additional 3,000,000 shares of common stock from us at the public offering price, less the underwriting discount, within 30 days from the closing of this offering to cover over-allotments.

We have also agreed to issue to the underwriters warrants to purchase 1,000,000 shares of common stock (or 1,150,000 shares if the over-allotment option is exercised in full), exercisable at the public offering price for a period of 18 months following the one-year anniversary of the closing of the offering.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The shares will be ready for delivery on or about November 20, 2006.

Sprott Securities (USA) Limited

     Canaccord Adams Inc.

CIBC World Markets

The date of this prospectus is November 9, 2006

 

TABLE OF CONTENTS

	Page
PROSPECTUS SUMMARY		1
RISK FACTORS		9
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS		19
USE OF PROCEEDS		21
DIVIDEND POLICY		22
CAPITALIZATION		23
DILUTION		24
SELECTED CONSOLIDATED FINANCIAL DATA		25
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		27
THE BUSINESS		44
MANAGEMENT		63
PRINCIPAL AND SELLING STOCKHOLDERS		71
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS		74
ESCROWED SECURITIES		75
DESCRIPTION OF CAPITAL STOCK		76
SHARES ELIGIBLE FOR FUTURE SALE		79
MATERIAL UNITED STATES FEDERAL TAX CONSIDERATIONS		81
UNDERWRITING		84
LEGAL MATTERS		86
EXPERTS		86
WHERE YOU CAN FIND MORE INFORMATION		86
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS		F-1

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with information different from or additional to that contained in this prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We are offering to sell, and are seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

For investors outside the United States and Canada: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States and Canada. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

THIRD PARTY AND MANAGEMENT INFORMATION

This prospectus includes market share information, industry data and forecasts obtained from independent industry publications, market research, surveys and other sources. Although we believe these sources to be reliable, we have not independently verified any of the data nor ascertained the underlying economic assumptions relied upon therein. Some data is also based on our management’s knowledge of the industry and our estimates and assumptions relating to the industry, some of which are derived from our management’s review of data from independent sources. Management’s knowledge of the industry has been developed through its experience and participation in the industry. Our management believes that its knowledge of the industry is accurate and its estimates and assumptions are reasonable. However, certain of the information contained herein relating to the industry cannot be independently verified.

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before buying shares of our common stock. You should read the entire prospectus carefully, especially the risks of investing in shares of our common stock that we describe under “Risk Factors” and our consolidated financial statements and the related notes included at the end of this prospectus, before deciding to invest in shares of our common stock. Unless the context requires otherwise, references to “World Energy,” “the company,” “we,” “our” and “us” refer to World Energy Solutions, Inc. and our predecessor, Oceanside Energy, Inc.

The Company

World Energy is an energy brokerage company that has developed an online auction platform, the World Energy Exchange, through which commercial, industrial and governmental energy consumers in the United States are able to purchase electricity and other energy resources from competing energy suppliers which have agreed to participate on our auction platform in a given auction. Fees for our services are paid to us by the suppliers for conducting a successful auction. We were founded in response to the restructuring of the electricity industry in some U.S. states, which are increasingly permitting commercial, industrial and governmental energy consumers to choose their electricity supplier. While our core competency is brokering electricity, we adapted our World Energy Exchange auction platform to accommodate the brokering of natural gas, green power (i.e., electricity generated by renewable resources) and energy-related products. Since 2001, we have brokered over 24 billion kilowatt hours of electricity for energy consumers in North America on the World Energy Exchange. We believe that we are among the pioneering companies brokering electricity online and we are not aware of any competitor that has brokered more electricity online than we have. We are in the process of adapting our World Energy Exchange auction platform to accommodate transactions in fuel oils including: diesel, heating oil, propane and jet fuel. We are in the process of developing the World Green Exchange auction platform to facilitate green credit transactions. Green credit transactions involve the trading of instruments developed in conjunction with United States and/or international mandates to mitigate global warming. Generally, these instruments permit the release of certain quantities of pollutants without further tax or penalty to the holder of the instrument and are tradable to entities that may want or need them.

At the core of our World Energy Exchange is an auction process that, according to our estimates, has helped energy consumers to save an average of 11%, and as much as 30%, on their energy costs as compared to contracting at the utility rates. The auction creates a competitive bidding environment that is designed to cause energy suppliers to bid their prices down during the auction event in response to other competitive bids. The auction also creates a best and final “last bid blind” process to encourage energy suppliers to provide their best closing bid in the final moments of the auction event without knowledge of any other competing supplier’s closing bid.

The following is an example of the bid history page of the World Energy Exchange taken from a representative auction. Although we believe that this example is typical of the results energy consumers realize by using our auction platform, it is not necessarily indicative of all auctions on the World Energy Exchange.

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There are approximately 175 competitive electricity, natural gas and wholesale electricity suppliers, and over 20 resellers and distributors, whom we refer to as our channel partners, registered on our World Energy Exchange, creating a robust community of potential bidders and strong competition for the provision of energy to energy consumers. Of these registered energy suppliers, approximately 37 had active contracts with energy consumers that were brokered through our World Energy Exchange as of June 30, 2006.

All of our channel partners are party to channel partner agreements that set forth the terms of our relationship — principally that the channel partners may market and/or support the delivery of our brokerage services to their energy consumer customers in exchange for a commission based on the revenue we earn from our energy suppliers. The exact percentage share varies by channel partner due to a number of factors, including expected volume, effort required and competitive factors. Fifteen of our channel partners have successfully contributed to our revenue by brokering transactions during the first six months of 2006.

In 2005, the total electricity consumption by commercial, industrial and government, or CIG, energy consumers in the United States was approximately 2.3 trillion kilowatt hours according to the Department of Energy’s Energy Information Administration. Assuming a company-estimated average price of $0.075 per kilowatt hour for CIG energy consumers in the United States, this represents annual electricity purchases of approximately $170 billion.

Based on management’s analysis of data from industry analyst KEMA, approximately 34% of total electricity consumption by CIG energy consumers in the United States, or 783 billion kilowatt hours, is consumed in the 14 states and the District of Columbia where CIG energy consumers can choose their electricity supplier and the pricing of electricity is currently competitive. Management further estimates that if additional states and utility territories permit retail CIG electricity consumers to choose their energy suppliers and deregulate pricing to create competitive markets, the market has the potential to grow by up to 47% to 1.15 trillion kilowatt hours by 2010 when management estimates that there will be 20 states and the District of Columbia that are both deregulated (i.e, the federal and state regulation has been restructured to permit consumers to choose their supplier) and competitive. According to a January 2006 KEMA report, commissions typically charged by energy aggregators, brokers and consultants ranged from $0.00045 to $0.003 per kilowatt hour and averaged $0.00186 per kilowatt hour.

CIG energy consumers located in regions that permit them to choose their electricity supplier generally have two options for purchasing electricity. They can either purchase electricity directly from their local utility at regulated rates or they can switch from their local utility to a competitive supplier. Based on management’s analysis of KEMA statistics, in 2001, in states where CIG energy consumers could choose their suppliers,

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approximately 17% of the aggregate load (i.e, total usage) of these consumers had already switched to competitive suppliers, and by 2005 that share more than doubled to 39%.

The following chart sets forth the compound annual growth rate, or CAGR, of kilowatt hours consumed, for the three year period from 2003 through 2005 by:

•  the total U.S. CIG electricity market;

•  energy consumers in deregulated markets who can choose their electricity supplier;

•  CIG energy consumers who switched from a regulated non-competitive public utility serving an energy consumer, sometimes referred to as the incumbent utility, to a competitive source of supply; and

•  switched CIG energy consumers who purchased through a broker.

Comparative Market Compound Annual Growth Rate
(2003-2005)

(1)	Department of Energy’s Energy Information Administration Form EIA-826, “Monthly Electric Utility Sales and Revenue Report with State Distributions”
(2)	World Energy analysis of KEMA data, KEMA’s Retail Outlook: 2005 Update, dated October 2005
(3)	World Energy analysis of KEMA estimates, KEMA’s Retail Energy Foresight, May/June 2006

Growth Strategy

Our overall objective is to achieve a preeminent position as the exchange for executing transactions in energy and energy-related products. We seek to achieve our objective by expanding our community of channel partners, energy consumers and energy suppliers on our exchange and by broadening our exchange to include other geographic markets and other energy and energy-related markets, including wholesale transactions with utilities and the emerging green credits market. Key elements of our strategy include:

Continuing to Develop Channel Partner Relationships:  A significant majority of the energy consumers using our auction platform have been introduced to us through our channel partners. Our primary growth strategy is to focus on developing and increasing our number of channel partner relationships in an effort to expand the base of energy consumers using our auction platform and to increase the volume of energy procured on our World Energy Exchange.

Strengthening and Expanding Long-term Relationships with Government Agencies:  We intend to build on the relationships we have established with federal, state and local government agencies. In 2001, we first penetrated the government segment by brokering energy for the United States Federal Government’s General Services Administration, or GSA, as a subcontractor to channel partner Science Applications International Corporation, or SAIC. Working with SAIC, we have completed hundreds of auctions, resulting in dozens of procurements for GSA and its federal government electricity consumers in four states and for natural gas in over 30 states.

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Targeting Other Energy-Related Products:  While our core competence lies in electricity brokerage for CIG energy consumers, we intend to expand our brokerage services into new markets. To date, we have brokered over 45 million decatherms of natural gas under contract under GSA’s Natural Gas Acquisition Program and continue to grow our natural gas brokering activities to support existing energy consumer relationships. At the request of participants on our auction platform we are also considering adapting our World Energy Exchange auction platform to accommodate transactions in diesel, heating oil, propane and jet fuel.

Targeting Utilities:  We have added the capability to auction energy-related products for utilities, and several auctions were closed for an aggregate of over 5 billion kilowatt hours of electricity. We believe that there is an opportunity for us to further expand our business operations to facilitate the brokering of energy-related products for utilities.

Brokering Green Credits:  We also plan to expand our operations by entering the green credit market through our established relationships and growing reputation in the energy procurement marketplace. The brokerage of green credits would complement our current business and remains aligned with our focus on brokerage of cost-effective energy transactions. As countries attempt to reduce their environmental emissions in order to achieve compliance under the Kyoto Protocol and U.S.-based initiatives, we believe that the creation and trading of green credits will accelerate.

Risks

Our business is subject to a number of risks of which you should be aware before making an investment decision. For a discussion of factors you should consider before deciding to invest in our common stock, we refer you to the risks described below under the heading “Risk Factors,” including the following:

•  We have limited operating experience and a history of operating losses, and we may be subject to risks inherent in early stage companies, which may make it difficult for you to evaluate our business and prospects.

•  Our business is heavily influenced by how much regulated utility prices for energy are above or below competitive market prices for energy and, accordingly, any changes in regulated prices or cyclicality or volatility in competitive market prices heavily impacts our business.

•  The online brokerage of electricity and other energy-related products is a relatively new and emerging market and it is uncertain whether our reverse auction model will gain widespread acceptance.

•  We depend on a small number of key energy consumers for a significant portion of our revenue, many of which are government entities that have no obligation to use our auction platform or continue their relationship with us, and the partial or complete loss of business of one or more of these consumers could negatively affect our business.

•  We do not have contracts for fixed volumes with the energy suppliers who use our auction platform and we depend on a small number of key energy suppliers, and the partial or complete loss of one or more of these energy suppliers as a participant on our auction platform could undermine our ability to execute effective auctions.

•  We depend on our channel partners to establish and develop certain of our relationships with energy consumers and the loss of certain channel partners could result in the loss of certain key energy consumers.

•  If we are unable to rapidly implement some or all of our major strategic initiatives, our ability to maintain our market position may be negatively impacted.

Company Information

We commenced operations through an entity named Oceanside Energy, Inc., which was incorporated under the laws of the State of Delaware on September 3, 1996. We incorporated World Energy Solutions, Inc.

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under the laws of the State of Delaware under the name “World Energy Exchange, Inc.” on June 22, 1999, and on October 31, 1999, Oceanside became a wholly-owned subsidiary of World Energy Solutions, Inc. through a share exchange whereby Oceanside stockholders were given shares of common stock of World Energy in exchange for their Oceanside shares. Pursuant to a certificate of amendment filed on November 30, 1999, World Energy Exchange, Inc. changed its name to “World Energy Exchange.com, Inc.” and then back to “World Energy Exchange, Inc.” on November 2, 2000. World Energy Exchange, Inc. subsequently changed its name to World Energy Solutions, Inc. pursuant to a certificate of amendment filed on February 4, 2002. Oceanside was subsequently dissolved on May 18, 2006. We currently have no subsidiaries.

In addition, in connection with the offering we will adopt an amended and restated certificate of incorporation to, among other things, increase the authorized number of shares of common stock to 150,000,000 shares and to create 5,000,000 shares of undesignated preferred stock, and we will amend and restate our by-laws.

Our registered and principal office is located at 446 Main Street, Worcester, Massachusetts, 01608, United States of America, and our telephone number is (508) 459-8100. Our website is located at www.worldenergy.com. Information on our website is not part of this prospectus.

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THE OFFERING

Common stock offered by World Energy	20,000,000 shares
Common stock offered by the selling stockholders	7,441,064 shares. The selling stockholders include our employees (other than officers and directors), former employees and investors.
Common stock to be outstanding after this offering	72,783,248 shares (75,783,248 shares if the over-allotment option is exercised in full).
Over-allotment option	The underwriters have been granted an over-allotment option, exercisable for a period of 30 days from the closing of the offering, to purchase up to a total of 3,000,000 additional shares from us on the same terms as set out above solely to cover over-allotments, if any, and for market stabilization purposes.
Use of proceeds	The net proceeds to us from the offering, after deducting underwriting discount and the estimated expenses of the offering, are expected to be $15.2 million. We will not receive any proceeds from the sale of shares by the selling stockholders.
	Although there can be no assurance that our estimates related to our various proposed strategic initiatives or that facts and circumstances will not change causing the Board to direct management to utilize our assets, including the proceeds of this offering, in different amounts or for different purposes altogether, our current estimates are that we would use approximately:
	• $5.0 million to $10.0 million to fund acquisitions;
	• $3.0 million to $5.0 million to develop a green credits platform;
	• $2.0 million to pay outstanding debt;
	• $1.5 million to $2.5 million for growing our channel partner base;
	• $1.5 million to $2.5 million to target other energy-related markets;
	• $1.5 million to $2.5 million to target utilities; and
	• $0.5 million to $1.5 million to expand our government relationships.
Dividend policy	We do not currently intend to pay dividends on our shares of common stock, although our board of directors may, in its sole discretion, determine to pay dividends in the future.
Proposed Toronto Stock Exchange symbol	XWE

The number of shares of common stock to be outstanding after the offering is based on 52,783,248 shares of common stock outstanding as of June 30, 2006 after giving effect to the conversion of our outstanding non-voting common stock and preferred stock described elsewhere in this prospectus, plus the shares being issued

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in connection with this offering. Unless otherwise indicated, the information contained in this prospectus, including the information above excludes:

•  3,681,029 shares of common stock issuable upon the exercise of stock options outstanding as of June 30, 2006, with a weighted average exercise price of $0.09 per share;

•  1,579,307 shares of common stock issuable upon exercise of outstanding warrants as of June 30, 2006, with a weighted average exercise price of $0.17 per share, and 1,000,000 shares (1,150,000 shares if the over-allotment option is exercised in full) of common stock issuable upon exercise of the warrants being issued to the underwriters in connection with this offering with an exercise price equal to the initial public offering price; and

•  an additional 2,336,165 shares reserved for future stock option and award grants under our equity compensation plans.

In addition, except where we state otherwise, the information in this prospectus assumes:

•  The adoption of our restated certificate of incorporation, which we refer to as our certificate of incorporation, and our amended and restated by-laws, which we refer to as our by-laws, to be effective upon the completion of this offering; and

•  No exercise of the underwriters’ over-allotment option.

All shares in this offering will be sold in Canadian dollars (C$) and we intend to immediately convert all proceeds of the offering to U.S. dollars. Accordingly, references to the proceeds of this offering in this prospectus are in U.S. dollars based on an exchange rate between Canadian dollars and U.S. dollars of $1 U.S. dollar to $1.1292 Canadian dollars. All references to “$” are to United States dollars unless otherwise noted.

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables present our summary consolidated statements of operations data for our fiscal years 2003 through 2005 and for the six months ended June 30, 2005 and June 30, 2006, and our summary consolidated balance sheet data as of December 31, 2005 and June 30, 2006. The financial data for the fiscal years ended December 31, 2003, 2004 and 2005 have been derived from our audited consolidated financial statements, which appear elsewhere in this prospectus. The financial data as of and for the six months ended June 30, 2005 and June 30, 2006, are derived from our unaudited consolidated financial statements, which in the opinion of management contain all adjustments necessary for a fair presentation of the consolidated financial data. Operating results for these periods are not necessarily indicative of the operating results for a full year.

The summary pro forma as adjusted consolidated balance sheet data reflects this offering, the expected repayment of debt from the proceeds of this offering and the conversion of our outstanding non-voting common stock and preferred stock into common stock. You should read this information in conjunction with our consolidated financial statements, including the related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

	For the Years Ended December 31,									Six Months Ended June 30,
	2003			2004			2005			2005			2006
Consolidated Statement of Operations Data:
Revenue	$	2,474,699		$	3,191,660		$	4,673,987		$	2,156,544		$	2,479,770
Cost of revenue		872,647			563,972			648,410			326,671			490,955
Gross profit		1,602,052			2,627,688			4,025,577			1,829,873			1,988,815
Operating expenses:
Sales and marketing		1,781,173			1,814,799			2,649,786			1,328,728			1,496,309
General and administrative		557,910			710,462			995,703			333,447			754,933
Total operating expenses		2,339,083			2,525,261			3,645,489			1,662,175			2,251,242
Operating income (loss)		(737,031	)		102,427			380,088			167,698			(262,427	)
Other income (expense) net(1)		(180,738	)		960,524			(86,838	)		(22,111	)		(101,182	)
Income (loss) before income taxes		(917,769	)		1,062,951			293,250			145,587			(363,609	)
Income tax benefit		—			—			(754,000	)		—			(143,797	)
Net income (loss)		(917,769	)		1,062,951			1,047,250			145,587			(219,812	)
Accretion of preferred stock issuance costs		(7,199	)		(7,199	)		(7,199	)		(3,600	)		(3,600	)
Net income (loss) available to common stockholders	$	(924,968	)	$	1,055,752		$	1,040,051		$	141,987		$	(223,412	)

							Pro Forma
	As of			As of			as adjusted
	December 31, 2005			June 30, 2006			June 30, 2006(2)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	1,584,066			816,603		$	14,003,520
Total assets		3,787,842			3,889,459			17,076,376
Long-term liabilities		1,879,745			1,874,583			109,783
Series A redeemable convertible preferred stock		1,501,698			1,505,298			—
Total stockholders’ equity (deficit)		(938,883	)		(1,100,768	)		15,356,247

(1)	Other income (expense) for the year ended December 31, 2004 includes a gain of $1,062,775 from extinguishment of debt.
(2)	The estimated net proceeds to us from this offering are $15,186,917 after deducting underwriting discounts and commissions and estimated offering expenses.

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RISK FACTORS

This offering involves a high degree of risk. You should carefully consider the risks and uncertainties described below and the other information in this prospectus, including the consolidated financial statements and the related notes included at the end of this prospectus, before deciding to invest in shares of our common stock. If any of the following risks or uncertainties actually occurs, our business, prospects, financial condition and operating results would likely suffer, possibly materially. In that event, the market price of our common stock could decline and you could lose all or part of your investment.

Risks Related to Our Business

We have limited operating experience and a history of operating losses, and we may be subject to risks inherent in early stage companies, which may make it difficult for you to evaluate our business and prospects.

We have a limited operating history upon which you can evaluate our business and prospects. We began assisting in energy transactions in 2001 and introduced our current auction model in April of that same year. Further, we have a history of losses and, at June 30, 2006, we had an accumulated deficit of approximately $3.9 million. We cannot provide any assurance that we will be profitable in any given period or at all. You must consider our business, financial history and prospects in light of the risks and difficulties we face as an early stage company with a limited operating history. In particular, our management may have less experience in implementing our business plan and strategy compared to our competitors, including our strategy to increase our market share and build our brand name. In addition, we may face challenges in planning and forecasting accurately as a result of our limited historical data and inexperience in implementing and evaluating our business strategies. Our inability to successfully address these risks, difficulties and challenges as a result of our inexperience and limited operating history may have a negative impact on our ability to implement our strategic initiatives, which may have a material adverse effect on our business, prospects, financial condition and results of operations.

Our business is heavily influenced by how much regulated utility prices for energy are above or below competitive market prices for energy and, accordingly, any changes in regulated prices or cyclicality or volatility in competitive market prices heavily impacts our business.

When energy prices increase in competitive markets above the price levels of the regulated utilities, energy consumers are less likely to lock-in to higher fixed price contracts in the competitive markets and so they are less likely to use our auction platform. Accordingly, reductions in regulated energy prices can severely negatively impact our business. Any such reductions in regulated energy prices over a large geographic area or over a long period of time would have a material adverse effect on our business, prospects, financial condition and results of operations. Similarly, cyclicality or volatility in competitive market prices that have the effect of driving those prices above the regulated utility prices will make our auction platform less useful to energy consumers and will negatively impact our business.

The online brokerage of electricity and other energy-related products is a relatively new and emerging market and it is uncertain whether our reverse auction model will gain widespread acceptance.

The emergence of competition in the electricity market and other energy-related products is a relatively recent development, and industry participants have not yet achieved consensus on how to most efficiently take advantage of the competitive environment. We believe that as the online energy brokerage industry matures, it is likely to become dominated by a relatively small number of competitors that can offer access to the largest number of competitive suppliers and consumers. Brokerage exchanges with the highest levels of transaction volume will likely be able to offer energy suppliers lower transaction costs and offer consumers better prices, which we believe will increasingly create competitive barriers for smaller online brokerage exchanges. For us to capitalize on our position as an early entrant into this line of business, we will need to generate widespread support for our reverse auction platform and continue to rapidly expand the scale of our operations. Other online auction or non-auction strategies may prove to be more attractive to the industry than our reverse

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auction model. If an alternative brokerage exchange model becomes widely accepted in the electricity industry and/or the other energy-related industries we participate in, our business will fail.

We depend on a small number of key energy consumers for a significant portion of our revenue, many of which are government entities that have no obligation to use our auction platform or continue their relationship with us, and the partial or complete loss of business of one or more of these consumers could negatively affect our business.

We have an energy consumer base comprised primarily of large businesses and government organizations. Four of these energy consumers each accounted for over 10% individually and approximately 59% in the aggregate of our revenue for the six months ended June 30, 2006, and three of these energy consumers accounted for over 10% individually and approximately 51% in the aggregate of our revenue for the year ended December 31, 2005. Our government contracts are typically for multiple years but are subject to government funding contingencies and cancellation for convenience clauses. Although our non-government contracts create a short-term exclusive relationship with the energy consumer, typically this exclusivity relates only to the specific auction event and expires during the term of the energy contract. Accordingly, we do not have ongoing commitments from these energy consumers to purchase any of their incremental energy requirements utilizing our auction platform, and they are not prohibited from using competing brokerage services. The loss of any of these key energy consumers will negatively impact our revenue, particularly in the absence of our ability to attract additional energy consumers to use our service.

We do not have contracts for fixed volumes with the energy suppliers who use our auction platform and we depend on a small number of key energy suppliers, and the partial or complete loss of one or more of these energy suppliers as a participant on our auction platform could undermine our ability to execute effective auctions.

We do not have contracts for fixed volumes with any of the energy suppliers who use our auction platform. Five energy suppliers each accounted for over 10% individually and approximately 66% in the aggregate of our revenue for the six months ended June 30, 2006, and four of these energy suppliers each accounted for over 10% individually and approximately 57% in the aggregate of our revenue for the year ended December 31, 2005. The loss of any of these, or other significant, suppliers will negatively impact our operations, particularly in the absence of our ability to locate additional national suppliers. We do not have agreements with any of these suppliers preventing them from directly competing with us or utilizing competing services.

We depend on our channel partners to establish and develop certain of our relationships with energy consumers and the loss of certain channel partners could result in the loss of certain key energy consumers.

We rely on our channel partners to establish certain of our relationships with energy consumers. Our ability to maintain our relationships with our channel partners will impact our operations and revenue. We depend on the financial viability of our channel partners and their success in procuring energy consumers on our behalf. One of our channel partners was involved with identifying and qualifying energy consumers which entered into contracts that accounted for approximately 66% of our revenue in the first six months of 2006, and two of our channel partners were involved with identifying and qualifying energy consumers which entered into contracts that accounted for over 10% individually and approximately 80% in the aggregate of our revenue for the year ended December 31, 2005. Channel partners may be involved in various aspects of a deal including but not limited to lead identification, the selling process, project management, data gathering, contract negotiation, deal closing and post-auction account management. To the extent that a channel partner ceases to do business with us, or goes bankrupt, dissolves, or otherwise ceases to carry on business, we may lose access to that channel partner’s existing client base, in which case the volume of energy traded through the World Energy Exchange will be adversely affected and our revenue will decline.

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If we are unable to rapidly implement some or all of our major strategic initiatives, our ability to improve our competitive position may be negatively impacted.

Our strategy is to improve our competitive position by implementing certain key strategic initiatives in advance of competitors, including the following:

•  continuing to develop channel partner relationships;

•  strengthen and expand long-term relationships with government agencies;

•  target other energy-related markets;

•  target utilities in order to broker energy-related products for them; and

•  develop a green credits auction platform.

We cannot assure you that we will be successful in implementing any of these key strategic initiatives, or that our time to market will be sooner than that of competitors. Some of these initiatives relate to new services or products for which there are no established markets, or in which we lack experience and expertise. In addition, the execution of our growth strategies will require significant increases in working capital expenses and increases in capital expenditures and management resources and may subject us to additional regulatory oversight.

If we are unable to rapidly implement some or all of our key strategic initiatives in an effective and timely manner, our ability to improve our competitive position may be negatively impacted, which would have a material and adverse effect on our business and prospects.

We currently derive substantially all of our revenue from the brokerage of electricity, and as a result our business is highly susceptible to factors affecting the electricity market over which we have no control.

We derived approximately 91% of revenue during 2005 and 94% of revenue during the first six months of 2006 from the brokerage of electricity. Although we expect that our reliance on the brokerage of electricity will diminish as we implement our strategy to expand brokerage into other markets, we believe that our revenue will continue to be highly dependent on the level of activity in the electricity market for the near future. Transaction volume in the electricity market is subject to a number of variables, such as consumption levels, pricing trends, availability of supply and other variables. We have no control over these variables, which are affected by geopolitical events such as war, threat of war, terrorism, civil unrest, political instability, environmental or climatic factors and general economic conditions. We are particularly vulnerable during periods when energy consumers perceive that electricity prices are at elevated levels since transaction volume is typically lower when prices are high relative to regulated utility prices. Accordingly, if electricity transaction volume declines sharply, our results will suffer.

Our success depends on the widespread adoption of purchasing electricity from competitive sources.

Our success will depend, in large part, on the willingness of commercial, industrial and governmental, or CIG, energy consumers to embrace competitive sources of supply, and on the ability of our energy suppliers to consistently source electricity at competitive rates. In most regions of North America, energy consumers have either no or relatively little experience purchasing electricity in a competitive environment. Although electricity consumers in deregulated regions have been switching from incumbent utilities to competitive sources, there can be no assurance that the trend will continue. In a majority of states and municipalities, including some areas which are technically “deregulated”, electricity is still provided by the incumbent local utility at subsidized rates or at rates that are too low to stimulate meaningful competition by other providers. In addition, extreme price volatility could delay or impede the widespread adoption of competitive markets. To the extent that competitive markets do not continue to develop rapidly our prospects for growth will be constrained. Also, there can be no assurance that trends in government deregulation of energy will continue or will not be reversed. Increased regulation of energy would significantly damage our business.

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Even if our auction brokerage model achieves widespread acceptance as the preferred means to transact electricity and other energy-related products, we may be unsuccessful in competing against current and future competitors.

We expect that competition for online brokerage of electricity and other energy-related products will intensify in the near future in response to expanding restructured energy markets that permit consumer choice of energy sources and as technological advances create incentives to develop more efficient and less costly energy procurement in regional and global markets. The barriers to entry into the online brokerage marketplace are relatively low, and we expect to face increased competition from traditional off-line energy brokers, other established participants in the energy industry and online services companies that can launch online auction services that are similar to ours.

Many of our competitors and potential competitors have longer operating histories, better brand recognition and significantly greater financial resources than we do. The management of some of these competitors may have more experience in implementing their business plan and strategy and they may have pre-existing commercial or other relationships with large energy consumers and or suppliers which would give them a competitive advantage. We expect that as competition in the online marketplace increases, brokerage commissions for the energy industry will decline, which could have a negative impact on the level of brokerage fees we can charge per transaction and may reduce the relative attractiveness of our exchange services. We expect that our costs relating to marketing and human resources may increase as our competitors undertake marketing campaigns to enhance their brand names and to increase the volume of business conducted through their exchanges. We also expect many of our competitors to expend financial and other resources to improve their network and system infrastructure to compete more aggressively. Our inability to adequately address these and other competitive pressures would have a material adverse effect on our business, prospects, financial condition and results of operations.

Our costs will increase significantly as we expand our business and in the event that our revenue does not increase proportionately, we will generate significant operating losses in the future.

We expect to significantly increase our operating expenses as we continue to expand our brokerage capabilities to offer additional energy-related products, increase our sales and marketing efforts, and develop our administrative organization. We also expect to incur increased costs as a result of being a publicly held company with shares listed on the Toronto Stock Exchange. As we seek to expand our business rapidly, we may incur significant operating losses. During the six months ended June 30, 2006 we incurred a net loss of approximately $220,000, which was a direct result of these increased costs. In addition, our budgeted expense levels are based, in significant part, on our expectations as to future revenue and are largely fixed in the short term. As a result, we may be unable to adjust spending in a timely manner to compensate for any unexpected shortfall in revenue which could compound those losses in any given fiscal period.

We depend on the services of our senior executives and other key personnel, the loss of whom could negatively affect our business.

Our future performance will depend substantially on the continued services of our senior management and other key personnel, including our vice president of sales, vice president of business development, vice president of channel sales, chief information officer, vice president of operations and account management, and our market directors. If any one or more of such persons leave their positions and we are unable to find suitable replacement personnel in a timely and cost efficient manner, our business may be disrupted and we may not be able to achieve our business objectives, including our ability to manage our growth and successfully implement our strategic initiatives. We do not have long-term employment agreements with our senior management or other key personnel and we do not have a non-competition agreement with our current chief executive officer.

We must also continue to seek ways to retain and motivate all of our employees through various means, including through enhanced compensation packages. In addition, we will need to hire more employees as we continue to implement our key strategy of building on our market position and expanding our business.

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Competition for qualified personnel in the areas in which we compete remains intense and the pool of qualified candidates is limited. Our inability to attract, hire and retain qualified staff on a cost efficient basis may have a material adverse effect on our business, prospects, financial condition, results of operations and ability to successfully implement our growth strategies.

We depend on third-party service and technology providers and any loss or break-down in those relationships could damage our operations significantly if we are unable to find alternative providers.

We depend on a number of third party providers for web hosting, elements of our online auction system, data management and other systems, as well as communications and networking equipment, computer hardware and software and related support and maintenance. There can be no assurance that any of these providers will be able to continue to provide these services without interruption and in an efficient, cost-effective manner or that they will be able to adequately meet our needs as our transaction volume increases. An interruption in or the cessation of such third-party services and our inability to make alternative arrangements in a timely manner, or at all, could have a material adverse effect on our business, financial condition and operating results. There is also no assurance that any agreements that we have in place with such third-party providers will be renewed, or if renewed, renewed on favorable terms.

Our business depends heavily on information technology systems the interruption or unavailability of which could materially damage our operations.

The satisfactory performance, reliability and availability of our exchange, processing systems and network infrastructure are critical to our reputation and our ability to attract and retain energy consumers and energy suppliers to the World Energy Exchange. Our efforts to mitigate systems risks may not be adequate and the risk of a system failure or interruption cannot be eliminated. Although we have never experienced an unscheduled interruption of service, any such interruption in our services may result in an immediate, and possibly substantial, loss of revenue and damage to our reputation.

Our business also depends upon the use of the Internet as a transactions medium. Therefore, we must remain current with Internet use and technology developments. Our current technological architecture may not effectively or efficiently support our changing business requirements.

Any substantial increase in service activities or transaction volume on the World Energy Exchange and the development of the World Green Exchange may require us to expand and upgrade our technology, transaction processing systems and network infrastructure. There can be no assurance that we will be able to successfully do so, and any failure could have a material adverse effect on our business, results of operations and financial condition.

Breaches of online security could damage or disrupt our reputation and our ability to do business.

To succeed, online communications must provide a secure transmission of confidential information over public networks. Security measures that are implemented may not always prevent security breaches that could harm our business. Although to our knowledge we have never experienced a breach of online security, compromise of our security could harm our reputation, cause users to lose confidence in our security systems and to not source their electricity using our auction platform and also subject us to lawsuits, sanctions, fines and other penalties. In addition, a party who is able to circumvent our security measures could misappropriate proprietary information, cause interruptions in our operations, damage our computers or those of our users, or otherwise damage our reputation and business. Our insurance policies may not be adequate to reimburse us for losses caused by security breaches.

We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. These issues are likely to become more difficult and costly as our business expands.

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To the extent that we expand our operations into foreign markets, additional costs and risks associated with doing business internationally will apply.

It is possible that we will have international operations in the near future. These operations may include the brokering of green credits in countries signatory to the Kyoto Protocol, the outsourcing of data and programming to lower cost locations, and the brokering of energy in other geographic markets where we believe the demand for our services may be strong. To the extent we enter geographic markets outside of the United States, our international operations will be subject to a number of risks and potential costs, including:

•  different regulatory requirements governing the energy marketplace;

•  difficulty in establishing, staffing and managing international operations;

•  regulatory regimes governing the Internet and auctioneering that may limit or prevent our operations in some jurisdictions;

•  different and more stringent data privacy laws;

•  differing intellectual property laws;

•  differing contract laws that prevent the enforceability of agreements between energy suppliers and energy consumers;

•  the imposition of special taxes, including local taxation of our fees or of transactions through our exchange;

•  strong local competitors;

•  currency fluctuations; and

•  political and economic instability.

Our failure to manage the risks associated with international operations could limit the future growth of our business and adversely affect our operating results. We may be required to make a substantial financial investment and expend significant management efforts in connection with any international expansion.

The application of taxes including sales taxes and other taxes could negatively affect our business.

The application of indirect taxes (such as sales and use tax, value added tax, goods and services tax, business tax, and gross receipt tax) to e-commerce businesses and our users is a complex and evolving issue. Many of the fundamental statutes and regulations that impose these taxes were established before the growth of the Internet and e-commerce. In many cases, it is not clear how existing statutes apply to the Internet or e-commerce. In addition, some jurisdictions have implemented or may implement laws specifically addressing the Internet or some aspect of e-commerce. The application of existing or future laws could have adverse effects on our business.

Several proposals have been made at the United States state and local level that would impose additional taxes on the sale of goods and services through the Internet. These proposals, if adopted, could substantially impair the growth of e-commerce, and could diminish our opportunity to derive financial benefit from our activities. The United States federal government’s moratorium on states and other local authorities imposing access or discriminatory taxes on the Internet is scheduled to expire in November 2007. This moratorium does not prohibit federal, state, or local authorities from collecting taxes on our income or from collecting taxes that are due under existing tax rules.

In conjunction with the Streamlined Sales Tax Project — an ongoing, multi-year effort by certain state and local governments to require collection and remittance of distant sales tax by out-of-state sellers — bills have been introduced in the U.S. Congress to overturn the Supreme Court’s Quill decision, which limits the ability of state governments to require sellers outside of their own state to collect and remit sales taxes on goods purchased by in-state residents. An overturning of the Quill decision would harm our users and our business.

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The passage of new legislation and the imposition of additional tax requirements could increase the costs to energy suppliers and energy consumers using our auction platform and, accordingly, could harm our business. There have been, and will continue to be, ongoing costs associated with complying with the various indirect tax requirements in the numerous states, localities or countries in which we currently conduct or will conduct business.

U.S. federal or state legislative or regulatory reform of the current systems governing commodities or energy may affect our ability to conduct our business profitably.

We are currently not regulated as an energy provider, broker or commodities dealer. Changes to the laws or regulations governing activities related to commodities trading or energy procurement, supply, distribution or sale, or transacting in energy-related products or securities could adversely affect the profitability of our brokerage operations or even our ability to conduct auctions. In addition, our future lines of business under consideration, including transacting in green credits, could subject us to additional regulation. Changes to the current regulatory framework could result in additional costs and expenses or prohibit certain of our current business activities or future business plans. We cannot predict the form any such legislation or rule making may take, the probability of passage, and the ultimate effect on us.

Risks Relating to Intellectual Property

We may be unable to adequately protect our intellectual property, which could harm us and affect our ability to compete effectively.

We have developed proprietary software, logos, brands, service names and web sites, including our proprietary auction platform. Although we have taken certain limited steps to protect our proprietary intellectual property (including consulting with outside patent and trademark counsel regarding protection of our intellectual property and implementing a program to protect our trade secrets), we have not applied for any patents with respect to our auction platform and we have not registered any trademarks. The steps we have taken to protect our intellectual property may be inadequate to deter misappropriation of our proprietary information or deter independent development of similar technologies by others. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or trade secrets by consultants, vendors, former employees and current employees, despite the existence of confidentiality agreements and other contractual restrictions. If our intellectual property rights are not adequately protected, we may not be able to commercialize our technologies, products or services and our competitors could commercialize similar technologies, which could result in a decrease in our sales and market share. We may be unable to detect the unauthorized use of, or take adequate steps to enforce, our intellectual property rights. In addition, certain of our trade names may not be eligible for protection if, for example, they are generic or in use by another party. Accordingly, we may be unable to prevent competitors from using trade names that are confusingly similar or identical to ours.

Our auction platform, services, technologies or usage of trade names could infringe the intellectual property rights of others, which may lead to litigation that could itself be costly, could result in the payment of substantial damages or royalties, and/or prevent us from using technology that is essential to our business.

Although no third party has threatened or alleged that our auction platform, services, technologies or usage of trade names infringe their patents or other intellectual property rights, we cannot assure you that we do not infringe the patents or other intellectual property rights of third parties.

Infringement and other intellectual property claims and proceedings brought against us, whether successful or not, could result in substantial costs and harm to our reputation. Defending our intellectual property rights could result in the expenditure of significant financial and managerial resources, which could adversely affect our business, financial condition, and operating results. If our business is successful, the possibility may increase that others will assert infringement claims against us.

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We use intellectual property licensed from third parties in our operations. There is a risk that such licenses may be terminated, which could significantly disrupt our business. In such an event, we may be required to spend significant time and money to develop a non-infringing system or process or license intellectual property that does not infringe upon the rights of that other person or to obtain a license for the intellectual property from the owner. We may not be successful in that development or any such license may not be available on commercially acceptable terms, if at all. In addition, any litigation could be lengthy and costly and could adversely affect us even if we are successful in such litigation.

Our corporate name and certain of our trade names may not be eligible for protection if, for example, they are generic or in use by another party. We may be unable to prevent competitors from using trade names or corporate names that are confusingly similar or identical to ours. A company organized under the laws of the State of Florida and whose shares are publicly traded under the symbol “WEGY” also operates under the name “World Energy Solutions, Inc.” According to its filings with the Securities and Exchange Commission, this other company changed its name to “World Energy Solutions” in November 2005, and is in the business of manufacturing and selling transient voltage surge suppressors and related products and commercial and residential energy-saving equipment and applications to distributors and customers throughout the United States. Such filings indicate that this other company plans to implement a new business model to market a multi-product package to commercial, industrial and residential facilities in order to lower their overall cost of electricity, gas and water. This appears to be a different business than ours. We cannot assure you that this other company will not seek to challenge our right to the use of our name, in which case we could be drawn into litigation and, if unsuccessful could be required, or could decide, to cease using the name World Energy Solutions, Inc., in which case we would not realize any value we had built in our name. Additionally, our reputation could be damaged if the other company continues its use of the name World Energy Solutions, Inc. and such other company develops a negative reputation.

Risks Relating to this Offering and Ownership of Our Common Stock

Because there has not been a public market for our common stock and our stock price may be volatile, you may not be able to resell your shares at or above the initial offering price.

Prior to this offering, you could not buy or sell our common stock publicly. We cannot predict the extent to which investors’ interests will lead to an active trading market for our common stock or whether the market price of our common stock will be volatile following this offering. The market for early stage Internet and technology stocks has been extremely volatile. The following factors, many of which are outside of our control, could cause the market price of our common stock to decrease significantly from the price you pay in this offering:

•  loss of any of the major energy consumers or suppliers using our auction platform;

•  departure of key personnel;

•  variations in our quarterly operating results;

•  announcements by our competitors of significant contracts, new transaction capabilities, enhancements, lower fees, acquisitions, distribution partnerships, joint ventures or capital commitments;

•  changes in governmental regulations and standards affecting the energy industry and our products, including implementation of additional regulations relating to consumer data privacy;

•  decreases in financial estimates by equity research analysts;

•  sales of common stock or other securities by us in the future;

•  decreases in market valuations of Internet or technology companies; and

•  fluctuations in stock market prices and volumes.

In the past, securities class action litigation often has been initiated against a company following a period of volatility in the market price of the company’s securities. If class action litigation is initiated against us, we

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will incur substantial costs and our management’s attention will be diverted from our operations. All of these factors could cause the market price of our stock to decline, and you may lose some or all of your investment. Also due to the size of the offering and market capitalization of our shares, and the fact that we will only be publicly listed on the Toronto Stock Exchange, the market for our common stock may be volatile and may not afford a high level of liquidity.

Future sales of our common stock by existing stockholders could cause our stock price to decline.

If our existing stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could decrease significantly. The perception in the public market that our stockholders might sell shares of common stock could also depress the market price of our common stock. A substantial portion of our existing stockholders prior to this offering are subject to lock-up agreements with the underwriters that restrict their ability to transfer their stock for at least 365 days after the date of this prospectus. Upon expiration of the lock-up agreements, an additional 43,368,733 shares of our common stock will be eligible for sale in the public market. In addition, we intend to file registration statements with the SEC covering (a) substantially all of the shares of our common stock acquired upon option exercises prior to the closing of this offering, other than shares we believe are eligible for sale pursuant to Rule 144(k) under the U.S. Securities Act of 1933, as amended, as of the time of filing, (b) all of the shares subject to options outstanding, but not exercised, as of the closing of this offering, and (c) all of the shares available for future issuance under our stock incentive plans upon the closing of this offering. The market price of shares of our common stock may drop significantly when the restrictions on resale by our existing stockholders lapse and our stockholders are able to sell shares of our common stock into the market. A decline in the price of shares of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities, and may cause you to lose part or all of your investment in our shares of common stock.

Massachusetts Capital Resource Company holds certain piggy-back and demand registration rights with respect to 600,000 shares. The underwriters for this offering have piggy-back registration rights with respect to the 1,000,000 shares issuable upon exercise of the warrants being issued in connection with this offering. In the event that the holders of registration rights were to exercise such rights, upon registration of the shares of our common stock in connection with any such exercises, sales of a substantial number of shares of our common stock in the applicable public market could occur. Such sales, or the perception in such market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.

Our auditors identified a material weakness in our internal control over financial reporting as of December 31, 2005

In a letter dated August 2, 2006, our external auditors, UHY LLP, advised us that they were concerned that as of and for the year ended December 31, 2005, we were operating without an experienced principal accounting/financial officer with sufficient knowledge of accounting principles generally accepted in the United States, SEC financial reporting issues, internal controls, and other complex accounting and reporting issues, and that the lack of such an officer constituted a “material weakness” in our internal control over financial reporting as of December 31, 2005. A “material weakness” is a control deficiency or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement in the financial statements or related disclosures will not be prevented or detected. In May 2006, we hired a full-time chief financial officer with the appropriate experience and background to manage the diverse and complex financial issues that may arise in our business. In addition, we have recently reorganized our accounting staff and have hired an additional professional to augment our staff. As a public company we will become subject to Section 404 of the Sarbanes-Oxley Act. Compliance with Section 404 will result in the incurrence of significant costs, the commitment of time and operational resources and the diversion of management’s attention. If our management identifies additional material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent auditors are unable to attest that our

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management’s report is fairly stated or they are unable to express an opinion on our management’s evaluation or on the effectiveness of our internal controls, our business may be harmed. Market perception of our financial condition and the trading price of our stock may also be adversely affected and customer perception of our business may suffer.

We have broad discretion in the use of the proceeds of this offering and may apply the proceeds in ways with which you do not agree.

Substantially all of our net proceeds from this offering will be used, as determined by management in its sole discretion, including for repayment of debt, to develop a green credits trading capability, and for working capital and general corporate purposes, including for possible acquisitions and strategic transactions complementary to our existing operations. Although we have provided detail in the Use of Proceeds section below regarding our current strategic plans and estimates, we have not committed to the use of funds for those purposes or in those estimated amounts. Our management will have broad discretion over the use and investment of these net proceeds of this offering and, accordingly, you will need to rely upon the judgment of our management with respect to our use of these net proceeds, with only limited information concerning management’s specific intentions. You will not have the opportunity, as part of your investment decision, to assess whether our proceeds are being used appropriately. Pending application of our proceeds, they may be placed in investments that do not produce income or that lose value.

Our directors and executive officers will continue to have substantial control over us after this offering and could limit your ability to influence the outcome of key transactions, including changes of control.

We anticipate that our executive officers and directors and entities affiliated with them will, in the aggregate, beneficially own up to 36.8% of our outstanding common stock following the completion of this offering. In particular, Richard Domaleski, our president and chief executive officer, will beneficially own up to 26.3% of our outstanding common stock following the completion of this offering. Our executive officers, directors and affiliated entities, if acting together, would be able to control or influence significantly all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other significant corporate transactions. These stockholders may have interests that differ from yours, and they may vote in a way with which you disagree and that may be adverse to your interests. The concentration of ownership of our common stock may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company, and may affect the market price of our common stock.

Our corporate documents and Delaware law make a takeover of our company more difficult, we have a classified board of directors and certain provisions of our certificate of incorporation and by-laws require a super-majority vote to amend, all of which may prevent certain changes in control and limit the market price of our common stock.

Our charter and by-laws and Section 203 of the Delaware General Corporation Law contain provisions that might enable our management to resist a takeover of our company. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years after the person became an interested stockholder, unless the interested stockholder attained such status with the approval of our Board or the business combination is approved in a prescribed manner. Our certificate of incorporation and by-laws establish a classified board of directors such that our directors serve staggered three-year terms and do not all stand for re-election every year. In addition, any action required or permitted to be taken by our stockholders at an annual meeting or special meeting of stockholders may only be taken if it is properly brought before the meeting and may not be taken by written action in lieu of a meeting, and special meetings of the stockholders may only be called by the chairman of the Board, the Chief Executive Officer or our Board. Further, our certificate of incorporation provides that directors may be removed only for cause by the affirmative vote of the holders of 75% of our shares of capital stock entitled to vote, and any vacancy on our Board, including a vacancy resulting from an enlargement of our Board, may only be filled by vote of a majority of our directors then in office. In addition, our by-laws

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establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of stockholders, including proposed nominations of persons for election to the Board. These provisions of our certificate of incorporation and by-laws, including those setting forth the classified board, require a super-majority vote of stockholders to amend. These provisions might discourage, delay or prevent a change in the control of our company or a change in our management. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. The existence of these provisions could limit the price that investors might be willing to pay in the future for shares of our common stock.

You will experience immediate and substantial dilution in the net tangible book value of the common stock you purchase in this offering.

If you purchase shares of our common stock in this offering, you will experience immediate dilution of $0.72 per share, because the price that you pay will be substantially greater than the adjusted net tangible book value per share of common stock that you acquire. This dilution is due to the fact that we have sold securities in the past at a price that is lower than the price in this offering and have experienced losses in the past resulting in a net tangible asset deficiency prior to giving effect to this offering. If the outstanding options to purchase our common stock are exercised, you will experience additional dilution.

We may choose not to continue to file periodic reports with the SEC following this offering if we are not required to do so, which would limit the information available about us in the United States, and because we are not listing on a United States exchange, we do not have the same disclosure and corporate governance obligations as a company that is so listed.

Under United States securities laws, we are required to file informational reports about us with the SEC, including periodic reports on Forms 10-K and 10-Q and current reports on Form 8-K, following the effectiveness in the United States of the registration statement of which this prospectus is a part. However, unless we list our shares on a market located in the United States, our obligation to file those reports will be suspended as to any year in the event that our shares are held by fewer than 300 stockholders of record as of the beginning of that year. In such an event, we may choose not to file those reports and the information you would thereafter receive about us would be limited. We may choose not to file those reports for cost or other reasons. In addition, in the event we are not required to be a reporting issuer under the Securities Exchange Act we will no longer be subject to certain rules intended to protect U.S. investors, such as the Sarbanes-Oxley Act. Our determination not to file those reports could have the result of limiting the market for our shares, and thereby have a negative effect on our stock price. Should we not have an obligation to file periodic reports in accordance with United States securities laws, we will file periodic reports in compliance with National Instrument 51-102 of the Canadian securities regulators.

We are registering the shares being issued in connection with this offering on the Toronto Stock Exchange and not any U.S. exchange. Because we are not planning to list on any U.S. exchange, we will not have the same disclosure and corporate governance obligations as companies that are listed on a U.S. exchange. However, we will be subject to corporate governance and disclosure requirements of companies listed on the Toronto Stock Exchange and as a result of being a reporting issuer in each of the provinces of Canada.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this prospectus regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects and plans and objectives of management are forward-looking statements. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that the expectations underlying any of our forward-looking statements are reasonable,

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these expectations may prove to be incorrect and all of these statements are subject to risks and uncertainties. Should one or more of these risks and uncertainties materialize, or should underlying assumptions, projections or expectations prove incorrect, actual results, performance or financial condition may vary materially and adversely from those anticipated, estimated or expected. The sections of this prospectus entitled “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “The Business”, as well as other sections of this prospectus, discuss some of the factors that could contribute to these differences.

The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately $15.2 million after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ over-allotment option is exercised in full, we estimate the net proceeds will be approximately $17.8 million. We will not receive any proceeds from the sale of shares by the selling stockholders.

Although there can be no assurance that our estimates related to our various proposed strategic initiatives or that facts and circumstances will not change causing the Board to direct management to utilize our assets, including the proceeds of this offering, in different amounts or for different purposes altogether, our current estimates are that we would use our net proceeds of the offering as follows:

•  $5.0 million to $10.0 million to fund acquisitions, including due diligence. We continually evaluate potential acquisition and strategic opportunities and intend to pursue such transactions if and when our Board determines it is in our best interest. Although we are not currently a party to any arrangement or understanding with respect to such a transaction, we believe that it is possible that we will consummate one or more of such transactions in the future.

•  $3.0 million to $5.0 million to develop a green credits platform which will include hiring additional sales and account management staff (potentially including a European office), enhancing our non-U.S. marketing capabilities (including development of non-U.S. sales materials, demand generation activities, and public relations), software development or modification for buying and selling green credits, and travel associated with sales and account management. We expect to spend a majority of the net proceeds that are allocated to the development of a green credits platform during 2007. A majority of this allocated amount will be expended on the development, programming and testing of auction software having functionality to accommodate a subdivision of the offered green credits among multiple buyers in multiple volumes.

•  $2.0 million to pay the principal and interest under an outstanding promissory note to the Massachusetts Capital Resource Company.

•  $1.5 million to $2.5 million for growing our channel partner base which would include the addition of sales and account management staff, marketing (one time material development, demand generation activities, and public relations), channel certification training, software development, and travel associated with partnering, sales support, and account management.

•  $1.5 million to $2.5 million to target other energy-related markets through the hiring of additional market directors who are experts in other energy markets such as fuels, making investments in software development to accommodate new commodities and new data feeds related to the new commodities, and marketing expenses.

•  $1.5 million to $2.5 million to target utilities through the addition of sales and account management staff, marketing (one time material development, demand generation activities, and public relations), utility self-serve training, software development, and travel associated with sales and account management.

•  $0.5 million to $1.5 million to expand our government relationships through the addition of sales and account management staff and marketing and to grow our District of Columbia office.

The promissory note issued to the Massachusetts Capital Resource Company in November of 2005 that is being repaid bears interest at the rate of 10% per year and is due in quarterly installments of $125,000 commencing September 30, 2009 through its maturity on June 30, 2013. Of the funds borrowed from Massachusetts Capital Resource Company, $500,000 was used to repay debt owed to Silicon Valley Bank. The proceeds from the Massachusetts Capital Resource Company borrowing were used by the Company for general working capital purposes.

This expected use of the net proceeds of this offering represents our current intentions based upon our present plans and business conditions. The amounts and timing of our actual expenditures will depend upon

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numerous factors, and we may decide to reallocate funds in response to business conditions, opportunities and circumstances. Our management will have broad discretion over the use and investment of the net proceeds and, accordingly, you will need to rely upon the judgment of our management with respect to the use of proceeds.

Pending the application of the net proceeds of the offering as described above, we intend to invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our common stock. Our current intention is to retain earnings to fund the development and growth of our business, and therefore we do not anticipate declaring or paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon a number of factors, including our results of operations, financial condition, future prospects, contractual restrictions, restrictions imposed by applicable law and other factors our board deems relevant.

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CAPITALIZATION

The following table sets forth our capitalization as of December 31, 2005 and June 30, 2006. The June 30, 2006 information is presented:

•  on an actual basis; and

•  on a pro forma as adjusted basis to give effect to this offering, the repayment of debt and related interest with the proceeds from this offering and the conversion of our outstanding non-voting common stock and preferred stock into common stock.

You should read this information together with our consolidated financial statements and the related notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Use of Proceeds” appearing elsewhere in this prospectus.

				As of June 30, 2006
	As of December 31,						Pro forma
	2005			Actual			as adjusted(1)
Cash and cash equivalents	$	1,584,066		$	816,603		$	14,003,520
Series A redeemable convertible preferred stock	$	1,501,698		$	1,505,298		$	—
Long-term liabilities		1,879,745			1,874,583			109,783
Stockholders’ equity (deficit)
Share capital		2,923,344			2,829,318			19,521,533
Treasury stock		(151,953	)		—			—
Accumulated deficit		(3,710,274	)		(3,930,086	)		(4,165,286	)
Total stockholders’ equity (deficit)		(938,883	)		(1,100,768	)		15,356,247
Total capitalization	$	2,442,560		$	2,279,113		$	15,466,030

⁽¹⁾ The estimated net proceeds to us from this offering are $15,186,917 after deducting underwriting discounts and commissions and estimated offering expenses.

MCRC Indebtedness and Warrants

In November 2005, we issued a $2.0 million subordinated note to Massachusetts Capital Resource Company, or MCRC, that bears interest at the rate of 10% per year and is due in quarterly installments of $125,000 commencing September 30, 2009 through its maturity on June 30, 2013. We intend to use approximately $2.0 million of our net proceeds from the offering to pay in full the outstanding principal and interest of the note held by MCRC. We also issued a warrant to MCRC in connection with the issuance of the note. The warrant is exercisable for 600,000 shares of common stock at a price of $0.40 per share until June 30, 2013. The pro forma as adjusted numbers do not assume the exercise of these warrants.

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DILUTION

If you invest in our common stock, your interest will be immediately diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering. The net tangible book deficit of our common stock as of June 30, 2006 was $(1.1) million, or approximately $(0.03) per share. Net tangible book deficit per share represents the amount of stockholders’ deficit divided by 42,349,744 shares of common stock outstanding at that date.

Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of common stock in this offering and the pro forma net tangible book value per share of common stock immediately after completion of this offering and the use of such proceeds to repay debt as described herein. After giving effect to our sale of 20,000,000 shares of common stock in this offering, after deducting underwriting discounts and commissions and estimated offering expenses, our pro forma net tangible book value as of June 30, 2006 would have been $15.4 million, or approximately $0.21 per share. This represents an immediate increase in net tangible book value of $0.24 per share to existing stockholders and an immediate dilution in net tangible book value of $0.72 per share to purchasers of common stock in this offering, as illustrated in the following table:

Initial public offering price per share				$	0.93
Net tangible book value per share as of June 30, 2006	$	(0.03	)
Increase per share attributable to new investors		0.24
Pro forma net tangible book value per share at June 30, 2006 after giving effect to this offering					0.21
Dilution per share to new investors				$	0.72

Assuming the exercise in full of the underwriters’ over-allotment option, our pro forma net tangible book value at June 30, 2006 would have been approximately $0.24 per share, representing an immediate increase in the pro forma net tangible book value of $0.27 per share to our existing stockholders and an immediate dilution in net tangible book value of $0.69 per share to new investors.

The following table summarizes, on a pro forma basis, as of June 30, 2006, the difference between the number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid by existing stockholders and by new investors in this offering at an initial public offering price of $0.93 per share, before deducting underwriting discounts and commissions and estimated offering expenses.

											Average
	Shares Purchased					Total Consideration					Price
	Number		Percent			Amount		Percent			per Share
Existing stockholders		52,783,248		73	%	$	4,071,579		18	%	$	0.08
New investors		20,000,000		27		$	18,597,600		82		$	0.93
Total		72,783,248		100	%	$	22,669,179		100	%	$	0.31

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SELECTED CONSOLIDATED FINANCIAL DATA

The following table summarizes our consolidated financial data for the periods presented. You should read the following financial information together with the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes to those consolidated financial statements appearing elsewhere in this prospectus. The selected consolidated statements of operations data for the fiscal years ended December 31, 2003, 2004 and 2005, and the selected consolidated balance sheet data as of December 31, 2004 and 2005 are derived from the audited consolidated financial statements, which are included elsewhere in this prospectus. The selected consolidated statements of operations data for the years ended December 31, 2001 and 2002, and the consolidated balance sheet data at December 31, 2001, 2002 and 2003 are derived from our unaudited consolidated financial statements not included in this prospectus. The selected consolidated financial data as of and for the periods ended June 30, 2005 and June 30, 2006 are derived from our unaudited consolidated financial statements. The unaudited consolidated financial statements for such six-month periods have been prepared on the same basis as our audited financial statements and include, in the opinion of management, all adjustments, consisting of only normal recurring adjustments, that management considers necessary for the fair presentation of the financial information set forth in those statements. Historical results are not necessarily indicative of the results to be expected in future periods.

																Six Months Ended
	For the Years Ended December 31,															June 30,
	2001			2002			2003			2004			2005			2005			2006
Consolidated Statement of Operations Data:
Revenue	$	259,876		$	1,627,286		$	2,474,699		$	3,191,660		$	4,673,987		$	2,156,544		$	2,479,770
Cost of revenue		260,686			795,367			872,647			563,972			648,410			326,671			490,955
Gross profit (loss)		(810	)		831,919			1,602,052			2,627,688			4,025,577			1,829,873			1,988,815
Operating expenses:
Sales and marketing		452,104			1,485,410			1,781,173			1,814,799			2,649,786			1,328,728			1,496,309
General and administrative		567,034			577,371			557,910			710,462			995,703			333,447			754,933
Total operating expenses		1,019,138			2,062,781			2,339,083			2,525,261			3,645,489			1,662,175			2,251,242
Operating income (loss)		(1,019,948	)		(1,230,862	)		(737,031	)		102,427			380,088			167,698			(262,427	)
Other income (expense), net(1)		(109,431	)		(272,866	)		(180,738	)		960,524			(86,838	)		(22,111	)		(101,182	)
Income (loss) before income taxes		(1,129,379	)		(1,503,728	)		(917,769	)		1,062,951			293,250			145,587			(363,609	)
Income tax benefit		—			—			—			—			(754,000	)		—			(143,797	)
Net income (loss)		(1,129,379	)		(1,503,728	)		(917,769	)		1,062,951			1,047,250			145,587			(219,812	)
Accretion of preferred stock issuance costs		—			—			(7,199	)		(7,199	)		(7,199	)		(3,600	)		(3,600	)
Net income (loss) available to common stockholders	$	(1,129,379	)	$	(1,503,728	)	$	(924,968	)	$	1,055,752		$	1,040,051		$	141,987		$	(223,412	)
Net income (loss) available to common stockholders per share:
Basic Voting	$	(0.04	)	$	(0.05	)	$	(0.03	)	$	0.02		$	0.02		$	—		$	(0.01	)
Basic Non-Voting		—			—			(0.03	)		0.02			0.02			—			(0.01	)
Diluted Voting and Non-Voting		(0.04	)		(0.05	)		(0.03	)		0.02			0.02			—			(0.01	)
Weighted average shares outstanding — Basic:
Voting Common Stock		30,129,260			30,340,029			30,105,188			32,058,759			33,049,472			33,049,472			33,087,533
Non-Voting Common Stock		—			—			339,726			2,880,592			6,778,327			6,764,290			7,650,328
Total Common Stock-Basic		30,129,260			30,340,029			30,444,914			34,939,351			39,827,799			39,813,762			40,737,861
Weighted Average Shares Outstanding — Diluted:		30,129,260			30,340,029			30,444,914			52,096,206			55,945,568			56,122,875			40,737,861
Pro forma net earnings (loss) per share available to common stockholders													$	0.02					$	—
Pro forma weighted average shares outstanding:
Basic														50,261,303						51,171,365
Diluted														55,945,568						56,084,979

⁽¹⁾ Other income (expense) for the year ended December 31, 2004 includes a gain of $1,062,775 from extinguishment of debt.

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																Six Months
	For the Years Ended December 31,															Ended June 30,
	2001			2002			2003			2004			2005			2006
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	(28,523	)	$	263,531		$	220,796		$	49,389		$	1,584,066		$	816,603
Working capital		(582,947	)		(999,592	)		(2,051,277	)		(882,162	)		1,372,542			1,025,753
Total assets		866,685			1,141,337			934,635			941,688			3,787,842			3,889,459
Long-term liabilities		1,544,122			3,835,283			25,565			150,368			1,879,745			1,874,583
Series A redeemable convertible preferred stock		—			—			1,487,300			1,494,499			1,501,698			1,505,298
Accumulated deficit		(3,398,959	)		(4,902,707	)		(5,820,475	)		(4,747,524	)		(3,710,274	)		(3,930,086	)
Total stockholders’ deficit	$	(1,258,800	)	$	(2,669,421	)	$	(3,485,026	)	$	(2,241,134	)	$	(938,883	)	$	(1,100,768	)

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes appearing elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

World Energy is an energy brokerage company that has developed an online auction platform, the World Energy Exchange. We bring energy suppliers and commercial, industrial and government, or CIG, energy consumers together in the virtual marketplace, often with the assistance of channel partners. Our auction platform, the World Energy Exchange, is an online reverse auction supplemented with information about market rules, pricing trends, energy consumer usage and load profiles. Our procurement staff uses this auction platform to conduct auctions, analyze results, guide energy consumers through contracting, and track their contracts, sites, accounts and usage history. While our core competency is brokering electricity, we have adapted our World Energy Exchange auction platform to accommodate the brokering of natural gas, green power (i.e., electricity generated by renewable resources) and energy-related products. To date we have focused on CIG energy consumers.

We expect our operating expenses to increase in the future. In 2006, we hired additional staff to pursue the development of our channel partner network and expand the base of energy consumers using our auction platform. We have also hired additional staff for our back office functions to accommodate this growth and expansion into brokerage of additional energy-related products. We also expect there to be significant additional general and administrative expense associated with being a public company reporting in both the United States and Canada. We expect these additional costs to have a material adverse effect during fiscal 2006 and 2007 and to permanently increase our general and administrative expenses on a going-forward basis.

Operations

Revenue

We receive a monthly commission on energy sales contracted through our online auction platform from each energy supplier based on the energy usage generated and transacted between the energy supplier and energy consumer. Our commissions are based on the energy usage generated and transacted between the energy supplier and energy consumer multiplied by our contractual commission rate. Our contractual commission rate is negotiated with the energy consumer on a procurement by procurement basis based on energy consumer specific circumstances, including size of auction (kilowatt hours for electricity or decatherms for gas), internal effort required to organize and run the respective auction and competitive factors, among others. Once the contractual commission is agreed to with the energy consumer, all energy suppliers participating in the auction agree to that rate. That commission rate remains fixed for the duration of the contractual term regardless of energy usage. Energy consumers provide us with a letter of authority to request their usage history from the local utility. We then use this data to compile a usage profile for that energy consumer that will become the basis for the auction. This data may also be used to estimate revenue on a going forward basis, as noted below. Revenue from commissions is recognized as earned on a monthly basis over the life of each contract as energy is consumed. We gather actual usage data through multiple mechanisms including certain suppliers’ contractual requirements to supply actual usage data to us on a monthly basis, and/or usage data we receive on a quarterly basis from local utilities. We review these usage reports in detail to determine whether we believe that the data reported is a full and accurate assessment of the usage during that period. We record brokerage commissions based on actual usage data obtained from the

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energy supplier for that accounting period or, to the extent actual usage data is not available, based on the estimated amount of electricity and gas delivered to the energy consumers for that accounting period. Actual data might not be received from energy suppliers due to any one of a number of things, including: timing of meter reads, utility delays in gathering the data, and/or delays within the supplier organization in forwarding data to us. We develop our estimates on a quarterly basis based on the following criteria: payments received prior to the issuance of the financial statements; usage updates from energy suppliers; and usage data from utilities. We regularly evaluate our estimates and underlying assumptions based upon our historical experience and various other factors that we believe to be reasonable under the circumstances. To the extent actual results differ from those estimates, adjustments will be made in the period in which the difference is determined.

Historically, our revenue and operating results have varied from quarter-to-quarter and are expected to continue to fluctuate in the future. These fluctuations are primarily due to energy usage, particularly electricity, having higher demand in our second and third quarters and lower demand during our fourth and first quarters. In addition, the activity levels on the World Energy Exchange can fluctuate due to a number of factors, including geopolitical events, weather conditions and market prices. To the extent these factors affect the purchasing decisions of energy consumers, our future results of operations may be affected.

Contracts are signed for a variety of term lengths, with a one year contract term being typical for commercial and industrial energy consumers, and government contracts typically having two to three year terms. Our revenue has grown over the last three years through new participants utilizing our World Energy Exchange as well as energy consumers increasing the size or frequency of their transactions on our exchange platform.

We do not directly invoice energy suppliers and, therefore, we report all of our receivables as “unbilled.” Unbilled accounts receivable represents management’s best estimate of energy provided by the energy suppliers to the energy consumers for a specific completed time period at contracted commission rates and is made up of two components. The first component represents energy usage for which we have received actual data from the supplier and/or the utility but for which payment has not been received at the balance sheet date. The majority of our contractual relationships with energy suppliers require them to supply actual usage data to us on a monthly basis and remit payment to us based on that usage. The second component represents energy usage for which we have not received actual data, but for which we have estimated usage.

Cost of Revenue

Cost of revenue primarily consists of:

•  employee costs (salaries and commissions) and other employee-related costs (primarily payroll taxes and fringe benefits) associated with our auction management services, which are directly related to the development and production of the online auction and maintenance of market related data on our auction platform (our supply desk function);

•  amortization of capitalized costs associated with our auction platform; and

•  rent, depreciation and other related overhead and facility-related costs.

Sales and marketing

Sales and marketing expenses consist primarily of:

•  third party commission expenses to our channel partners;

•  employee costs (salaries and commissions) and other employee-related costs (primarily payroll taxes and fringe benefits) related to sales and marketing personnel;

•  travel and related expenses;

•  general marketing costs such as trade shows and marketing materials; and

•  rent, depreciation and other related overhead and facility-related costs.

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While third party and sales commission expense vary as a function of revenue from period-to-period, we expect increases in non-commission sales and marketing expenses as we plan to increase the size of our sales and marketing staff within our government and channel partner groups, expand our geographic reach through the opening of additional sales offices within the United States and launch new business initiatives.

General and administration

General and administrative expenses consist primarily of:

•  employee costs (salaries), employee-related costs (primarily payroll taxes and fringe benefits) and stock-based compensation related to general and administrative personnel;

•  accounting, legal and other professional fees; and

•  rent, depreciation and other related overhead and facility-related costs.

Other income (expense)

Other income (expense) consists primarily of:

•  interest expense on our $500,000 line of credit with a bank that matured on December 14, 2005 and our $2.0 million subordinated note payable to Massachusetts Capital Resource Company;

•  interest expense related to capital leases; and

•  gain on extinguishment of debt in 2004.

Income tax benefit

Income tax benefit primarily relates to the partial reversal of our valuation allowance in 2005 against our previously established deferred tax assets. A valuation allowance was provided against the deferred tax assets generated in prior years due to uncertainty regarding the realization of those deferred tax assets, primarily net operating loss carryforwards, in the future.

Results of Operations

The following table sets forth certain items as a percent of revenue for the periods presented:

										For the Six
										Months
	For the Year Ended									Ended
	December 31,									June 30,
	2003			2004			2005			2005			2006
										(Unaudited)
Revenue		100	%		100	%		100	%		100	%		100	%
Cost of revenue		35			18			14			15			20
Gross profit		65			82			86			85			80
Operating expenses:
Sales and marketing		72			57			57			62			60
General and administrative		23			22			21			15			31
Operating income (loss)		(30	)		3			8			8			(11	)
Other income (expense)		(7	)		30			(2	)		(1	)		(4	)
Income tax benefit		—			—			(16	)		—			(6	)
Net income (loss)		(37	)%		33	%		22	%		7	%		(9	)%

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Comparison of the Six Months Ended June 30, 2005 and 2006

Revenue

	For the Six Months
	Ended June 30,				Increase
	2005		2006		(Decrease)
Revenue	$	2,156,544	$	2,479,770	$	323,226	15	%

Revenue increased by $323,226 or 15%, primarily due to increased auction activity being conducted on the exchange. These increases were primarily due to the increase to 21 channel partners as of June 30, 2006 from 11 as of June 30, 2005 and the addition of new government procurements. Of those channel partners, 15 had successfully contributed to our revenue by brokering transactions over the exchange in the first six months of 2006 as compared to 9 during the first six months of 2005. In addition, our 2006 revenue for this period benefited from a procurement contract with the Commonwealth of Massachusetts which was entered into in December 2005.

Cost of revenue

	For the Six Months Ended June 30,
	2005					2006
	$		% of Revenue			$		% of Revenue			Increase (Decrease)
Cost of revenue	$	326,671		15	%	$	490,955		20	%	$	164,284	50	%

The 50% increase in cost of revenue related to the six month period ended June 30, 2006 as compared to the same period in 2005 was substantially due to an increase in employee and employee-related costs associated with the addition of 5 new employees and general salary increases. Cost of revenue as a percent of revenue increased 5% primarily due to the cost increases noted above, partially offset by the 15% increase in revenue.

Operating expenses

	For the Six Months Ended June 30,
	2005					2006
	$		% of Revenue			$		% of Revenue			Increase (Decrease)
Sales and marketing	$	1,328,728		62	%	$	1,496,309		60	%	$	167,581	13	%
General and administrative		333,447		15			754,933		31			421,486	126
Total operating expenses	$	1,662,175		77	%	$	2,251,242		91	%	$	589,067	35	%

The 13% increase in sales and marketing expense for the six month period ended June 30, 2006 as compared to the same period in 2005 was primarily due to an increase in employee and employee-related costs associated with one additional employee, general salary increases and increased commission costs associated with our increased sales activity as well as increased sales and marketing activities. Sales and marketing expense as a percentage of revenue during such period decreased 2% due to the increase in revenue discussed above substantially offset by the increase in employee and employee-related costs.

The 126% increase in general and administrative expenses related to the six month period ended June 30, 2006 was primarily due to employee-related costs associated with the addition of three new employees, compliance and recruiting costs as we increased staffing in all functional areas. General and administrative expenses as a percent of revenue increased 16% substantially due to the cost increases noted above, partially offset by the 15% increase in revenue.

Other income (expense)

Interest expense increased approximately $79,000, or 358%, during the six months ended June 30, 2006 as compared to the same period in 2005 primarily due to our $2.0 million, 10% subordinated note financing

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with Massachusetts Capital Resource Corporation on November 7, 2005, referred to herein as the MCRC note. This note replaced a $500,000 revolving line of credit with a bank that bore interest at the then effective prime rate plus 1%. The revolving line of credit was scheduled to mature on December 14, 2005. As a result, we commenced discussions with various lending and equity institutions to investigate increasing our lending capacity in the form of a long-term instrument. The MCRC note met both of those criteria and not only afforded us the opportunity to retire the line of credit with long-term financing but also gave us additional funds to pursue our long-term growth strategy through expansion of our work force and channel partner network. The increase in interest expense was partially offset by an increase in interest income earned on the invested portion of the proceeds from this borrowing.

Income tax benefit

We recorded an income tax benefit of approximately $144,000 for the six months ended June 30, 2006 reflecting an expected effective federal and state tax rate of 40%. We did not record an income tax benefit for the six months ended June 30, 2005. A valuation allowance was provided against the tax benefit generated during this period due to uncertainty regarding the realization of the net operating loss in the future.

Net income (loss)

We reported a net loss for the six months ended June 30, 2006 of approximately $220,000 compared to net income of approximately $146,000 in 2005. The net loss in 2006 versus net income in 2005 is primarily due to the increases in operating expenses and net interest expense, which were partially offset by the increase in revenue.

Comparison of the Years Ended December 31, 2004 and 2005

Revenue

	For the Years Ended December 31,
	2004		2005		Increase (Decrease)
Revenue	$	3,191,660	$	4,673,987	$	1,482,327	46	%

Revenue increased approximately $1.5 million, or 46%, in 2005 primarily due to an increase in auction activity being conducted on the World Energy Exchange. The increase was substantially due to the increase to 16 channel partners at the end of 2005 from 10 at the end of 2004. Of those channel partners, 10 had successfully contributed to our revenue by brokering transactions over the World Energy Exchange in 2005, compared to eight in 2004. In addition, we benefited from a full year of revenue from the State of Maryland procurement in 2005, which was contracted in June 2004, and in December 2004, the second largest procurement in our history using our auction platform was completed by the District of Columbia.

Cost of revenue

	For the Years Ended December 31,
	2004					2005
	$		% of Revenue			$		% of Revenue			Increase (Decrease)
Cost of revenue	$	563,972		18	%	$	648,410		14	%	$	84,438	15	%

The 15% increase in cost of revenue in 2005 was substantially due to employee-related costs within the supply desk function and, to a lesser extent, increased amortization of capitalized software costs, rent and depreciation expense. Employee related costs increased primarily due to increased internal commissions directly related to the increase in revenue. Cost of revenue as a percent of revenue decreased 4% primarily due to the 46% increase in revenue partially offset by the cost increases discussed above.

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Operating expenses

	For the Years Ended December 31,
	2004					2005
	$		% of Revenue			$		% of Revenue			Increase (Decrease)
Sales and marketing	$	1,814,799		57	%	$	2,649,786		57	%	$	834,987	46	%
General and administrative		710,462		22			995,703		21			285,241	40
Total operating expenses	$	2,525,261		79	%	$	3,645,489		78	%	$	1,120,228	44	%

The 46% increase in sales and marketing expense in 2005 was primarily due to third party commissions due our channel partners and, to a lesser extent, employee-related costs, including internal commissions and payroll and increased occupancy costs. Payroll increased due to the addition of one person in sales and marketing during 2005 and increased internal commission costs associated with our increase in revenue. Sales and marketing expenses as a percentage of revenue was flat year over year as the percentage increase in revenue in 2005 resulted in a corresponding percentage increase in commission expenses.

The 40% increase in general and administrative expense in 2005 was primarily due to compliance related costs, including legal and accounting services, employee-related costs and recruiting and human resource costs. These cost increases were all related to developing and enhancing our internal processes including general business matters, auditing expense and staff requirements, retention and recruitment. In addition, employee related costs increased in 2005 as fewer costs were allocated to capitalized software costs as compared to 2004. General and administrative expenses as a percentage of revenue decreased 1% primarily due to the increase in revenue substantially offset by the 40% increase in costs discussed above.

Other income (expense)

Other expense was approximately $87,000 in 2005 as compared to other income of approximately $961,000 in 2004. Other income in 2004 included an approximate $1,063,000 gain from extinguishment of debt with no similar gain in 2005. Interest expense decreased approximately $7,000, or 7%, primarily due to a decrease in interest expense on our capital leases and a decrease in interest expense related to an obligation to a securing party of our bank debt. These decreases were partially offset by interest on the MCRC note and increases in the effective borrowing rate on our $500,000 revolving line of credit with a bank.

Income tax

We recorded an income tax benefit during the fourth quarter in 2005 as we determined that it was more likely than not that a portion of our deferred tax assets would be benefited against expected future income. We did not record an income tax provision for the year ended December 31, 2004 as income (loss) before income taxes was substantially offset by net operating loss carryforwards of approximately $3.2 million and a valuation allowance was provided against our deferred tax assets. At December 31, 2005, we had gross deferred tax assets of approximately $1.4 million, against which a valuation allowance of approximately $639,000 had been applied. Gross deferred tax liabilities of approximately $40,000 were applied against the net deferred tax asset. Prior to December 31, 2005, we had determined that it was not more likely than not that we would be able to benefit from our deferred tax assets in the future. At December 31, 2005, we reassessed the recoverability of these deferred tax items both on recent operating history and forecasts for the next three years and determined that a portion of our deferred tax assets would, more likely than not, be recoverable in the future. As a result, we recognized a tax benefit of approximately $754,000 for the year ended December 31, 2005.

Net income

We reported net income for the year ended December 31, 2005 of $1,047,250 compared to net income of $1,062,951 in 2004. The decrease in net income in 2005 versus 2004 is primarily due to the $1,062,775 gain

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from debt extinguishment included in other income (expense) in 2004 with no similar gain in 2005. This decrease was substantially offset by the $754,000 tax benefit resulting from the release of a portion of the valuation allowance related to our deferred tax assets and, to a lesser extent, the approximate $278,000 increase in operating income resulting from the increased revenue and improvement in the gross margin percentage in 2005 as compared to 2004.

Comparison of the Years Ended December 31, 2003 and 2004

Revenue

	For the Years Ended December 31,
	2003		2004		Increase (Decrease)
Revenue	$	2,474,699	$	3,191,660	$	716,961	29	%

Revenue increased $716,961, or 29%, in 2004 primarily due to an increase in auction activity being conducted on the exchange. The increase was substantially due to the increase to 10 channel partners at the end of 2004 from six at the end of 2003. Of those channel partners, eight had successfully contributed to our revenue by brokering transactions over the exchange in 2004, compared to five in 2003. In addition, the State of Maryland used our auction platform for the first time to procure electricity. This two year contract provided revenue for the second half of 2004, all of 2005 and the first half of 2006.

Cost of revenue

	For the Years Ended
	December 31,
	2003					2004
	$		% of Revenue			$		% of Revenue			Increase (Decrease)
Cost of revenue	$	872,647		35	%	$	563,972		18	%	$	(308,675	)	(35	%)

The $308,675, or 35%, decrease in cost of revenue in 2004 was substantially due to a $250,000 impairment charge related to capitalized software in 2003 and an approximate $225,000 decrease in software amortization in 2004 versus 2003. These decreases were partially offset by an increase in employee-related costs as we built out our supply desk function in 2004. In 2003, we implemented our own auction platform after leasing a solution from a third party. We discontinued our use of the third party’s platform prior to the end of its lease resulting in a $250,000 impairment charge to write down certain acquired software to its fair value. This impairment resulted in the decrease in software amortization costs in 2004. Cost of revenue as a percent of revenue decreased 17% primarily due to the 35% decrease in cost of revenue and the 29% increase in revenue.

Operating expenses

	For the Years Ended December 31,
	2003					2004
	$		% of Revenue			$		% of Revenue			Increase (Decrease)
Sales and marketing	$	1,781,173		72	%	$	1,814,799		57	%	$	33,626	2	%
General and administrative		557,910		23			710,462		22			152,552	27
Total operating expenses	$	2,339,083		95	%	$	2,525,261		79	%	$	186,178	8	%

The $33,626, or 2%, increase in sales and marketing expense in 2004 was primarily due to increases in employee costs, travel and increased marketing activities substantially offset by a decrease in commission expense. Sales and marketing expense as a percentage of revenue decreased 15% due to the 29% increase in revenue.

The 27% increase in general and administrative expense in 2004 was primarily due to employee-related costs as we added staff, which was partially offset by decreases in legal and consulting costs. General and

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administrative expense as a percentage of revenue decreased 1% primarily due to the 29% increase in revenue substantially offset by the 27% increase in costs discussed above.

Other income (expense)

Other income in 2004 included an approximate $1,063,000 gain from extinguishment of debt with no similar gain in 2003. Interest expense decreased approximately $78,000, or 43%, in 2004 primarily due to a decrease in interest expense on a note issued to a third party as we incurred interest expense of $46,000 on this note in 2004 versus $100,000 in 2003.

Income tax benefit

We did not record an income tax provision for the years ended December 31, 2004 as income (loss) before income taxes was substantially offset by net operating loss carryforwards of approximately $3.1 million. No income tax benefit was recorded for the year ended December 31, 2003 due to the uncertainty regarding the realization of deferred tax assets.

Net income (loss)

We reported net income for the year ended December 31, 2004 of $1,062,951 compared to a net loss of $917,769 in 2003. The increase in net income in 2004 versus 2003 is primarily due to the $1,062,775 gain from debt extinguishment included in other income (expense) in 2004 with no similar gain in 2003 and the increase in revenue and improved gross margins in 2004 discussed above.

Liquidity and Capital Resources

We had a loan and security agreement with Silicon Valley Bank, which matured on December 14, 2005. The agreement consisted of a committed revolving line of credit of up to $500,000 and a security agreement with one of our investors who had agreed to provide an unconditional guarantee to the bank. We repaid the balance due under the agreement of $500,000 on November 7, 2005 and, accordingly, the security agreement was terminated.

In November 2005, we received $2.0 million in exchange for a subordinated note with the Massachusetts Capital Resource Company, which bears interest of 10% per annum, and requires quarterly interest payments beginning on December 31, 2005. We plan to repay this loan with proceeds of this offering. For the year ended December 31, 2005, interest expense related to the subordinated debt was $29,444.

We entered into a note payable agreement on June 29, 2001 for the purchase of certain long-lived intangible assets from a third party, bearing interest at 10% per annum for a three year period with any unpaid principal and interest due on June 29, 2004. In June 2004, the third party forgave the principal balance due under the note plus accrued interest in exchange for a one-time payment. The net effect is the $1,062,775 gain from extinguishment of debt included under the caption “Other income (expense)” in the accompanying consolidated statement of operations.

At June 30, 2006, we had no commitments for material capital expenditures. We have identified a number of strategic initiatives that we believe are key components of our future growth, including: continued development of our channel partner relationships; strengthening and expanding our long-term relationships with government agencies; entry into other energy-related markets; targeting utilities; and development of a green credits auction platform. We believe that our current management and financial resources are adequate to pursue these initiatives and to maintain our competitive position in the near term. The proceeds from this offering will allow us to expand and enhance our efforts in these areas including allocating additional resources for: development of our channel partner, government agency and utility relationships; pursuit and development of other energy-related markets; and additional investment in technology and personnel to further develop our green credit trading platform and to pursue overseas opportunities.

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Comparison of December 31, 2005 to June 30, 2006

	December 31,			June 30,
	2005			2006			Increase/(Decrease)
Cash and cash equivalents	$	1,584,066		$	816,603		$	(767,463	)	(48	)%
Unbilled accounts receivable		1,028,807			1,345,153			316,346		31
Days sales outstanding		75			98			23		31
Working capital		1,372,542			1,025,753			(346,789	)	(25	)
Stockholders’ deficit		(938,883	)		(1,100,768	)		(161,885	)	17

Cash and cash equivalents decreased $767,463, or 48%, due primarily to an increase in unbilled accounts receivable and the net loss for the period. Unbilled accounts receivable increased $316,346, or 31%, due to the increase in large government procurements, including the addition of the Commonwealth of Massachusetts procurement in 2006. These procurements tend to have longer payment cycles due to:

•  added complexity and volume;

•  the inclusion of various federal, state and local agencies that may be covered by the procurement (e.g. housing and prison authorities);

•  varied and extensive internal approval processes; and

•  an additional party (e.g., the local utility) involved in the payment cycle.

Eliminating the effect of the Massachusetts procurement, unbilled accounts receivable would have increased 3% and days sales outstanding would have been 87 as of June 30, 2006. To the extent we are awarded any large government procurements in the future, we expect to experience short term increases in our unbilled accounts receivable. We believe that we have adequate working capital to account for these short term fluctuations and that these accounts will not have a significant short-term impact on our future liquidity. We believe these receivables are collectible and the energy consumers and energy suppliers who are parties to these contracts are all large, credit worthy entities.

Working capital (consisting of current assets less current liabilities) decreased $346,789, or 25%, primarily due to the decrease in cash substantially offset by the increase in unbilled accounts receivable. Stockholders’ deficit increased due to the net loss for the period and, to a lesser extent, the repurchase of 25,000 shares of voting common stock for an aggregate consideration of $50,000. These increases in stockholders’ deficit were partially offset by the issuance of non-voting and voting common stock under option plans and warrant exercises.

Cash used in operating activities for the six months ended June 30, 2006 was $634,936, due primarily to the increase in unbilled accounts receivable described above and the net loss for the period. Cash used in investing and financing activities for the six months ended June 30, 2006 was $132,527, primarily due to the purchases of property and equipment, costs incurred in software development and costs associated with our initial public offering.

Cash provided by operating activities for the six months ended June 30, 2005 was $112,028 due primarily to the increase in accrued commissions and, to a lesser extent, net income. These sources of operating cash flow were partially offset by an increase in unbilled accounts receivable. Cash used in investing and financing activities for the six months ended June 30, 2005 was $55,647 primarily due to the capitalization of costs associated with software development and principal payments on capital lease obligations.

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Comparison of December 31, 2004 to December 31, 2005

	2004			2005			Increase/(Decrease)
Cash and cash equivalents	$	49,389		$	1,584,066		$	1,534,677		3,107	%
Unbilled accounts receivable		548,904			1,028,807			479,903		87
Days sales outstanding		63			75			12		19
Working capital		(882,162	)		1,372,542			2,254,704		256
Stockholders’ deficit		(2,241,134	)		(938,883	)		(1,302,251	)	(58	)

Cash and cash equivalents increased $1,534,677, or 3,107%, primarily due to the $2.0 million MCRC note. This increase was partially offset by the repayment of our $500,000 line of credit in December 2005. Unbilled accounts receivable increased $479,903, or 87%, due to the 46% increase in revenue in 2005 as compared to 2004. This increase in revenue was partially due to two large government procurements including the completion of the District of Columbia procurement in December 2004. These large government procurements accounted for the incremental percentage increase in unbilled accounts receivable in excess of the percentage revenue increase. Days sales outstanding increased 12 days, or 19%, primarily due to the effect of these large government procurements. Working capital increased $2,254,704 or 256%, primarily due to the proceeds from the MCRC note and, to a lesser extent, an increase in unbilled accounts receivable. These increases were partially offset by the repayment of the line of credit and, to a lesser extent, increases in current liabilities. Stockholders’ deficit decreased $1,302,251, or 58%, substantially due to net income for the year and, to a lesser extent, the fair value of warrants associated with the MCRC note.

Cash provided by operating activities for the year ended December 31, 2005 was $171,221, primarily resulting from net income for the period partially offset by the increase in working capital. Cash used in investing activities for the year ended December 31, 2005 was $79,749, primarily related to costs associated with software development and, to a lesser extent, purchases of property and equipment. Cash provided by financing activities for the year ended December 31, 2005 was $1,443,205, primarily due to the MCRC note described above less the repayment of the $500,000 line of credit.

Cash provided by operating activities for the year ended December 31, 2004 was $38,582 primarily resulting from net income for the period partially offset by an increase in working capital. Cash used in investing activities for the year ended December 31, 2004 was $96,326 primarily related to costs associated with software development and, to a lesser extent, purchases of property and equipment. Cash used in financing activities for the year ended December 31, 2004 was $113,663 primarily due to a payment related to a note payable with a third party and, to a lesser extent, principal payments on other notes payable. These cash uses were partially offset by the receipt of $168,872 from the exercise of options and warrants.

We have historically funded our operations from cash flow from operations and, when required, the issuance of various debt and equity instruments. Based on cash and cash equivalents as of June 30, 2006, and after giving effect to the offering, we expect to have approximately $14.0 million of cash and cash equivalents and no long term debt as of the closing of this offering. Actual cash and cash equivalents may vary from this amount with changes in our working capital balances prior to closing. We expect to continue to fund our operations from operating cash flow and, when required, the issuance of various debt and equity instruments. That notwithstanding, we expect that our operations and our cash and cash equivalents on hand at June 30, 2006 will meet our working capital requirements at least to December 31, 2007.

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Contractual Obligations and Other Commercial Commitments

The table below summarizes our gross contractual obligations and other commercial commitments as of December 31, 2005. As of December 31, 2005, we did not have any purchase obligations other than our capital and operating leases.

	Payments Due by Period
							2011 and
Contractual Obligations	2006		2007 and 2008		2009 and 2010		Thereafter		Total
Long-term debt	$	—	$	—	$	750,000	$	1,250,000	$	2,000,000
Capital leases		63,085		107,116		40,211		—		210,412
Operating leases		89,320		193,952		100,804		—		384,076
Total contractual obligations	$	152,405	$	301,068	$	891,015	$	1,250,000	$	2,594,488

Critical Accounting Policies

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Among the significant estimates affecting our consolidated financial statements are those relating to revenue recognition, software development costs, accrued commissions, employee and consultant stock option grants, impairment of long-lived assets and income taxes. We regularly evaluate our estimates and assumptions based upon historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent actual results differ from those estimates, our future results of operations may be affected. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. Refer to Note 2 of our notes to consolidated financial statements for a description of our accounting policies.

Revenue Recognition

We receive a monthly commission on energy sales contracted through our online auction platform from each energy supplier based on the energy usage generated and transacted between the energy supplier and energy consumer. Our commissions are not based on the retail price for electricity; rather they are based on the energy usage generated and transacted between the energy supplier and energy consumer multiplied by our contractual commission rate. Revenue from commissions is recognized as earned on a monthly basis over the life of each contract as energy is consumed, provided there is persuasive evidence of an arrangement, the sales price is fixed or determinable, collection of the related receivable is reasonably assured, and customer acceptance criteria, if any, has been successfully demonstrated.

We record brokerage commissions based on actual usage data obtained from the energy supplier for that accounting period, or to the extent actual usage data is not available, based on the estimated amount of electricity and gas delivered to the energy consumers for that accounting period. We develop our estimates on a quarterly basis based on the following criteria:

•  Payments received prior to the issuance of the financial statements;

•  Usage updates from energy suppliers; and

•  Usage data from utilities.

To the extent usage data cannot be obtained, we estimate revenue as follows:

•  Historical usage data obtained from the energy consumer in conjunction with the execution of the auction;

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•  Geographic/utility usage patterns based on actual data received;

•  Analysis of prior year usage patterns; and

•  Specific review of individual energy supplier/location accounts.

In addition, we perform sensitivity analyses on this estimated data based on overall industry trends including weather and usage data. Once the payment is received, we adjust the estimated accounts receivable and revenue to the actual total amount in the period during which the payment is received. Differences between estimated and actual revenue have not been material to date.

We do not directly invoice energy suppliers and, therefore, we report all of our receivables as “unbilled.” Unbilled accounts receivable represents management’s best estimate of energy provided by the energy suppliers to the energy consumers for a specific completed time period at contracted commission rates and is made up of two components. The first component represents energy usage for which we have received actual data from the supplier and/or the utility but for which payment has not been received at the balance sheet date. The majority of our contractual relationships with energy suppliers require them to supply actual usage data to us on a monthly basis and remit payment to us based on that usage. The second component represents energy usage for which we have not received actual data, but for which we have estimated usage.

We also earn revenue for market research and analysis as well as for bill analysis, presentment and payment. We recognize revenue from these services as earned, generally on a time and materials basis, pursuant to the terms and conditions of the arrangement. Any research that we provide, in order to facilitate the online auction, is non-billable and is absorbed by us as a period cost and charged to operations during the period in which it is incurred.

We pay commissions to our sales people and channel partners at contracted rates based on monthly energy transactions between energy suppliers and energy consumers. The commission is accrued monthly and charged to sales and marketing expense as revenue is recognized. We pay commissions to our salespeople at contractual commission rates based upon cash collections from our customers.

Our estimates in relation to revenue recognition affect revenue and sales and marketing expense as reflected on our statements of operations, and unbilled accounts receivable and accrued commissions accounts as reflected on our balance sheets. For any quarterly reporting period, we may not have actual usage data for certain energy suppliers and will need to estimate revenue. We record revenue utilizing estimated usage based on the energy consumers’ historical usage profile. At the end of each reporting period, we adjust estimated revenue to reflect actual usage for the period. For the six months ended June 30, 2006, we estimated usage for approximately 19% of our revenue resulting in an approximate 0.5% ($13,000) adjustment. This reduction in revenue, which is based on adjusted revenue for the quarter, resulted in an approximate 0.5% reduction in sales and marketing expense related to third party commission expense associated with those revenues. Corresponding adjustments were made to unbilled accounts receivable and accrued commissions, respectively. A 1% difference between this estimate and actual usage would have an approximate $26,000 effect on our revenue for the six months ended June 30, 2006.

Software Development

Certain acquired software and significant enhancements to our software are recorded in accordance with Statement of Position 98-1, “Accounting for Costs of Computer Software Developed or Obtained for Internal Use”. Accordingly, internally developed software costs of $61,488, $85,567 and $54,375 related to implementation, coding and configuration have been capitalized in 2003, 2004 and 2005, respectively. We amortize internally developed and purchased software over the estimated useful life (generally three years). For the years ended December 31, 2003, 2004 and 2005, $5,124, $28,625 and $54,747 of amortization expense was recorded as a component of cost of revenue, respectively.

Our estimates for capitalization of software development costs affect cost of revenue and capitalized software as reflected on our statements of operations and on our balance sheets. We capitalize certain acquired software and internal costs related to significant enhancements to our software by estimating the amount of

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time our internal staff has expended for implementation, coding and configuration to develop software. During the six months ended June 30, 2006, we capitalized approximately $38,000, or 1.0% of our total assets. We amortize internally developed and purchased software over its estimated useful life, which is generally three years. Amortization for the six months ended June 30, 2006 was approximately 7% of cost of revenue ($33,000). To the extent the carrying amount of the capitalized software costs may not be fully recoverable or that the useful lives of those assets are no longer appropriate, we may need to record an impairment (non-cash) charge and write-off a portion or all of the capitalized software balance on the balance sheet.

Long-Lived and Intangible Assets

In accordance with Statement of Financial Accounting Standards, or SFAS, No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, we periodically review long-lived assets and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable or that the useful lives of those assets are no longer appropriate. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate to the carrying amount. If the operation is determined to be unable to recover the carrying amount of our assets, then intangible assets are written down first, followed by the other long-lived assets of the operation to fair value. Fair value is determined based on discounted cash flows or appraised values, depending upon the nature of the assets.

Income Taxes

We account for income taxes in accordance with SFAS 109, “Accounting for Income Taxes”. Deferred tax assets and liabilities are determined at the end of each period based on the future tax consequences that can be attributed to net operating loss carryforwards, as well as differences between the financial statement carrying amounts of the existing assets and liabilities and their respective tax basis. Deferred income tax expense or credits are based on changes in the asset or liability from period to period. Valuation allowances are provided if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The realization of deferred tax assets is dependent upon the generation of future taxable income. In determining the valuation allowance, we consider past performance, expected future taxable income, and qualitative factors which we consider to be appropriate in estimating future taxable income. Our forecast of expected future taxable income is for future periods that can be reasonably estimated. Results that differ materially from current expectations may cause management to change its judgment on future taxable income. These changes, if any, may require us to adjust our existing tax valuation allowance higher or lower than the amount recorded.

Our estimates in relation to income taxes affect income tax benefit and deferred tax assets as reflected on our statements of operations and balance sheets, respectively. The deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized. The realization of deferred tax assets is dependant upon the generation of future taxable income. In determining the valuation allowance, we consider past performance, expected future taxable income, and qualitative factors which we consider to be appropriate to estimate future taxable income. Our forecast of expected future taxable income is for future periods that can be reasonably estimated. Results that differ materially from current expectations may cause management to change its judgment on future taxable income. These changes, if any, may require us to adjust our existing tax valuation higher or lower. As of December 31, 2005, we had deferred tax assets of approximately $1.4 million against which we had applied an approximate $639,000 valuation allowance. To the extent we determine that our deferred tax assets are no longer recoverable, it could result in a maximum $754,000 non-cash tax charge. To the extent we determine that it is more likely than not that we will recover all our deferred tax assets, it could result in a maximum $639,000 non-cash tax credit.

Stock-Based Compensation

Effective January 1, 2006, we account for stock-based compensation in accordance with SFAS No. 123(R), “Share-based Payments”, which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. SFAS No. 123(R) requires

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nonpublic companies that used the minimum value method in SFAS No. 123 for either recognition or pro forma disclosures to apply SFAS No. 123(R) using the prospective-transition method. As such, we will continue to apply Accounting Principles Board, or APB, Opinion No. 25 “Accounting For Stock Issued to Employees”, in future periods to equity awards outstanding at the date of SFAS No. 123(R)’s adoption that were measured using the minimum value method and prior period pro forma stock information has not been restated. In accordance with SFAS No. 123(R), we will recognize the compensation cost of share-based awards on a straight-line basis over the vesting period of the award.

Effective with the adoption of SFAS No. 123(R), we elected to use the Black-Scholes option pricing model to determine the weighted average fair value of options granted. As there was no public market for its common stock as of June 30, 2006, we determined the volatility for options granted in 2006 based on an analysis of its historical data and reported data for a peer group of companies that issued options with substantially similar terms. The expected volatility for options granted during the six months ended June 30, 2006 was 47%. The expected life of options has been determined utilizing the “simplified” method as prescribed by the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107, “Share-Based Payment”. The expected life of options granted during the six months ended June 30, 2006 was 4.75 years. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. We have not paid and do not anticipate paying cash dividends on its common stock; therefore, the expected dividend yield is assumed to be zero. In addition, SFAS No. 123(R)requires companies to utilize an estimated forfeiture rate when calculating the expense for the period, whereas, SFAS No. 123 permitted companies to record forfeitures based on actual forfeitures, which was the company’s historical policy under SFAS No. 123. As a result, we applied an estimated forfeiture rate of 13% in the first six months of 2006 in determining the expense recorded in the accompanying consolidated statement of operations.

Prior to January 1, 2006, we accounted for our stock-based awards to employees using the intrinsic value method prescribed in APB 25 and related interpretations. Under the intrinsic value method, compensation expense is measured on the date of grant as the difference between the deemed fair value of the company’s common stock and the option exercise price multiplied by the number of options granted. We provided the disclosures as required by SFAS No. 148, “Accounting for Stock-Based Compensation and Disclosure, an Amendment of FASB Statement No. 123”.

A summary of options outstanding and options exercisable as of June 30, 2006 is as follows:

	Options Outstanding								Options Exercisable
			Weighted
			Average		Weighted						Weighted
			Remaining		Average		Aggregate		Number		Average		Aggregate
Range of			Contractual		Exercise		Intrinsic		of Shares		Exercise		Intrinsic
Exercise Price	Options		Life		Price		Value		Exercisable		Price		Value
$0.025		2,851,029		4.37 years	$	0.025	$	2,579,839		2,538,747	$	0.025	$	2,297,261
$0.240		430,000		5.72 years		0.240		296,648		130,000		0.240		89,684
$0.380		400,000		6.58 years		0.380		219,952		—		—		—
		3,681,029		4.77 years	$	0.090	$	3,096,440		2,668,747	$	0.036	$	2,386,945

The aggregate intrinsic value in the table above represents the total intrinsic value of our outstanding options and exercisable options as of June 30, 2006 based on the offering price. The aggregate intrinsic value of options exercised during the six months ended June 30, 2006 was approximately $1,980,144.

Significant Factors Contributing to the Difference between Fair Value as of the Date of Grant and the Estimated Initial Public Offering Price

We determined that the deemed fair value of our common stock increased from $0.025 to $0.95 per share over the period from July 1, 2004 to July 31, 2006. The difference between the range of $0.025 to $0.95 per share and the per share price of this offering is attributable to the following factors:

•  At December 31, 2003, we had a working capital deficit of approximately $2.1 million, used cash from operations of approximately $133,000 and generated a net loss of approximately $918,000 during the

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year ended December 31, 2003. We expected to incur additional losses in the near term, were required to repay or refinance the maturity of a $1 million note obligation on June 29, 2004 and had no availability for incremental borrowing under our line of credit. As a result our independent accountants included a fourth paragraph to their review opinion dated March 4, 2004 indicating that we may be unable to continue as a going concern.

•  In June 2004, the $1 million note obligation was extinguished in exchange for a one-time payment.

•  In July 2004, the State of Maryland used our auction platform for the first time to procure electricity.

•  In December 2004, we extended the maturity of our line of credit from December 14, 2004 to December 14, 2005.

•  In December 2004, the second largest procurement in our history using our auction platform was completed by the District of Columbia.

•  At December 31, 2004, we had a working capital deficit of approximately $882,000, generated cash from operations of approximately $39,000 and generated net income before gain on extinguishment of debt of $176 during the year ended December 31, 2004. We had no availability to borrow additional funds under our existing line of credit, which had a maturity of December 14, 2005. As a result our independent accountants included a fourth paragraph to their review opinion dated March 10, 2005 indicating that we may be unable to continue as a going concern.

•  On November 7, 2005, we entered into a $2,000,000 Subordinated Note Agreement with the Massachusetts Capital Resource Company. A portion of the proceeds were used to retire our line of credit that was due to mature on December 14, 2005.

•  In December 2005, the Commonwealth of Massachusetts used our auction platform for the first time to procure electricity.

•  At December 31, 2005, we had working capital of approximately $1.4 million, primarily cash and cash equivalents of approximately $1.6 million, generated cash from operations of approximately $171,000 and had net income before income taxes of approximately $293,000 for the twelve months ended December 31, 2005.

•  We have increased the number of our channel partners from one at the end of 2001 to 21 as of June 30, 2006.

•  We have increased the number of energy suppliers registered on our auction platform since inception to approximately 175 as of June 30, 2006.

•  During the quarter ended March 31, 2006, we commenced preparations for a potential equity offering including:

•  Conducting exploratory meetings with various investment bankers;

•  Engaging legal counsel;

•  Preparing audited financial statements; and

•  Recruiting and hiring additional staff.

•  On June 12, 2006, we engaged investment bankers to initiate the process of an initial public offering and began drafting a registration statement.

•  Management anticipates that the completion of this offering will add value to the shares because of their increased liquidity and marketability, and that absent the liquidity created by a public market, our shares would be valued lower than the estimated offering price.

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Recent Accounting Pronouncements

In March 2005, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations”, or FIN 47, which aims to clarify the requirement to record liabilities stemming from a legal obligation to retire fixed assets when a retirement depends on a future event. FIN 47 is effective for fiscal years ending after December 15, 2005. The adoption of this statement did not have a material impact on the our results of operations or financial position.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”, which replaces APB Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”. SFAS 154 applies to all voluntary changes in accounting principle and requires retrospective application (a term defined by the statement) to prior periods’ financial statements, unless it is impracticable to determine the effect of a change. It also applies to changes required by an accounting pronouncement that does not include specific transition provisions. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We have adopted SFAS No. 154 as of the beginning of fiscal 2006 the adoption of SFAS 154 has not had a material impact on our financial condition or results of operations.

In November 2005, the FASB issued Staff Position No. FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” or FSP 115-1. FSP 115-1 provides accounting guidance for determining and measuring other-than-temporary impairments of debt and equity securities, and confirms the disclosure requirements for investments in unrealized loss positions as defined in Emerging Issues Task Force Issue 03-01, “The Meaning of Other-Than-Temporary Impairments and its Application to Certain Investments”. The accounting requirements of FSP 115-1 are effective for us as of January 1, 2006 and have not had a material impact on our financial position, results of operations or cash flows.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” which amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”. SFAS No. 155 resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets, among other matters, permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006, except early adoption is allowed in certain circumstances. We expect to adopt SFAS No. 155 on January 1, 2007.

In July 2006, FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109”, or FIN 48, which clarifies the accounting for uncertainty in tax positions. This interpretation requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not to be sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of January 1, 2007. The adoption of FIN 48 is not expected to have a material effect on our financial position or results of operations.

Seasonality

Our revenue is subject to seasonality and fluctuations during the year primarily as a result of weather conditions and their impact on the demand for energy. Our revenue is generated from the commissions we receive under any given energy contract, which is tied to the energy consumer’s consumption of energy. Therefore, revenue from natural gas consumption tends to be strongest during the winter months due to the increase in heating usage, and revenue from electricity consumption tends to be strongest during the summer months due to the increase in air conditioning usage. Our revenue is also subject to fluctuations within any given season, depending on the severity of weather conditions — during a particularly cold winter or an unseasonably warm summer, energy consumption will rise.

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Impact of Inflation and Changing Prices

Historically, our business has not been materially impacted by inflation. We provide our service at the inception of the service contract between the energy supplier and energy consumer. Our fee is typically based on a fixed dollar amount per unit of measure and fluctuates with changes in energy demand over the contract period.

We believe that our business will be cyclical in nature and is tied, in part, to market energy prices which impact transaction volume. When energy prices increase in competitive markets above the price levels of the regulated utilities, energy consumers are less likely to lock-in to higher fixed price contracts in the competitive markets and so they are less likely to use our auction platform. Conversely, when energy prices decrease in competitive markets below the price levels of the regulated utilities, energy consumers are more likely to lock-in to lower fixed price contracts in the competitive markets and so they are more likely to use our auction platform.

Foreign Currency Fluctuation

Our commission revenue is primarily denominated in U.S. dollars. Therefore, we are not directly affected by foreign exchange fluctuations on our current orders. However, fluctuations in foreign exchange rates do have an effect on energy consumers’ access to U.S. dollars and on pricing competition. We have entered into non-U.S. dollar contracts but they have not had a material impact on our operations. We do not believe that foreign exchange fluctuations will materially affect our results of operations.

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THE BUSINESS

Background and Overview

World Energy is an energy brokerage company that has developed an online auction platform, the World Energy Exchange, through which energy consumers in the United States are able to purchase electricity and other energy resources from competing energy suppliers which have agreed to participate on our auction platform in a given auction. We were founded in response to the restructuring of the electricity industry in some U.S. states, which are increasingly permitting energy consumers to choose their electricity supplier. While our core competency is brokering electricity, we adapted our World Energy Exchange auction platform to accommodate the brokering of natural gas in 2002, green power in 2003 (i.e., electricity generated by renewable resources) and certain other energy-related products in 2005. Since 2001, we have brokered over 24 billion kilowatt hours of electricity for energy consumers in North America on the World Energy Exchange. We believe that we are among the pioneering companies brokering electricity online and we are not aware of any third-party competitor brokering more electricity online than we do. We are in the process of adapting our World Energy Exchange auction platform to accommodate transactions in fuel oils including: diesel, heating oil, propane and jet fuel. We are in the process of developing the World Green Exchange auction platform to accommodate green credit transactions.

In the United States, the electricity industry restructuring that has permitted energy consumers a choice of supplier has taken place on a state-by-state basis. This development presents energy consumers with a number of challenges because they generally lack the expertise, experience and information necessary to effectively source electricity from competitive energy suppliers. We provide energy consumers that choose to switch to a competitive energy supplier with a comprehensive energy procurement solution that is designed to ensure that they receive market-based pricing terms. To date we have focused on CIG energy consumers.

In the early stages of the deregulated electricity market, we focused on understanding the energy consumers’ needs and the market rules. While other early competitors focused on building technologies that enabled energy consumers to source energy directly via the Internet, we believed that the deregulated market was not ready for a self-service model and focused on the auction process. We initially licensed existing third party auction technology. As the markets evolved and we gained deeper insight into energy consumers’ needs, we made a significant investment to develop our own energy-focused auction platform and in 2003, we introduced the current version of the World Energy Exchange.

The Industry

We currently provide brokerage services primarily in two industries: deregulated electricity and natural gas in the United States. We are making significant investments to gain the capability to provide brokerage in a third emerging industry: trading of green credits.

Electricity Deregulation

The electricity industry in the United States is governed by both federal and state laws and regulations, with the federal government having jurisdiction over the sale and transmission of electricity at the wholesale level in interstate commerce, and the states having jurisdiction over the sale and distribution of electricity at the retail level.

The federal government regulates the electricity wholesale and transmission business through the Federal Energy Regulatory Commission, or FERC, which draws its jurisdiction from the Federal Power Act, and from other legislation such as the Public Utility Regulatory Policies Act of 1978, the Energy Policy Act of 1992, or EPA 1992, and the recently enacted Energy Policy Act of 2005. FERC has comprehensive and plenary jurisdiction over the rates and terms for sales of power at wholesale, and over the organization, governance and financing of the companies engaged in such sales. States regulate the sale of electricity at the retail level within their respective jurisdictions, in accordance with individual state laws which can vary widely in material respects. Restructuring of the retail electricity industry in the United States began in the mid-1990s, when

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certain state legislatures restructured their electricity markets to create competitive markets that enable energy consumers to purchase electricity from competitive energy suppliers.

Prior to the restructuring of the retail electricity industry, the electricity market structure in the United States consisted of vertically integrated utilities which had a near monopoly over the generation, transmission and distribution of electricity to retail energy consumers. In states that have embraced electricity restructuring, the generation component (i.e., the source of the electricity) has become more competitive while the energy delivery functions of transmission and distribution remain as monopoly services provided by the incumbent local utility and subject to comprehensive rate regulation. In other words, in these states, certain retail energy consumers (specifically, those served by investor-owned utilities and not by municipal power companies or rural power cooperatives) can choose their electricity supplier but must still rely upon their local utility to deliver that electricity to their home or place of business.

The structure and, ultimately, the success level of industry restructuring has been determined on a state by state basis. There have been three general models for electricity industry restructuring: (i) delayed competition, (ii) phased-in competition, and (iii) full competition. The delayed competition model consists of the state passing legislation authorizing competitive retail electricity markets (i.e., customer choice of electric energy supplier), however, no action is taken by the state regulatory authority charged with utility industry oversight within such state to change the incumbent utility rates for electric energy to encourage competition. The phased-in competition model consists of the state passing legislation authorizing competitive retail electricity markets together with a gradual change of the incumbent local utility’s retail electric rates to encourage the competitive supply of electricity over time. The full competition model consists of the state passing legislation authorizing competitive retail electricity markets together with an immediate change to the incumbent local utilities’ retail electric rates that results in the whole commercial, industrial and government electricity market in such state being competitive immediately.

Based on management’s analysis of data from industry analyst KEMA, as at June 30, 2006, 14 states, comprising California, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Oregon, Pennsylvania, Rhode Island and Texas, and the District of Columbia are deregulated and currently competitive. The following graphic illustrates the year when states restructured their respective electricity industries to permit CIG energy consumers a choice of energy supplier and pricing became competitive:

Source: World Energy analysis of KEMA data, KEMA’s Retail Outlook: 2005 Update, dated October 2005

In 2005, the total electricity consumption by commercial, industrial and government, or CIG, energy consumers in the United States was approximately 2.3 trillion kilowatt hours according to the Department of Energy’s Energy Information Administration. Assuming a company-estimated average price of $0.075 per kilowatt hour for CIG energy consumers in the United States, this represents annual electricity purchases of approximately $170 billion.

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Based on management’s analysis of data from industry analyst KEMA, approximately 34%, or 783 billion kilowatt hours, is consumed in the 14 states and the District of Columbia where CIG energy consumers can choose their electricity supplier and the pricing of electricity is currently competitive. Management further estimates that if additional states and utility territories permit retail CIG electricity consumers to choose their energy suppliers and deregulate pricing to create competitive markets, the market has the potential to grow by up to 47% to 1.15 trillion kilowatt hours by 2010 when management estimates that there will be 20 states and the District of Columbia that are both deregulated (i.e, the federal and state regulation has been restructured to permit consumers to choose their supplier) and competitive. According to a January 2006 KEMA report, commissions typically charged by energy aggregators, brokers and consultants ranged from $0.00045 to $0.003 per kilowatt hour and averaged $0.00186 per kilowatt hour.

Total U.S. CIG Electricity Market

(1)	Department of Energy’s Energy Information Administration Form EIA-826, “Monthly Electric Utility Sales and Revenue Report with State Distributions”
(2)	World Energy analysis of KEMA data, KEMA’s Retail Outlook: 2005 Update, dated October 2005

CIG energy consumers located in regions that permit them to choose their electricity supplier generally have two options for purchasing electricity. They can either purchase electricity directly from their local utility at regulated rates or they can switch from their local utility to a competitive supplier. Based on management’s analysis of KEMA statistics, in 2001, in states where CIG energy consumers could choose their suppliers, approximately 17% of the aggregate load (i.e, total usage) of these consumers had already switched to competitive suppliers, and by 2005 that share more than doubled to 39%. The following chart presents our estimate of the volume of electricity consumed by CIG energy consumers who have switched to competitive suppliers in the deregulated market.

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Total U.S. CIG Switched Electricity Market

World Energy analysis of KEMA data, KEMA’s Retail Outlook: 2005 Update, dated October 2005

Energy consumers who choose to switch electricity suppliers can either do it themselves by contacting competitive suppliers directly, or indirectly, by engaging aggregators, brokers or consultants, collectively referred to as ABCs, to assist them with their electricity procurement. In its May/June 2006 Retail Energy Foresight, KEMA estimated that in 2003, ABCs were used for between 20% to 40% of the aggregate CIG volume that had switched to competitive suppliers and that in 2005 that share had grown to between 40% and 60%.

Competitive Energy Suppliers:  These entities take title to power and resell it directly to energy consumers. These are typically well-funded entities, which both service energy consumers and also work with ABCs to contract with energy consumers. Presently, we estimate there are over 40 competitive suppliers several of which operate on a national level and are registered in nearly all of the 14 states and the District of Columbia that permit CIG energy consumers to choose their electricity supplier and have deregulated pricing to create competitive markets.

Aggregators, Brokers and Consultants:  ABCs facilitate transactions by having competitive energy suppliers compete against each other in an effort to get their energy customers the lowest price. This group uses manual RFP processes that are labor intensive, relying on phone, fax and email solicitations. In a January 2006 report entitled “Channel Partners: The Growing Role of Aggregators, Brokers and Consultants in Competitive Energy Markets”, KEMA identified 280 ABCs. We believe that the online request for proposal, or RFP process, is superior to the traditional paper based RFP process as it involves a larger number of energy suppliers, can accommodate a larger number of bids within a shorter time span, and allows for a larger amount of contract variations including various year terms, territories and energy usage patterns.

Online Brokers:  Online brokers are a subset of the ABCs. These entities use online platforms to run electronic RFP processes in an effort to secure the lowest prices for their energy customers by having competitors bid against one another. We believe that we are among the pioneering companies brokering electricity online and we are not aware of any competitor that has brokered more electricity online than we have.

The following chart sets forth the compound annual growth rate, or CAGR, of kilowatt hours consumed, for the three year period from 2003 through 2005 by:

•  the total U.S. CIG electricity market;

•  energy consumers in deregulated markets who can choose their electricity supplier;

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•  CIG energy consumers who switched from a regulated non-competitive public utility serving an energy consumer, or the incumbent utility, to a competitive source of supply; and

•  switched CIG energy consumers who purchased through a broker.

Comparative Market Compound Annual Growth Rate
(2003-2005)

(1)	Department of Energy’s Energy Information Administration Form EIA-286, “Monthly Electric Utility Sales and Revenue Report with State Distributions”
(2)	World Energy analysis of KEMA data, KEMA’s Retail Outlook: 2005 Update, dated October 2005
(3)	World Energy analysis of KEMA’s estimates, KEMA’s Retail Energy Foresight, May/June 2006

Natural Gas

The natural gas industry in the United States is governed by both federal and state laws and regulations, with the federal government having jurisdiction over the transmission of natural gas in interstate commerce, and the states having jurisdiction over the sale and distribution of electricity at the retail level.

The federal government regulates the natural gas transmission business through FERC which draws its jurisdiction from the Natural Gas Act, and from other legislation such as the recently enacted Energy Policy Act of 2005. FERC has comprehensive and plenary jurisdiction over the rates and terms for transmission of gas in interstate commerce, and over the organization, governance and financing of the companies engaged in such transmission. States regulate the distribution and sale of gas at the retail level within their respective jurisdictions, in accordance with individual state laws which can vary widely in material respects.

Much like the competitive electric supply market, the natural gas market in the United States is also deregulated in most states and offers retail energy consumers access to their choice of natural gas commodity supplier.

Following a period of heavy regulation, the gas industry was deregulated in three phases as a result of legislation enacted in 1978 followed by multiple orders of FERC. The expected result of this deregulation was to stimulate competition in the natural gas industry down the pipeline to the distribution level.

At the retail level, reforms and restructuring has taken place on a state-by-state basis, with varying nuances to the restructuring in different states. For example, state commissions have allowed local distribution companies to offer unbundled transportation service to large customers; occasionally to provide flexible pricing in competitive markets; and to engage in other competitive activities.

Today, management estimates that utilities in over 40 states permit retail natural gas consumers to choose their natural gas commodity suppliers. In most instances, the incumbent local distribution utility still delivers the commodity to the consumers’ premises, even if a different supplier is selected to provide the commodity.

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The level of competitive choice available to retail CIG energy consumers has increased, with a wide range of products and a significant number of suppliers participating in both retail and wholesale transactions.

According to the U.S. Government’s Energy Information Administration, total natural gas consumption in the U.S. for 2004 was 22.4 trillion cubic feet, and is projected to grow to just under 26.5 trillion cubic feet by 2017. Of 2004’s total consumption, CIG energy consumers accounted for 10.4 trillion cubic feet, with the rest being consumed in the production of electricity, by residential consumers and for vehicle fuel.

Green Credits

Concerns about global warming have spawned a number of initiatives to reduce greenhouse gas emissions. The most well known of these initiatives is the Kyoto Protocol pursuant to which many countries in Europe, Asia and elsewhere have created carbon cap and trade systems. While the United States has not adopted the Kyoto Protocol at a federal level, there are a number of initiatives in the U.S. at the regional, state and local level aimed at limiting greenhouse gas emissions including the Regional Greenhouse Gas Initiative, a collaboration of seven Northeastern states, renewable portfolio standards, initiatives adopted by 20 different states and the District of Columbia regarding the minimum requirements mandated to utilities to derive power from renewable sources, and other initiatives such as the New Jersey Solar Credit Initiative.

These mandates are spurring investments in renewable energy, carbon efficiency and recovery processes to create credits that can be traded to countries or companies seeking to get beneath mandated carbon emission limits. Thus far these credits are being traded privately or via exchanges (such as the European Climate Exchange, Evomarkets, and the Chicago Climate Exchange) that have been formed to take advantage of these opportunities, although we believe that a structured auction event may be a more efficient mechanism for transacting these credits.

Kyoto Protocol

At the Earth Summit in Rio de Janeiro in 1992, there was broad international recognition of the need for a common effort in order to mitigate climate change. This resulted in the first international legally binding agreement aiming to curb greenhouse gas emissions — the United Nations Framework Convention on Climate Change. According to the UNFCCC, industrialized countries located in Europe and Asia, and including the U.S. and Australia, referred to as Annex I countries, have the principal responsibility for mitigating climate change as they are the largest producers of greenhouse gases.

In 1997, concrete targets for curbing greenhouse gas emissions were established in the Kyoto Protocol. Each Annex I country that has ratified the Kyoto Protocol (most industrialized countries except the U.S. and Australia) is obliged to reduce greenhouse gas emissions to reach a domestic target for carbon dioxide equivalent emissions which is, on average, 5.2% below 1990 levels, by the first commitment period running from 2008 to 2012.

The Kyoto Protocol has created a new opportunity in the brokerage of greenhouse gas emission credits, as certain countries may have to purchase greenhouse gas emission credits in order to meet the targets that have been set under the Kyoto Protocol from countries that exceed their targets. In addition, individual countries may also need to purchase such credits to meet greenhouse gas emission limits applicable to individual companies in those countries.

In order to meet these targets, four flexible mechanisms for creating and brokering credits have been established:

•  Bubbles whereby groups of countries can sum their targets and redistribute them internally — as the European Union has done;

•  The Clean Development Mechanism, which allows Annex I countries (and companies in Annex I countries) to create Certified Emission Reduction units by funding projects in non-Annex I countries;

•  Joint Implementation programs which are projects developed by or between two or more Annex I countries (or companies in those countries); and

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•  International Emissions Trading of assigned amount units, or AAUs, which allows Annex B parties to exchange emissions reductions via a cap-and-trade system to meet their Kyoto targets.

Eastern European countries have accumulated a significant amount of AAU’s as a result of the downturn in their economies since 1990. Countries that are expected to have the largest surplus of greenhouse gas emissions available for sale as greenhouse gas emission credits are: Russia with between 4.5 and 5.0 billion tons, Ukraine with an estimated 1.5 billion tons, and the rest of eastern Europe with approximately 2.0 billion tons.

With the launch of the European Union Emissions Trading System greenhouse gas allowances, known as EUAs, began trading in spot auctions and futures contracts on France’s Powernext Exchange, Germany’s European Energy Exchange and the Austrian Energy Exchange.

United States Emission and Green Credit Market Overview

In the United States, while the Kyoto Protocol has not been ratified, several regional initiatives are emerging to create green credit trading opportunities.

•  Twenty states and the District of Columbia have created Renewable Portfolio Standards by which utilities in these states are mandated to source power from renewable sources.

•  The Regional Greenhouse Gas Initiative is a collaboration of seven Northeastern states to reduce carbon dioxide emissions.

•  The New Jersey Board of Public Utilities approved new regulations in early April 2006 that will require the state’s electric utilities to draw on wind power, solar power, and sustainable biomass power for 20% of their electricity by 2020.

Company Strategy and Operations

Overview

World Energy is an energy brokerage company that has developed an online auction platform, the World Energy Exchange. We bring energy suppliers and CIG energy consumers together in our virtual marketplace, often with the assistance of our channel partners, who identify and work with energy consumers on our behalf. While our core competency is brokering electricity, we have adapted our World Energy Exchange auction platform to accommodate the brokering of natural gas, green power and energy-related products. Since 2001, we have brokered over 24 billion kilowatt hours of electricity for energy consumers in North America on the World Energy Exchange. We believe that we are among the pioneering companies brokering electricity online and we are not aware of any competitor that has brokered more electricity online than we have. We are in the process of adapting our World Energy Exchange auction platform to accommodate transactions in fuel oils including: diesel, heating oil, propane and jet fuel. We are in the process of developing the World Green Exchange auction platform to accommodate green credits transactions. The World Energy Exchange is part of a comprehensive online energy procurement process that includes the following modules:

•  energy sourcing management — a database of suppliers and contacts;

•  deal and task management — a module to list, assign and track steps to complete a procurement successfully;

•  market intelligence — a database of information related to market rules and pricing trends for deregulated markets;

•  RFP development — a module to create RFPs with a variety of terms and parameters;

•  conducting auctions — underlying software to manage the bidding and timing of an auction and display the results;

•  energy consumer portfolio management — a database of consumer contracts, sites, accounts and usage;

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•  commission reporting — a system to display forecasted and actual commissions due to channel partners; and

•  receivables management — a system to upload data received from suppliers and track payment receipt.

Our technology-based comprehensive energy brokerage solution is attractive to channel partners as it provides them with a business automation platform to enhance their growth, profitability and customer satisfaction. Channel partners are important to our business because these entities offer our World Energy Exchange auction platform to enhance their service offerings to their customers. By accessing our market intelligence and automated auction platform, channel partners significantly contribute to our transaction volume and the volume of energy procured via our auction platform, and in return we pay them a commission at a fixed contractual commission rate based on the revenues earned from energy suppliers. The contractual commission rate is negotiated in the channel partner agreement based on a number of factors, including expected volume, effort required in the auction process and competitive factors.

As a requirement to bid in an auction (which is described in greater detail below), energy suppliers must agree to an on-line agreement to pay our fee if they execute a contract as a result of the auction. Following an auction event, our employees continue to work with the energy consumer and energy supplier through the contract negotiation process and, accordingly, we are aware of whether a contract between the energy consumer and energy supplier is consummated. If a contract is entered into between an energy consumer and an energy supplier using the World Energy Exchange auction platform, we are compensated based upon a commission that is built into the price of the energy commodity. This approach is attractive to energy suppliers and energy consumers because there is no fee charged to the energy supplier or the energy consumer if the brokering process does not result in an energy procurement contract. Our commissions are based on energy usage transacted between the energy supplier and energy consumer multiplied by our contractual commission rate, and is set forth in two contracts between us and the energy supplier. The first agreement is an energy supplier master agreement, whereby energy suppliers are allowed to bid on energy consumer usage in exchange for agreeing to pay the fee that we have negotiated with the energy consumer, and the second is a fee addendum to the contract between the energy consumer and energy supplier that sets forth the fee and energy accounts to which the fee applies.

Monthly revenue is based on actual usage data obtained from the energy supplier for a given month or, to the extent actual usage data is not available, based on the estimated amount of electricity and gas delivered to the energy consumer for that month. While the number of contracts closed via the World Energy Exchange in any given period can fluctuate widely due to a number of factors, this revenue recognition method provides for a relatively predictable revenue stream, as revenue is based on the energy consumers actual historical energy usage profile. However, monthly revenue can still vary from our expectations because usage is affected by a number of variables which cannot always be accurately predicted, such as the weather and general business conditions affecting our energy consumers.

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The following table sets out our revenue and operating income (loss) for each of the fiscal years ended December 31, 2001 through 2005.

Revenue and Operating Income (Loss) of World Energy

(in thousands)

Contracts between CIG energy consumers and energy suppliers are signed for a variety of term lengths, with a one year contract term being typical for commercial and industrial energy consumers, and government contracts typically having two to three year terms. The chart below displays our annualized backlog as at year-end from 2001 through 2005 and as at June 30, 2006. Annualized backlog represents the revenue that we would derive within the twelve months following the date on which the backlog is calculated from contracts between CIG energy consumers and energy suppliers that are in force on such date, assuming such CIG energy consumers use energy at their historical usage levels. For any particular contract, annualized backlog is calculated by multiplying the CIG energy consumer’s historical usage by our fixed contractual commission rate. This metric is not intended as an estimate of overall future revenues, since it does not purport to include revenues that may be earned during the relevant 12 month backlog period from new contracts or renewals of contracts that expire during such period. In addition, annualized backlog does not represent guaranteed future revenues, and to the extent actual usage under a particular contract varies from historical usage, our revenues under such contract will differ from the amount included in annualized backlog. Annualized backlog as at June 30, 2006 contains all contracts in force as of June 30, 2006 that have expected revenue associated with them from July 1, 2006 through June 30, 2007. These contracts may expire during the period and therefore the annualized backlog does not include any revenue from expected contract renewals.

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Annualized Backlog

(in millions)

Because the calculation of backlog is a calculation of a contracted commission rate multiplied by a historical energy usage figure, our annualized backlog may not necessarily be indicative of future results. Annualized backlog should not be viewed in isolation or as a substitute for our historical revenues presented in the financial statements included in this prospectus. Events that may cause future revenues from contracts in force to differ materially from our annualized backlog include the events that may affect energy usage, such as overall business activity levels, changes in energy consumers’ businesses, weather patterns and other factors described under “Risk Factors”.

The Brokerage Process

Our brokerage process is supported by a variety of software modules designed with the goal to find energy supplies at the lowest possible price while providing step-by-step process management and detailed documentation prior to, during and following the auction. Our process includes data collection and analysis, establishing the utility benchmark price, conducting multiple auction events to enable testing of various term and price combinations and assisting in contract completion. We create an audit trail of all the steps taken in a given transaction. Specific web pages track all information provided to energy suppliers including energy supplier calls, supplier invitations, usage profiles and desired contract parameters.

At the commencement of the process, non-government energy consumers will enter into a procurement consulting agreement with us pursuant to which we are appointed as the energy brokerage service provider to solicit and obtain bids for the supply of energy and to assist in the procurement of energy. Government energy consumers will send out a solicitation at the commencement of the brokerage process which sets out the contract terms. Only energy suppliers that are qualified under the solicitation may participate in the auction. Energy suppliers who wish to bid on the provision of energy to such energy consumers must partake in our brokerage process and cannot contract with energy consumers outside of our brokerage process. The procurement consulting agreement authorizes us to retrieve the energy consumer’s energy usage history from the utility serving its accounts. We utilize the usage history to identify and analyze the energy consumer’s energy needs and to run a rate and tariff model which calculates the utility rate for that energy consumer’s facilities. This price is used as a benchmark price to beat for the auction event.

Prior to conducting the auction, the auction parameters, including target price, supplier preferences, contract terms, payment terms and product mix, as applicable, are discussed with the energy consumer and agreed upon. Approximately two to five days prior to the auction, we will post RFP’s with these auction parameters on our World Energy Exchange and alert the potential energy suppliers. Additionally, energy suppliers are provided with information about the energy consumer, historical energy usage information

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relating to the energy consumer’s facilities, and the desired contract parameters, several days in advance of the auction as part of the RFP. This advanced notice gives the energy suppliers the opportunity to analyze the value of a potential deal and the creditworthiness of the energy consumer. We believe that, using this information along with the auction parameters described in the RFP, the energy suppliers develop a bidding strategy for the auction.

The auction is run on the World Energy Exchange, which is our auction platform. The auction creates a competitive bidding environment that is designed to cause energy suppliers to bid their prices down during the auction event in response to other competitive bids. Specifically, energy suppliers enter an auction by submitting an opening bid at or lower than the suggested opening bid posted on the RFP. After they enter the auction and assess the bidding activity, energy suppliers may begin testing the competition by submitting a bid lower than the then leading bid. They do this presumably to test their pricing and to gauge the relative level of competition for the deal. There is typically a modest level of bidding and counter-bidding activity among energy suppliers until the final 30 seconds of the auction when bidding activity tends to increase. In the final seconds, all energy suppliers see the then-leading bid and must make a judgment as to how low to submit their last bid in order to win the deal. At this point in the auction, energy suppliers make their final bid without knowledge of what any other energy suppliers is bidding. We call this a final “blind” bid. Because it does not know what the other energy supplier will bid in their blind bid, this process has often resulted in the leading energy supplier outbidding itself at the moment before the auction closes in an effort to maintain its lead position and win the auction event.

Typically, a number of auctions tailored to the energy consumer’s specific energy needs will be held. Our World Energy Exchange provides rapid results and can accommodate a multitude of permutations for offers, including various year terms, utility territories, load factors and green power requirements. For commercial and industrial energy consumers, we typically run two to six auction events and for large government aggregations that generally are more complex, we typically run 20 to 40 auction events. Each auction event usually lasts 15 minutes. Included as part of any auction transaction are date and time stamping of bids, comparison of each bid with utility rates, as well as automated stop times, which ensure the integrity of auction events. The World Energy Exchange is also tied to the atomic clock which is intended to ensure that auction start and stop times are precise.

Following an auction, the auction results are analyzed and if the auction has been successful, we assist the energy consumer with the contracting process with the energy supplier which is typically finalized within one hour of the closing of the last auction event, although not all auctions result in procurements. In the case of a commercial energy consumer, we facilitate any remaining discussion between the leading energy supplier and the energy consumer relating to the energy supplier’s contract terms that were not addressed in establishing the auction parameters. In the case of government energy consumers, the energy suppliers have seen and, in general, have agreed to the form of supply contract being required by the government energy consumer. Accordingly, the time period between the end of the auction and the execution of a contract is usually shorter than in the case of non-government energy consumers. Not all auctions result in procurements.

As part of the contracting process between the successful energy supplier and the energy consumer, the energy supplier will enter into a fee addendum with us which provides for payment of a commission on a monthly basis based on actual energy usage by the energy consumer during the contract term. We also receive a monthly summary accounting of the energy consumer’s energy consumption. For electricity contracts, we have historically received a commission ranging generally from $0.00005 to $0.0025 per kilowatt hour consumed by the energy consumer. For natural gas contracts, we have historically received a commission ranging generally from $0.01 to $0.10 per decatherm of gas consumed by the energy consumer. If a channel partner was involved, the channel partner will receive a commission based on a fee sharing arrangement it has negotiated with us in the applicable channel partner agreement.

The incumbent local utility serving a given location is typically obligated to deliver electric energy to the customer’s premises from the location where the supplier delivers electricity into that local utility’s delivery system. However, the energy supplier is responsible for enrolling the energy consumer’s account with the applicable local utility and the energy supplier remains liable for any costs resulting from the physical loss of

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energy during transmission and delivery to the customer’s premises. We never buy, sell or take title to the energy products on our auction platform.

We typically interface directly with the energy consumer through the brokerage process. However, if a channel partner is involved, the channel partner will often perform one or more of the following functions: working with an energy consumer to sign a procurement consulting agreement, interacting with the energy consumer relating to World Energy analyses, supporting the decision-making, and interfacing with the energy consumer during the contracting process. However, even if a channel partner is involved, we are still primarily responsible for tasks such as interacting with utilities to obtain an energy consumer’s usage history, performing analyses, creating RFPs, interfacing with suppliers, and scheduling, conducting and monitoring auctions and collecting the commission earned from the energy supplier.

Company Strengths

We believe that the following are some of our key strengths:

Effective Auction Platform  At the core of our World Energy Exchange is an auction that, according to our estimates, has helped energy consumers to save an average of 11%, and as much as 30%, on their energy costs as compared to contracting at the rates offered by utilities. The auction creates a competitive bidding environment among energy suppliers and then a final closing “blind bid” process in which no supplier knows what another’s closing bid will be that has often resulted in the leading energy supplier outbidding itself at the moment before the auction closes in an effort to maintain its lead position and win the auction event.

The following is an example of the bid history page of the World Energy Exchange taken from a representative auction. Although we believe that this example is typical of the results energy consumers realize by using our auction platform, it is not necessarily indicative of all auctions on the World Energy Exchange.

The automated nature of our World Energy Exchange permits energy consumers to run multiple auction events testing prices for multiple contract lengths, different energy products, and green power requirements. This level of price testing is difficult to achieve with traditional paper-based RFP procurement methods. Also, because the price of energy can often be optimized by sourcing supply in smaller increments from those who specialize in one territory or have capability for certain usages, we have designed our system to allow energy consumers to segment their usage by utility or account type.

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Our World Energy Exchange also facilitates a rapid contracting process (often, contracts are finalized within one hour of the auction event closing) enabling energy suppliers to minimize the uncertainty premium typically attached to paper-based RFPs to account for market price changes between the time a paper-based RFP is completed and final decision is made.

Ability to Attract and Integrate Channel Partners  Our technology-based comprehensive energy brokerage solution is attractive to channel partners that may not have sufficient energy procurement expertise, market knowledge, technology or resources to adequately provide such services independently to their customers. Our solution includes the following modules: energy sourcing management; deal and task management; market intelligence; RFP development; conducting auctions; energy consumer portfolio management; commission reporting; and receivables management. For channel partners that do not traditionally offer energy supply solutions, we offer a comprehensive program for creating a new recurring revenue stream from their existing customer relationships, including software, training and on-going support. For channel partners that traditionally offer energy supply solutions, our World Energy Exchange provides an automated business platform which is designed to assist such channel partners in enhancing their growth, profitability and customer satisfaction.

Sarbanes-Oxley Act Compliance  With the advent of the Sarbanes-Oxley Act, or SOX, in the United States, companies are increasingly seeking tools and processes that bolster internal controls over financial reporting as mandated by SOX. The software and business processes inherent in our World Energy Exchange provide self-documenting due diligence that we believe supports SOX compliance. Our World Energy Exchange includes a variety of modules that provide for step-by-step process management and detailed documentation prior to, during and following an auction. The deal and task management module creates an audit trail of all the steps taken to run a successful transaction. Procurement specific web pages track all information provided to energy suppliers including supplier calls, supplier invitations, usage profiles and desired contract parameters. The auction transaction includes date and time stamping of bids, comparison of each bid with utility rates, as well as automated stop times, which is designed to ensure the integrity of auction events in an effort to support SOX compliance.

Adaptable Technology and Business Model  We believe that our business model and auction platform are flexible and can be adapted to allow us to broker transactions in energy related markets in addition to electricity transactions with CIGs, natural gas transactions and wholesale electricity. For example, we believe that we can also adapt our auction platform to assist in transactions in fuels and green credits, and to service new geographic markets.

Performance-based Model  We believe that our performance-based commission structure is attractive to energy consumers, who often have limited budgets for procurement support. Our commission fees are built into the procurement price, so that there is no cost to the energy supplier or the energy consumer if the auction is unsuccessful and does not result in a contract between an energy supplier and the energy consumer.

We recognize revenue over the life of the energy contract in the period energy is consumed by the energy consumer based on the energy consumer’s actual and estimated usage. We believe that we have a relatively predictable revenue stream notwithstanding that activity levels on the World Energy Exchange can fluctuate due to a number of factors, including geopolitical events, weather conditions and market prices.

Market Intelligence  We provide insight for energy consumers to understand when and where to go to market for competitive energy supply. We maintain a database of market rules that helps us understand deregulation trends and identify opportunities for energy consumers. We also calculate forward wholesale pricing curves to assist energy consumers in identifying market opportunities. Once an opportunity is identified, we will perform a tariff analysis based on the energy consumer’s specific usage to quantify an energy consumer’s potential savings. We also perform a technical analysis to provide energy consumers with up-to-the-minute strategy recommendations on when to enter the market. We provide technical market analysis on energy price action through our Market Edge weekly e-newsletter, and quarterly energy e-perspectives from our Chairman, Dr. Edward Libbey. These tools are valuable to energy consumers with many locations in one or multiple utility territories. Our experience with a large number of energy suppliers and energy consumers

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has also allowed us to gain knowledge and insight into energy consumers’ and energy suppliers’ purchase and sale practices.

Experienced Management Team  We have an experienced and entrepreneurial management team. Certain members of our management team were involved with some of the first competitive energy transactions that were contracted at the beginning of electricity market deregulation. Our management team has industry and market knowledge combined with relationships with energy consumers resulting in our being one of the first entrants in newly competitive markets.

Growth Strategy

Our overall objective is to achieve a preeminent position as the exchange for executing transactions in energy and energy-related products. We seek to achieve our objective by expanding our community of channel partners, energy consumers and energy suppliers on our exchange and by broadening our exchange to include other geographic markets and other energy and energy-related markets, including wholesale transactions with utilities and the emerging green credits market.

Key elements of our strategy are as follows:

Continuing to Develop Channel Partner Relationships  A significant majority of the energy consumers using our auction platform have been introduced to us through our channel partners. Our primary growth strategy is to focus on developing and increasing our number of channel partner relationships in an effort to expand the base of energy consumers using our auction platform and to increase the volume of energy procured on our World Energy Exchange. As illustrated by the diagram below, we have consistently increased the number of channel partners since 2001 from one to 21, and have recently made investments to focus on recruitment and training in an effort to accelerate the addition of channel partners. We will also consider future opportunities to work with channel partners who have succeeded in establishing a significant customer base. The following table sets out the growth in our channel partner relationships since the fiscal year ended December 31, 2001 and data is presented as at year-end and as at June 30, 2006.

Number of Channel Partners

Strengthening and Expanding Long-term Relationships with Government Agencies  We intend to build on the relationships we have established with federal, state and local government agencies. We expect that our expertise in brokering cost-saving energy contracts for government agencies will continue to be in demand as contract terms expire and governments look to contract for low energy prices in a competitive market. In 2001, we first penetrated the government segment by brokering energy for the

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United States Federal Government’s General Services Administration, or GSA, as a subcontractor to channel partner Science Applications International Corporation, or SAIC. In September 2005, we were awarded a five-year contract to provide energy brokerage services to the GSA. Working with SAIC, we have completed hundreds of auctions resulting in dozens of procurements for GSA and its federal government electricity consumers in four states and for natural gas in over 30 states.

In 2004, together with SAIC, we assisted the State of Maryland in procuring a two-year electricity supply contract through our World Energy Exchange, leading to an annual savings that we estimate to be over $5 million compared to the incumbent utility’s previous rate. In 2005, Maryland was awarded the National Association of State Facilities Administrators Innovation Award and the National Association of State Chief Administrators Outstanding Program Award in recognition of its innovative approach to energy procurement and leadership. This recognition has contributed to us along with our channel partner being awarded contracts to broker energy for the Commonwealth of Massachusetts, Montgomery County, Maryland, the District of Columbia and the Commonwealth of Pennsylvania. We intend to leverage this recognition to secure business relationships with other state and local governments. We believe that this strategy will not only permit us to grow our business laterally by establishing a business presence in other states but will also provide an opportunity for us to increase our base of energy consumers by branching out into other sectors and increasing our penetration into other levels of a particular state’s government agencies and organizations.

Targeting Other Energy-Related Markets  While our core competence lies in electricity brokerage for CIG energy consumers, we intend to expand our brokerage services into new markets. To date, we have brokered over 45 million decatherms of natural gas under contract under GSA’s Natural Gas Acquisition Program and continue to grow our natural gas brokering activities to support existing energy consumer relationships. At the request of participants on our auction platform, we are also in the process of adapting our World Energy Exchange platform to accommodate transactions in fuel oils including: diesel, heating oil, propane and jet fuel. Our World Energy Exchange has been and can further be modified to expand our capabilities to broker other energy-related transactions with appropriate resource allocation.

Targeting Utilities  We have added the capability to auction energy-related products, and several auctions were closed for an aggregate of over 5 billion kilowatt hours of electricity. We believe that there is an opportunity for us to further expand our business operations to facilitate the brokering of energy-related products for utilities. Having successfully tested our wholesale market model with the recent auction described above, we seek to leverage our initial success and aim to build this aspect of our operations by replicating the auction process with other utilities.

Brokering Green Credits  We also plan to expand our operations by entering into the green credits market through our established relationships and growing reputation in the energy procurement marketplace. The brokerage of green credits would complement our current business and remains aligned with our focus on brokerage of cost-effective energy transactions. As countries attempt to reduce their environmental emissions in order to achieve compliance under the Kyoto Protocol and U.S.-based initiatives, we believe that the creation and trading of green credits will accelerate. We intend to utilize our auction platform to create an ascending auction for the trading of green credits between countries and companies who have made energy efficient improvements to reduce their emissions below the permissible levels, and those who have not.

Energy Suppliers, Energy Consumers and Channel Partners

Energy Suppliers  Our success is heavily dependent on our energy supplier relationships, the credibility of our energy suppliers and the integrity of the auction process. There are approximately 175 competitive electricity, natural gas and wholesale electricity suppliers registered on the World Energy Exchange, representing a majority of all suppliers in the deregulated energy market. Of the registered energy suppliers, approximately 37 had active contracts with energy consumers that were brokered through our World Energy Exchange as of June 30, 2006. Five of these energy suppliers each accounted for over 10% individually and

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approximately 66% in the aggregate of our revenue for the six months ended June 30, 2006, and four of these energy suppliers each accounted for over 10% individually and approximately 57% in the aggregate of our revenue for the year ended December 31, 2005. In order to participate in an auction event, energy suppliers must register with us by either entering into a standard-form agreement pursuant to which the energy supplier is granted a license to access our auction platform and bid at auction events or by qualifying to participate in an auction pursuant to a government solicitation. Our national standard form agreement is for an indefinite term, may be terminated by either party upon 30 days prior written notice, is non-exclusive, non-transferable and cannot be sublicensed. Under our standard-form agreement or the government solicitation, the energy supplier agrees to pay us a commission, which varies from contract to contract and which is based on a set rate per energy unit consumed by the energy consumer.

Energy Consumers  Energy consumers using our auction platform to procure energy include government agencies and commercial and industrial energy consumers. Government energy consumers have complex energy needs in terms of both scope and scale, which management believes can best be met with a technology-based solution such as the World Energy Exchange. Additionally, the automated nature of our World Energy Exchange auction platform is designed to support protest free auctions. Working with our channel partner, SAIC, we have brokered energy for the GSA and over 25 federal agencies, Montgomery County, Maryland, the State of Maryland, the District of Columbia, the Commonwealth of Massachusetts, and have recently won a contract with the Commonwealth of Pennsylvania. Four of the energy consumers using our auction platform (Maryland Department of General Services, District of Columbia Energy Office, General Services Administration and the Commonwealth of Massachusetts) each accounted for over 10% individually and approximately 59% in the aggregate of our revenue for the six months ended June 30, 2006, and three of these energy consumers accounted for over 10% individually and approximately 51% in the aggregate of our revenue for the year ended December 31, 2005. In September 2005, we were awarded a five-year contract to assist GSA in its procurement of energy. Our procurement contracts with government energy consumers are typically for periods covering multiple years but are subject to termination for convenience. These contracts do not require that the government energy consumer use our services. The government energy consumers which accounted for more than 10% of our revenue during the six months ended June 30, 2006 are as follows:

	Percent of Revenue
	for the Six Months Ended
Contract Party	June 30, 2006
State of Maryland		19	%
District of Columbia		16	%
General Services Administration		12	%
Commonwealth of Massachusetts		12	%

Commercial and industrial energy consumers that have used our auction platform include companies such as Starwood Hotels & Resorts Worldwide Inc., Lockheed Martin Corporation, and Costco Wholesale Corporation. We also maintain a direct sales arm. Targets of direct sales efforts are typically large companies with facilities in many geographic locations including hotel chains, wholesale clubs, property management firms, big box retailers, supermarkets, department stores, drug stores, convenience stores, restaurant chains, financial services firms, and manufacturers across various industries.

Channel Partners  We target commercial and industrial energy consumers primarily through channel partners. These are firms with existing client relationships with certain commercial and industrial energy consumers that would benefit from the addition of an online energy procurement solution. Channel partners consist of a diverse array of companies including energy service companies, demand side consultants and manufacturers, ABCs and strategic sourcing companies, but in the most general terms they are resellers or distributors. As of June 30, 2006, we have entered into agreements with 21 channel partners, including SAIC and Cargill Energy Services, LLC, which are currently engaged in efforts to source potential transactions to the World Energy Exchange although not all have sourced a transaction for which an auction has been completed. Upon identifying opportunities with new channel partners, we enter into a non-exclusive channel partner agreement that grants the channel partner a non-exclusive right to sell our procurement process for a term of one year, which term renews automatically unless terminated upon 30 days written notice. The channel

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partner receives a commission based on the amount of involvement of the channel partner in the procurement process.

Competition

Energy consumers have a broad array of options when purchasing energy. Energy consumers can either purchase energy directly from the utility at the utility’s rate or purchase energy in the deregulated market through one of the following types of entities: competitive energy suppliers, ABCs and online brokers. We compete with competitive energy suppliers, ABCs and other online brokers for energy consumers that are seeking an alternative to purchasing directly from the utility.

Online Brokers  Online brokers are a subset of the ABCs. These entities use online platforms to run electronic RFP processes in an effort to secure the lowest prices for their energy customers by having competitors bid against one another. We believe that we are among the pioneering companies brokering electricity online and we are not aware of any competitor that has brokered more electricity online than we have. Our competitors include Usource LLC, Energy Window Inc., mdenergy, LLC, and Legacy Energy Group, LLC. There is very limited public information available about these other online brokers.

Aggregators, Brokers and Consultants  ABCs facilitate transactions by having competitive energy suppliers compete against each other in an effort to get their energy customers the lowest price. This group uses manual RFP processes that are labor intensive, relying on phone, fax and email solicitations. In a January 2006 report entitled “Channel Partners: The Growing Role of Aggregators, Brokers and Consultants in Competitive Energy Markets”, KEMA identified 280 ABCs. We believe that the online RFP process is superior to the traditional paper based RFP process as it involves a larger number of energy suppliers, can accommodate a larger number of bids within a shorter time span, and allows for a larger amount of contract variations including various year terms, territories and energy usage patterns.

Competitive Energy Suppliers  These entities take title to power and resell it directly to energy consumers. These are typically well-funded entities, which both service energy consumers and also work with ABCs to contract with energy consumers. Presently, we estimate there are over 40 competitive energy suppliers, several of which operate on a national level and are registered in nearly all of the 14 states and the District of Columbia that permit CIG energy consumers to choose their electricity supplier and have deregulated pricing to create competitive markets.

Technology

Our World Energy Exchange auction platform is comprised of a scalable transaction processing architecture and web-based energy consumer user interface. The auction platform is primarily based on internally developed proprietary software, but also includes third party components for user interface elements and reporting. The World Energy Exchange auction platform supports the selling and buying processes of energy-related products including bid placements, energy supplier registration and management, channel partner management, energy consumer management, deal process management, contract management, site management, collection and commission management, and reporting. The auction platform maintains current and historical data online for all of these components.

Our technology systems are monitored and upgraded as necessary to accommodate increasing levels of traffic and transaction volume on the website. However, future upgrades or additional technology licensing may be required to ensure optimal performance of our auction platform services. See “Risk Factors”. To provide maximum uptime and system availability, our auction platform is hosted in a multi-tiered, secure, and reliable fault tolerant environment which includes backup power supply to computer equipment, climate control, as well as physical security to the building and data center. In the event of a major system component failure, such as a system motherboard, spare servers are available.

We strive to offer a high level of data security in order to build the confidence in our services among energy consumers and to protect the energy consumers’ private information. Our World Energy Exchange security infrastructure has been designed to protect data from unauthorized access, both physically and over the Internet. The most sensitive data and hardware of the World Energy Exchange reside at the data centers.

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Facilities

We do not own any real property. We lease the business premises in the following locations for the stated principal uses:

	Approximate
	Floor Space
Location	(Square Feet)		Principal Use
446 Main Street, Worcester, Massachusetts(1)		5,104	Executive office and general administration
1215 19th Street NW, Washington, District of Columbia(2)		1,500	Branch office

Note:

(1)	Pursuant to a five-year lease agreement dated September 8, 2004 with Sovereign Bank at a monthly rate of $6,380 in the first year, $7,443.33 in the second year, $8,081.33 in the third and fourth years and $8,400.33 in the fifth year, plus operating expenses and taxes.
(2)	Pursuant to a one-year lease agreement dated June 21, 2006 with Roosevelt Land, LP at a monthly rate of $4,000 plus operating expenses and taxes.

Intellectual Property

We enter into confidentiality and non-disclosure agreements with third parties with whom we conduct business in order to limit access to and disclosure of our proprietary information.

We operate our auction platform under the trade names “World Energy Exchange” and “World Green Exchange”. We also own the following domain names: worldenergy.com, wesplatform.com, wexch.com, worldenergyexchange.com, echoicenet.com, e-choicenet.com, worldenergysolutions.com, worldenergysolutions.net, worldenergy.biz, worldgreenexchange.biz, worldgreenexchange.info, worldgreenexchange.us and worldpowerexchange.com. To protect our intellectual property, we rely on a combination of copyright and trade secret laws and the domain name dispute resolution system.

Our corporate name and certain of our trade names may not be eligible for protection if, for example, they are generic or in use by another party. We may be unable to prevent competitors from using trade names or corporate names that are confusingly similar or identical to ours. A company organized under the laws of the State of Florida and whose shares are publicly traded under the symbol “WEGY” also operates under the name “World Energy Solutions, Inc.” According to its filings with the Securities and Exchange Commission, this other company changed its name to “World Energy Solutions” in November 2005, and is in the business of manufacturing and selling transient voltage surge suppressors and related products and commercial and residential energy-saving equipment and applications to distributors and customers throughout the United States. Such filings indicate that this other company plans to implement a new business model to market a multi-product package to commercial, industrial and residential facilities in order to lower their overall cost of electricity, gas and water. This appears to be a different business than ours. We cannot assure you that this other company will not seek to challenge our right to the use of our name, in which case we could be drawn into litigation and, if unsuccessful could be required, or could decide, to cease using the name World Energy Solutions, Inc., in which case we would not realize any value we had built in our name. Additionally, our reputation could be damaged if the other company continues its use of the name World Energy Solutions, Inc. and such other company develops a negative reputation.

We do not have any patents and if we are unable to protect our copyrights, trade secrets or domain names, our business could be adversely affected. Others may claim in the future that we have infringed their intellectual property rights.

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Personnel

As of June 30, 2006, we had 24 employees, which includes 19 full-time and five part-time employees. Full-time staff consists of three members of senior management, five sales employees, two information technology employees, seven trading desk employees and two administrative employees. In addition, we rely on a number of consultants and other advisors. The extent and timing of any increase in staffing will depend on the availability of qualified personnel and other developments in our business. None of the employees are represented by a labor union, and we believe that we have good relationships with our employees.

Cyclicality

We believe that our business will be cyclical in nature and is tied, in part, to market energy prices which impact transaction volume. When energy prices increase in competitive markets above the price levels of the regulated utilities, energy consumers are less likely to lock-in to higher fixed price contracts in the competitive markets and so they are less likely to use our auction platform. Conversely, when energy prices decrease in competitive markets below the price levels of the regulated utilities, energy consumers are more likely to lock-in to lower fixed price contracts in the competitive markets and so they are more likely to use our auction platform. Although our short term revenue is impacted by usage trends, these cyclical effects will also have longer term implications on our business because we derive future revenue from current auctions.

Legal Proceedings

From time to time we may be a party to various legal proceedings arising in the ordinary course of our business. Our management is not aware of any litigation outstanding, threatened or pending as of the date hereof by or against us or our properties which we believe would be material to our financial condition or results of operations.

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MANAGEMENT

The following table sets forth, as of June 30, 2006, the names, age, positions held with us and principal occupations of our directors, executive officers, and director nominees and, if a director, the year in which the person became a director.

			Position with the	Principal	Director
Name	Age		Company	Occupation	Since
Richard Domaleski		37	Director, President	President and Chief	September 1996(5)
			and Chief Executive	Executive Officer of
			Officer	the Company
Philip Adams		48	Chief Operating	Chief Operating Officer of	—
			Officer	the Company
James Parslow		41	Chief Financial	Chief Financial Officer,	—
			Treasurer,	Officer, Treasurer and
			Secretary	Secretary of the Company
Edward Libbey(1)(2)(3)(4)		59	Director	Retired	February 1998(5)
Nicholas Zaldastani(1)(2)		49	Director	Managing Director,	August 2001
				Zaldastani Ventures (a
				venture capital company)
Patrick Bischoff(2)(3)		38	Director	Managing Director and	January 2004
				founder, Spinnaker Ventures
				LLC (a venture capital company)
John Wellard(1)(3)(6)		59	Director Nominee	Retired	—

Notes:

(1)	Denotes member or nominated member of the Audit Committee.
(2)	Denotes member of the Compensation Committee.
(3)	Denotes member or nominated member of the Corporate Governance and Nominating Committee.
(4)	Denotes that such person is an audit committee financial expert (as is currently defined under the SEC rules implementing Section 407 of the Sarbanes-Oxley Act) and is independent (as defined in Item 7(d)(3)(iv) of Schedule 14 under the Securities Exchange Act of 1934.)
(5)	Denotes year director began service as a director of the company’s predecessor Oceanside Energy, Inc.
(6)	Mr. Wellard will become a director upon the closing of this offering, and as a result of not being a director prior to the closing of the offering, Mr. Wellard will not have any statutory liability for the disclosure in this prospectus under provincial and territorial Canadian securities legislation.

Biographies

The following are brief profiles of our executive officers and directors, including director nominees, as well as a description of each individual’s principal occupation within the past five years.

Richard Domaleski.  Mr. Domaleski has served as our President and Chief Executive Officer since 1999 and as a director since 1999. Mr. Domaleski is responsible for our strategic vision and sales execution. Prior to working with us, in 1996, Mr. Domaleski co-founded our predecessor business, Oceanside Energy, Inc., which was one of the first reverse auction businesses to take advantage of utility deregulation and one of the first aggregators to be granted a FERC tariff, and which became our wholly-owned subsidiary in 2000.

Philip Adams.  Mr. Adams has served as our Chief Operating Officer since October 2003, and oversees our corporate strategy, marketing, direct and channel sales, and human resources functions. Prior to joining us, from September 2001 to October 2003, Mr. Adams was a principal of Go2 Market Momentum, LLC, a consulting firm to emerging companies. Prior to that, Mr. Adams was a senior executive at software and internet companies including Exchange Applications, Inc., Pegasystems, Inc., Corporate Software, Inc., Rowe Communications, Inc., and PC Connection, Inc. Mr. Adams also worked as a strategy consultant at Corporate Decisions, Inc., a company subsequently acquired by Mercer Consulting Inc.

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James Parslow.  Mr. Parslow joined us in May 2006 and serves as our Chief Financial Officer, Treasurer and Secretary. Mr. Parslow is a Certified Public Accountant in Massachusetts with 19 years experience serving private and public companies in the alternative energy, biomedical service and products, online auction services and high technology manufacturing industries. Since April 2004 until joining us in 2006, Mr. Parslow was the Chief Financial Officer and Treasurer for Spire Corporation. Prior to joining Spire, Mr. Parslow was an independent financial consultant from January 2003 to March 2004. From May 2002 to November 2002, Mr. Parslow served as Controller of Fairmarket, Inc. (now Dynabazaar, Inc.) From July 1998 to February 2002, he was Vice President, Finance and Administration of Thermo Power Corporation, a former public subsidiary of Thermo Electron Corporation.

Edward Libbey.  Dr. Libbey has served as one of our directors since our inception and prior to that was a director of Oceanside Energy, Inc. which became a wholly-owned subsidiary of ours in 1999. Dr. Libbey recently retired. From April 2003 to July 2006, Dr. Libbey had been a consultant with KMC International, which is held by KMC Holdings, a human resources recruitment company, and prior thereto was a consultant with Preng & Associates from May 1999. Dr Libbey also worked at British Petroleum for over 20 years in supply, logistics and oil trading.

Nicholas Zaldastani.  Mr. Zaldastani has served as one of our directors since 2001. Since September 1997, Mr. Zaldastani has been the Managing Director and is the founder of Zaldastani Ventures, a venture capital company that has invested in several early-stage ventures such as Saba Software, Inc., Pay-By-Touch and Salary.com. In addition to his career in venture capital, Mr. Zaldastani has worked at Saba Software, Inc, Open Horizon, Inc. and Oracle Corporation.

Patrick Bischoff.  Mr. Bischoff has served as one of our directors since 2004. Since April 2001, Mr. Bischoff has been the Managing Director and founder of Spinnaker Ventures LLC, a venture capital company. Mr. Bischoff served as Managing Director, Electronic Products, for Crocodiles not Waterlillies LLC, a children’s media and entertainment company from August 2004 until December 2005 and currently is a member of the advisory board. From August 2002 to April 2003, he was a senior partner of Esotera Group Inc., a human capital consulting and research company. In April 1997, Mr. Bischoff co-founded Saba Software Inc. and held various positions with the company until September 2001.

John Wellard.  Mr. Wellard has agreed to become a director upon the closing of this offering. From March 1996 to April 2005, Mr. Wellard was employed with Union Gas Limited in various capacities, including as its President from May 2003 to December 2004. He also served Union Gas Limited at various times as a Senior Vice-President of Sales and Marketing & Business Development, Vice-President of Sales and Marketing, Senior Vice President of Asset Management and Vice President of Operations.

Prior to giving effect to the offering, our current directors and executive officers, as a group, will beneficially own an aggregate of 27,386,674 shares of common stock (which includes 1,588,356 shares of common stock issuable upon exercise of stock options and warrants exercisable within 60 days of September 15, 2006) representing approximately 50.4% of our outstanding shares of common stock. Upon closing of the offering, the number of shares of common stock that our current directors and executive officers will beneficially own will be 27,386,674 shares of common stock representing approximately 36.8% of the outstanding shares of our common stock.

Board of Directors

Our board of directors consists of four members and is being expanded to five in connection with this offering. The Board has voted to fill the vacancy created by this increase in the number of directors with the director nominee identified above and the director nominee has indicated his intent to serve on our Board. Upon completion of this offering, the Board will be divided into three classes, with each class serving for a staggered three-year term. The Board will consist of two class I directors, Messrs. Zaldastani and Bischoff; two class II directors, Messrs. Libbey and Wellard; and one class III director, Mr. Domaleski. At each annual meeting of stockholders, a class of directors will be elected for a three-year term to succeed the directors of the same class whose terms are then expiring. The terms of the class I directors, class II directors and class III

64

directors expire upon the election and qualification of successor directors at the annual meeting of stockholders held during the calendar years 2007, 2008 and 2009, respectively.

Our by-laws provide that, subject to the rights of holders of any series of preferred stock that may be hereafter authorized from time to time, any vacancies in our Board and newly created directorships may be filled only by our Board and the authorized number of directors may be changed only by our Board. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes, so that, as nearly as possible, each class will consist of one-third of the total number of directors. These provisions of our by-laws and the classification of the Board may have the effect of delaying or preventing changes in the control or management of us.

Our Chief Executive Officer is elected by, and serves at the discretion of, the Board. The Board may appoint other executive officers from time to time as it deems appropriate.

Each of our executive officers and directors, other than non-employee directors, is principally occupied with our business and affairs. There are no family relationships among any of our directors or officers.

We are not listing our shares on a U.S. exchange in connection with this offering and so we will not be subject to certain corporate governance and disclosure requirements required of companies that are listed on a U.S. exchange. We will be subject to Canadian securities laws. Accordingly, a majority of the members of our Board are independent, as defined under applicable Canadian securities laws.

Committees of the Board of Directors

The Board has established the following three standing committees — an Audit Committee, a Compensation Committee and a Corporate Governance and Nominating Committee. Each of these standing committees operates under a charter that has been approved by the Board and will consist of at least three directors who are to be appointed by the Board. The Board has determined that all of the members of each of the Board’s three standing committees will be independent, as defined under applicable Canadian securities laws.

Audit Committee

The members of our Audit Committee are Messrs. Libbey and Zaldastani, and Mr. Wellard has agreed to join the committee immediately following the closing of the offering. The Audit Committee is responsible for assisting the Board in fulfilling its responsibilities for oversight of our accounting and financial reporting processes and audits of our financial statements. The Audit Committee will, among other things, independently monitor our financial reporting process and internal control systems, review our financial statements to ensure their quality, integrity and compliance with accounting standards, ensure the adequacy of procedures related to such review and oversee the work of our external auditors.

Compensation Committee

The members of our Compensation Committee are Messrs. Libbey, Zaldastani and Bischoff. The Compensation Committee is responsible for overseeing the discharge of the Board’s responsibilities related to compensation of our directors, executive officers and senior management. The Compensation Committee will, among other things, review the adequacy of compensation, review and approve corporate goals and objectives relevant to compensation and make recommendations regarding compensation of the Chief Executive Officer and our other directors and officers. The Compensation Committee will assess all aspects of compensation including salaries, bonuses, long-term incentive compensation and other performance based incentives, taking into account industry comparables to ensure that compensation is fair and reasonable.

Corporate Governance and Nominating Committee

The members of our Corporate Governance and Nominating Committee are Messrs. Libbey and Bischoff, and Mr. Wellard has agreed to join the committee immediately following the closing of the offering. The Corporate Governance and Nominating Committee is responsible for assisting the Board in discharging its responsibilities related to corporate governance practices and the nomination of directors. The Corporate

65

Governance and Nominating Committee will, among other things, develop our statement of corporate governance practices, recommend procedures to assist the Board in functioning cohesively and effectively, supervise our securities compliance procedures and have the authority to engage outside advisors where necessary. This committee will also be responsible for recommending to the Board director nominees to be elected at stockholder meetings, taking into consideration the appropriate size of the Board, the competencies and skills required and whether each nominee can sufficiently fulfill his or her duties as a member of the Board.

From time to time, the Board may establish other committees to facilitate the management of our business.

Director Compensation

Historically, we have not paid cash compensation to directors. Following the closing of the offering, each of the non-employee directors who are not currently stockholders of the company will initially be paid an annual fee of $10,000 for serving on the Board, and a per meeting fee of $1,500 for each regularly scheduled meeting of the Board (expected to be four meetings annually), or a committee thereof, attended in person. Each director who is not currently a stockholder of the company will also receive $1,500 for each additional meeting of the Board, or a committee thereof, that is scheduled and attended in person. We reimburse each member of our Board who is not an employee of ours for reasonable travel and other expenses in connection with attending meetings of the Board.

In addition, we have granted the following stock options under our 2003 Stock Incentive Plan to our current non-employee directors:

Name of Director	Number of Shares(1)			Date of Grant
Edward Libbey		300,000			12/11/2003
Nicholas Zaldastani		1,100,000	(2)		5/15/2003
		300,000	(2)		12/11/2003
Patrick Bischoff		450,000	(2)(3)		12/19/2003

Notes:

(1)	All options are fully vested and have or had an exercise price of $0.025 per share.
(2)	Option has been exercised.
(3)	These options were granted for advisory services prior to Mr. Bischoff’s becoming a director.

Compensation Committee Interlocks and Insider Participation

The current members of the Compensation Committee of our Board are Messrs. Libbey, Zaldastani and Bischoff. No interlocking relationship exists between our Board or Compensation Committee and the Board or compensation committee of any other company, nor has any interlocking relationship existed in the past.

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Executive Compensation

The following table sets forth the compensation earned by the following persons: the individual who served as our chief executive officer in 2005 and the four other highest paid executive officers during the fiscal year ended December 31, 2005. Such persons are referred to as our named executive officers. Because we had only two executive officers during our most recently completed fiscal year, our Chief Executive Officer and our Chief Operating Officer are the only named executive officers during such fiscal year. We did not have a Chief Financial Officer during the fiscal year ended December 31, 2005. No other executive officers who would have otherwise been includable in the following table on the basis of salary and bonus earned for the year ended December 31, 2005 have been excluded by reason of their termination of employment or change in executive status during that year.

Annual Compensation

Long-Term Compensation

Awards

Payouts

Restricted

Stock Awards ($)

Securities

or Shares or

Other

Under

Units Subject

Annual

Options/SARs

to Resale

LTIP

All Other

Name and Principal

Year

Salary ($)

Bonus ($)

Compensation ($)

Granted (#)

Restrictions

Payouts ($)

Compensation ($)

Position (a)

(b)

(c)

(d)

(e)

(f)

(g)

(h)

(i)

Richard Domaleski

2005

138,000

50,000

—

—

—

—

—

President and Chief

Executive Officer

Philip Adams

2005

150,000

35,000

—

—

—

—

—

Chief Operating Officer

James Parslow

2005

(1

)

—

—

—

—

—

—

Chief Financial Officer

Note:

(1) Mr. Parslow joined us as our Chief Financial Officer during 2006. His annualized base salary is $150,000.

Option Grants/Exercised During the Most Recently Completed Fiscal Year

No stock options were granted to or exercised by the named executive officers during the fiscal year ended December 31, 2005.

Option Exercises and Fiscal Year-End Values

The following table sets forth information for each of the named executive officers regarding the number of shares subject to both exercisable and unexercisable stock options, as well as the value of unexercised in-the-money options, as of December 31, 2005. There was no public trading market for our common stock as of December 31, 2005. Accordingly, the value of the unexercised in-the-money options at fiscal year-end has been calculated by determining the difference between the exercise price per share and the per share price of this offering. None of the named executive officers exercised options during the fiscal year ended December 31, 2005.

Number of Securities Underlying

Value of Unexercised

Unexercised Options

In-the-Money Options at

Shares Acquired

Value

at December 31, 2005 (#)

December 31, 2005 ($)

Name

on Exercise (#)

Realized ($)

Exercisable

Unexercisable

Exercisable

Unexercisable

Richard Domaleski

n/a

n/a

n/a

n/a

n/a

n/a

President and Chief Executive Officer

Philip Adams

n/a

n/a

1,250,000

n/a

$

1,131,100

n/a

Chief Operating Officer

James Parslow

n/a

n/a

n/a

n/a

n/a

n/a

Chief Financial Officer

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Employment Agreements

We have entered into employment agreements with certain of the named executive officers and other members of senior management, certain material terms of which are summarized below.

Pursuant to a letter of offer for employment with Mr. Adams, effective as of October 1, 2003, Mr. Adams is to be paid a base salary of $12,500 per month, subject to adjustments from time to time, and is eligible to participate in all bonus and benefit programs including the stock option plan. Mr. Adams was also granted incentive stock options exercisable to purchase 1,250,000 shares of common stock. In the event that Mr. Adams’ employment is terminated by us for reasons other than for cause, he is entitled to receive a severance package of six months salary at his then current rate of pay. Based on Mr. Adams’ current annual salary of $212,500, this severance may exceed $100,000. Mr. Adams has also entered into a non-competition and non-solicitation agreement and an invention and non-disclosure agreement with us, the terms of which are summarized below.

Pursuant to a letter of offer for employment with Mr. Parslow effective May 15, 2006, Mr. Parslow is to be paid a bi-weekly salary at the annualized rate of $150,000 per year, and is eligible to participate in all bonus and benefit programs. Mr. Parslow was also granted non-statutory stock options exercisable to purchase up to 450,000 shares of common stock. Mr. Parslow has also entered into a non-competition and non-solicitation agreement and an invention and non-disclosure agreement, the terms of which are summarized below.

The non-competition and non-solicitation agreement for each of Messrs. Adams and Parslow provides that for a period of one year following the termination or cessation of employment with us, the employee will not (i) engage in a business that competes with our business; (ii) directly or indirectly solicit any of our employees; or (iii) directly or indirectly solicit, hire or engage as an independent contractor any person who was employed by us during the employee’s term of employment with us.

The invention and non-disclosure agreement provides that all of our proprietary information is and shall remain our exclusive property and that the employee will not, for the duration of employment and afterwards, disclose or use such proprietary information without our written consent or until such information has become public knowledge without fault of the employee. Under the agreement, any and all materials containing proprietary information, whether created by the employee or coming into his possession during employment, remain the exclusive property of us to be used only in the performance of his duties and are to be returned upon request by us or upon termination of employment. Pursuant to the agreement, the employee is also required to disclose and assign all rights, title and interest in prior inventions created alone or jointly with others that relate to our business in addition to any inventions that may be created or conceived during our employment. The employee also agrees to cooperate with us, both during and after his employment, to assist in the enforcement of intellectual property rights relating to any inventions.

We do not currently have an employment agreement with our CEO. The CEO’s compensation is determined by the compensation committee of the Board which considers a variety of factors including comparable CEO compensation in the industry and certain targets achieved by the CEO. We believe that the CEO’s significant shareholdings align the interests of the CEO with those of the company as a whole.

Compensatory Plans, Severance or Other Arrangements

Mr. Adams is entitled to receive a severance package equal to six months salary at his then current base rate of pay in the event that his employment is terminated other than for cause. Based on Mr. Adams’ current annual salary of $212,500, this severance package would exceed $100,000.

Employee Benefit Plans

2003 Stock Incentive Plan

Our 2003 Stock Incentive Plan, or the 2003 plan, authorizes the Board to grant options, restricted stock awards or other stock-based awards to our employees, officers, directors, consultants and advisors. Pursuant to

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the 2003 plan, we can issue “non-statutory options” and “incentive stock options” to purchase shares of common stock. Incentive stock options can only be granted to our employees. The number of shares of common stock reserved for issuance under the 2003 plan is 15,000,000. As of the date of this prospectus, there are options outstanding to purchase 4,363,029 shares of common stock under the 2003 plan. No further options will be issued under the 2003 plan following the date of this prospectus.

The following table sets forth details regarding the options outstanding under the 2003 plan as at the date of this prospectus.

	Number of Persons		Number		Exercise		Market Value on		Expiration
Group	Holding Options		of Options		Price		Date of Grant(1)		Dates
Executive officers and former executive officers		2		850,000	$	0.025	$	0.025	Oct. 1, 2010
				450,000	$	0.95	$	0.95	July 31, 2013
Directors and former directors who are not executive officers		2		800,000	$	0.025	$	0.025	Various(2)
Current and former employees		16		961,029	$	0.025	$	0.025	Various(3)
				430,000	$	0.24	$	0.24	Various(4)
				340,000	$	0.38	$	0.38	Various(5)
				292,000	$	0.95	$	0.95	July 31, 2013
Consultants		1		240,000	$	0.025	$	0.025	Feb. 2, 2011

Notes:

(1)	Because there was no market for our shares, the market value on date of grant was determined by our Board.
(2)	From December 11, 2010 to January 1, 2011.
(3)	From June 1, 2010 to July 1, 2011.
(4)	From March 11, 2012 to June 1, 2012.
(5)	From January 16, 2013 to February 10, 2013.

2006 Stock Incentive Plan

In connection with the offering, we are adopting the 2006 Stock Incentive Plan, or the 2006 plan, to become effective immediately prior to the closing of the offering. The maximum aggregate number of shares of common stock issuable by us under the 2006 plan is the number of shares that, together with the shares underlying the outstanding options under our 2003 Plan at the closing of the offering, is equal to 12% of the outstanding number of shares of common stock immediately following the closing of this offering and the exercise or expiration of the over-allotment option (but not exceeding 5,000,000 shares).

Under the 2006 plan, the Board may grant awards including options, restricted stock awards or other stock unit awards to eligible participants including our employees, directors, officers, consultants and advisors. The 2006 plan was established to provide additional incentives to attract and retain our employees, directors, officers, consultants and advisors.

Options granted under the 2006 plan will have an exercise price as established by the Board and as specified in the applicable option agreement. However, the exercise price shall not in any event be less than the volume weighted average trading price of the shares of our common stock on the Toronto Stock Exchange or another stock exchange where the majority of the trading volume and value of the shares occurs for the five trading days immediately preceding the day on which the option is granted. The term of the options, in addition to whether they are exercisable in installments or pursuant to vesting schedules, are to be established by the Board and as specified in the applicable option agreement.

The terms and conditions of a restricted stock award, including the conditions for repurchase (or forfeiture) and the issue price, if any, are to be determined by the Board. The terms and conditions of other

69

stock unit awards, including any applicable purchase price are also to be determined by the Board and such other stock unit awards can be used as a form of payment in the settlement of other awards granted under the 2006 plan or as payment in lieu of compensation to which a participant is otherwise entitled.

Any expiry, termination, surrender, cancellation or forfeiture of awards will make new grants available under the 2006 plan, effectively resulting in a re-loading of the number of awards available to grant under the 2006 plan. The number of shares of common stock that can be issued to a participant in any 12-month period cannot exceed 750,000 shares. Similarly, under the 2006 plan and all of our other security based compensation arrangements, the number of shares of common stock that are: (i) issuable to insiders (as defined in the 2006 plan) at any time, calculated as at the date of grant of an award; and (ii) issued to insiders within any one year period, cannot exceed 10% of the number of shares of common stock that are issued and outstanding.

In connection with certain reorganization events, including a merger or acquisition of us with or into another entity as a result of which our common stock is converted into or exchanged for the right to receive cash, securities or other property, or is cancelled, the Board may provide for the accelerated exercise of any unexercised options or awards (other than restricted stock awards) and termination of same immediately prior to the completion of such reorganization event. In connection with a merger, consolidation, or acquisition of property or stock of another entity, the Board may grant awards in substitution for any options, stock or other stock-based awards granted by such entity or affiliate thereof. Such substitute awards will not count against the maximum aggregate share limit under the 2006 plan.

Awards under the 2006 plan cannot be sold, assigned or transferred except by will or the laws of descent and distribution or, other than in the case of an incentive stock option, pursuant to a qualified domestic relations order. However, the Board may permit or provide in an award for gratuitous transfers by a participant to certain family members, a family trust or similar entity if with respect to such proposed transferee we would be eligible to register the sale of the common stock subject to such award under the Securities Act of 1933 using a Form S-8. The Board shall also determine the effect of disability, death, termination of employment, change in employment or other status of the participant on an award and the extent to which any rights under the award may be exercised by a participant’s legal representative, guardian or beneficiary.

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PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information known to us regarding beneficial ownership of our common stock as of October 15, 2006 and as adjusted to reflect the sale of the shares of common stock in this offering by:

•  each person known by us to be the beneficial owner of more than 5% of our common stock;

•  our named executive officers;

•  each of our directors and director nominees;

•  all executive officers, directors and director nominees as a group; and

•  each of the selling stockholders.

Beneficial ownership is determined in accordance with SEC rules and generally includes voting or investment power with respect to securities. Under these rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power and includes any shares that an individual or entity has the right to acquire within 60 days of October 15, 2006 through the exercise of any warrant, stock option or other right. Except as noted by footnote, and subject to community property laws where applicable, the stockholders named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. None of the selling stockholders is an officer, director or family member residing with such person.

As of October 15, 2006, there were 52,843,248 shares of common stock issued and outstanding, which reflects the conversion to common stock, upon the closing of the offering, of all outstanding shares of non-voting common stock and preferred stock.

	Shares Beneficially Owned							Shares Beneficially Owned
	Prior to Offering							After Offering
Name and Address of Beneficial Owner(1)	Number		Percentage			Shares Offered		Number		Percentage
Directors and Five Percent Stockholders:
Richard Domaleski(8)/Roman Holdings Trust(2)		19,145,000		36.3	%		—		19,145,000		26.3	%
Nicholas Zaldastani(3)		2,918,887		5.5			—		2,918,887		4.0
Other Directors:
Patrick Bischoff(4)		924,339		1.8			—		924,339		1.3
Edward Libbey(5)		1,898,448		3.6			—		1,898,448		2.6
Other Named Executive Officers:
Philip Adams(6)(8)		2,500,000		4.7			—		2,500,000		3.4
All executive officers and directors as a group (6 individuals)(7)		27,386,674		50.4			—		27,386,674		36.8
Selling Stockholders:
Adams, Christopher V.		150,000		*			50,000		100,000		*
Adams, Elisa		80,000		*			60,000		20,000		*
Bachmann Family Trust		753,715		1.4			250,000		503,715		*
Bachmann, Stephen J.		1,232,830		2.3			250,000		982,830		1.3
Baker, Holly Elizabeth		5,000		*			2,500		2,500		*
Baker, Suzanne M.		17,500		*			17,500		0		*
Baker, Watson Christopher		5,000		*			2,500		2,500		*
Barone Family Trust		100,000		*			50,000		50,000		*
Bischoff, Dieter		504,447		1.0			100,000		404,447		*
Blum III, Richard L.		181,169		*			150,000		31,169		*

71

	Shares Beneficially Owned						Shares Beneficially Owned
	Prior to Offering						After Offering
Name and Address of Beneficial Owner(1)	Number		Percentage		Shares Offered		Number		Percentage
Callander, Clark N		502,477		1.0		50,248		452,229		*
Charnley, Elisabeth R.(8)(12)		15,417		*		5,000		10,417		*
Chicoski, Benjamin John		25,000		*		12,500		12,500		*
Chicoski, Mary Martha		25,000		*		25,000		0		*
Chicoski, Robert Hale		691,876		1.3		250,000		441,876		*
Chung, George J.		251,098		*		175,769		75,329		*
Conte, Maurice(9)		499,740		*		250,000		249,740		*
Conte, Patricia		57,000		*		57,000		0		*
Doehner, Axel		593,515		1.1		193,515		400,000		*
Erickson, Alan		324,119		*		250,000		74,119		*
Fromuth, August G.		38,000		*		38,000		0		*
Gibson, James H. McMillan(10)		935,000		1.8		200,000		735,000		1.0
Gjoka, Alketa		100,000		*		35,000		65,000		*
Gjoka, Ligor		30,000		*		15,000		15,000		*
Gjoka, Minella(8)(13)		649,125		1.2		250,000		399,125		*
Goldenblatt, Martin K.(9)(10)		2,072,135		3.9		250,000		1,822,135		2.5
Haddock, James		142,500		*		142,500		0		*
Haddock, Jeannette		142,500		*		142,500		0		*
Hartwell, Robert(8)(14) and Tina		715,000		1.3		150,000		565,000		*
House, Patrick		248,480		*		248,480		0		*
Kroll, Sherry L.		2,500		*		2,500		0		*
Leaderer, James		76,000		*		76,000		0		*
Livingston, Martha		85,000		*		20,000		65,000		*
Lois E. Hopkins Irrevocable Trust		380,000		*		250,000		130,000		*
Marcus, Morton		501,295		*		200,000		301,295		*
McDonough, Michael		1,028,936		1.9		78,936		950,000		1.3
Melesiute, Vitana(8)(15)		388,963		*		75,000		313,963		*
Morgan, Laura		179,987		*		89,994		89,993		*
Nugent, John J.		1,060,475		2.0		250,000		810,475		1.1
Nugent, Lynda		380,000		*		250,000		130,000		*
Polenske, Michael		500,028		*		250,000		250,028		*
Robinson, Gareth		177,622		*		177,622		0		*
Rydel, James W. Rydel and Amanda G.		60,500		*		60,500		0		*
Seashore Family Bypass Trust		363,971		*		180,000		183,971		*
Seashore, Anthony J.		72,794		*		40,000		32,794		*
Sheedy, Thomas W. Sheedy, Jr. and Maggie		500,169		*		250,000		250,169		*
Sidman, Barry		10,000		*		10,000		0		*
Siegel, Peter		20,000		*		20,000		0		*
Skipping Stone, Inc.		10,000		*		10,000		0		*
Smith, Larry A.		1,807,528		3.4		250,000		1,557,528		2.1
Sullivan & Worcester LLP		75,000		*		75,000		0		*
Thomas, Andrew J.(8)(16)		552,083		1.0		200,000		352,083		*

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	Shares Beneficially Owned						Shares Beneficially Owned
	Prior to Offering						After Offering
Name and Address of Beneficial Owner(1)	Number		Percentage		Shares Offered		Number		Percentage
Toppan, Deborah		21,500		*		9,000		12,500		*
Torr, Nina		99,392		*		15,000		84,392		*
W. Frederick Baker(9), Custodian for Andrew Richard		5,000		*		2,500		2,500		*
Warner J. Eldredge — IRA		1,112,351		2.1		250,000		862,351		1.2
Warner, Emily Whiteman		25,000		*		5,000		20,000		*
Warner, Leslie Hale		703,000		1.3		250,000		453,000		*
White, Maribeth		57,000		*		57,000		0		*
White, Max		57,000		*		57,000		0		*
White, Michie		57,000		*		57,000		0		*
William A. Reynolds(11), Trustee of the William A. Reynolds Revocable Trust dated December 19, 2001		2,144,349		4.1		250,000		1,894,349		2.6

*  denotes less than 1%.

(1)	Unless otherwise noted all addresses are c/o World Energy Solutions, Inc., 446 Main Street, Worcester, Massachusetts 01608.
(2)	Includes 145,000 shares held in the name of Mr. Domaleski and 19,000,000 shares held by Dana Domaleski and David T. Bunker, as co-trustees of the Roman Holdings Trust, of which Mr. Domaleski is the principal beneficiary. Mrs. Domaleski and Mr. Bunker, as co-trustees, share voting and investment power with respect to the shares held by the Roman Holdings Trust. The address of the Roman Holdings Trust is 2935 Barrymore Court, Orlando, FL 32835. The trustees disclaim beneficial ownership of these shares.
(3)	Includes 410,959 shares of common stock issuable upon the exercise of warrants exercisable within 60 days of October 15, 2006.
(4)	Consists of shares held by Spinnaker Ventures LLC, of which Mr. Bischoff is the managing director and over which he holds voting and investment power. Spinnaker Ventures LLC is owned by the Bischoff Alaska Irrevocable Trust of which Mr. Bischoff is a trustee. Mr. Bischoff’s children are the beneficiaries of the trust. Mr. Bischoff disclaims beneficial ownership of these shares.
(5)	Includes 703,000 shares of common stock held in the name of Mr. Libbey’s wife, Diane Libbey. Includes 27,397 shares of common stock issuable upon the exercise of a warrant exercisable within 60 days of July 21, 2006 and 300,000 shares of common stock issuable upon exercise of stock options exercisable within 60 days of October 15, 2006.
(6)	Includes 850,000 shares of common stock issuable upon exercise of stock options exercisable within 60 days of October 15, 2006.
(7)	Includes 1,588,356 shares of common stock issuable upon exercise of stock options and warrants exercisable within 60 days of October 15, 2006.
(8)	Current employee of ours.
(9)	Former employee of ours within the last three years.
(10)	Former director of ours within the last three years.
(11)	Mr. Reynolds guaranteed certain amounts borrowed by us from Silicon Valley Bank which amounts have since been repaid.
(12)	Includes 5,417 shares of common stock issuable upon exercise of stock options exercisable within 60 days of October 15, 2006.
(13)	Includes 32,354 shares of common stock issuable upon exercise of stock options exercisable within 60 days of October 15, 2006.
(14)	Includes 415,000 shares of common stock issuable upon exercise of stock options exercisable within 60 days of October 15, 2006.
(15)	Includes 174,263 shares of common stock issuable upon exercise of stock options exercisable within 60 days of October 15, 2006.
(16)	Includes 352,083 shares of common stock issuable upon exercise of stock options exercisable within 60 days of October 15, 2006.

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Since January 1, 2003, we have engaged in the following transactions with our directors, director nominees, executive officers and holders of more than 5% of our common stock, and affiliates of our directors, director nominees, executive officers and 5% stockholders.

Preferred Stock Issuances

Three of our current directors, Nicholas Zaldastani, Patrick Bischoff and Edward Libbey purchased 1,107,928, 924,339 and 74,551 shares of our preferred stock, respectively, on March 31, 2003, at a per share purchase price of $0.146 by converting all of the principal and interest owed to them on certain convertible promissory notes. Our preferred stock is converting to common stock on a one-for-one basis in connection with this offering.

Stock Option Grants

We have granted options to purchase shares of our common stock to our executive officers and directors. See “Management — Director Compensation,” “Management — Executive Compensation” and “Management — Option Grants/Exercised During the Most Recently Completed Fiscal Year.”

Warrants

In 2001 and 2002, three of our current directors, Nicholas Zaldastani, Patrick Bischoff and Edward Libbey, were issued warrants to purchase 410,959, 342,465 and 27,397 shares of our common stock, respectively, in connection with their purchase of convertible promissory notes of ours which they subsequently converted to preferred stock as described above.

Consulting Arrangements

In 2006, we have paid Patrick Bischoff, one of our Board members, to assist us in our analysis of potential equity financing and other strategic transactions, including this offering. We do not have a written agreement with Mr. Bischoff. This consulting arrangement does not have a fixed time commitment. Mr. Bischoff provides these services from time to time as requested by our Chief Executive Officer. Mr. Bischoff bills us hourly for such services. Payments under this arrangement to date are less than $30,000.

We paid Go2Marketing LLC, an entity affiliated with Philip Adams, approximately $135,000 in cash and we issued Mr. Adams options to purchase 1,250,000 shares of our common stock in consideration of consulting services provided by Mr. Adams to us between 2001 and 2003 prior to our hiring him as an employee, which services related primarily to marketing, channel recruiting, human resources, information technology and other operational matters, as well as financial matters.

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ESCROWED SECURITIES

In accordance with the Canadian National Policy 46-201 Escrow for Initial Public Offerings, or NP 46-201, and pursuant to an escrow agreement to be entered into among Richard Domaleski, Patrick Bischoff, Nicholas Zaldastani, Edward Libbey and Philip Adams, referred to below as the principals, and Computershare Trust Company, Inc., referred to below as the escrow agent, and us, the following table sets out the securities that will be deposited into escrow with the escrow agent on closing of the offering:

		Percentage of
		Shares of Common
	Amount and Type of	Stock After Giving Effect
Name of Principal	Escrowed Securities(4)	to the Offering
Richard Domaleski/Roman Holdings Trust(1)	19,145,000 shares of common stock		26.3	%
Nicholas Zaldastani	2,507,928 shares of common stock
	410,959 warrants		4.0
Philip Adams	1,650,000 shares of common stock
	850,000 options		3.4
Edward Libbey	1,571,051 shares of common stock(3)
	300,000 options		2.6
	27,397 warrants
Patrick Bischoff(2)	924,339 shares of common stock		1.3

Notes:

(1)	Includes 145,000 shares held in the name of Mr. Domaleski and 19,000,000 shares held by Dana Domaleski and David T. Bunker, as co-trustees of the Roman Holdings Trust, of which Mr. Domaleski is the principal beneficiary. The trustees disclaim beneficial ownership of these shares.
(2)	Consists of shares held by Spinnaker Ventures LLC, of which Mr. Bischoff is the managing director and sole stockholder and over which he holds voting and investment power. Spinnaker Ventures LLC is owned by the Bischoff Alaska Irrevocable Trust of which Mr. Bischoff is a trustee. Mr. Bischoff’s children are the beneficiaries of the trust. Mr. Bischoff disclaims beneficial ownership of these shares.
(3)	Includes 703,000 shares of common stock held in the name of Mr. Libbey’s wife, Diane Libbey.
(4)	Each option and warrant is exercisable for one share of common stock.

We will be classified as an “established issuer” under NP 46-201. An “established issuer” is an issuer that after its initial public offering has securities listed on the Toronto Stock Exchange and is not classified by the Toronto Stock Exchange as an exempt issuer. Based on our being an “established issuer”, the escrowed securities will be subject to an 18 month escrow. Twenty-five percent of each principal’s escrowed securities will be exempt from escrow effective on the receipt of notice confirming the listing of the shares of common stock on the Toronto Stock Exchange. The balance of the escrowed securities will be released over 18 months in three equal tranches at six month intervals from the date of the listing of the shares of common stock on the Toronto Stock Exchange, with 25% of the escrowed securities being released in each tranche.

The escrowed securities may not be transferred or otherwise dealt with during the term of the escrow agreement unless the transfers or dealings within escrow are: transfers to continuing or, upon their appointment, incoming directors and senior officers of the company or of a material operating subsidiary, with approval of our Board; transfers to other principals; transfers to a registered retirement savings plan or similar trust plan provided that the only beneficiaries are the transferor or the transferor’s spouse, children or parents; transfers upon bankruptcy to the trustee in bankruptcy; and pledges to a financial institution as collateral for a bona fide loan, provided that upon a realization the escrowed securities remain subject to escrow.

Tenders of escrowed securities to a take-over bid are permitted provided that, if the tenderer is a principal (as such term is defined in NP 46-201) of the successor company upon completion of the take-over bid, securities received in exchange for tendered escrowed securities are submitted in escrow on the basis of the successor company’s escrow classification.

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DESCRIPTION OF CAPITAL STOCK

The following description of our capital stock and provisions of our certificate of incorporation and by-laws are summaries and are qualified by reference to the certificate of incorporation and the by-laws that will become effective upon closing of this offering. Copies of these documents have been filed with the SEC as exhibits to our registration statement, of which this prospectus forms a part. The descriptions of the common stock and preferred stock reflect changes to our capital structure that will occur upon the closing of this offering.

Upon the completion of this offering, our authorized capital stock will consist of 150,000,000 shares of common stock, par value $0.0001 per share, and 5,000,000 shares of preferred stock, par value $0.0001 per share, all of which shares of preferred stock will be undesignated. Our Board may establish the rights and preferences of the preferred stock from time to time. As of October 15, 2006, after giving effect to the conversion of all outstanding shares of non-voting common stock and preferred stock into shares of common stock, there would have been 52,843,248 shares of common stock issued and outstanding. As of October 15, 2006, there were 140 stockholders of record of our capital stock. Generally, the presence of holders of one-third in voting power of the shares of the capital stock issued and outstanding and entitled to vote at a given meeting, all as determined in accordance with our by-laws, constitutes a quorum.

Common Stock

Holders of common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Accordingly, holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of common stock are entitled to receive proportionately any dividends as may be declared by our Board, subject to any preferential dividend rights of outstanding preferred stock. Upon our liquidation, dissolution or winding up, the holders of common stock are entitled to receive proportionately our net assets available after the payment of all debts and other liabilities and subject to the prior rights of any outstanding preferred stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. Our outstanding shares of common stock are, and the shares offered by us in this offering will be, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future.

Preferred Stock

Under the terms of our certificate of incorporation, our Board is authorized to issue shares of preferred stock in one or more series without stockholder approval. Our Board has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock.

The purpose of authorizing our Board to issue preferred stock and determine its rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of preferred stock, while providing flexibility in connection with possible future acquisitions and other corporate purposes, will affect, and may adversely affect, the rights of holders of any common stock or preferred stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock on the rights of holders of common stock until the Board determines the specific rights attached to that preferred stock. The effects of issuing preferred stock could include one or more of the following:

•  restricting dividends on the common stock;

•  diluting the voting power of the common stock;

•  impairing the liquidation rights of the common stock; or

•  delaying or preventing changes in control or management of us.

We have no present plans to issue any shares of preferred stock.

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Warrants

As of June 30, 2006:

•  Massachusetts Capital Resource Company holds a warrant to purchase, for $0.40 per share, up to 600,000 shares of our common stock as further described under “Capitalization — MCRC Indebtedness and Warrants” above and Note 7 to our consolidated financial statements.

•  Various investors who purchased our convertible promissory notes during 2001 and 2002, or our preferred stock during 2003, hold outstanding warrants to purchase up to 979,307 shares of our common stock at a weighted average exercise price of $0.03 per share.

In connection with the offering, we have also agreed to issue to the underwriters warrants to purchase 1,000,000 shares (or 1,150,000 shares if the over-allotment option is exercised in full) at the public offering price for a period of 18 months following the one-year anniversary of the closing of the offering.

These warrants provide for adjustments in the event of stock dividends, stock splits, reclassifications or other changes in our corporate structure. Certain of the holders of these warrants have registration rights that are outlined below under the heading “Registration Rights.”

Options

As of June 30, 2006, options to purchase an aggregate of 3,681,029 shares of common stock at a weighted average exercise price of $0.09 per share were outstanding.

Registration Rights

Massachusetts Capital Resource Company

If we register any of our shares of common stock under the U.S. Securities Act of 1933, we must use our best efforts to include in such registration statement all or any part of the shares of common stock Massachusetts Capital Resource Company requests to be registered, unless the underwriters impose a limitation on the number of shares of common stock that may be included in any such registration statement, in which case we shall limit the number of shares of common stock registered under the registration statement on a pro rata basis among all holders that have been granted registration rights. These registration rights are not effective in connection with this offering. We have agreed to indemnify Massachusetts Capital Resource Company against certain losses in connection with the registration of its shares as described above.

Underwriters

If we register any of our shares of common stock under the U.S. Securities Act of 1933, we must use our best efforts to include in such registration statement all or any part of the shares of common stock issued pursuant to the warrants issued to the underwriters in connection with this offering that such party requests to be registered. These registration rights will be substantially the same as those described in the foregoing paragraph. These registration rights are not effective in connection with this offering.

Anti-Takeover Provisions of Delaware Law, our Certificate of Incorporation and our Bylaws

We are subject to the provisions of Section 203 of the General Corporation Law of Delaware. Subject to certain exceptions, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years after the person became an interested stockholder, unless the interested stockholder attained such status with the approval of our Board or the business combination is approved in a prescribed manner. A business combination includes, among other things, a merger or consolidation involving us and the interested stockholder and the sale of more than 10% of our assets. In general, an interested stockholder is any entity or person beneficially owning 15% or more of our outstanding voting stock and any entity or person affiliated with or controlling or controlled by such entity or person.

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Our certificate of incorporation and our by-laws divide our Board into three classes with staggered three-year terms. In addition, our certificate of incorporation provides that subject to the rights of holders of preferred stock issued after the date hereof, directors may be removed only for cause by the affirmative vote of the holders of 75% of our shares of capital stock entitled to vote. Under our certificate of incorporation, any vacancy on our Board, including a vacancy resulting from an enlargement of our Board, may only be filled by vote of a majority of our directors then in office. The classification of our Board and the limitations on the removal of directors and filling of vacancies could make it more difficult for a third party to acquire, or discourage a third party from acquiring, control of us.

Our certificate of incorporation and our by-laws also provide that any action required or permitted to be taken by our stockholders at an annual meeting or special meeting of stockholders may only be taken if it is properly brought before the meeting and may not be taken by written action in lieu of a meeting. Our certificate of incorporation and our by-laws further provide that, except as otherwise required by law, special meetings of the stockholders may only be called by the chairman of the Board, the Chief Executive Officer or our Board. In addition, our by-laws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of stockholders, including proposed nominations of persons for election to the Board. Stockholders at an annual meeting may only consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of the Board or by a stockholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has delivered timely written notice in proper form to our secretary of the stockholder’s intention to bring such business before the meeting. These provisions could have the effect of delaying until the next stockholders’ meeting stockholder actions that are favored by the holders of a majority of our outstanding voting securities. These provisions may also discourage a third party from making a tender offer for our common stock, because even if it acquired a majority of our outstanding voting securities, the third party would be able to take action as a stockholder, such as electing new directors or approving a merger, only at a duly called stockholders’ meeting, and not by written consent.

The General Corporation Law of Delaware provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation’s certificate of incorporation or by-laws, unless a corporation’s certificate of incorporation or by-laws, as the case may be, requires a greater percentage. Our certificate of incorporation and by-laws require the affirmative vote of the holders of at least 75% of the shares of our capital stock issued and outstanding and entitled to vote to amend or repeal any of the provisions described in the prior two paragraphs.

Limitation of Liability and Indemnification

Our certificate of incorporation contains provisions permitted under the General Corporation Law of Delaware relating to the liability of directors. The provisions eliminate a director’s liability for monetary damages for a breach of fiduciary duty, except in circumstances involving wrongful acts, such as the breach of a director’s duty of loyalty or acts or omissions that involve intentional misconduct or a knowing violation of law. Further, our certificate of incorporation contains provisions to indemnify our directors and officers to the fullest extent permitted by the General Corporation Law of Delaware.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is Computershare Trust Company, Inc.

Toronto Stock Exchange

We have applied to list our common stock on the Toronto Stock Exchange under the symbol “XWE.”

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SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for our common stock and we cannot assure you that a significant public market for our common stock will develop or be sustained after this offering. Future sales of substantial amounts of our common stock in the public market, or the possibility of these sales could adversely affect trading prices of our common stock. Furthermore, since only a limited number of shares will be available for sale shortly after this offering because of certain contractual and legal restrictions on resale described below, sales of substantial amounts of our common stock in the public market after the restrictions lapse could also adversely affect the trading price of our common stock and our ability to raise equity capital in the future.

Sales of Restricted Shares

Upon completion of this offering, we will have outstanding an aggregate of 72,843,248 shares of common stock, assuming no exercise of the underwriters’ over-allotment option and no exercise of outstanding options or warrants that were outstanding as of October 15, 2006. Of these shares, the shares sold in this offering will be freely tradable without restrictions or further registration under the Unites States Securities Act of 1933 unless one of our existing affiliates as that term is defined in Rule 144 under the Securities Act of 1933 purchases such shares, in which case such shares will remain subject to the resale limitations of Rule 144.

The remaining 45,402,184 shares of our common stock held by existing stockholders are restricted shares or are restricted by the contractual provisions described below. Restricted shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 of the Securities Act of 1933, which are summarized below. Of these restricted shares, 18,991,030 shares will be available for resale in the public market in reliance on Rule 144(k), 17,333,979 of which shares are restricted by the terms of the lock-up agreements described below. The remaining 26,411,154 shares become eligible for resale in the public market at various dates thereafter, 26,034,754 of which shares are restricted by the terms of the lock-up agreements. The table below sets forth the approximate number of currently outstanding shares eligible for future sale, in addition to the shares sold by us in the offering:

	Approximate Additional
Days After Date of This	Number of Shares Becoming
Prospectus	Eligible for Future Sale		Comment
On Effectiveness		8,783,015	Freely tradable shares sold by selling stockholders in offering; Shares salable under Rule 144(k) that are not locked-up
180 Days		691,500	Shares salable under Rule 701 and outstanding shares salable under Rule 144 subject to a 180 day lock-up
365 Days		43,368,733	Shares salable under Rule 701 and outstanding shares salable under Rule 144 subject to a 365 day lock-up

Under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned restricted shares for at least one year and has complied with the requirements described below upon expiration of any applicable lock-up agreement would be entitled to sell a specified number of his, her or its shares within any three-month period. That number of shares cannot exceed one percent of the number of shares of our common stock then outstanding, which will equal approximately 728,432 shares immediately after this offering.

Sales under Rule 144 are also restricted by manner of sale provisions, notice requirements and the availability of current public information about our company. Rule 144 also provides that our affiliates who are selling shares of our common stock that are not restricted shares must nonetheless comply with the same restrictions applicable to restricted shares with the exception of the holding period requirement.

Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years is entitled to sell those shares without complying with the manner of sale, public information, volume

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limitation or notice provisions of Rule 144. Accordingly, unless otherwise restricted or subject to lock-up agreements, these shares may be sold immediately upon the completion of this offering.

Options

Rule 701 provides that the shares of common stock acquired upon the exercise of currently outstanding options or other rights granted under our equity plans may be resold, to the extent not restricted by the terms of the lock-up agreements, by persons, other than affiliates, beginning 90 days after the date of this prospectus, restricted only by the manner of sale provisions of Rule 144, and by affiliates in accordance with Rule 144, without compliance with its one-year minimum holding period. All outstanding shares available for resale in the public market in reliance on Rule 701 are restricted by the terms of the lock-up agreements.

As of June 30, 2006, our Board had authorized an aggregate of up to 15,000,000 shares of common stock for issuance under our existing equity plans. As of June 30, 2006, options to purchase a total of 3,681,029 shares of common stock were outstanding, 2,668,747 of which options are exercisable and all shares issuable upon exercise of these options are restricted by the terms of the lock-up agreements. Of these currently exercisable options, upon the closing of this offering all of these shares will be eligible for sale in the public market in accordance with Rule 701 under the Securities Act of 1933 beginning 365 days after the date of this prospectus.

We intend to file one or more registration statements on Form S-8 under the Securities Act of 1933 following this offering to register all shares of our common stock which have been issued or are issuable upon exercise of outstanding stock options or other rights granted under our equity plans. These registration statements are expected to become effective upon filing. Shares covered by these registration statements will thereupon be eligible for sale in the public market, upon the expiration or release from the terms of the lock-up agreements, to the extent applicable, or subject in certain cases to vesting of such shares.

Warrants

As of June 30, 2006, there were warrants outstanding to purchase a total of 979,307 shares of common stock at a weighted average exercise price of $0.03 per share, and 600,000 shares of common stock at a weighted average exercise price of $0.40 per share.

In connection with the offering, we have agreed to issue to the underwriters warrants to purchase 1,000,000 shares (or 1,150,000 shares if the over-allotment option is exercised in full) at a price equal to the public offering price for a period of 18 months following the one-year anniversary of the closing of the offering.

Lock-up Agreements

We, our officers, directors and the holders of substantially all of our outstanding shares of common stock have agreed with the underwriters not to offer or sell, agree to offer or sell, or enter into an arrangement to offer or sell any shares of common stock or any other of our securities, or securities convertible into, exchangeable for, or otherwise exercisable to acquire any of our securities without the prior written consent of Sprott Securities (USA) Limited, except for: (a) tenders pursuant to third party take-over bids made to all holders of common stock or similar acquisition transactions, (b) issuances of options under our equity-based compensation plans, (c) exercise of outstanding options or warrants, (d) transfers of securities acquired in open market transactions after the completion of the offering (provided that no U.S. or Canadian insider reporting laws require reporting of such transaction), (e) gifts of shares, (f) distributions of shares to limited partners or shareholders of the subject stockholder, (g) transfers of shares to certain family members or affiliates, or certain partnerships, and (h) transfers of shares pursuant to a plan adopted pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, to the extent that such plan does not provide for the sale of the subject stockholder’s shares during the lock-up period. The agreements will expire 365 days following the date of this prospectus.

Registration Rights

See “Description of Capital Stock — Registration Rights” for a detailed description of registration rights.

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MATERIAL UNITED STATES FEDERAL TAX CONSIDERATIONS

The following is a summary of the material U.S. federal income and estate tax consequences applicable to non-U.S. holders with respect to their ownership and disposition of shares. This discussion is for general information only and is not tax advice. Accordingly, all prospective non-U.S. holders of shares should consult their own tax advisors with respect to the U.S. federal, state, local and non-U.S. tax consequences of the purchase, ownership and disposition of shares. In general, a non-U.S. holder means a beneficial owner of shares who is not for U.S. federal income tax purposes:

•  an individual who is a citizen or resident of the U.S.;

•  a corporation or any other organization taxable as a corporation for U.S. federal income tax purposes, created or organized in the U.S. or under the laws of the U.S. or of any state thereof or the District of Columbia;

•  an estate, the income of which is included in gross income for U.S. federal income tax purposes regardless of its source; or

•  a trust if (i) a U.S. court is able to exercise primary supervision over the trust’s administration and one or more United States persons have the authority to control all of the trust’s substantial decisions or (ii) the trust has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a United States person.

This discussion is based on current provisions of the U.S. Internal Revenue Code of 1986, as amended, which is referred to herein as the Code, existing and proposed U.S. Treasury Regulations promulgated thereunder, current administrative rulings and judicial decisions, in effect as of the date of this prospectus, all of which are subject to change or to differing interpretation, possibly with retroactive effect. Any change could alter the tax consequences to non-U.S. holders described in this prospectus. This discussion assumes that a non-U.S. holder holds shares as a capital asset, generally property held for investment.

This discussion does not address all aspects of U.S. federal income and estate taxation that may be relevant to a particular non-U.S. holder in light of that non-U.S. holder’s individual circumstances nor does it address any aspects of U.S. state, local or non-U.S. taxes. This discussion also does not consider any specific facts or circumstances that may apply to a non-U.S. holder and does not address the special tax rules applicable to particular non-U.S. holders, such as:

•  insurance companies;

•  tax-exempt organizations;

•  financial institutions;

•  brokers or dealers in securities;

•  regulated investment companies;

•  pension plans;

•  controlled foreign corporations;

•  passive foreign investment companies;

•  owners that hold the shares as part of a straddle, hedge, conversion transaction, synthetic security or other integrated investment; and

•  certain U.S. expatriates.

In addition, this discussion does not address the tax treatment of partnerships or persons who hold their shares through partnerships or other pass-through entities. A partner in a partnership that will hold shares should consult his, her or its own tax advisor regarding the tax consequences of the ownership and disposition of shares.

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There can be no assurance that the Internal Revenue Service, referred to herein as the IRS, will not challenge one or more of the tax consequences described herein. Prospective investors are urged to consult with their own tax advisors regarding the U.S. federal, state, local and non-U.S. income, estate and other tax considerations of acquiring, holding and disposing of shares.

Distributions on Shares

We do not intend to pay any distributions on the shares in the foreseeable future. In the event we do pay distributions on the shares, however, these distributions generally will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. If a distribution exceeds our current and accumulated earnings and profits, the excess will be treated as a tax-free return of the non-U.S. holder’s investment, up to such holder’s tax basis in the shares. Any remaining excess will be treated as capital gain, subject to the tax treatment described below in “Gain on Sale, Exchange or Other Disposition of Shares.”

Dividends paid to a non-U.S. holder generally will be subject to withholding of U.S. federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty between the U.S. and such holder’s country of residence. In the case of a non-U.S. holder entitled to the benefits of the income tax treaty between the U.S. and Canada, the tax rate generally may be reduced to 15%.

If we determine, at a time reasonably close to the date of payment of a distribution on the shares, that the distribution will not constitute a dividend because we do not anticipate having current or accumulated earnings and profits, we intend not to withhold any U.S. federal income tax on the distribution as permitted by U.S. Treasury Regulations. If we or another withholding agent withholds tax on such a distribution, a non-U.S. holder may be entitled to a refund of the tax withheld, which the non-U.S. holder may claim by filing a U.S. tax return with the IRS.

Dividends that are treated as effectively connected with a trade or business conducted by a non-U.S. holder within the U.S. and, if an applicable income tax treaty so provides, that are attributable to a permanent establishment or a fixed base maintained by the non-U.S. holder within the U.S. are generally exempt from the 30% withholding tax if the non-U.S. holder satisfies applicable certification and disclosure requirements. However, such U.S. effectively connected income, net of specified deductions and credits, is taxed at the same graduated U.S. federal income tax rates applicable to U.S. persons (as defined in the Code). Any U.S. effectively connected income received by a non-U.S. holder that is a corporation may also, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty between the U.S. and such holder’s country of residence.

A non-U.S. holder of shares who claims the benefit of an applicable income tax treaty between the U.S. and such holder’s country of residence generally will be required to provide a properly executed IRS Form W-8BEN (or successor form) and satisfy applicable certification and other requirements. Non-U.S. holders are urged to consult their tax advisors regarding their entitlement to benefits under a relevant income tax treaty.

A non-U.S. holder that is eligible for a reduced rate of U.S. withholding tax under an income tax treaty may obtain a refund or credit of any excess amounts withheld by timely filing an appropriate claim with the IRS.

Gain On Sale, Exchange or Other Disposition of Shares

In general, a non-U.S. holder will not be subject to any U.S. federal income tax or withholding tax on any gain realized upon such holder’s sale, exchange or other disposition of shares unless:

•  the gain is effectively connected with a U.S. trade or business and, if an applicable income tax treaty so provides, is attributable to a permanent establishment or a fixed base maintained by such non-U.S. holder, in which case the non-U.S. holder generally will be taxed at the graduated U.S. federal income tax rates applicable to U.S. persons (as defined in the Code) and, if the non-U.S. holder is a foreign corporation, the branch profits tax described above in “Distributions on Shares” also may apply;

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•  the non-U.S. holder is a nonresident alien individual who is present in the U.S. for 183 days or more in the taxable year of the disposition and certain other conditions are met, in which case the non-U.S. holder will be subject to a 30% tax (or such lower rate as may be specified by an applicable income tax treaty between the U.S. and such holder’s country of residence) on the net gain derived from the disposition, which may be offset by U.S. source capital losses of the non-U.S. holder, if any; or

•  we are or have been, at any time during the five-year period preceding such disposition (or the non-U.S. holder’s holding period if shorter) a “U.S. real property holding corporation” unless our common stock is regularly traded on an established securities market and the non-U.S. holder holds no more than 5% of our outstanding common stock, directly or indirectly during the shorter of the 5-year period ending on the date of the disposition or the period that the non-U.S. holder held the common stock and we were a U.S. real property holding corporation during such period. If we are determined to be a U.S. real property holding corporation and the foregoing exception does not apply, then a purchaser may withhold 10% of the proceeds payable to a non-U.S. holder from a sale of our common stock and the non-U.S. holder generally will be taxed on its net gain derived from the disposition at the graduated U.S. federal income tax rates applicable to U.S. persons (as defined in the Code). Generally, a corporation is a U.S. real property holding corporation only if the fair market value of its U.S. real property interests equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in a trade or business. Although there can be no assurance, we do not believe that we are, or have been, a U.S. real property holding corporation, or that we are likely to become one in the future. Furthermore, no assurance can be provided that our common stock will be regularly traded on an established securities market for purposes of the rules described above.

U.S. Federal Estate Tax

Shares that are owned or treated as owned at the time of death by an individual who is not a citizen or resident of the U.S., as specifically defined for U.S. federal estate tax purposes, are considered U.S. situs assets and will be included in the individual’s gross estate for U.S. federal estate tax purposes. Such shares, therefore, may be subject to U.S. federal estate tax, unless an applicable estate tax or other treaty provides otherwise.

Backup Withholding and Information Reporting

We must report annually to the IRS and to each non-U.S. holder the gross amount of the distributions on shares paid to such holder and the tax withheld, if any, with respect to such distributions. Non-U.S. holders may have to comply with specific certification procedures to establish that the holder is not a U.S. person in order to avoid backup withholding at the applicable rate, currently 28%, with respect to dividends on our shares. Generally, a non-U.S. holder will certify its non-U.S. status on IRS Form W-8BEN. Dividends paid to non-U.S. holders subject to the U.S. withholding tax, as described above in “Distributions on Shares,” generally will be exempt from U.S. backup withholding.

Information reporting and backup withholding will generally apply to the proceeds of a disposition of shares by a non-U.S. holder effected by or through the U.S. office of any broker, U.S. or foreign, unless the holder certifies its status as a non-U.S. holder and satisfies certain other requirements, or otherwise establishes an exemption. Generally, information reporting and backup withholding will not apply to a payment of disposition proceeds to a non-U.S. holder where the transaction is effected outside the U.S. through a non-U.S. office of a broker. However, for information reporting purposes, dispositions effected through a non-U.S. office of a broker with substantial U.S. ownership or operations generally will be treated in a manner similar to dispositions effected through a U.S. office of a broker. Non-U.S. holders should consult their own tax advisors regarding the application of the information reporting and backup withholding rules to them.

Copies of information returns may be made available to the tax authorities of the country in which the non-U.S. holder resides or is incorporated under the provisions of a specific treaty or agreement.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a non-U.S. holder can be refunded or credited against the non-U.S. holder’s U.S. federal income tax liability, if any, provided that an appropriate claim is timely filed with the IRS.

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UNDERWRITING

Subject to the terms and conditions contained in an underwriting agreement among us, the selling stockholders and the underwriters named below, such underwriters have agreed to purchase, and we and the selling stockholders have agreed to sell to them, the number of shares indicated below on the closing date:

Underwriter	Number of Shares
Sprott Securities (USA) Limited		13,720,532
Canaccord Adams Inc.		6,860,266
CIBC World Markets Corp.		6,860,266
Total		27,441,064

The underwriters are offering the common stock subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the common stock offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The obligations of the underwriters under the underwriting agreement are conditional and may be terminated at their discretion if there has been a material adverse change in the state of the financial markets and may also be terminated in other stated circumstances and upon the occurrence of other stated events that they deem to be material and adverse. The underwriters are, however, severally obligated to take up and pay for all of the shares that they have agreed to purchase if any shares are purchased under the underwriting agreement. However, the underwriters are not required to take or pay for the shares covered by the underwriters’ over-allotment option.

This offering is being made concurrently in the United States and in each of the provinces of Canada. The common stock will be offered in the United States and Canada through the underwriters either directly or through their respective U.S. or Canadian registered broker-dealer affiliates. Subject to applicable law, the underwriters may offer the common stock outside the United States and Canada.

We and the selling stockholders have agreed to indemnify the underwriters and their affiliates, directors, officers, employees and agents against certain liabilities, including, without restriction, liabilities under the Securities Act of 1933 and civil liabilities under Canadian provincial securities legislation, and to contribute to any payments the underwriters may be required to make in respect thereof.

Commissions and Discounts

The underwriters’ representatives have advised us that the underwriters propose initially to offer the shares to the public at the initial public offering price on the cover page of this prospectus and to dealers at that price less a concession not in excess of C$0.03 per share. All of the shares in this offering will be sold in Canadian dollars. The underwriters may allow, and the dealers may reallow, a discount not in excess of C$0.01 per share to other dealers. After the initial public offering, the public offering price, concession and discount may be changed. After the underwriters have made a reasonable effort to sell all of the shares at the initial offering price, the offering price may be decreased, and further changed from time to time, to an amount not greater than the initial offering price disclosed in the prospectus and the compensation realized by the underwriters will be decreased by the amount that the aggregate price paid by purchasers for the shares is less than the gross proceeds paid by the underwriter to us or selling stockholders.

The following table shows the public offering price, underwriting discount and proceeds before expenses to us and to the selling stockholders. The information assumes either no exercise or full exercise by the underwriters of their over-allotment option to purchase additional shares of our common stock:

	Per Share		Without Option		With Option
Public offering price	C$	1.05	C$	28,813,117.20	C$	31,963,117.20
Underwriting discount	C$	0.063	C$	1,728,787.03	C$	1,917,787.03
Proceeds, before expenses, to us	C$	0.987	C$	19,740,000.00	C$	22,701,000.00
Proceeds, before expenses, to selling stockholders	C$	0.987	C$	7,344,330.17	C$	7,344,330.17

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The expenses of the offering, not including the underwriting discount and the underwriters’ legal fees and expenses, are estimated at $2.0 million and are payable by us. In addition, we will reimburse the underwriters up to $50,000 of expenses incurred by them as well as 50% of fees owed by them to their legal counsel (which represents less than 1% of the offering proceeds).

We have also agreed to grant to the underwriters warrants to purchase 1,000,000 shares (or 1,150,000 shares if the over-allotment option is exercised in full), which amount shall be equal to 5% of the shares of common stock issued by us in this offering (including the over-allotment option, if applicable), at a price equal to the public offering price for a period of 18 months following the one-year anniversary of the closing of the offering. These warrants may not be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the warrants, by the underwriters for a period of 365 days immediately following the date of effectiveness of this offering.

Over-allotment Option

The underwriters have been granted an over-allotment option, exercisable for a period of 30 days from the closing of the offering, to purchase up to a total of 3,000,000 additional shares from us (being 15% of the number of shares offered by us hereby) on the same terms as set out above solely to cover over-allotments, if any, and for market stabilization purposes.

Listing on the Toronto Stock Exchange

The Toronto Stock Exchange has conditionally approved the listing of our common stock under the symbol XWE. Listing will be subject to us fulfilling all of the listing requirements of the Toronto Stock Exchange, including distribution of these securities to a minimum of public security holders.

Pricing of the Offering

Before this offering, there has been no public market for our common stock. The initial public offering price was determined through negotiations among us, the selling stockholders and the underwriters. In addition to prevailing market conditions, the factors considered in determining the initial public offering price included:

•  the valuation multiples of publicly traded companies that the underwriters believe to be comparable to us;

•  our financial information;

•  the history of, and the prospects for, our company and the industry in which we compete;

•  an assessment of our management, its past and present operations, and the prospects for, and timing of, our future revenue;

•  the present state of our development; and

•  the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours.

An active trading market for the shares may not develop. It is also possible that after the offering the shares will not trade in the public market at or above the initial public offering price.

The underwriters have advised us that they do not expect to sell more than 5% of the shares in the aggregate to accounts over which they exercise discretionary authority.

Price Stabilization, Short Positions and Penalty Bids

Until the distribution of the shares is completed, Securities and Exchange Commission rules may limit underwriters and selling group members from bidding for and purchasing our common stock. However, the underwriters’ representatives may engage in transactions that stabilize the price of our common stock, such as bids or purchases to peg, fix or maintain that price.

If the underwriters create a short position in the common stock in connection with the offering, (i.e., if they sell more shares than are listed on the cover of this prospectus), the underwriters’ representatives may reduce that short position by purchasing shares in the open market. The underwriters’ representatives may also

85

elect to reduce any short position by exercising all or part of the over-allotment option described above. Purchases of the common stock to stabilize its price or to reduce a short position may cause the price of the common stock to be higher than it might be in the absence of such purchases.

The underwriters’ representatives may also impose a penalty bid on underwriters and selling group members. This means that if the underwriters’ representatives purchase shares in the open market to reduce the underwriter’s short position or to stabilize the price of such shares, they may reclaim the amount of the selling concession from the underwriters and selling group members who sold those shares. The imposition of a penalty bid may also affect the price of the shares in that it discourages resales of those shares.

Pursuant to policy statements of the Canadian provincial securities commissions, the underwriters may not, throughout the period of distribution, bid for or purchase any shares. The policy statements allow certain exceptions to the foregoing prohibitions. The underwriters may only avail themselves of such exceptions on the condition that the bid or purchase not be engaged in for the purpose of creating actual or apparent active trading in, or raising the price of, the shares. These exceptions include a bid or purchase permitted under the Universal Market Integrity Rules for Canadian Marketplaces of Market Regulation Services Inc. relating to market completion and passive market-making activities and a bid or purchase made for and on behalf of a customer where the order was not solicited during the period of distribution. Subject to the foregoing and applicable laws, the underwriters may, in connection with the offering, over-allot or effect transactions that stabilize or maintain the market price of the shares at levels other than those which might otherwise prevail on the open market. Such transactions, if commenced, may be discontinued at any time.

Neither we nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor any of the underwriters make any representation that the underwriters’ representatives or lead manager will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.

LEGAL MATTERS

The validity of the shares of common stock we are offering will be passed upon for us by Wilmer Cutler Pickering Hale and Dorr LLP, Boston, Massachusetts. Legal matters in connection with this offering will be passed upon for the underwriters by Torys LLP, New York, New York. Certain matters regarding Canadian law will be passed upon for us by Cassels Brock & Blackwell LLP, and for the underwriters by Torys LLP, Toronto, Ontario.

EXPERTS

The financial statements as of December 31, 2004 and 2005 and for each of the three years in the period ended December 31, 2005 included in this prospectus have been audited by UHY LLP, an independent registered public accounting firm, as stated in their report appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission, or the SEC, a registration statement on Form S-1 under the Securities Act of 1933, with respect to our common stock offered hereby. In accordance with the rules and regulations of the SEC, this prospectus, which forms part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. For further information about us and our common stock, we refer you to the registration statement and the exhibits and schedules to the registration statement filed as part of the registration statement. Statements contained in this prospectus as to the contents of any contract or other document filed as an exhibit are qualified in all respects by reference to the actual text of the exhibit. You may read and copy the registration statement, including the exhibits and schedules to the registration statement, at the SEC’s Public Reference Room at 100 F. Street, N.E., Washington, D.C. 20549. You can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at www.sec.gov, from which you can electronically access the registration statement, including the exhibits and schedules to the registration statement.

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Upon completion of the offering, we will become subject to the full informational and periodic reporting requirements of the Securities Exchange Act of 1934. We will fulfill our obligations with respect to such requirements by filing periodic reports and other information with the SEC. However, because we are not listing our common stock on a U.S. stock exchange, we may not be subject to such SEC reporting requirements in the future. We also maintain an Internet site at www.worldenergy.com. Our Internet site is not a part of this prospectus.

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WORLD ENERGY SOLUTIONS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets for World Energy Solutions, Inc. at December 31, 2004, December 31, 2005 and June 30, 2006 (Unaudited)		F-3
Consolidated Statements of Operations for World Energy Solutions, Inc. for the years ended December 31, 2003, 2004 and 2005 and for the six months ended June 30, 2005 and 2006 (Unaudited)		F-4
Consolidated Statements of Stockholders’ Deficit for World Energy Solutions, Inc. for the years ended December 31, 2003, 2004 and 2005 and for the six months ended June 30, 2006 (Unaudited)		F-5
Consolidated Statements of Cash Flows for World Energy Solutions, Inc. for the years ended December 31, 2003, 2004 and 2005 and for the six months ended June 30, 2005 and 2006 (Unaudited)		F-6
Notes to Consolidated Financial Statements		F-7

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

World Energy Solutions, Inc.

Worcester, Massachusetts

We have audited the accompanying consolidated balance sheets of World Energy Solutions, Inc. (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing our audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of World Energy Solutions, Inc. as of December 31, 2005 and 2004 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.

/s/  UHY LLP

Boston, Massachusetts

August 2, 2006 except for Note 11

for which the date is October 16, 2006

F-2

WORLD ENERGY SOLUTIONS, INC.

Consolidated Balance Sheets

	December 31,						June 30, 2006
	2004			2005			Actual			Pro Forma
							(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	49,389		$	1,584,066		$	816,603
Unbilled accounts receivable		548,904			1,028,807			1,345,153
Prepaid expenses and other current assets		57,500			104,951			112,773
Deferred offering costs		—			—			361,570
Total current assets		655,793			2,717,824			2,636,099
Property and equipment, net		172,589			203,084			237,821
Capitalized software, net		113,306			112,934			117,742
Deferred tax assets		—			754,000			897,797
Total assets	$	941,688		$	3,787,842		$	3,889,459
LIABILITIES, SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Line of credit	$	500,000		$	—		$	—
Accounts payable		199,651			157,610			278,953
Accrued commissions		368,858			864,893			803,090
Accrued compensation		16,493			85,000			149,962
Accrued expenses		10,000			48,009			195,927
Due to customer		—			65,324			82,736
Deferred revenue		394,956			64,416			37,047
Guaranteed return on voting common stock		14,062			10,523			2,915
Capital lease obligations		33,935			49,507			59,716
Total current liabilities		1,537,955			1,345,282			1,610,346
Guaranteed return on voting common stock, net of current portion		10,523			—			—
Long-term debt		—			1,748,000			1,764,800
Capital lease obligations, net of current portion		139,845			131,745			109,783
Total liabilities		1,688,323			3,225,027			3,484,929
Commitments (Note 10)
Series A redeemable convertible preferred stock, $0.0001 par value; 15,000,000 shares authorized; 10,433,504 shares issued and outstanding at December 31, 2004 and 2005 and June 30, 2006 (unaudited), and no shares at June 30, 2006 pro forma (unaudited) ; stated at redemption value; (liquidation preference of $1,523,295 at December 31, 2005)		1,494,499			1,501,698			1,505,298		$	—
Stockholders’ deficit:
Common stock, non-voting, $0.0001 par value; 15,000,000 shares authorized; 6,552,135, 6,792,135, and 8,982,806 shares issued and outstanding at December 31, 2004 and 2005 and June 30, 2006 (unaudited), respectively, and no shares at June 30, 2006 pro forma (unaudited)		655			679			898			—
Common stock, voting, $0.0001 par value; 75,000,000 shares authorized; 33,724,819 shares issued and 33,049,473 shares outstanding at December 31, 2004 and 2005 and 33,366,938 shares outstanding at June 30, 2006 (unaudited), and 52,783,248 shares at June 30, 2006 pro forma (unaudited)		3,372			3,372			3,336			5,278
Treasury stock, 675,346 shares of voting common stock at cost, at December 31, 2004 and 2005 and no shares of voting common stock, at cost, at June 30, 2006 (unaudited) and June 30, 2006 pro forma (unaudited)		(151,953	)		(151,953	)		—			—
Additional paid-in capital		2,664,316			2,919,293			2,825,084			4,329,338
Accumulated deficit		(4,757,524	)		(3,710,274	)		(3,930,086	)		(3,930,086	)
Total stockholders’ deficit		(2,241,134	)		(938,883	)		(1,100,768	)	$	404,530
Total liabilities, Series A redeemable convertible preferred stock and stockholders’ deficit	$	941,688		$	3,787,842		$	3,889,459

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

F-3

WORLD ENERGY SOLUTIONS, INC.

Consolidated Statements of Operations

										Six Months Ended
	Years Ended December 31,									June 30,
	2003			2004			2005			2005			2006
										(Unaudited)
Revenue:
Brokerage commissions	$	2,451,007		$	3,186,660		$	4,673,987		$	2,156,544		$	2,479,770
Consulting		23,692			5,000			—			—			—
Total revenue		2,474,699			3,191,660			4,673,987			2,156,544			2,479,770
Cost of revenue		872,647			563,972			648,410			326,671			490,955
Gross profit		1,602,052			2,627,688			4,025,577			1,829,873			1,988,815
Operating expenses:
Sales and marketing		1,781,173			1,814,799			2,649,786			1,328,728			1,496,309
General and administrative		557,910			710,462			995,703			333,447			754,933
Total operating expenses		2,339,083			2,525,261			3,645,489			1,662,175			2,251,242
Operating income (loss)		(737,031	)		102,427			380,088			167,698			(262,427	)
Other income (expense):
Gain from debt extinguishment		—			1,062,775			—			—			—
Interest income		—			—			8,004			—			20,648
Interest expense		(180,738	)		(102,251	)		(94,842	)		(22,111	)		(121,830	)
Total other income (expense)		(180,738	)		960,524			(86,838	)		(22,111	)		(101,182	)
Income (loss) before income taxes		(917,769	)		1,062,951			293,250			145,587			(363,609	)
Income tax benefit		—			—			(754,000	)		—			(143,797	)
Net income (loss)		(917,769	)		1,062,951			1,047,250			145,587			(219,812	)
Accretion of preferred stock issuance costs		(7,199	)		(7,199	)		(7,199	)		(3,600	)		(3,600	)
Net income (loss) available to common stockholders	$	(924,968	)	$	1,055,752		$	1,040,051		$	141,987		$	(223,412	)
Earnings (loss) per share:
Net income (loss) per voting common share — basic	$	(0.03	)	$	0.02		$	0.02		$	—		$	(0.01	)
Net income (loss) per non-voting common share — basic	$	(0.03	)	$	0.02		$	0.02		$	—		$	(0.01	)
Net income (loss) available to common stockholders — diluted	$	(0.03	)	$	0.02		$	0.02		$	—		$	(0.01	)
Weighted average shares outstanding — basic:
Voting common stock		30,105,188			32,058,759			33,049,472			33,049,472			33,087,533
Non-voting common stock		339,726			2,880,592			6,778,327			6,764,290			7,650,328
		30,444,914			34,939,351			39,827,799			39,813,762			40,737,861
Weighted average shares outstanding — diluted		30,444,914			52,096,206			55,945,568			56,122,875			40,737,861
Pro forma net earnings (loss) per share available to common stockholders							$	0.02					$	—
Pro forma weighted average shares outstanding:
Basic								50,261,303						51,171,365
Diluted								55,945,568						56,084,979

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

F-4

WORLD ENERGY SOLUTIONS, INC.

Consolidated Statements of Stockholders’ Deficit

Years Ended December 31, 2003, 2004, and 2005 and for the

Six Months Ended June 30, 2006 (Unaudited)

	Non-Voting				Voting
	Common Stock				Common Stock						Treasury Stock						Additional						Total
	Number of		$0.0001		Number of			$0.0001			Number of			Stated at			Paid-in			Accumulated			Stockholders’
	Shares		Par Value		Shares			Par Value			Shares			Cost			Capital			Deficit			Deficit
Balance, January 1, 2003		—	$	—		31,015,376		$	3,102			675,346		$	(151,953	)	$	2,382,137		$	(4,902,706	)	$	(2,669,420	)
Exercise of stock options		2,000,000		200		—			—			—			—			49,800			—			50,000
Issuance of warrants in connection with Series A
Redeemable Convertible Preferred Stock		—		—		—			—			—			—			18,194			—			18,194
Accretion of stock issuance costs		—		—		—			—			—			—			(7,199	)		—			(7,199	)
Common stock warrants exercised		—		—		873,828			87			—			—			26,129			—			26,216
Issuance of fully vested stock options to non-employees		—		—		—			—			—			—			14,952			—			14,952
Net loss		—		—		—			—			—			—			—			(917,769	)		(917,769	)
Balance, December 31, 2003		2,000,000		200		31,889,204			3,189			675,346			(151,953	)		2,484,013			(5,820,475	)		(3,485,026	)
Exercise of stock options		4,552,135		455		—			—			—			—			113,348			—			113,803
Accretion of stock issuance costs		—		—		—			—			—			—			(7,199	)		—			(7,199	)
Common stock warrants exercised		—		—		1,835,615			183			—			—			54,886			—			55,069
Issuance of fully vested stock options to non-employees		—		—		—			—			—			—			19,268			—			19,268
Net income		—		—		—			—			—			—			—			1,062,951			1,062,951
Balance, December 31, 2004		6,552,135		655		33,724,819			3,372			675,346			(151,953	)		2,664,316			(4,757,524	)		(2,241,134	)
Exercise of stock options		240,000		24		—			—			—			—			5,976			—			6,000
Accretion of stock issuance costs		—		—		—			—			—			—			(7,199	)		—			(7,199	)
Issuance of warrants in connection with long-term debt		—		—		—			—			—			—			256,200			—			256,200
Net income		—		—		—			—			—			—			—			1,047,250			1,047,250
Balance, December 31, 2005		6,792,135		679		33,724,819			3,372			675,346			(151,953	)		2,919,293			(3,710,274	)		(938,883	)
Exercise of stock options (unaudited)		2,190,671		219		—			—			—			—			56,698			—			56,917
Common stock warrants exercised (unaudited)		—		—		342,465			34			—			—			10,240			—			10,274
Accretion of stock issuance costs (unaudited)		—		—		—			—			—			—			(3,600	)		—			(3,600	)
Stock-based compensation (unaudited)		—		—		—			—			—			—			6,836			—			6,836
Purchase of treasury stock (unaudited)		—		—		—			—			25,000			(12,500	)		—			—			(12,500	)
Retirement of treasury stock (unaudited)		—		—		(700,346	)		(70	)		(700,346	)		164,453			(164,383	)		—			—
Net loss (unaudited)		—		—		—			—			—			—			—			(219,812	)		(219,812	)
Balance, June 30, 2006 (unaudited)		8,982,806	$	898		33,366,938		$	3,336			—		$	—		$	2,825,084		$	(3,930,086	)	$	(1,100,768	)

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

F-5

WORLD ENERGY SOLUTIONS, INC.

Consolidated Statements of Cash Flows

										Six Months Ended
	Years Ended December 31,									June 30,
	2003			2004			2005			2005			2006
										(Unaudited)
Cash flows from operating activities:
Net income (loss)	$	(917,769	)	$	1,062,951		$	1,047,250		$	145,587		$	(219,812	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization		271,528			61,113			105,831			58,370			63,442
Impairment of intangible asset		250,000			—			—			—			—
Deferred taxes		—			—			(754,000	)		—			(143,797	)
Stock-based compensation		14,952			19,268			—			—			6,836
Amortization of debt issuance costs		6,372			—			—			—			—
Accretion of warrants		—			—			4,200			—			16,800
Gain related to the extinguishment of debt		—			(1,062,775	)		—			—			—
Changes in operating assets and liabilities:
Unbilled accounts receivable		(248,411	)		17,892			(479,903	)		(325,141	)		(316,346	)
Prepaid expenses and other current assets		(67,927	)		10,427			(47,451	)		(48,349	)		(304,522	)
Employee receivable		20,265			—			—			—			—
Accounts payable		78,234			(59,073	)		(42,041	)		(65,680	)		121,343
Accrued commissions		363,678			(322,706	)		496,035			407,567			(61,803	)
Accrued compensation		13,500			(87,007	)		68,507			8,508			64,962
Accrued expenses		83,094			3,536			38,009			33,638			147,918
Due to customer		—			—			65,324			12,885			17,412
Deferred revenue		—			394,956			(330,540	)		(115,357	)		(27,369	)
Net cash (used in) provided by operating activities		(132,484	)		38,582			171,221			112,028			(634,936	)
Cash flows from investing activities:
Costs incurred in software development		(61,488	)		(85,567	)		(54,375	)		(22,966	)		(38,130	)
Purchases of property and equipment		—			(14,259	)		(25,374	)		—			(51,914	)
Proceeds from sale of property and equipment		—			3,500			—			—			—
Net cash used in investing activities		(61,488	)		(96,326	)		(79,749	)		(22,966	)		(90,044	)
Cash flows from financing activities:
Proceeds from issuance of Series A Preferred Stock		55,656			—			—			—			—
Proceeds from exercise of options		50,000			113,803			6,000			6,000			56,917
Proceeds from exercise of warrants		26,216			55,069			—			—			10,274
Deferred offering costs		—			—			—			—			(64,870	)
Proceeds from line of credit		96,870			—			—			—			—
Principal payments on line of credit		—			—			(500,000	)		—			—
Proceeds from the issuance of long-term debt		—			—			2,000,000			—			—
Payment made on third party note		—			(150,000	)		—			—			—
Principal payments on stockholder notes payable		(60,000	)		(115,000	)		—			—			—
Principal payments on capital lease obligations		(6,030	)		(4,836	)		(48,733	)		(31,868	)		(24,696	)
Principal payments on guaranteed return		(11,475	)		(12,699	)		(14,062	)		(6,813	)		(7,608	)
Purchase of treasury stock		—			—			—			—			(12,500	)
Net cash provided by (used in) financing activities		151,237			(113,663	)		1,443,205			(32,681	)		(42,483	)
Net (decrease) increase in cash and cash equivalents		(42,735	)		(171,407	)		1,534,677			56,381			(767,463	)
Cash and cash equivalents, beginning of period		263,531			220,796			49,389			49,389			1,584,066
Cash and cash equivalents, end of period	$	220,796		$	49,389		$	1,584,066		$	105,770		$	816,603
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	81,072		$	157,827		$	94,842		$	25,833		$	67,167
Property and equipment acquired through capital lease obligations	$	—		$	171,566		$	56,205		$	56,205		$	12,943
Conversion of debt to Series A Preferred Stock	$	1,424,444		$	—		$	—		$	—		$	—
Issuance of warrants in connection with long-term debt	$	—		$	—		$	256,200		$	—		$	—

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

F-6

WORLD ENERGY SOLUTIONS, INC.

Notes to Consolidated Financial Statements

(Information subsequent to December 31, 2005 is unaudited)

NOTE 1 — NATURE OF BUSINESS AND BASIS OF PRESENTATION

World Energy Solutions, Inc. (“World Energy” or the “Company”) was incorporated in 1999 as a Delaware corporation and is focused on providing energy procurement and value-added energy services to commercial, industrial, and government customers. The Company commenced operations through an entity named Oceanside Energy, Inc., which was incorporated under the laws of the State of Delaware on September 3, 1996. The Company was incorporated under the laws of the State of Delaware under the name “World Energy Exchange, Inc.” on June 22, 1999, and on October 31, 1999, Oceanside became a wholly-owned subsidiary of World Energy Solutions, Inc. through a share exchange whereby Oceanside stockholders were given shares of common stock of World Energy in exchange for their Oceanside shares. Pursuant to a certificate of amendment filed on November 30, 1999, World Energy Exchange, Inc. changed its name to “World Energy Exchange.com, Inc.” and then back to “World Energy Exchange, Inc.” on November 2, 2000. World Energy Exchange, Inc. subsequently changed its name to World Energy Solutions, Inc. pursuant to a certificate of amendment filed on February 4, 2002. Oceanside was subsequently dissolved on May 18, 2006.

World Energy is an energy brokerage company that has developed an online auction platform, the World Energy Exchange, through which energy consumers in the United States are able to purchase electricity and other energy resources from competing energy suppliers. Although the Company’s primary source of revenue is from brokering electricity, the Company has adapted its World Energy Exchange auction platform to accommodate the brokering of natural gas, green power (i.e., electricity generated by renewable resources) and energy-related products.

Risks and Uncertainties

We have historically funded our operations from cash flow from operations and, when required, the issuance of various debt and equity instruments. The Company has cash and cash equivalents as of June 30, 2006 of approximately $0.8 million. Actual cash and cash equivalents may vary from this amount with changes in our working capital balances over the next twelve month period. We expect to continue to fund our operations from operating cash flow and, when required, the issuance of various debt and equity instruments. That notwithstanding, we expect that our operations, our existing cash and cash equivalents will meet our working capital requirements at least to December 31, 2007. While management expects to raise additional capital when required, there can be no assurance that such capital will be available to the Company with acceptable terms and conditions or if at all.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Information

The accompanying interim balance sheet as of June 30, 2006, the consolidated statements of operations and cash flows for the six months ended June 30, 2006 and 2005, and the consolidated statement of stockholders’ deficit for the six months ended June 30, 2006 are unaudited. The unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. In the opinion of the Company’s management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments consisting of normal recurring adjustments and accruals necessary for the fair presentation of the Company’s financial position at June 30, 2006 and its results of operations and its cash flows for the six months ended June 30, 2005 and 2006. The results for the six months ended June 30, 2006 are not necessarily indicative of the results to be expected for the year ending December 31, 2006.

F-7

WORLD ENERGY SOLUTIONS, INC.

Notes to Consolidated Financial Statements — (Continued)

Unaudited Pro-forma Presentation

The unaudited pro forma presentation of stockholders equity in the Company’s balance sheet as of June 30, 2006 reflects the automatic conversion, at the closing of an initial public offering of the Company’s common stock, of all outstanding shares of convertible preferred stock and non-voting common stock into 19,416,310 shares of voting common stock based on the shares of convertible preferred stock and non-voting common stock outstanding at June 30, 2006.

Principles of Consolidation

The Company’s consolidated financial statements include its wholly-owned subsidiary, Oceanside Energy, Inc. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates.

The Company’s most judgmental estimates relate to revenue recognition and the estimate of actual energy usage between the utility and end user of such energy; the fair value of the Company’s equity securities where there is no ready market for the purchase and sale of those shares; and estimates of future taxable income as it relates to the realization of the Company’s net deferred tax assets. The effect of those estimates could have a material impact on the Company’s estimation of commission revenue, accounts receivable, accrued commission expense, stock-based compensation and earnings per share.

Revenue Recognition

The Company generates revenue through commissions on sales of energy usage transacted on the Company’s online auction platform. The Company recognizes revenues in accordance with the United States Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB 104”). SAB 104 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) the service has been rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured.

The Company’s commissions are earned based on executed contractual arrangements between the energy supplier and end-user of electricity or natural gas (the “energy consumer”). These supply arrangements are typically 12 to 36 month arrangements and provide the Company with a monthly commission from each energy supplier based on the energy usage generated and transacted between the energy supplier and energy consumer multiplied by the Company’s contractual commission rate. Revenue from commissions is recognized as earned on a monthly basis using estimates of electricity and natural gas delivered for the month. To determine whether collectibility is reasonably assured, the Company assesses a variety of different factors including past transaction history and creditworthiness of the customer. The Company’s commission arrangements generally do not provide for refunds or cancellation privileges. The Company’s determination of whether the commission fee is fixed or determinable is based on the terms and conditions of the supply arrangement which provide for a fixed commission rate, and the ability of the Company to estimate actual energy usage when such actual information is not yet available from suppliers prior to the release of its financial statements.

F-8

WORLD ENERGY SOLUTIONS, INC.

Notes to Consolidated Financial Statements — (Continued)

The Company records brokerage commissions based upon the estimated amount of electricity and gas delivered to energy consumers through the end of the accounting period. The Company develops its estimates based on the following criteria:

•  Payments received prior to the issuance of the financial statements;

•  Usage updates from energy suppliers;

•  Usage data provided from utilities;

•  Comparable historical usage data; and

•  Historical variances to previous estimates.

To the extent actual usage data cannot be attained, the Company estimates revenue as follows:

•  Historical usage data obtained from the energy consumers in conjunction with the execution of the auction;

•  Geographic/utility usage patterns based on actual data received;

•  Analysis of prior year usage patterns; and

•  Specific review of individual supplier / location accounts.

In addition, the Company performs sensitivity analyses on this estimated data based on overall industry trends including weather and usage data. Once the actual usage data is received, the Company adjusts the estimated accounts receivable and revenue to the actual total amount. Based on management’s current capacity to obtain actual energy usage, the Company currently estimates approximately 4 to 6 weeks of revenue at the end of its accounting period. Differences between estimated and actual revenues have been within management’s expectations and have not been material to date.

We do not directly invoice energy suppliers and, therefore, we report all of our receivables as “unbilled.” Unbilled accounts receivable represents management’s best estimate of energy provided by the energy suppliers to the energy consumers for a specific completed time period at contracted commission rates and is made up of two components. The first component represents energy usage for which we have received actual data from the supplier and/or the utility but for which payment has not been received at the balance sheet date. The majority of our contractual relationships with energy suppliers require them to supply actual usage data to us on a monthly basis and remit payment to us based on that usage. The second component represents energy usage for which we have not received actual data, but for which we have estimated usage. Commissions paid in advance by certain energy suppliers are recorded as deferred revenue and amortized to commission revenue on a monthly basis based on the energy exchanged for that month.

The Company has also earned revenue for market research and analysis as well as for bill analysis, presentment and payment. The Company recognizes revenue from these services as earned, generally on a time and materials basis, pursuant to the terms and conditions of the arrangement. Any research that the Company provides in order to facilitate the online auction is non-billable and is absorbed by the Company as a period cost and charged to operations during the period in which it is incurred.

The Company pays commissions to its channel partners at contractual commission rates based on monthly energy transactions between energy suppliers and energy consumers. The commission is accrued monthly and charged to sales and marketing expense as revenue is recognized. The Company pays commissions to its salespeople at contractual commission rates based upon cash collections from its customers.

F-9

WORLD ENERGY SOLUTIONS, INC.

Notes to Consolidated Financial Statements — (Continued)

Software Development

Certain acquired software and significant enhancements to the Company’s software are recorded in accordance with Statement of Position (“SOP”) 98-1, “Accounting for Costs of Computer Software Developed or Obtained for Internal Use”. Accordingly, internally developed software costs of $61,488, $85,567, and $54,375 related to implementation, coding and configuration have been capitalized in 2003, 2004, and 2005, respectively. The Company amortizes internally developed and purchased software over the estimated useful life of the software (generally three years). Accordingly, during 2003, 2004, and 2005, $5,124, $28,625, and $54,747 respectively, were amortized to cost of revenues resulting in accumulated amortization of $5,124, $33,749, and $88,496 at December 31, 2003, 2004, and 2005, respectively. At December 31, 2005, estimated amortization expense for capitalized internally developed software is as follows:

2006	$	62,019
2007		38,288
2008		12,627
	$	112,934

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments purchased with an original maturity of 90 days or less to be cash equivalents.

Long-Lived and Intangible Assets

Long-lived assets primarily include property and equipment and intangible assets with finite lives (capitalized software). In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company periodically reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of those assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the discounted cash flow analysis.

During 2003, the Company determined, based on estimated future cash flows, the carrying amount of certain acquired software exceeded its fair value by $250,000, accordingly, an impairment loss of that amount was recognized and is included in cost of revenue.

Property and Equipment

Property and equipment is stated at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the related assets or the life of the related lease, whichever is shorter, which range from 3 to 7 years.

Income Taxes

The Company accounts for its income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). Deferred tax assets and liabilities are determined at the end of each year based on the future tax consequences that can be attributed to net operating loss carryforwards, as well as the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. The deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized. The realization of deferred tax assets is dependant upon the generation of future taxable income. In determining the valuation allowance, the Company considers past performance, expected future taxable income, and qualitative factors which we consider to be appropriate to

F-10

WORLD ENERGY SOLUTIONS, INC.

Notes to Consolidated Financial Statements — (Continued)

be considered in estimating future taxable income. The Company’s forecast of expected future taxable income is for future periods that can be reasonably estimated. Results that differ materially from current expectations may cause management to change its judgment on future taxable income. These changes, if any, may require the Company to adjust its existing tax valuation allowance higher or lower than the amount recorded.

Advertising Expense

Advertising expense primarily includes promotional expenditures and is expensed as incurred, as such efforts have not met the direct-response criteria required for capitalization. Amounts incurred for advertising expense were not material for the years ended December 31, 2003, 2004, and 2005 and the six months ended June 30, 2005 and 2006.

Comprehensive Income

SFAS No. 130, “Reporting Comprehensive Income”, establishes standards for reporting and displaying comprehensive income (loss) and its components in financial statements. Comprehensive income (loss) is defined as the change in stockholders’ equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The comprehensive income (loss) for all periods presented does not differ from the reported net income (loss).

Fair Value of Financial Instruments

SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” (“SFAS 107”), requires management to disclose the estimated fair value of certain assets and liabilities defined by SFAS 107 as financial instruments. Financial instruments are generally defined as cash, evidence of ownership interest in an entity, or a contractual obligation that both conveys to one entity a right to receive cash or other financial instruments from another entity and imposes on the other entity the obligation to deliver cash or other financial instruments to the first entity. At December 31, 2005, management believes that the carrying value of cash and cash equivalents, receivables and payables approximated fair value because of the short maturity of these financial instruments. At December 31, 2005, management believes that the fair value of the Company’s debt approximated its carrying value based on interest rates available to the Company at the time.

Segment Reporting

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”, established standards for reporting information about operating segments in financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief decision maker is the chief executive officer. The Company’s chief decision maker reviews the results of operations based on one industry segment: the brokering of energy.

Concentration of Credit Risk and Off-Balance Sheet Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company has no significant off-balance sheet risk such as foreign exchange contracts, option contracts, or other foreign hedging arrangements. The Company places its cash with primarily one institution, which management believes is of high credit quality.

The Company provides credit to energy suppliers in the normal course of business. Collateral is not required for accounts receivable, but ongoing credit evaluations of energy suppliers are performed. Management provides for an allowance for doubtful accounts on a specifically identified basis, as well as through

F-11

WORLD ENERGY SOLUTIONS, INC.

Notes to Consolidated Financial Statements — (Continued)

historical experience applied to an aging of accounts, if necessary. Accounts receivable are written off when deemed uncollectible.

The Company receives commission payments from energy suppliers based on the energy usage transacted between energy consumers and energy suppliers. The following represents revenue and accounts receivable from energy suppliers exceeding 10% of the total in each category:

																	Six-Months Ended
	December 31, 2003						December 31, 2004						December 31, 2005				June 30, 2006
				Unbilled						Unbilled					Unbilled				Unbilled
				Accounts						Accounts					Accounts				Accounts
Customer	Revenue			Receivable			Revenue			Receivable			Revenue		Receivable		Revenue		Receivable
A		33	%		25	%		20	%		19	%		18%		10%		19%		26%
B		—			—			12	%		12	%		18%		32%		12%		10%
C		—			—			—			11	%		11%		11%		11%		5%
D		—			—			—			—			10%		16%		12%		13%
E		—			—			—			—			—		—		12%		10%

The Company considers energy suppliers as its customers. However, the Company does have a direct contractual relationship with energy consumers for the online procurement of their energy usage needs. These energy consumers are primarily large businesses and government organizations. For the six months ended June 30, 2006, four of these energy consumers accounted for transactions resulting in over 10% individually, and approximately 59% in the aggregate of our revenue, and three of these energy consumers accounted for transactions resulting in over 10% individually and approximately 51% in the aggregate of our revenue for the year ended December 31, 2005.

Earnings (Loss) Per Share

In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 03-6, “Participating Securities and the Two — Class Method under FAS 128” (“EITF Issue No. 03-6”) EITF Issue No. 03-6 provides guidance in determining when the two-class method, as defined in SFAS No. 128, “Earnings Per Share”, must be utilized in calculating earnings per share. The Company was required to adopt EITF Issue No. 03-6 in the quarter ended September 30, 2004 and to apply the provisions of EITF Issue No. 03-6 retroactively to all periods presented. The Company has determined that its non-voting common stock and Series A redeemable convertible preferred stock (the “Series A Preferred”) represent participating securities. The non-voting common has the same privileges and rights of the voting common stock, except for the right to vote. The Series A Preferred participates in dividends, if any, paid by the Company on a proportional basis with the voting common stock. The Series A Preferred will automatically convert into voting common stock on a one-for-one basis upon the closing of a qualified underwritten initial public offering. EITF Issue No. 03-6 requires the income per share for each class of common stock to be calculated assuming 100% of the Company’s earnings are distributed as dividends to each class of common stock based upon their respective dividend rights, even though the Company does not anticipate distributing 100% of its earnings as dividends.

Basic earnings per share for the Company’s voting common and non-voting common stock is calculated by dividing net income (loss) allocated to voting common and non-voting common stock by the weighted average number of shares of voting common and non-voting common stock outstanding, respectively. Diluted earnings per share for the Company’s voting common stock assumes the conversion of all the Company’s non-voting common stock and Series A Preferred so no allocation of earnings to non-voting common stock or the Series A Preferred is required.

F-12

WORLD ENERGY SOLUTIONS, INC.

Notes to Consolidated Financial Statements — (Continued)

For the basic earnings per share calculation, net income is allocated to Series A Preferred shareholders based on dividend rights and then among the Company’s two classes of common stock; voting common stock and non-voting common stock based on ownership interests. The allocation among each class of stock was based upon the two-class method. Net losses are not allocated to Series A Preferred shareholders. The following table reflects the allocation of net income (loss) using this method:

								For the
								Six Months Ended
	For the Years Ended December 31,							June 30,
	2003			2004		2005		2005		2006
								(Unaudited)		(Unaudited)
Net income (loss) available to common shareholders	$	(924,968	)	$	1,055,752	$	1,040,051	$	141,987	$	(223,412	)
Allocation of net income (loss) for basic:
Voting common stock		(914,647	)		746,417		684,354		93,390		(181,437	)
Non-voting common stock		(10,321	)		66,512		140,407		19,114		(41,975	)
Series A Preferred stock		—			242,823		215,290		29,483		—
	$	(924,968	)	$	1,055,752	$	1,040,051	$	141,987	$	(223,412	)

The following table reflects the weighted average shares used to calculate basic and diluted earnings per share:

							For the
							Six Months Ended
	For the Years Ended December 31,						June 30,
	2003		2004		2005		2005		2006
							(Unaudited)		(Unaudited)
Weighed average number of voting common shares — basic		30,105,188		32,058,759		33,049,472		33,049,472		33,087,533
Weighed average number of non-voting common shares — basic		339,726		2,880,592		6,778,327		6,764,290		7,650,328
Weighted average number of Series A Preferred shares — basic		—		10,433,504		10,433,504		10,433,504		—
Weighted average number of common and common equivalent shares outstanding — basic		30,444,914		45,372,855		50,261,303		50,247,266		40,737,861
Dilutive Shares:
Incremental shares under the treasury stock method for outstanding warrants		—		1,144,104		1,071,055		1,044,743		—
Incremental shares under the treasury stock method for outstanding options		—		5,579,247		4,613,210		4,830,866		—
Weighted average number of common and common equivalent shares outstanding — diluted		30,444,914		52,096,206		55,945,568		56,122,875		40,737,861

F-13

WORLD ENERGY SOLUTIONS, INC.

Notes to Consolidated Financial Statements — (Continued)

For the year ended December 31, 2003, 6,152,358, 3,136,264 and 5,162,963 weighted average shares issuable relative to preferred stock, common stock warrants and stock options, respectively, were excluded from net loss per share since the inclusion of such shares would be anti-dilutive due to the Company’s net loss position.

For the six months ended June 30, 2006, 10,433,504, 1,596,023 and 3,317,591 weighted average shares issuable relative to preferred stock, common stock warrants and stock options, respectively, were excluded from net loss per share since the inclusion of such shares would be anti-dilutive.

The Company did not declare or pay any dividends in 2003, 2004 and 2005 or for the six months ended June 30, 2006.

Pro Forma Net Income (Loss) per Share (Unaudited)

Upon the closing of an initial public offering, the outstanding shares of Series A Preferred Stock will convert into 10,433,504 shares of common stock. Pro forma net earnings (loss) per share- basic and diluted reflects the conversion of all of the outstanding shares of convertible preferred stock into shares of common stock.

The following table sets forth the computation of the denominator used in the computation of pro forma net earnings (loss) per share for the year ended December 31, 2005 and the six months ended June 30, 2006:

			Six Months
	Year-Ended		Ended
	December 31, 2005		June 30, 2006
			(Unaudited)
Weighted-average common stock outstanding		39,827,799		40,737,861
Plus: conversion of Series A Preferred Stock		10,433,504		10,433,504
Total weighted-average number of shares used in computing pro forma net income (loss) per share — basic		50,261,303		51,171,365
Plus: common stock equivalents related to options and warrants		5,684,265		4,913,614
Total weighted-average number of shares used in computing pro forma net income (loss) per share — diluted		55,945,568		56,084,979

Stock-Based Compensation

At December 31, 2005, the Company had one stock-based employee compensation plan, which is more fully described in Note 7. The Company accounts for its stock-based awards to employees using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. Under the intrinsic value method, compensation expense is measured on the date of grant as the difference between the deemed fair value of the Company’s common stock and the option exercise price multiplied by the number of options granted. Generally, the Company grants stock options with exercise prices equal to the estimated fair value of its common stock; however, to the extent that the deemed fair value of the common stock exceeds the exercise price of stock options granted to employees on the date of grant, the Company records stock-based compensation expense ratably over the vesting schedule of the options, generally four years. The fair value of the Company’s common stock is determined by the Company’s Board of Directors (the “Board”).

As of June 30, 2006, there had been no public market for the Company’s common stock and the fair value for the Company’s common stock was estimated by the Board, with input from management as well as from independent appraisals. The Board exercised judgment in determining the estimated fair value of the Company’s common stock on the date of grant based on several factors, including the liquidation preferences,

F-14

WORLD ENERGY SOLUTIONS, INC.

Notes to Consolidated Financial Statements — (Continued)

dividend rights, and voting control attributable to the Company’s then-outstanding convertible preferred stock and, primarily, the likelihood of achieving a liquidity event such as an initial public offering or sale of the Company. In the absence of a public trading market for the Company’s common stock, the Board considered objective and subjective factors in determining the fair value of the Company’s common stock. The Company believes this to have been a reasonable methodology based upon the Company’s internal peer company analyses and based on arm’s-length transactions, when applicable, involving the Company’s common stock supportive of the results produced by this valuation methodology.

During the years ended December 31, 2003, 2004, and 2005, the Company granted options to employees to purchase a total of 14,109,200 shares of non-voting common stock at exercise prices ranging from $0.025 to $0.24 per share. The Company granted the following stock options during the first six months of 2006:

							Estimated
							Intrinsic Value
	Options		Exercise		Fair Value		as of June 30,
Grant Date	Granted		Price		at Grant Date		2006
January 16, 2006		300,000	$	0.38	$	0.38	$	126,000
February 10, 2006		40,000	$	0.38	$	0.38	$	16,800
March 30, 2006		60,000	$	0.38	$	0.50	$	25,200

There were no grants during the period from July 1, 2005 to December 31, 2005.

In preparing for the initial public offering of the Company’s common stock, the Company reassessed the valuations of its common stock during 2006, in accordance with the AICPA’s Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation (the “Practice Aid”). In May 2006, the company engaged an unrelated third-party valuation specialist to assist management in providing a retrospective valuation report of option grants during the first quarter of 2006. The third-party valuation specialist valued the Company’s common stock (both voting and non-voting common stock) at approximately $0.30 and $0.39 as of January 16, 2006 and February 10, 2006, respectively, representing the dates when certain stock options were granted.

The Company believes that the valuation methodologies that were used were consistent with the Practice Aid. With the exception of one option to purchase 60,000 shares on March 30, 2006, the Company has concluded that for all options granted to employees for each of the three years in the period ended December 31, 2005 and the six months ended June 30, 2006, the fair value of its common stock, for financial reporting purposes, did not exceed the exercise price for those options at the time of grant. The Company granted stock options to purchase 60,000 shares of non-voting common stock, on March 30, 2006, to an employee with an exercise price of $0.38 per share, which was $0.12 per share below market value as subsequently determined by the Board of Directors. Compensation expense related to this grant was deemed to be immaterial for the six months ended June 30, 2006. On July 19, 2006 the Company and the option holder agreed to terminate the option grant. On July 31, 2006, the Company granted this employee an option to purchase 72,000 shares of common stock at an exercise price of $0.95, which the Board determined to be the fair market value at that date. No stock-based compensation expense was recorded for the years ended December 31, 2003, 2004, or 2005 as the exercise price of the Company’s stock options was equal to the estimated fair value of the Company’s common stock on the date of grant.

The Company accounts for transactions in which services are received from non-employees in exchange for equity instruments based on the fair value of such services received or of the equity instruments issued, whichever is more reliably measured, in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation”, and EITF 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction With Selling, Goods or Services”. The Company granted stock options to purchase 850,000 and 526,400 shares of non-voting common stock during 2003 and 2004, respectively, to non-employees, at an exercise price of $0.025 in consideration for services performed. At the

F-15

WORLD ENERGY SOLUTIONS, INC.

Notes to Consolidated Financial Statements — (Continued)

time of the grants in 2003 and 2004, these options had a fair value of $14,952 and $19,268, respectively, using the Black-Scholes option pricing model, based on the fair value of the Company’s non-voting common stock of $0.025 per share, an assumed volatility of 70%, risk-free interest rates ranging from 2.94% to 4.65%, a weighted average expected life of five years, and a dividend rate of 0.0%. All of these option grants were fully vested on the date of grant. Accordingly, the Company recognized charges of $14,952 and $19,268 to general and administrative expense in the statements of operations for the years ended December 31, 2003 and 2004, respectively, related to these grants.

The Company provides the disclosures as required by SFAS No. 148, “Accounting for Stock-Based Compensation and Disclosure, an Amendment of FASB Statement No. 123”.

The following table illustrates the assumptions used and the effect on net income (loss) if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation. For purposes of this pro forma disclosure, the Company estimated the fair value of stock options issued to employees using the minimum value option-pricing model. The Company’s use of the minimum value model was primarily due to the determination as to its appropriateness, as well as its general acceptance as an option valuation technique for private companies.

The weighted-average assumptions used to calculate the SFAS No. 123 pro forma expense for stock options granted to employees and directors for the years ended December 31, 2003, 2004, and 2005.

Dividend yield	0%
Risk-free interest rate	3.47% to 4.41%
Expected life	5 years
Volatility	0%

F-16

WORLD ENERGY SOLUTIONS, INC.

Notes to Consolidated Financial Statements — (Continued)

Had compensation cost for these awards been determined consistent with SFAS No. 123, the Company’s net income (loss) would have been as follows:

										Six Months
	For the Years Ended December 31,									Ended
	2003			2004			2005			June 30, 2005
										(Unaudited)
Net income (loss) available to common shareholders, as reported	$	(924,968	)	$	1,055,752		$	1,040,051		$	141,987
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(23,172	)		(4,652	)		(7,499	)		(3,221	)
Net income (loss) available to common shareholders, pro forma	$	(948,140	)	$	1,051,100		$	1,032,552		$	138,766
As Reported Per Share Amounts:
Basic net income (loss) per weighted average voting common share	$	(0.03	)	$	0.02		$	0.02		$	—
Basic net income (loss) per weighted average non-voting common share	$	(0.03	)	$	0.02		$	0.02		$	—
Diluted net income (loss) per weighted average common share	$	(0.03	)	$	0.02		$	0.02		$	—
Pro-forma Per Share Amounts:
Pro-forma basic net income (loss) per weighted average voting common share	$	(0.03	)	$	0.02		$	0.02		$	—
Pro-forma basic net income (loss) per weighted average non-voting common share	$	(0.03	)	$	0.02		$	0.02		$	—
Pro-forma diluted net income (loss) per weighted average common share	$	(0.03	)	$	0.02		$	0.02		$	—

As stock options vest over several years and additional stock option grants are expected to be made each year, the above pro forma disclosures are not necessarily representative of pro forma effects on results of operations for future periods.

On December 16, 2004 the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), which is a revision of SFAS No. 123. SFAS No. 123(R)supersedes APB 25, and amends SFAS No. 95, “Statement of Cash Flows”. Generally, the approach under SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. SFAS No. 123(R) must be adopted for fiscal years starting after June 15, 2005. As a result, the Company adopted SFAS No. 123(R) starting in its fiscal first quarter of 2006, which began on January 1, 2006.

SFAS No. 123(R) requires nonpublic companies that used the minimum value method in SFAS No. 123 for either recognition or pro forma disclosures to apply SFAS No. 123(R) using the prospective-transition method. As such, the Company will continue to apply APB 25 in future periods to equity awards outstanding at the date of SFAS No. 123(R)’s adoption that were measured using the minimum value method. In accordance with this standard, the prior period pro forma stock information has not been restated. In accordance with SFAS No. 123(R), the Company will recognize the compensation cost of share-based awards on a straight-line basis over the vesting period of the award.

F-17

WORLD ENERGY SOLUTIONS, INC.

Notes to Consolidated Financial Statements — (Continued)

Effective with the adoption of SFAS No. 123(R), the Company has elected to use the Black-Scholes option pricing model to determine the weighted average fair value of options granted. As there was no public market for its common stock as of June 30, 2006, the Company determined the volatility for options granted in 2006 based on an analysis of its historical data and reported data for a peer group of companies that issued options with substantially similar terms. The expected volatility for options granted during the six months ended June 30, 2006 was 47%. The expected life of options has been determined utilizing the “simplified” method as prescribed by the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107, “Share-Based Payment”. The expected life of options granted during the six months ended June 30, 2006 was 4.75 years. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. The Company has not paid and does not anticipate paying cash dividends on its common stock; therefore, the expected dividend yield is assumed to be zero. In addition, SFAS No. 123(R) requires companies to utilize an estimated forfeiture rate when calculating the expense for the period, whereas, SFAS No. 123 permitted companies to record forfeitures based on actual forfeitures, which was the Company’s historical policy under SFAS No. 123. As a result, the Company applied an estimated forfeiture rate of 13% during the first six months of 2006 in determining the expense recorded in the accompanying consolidated statement of operations.

The weighted average fair value of options granted during the six months ended June 30, 2006, under the Black-Scholes option pricing model was approximately $0.17 per option share. The weighted-average assumptions utilized to determine the above values are indicated in the following table (unaudited):

Dividend yield	0%
Risk-free interest rate	4.27% to 4.83%
Expected life	4.75 years
Volatility	47%

For the six months ended June 30, 2006, the Company recorded stock-based compensation expense of approximately $6,800 in connection with share-based payment awards. The stock-based compensation expense included $5,600 in sales and marketing, $600 in cost of revenue and $600 in general and administrative expenses for the six months ended June 30, 2006. As of June 30, 2006, there was approximately $63,000 of unrecognized compensation expense related to non-vested stock option awards that is expected to be recognized over a weighted-average period of 3.75 years. See Note 7 for a summary of the stock option activity under the Company’s stock-based employee compensation plan for the years ended December 31, 2003, 2004 and 2005 and the six months ended June 30, 2006.

Recent Accounting Pronouncements

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations”, or FIN 47, which aims to clarify the requirement to record liabilities stemming from a legal obligation to retire fixed assets when a retirement depends on a future event. FIN 47 is effective for fiscal years ending after December 15, 2005. The adoption of this statement did not have a material impact on the Company’s results of operations or financial position.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”, which replaces APB Opinion No. 20, “Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”. SFAS No. 154 applies to all voluntary changes in accounting principle and requires retrospective application (a term defined by the statement) to prior periods’ financial statements, unless it is impracticable to determine the effect of a change. It also applies to changes required by an accounting pronouncement that does not include specific transition provisions. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The

F-18

WORLD ENERGY SOLUTIONS, INC.

Notes to Consolidated Financial Statements — (Continued)

Company’s adoption of SFAS No. 154 as of the beginning of fiscal 2006 did not have a material impact on its financial condition or results of operations.

In November 2005, the FASB issued Staff Position No. FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” (“FSP 115-1”). FSP 115-1 provides accounting guidance for determining and measuring other-than-temporary impairments of debt and equity securities and confirms the disclosure requirements for investments in unrealized loss positions as outlined in EITF Issue 03-01, “The Meaning of Other-Than-Temporary Impairments and its Application to Certain Investments”. The accounting requirements of FSP 115-1 were effective for the Company as of January 1, 2006 and did not have a material impact on the Company’s financial position, results of operations, or cash flows.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS No. 155”), which amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. SFAS No. 155 resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets”, among other matters, permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006, except earlier adoption is allowed in certain circumstances. The Company expects to adopt SFAS No. 155 on January 1, 2007.

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109”, (“FIN 48”) which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognize in its financial statements, the impact of a tax position, if that position is more likely than not to be sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of January 1, 2007. The adoption of FIN 48 is not expected to have a material effect on our financial position or results of operations.

NOTE 3 — PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

	December 31,						June 30,
	2004			2005			2006
							(Unaudited)
Leasehold improvements	$	—		$	—		$	14,305
Equipment		151,511			190,826			214,365
Furniture and fixtures		118,260			160,524			187,537
		269,771			351,350			416,207
Less accumulated depreciation:
Leasehold improvements		—			—			(1,768	)
Equipment		(85,356	)		(116,328	)		(132,657	)
Furniture and fixtures		(11,826	)		(31,938	)		(43,961	)
		(97,182	)		(148,266	)		(178,386	)
Property and equipment, net	$	172,589		$	203,084		$	237,821

Depreciation expense for the years ended December 31, 2003, 2004 and 2005 was $16,404, $32,488, and $51,084, respectively and was $24,858 and $30,120 for the six months ended June 30, 2005 and 2006, respectively. Property and equipment purchased under capital lease obligations during the years ended

F-19

WORLD ENERGY SOLUTIONS, INC.

Notes to Consolidated Financial Statements — (Continued)

December 31, 2004 and 2005 was $203,556 and $259,761, respectively. Accumulated depreciation for property and equipment purchased under capital lease was $46,379 and $91,828 at December 31, 2004 and 2005, respectively.

NOTE 4 — LINE OF CREDIT

The Company had a loan and security agreement (the “Agreement”) with a bank, which matured on December 14, 2005. The Agreement consisted of a committed revolving line of credit (the “Line”) of up to $500,000 and a security agreement with another party (the “Securing Party”), who is also an investor in the Company, who had agreed to provide an unconditional guarantee (the “Guarantee”) to the bank. The Company repaid the balance due under the Agreement of $500,000 on November 7, 2005. The loan bore interest at the prime lending rate, plus 1% and was payable monthly. Interest expense under the Agreement was approximately $23,000, $29,000, and $30,000 for the years ended December 31, 2003, 2004, and 2005, respectively.

The Company agreed to pay the Securing Party 2% interest per annum of any cash amounts that are used to secure the Line, as well as to issue the Securing Party 1.5 options for each $1.00 the Company draws down on the Line (see Note 6, “Series A Redeemable Convertible Preferred Stock”). The Company issued 150,000 and 750,000 options in conjunction with the Line during the years ended December 31, 2003 and 2004, respectively. The options were accounted for at their estimated fair value of $2,243 and $11,214 and charged to interest expense in the years ended December 31, 2003 and 2004, respectively (see Note 7, “Common Stock”).

NOTE 5 — DEBT

Subordinated Notes Payable

Long-term debt consists of the following:

	December 31,				June 30,
	2004		2005		2006
					(Unaudited)
Subordinated note payable to Massachusetts Capital Resource Company, bearing interest at 10% per annum net of unamortized discount of $252,000 and $235,200, respectively related to warrants	$	—	$	1,748,000	$	1,764,800
Total long-term debt		—		1,748,000		1,764,800
Less: current portion		—		—		—
	$	—	$	1,748,000	$	1,764,800

In November 2005, the Company received $2,000,000 in exchange for a subordinated note with the Massachusetts Capital Resource Company, which bears interest of 10% per annum, and required quarterly interest payments beginning on December 31, 2005. The note also requires quarterly principal payments of $125,000 beginning on September 30, 2009 through the maturity date of June 30, 2013 (hereinafter referred to

F-20

WORLD ENERGY SOLUTIONS, INC.

Notes to Consolidated Financial Statements — (Continued)

as the “Subordinated Note”). Aggregate maturities required in accordance with this Subordinated Note subsequent to December 31, 2005 are as follows:

2006	$	—
2007		—
2008		—
2009		250,000
2010		500,000
Thereafter		1,250,000
	$	2,000,000

The Company may, at its discretion, redeem the Subordinated Note in whole or in part together with interest due on the amount so redeemed through the date of redemption, and a premium equal to the percentage of the principal amount of the Subordinated Note redeemed, beginning at 10% in 2005 and decreasing in 2% increments in each of the following years through 2009. However, should the Company consummate an initial underwritten public offering of its common stock with gross proceeds to the Company of at least $5,000,000 on or before December 31, 2006, the Company can redeem the Subordinated Note without premium. For the year ended December 31, 2005, interest expense related to the Subordinated Note was approximately $30,000.

In connection with the Subordinated Note, the Company also issued to the lender a warrant to purchase from the Company, at a purchase price per share of forty cents ($0.40), at any time before June 30, 2013, 3,000,000 fully paid and non-assessable shares of voting common stock of the Company, of which 600,000 warrants were vested upon issuance and the remaining 2,400,000 warrants have not vested and would be cancelled in the event that the Company shall on or before December 31, 2006 consummate an initial underwritten public offering of its common stock with gross proceeds to the Company of at least $5,000,000 (see Note 7 — Common Stock). The warrants provide for net share settlement.

In accordance with Accounting Principles Board No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants” (“APB No. 14”), the Company has allocated $256,200 to the warrants based on its fair value and has accounted for such warrants as additional paid-in capital with a corresponding discount on the Subordinated Note. The cost of the warrants is being amortized to interest expense over the life of the Subordinated Note and resulted in amortization expense of $4,200 for the year ended December 31, 2005 and $16,800 for the six months ended June 30, 2006.

The Subordinated Note contains financial covenants which require the Company to (1) maintain a ratio of consolidated indebtedness (other than indebtedness represented by the notes) to consolidated net worth (plus indebtedness represented by the notes) of not more than 1 to 1 and (2) maintain a ratio of consolidated net earnings available for interest charges to interest charges of not less than 1 to 1. These covenants are effective beginning in the quarter ending June 30, 2007.

Third Party Note

The Company entered into a note payable agreement on June 29, 2001 for the purchase of certain long-lived intangible assets from a third party, bearing interest at 10% per annum for a three year period with any unpaid principal and interest due on June 29, 2004. In June 2004, the third party forgave the principal balance due under the note plus accrued interest in exchange for a one-time payment. The net effect is the $1,062,775 included under the caption “other income (expense)” in the accompanying consolidated statement of operations. During the years ended December 31, 2003 and 2004, approximately $100,000 and $46,000, respectively was charged to interest expense related to the third party note.

F-21

WORLD ENERGY SOLUTIONS, INC.

Notes to Consolidated Financial Statements — (Continued)

NOTE 6 — SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK

In March 2003, the Board of Directors (the “Board”) authorized the creation of a new class of stock designated as Series A Redeemable Convertible Preferred Stock, with 15,000,000 shares authorized for issuance at $0.0001 par value per share (the “Series A Preferred”). During 2003, 8,142,438 shares of Series A Preferred were issued upon the conversion of certain convertible notes payable. Also during 2003, the Company sold a total of 552,413 shares of Series A Preferred for total gross proceeds of $80,657, and 1,738,653 shares of Series A Preferred were issued upon the conversion of other notes payable with total outstanding principal and accrued interest of $253,842 at the time of the conversion. The Series A Preferred has the following terms and conditions:

Dividends — In the event that the Company pays a dividend (other than a dividend payable solely in shares of common stock) on its common stock, the holders of shares of Series A will be entitled to a proportionate share of any such distribution as though it was the holder of the number of shares of common stock into which its share of Series A is convertible as of the date fixed for the determination of the holders of common stock entitled to receive the distribution.

Automatic Conversion — Shares of Series A Preferred will automatically convert into common stock at the applicable conversion rate (one share of common stock for one share of Series A Preferred) in the event of: (1) the closing of an underwritten initial public offering with aggregate proceeds to the Company of at least $10,000,000 and a per share price to the public of at least three times the initial conversion price (a “qualified public offering”) or (2) the election of the holders of a majority of the outstanding shares of Series A Preferred.

Optional Conversion — The holders of Series A Preferred have the right to convert their shares, at any time, into shares of voting common stock on a one for one basis.

Liquidation Preference — In the event of liquidation or winding up of the Company, each holder of Series A Preferred shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders in preference to the common stockholders, in an amount equal to the price per share of the Series A Preferred or $0.146 (the “Liquidation Amount”). After the payment of this amount to holders of Series A Preferred, the common stockholders will be entitled to receive any remaining assets of the Company on a pro rata basis. The following qualify as events that would trigger a liquidation: (1) a merger or consolidation (other than one in which the stockholders, at the time of the merger or consolidation, continue to hold more than 50% of the stock of the surviving entity) or (2) a sale or exclusive license of all or substantially all of the assets or intellectual property of the Company.

Redemption Provisions — All shares of Series A Preferred will be redeemed by the Company, at the Liquidation Amount, at any time after January 31, 2009, if the holders of two-thirds of the outstanding shares of Series A Preferred request, by written notice to the Company, that the shares be redeemed. The shares will be redeemed within 60 days of the Company receiving such written notice.

The Company determined that the Series A Preferred contained a beneficial conversion feature at the time of issuance. Accordingly, the Company recorded $18,191 as additional paid-in capital, which represented the intrinsic value of this beneficial conversion feature. As the holders of the Series A Preferred could convert to voting common stock at the date of issuance, the $18,191 was immediately accreted as a charge to additional paid-in capital.

F-22

WORLD ENERGY SOLUTIONS, INC.

Notes to Consolidated Financial Statements — (Continued)

The Company has classified the Series A Preferred outside of permanent equity due to its redemption feature being outside the control of the Company. The activity within the Series A Preferred shares and redemption value for the years ended December 31, 2003, 2004 and 2005 is as follows:

	Number of		Redemption
	Shares		Value
Balance, January 1, 2003		—	$	—
Conversion of bridge loans into Series A redeemable convertible preferred stock, net of issuance costs of $19,510		8,142,438		1,169,286
Sale of Series A redeemable convertible preferred stock, net of issuance costs of $6,526		552,413		74,131
Conversion of other loans into Series A redeemable convertible preferred stock, net of issuance costs of $17,158		1,738,653		236,684
Accretion of stock issuance costs		—		7,199
Balance, December 31, 2003		10,433,504		1,487,300
Accretion of stock issuance costs		—		7,199
Balance, December 31, 2004		10,433,504		1,494,499
Accretion of stock issuance costs		—		7,199
Balance, December 31, 2005		10,433,504		1,501,698
Accretion of stock issuance costs (unaudited)		—		3,600
Balance, June 30, 2006 (unaudited)		10,433,504	$	1,505,298

NOTE 7 — COMMON STOCK

On March 31, 2003, the Board increased the number of shares of $0.0001 par value common stock from 50,000,000 to 90,000,000, of which, 75,000,000 are designated voting common stock (“Voting Common Stock”) and 15,000,000 are designated as non-voting common stock (“Non-Voting Common Stock”). As of December 31, 2004 and 2005, 33,724,819 and 33,049,473 shares of Voting Common Stock were issued and outstanding, respectively, while 6,552,135 and 6,792,135 shares of Non-Voting Common Stock were issued and outstanding as of December 31, 2004 and 2005, respectively. The holders of the Non-Voting Common Stock have the same privileges and rights of the holders of the Voting Common Stock, except for the right to vote. The Non-Voting Common Stock will automatically convert to Voting Common Stock at the closing of an initial public offering of the Company’s common stock.

Guaranteed Return on Voting Common Stock

In 2002, a certain shareholder purchased shares of Voting Common Stock of the Company and the Company agreed to pay an 8% guaranteed return per year based on the initial investment of $200,000 with payments to continue until the earlier of a liquid market for the Company’s equity or August 31, 2006. In accordance with SFAS 133, “Accounting for Derivatives and Hedging Activities”, the Company bifurcated the guaranteed return on the Voting Common Stock at its then deemed fair value of $66,651 and recorded the guaranteed return as a liability. The payments on the guaranteed return are being amortized to principal and interest, using the interest method, until August 31, 2006. The Company has deemed the difference between the stated value and the fair market value of the derivative feature to be immaterial and has not recorded a “mark-to-market” adjustment during the life of the feature.

F-23

WORLD ENERGY SOLUTIONS, INC.

Notes to Consolidated Financial Statements — (Continued)

Fair Value of Common Stock

The Company has granted common stock, common stock warrants, and common stock option awards (“equity awards”) to consultants, employees, debt holders, and others since its inception. The Company’s determination of the fair value of the underlying common stock is a significant aspect in accounting for these aforementioned equity awards in accordance with generally accepted accounting principles.

During each of the three years in the period ended December 31, 2005, the Company and the Board had determined the fair value of the Series A Preferred Stock, the Voting and Non-Voting Common Stock at each issuance of such equity awards. The fair value of the Voting and Non-Voting Common Stock has been determined by the Board at the measurement date of each of the aforementioned equity awards, based on a variety of different factors including, but not limited to the Company’s financial position and historical financial performance, the status of technological developments within the Company, the composition and ability of the current engineering, operations, and management team, an evaluation and benchmark of the Company’s competition, the current climate in the marketplace, the illiquid nature of the common stock, arms-length sales and anticipated sales of the Company’s capital stock (including preferred stock), the effect of the rights and preferences of preferred shareholders, independent third party appraisals, and the prospects of a liquidity event, among others.

Treasury Stock

On March 14, 2006, the Company purchased 25,000 of its voting common stock from certain shareholders at $2.00 per share. The excess of the purchase price and the then deemed fair value on the date of the purchase of $0.50 per share, or $37,500, has been charged to general and administrative expense. On June 19, 2006, the Company’s Board of Directors voted to retire 700,346 shares of its treasury stock which had a cost of $164,453.

Common Stock Warrants

During 2001 and 2002, the Company issued warrants to purchase 3,114,791 shares of Voting Common Stock in connection with the issuance of convertible notes payable to certain stockholders. The warrants are exercisable at $0.03 per share at any time through March 2010. The Company valued the warrants at $64,234 using the Black-Scholes option pricing model, based on the fair value of the Company’s Voting Common Stock of $0.03 per share, an assumed volatility of 70%, risk-free interest rates ranging from 3.99% to 5.29%, a weighted-average expected life of 7 years, and a dividend rate of 0.0%. The Company amortized the value of the warrants over the period of the related convertible notes payable. Accordingly, the Company charged $6,372, $0, and $0 to interest expense during the years ended December 31, 2003, 2004, and 2005, respectively. During 2003 and 2004, 873,828, and 1,835,615 respectively, of Voting Common Stock was issued upon the exercise of these warrants.

During 2003, the Company issued warrants to purchase 220,964 shares of Voting Common Stock in connection with the sale of Series A Preferred and also issued warrants to purchase 695,460 shares of Voting Common Stock in connection with other outstanding notes payable which were converted into Series A Preferred. The Company valued the warrants at $18,194 using the Black-Scholes option pricing model, based on the deemed fair value of the Company’s Voting Common Stock of $0.03 per share, an assumed volatility of 70%, a risk-free interest rate of 4.7%, a weighted-average expected life of 6 years, and a dividend rate of 0%. The Company is accreting the value of the warrants to the carrying value of Series A Preferred on a straight-line basis over the six year redemption period of the Series A Preferred.

During 2005, the Company issued warrants to purchase 3,000,000 shares of Voting Common Stock in connection with the Subordinated Note issued to the Massachusetts Capital Resource Company. Of the warrants that were issued in connection with this note, 600,000 were vested upon issuance and the remaining

F-24

WORLD ENERGY SOLUTIONS, INC.

Notes to Consolidated Financial Statements — (Continued)

2,400,000 warrants will vest should the Company fail to consummate an initial underwritten public offering of its common stock with gross proceeds to the Company of at least $5,000,000 on or before December 31, 2006. As subsequently determined by the Board of Directors with the assistance of an independent valuation specialist, the Company valued the warrants at $256,200. The Company is accreting the value of the warrants to the carrying value of the Subordinated Note on a straight-line basis over the life of the Subordinated Note (approximately 8 years) and for the year ended December 31, 2005, the Company recorded as interest expense $4,200 for the accretion of the value of these warrants. During the six months ended June 30, 2006, the Company recorded interest expense of $16,800 for the accretion of the value of these warrants.

The following table summarizes the Company’s warrant activity:

				Weighted
				Average
				Exercise
	Shares			Price
Warrants outstanding, January 1, 2003		3,114,791		$	0.03
Granted		916,424		$	0.03
Exercised		(873,828	)	$	0.03
Canceled/expired		—		$	—
Warrants outstanding, December 31, 2003		3,157,387		$	0.03
Granted		—		$	—
Exercised		(1,835,615	)	$	0.03
Canceled/expired		—		$	—
Warrants outstanding, December 31, 2004		1,321,772		$	0.03
Granted		3,000,000		$	0.40
Exercised		—		$	—
Canceled/expired		—		$	—
Warrants outstanding, December 31, 2005		4,321,772		$	0.29
Granted (unaudited)		—		$	—
Exercised (unaudited)		(342,465	)	$	.03
Canceled/expired (unaudited)		—		$	—
Warrants outstanding, June 30, 2006 (unaudited)		3,979,307		$	0.31

The weighed average remaining contractual life of warrants outstanding is 6.1 years as of December 31, 2005 and 5.9 years as of June 30, 2006.

Stock Options

On May 9, 2003, the Company formally approved the adoption of the 2003 Stock Incentive Plan (the “Plan”) and reserved 9,452,800 shares of Non-Voting Common Stock for the grant of options to purchase shares of Non-Voting Common Stock. In December 2003, the Company increased the number of Non-Voting Common Stock reserved for issuance under the Plan to 14,000,000, and increased the number of Non-Voting

F-25

WORLD ENERGY SOLUTIONS, INC.

Notes to Consolidated Financial Statements — (Continued)

Common Stock reserved for issuance under the Plan to 15,000,000 in October 2005. A summary of option activity under the Plan is as follows:

				Weighted Average
	Shares			Exercise Price
Outstanding at January 1, 2003		—		$	—
Granted		11,752,800		$	0.025
Canceled		—		$	—
Exercised		(2,000,000	)	$	0.025
Outstanding at December 31, 2003		9,752,800		$	0.025
Granted		1,916,400		$	0.025
Canceled		(452,865	)	$	0.025
Exercised		(4,552,135	)	$	0.025
Outstanding at December 31, 2004		6,664,200		$	0.025
Granted		440,000		$	0.240
Canceled		(1,392,500	)	$	0.025
Exercised		(240,000	)	$	0.025
Outstanding at December 31, 2005		5,471,700		$	0.042
Granted (Unaudited)		400,000		$	0.380
Canceled (Unaudited)		—		$	—
Exercised (Unaudited)		(2,190,671	)	$	0.026
Outstanding at June 30, 2006 (Unaudited)		3,681,029		$	0.090

A summary of options outstanding and options exercisable as of December 31, 2005 is as follows:

	Options Outstanding								Options Exercisable
			Weighted
			Average		Weighted						Weighted
			Remaining		Average		Aggregate		Number		Average		Aggregate
Range of			Contractual		Exercise		Intrinsic		of Shares		Exercise		Intrinsic
Exercise Price	Options		Life		Price		Value		Exercisable		Price		Value
$0.025		5,031,700		4.81 years	$	0.025	$	1,786,254		4,481,700	$	0.025	$	1,591,004
$0.240		440,000		6.23 years	$	0.240		61,600		—	$	0.240		—
		5,471,700		4.93 years	$	0.042	$	1,847,854		4,481,700	$	0.030	$	1,591,004

A summary of options outstanding and options exercisable as of June 30, 2006 is as follows:

	Options Outstanding								Options Exercisable
			Weighted
			Average		Weighted						Weighted
			Remaining		Average		Aggregate		Number		Average		Aggregate
Range of			Contractual		Exercise		Intrinsic		of Shares		Exercise		Intrinsic
Exercise Price	Options		Life		Price		Value		Exercisable		Price		Value
$0.025		2,851,029		4.37 years	$	0.025	$	2,209,547		2,538,747	$	0.025	$	1,967,528
$0.240		430,000		5.72 years	$	0.240		240,800		130,000	$	0.240		72,800
$0.380		400,000		6.58 years	$	0.380		168,000		—	$	0.380		—
		3,681,029		4.77 years	$	0.090	$	2,618,347		2,668,747	$	0.036	$	2,040,328

F-26

WORLD ENERGY SOLUTIONS, INC.

Notes to Consolidated Financial Statements — (Continued)

The aggregate intrinsic value in the table above represents the total intrinsic value, based on the Board’s determination of the fair value of the Non-voting Common stock of $0.38 and $0.80 as of December 31, 2005 and June 30, 2006, respectively, which would have been received by the option holders had all option holders exercised their options as of that date. The total intrinsic value of options exercised during the six months ended June 30, 2006 was approximately $1,244,000. There were 2,336,165 shares reserved for issuance under this plan at June 30, 2006.

NOTE 8 — RELATED PARTIES

In 2006, the Company entered into a consulting agreement with a board member to assist the Company in its research of potential equity financing. Costs incurred during the six months ended June 30, 2006 were approximately $20,000. Directors are not currently compensated for their service on the Board or for attendance at Board meetings.

NOTE 9 — INCOME TAXES

The components of the net deferred tax asset were as follows:

	December 31,
	2004			2005
Depreciation and amortization	$	87,785		$	21,226
Commission income		86,543			(40,068	)
Accruals & reserves		111,982			115,451
Prepaids		—			35,271
Net operating loss carryforwards		1,264,404			1,261,183
		1,550,714			1,393,063
Valuation allowance		(1,550,714	)		(639,063	)
	$	—		$	754,000

The provision for income taxes is comprised of the following:

	Years Ended December 31,
	2003		2004		2005
Current income tax expense:
Federal	$	—	$	—	$	—
State		—		—		—
		—		—		—
Deferred income tax benefit
Federal		—		—		(588,120	)
State		—		—		(165,880	)
		—		—		(754,000	)
Total income tax benefit	$	—	$	—	$	(754,000	)

F-27

WORLD ENERGY SOLUTIONS, INC.

Notes to Consolidated Financial Statements — (Continued)

A reconciliation of the Company’s federal statutory tax rate to its effective rate is as follows:

	Years Ended December 31,
	2003			2004			2005
Income tax at federal statutory rate		34.0	%		34.0	%		34.0	%
Increase (decrease) in tax resulting from:
State taxes, net of federal benefit		6.3	%		6.3	%		6.3	%
Permanent differences		0.0	%		0.6	%		2.3	%
Utilization of net operating losses		0.0	%		0.0	%		0.0	%
Change in valuation allowance		(40.3	)%		(40.9	)%		(270.0	)%
Other		0.0	%		0.0	%		0.0	%
		0.0	%		0.0	%		(227.4	)%

As of December 31, 2005, the Company has federal and state net operating loss carryforwards of approximately $3,200,000 each, which begin to expire in 2006 through 2021 for state and federal purposes, respectively. A valuation allowance is established, if it is more likely than not, that all or a portion of the deferred tax asset will not be realized.

Pursuant to SFAS No. 109, management of the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of net operating loss carryforwards, and other temporary differences. Management has determined at this time that it is more likely than not that the Company will recognize a portion of the benefits of its federal and state deferred tax assets based on estimates of expected future income. Accordingly, in 2005 the Company released $754,000 of its valuation allowance. As a result, a valuation allowance of approximately $639,000 has been established at December 31, 2005. Prior to 2005 the Company’s valuation allowance increased by $374,207 during 2003 and decreased by $430,707 in 2004. The amount of the net deferred tax asset considered realizable at December 31, 2005 could be reduced or increased in the near term if estimates of future taxable income during the carryforward period change.

Under the provisions of the Internal Revenue Code, certain substantial changes in the Company’s ownership may have limited or may limit in the future the amount of net operating loss carryforwards which could be utilized annually to offset future taxable income and income tax liabilities. The amount of any annual limitation is determined based upon the Company’s value prior to an ownership change.

NOTE 10 — COMMITMENTS

Leases

The Company leases certain equipment under capital leases that expire through December 2009 and are collateralized by the related equipment. The Company has accounted for these leases using an incremental borrowing rate of 8%. In December 2004, the Company entered into an operating lease for its office space under a five year agreement, paid in installments due the beginning of each month and expires in December

F-28

WORLD ENERGY SOLUTIONS, INC.

Notes to Consolidated Financial Statements — (Continued)

2009. Future aggregate minimum payments under capital and operating leases as of December 31, 2005 were as follows:

	Capital		Operating
	Leases		Leases
2006	$	63,085	$	89,320
2007		63,085		96,976
2008		44,031		96,976
2009		40,211		100,804
Total future minimum lease payments		210,412	$	384,076
Less: amounts representing interest		29,160
Present value of future minimum lease payments		181,252
Less: current portion		49,507
Capital lease obligation, net of current portion	$	131,745

The accompanying statement of operations for the years ended December 31, 2003, 2004, and 2005 includes approximately $37,000, $40,300, and $78,800 of rent expense, respectively and $37,682 and $45,800 for the three months ended June 30, 2005 and 2006, respectively.

Service Agreement

On February 2, 2005, the Company entered into a two year service agreement with an unrelated party for a hosting environment and dedicated server for the Company’s online energy procurement software. The terms of the agreement requires monthly payments of $600. The agreement expires on February 1, 2007.

NOTE 11 — SUBSEQUENT EVENT

On October 16, 2006, the Company amended its Certificate of Incorporation to increase the authorized shares of voting common stock from 75,000,000 to 100,000,000 shares. The total number of shares of all classes of stock which the Corporation shall have the authority to issue after this amendment is 130,000,000, consisting of 15,000,000 shares of non-voting common stock, 100,000,000 shares of voting common stock and 15,000,000 shares of preferred stock.

F-29

Through and including December 4, 2006, all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

27,441,064 Shares

Common Stock

PROSPECTUS

Sprott Securities (USA) Limited

November 9, 2006